OBLIGATIONS AND CONTRACTS Art.

1156-1162: The New Civil Code Nuguid vs Nicdao

EMMA P. NUGUID, petitioner vs. CLARITA S. NICDAO, respondent. In this petition for review on certiorari under Rule 45 of the Rules of Court, Emma P. Nuguid assails the decision of the Court of Appeals (CA) dated October 30, 2001 in CA-G.R. No. 23054: WHEREFORE, the Petition for Review is hereby GRANTED and the Assailed Decision dated May 10, 1999 of the Regional Trial Court [RTC], Branch 5, Bataan, affirming the Decision dated January 11, 1999 of the First Municipal Circuit Trial Court of Dinalupihan-Hermosa, Bataan is REVERSED and SET ASIDE. The petitioner CLARITA S. NICDAO is hereby ACQUITTED of the offense charged. NO COSTS. SO ORDERED.
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Petitioner seeks a review of the decision with respect to the alleged lack of civil liability of respondent Clarita S. 3 Nicdao. Stemming from two cases of violation of BP 22, this petition involves the following facts: xxx xxx xxx

Accused Clarita S. Nicdao is charged with having committed the crime of Violation of BP 22 in fourteen (14) counts. The criminal complaints allege that sometime in 1996, from April to August thereof, [respondent] and her husband [,] of Vignette Superstore [,] approached [petitioner] and asked her if they [could] borrow money to settle some obligations. Having been convinced by them and because of the close relationship of [respondent] to [petitioner], the latter lent the former her money. Thus, every month, she was persuaded to release P100,000.00 to the accused until the total amount reached P1,150,000.00. As security for the P1,150,000.00, [respondent] gave [petitioner] the following open dated Hermosa Savings Bank (HSLB) (sic) with the assurance that if the entire amount is not paid within one (1) year, [petitioner] can deposit the check: Check No. 7277 7348 12118 8812 12102 7255 2286 8128 7254 7278 4540 4523 12103 7294 P1,150,000.00 Amount P100,000.00 (Exhibit "A") 150,000.00 (Exhibit "A") 100,000.00 (Exhibit "A") 50,000.00 (Exhibit "A") 100,000.00 (Exhibit "A") 100,000.00 (Exhibit "A") 50,000.00 (Exhibit "A") 100,000.00 (Exhibit "A") 50,000.00 (Exhibit "A") 100,000.00 (Exhibit "A") 50,000.00 (Exhibit "A") 50,000.00 (Exhibit "A") 50,000.00 (Exhibit "A") 100,000.00 (Exhibit "A")

In June 1997, [petitioner] together with Samson Ching demanded payment of the sums [above-mentioned], but [respondent] refused to acknowledge the indebtedness. Thus, on October 6, 1977, [petitioner] deposited all aforementioned checks in the bank of Samson Ching totaling P1,150,000.00 since all the money given by her to [respondent] came from Samson Ching. The checks were all returned for having been drawn against insufficient funds (DAIF). A verbal and written demand was made upon [respondent] to pay the amount represented by the bounced checks, but [to] no avail. Hence, a complaint for violation of BP 22 was filed against the 4 [respondent]. (Citation omitted) After petitioner instituted 14 criminal cases (docketed as Criminal Case Nos. 9458-9471) for violation of BP 22 involving the sum of P1,150,000, corresponding warrants of arrest were issued against respondent. On November 12, 1997, respondent was arraigned. She pleaded not guilty and trial ensued. In a decision dated January 11, 1999, Judge Manuel M. Tan of the Municipal Circuit Trial Court of Dinalupihan, Bataan found respondent guilty of the charges against her. Respondent was sentenced to pay P1,150,000, plus interest, and to suffer imprisonment equivalent to one year for each violation of BP 22, or a total of 14 years of imprisonment. On appeal, the decision was affirmed in toto by the Regional Trial Court of Dinalupihan, Bataan. Respondent elevated the case to the CA. On October 30, 2001, the CA reversed the decision of the lower courts and acquitted respondent. According to the CA, certain substantial facts were overlooked by the trial court. These circumstances, if properly 6 considered, justified a different conclusion on the case. Petitioner now comes to us, raising this main issue: whether respondent remains civilly liable to her for the sum ofP1,150,000. In this connection, she asserts that respondent obtained loans from her in the aggregate amount ofP1,150,000 and that these loans have not been paid. From the standpoint of its effects, a crime has a dual character: (1) as an offense against the State because of the disturbance of the social order and (2) as an offense against the private person injured by the crime unless it involves the crime of treason, rebellion, espionage, contempt and others (wherein no civil liability arises on the part of the offender either because there are no damages to be compensated or there is no private person injured by the 7 crime ). What gives rise to the civil liability is really the obligation of everyone to repair or to make whole the damage caused to another by reason of his act or omission, whether done intentionally or negligently and whether or not 8 punishable by law. Extinction of penal action does not carry with it the eradication of civil liability, unless the extinction proceeds from a 9 declaration in the final judgment that the fact from which the civil liability might arise did not exist. On one hand, as regards the criminal aspect of a violation of BP 22, suffice it to say that: [t]he gravamen of BP 22 is the act of making and issuing a worthless check or one that is dishonored upon its presentment for payment [and] the accused failed to satisfy the amount of the check or make arrangement for its payment within 5 banking days from notice of dishonor. The act is malum prohibitum, pernicious and inimical to public welfare. Laws are created to achieve a goal intended to guide and prevent against an evil or mischief. Why and to whom the check was issued is irrelevant in determining culpability. The terms and conditions surrounding the issuance of the checks are also 10 irrelevant. On the other hand, the basic principle in civil liability ex delicto is that every person criminally liable is also civilly 11 liable, crime being one of the five sources of obligations under the Civil Code. A person acquitted of a criminal charge, however, is not necessarily civilly free because the quantum of proof required in criminal prosecution (proof 12 beyond reasonable doubt) is greater than that required for civil liability (mere preponderance of evidence ). In order to be completely free from civil liability, a person's acquittal must be based on the fact that he did not commit the 13 offense. If the acquittal is based merely on reasonable doubt, the accused may still be held civilly liable since this
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does not mean he did not commit the act complained of. It may only be that the facts proved did not constitute the 15 offense charged. Acquittal will not bar a civil action in the following cases: (1) where the acquittal is based on reasonable doubt as only preponderance of evidence is required in civil cases; (2) where the court declared the accused's liability is not criminal but only civil in nature and (3) where the civil liability does not arise from or is not based upon the criminal act of 16 which the accused was acquitted. In this petition, we find no reason to ascribe any civil liability to respondent. As found by the CA, her supposed civil liability had already been fully satisfied and extinguished by payment. The statements of the appellate court leave no doubt that respondent, who was acquitted from the charges against her, had already been completely relieved of civil liability: [Petitioner] does not dispute the fact that payments have already been made by petitioner in [the stated] amounts but argues that the Demand Draft represented payment of a previous obligation. However, no evidence of whatever nature was presented by the prosecution to substantiate their claim that there was indeed a previous obligation involving the same amount for which the demand draft was given. Except for this bare allegation, which is self-serving, no documentary evidence was ever adduced that there were previous transactions involving the subject amount. Likewise, [petitioner] admitted having received the cash payments from petitioner on a daily basis but argues that the same were applied to interest payments only. It however appears that [petitioner] was charging *respondent+ with an exorbitant rate of intereston a daily basis. xxx In any event, the cash payments [made] were recorded at the back of the cigarette cartons by [petitioner] in her own handwriting as testified to by [respondent] and her employees, Melanie Tolentino and Jocelyn Nicdao. Indeed, the daily cash payments marked in evidence as Exhibits 7 to 15 reveal that [respondent] had already paid her obligation to [petitioner] in the amount of P5,780,000.00 as of July 21, 1997 and that she stopped making further payments when she realized that she had already paid such amount. From the foregoing, it would appear that [respondent] made a total payment of P6,980,000.00, inclusive of the P1,200,000.00 Demand Draft, which is definitely much more than P1,150,000.00, the amount she actually borrowed from [petitioner]. These facts were never rebutted by [petitioner]. Moreover, we find no evidence was presented by the prosecution to prove that there was a stipulation in writing that interest will be paid by [respondent] on her loan obligations [as required under Article 1956 of the Civil Code]. xxx xxx xxx

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By and large, the obligation of [respondent] has already been extinguished long before the encashment of the subject checks. A check is said to apply for account only when there is still a pre-existing obligation. In the case at bench, the pre-existing obligation was extinguished after full payment was made by [respondent]. We therefore find the clear and convincing documentary evidence of payment presented by 17 [respondent] worthy of credence. (emphasis supplied) WHEREFORE, the petition is hereby DENIED. The October 30, 2001 decision of the Court of Appeals in CA-G.R. No. 23054 is AFFIRMED. Costs against petitioner. SO ORDERED. Puno, Chairperson, Sandoval-Gutierrez, Azcuna, Garcia, J.J., concur.

Art. 1163-1168 Angeles vs Calasanz

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 plaintiffsappellees 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 plaintiffsappellees 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

Reliance Commodities vs IAC RELIANCE COMMODITIES, INC. and THE PROVINCIAL SHERIFF OF NUEVA ECIJA, petitioners, vs. INTERMEDIATE APPELLATE COURT, MARVIN PAEZ and ROSA VALINO, respondents. DECISION PARDO, J.: batas The case before the Court is an appeal from a decision of the Intermediate Appellate Court, the dispositive portion of which reads: "WHEREFORE, the decision appealed from is hereby set aside and another one entered, declaring both the "Deed of First Real Estate Mortgage" (Exhibit F) and the "Addendum to Operating Agreement" (Exhibit A) null and void, and ordering defendant Reliance Commodities, Inc. to pay the plaintiffs the amount of P20,000.00 for unrealized profits in the amount of P3,500.00 as attorneys fees. The restraining order issued in this case is hereby made permanent. "Cost against the defendant Reliance Commodities, Inc. "SO ORDERED."[1] The facts, as found by the Intermediate Appellate Court, are as follows: "x x x on April 19, 1972, plaintiff Marvin Paez entered into contract with Samuel Chuason, president and general manager of defendant Reliance Commodities, Inc. whereby the latter agreed to provide the former with funds and equipment for the operation of the manganese mining claims of Daniel Garde located in Malinas, Gabaldon, Nueva Ecija. (Exhibit I, RTC Record, p. 199). On June 1, 1972, Samuel Chuason and Marvin Paez entered into another agreement called "Addendum to Operating Agreement" (Exhibit A, Folder of Exhibits, p. 1), the pertinent provisions of which are as follows:

"(1) PAEZ shall segregate the Manganese Ores into two (2) classes: "Pursuant to this agreement and upon the suggestion of plaintiff Marvin Paez, defendant Reliance Commodities, Inc. gave a cash advance of P8,300.00 (Exhibit B, Ibid., p. 5). With this amount, plaintiff Marvin Paez hired laborers and purchased the necessary tools, supplies and foodstuff. With the bulldozer, dump truck and cobra drill supplied by defendant Reliance Commodities, Inc. the mining operation in the mountains of Gabaldon, Nueva Ecija started on July 1, 1972 (t.s.n. August 27, 1976, pp. 9-10). katarungan "On July 28, 1972, plaintiffs Marvin Paez and his wife Rosa Valino executed a deed of first real estate mortgage on their property (Exhibit F, Folder of Exhibits, p. 9) in favor of defendant Reliance Commodities, Inc. as security for more cash advances needed to sustain the mining operation. "On the basis of this mortgage agreement, defendant Reliance Commodities, Inc. made several cash advances to plaintiff Marvin Paez (Exhibits 6, 7, 8 and 9, RTC Record, pp. 203, 204, 206, 208) amounting to P25,030.00. Subsequently, a difference arose between plaintiff Marvin Paez and defendant company concerning cash advances. Defendant Reliance Commodities, Inc. demanded the return of the bulldozer, the dump truck and the cobra drill. Marvin Paez' laborers refused to release the equipment, for the reason that they had not been paid their wages. Defendant Reliance Commodities, Inc. thereupon gave plaintiff Marvin Paez the amount of P800.00 on November 24, 1972 for the laborers' salaries (Exhibit C, Folder of Exhibits, p. 6). Later, defendant Reliance Commodities, Inc. foreclosed extrajudicially the mortgage executed by plaintiffs in its favor. Consequently, the provincial sheriff of Nueva Ecija served notice on plaintiff Marvin Paez that the mortgaged property would be sold at public auction on June 4, 1974. "Plaintiff Marvin Paez with his wife as co-plaintiff filed the present action in the court below (Court of First Instance of Nueva Ecija) on May 29, 1974, praying for: 1) a writ of preliminary injunction to enjoin the provincial sheriff from proceeding with the auction sale, 2) an order annulling the Deed of First Real Estate Mortgage (Exhibit F, Ibid., p. 9) and the Addendum (Exhibit A, Ibid., p. 1), and 3) a directive requiring the defendant Reliance Commodities to make further cash advances to plaintiffs in the amount of P75,000.00 plus moral damages, attorney's fees and costs."[2] haideem In the answer filed on July 8, 1974, defendants claimed that the violation of the contracts came from the plaintiffs because they failed to deliver at all the manganese ores stipulated in the contract according to the schedule outlined. Hence, plaintiffs were not entitled to rescind the contracts or recover damages and by reason of which defendant was entitled to foreclose on the security constituted.[3] After due trial, on May 30, 1974, the trial court rendered a decision in favor of defendants, the dispositive portion of which reads:

"WHEREFORE, judgment is hereby rendered in favor of defendant Reliance Commodities, Inc. and against the plaintiffs-spouses Marvin Paez and Rosa Valino, as follows: "(1) Ordering the dismissal of the complaint filed by said plaintiffs in this case, for lack of merit; and "(2) On the counterclaims of said defendant Reliance: "(a) Ordering the said plaintiffs jointly and severally, to pay unto the defendant Reliance Commodities, Inc. the sum of P41,130.00, representing the cash advances they received from the said company, with interest thereon at the rate of 12% per annum from the dates of receipt of said advances until the same are fully paid; "(b) Ordering the said plaintiffs, jointly and severally, to pay unto the defendant Reliance Commodities, Inc. the sum of P5,000.00 as and for attorneys fees; "(c) Setting aside the restraining order heretofore issued in this case so that defendant Reliance may proceed with the extrajudicial foreclosure of the real estate mortgage in its favor upon plaintiffs failure to pay the cash advances and interest thereon which they are ordered to pay under this decision; and "(d) Ordering the said plaintiffs to pay the costs. "SO ORDERED. hustisya "Cabanatuan City, May 24, 1982."[4] On November 25, 1982, respondents Marvin Paez and Rosa Valino as defendants in the lower court filed an appeal to the Court of Appeals.[5] On March 10, 1986, the Intermediate Appellate Court promulgated its decision, quoted in the opening paragraph of this opinion. Hence, this petition.[6] The basic issue raised is whether the Intermediate Appellate Court erred in finding that the petitioner, not respondent, gave cause for rescission of the contracts and in ruling that restitution was not available in rescission of contracts under Article 1191 of the Civil Code. We rule in favor of petitioners.[7]

Under the agreement of petitioner Reliance Commodities, Inc. with respondent Mervin Paez, the former was to pay Paez P70.00 for every ton of manganese ores delivered with a grade of 40% to 46% or over. Payment was to be made upon delivery of the ores at the stockpile yard at Gabaldon, Nueva Ecija. Petitioner Reliance was to advance the expenses of mining and hauling as they were incurred every fifteen (15) days, and that advances made were deductible from the agreed consideration of P70.00 per ton. Petitioner made cash advances to respondent Paez totalling P41,130.00 and also turned over to him three heavy equipment for use in the mining operation. On the other hand, respondent Paez failed to make even a single delivery of manganese ores to the stockpile yard at Gabaldon. In fact, there was no mining operation at all. Consequently, petitioner rescinded the contracts. Contrary to the ruling of the appellate court, in reciprocal obligations, the power to rescind or resolve is given to the injured party.[8] More, the rescission of the contracts requires the parties to restore to each other what they have received by reason of the contracts.[9] The rescission has the effect of abrogating the contracts in all parts.[10] WHEREFORE, the Court GRANTS the petition for review on certiorari, and reverses the decision of the Intermediate Appellate Court. The court revives and affirms the decision of the trial court, with the modification that the sum to be restituted to petitioner Reliance Commodities, Inc. shall earn legal interest only from the finality of this decision until fully paid. No costs. Jksm SO ORDERED Rivera vs del Rosario
ADELFA S. RIVERA, CYNTHIA S. RIVERA, and JOSE S. RIVERA, petitioners, vs. FIDELA DEL ROSARIO (deceased and substituted by her co-respondents), and her children, OSCAR, ROSITA, VIOLETA, ENRIQUE JR., CARLOS, JUANITO and ELOISA, all surnamed DEL ROSARIO, respondents. DECISION QUISUMBING, J.: Before us is a petition for review on certiorari of the Court of Appeals decision , dated November [2] 29, 1999, in CA-G.R. CV No. 60552, which affirmed the judgment of the Regional Trial Court (RTC) of Malolos, Bulacan, Branch 17, in Civil Case No. 151-M-93. The RTC granted respondents complaint for nullity of contract of sale and annulment of the transfer certificates of title issued in favor of petitioners. The facts, as found by the Court of Appeals, are as follows: Respondents Fidela (now deceased), Oscar, Rosita, Violeta, Enrique Jr., Carlos, Juanito and Eloisa, all surnamed Del Rosario, were the registered owners of Lot No. 1083-C, a parcel of land situated at Lolomboy, Bulacan. This lot spanned an area of 15,029 square meters and was covered by TCT No. T50.668 (M) registered in the Registry of Deeds of Bulacan.
[1]

On May 16, 1983, Oscar, Rosita, Violeta, Enrique Jr., Juanito, and Eloisa, executed a Special Power of [3] Attorney in favor of their mother and co-respondent, Fidela, authorizing her to sell, lease, mortgage, [4] transfer and convey their rights over Lot No. 1083-C. Subsequently, Fidela borrowed P250,000 from Mariano Rivera in the early part of 1987. To secure the loan, she and Mariano Rivera agreed to execute a deed of real estate mortgage and an agreement to sell the land. Consequently, on March 9, 1987, Mariano went to his lawyer, Atty. Efren Barangan, to have three documents drafted: the Deed of Real [5] [6] [7] Estate Mortgage , a Kasunduan (Agreement to Sell) , and a Deed of Absolute Sale. The Kasunduan provided that the children of Mariano Rivera, herein petitioners Adelfa, Cynthia and Jose, would purchase Lot No. 1083-C for a consideration of P2,141,622.50. This purchase price was to be paid in three installments: P250,000 upon the signing of the Kasunduan, P750,000 on August 31, 1987, [8] and P1,141,622.50 on December 31, 1987. It also provided that the Deed of Absolute Sale would be executed only after the second installment is paid and a postdated check for the last installment is [9] deposited with Fidela. As previously stated, however, Mariano had already caused the drafting of the Deed of Absolute Sale. But unlike the Kasunduan, the said deed stipulated a purchase price of [10] only P601,160, and covered a certain Lot No. 1083-A in addition to Lot No. 1083-C. This deed, as well as [11] the Kasunduan and the Deed of Real Estate Mortgage , was signed by Marianos children, petitioners [12] Adelfa, Cynthia and Jose, as buyers and mortgagees, on March 9, 1987. The following day, Mariano Rivera returned to the office of Atty. Barangan, bringing with him the signed documents. He also brought with him Fidela and her son Oscar del Rosario, so that the latter two may sign the mortgage and the Kasunduan there. Although Fidela intended to sign only the Kasunduan and the Real Estate Mortgage, she inadvertently affixed her signature on all the three documents in the office of Atty. Barangan on the said day, March 10, 1987. Mariano then gave Fidela the amount of P250,000. On October 30, 1987, he also gave Fidela a check for P200,000. In the ensuing months, also, Mariano gave Oscar del Rosario several amounts totaling P67,800 upon the latters demand for the payment of the balance despite Oscars lack of [13] authority to receive payments under the Kasunduan. While Mariano was making payments to Oscar, Fidela entrusted the owners copy of TCT No. T -50.668 (M) to Mariano to guarantee compliance with the Kasunduan. When Mariano unreasonably refused to return the TCT, one of the respondents, Carlos del Rosario, caused the annotation on TCT No. T-50.668 (M) of an Affidavit of Loss of the owners duplicate copy of the title on September 7, 1992. This annotation was offset, however, when Mariano registered the Deed of Absolute Sale on October 13, 1992, and afterwards caused the annotation of an Affidavit of Recovery of Title on October 14, 1992. Thus, TCT No. T-50.668 (M) was cancelled, and in its place was [15] issued TCT No. 158443 (M) in the name of petitioners Adelfa, Cynthia and Jose Rivera. Meanwhile, the Riveras, representing themselves to be the new owners of Lot No. 1083-C, were also negotiating with the tenant, Feliciano Nieto, to rid the land of the latters tenurial right. When Nieto refused to relinquish his tenurial right over 9,000 sq. m. of the land, the Riveras offered to give 4,500 sq. m. in exchange for the surrender. Nieto could not resist and he accepted. Subdivision Plan No. Psd031404-052505 was then made on August 12, 1992. Later, it was inscribed on TCT No. 158443 (M), and [16] Lot No. 1083-C was divided into Lots 1083 C-1 and 1083 C-2. To document their agreement with Feliciano Nieto, the Riveras executed a Kasulatan sa Pagtatakwil ng Karapatan sa Pagmamay-ari ng Bahagi ng Isang Lagay na Lupa (Written Abdication of Rights over a [17] Portion of a Parcel of Land) on November 16, 1992. Four days later, they registered the document with the Registry of Deeds. Two titles were then issued: TCT No. T-161784 (M) in the name of Nieto, for 4,500 sq. m. of land, and TCT No. T-161785 (M) in the name of petitioners Adelfa, Cynthia and Jose Rivera, over [18] the remaining 10,529 sq. m. of land. On February 18, 1993, respondents filed a complaint in the Regional Trial Court of Malolos, asking that the Kasunduan be rescinded for failure of the Riveras to comply with its conditions, with damages.
[19] [14]

They also sought the annulment of the Deed of Absolute Sale on the ground of fraud, the cancellation of TCT No. T-161784 (M) and TCT No. T-161785 (M), and the reconveyance to them of the entire property [20] with TCT No. T-50.668 (M) restored. Respondents claimed that Fidela never intended to enter into a deed of sale at the time of its execution and that she signed the said deed on the mistaken belief that she was merely signing copies of the Kasunduan. According to respondents, the position where Fidelas name was typed and where she was supposed to sign her name in the Kasunduan was roughly in the same location where it was typed in the Deed of Absolute Sale. They argued that given Fidelas advanced age (she was then around 72 at the [21] time) and the fact that the documents were stacked one on top of the other at the time of signing, Fidela could have easily and mistakenly presumed that she was merely signing additional copies of [22] the Kasunduan. They also alleged that petitioners acquired possession of the TCT through fraud and machination. In their defense, petitioners denied the allegations and averred that the Deed of Absolute Sale was validly entered into by both parties. According to petitioners, Fidela del Rosario mortgaged Lot No. 1083C to their predecessor in interest, Mariano Rivera, on March 9, 1987. But on the following day Fidela decided to sell the lot to petitioners for P2,161,622.50. When Mariano agreed (on the condition that Lot No. 1083-C will be delivered free from all liens and encumbrances), the Kasunduan was consequently drawn up and signed. After that, however, Fidela informed Mariano of the existence of Feliciano Nietos tenancy right over the lot to the extent of 9,000 sq. m. When Mariano continued to want the land, albeit on a much lower price of onlyP601,160, as he had still to deal with Feliciano Nieto, the parties drafted the Deed of Absolute Sale on March 10, 1987, to supersede the Kasunduan. Petitioners likewise argued that respondents cause of action had been barred by laches or estoppel since more than four years has lapsed from the time the parties executed the Deed of Absolute Sale on March 10, 1987, to the time respondents instituted their complaint on February 18, 1993. Petitioners also filed a counterclaim asking for moral and exemplary damages and the payment of attorneys fees and costs of suit. After trial, the RTC ruled in favor of respondents: WHEREFORE, in the light of all the foregoing, judgment is hereby rendered: 1. 2. Declaring the Deed of Absolute Sale dated March 10, 1987 as null and void; Annulling TCT No. T-158443 (M) and TCT No. T-161785 (M) both in the names of Adelfa, Cynthia and Jose, all surnamed Rivera; Declaring the plaintiffs to be the legitimate owners of the land covered by TCT No. T161785 (M) and ordering defendant Adelfa, Cynthia, and Jose, all surnamed Rivera, to reconvey the same to the plaintiffs; Ordering the Register of Deeds of Bulacan to cancel TCT No. T-161785 (M) and to issue in its place a new certificate of title in the name of the plaintiffs as their names appear in TCT No. T-50.668; Declaring TCT No. T-161784 (M) in the name of Feliciano Nieto as valid; Ordering the defendant Riveras to pay the plaintiffs solidarily the following amounts:

3.

4.

5. 6.

a)

P191,246.98 as balance for the 4,500 square-meter portion given to defendant Feliciano Nieto P200,000.00 as moral damages P50,000.00 as exemplary damages P50,000.00 as attorneys fees costs of the suit.

b) c) d) e) 7. 8. SO ORDERED.
[23]

Dismissing the counterclaim of the defendant Riveras; Dismissing the counterclaim and the crossclaim of defendant Feliciano Nieto.

The trial court ruled that Fidelas signature in the Deed of Abs olute Sale was genuine, but found that Fidela never intended to sign the said deed. Noting the peculiar differences between theKasunduan and the Deed of Absolute Sale, the trial court concluded that the Riveras were guilty of fraud in securing the [24] execution of the deed and its registration in the Registry of Deeds. This notwithstanding, the trial court sustained the validity of TCT No. T-161784 (M) in the name of Feliciano Nieto since there was no fraud proven on Nietos part. The trial court found him to have relied in good faith on the representations of ownership of Mariano Rivera. Thus, Nietos rights, according to the trial court, were akin t o those of an [25] innocent purchaser for value. On the foregoing, the trial court rescinded the Kasunduan but ruled that the P450,000 paid by petitioners be retained by respondents as payment for the 4,500 sq. m. portion of Lot No. 1083-C that [26] petitioners gave to Nieto. The trial court likewise ordered petitioners to pay P191,246.98 as balance for the price of the land given to Nieto, P200,000 as moral damages, P50,000 as exemplary damages, P50,000 [27] as attorneys fees, and the costs of suit. On appeal to the Court of Appeals, the trial courts judgment was modified as follows: WHEREFORE, the judgment appealed from is hereby AFFIRMED with the MODIFICATION that the Deed of Absolute Sale dated March 10, 1987 is declared null and void only insofar as Lot No. 1083-C is concerned, but valid insofar as it conveyed Lot No. 1083-A, that TCT No. 158443 (M) is valid insofar as Lot No. 1083-A is concerned and should not be annulled, and increasing the amount to be paid by the defendantsappellants to the plaintiffs-appellees for the 4,500 square meters of land given to Feliciano Nieto to P323,617.50. Costs against the defendants-appellants. SO ORDERED.
[28]

Petitioners motion for reconsideration was denied. Hence, this petition. While this petition was pending, respondent Fidela del Rosario died. She was substituted by her children, herein respondents. In this petition, petitioners rely on the following grounds: I

THE HONORABLE COURT OF APPEALS COMMITTED A SERIOUS, GRAVE AND REVERSIBLE ERROR IN AWARDING LOT 1083-A IN FAVOR OF THE PETITIONERS AND FELICIANO NIETO WHICH IS ADMITTEDLY A PART AND PORTION OF THE EXISTING NORTH LUZON EXPRESSWAY AND AS SUCH ACTED WITHOUT OR IN EXCESS OF ITS JURISDICTION, OR WITH GRAVE ABUSE OF JUDICIAL DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION. II RESPONDENTS FAILED TO PAY THE CORRECT DOCKET, FILING AND OTHER LAWFUL FEES WITH THE OFFICE OF THE CLERK OF COURT OF THE COURT A QUO (RTC, MALOLOS, BULACAN) AT THE TIME OF THE FILING [29] OF THE ORIGINAL COMPLAINT IN 1993 PURSUANT TO THE SIOL DOCTRINE. III [THE] TRIAL COURT AWARDED RELIEFS NOT SPECIFICALLY PRAYED FOR IN THE AMENDED COMPLAINT WITHOUT REQUIRING THE PAYMENT OF THE CORRECT DOCKET, FILING AND OTHER LAWFUL FEES. IV THE COURT A QUO HAS NO JURISDICTION OVER THE RESPONDENTS CAUSE OF ACTION AND OVER THE RES CONSIDERING THAT FELICIANO NIETO IS AN AGRICULTURAL TENANT OF THE RICELAND IN QUESTION. V RESPONDENTS*+ MAIN CAUSE OF ACTION *IS+ FOR RESCISSION OF CONTRACT WHICH IS SUBSIDIARY IN NATURE[,] AND ANNULMENT OF SALE[,] BOTH OF WHICH HAVE ALREADY PRESCRIBED UNDER ARTICLES [30] 1389 AND 1391 OF THE CIVIL CODE. Petitioners assignment of errors may be reduced into three issues: (1) Did the trial court acquire jurisdiction over the case, despite an alleged deficiency in the amount of filing fees paid by respondents and despite the fact that an agricultural tenant is involved in the case? (2) Did the Court of Appeals correctly rule that the Deed of Absolute Sale is valid insofar as Lot 1083-A is concerned? (3) Is the respondents cause of action barred by prescription? On the first issue, petitioners contend that jurisdiction was not validly acquired because the filing fees respondents paid was only P1,554.45 when the relief sought was reconveyance of land that was worth P2,141,622.50 under the Kasunduan. They contend that respondents should have paid filing fees amounting to P12,183.70. In support of their argument, petitioners invoke the doctrine in Sun Insurance [31] [32] Office, Ltd., (SIOL) v. Asuncion and attach a certification from the Clerk of Court of the RTC of Quezon City. Respondents counter that it is beyond dispute that they paid the correct amount of docket fees when they filed the complaint. If the assessment was inadequate, they could not be faulted because the clerk of court made no notice of demand or reassessment, respondents argue. Respondents also add that since petitioners failed to contest the alleged underpayment of docket fees in the lower court, they [33] cannot raise the same on appeal. We rule in favor of respondents. Jurisdiction was validly acquired over the complaint. In Sun [34] Insurance Office, Ltd., (SIOL) v. Asuncion, this Court ruled that the filing of the complaint or appropriate initiatory pleading and the payment of the prescribed docket fee vest a trial court with jurisdiction over the subject matter or nature of the action. If the amount of docket fees paid is insufficient considering

the amount of the claim, the clerk of court of the lower court involved or his duly authorized deputy has the responsibility of making a deficiency assessment. The party filing the case will be required to pay the deficiency, but jurisdiction is not automatically lost. Here it is beyond dispute that respondents paid the full amount of docket fees as assessed by the Clerk of Court of the Regional Trial Court of Malolos, Bulacan, Branch 17, where they filed the complaint. If petitioners believed that the assessment was incorrect, they should have questioned it before the trial court. Instead, petitioners belatedly question the alleged underpayment of docket fees through this petition, attempting to support their position with the opinion and certification of the Clerk of Court of another judicial region. Needless to state, such certification has no bearing on the instant case. Petitioners also contend that the trial court does not have jurisdiction over the case because it [35] involves an agricultural tenant. They insist that by virtue of Presidential Decree Nos. 316 and 1038, it is [36] the Department of Agrarian Reform Adjudication Board (DARAB) that has jurisdiction. Petitioners contention lacks merit. The DARAB has exclusive original jurisdiction over cases involving the rights and obligations of persons engaged in the management, cultivation and use of all [37] agricultural lands covered by the Comprehensive Agrarian Reform Law. However, the cause of action in this case is primarily against the petitioners, as indispensable parties, for rescission of the Kasunduan and nullification of the Deed of Sale and the TCTs issued because of them. Feliciano Nieto was impleaded merely as a necessary party, stemming from whatever rights he may have acquired by virtue of the agreement between him and the Riveras and the corresponding TCT issued. Hence, it is the regular judicial courts that have jurisdiction over the case. On the second issue, contrary to the ruling of the Court of Appeals that the Deed of Absolute Sale is void only insofar as it covers Lot No. 1083-C, we find that the said deed is void in its entirety. Noteworthy is that during the oral arguments before the Court of Appeals, both petitioners and respondents admitted that Lot No. 1083-A had been expropriated by the government long before the Deed of Absolute Sale was [38] entered into. Whats more, this case involves only Lot No. 1083-C. It never involved Lot 1083-A. Thus, the Court of Appeals had no jurisdiction to adjudicate on Lot 1083-A, as it was never touched upon in the [39] pleadings or made the subject of evidence at trial. As to the third issue, petitioners cite Articles 1383, 1389 and 1391 of the New Civil Code. They submit that the complaint for rescission of the Kasunduan should have been dismissed, for respondents failure to prove that there was no other legal means available to obtain reparation other than to file a case for rescission, as required by Article 1383. Moreover, petitioners contend that even assuming respondents had satisfied this requirement, prescription had already set in, the complaint having been filed in 1992 or five years after the execution of the Deed of Absolute Sale in March 10, 1987. Respondents counter that Article 1383 of the New Civil Code applies only to rescissible contracts enumerated under Article 1381 of the same Code, while the cause of action in this case is for rescission of [43] a reciprocal obligation, to which Article 1191 of the Code applies. They assert that their cause of action had not prescribed because the four-year prescriptive period is counted from the date of discovery of the fraud, which, in this case, was only in 1992. Rescission of reciprocal obligations under Article 1191 of the New Civil Code should be distinguished from rescission of contracts under Article 1383 of the same Code. Both presuppose contracts validly entered into as well as subsisting, and both require mutual restitution when proper, nevertheless they are [44] not entirely identical. In countless times there has been confusion between rescission under Articles 1381 and 1191 of the Civil Code. Through this case we again emphasize that rescission of reciprocal obligations under Article 1191 is different from rescissible contracts under Chapter 6 of the law on contracts under the Civil [45] Code. While Article 1191 uses the term rescission, the original term used in Article 1124 of the old Civil [46] Code, from which Article 1191 was based, was resolution. Resolution is a principal action that is based
[40] [41] [42]

on breach of a party, while rescission under Article 1383 is a subsidiary action limited to cases of [47] rescission for lesion under Article 1381 of the New Civil Code, which expressly enumerates the following rescissible contracts: ART. 1381. The following contracts are rescissible: (1) Those which are entered into by guardians whenever the wards whom they represent suffer lesion by more than one-fourth of the value of the things which are the object thereof; Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the preceding number; Those undertaken in fraud of creditors when the latter cannot in any other manner collect the claims due them; Those which refer to things under litigation if they have been entered into by the defendant without the knowledge and approval of the litigants or of competent judicial authority; All other contracts specially declared by law to be subject to rescission.

(2)

(3)

(4)

(5)

Obviously, the Kasunduan does not fall under any of those situations mentioned in Article 1381. Consequently, Article 1383 is inapplicable. Hence, we rule in favor of the respondents. May the contract entered into between the parties, however, be rescinded based on Article 1191? A careful reading of the Kasunduan reveals that it is in the nature of a contract to sell, as distinguished from a contract of sale. In a contract of sale, the title to the property passes to the vendee upon the delivery of the thing sold; while in a contract to sell, ownership is, by agreement, reserved in the [48] vendor and is not to pass to the vendee until full payment of the purchase price. In a contract to sell, [49] the payment of the purchase price is a positive suspensive condition, the failure of which is not a breach, casual or serious, but a situation that prevents the obligation of the vendor to convey title from [50] acquiring an obligatory force. Respondents in this case bound themselves to deliver a deed of absolute sale and clean title covering Lot No. 1083-C after petitioners have made the second installment. This promise to sell was subject to the fulfillment of the suspensive condition that petitioners pay P750,000 on August 31, 1987, [51] and deposit a postdated check for the third installment of P1,141,622.50. Petitioners, however, failed to complete payment of the second installment. The non-fulfillment of the condition rendered the contract to sell ineffective and without force and effect. It must be stressed that the breach contemplated in Article 1191 of the New Civil Code is the obligors failure to comply with an obligation [52] already extant, not a failure of a condition to render binding that obligation. Failure to pay, in this instance, is not even a breach but an event that prevents the vendors obligation to convey title from [53] acquiring binding force. Hence, the agreement of the parties in the instant case may be set aside, but not because of a breach on the part of petitioners for failure to complete payment of the second installment. Rather, their failure to do so prevented the obligation of respondents to convey title from [54] acquiring an obligatory force. Coming now to the matter of prescription. Contrary to petitioners assertion, we find that prescription has not yet set in. Article 1391 states that the action for annulment of void contracts shall be brought within four years. This period shall begin from the time the fraud or mistake is discovered. Here,

the fraud was discovered in 1992 and the complaint filed in 1993. Thus, the case is well within the prescriptive period. On the matter of damages, the Court of Appeals awarded respondents P323,617.50 as actual damages for the loss of the land that was given to Nieto, P200,000 as moral damages,P50,000 as exemplary damages, P50,000 as attorneys fees and the costs of suit. Modifications are in order, however. Moral damages may be recovered in cases where one willfully causes injury to property, or in cases [55] of breach of contract where the other party acts fraudulently or in bad faith. Exemplary damages are [56] imposed by way of example or correction for the public good, when the party to a contract acts in a [57] wanton, fraudulent, oppressive or malevolent manner. Attorneys fees are allowed when exemplary damages are awarded and when the party to a suit is compelled to incur expenses to protect his [58] interest. While it has been sufficiently proven that the respondents are entitled to damages, the actual amounts awarded by the lower court must be reduced because damages are not intended for a litigants [59] enrichment, at the expense of the petitioners. The purpose for the award of damages other than actual damages would be served, in this case, by reducing the amounts awarded. Respondents were amply compensated through the award of actual damages, which should be sustained. The other damages awarded total P300,000, or almost equivalent to the amount of actual damages. Practically this will double the amount of actual damages awarded to respondents. To avoid breaching the doctrine on enrichment, award for damages other than actual should be reduced. Thus, the amount of moral damages should be set at only P30,000, and the award of exemplary damages at only P20,000. The award of attorneys fees should also be reduced to P20,000, which under the circumstances of this case appears justified and reasonable. WHEREFORE, the assailed decision of the Court of Appeals is MODIFIED. The Deed of Absolute Sale in question is declared NULL and VOID in its entirety. Petitioners are ORDERED to pay respondents P323,617.50 as actual damages, P30,000.00 as moral damages, P20,000.00 as exemplary damages and P20,000.00 as attorneys fees. No pronouncement as to costs. SO ORDERED.

Barredo vs Leano SPOUSES MANUEL and JOCELYN BARREDO, petitioners, vs. SPOUSES EUSTAQUIO and EMILDA LEAO, respondents. DECISION PUNO, J.: In resolving the case at bar, we hearken back to the time-honored principle in obligations and contracts enunciated by this Court some 80 years ago in Song Fo & Co. v. Hawaiian Philippine Co.[1] that the rescission of contracts will not be permitted for a slight or casual breach thereof. The factual antecedents are undisputed. Sometime in 1979, petitioners spouses Manuel and Jocelyn Barredo (Barredo Spouses) bought a house and lot located along Lilac Road, Pilar Village, Las Pias, Metro Manila, with the proceeds of a P50,000.00 loan from the Social Security System (SSS) which was payable in 25 years and an P88,400.00 loan from the Apex Mortgage

and Loans Corporation (Apex) which was payable in 20 years. To secure the twin loans, they executed a first mortgage over the house and lot in favor of SSS and a second one in favor of Apex. On July 10, 1987, the Barredo Spouses sold their house and lot to respondents Eustaquio and Emilda Leao (Leao Spouses) by way of a Conditional Deed of Sale with Assumption of Mortgage. The Leao Spouses would pay the Barredo Spouses P200,000.00, P100,000.00 of which would be payable on July 15, 1987, while the balance of P100,000.00 would be paid in ten (10) equal monthly installments after the signing of the contract. The Leao Spouses would also assume the first and second mortgages and pay the monthly amortizations to SSS and Apex beginning July 1987 until both obligations are fully paid. In accordance with the agreement, the purchase price of P200,000.00 was paid to the Barredo Spouses who turned over the possession of the house and lot in favor of the Leao Spouses. Two (2) years later, on September 4, 1989, the Barredo Spouses initiated a complaint before the Regional Trial Court of Las Pias seeking the rescission of the contract on the ground that the Leao Spouses despite repeated demands failed to pay the mortgage amortizations to the SSS and Apex causing the Barredo Spouses great and irreparable damage. The Leao Spouses, however, answered that they were up-to-date with their amortization payments to Apex but were not able to pay the SSS amortizations because their payments were refused upon the instructions of the Barredo Spouses. Meanwhile, allegedly in order to save their good name, credit standing and reputation, the Barredo Spouses took it upon themselves to settle the mortgage loans and paid the SSS the sum ofP27,494.00 on September 11, 1989, and P41,401.91 on January 9, 1990. The SSS issued a Release of Real Estate Mortgage Loan on January 9, 1990. They also settled the mortgage loan with Apex and paid the sum of P5,379.23 on October 3, 1989, and P64,000.00 on January 9, 1990. Likewise, Apex issued a Certification of Full Payment of Loan on January 12, 1990. They also paid the real estate property taxes for the years 1987 up to 1990. On October 5, 1993, the Regional Trial Court of Las Pias, Br. 275,[2] ruled that the assumption of mortgage debts of the Barredo Spouses by the Leao Spouses is a very substantial condition x x x x The credit standing of the (Barredo Spouses) will be greatly prejudiced should they appear delinquent or not paying at all. This is what the (Barredo Spouses) feared so much, if foreclosure proceedings are resorted to because of their failure to pay their obligations.[3] The trial court thus rendered judgment in favor of the plaintiff, the Barredo Spouses WHEREFORE, and in consideration of the foregoing, by preponderance of evidence, judgment is hereby rendered in favor of the plaintiffs and against the defendants by: (1) declaring the Conditional Deed of Sale with Assumption of Mortgage entered into by the plaintiffs and the defendants on July 10, 1987, as rescinded and therefore null and void as of this date; (2) ordering the defendants jointly and severally to pay the sum ofP15,000.00 as actual and litigation expenses, and the sum of P25,000.00 as and by way of attorneys fees; and (3) to pay the costs. SO ORDERED.[4]

Aggrieved, the Leao Spouses who have turned over the possession of the subject house and lot to the Barredo Spouses appealed to the Court of Appeals. On May 21, 2002, the appellate court reversed and set aside the decision of the trial court on the ground that the payments of amortization to Apex and SSS were mere collateral matters which do not detract from the condition of paying the principal consideration.[5] The dispositive portion of the decision reads WHEREFORE, the questioned decision of the Regional Trial Court of Las Pias, Branch 275, is hereby REVERSED and SET ASIDE, and another one is entered DISMISSING the complaint for lack of cause of action, and ordering plaintiff-appellees to: a) execute the Deed of Absolute Sale and to deliver TCT No. S-104634 in favor of defendants-appellants upon full payment of the amounts of P68,895.91, P69,379.23 and P2,217.60, or a total ofP140,492.74, subject to the legal rate of interest per annum from the time said payments were made by plaintiffs-appellees until the same are fully paid; to vacate and/or turn over the said property to defendants-appellants; to pay attorneys fees in the sum of P20,000.00 and

b) c) d)

to pay the costs of litigation.

SO ORDERED.[6] On December 10, 2002, the appellate court denied the motion for reconsideration for lack of merit. Hence, this petition for review on certiorari on a sole assignment of error CONTRARY TO THE EXPRESS FINDINGS OF THE TRIAL COURT THAT THERE WAS SUBSTANTIAL AND FUNDAMENTAL BREACH BY THE RESPONDENTS OF THEIR RECIPROCAL OBLIGATIONS TO ASSUME AND PAY THE MORTGAGE OBLIGATION OF PETITIONERS WITH THE SSS AND APEX, THE COURT OF APPEALS ERRED IN HOLDING THAT THE PAYMENTS OF AMORTIZATION TO APEX AND SSS ARE MERE COLLATERAL MATTERS AND DISMISSING PETITIONERS COMPLAINT FOR LACK OF CAUSE OF ACTION.[7] Petitioners argue that the terms of the agreement called for the strict compliance of two (2) equally essential and material obligations on the part of the Leao Spouses, namely, the payment of the P200,000.00 to them and the payment of the mortgage amortizations to the SSS and Apex. And, the Barredo Spouses undertook to execute the corresponding Deed of Absolute Sale only upon the faithful compliance by the Leao Spouses of the conditions set forth in their agreement. Thus, the failure of the Leao Spouses to pay the mortgage amortizations to the SSS and Apex gave rise to the right of the Barredo Spouses to refrain from executing the deed of sale and in fact ask for rescission, a right accorded to an injured party. Respondents Leao Spouses, however, contend that they were only obliged to assume the amortization payments of the Barredo Spouses with the SSS and Apex, which they did upon signing the agreement. The contract does not stipulate as a condition the full payment of the

SSS and Apex mortgages. Granting for arguments sake that their failure to pay in full the mortgage was not a full compliance of their obligation, they could not be faulted because their payments were not accepted by the SSS since the Barredo Spouses failed to notify the SSS of the assignment of their debt. In fine, the alleged breach, if any, was only casual or slight and does not defeat the very object of the parties in entering into the agreement. Moreover, the Barredo Spouses were not and will never be injured parties since if the amortizations were not paid, it would be the Leao Spouses who would eventually lose the house and lot. As such, rescission does not obtain. We quote the pertinent provisions of the Conditional Deed of Sale with Assumption of Mortgage 1. ONE HUNDRED THOUSAND PESOS (P100,000.00) Philippine Currency, shall be paid by the VENDEES to the VENDORS on July 15, 1987. 2. The balance of ONE HUNDRED THOUSAND PESOS (P100,000.00) Philippine Currency, shall be paid by the VENDEES to the VENDORS in ten (10) equal monthly installments at the VENDORS residence, after the signing of this Contract, consisting of ten (10) post-dated checks drawn against the checking account of the VENDEES beginning August 1, 1987, and the succeeding months x x x x until the amount is fully paid and the checks properly encashed x x x x 3. The VENDEES do hereby accept this Sale and bind themselves to assume as they hereby assume beginning on July 1, 1987, the payment of the unpaid balance of the First Mortgage indebtedness of the VENDORS with the Social Security System as of June 1, 1987 x x x x and another indebtedness of the VENDORS in a 2nd Mortgage with the Apex Mortgage and Loans Corporation, as of June 1, 1987, x x x x and that the herein VENDEES do hereby further agree to be bound by the precise terms and conditions therein contained. 4. That should the VENDEES well and faithfully comply with the conditions set forth in this Contract, then the VENDORS shall execute the corresponding Absolute Deed of Sale over the property herein conveyed with assumption of the mortgages aforecited, in favor of the VENDEES herein. A careful reading of the pertinent provisions of the agreement readily shows that the principal object of the contract was the sale of the Barredo house and lot, for which the Leao Spouses gave a down payment of P100,000.00 as provided for in par. 1 of the contract, and thereafter ten (10) equal monthly installments amounting to another P100,000.00, as stipulated in par. 2 of the same agreement. The assumption of the mortgages by the Leao Spouses over the mortgaged property and their payment of amortizations are just collateral matters which are natural consequences of the sale of the said mortgaged property. Thus, par. 3 of the agreement provides that the Leao Spouses bind themselves to assume as they hereby assume beginning on July 1, 1987, the payment of the unpaid balance x x x x Hence, the Leao Spouses merely bound themselves to assume, which they actually did upon the signing of the agreement, the obligations of the Barredo Spouses with the SSS and Apex. Nowhere in the agreement was it stipulated that the sale was conditioned upon their full payment of the loans with SSS and Apex. When the language of the contract is clear, it requires no interpretation,[8] and its terms should not be disturbed.[9] The primary and elementary rule

of construction of documents is that when the words or language thereof is clear and plain or readily understandable by any ordinary reader thereof, there is absolutely no room for interpretation or construction anymore[10] and the literal meaning of its stipulations shall control.[11] To include the full payment of the obligations with the SSS and Apex as a condition would be to unnecessarily stretch and put a new meaning to the provisions of the agreement. For, as a general rule, when the terms of an agreement have been reduced to writing, such written agreement is deemed to contain all the terms agreed upon and there can be, between the parties and their successors-in-interest, no evidence of such terms other than the contents of the written agreement.[12] And, it is a familiar doctrine in obligations and contracts that the parties are bound by the stipulations, clauses, terms and conditions they have agreed to, which is the law between them, the only limitation being that these stipulations, clauses, terms and conditions are not contrary to law, morals, public order or public policy.[13] Not being repugnant to any legal proscription, the agreement entered into by the parties must be respected and each is bound to fulfill what has been expressly stipulated therein.[14] But even if we consider the payment of the mortgage amortizations to the SSS and Apex as a condition on which the sale is based on, still rescission would not be available since noncompliance with such condition would just be a minor or casual breach thereof as it does not defeat the very object of the parties in entering into the contract. A cursory reading of the agreement easily reveals that the main consideration of the sale is the payment of P200,000.00 to the vendors within the period agreed upon. The assumption of mortgage by the Leao Spouses is a natural consequence of their buying a mortgaged property. In fact, the Barredo Spouses do not stand to benefit from the payment of the amortizations by the Leao Spouses directly to the SSS and Apex simply because the Barredo Spouses have already parted with their property, for which they were already fully compensated in the amount of P200,000.00. Thus, as adverted to in Song Fo & Co. v. Hawaiian Philippine Co.,[15] we ruled that a delay in the payment for a small quantity of molasses for some twenty (20) days is not such a violation of an essential condition of the contract that warrants rescission due to nonperformance. In Philippine Amusement Enterprise, Inc. v. Natividad,[16] we declined rescission for the occasional failure of the phonograph to operate, not frequent enough to render it unsuitable and unserviceable. In Laforteza v. Machuca,[17] we said that the delay of one month in payment was a mere casual breach that would not entitle the respondents to rescind the contract. In Ang v. Court of Appeals,[18] we held that the failure to remove and clear the subject property of all occupants and obstructions and deliver all the pertinent papers to the vendees for the registration and issuance of a certificate of title in their name were not essential conditions but merely incidental undertakings which will not permit rescission. In Power Commercial and Industrial Corp. v. Court of Appeals,[19] we went a step further and considered the failure of the vendor to eject the occupants of a lot sold as a usual warranty against eviction, and not a condition that was not met, and thus, rescission was not allowed. And, in Del Castillo v. Nanguiat,[20] we ruled that the failure to pay in full the purchase price stipulated in a deed of sale does not ipso facto grant the seller the right to rescind the agreement. In all these cases, we were consistent in holding that rescission of a contract will not be permitted for a slight or casual breach, but only such substantial and fundamental breach as would defeat the very object of the parties in making the agreement. If the Barredo Spouses were really protective of their reputation and credit standing, they should have sought the consent, or at least notified the SSS and Apex of the assumption by the

Leao Spouses of their indebtedness. Besides, in ordering rescission, the trial court should have likewise ordered the Barredo Spouses to return the P200,000.00 they received as purchase price plus interests. Art. 1385 of the Civil Code provides that *r+escission creates the obligation to return the things which were the object of the contract, together with their fruits, and the price with its interest.[21] The vendor is therefore obliged to return the purchase price paid to him by the buyer if the latter rescinds the sale.[22] Thus, where a contract is rescinded, it is the duty of the court to require both parties to surrender that which they have respectively received and place each other as far as practicable in his original situation.[23] IN VIEW WHEREOF, the petition is DENIED. The Decision of the Court of Appeals in CA-G.R. CV No. 44009 promulgated May 21, 2002, and its Resolution therein dated December 10, 2002, are hereby AFFIRMED. Costs against petitioners. SO ORDERED. Villanueva vs Gonzaga

GENEROSO V. VILLANUEVA and RAUL C. VILLANUEVA, JR., Petitioners, vs. ESTATE OF GERARDO L. GONZAGA/MA. VILLA GONZAGA, in her capacity as Administratrix, Respondents. DECISION PUNO, J.: Before us is a petition for review on certiorari assailing the Decision dated January 16, 2003 1 of the Court of Appeals in CA-G.R. CV No. 46865 which affirmed with modification the Decision dated December 29, 1993 2 of the Regional Trial Court (RTC) of Bacolod City in Civil Case No. 6552. The RTC-Bacolod City declared the Memorandum of Agreement (MOA) between petitioners and respondents as rescinded, and ordered petitioners to pay moral damages and attorneys fees to respondents. The Court of Appeals deleted the award for moral damages. The antecedent facts are as follows: On January 15, 1990, petitioners Generoso Villanueva and Raul Villanueva, Jr., business entrepreneurs engaged in the operation of transloading stations and sugar trading, and respondent Estate of Gerardo L. Gonzaga, represented by its Judicial Administratrix, respondent Ma. Villa J. Gonzaga, executed a MOA 3 which reads: KNOW ALL MEN BY THESE PRESENTS: This Memorandum made and entered into by and between: THE ESTATE OF GERARDO L. GONZAGA represented in the act by its Administratrix, MA. VILLA J. GONZAGA, Filipino, of legal age, widow and resident of Bacolod City, hereinafter referred to as the FIRST PARTY, -andRAUL VILLANUEVA, JR. and GENEROSO V. VILLANUEVA, Filipinos, of legal age, married and residents of Bacolod City, hereinafter jointly referred to as the SECOND PARTY. W I T N E S S E T H:

1. WHEREAS, the FIRST PARTY is the true and lawful owner of a parcel of land, Lot No. 1362, covered by TCT No. T-131872 situated at Brgy. Granada, Bacolod City and known as Hda. San Dionisio Norte; 2. WHEREAS, the aforesaid property is presently mortgaged with the Philippine National Bank (PNB) as collateral for a loan; 3. WHEREAS, the aforesaid property is already subdivided into sub-lots although separate titles for each lot is not yet issued; 4. WHEREAS, the herein SECOND PARTY agrees to purchase portions of the aforesaid property equivalent to 3,240 sq. meters which portions are designated as Lots Nos. 28, 29, 30, 31, 32, 33, 34, 35, 36, 37, 38 & 39 in phase 11 of the subdivision plan; 5. WHEREAS, the SECOND PARTY agrees to purchase the aforesaid lots at the price of ONE HUNDRED FIFTY (P150.00) PESOS per sq. meter or for a total price of FOUR HUNDRED EIGHTY SIX THOUSAND (P486,000.00) PESOS subject to the following conditions: A.) That the FIRST PARTY shall cause the release of the aforementioned lots from the Philippine National Bank (PNB) at the earliest possible time. B.) That the SECOND PARTY agrees to pay the amount of P486,000.00 as follows: P100,000.00 - upon the signing of this agreement. P191,600.00 - on or before January 10, 1990. P194,400.00 - upon the approval by the PNB of the release of the lots. C.) That it is hereby agreed that the ONE HUNDRED THOUSAND (P100,000.00) PESOS down payment shall at the same time be considered as earnest money which shall be forfeited in the event the SECOND PARTY withdraws from this agreement. D.) That upon payment of 60% of the purchase price, the SECOND PARTY may start to introduce improvements in the area if they so desire. E.) That upon the release by the Philippine National Bank (PNB) of the lots subject of this agreement, the FIRST PARTY shall immediately execute a Deed of Sale in favor of the SECOND PARTY. All expenses for documentation and capital gains shall be borne by the FIRST PARTY, while expenses for transfer of title to the SECOND PARTY shall be borne by the latter. IN WITNESS WHEREOF, the parties have hereunto set their hands this 15th day of January, 1990 in this City of Bacolod, Philippines. [emphases added] As stipulated in the agreement, petitioners introduced improvements after paying P291,600.00 constituting sixty (60%) percent of the total purchase price of the lots. Petitioners then requested permission from respondent Administratrix to use the premises for the next milling season. Respondent refused on the ground that petitioners cannot use the premises until full payment of the purchase price. Petitioners informed respondent that their immediate use of the premises was absolutely necessary and that any delay will cause them substantial damages. Respondent remained firm in her refusal, and demanded that petitioners stop using the lots as a transloading station to service the Victorias Milling Company unless they pay the full purchase price. In a letter-reply dated April

5, 1991, petitioners assured respondent of their readiness to pay the balance but reminded respondent of herobligation to redeem the lots from mortgage with the Philippine National Bank (PNB). [4]Petitioners gave respondent ten (10) days within which to do so. [5] On April 10, 1991, respondent Administratrix wrote petitioners informing them that the PNB had agreed to release the lots from mortgage. She demanded payment of the balance of the purchase price. Enclosed with the demand letter was the PNBs letter of approval dated April 8, 1991, 6 marked as Exhibit "3-B," which reads Mrs. Ma. Villa J. Gonzaga Judicial Administratrix Int. Est. of Gerardo L. Gonzaga La Salle Subdivision Bacolod City Dear Mrs. Gonzaga: We are pleased to inform you that your request for the partial release of securities, particularly the 3,240 sq. m. agricultural land x x x covered by TCT No. T-31113 has been approved by our Senior Management Credit Committee I on April 1, 1991 subject to the following conditions: 1. The sale be approved by the Court insofar as the interest of the estate is concerned; 2. Payment of two (2) annual amortizations of the restructured accounts in addition to P50,000.00 to be derived from sale of lot sought to be released; 3. Such terms and conditions that our Legal Dept. may impose to protect the interest of the Bank. Please see us for the preparation of the covering documents. [ emphases added] Very truly yours, (signed) CECILIA S. GAYENALO Asst. Manager In their letter-reply dated April 18, 1991, 7 petitioners demanded that respondent show the clean titles to the lots first before they pay the balance of the purchase price. Respondent merely reiterated the demand for payment. Petitioners stood pat on their demand. On May 28, 1991, respondent Administratrix executed a Deed of Rescission rescinding the MOA on two grounds: (1) petitioners failed to pay the balance of the purchase price despite not ice of the lots release from mortgage, and (2) petitioners violated the MOA by using the lots as a transloading station without permission from the respondents. In their Letter dated June 13, 1991, petitioners, through counsel, formally demanded the production of the titles to the lots before they pay the balance of the purchase price. The demand was ignored. Consequently, on June 19, 1991, petitioners filed a complaint against respondents for breach of contract, specific performance and damages before the RTC-Bacolod City, docketed as Civil Case No. 6552. Petitioners alleged that respondents delayed performance of their obligation by unreasonably failing to secure the release of the lots from mortgage with the PNB within the earliest possible time, as stipulated in the MOA. Petitioners prayed that respondents be ordered to produce the clean titles to the lots before they pay the balance of the purchase price.

The trial court decided the case in favor of respondents. The dispositive portion of the decision reads(1) Declaring the Memorandum of Agreement, Exh. "C" rescinded; consequently ownership and possession of Lots 28 to 39, inclusive, of Phase II of the subdivision plan covered by TCT No. T-31113 are hereby restored to defendants, and defendants (sic) are thereby ordered to vacate the premises of said lots; (2) Ordering plaintiffs to jointly and severally pay defendants: P20,000.00 as moral damages; and P15,000.00 as attorneys fees; (3) Ordering defendants to solidarily pay or refund plaintiffs: the sum of P100,000.00 paid by the latter as down payment on the aforesaid Memorandum of Agreement on December 18, 1989, with legal interest at 6% per annum from said date up to and until the amount is fully paid or refunded; and another sum of P191,600.00 paid by the latter to the former in connection with the said Memorandum of Agreement on January 10, 1990, with the same rate of interest at 6% per annum from said date up to and until the amount is fully paid or refunded; and (4) Condemning plaintiffs to pay the cost of suit. [8] Petitioners filed a petition for review before the Court of Appeals. On January 16, 2003, the Court of Appeals affirmed the trial courts decision but deleted the award for moral damages on the ground that petitioners were not guilty of bad faith in refusing to pay the balance of the purchase price. 9 Hence, this petition. Petitioners raise the following issues: 1. Whether x x x respondents failed to comply with their reciprocal obligation of securing the release of the subject lots from mortgage indebtedness with the Philippine National Bank. 2. Whether x x x the delivery of the titles corresponding to the twelve (12) lots subject of the Memorandum of Agreement is a precondition to the payment by the petitioners of the balance of the consideration. 3. Whether x x x petitioners did incur (sic) delay in the performance of their reciprocal obligation under the Memorandum of Agreement. 4. Whether x x x there is legal, or even a factual, ground for the rescission of the Memorandum of Agreement. We will resolve first the procedural objections raised by the respondents. Respondents contend that the petition should be dismissed for late filing, and irregular execution of the affidavit of service attached to the petition. Respondents allege that the petition was filed late as there was no evidence to show that petitioners motion for extension of time to file the petition has been granted by the Court. Petitioners allegedly received a copy of the assailed Court of Appeals decision on January 28, 2003 but filed the petition for review on March 12, 2003 only, contrary to Section 2, Rule 45 of the 1997 Rules of Civil Procedure. 11 In addition, the Affidavit of Service attached to the petition was irregularly executed on March 13, 2003, a day after the petition has been filed in Court. Respondents contentions are not meritorious. The records show that petitioners motion for 30 days extension of time to file the petition for review has been granted in our Resolution dated March 26, 2003. Petitioners were given thirty (30) days from the expiration of the original period, or until March 13, 2003, within which to file the petition for review. Although our resolution is dated after the extension prayed for has already expired, we specifically conditioned the grant of extension upon the timeliness of the filing of the petition and payment by petitioners of the correct docket and other filing fees. Petitioners did so. The petition for review was posted by registered mail on March 13, 2003, as shown by the date appearing on the first page of the original copy of the petition filed with the Court. [12]The Affidavit of Service was thus regularly executed on March 13, 2003, the same day that the petition was posted by registered mail. No reason exists therefore for the dismissal of the petition on technical grounds, as respondents erroneously contend. On the merits of the case, we agree with the petitioners that the Court of Appeals erred in ruling that respondents had already fulfilled their obligation to cause the release of the lots from mortgage with the PNB at the time they demanded payment of the balance of the purchase price. The finding of the appellate court is refuted by Exh. "3-B" and by the testimonial evidence on record.
10

A reading of Exhibit "3-B," 13 which is the PNBs letter of approval dated April 8, 1991, clearly shows that the approval was conditional. Three (3) conditions were laid down by the bank before the lots could be finally released from mortgage. The three conditions were: (1) that respondents secure approval of the sale from the intestate court insofar as the interest of the estate is concerned; (2) that respondents pay two annual amortizations of their restructured accounts with the PNB plus P50,000.00 to be derived from the sale of the lots sought to be released; and (3) that respondents comply with such other terms and conditions as the PNBs Legal Departm ent may impose. Cecilia S. Gayenalo, the Assistant Manager of PNB Bacolod City Branch, herself testified that it was in July 1991 that the final release papers were prepared by the bank because it was only at that time that respondents complied with the three conditions. 14 It was therefore premature for respondents to demand payment of the balance of the purchase price from the petitioners in April 1991 and, failing in that, to "rescind" the MOA in May 1991. Moreover, there is no legal basis for the rescission. The remedy of rescission under Art. 1191 of the Civil Code 15is predicated on a breach of faith by the other party that violates the reciprocity between them. 16 We have held in numerous cases that the remedy does not apply to contracts to sell. 17 We explained the reason in Santos v. Court of Appeals, 18 viz x x x [I]n a contract to sell, title remains with the vendor and does not pass on to the vendee until the purchase price is paid in full. Thus, in a contract to sell, the payment of the purchase price is a positive suspensive condition. Failure to pay the price agreed upon is not a mere breach, casual or serious, but a situation that prevents the obligation of the vendor to convey title from acquiring an obligatory force. This is entirely different from the situation in a contract of sale, where non-payment of the price is a negative resolutory condition. The effects in law are not identical. In a contract of sale, the vendor has lost ownership of the thing sold and cannot recover it, unless the contract of sale is rescinded and set aside. In a contract to sell, however, the vendor remains the owner for as long as the vendee has not complied fully with the condition of paying the purchase price. If the vendor should eject the vendee for failure to meet the condition precedent, he is enforcing the contract and not rescinding it. x x x x Article 1592 speaks of non-payment of the purchase price as a resolutory condition. It does not apply to a contract to sell. As to Article 1191, it is subordinated to the provisions of Article 1592 when applied to sales of immovable property. Neither provision is applicable [to a contract to sell]. ( emphasis added) The MOA between petitioners and respondents is a conditional contract to sell. Ownership over the lots is not to pass to the petitioners until full payment of the purchase price. Petitioners obligation to pay, in turn, is conditioned upon the release of the lots from mortgage with the PNB to be secured by the respondents. Although there was no express provision regarding reserved ownership until full payment of the purchase price, the intent of the parties in this regard is evident from the provision that a deed of absolute sale shall be executed only when the lots have been released from mortgage and the balance paid by petitioners. Since ownership has not been transferred, no further legal action need have been taken by the respondents, except an action to recover possession in case petitioners refuse to voluntarily surrender the lots. 19 The records show that the lots were finally released from mortgage in July 1991. Petitioners have always expressed readiness to pay the balance of the purchase price once that is achieved. Hence, petitioners should be allowed to pay the balance now, if they so desire, since it is established that respondents demand for them to pay in April 1991 was premature. However, petitioners may not demand production by the respondents of the titles to the lots as a condition for their payment. It was not required under the MOA. The MOA merely states that petitioners shall pay the balance "upon approval by the PNB of the release of the lots " from mortgage. Petitioners may not add further conditions now. Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith. 20 IN VIEW WHEREOF, the petition is GRANTED. The assailed Decision dated January 16, 2003 of the Court of Appeals in CA-G.R. CV No. 46865 is REVERSED and SET ASIDE. Petitioners and respondents are restored to thestatus quo ante before the execution of the Deed of Rescission dated May 28, 1991which is declared of no legal effect. SO ORDERED.

Art. 1169-1174 RCPI vs CA

G.R. No. L-44748 August 29, 1986 RADIO COMMUNICATIONS OF THE PHILS., INC. (RCPI). petitioner, vs. COURT OF APPEALS and LORETO DIONELA, respondents. O. Pythogoras Oliver for respondents.

PARAS, J.: Before Us, is a Petition for Review by certiorari of the decision of the Court of Appeals, modifying the decision of the trial court in a civil case for recovery of damages against petitioner corporation by reducing the award to private respondent Loreto Dionela of moral damages from P40,000 to Pl5,000, and attorney's fees from P3,000 to P2,000. The basis of the complaint against the defendant corporation is a telegram sent through its Manila Office to the offended party, Loreto Dionela, reading as follows: 176 AS JR 1215PM 9 PAID MANDALUYONG JUL 22-66 LORETO DIONELA CABANGAN LEGASPI CITY WIRE ARRIVAL OF CHECK FER LORETO DIONELA-CABANGAN-WIRE ARRIVAL OF CHECK-PER 115 PM SA IYO WALANG PAKINABANG DUMATING KA DIYAN-WALA-KANG PADALA DITO KAHIT BULBUL MO (p. 19, Annex "A") Plaintiff-respondent Loreto Dionela alleges that the defamatory words on the telegram sent to him not only wounded his feelings but also caused him undue embarrassment and affected adversely his business as well because other people have come to know of said defamatory words. Defendant corporation as a defense, alleges that the additional words in Tagalog was a private joke between the sending and receiving operators and that they were not addressed to or intended for plaintiff and therefore did not form part of the telegram and that the Tagalog words are not defamatory. The telegram sent through its facilities was received in its station at Legaspi City. Nobody other than the operator manned the teletype machine which automatically receives telegrams being transmitted. The said telegram was detached from the machine and placed inside a sealed envelope and delivered to plaintiff, obviously as is. The additional words in Tagalog were never noticed and were included in the telegram when delivered. The trial court in finding for the plaintiff ruled as follows: There is no question that the additional words in Tagalog are libelous. They clearly impute a vice or defect of the plaintiff. Whether or not they were intended for the plaintiff, the effect on the plaintiff is the same. Any person reading the additional words in Tagalog will naturally think that they refer to the addressee, the plaintiff. There is no indication from the face of the telegram that the additional words in Tagalog were sent as a private joke between the operators of the defendant. The defendant is sued directly not as an employer. The business of the defendant is to transmit telegrams. It will open the door to frauds and allow the defendant to act with impunity if it can escape liability by the simple expedient of showing that its employees acted beyond the scope of their assigned tasks.

The liability of the defendant is predicated not only on Article 33 of the Civil Code of the Philippines but on the following articles of said Code: ART. 19.- Every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith. ART. 20.-Every person who, contrary to law, wilfully or negligently causes damage to another, shall indemnify the latter for the same. There is sufficient publication of the libelous Tagalog words. The office file of the defendant containing copies of telegrams received are open and held together only by a metal fastener. Moreover, they are open to view and inspection by third parties. It follows that the plaintiff is entitled to damages and attorney's fees. The plaintiff is a businessman. The libelous Tagalog words must have affected his business and social standing in the community. The Court fixes the amount of P40,000.00 as the reasonable amount of moral damages and the amount of P3,000.00 as attorney's fee which the defendant should pay the plaintiff. (pp. 15-16, Record on Appeal) The respondent appellate court in its assailed decision confirming the aforegoing findings of the lower court stated: The proximate cause, therefore, resulting in injury to appellee, was the failure of the appellant to take the necessary or precautionary steps to avoid the occurrence of the humiliating incident now complained of. The company had not imposed any safeguard against such eventualities and this void in its operating procedure does not speak well of its concern for their clientele's interests. Negligence here is very patent. This negligence is imputable to appellant and not to its employees. The claim that there was no publication of the libelous words in Tagalog is also without merit. The fact that a carbon copy of the telegram was filed among other telegrams and left to hang for the public to see, open for inspection by a third party is sufficient publication. It would have been otherwise perhaps had the telegram been placed and kept in a secured place where no one may have had a chance to read it without appellee's permission. The additional Tagalog words at the bottom of the telegram are, as correctly found by the lower court, libelous per se, and from which malice may be presumed in the absence of any showing of good intention and justifiable motive on the part of the appellant. The law implies damages in this instance (Quemel vs. Court of Appeals, L-22794, January 16, 1968; 22 SCRA 44). The award of P40,000.00 as moral damages is hereby reduced to P15,000.00 and for attorney's fees the amount of P2,000.00 is awarded. (pp. 22-23, record) After a motion for reconsideration was denied by the appellate court, petitioner came to Us with the following: ASSIGNMENT OF ERRORS I The Honorable Court of Appeals erred in holding that Petitioner-employer should answer directly and primarily for the civil liability arising from the criminal act of its employee. II The Honorable Court of Appeals erred in holding that there was sufficient publication of the alleged libelous telegram in question, as contemplated by law on libel. III The Honorable Court of Appeals erred in holding that the liability of petitioner-companyemployer is predicated on Articles 19 and 20 of the Civil Code, Articles on Human Relations.

IV The Honorable Court of Appeals erred in awarding Atty's. fees. (p. 4, Record) Petitioner's contentions do not merit our consideration. The action for damages was filed in the lower court directly against respondent corporation not as an employer subsidiarily liable under the provisions of Article 1161 of the New Civil Code in relation to Art. 103 of the Revised Penal Code. The cause of action of the private respondent is based on Arts. 19 and 20 of the New Civil Code (supra). As well as on respondent's breach of contract thru the negligence of its own employees. 1 Petitioner is a domestic corporation engaged in the business of receiving and transmitting messages. Everytime a person transmits a message through the facilities of the petitioner, a contract is entered into. Upon receipt of the rate or fee fixed, the petitioner undertakes to transmit the message accurately. There is no question that in the case at bar, libelous matters were included in the message transmitted, without the consent or knowledge of the sender. There is a clear case of breach of contract by the petitioner in adding extraneous and libelous matters in the message sent to the private respondent. As a corporation, the petitioner can act only through its employees. Hence the acts of its employees in receiving and transmitting messages are the acts of the petitioner. To hold that the petitioner is not liable directly for the acts of its employees in the pursuit of petitioner's business is to deprive the general public availing of the services of the petitioner of an effective and adequate remedy. In most cases, negligence must be proved in order that plaintiff may recover. However, since negligence may be hard to substantiate in some cases, we may apply the doctrine of RES IPSA LOQUITUR (the thing speaks for itself), by considering the presence of facts or circumstances surrounding the injury. WHEREFORE, premises considered, the judgment of the appellate court is hereby AFFIRMED. SO ORDERED.

Syquia vs CA

JUAN J. SYQUIA, CORAZON C. SYQUIA, CARLOTA C. SYQUIA, CARLOS C. SYQUIA and ANTHONY C. SYQUIA, petitioners, vs. THE HONORABLE COURT OF APPEALS, and THE MANILA MEMORIAL PARK CEMETERY, INC., respondents. Pacis & Reyes Law Offices for petitioners. Augusto S. San Pedro & Ari-Ben C. Sebastian for private respondents.

CAMPOS, JR., J.: Herein petitioners, Juan J. Syquia and Corazon C. Syquia, Carlota C. Syquia, Carlos C. Syquia, and Anthony Syquia, were the parents and siblings, respectively, of the deceased Vicente Juan Syquia. On March 5, 1979, they filed a complaint 1 in the then Court of First Instance against herein private respondent, Manila Memorial Park Cemetery, Inc. for recovery of damages arising from breach of contract and/or quasi-delict. The trial court dismissed the complaint. The antecedent facts, as gathered by the respondent Court, are as follows: On March 5, 1979, Juan, Corazon, Carlota and Anthony all surnamed Syquia, plaintiffappellants herein, filed a complaint for damages against defendant-appellee, Manila Memorial Park Cemetery, Inc.

The complaint alleged among others, that pursuant to a Deed of Sale (Contract No. 6885) dated August 27, 1969 and Interment Order No. 7106 dated July 21, 1978 executed between plaintiff-appellant Juan J. Syquia and defendant-appellee, the former, father of deceased Vicente Juan J. Syquia authorized and instructed defendant-appellee to inter the remains of deceased in the Manila Memorial Park Cemetery in the morning of July 25, 1978 conformably and in accordance with defendant-appellant's (sic) interment procedures; that on September 4, 1978, preparatory to transferring the said remains to a newly purchased family plot also at the Manila Memorial Park Cemetery, the concrete vault encasing the coffin of the deceased was removed from its niche underground with the assistance of certain employees of defendantappellant (sic); that as the concrete vault was being raised to the surface, plaintiffs-appellants discovered that the concrete vault had a hole approximately three (3) inches in diameter near the bottom of one of the walls closing out the width of the vault on one end and that for a certain length of time (one hour, more or less), water drained out of the hole; that because of the aforesaid discovery, plaintiffs-appellants became agitated and upset with concern that the water which had collected inside the vault might have risen as it in fact did rise, to the level of the coffin and flooded the same as well as the remains of the deceased with ill effects thereto; that pursuant to an authority granted by the Municipal Court of Paraaque, Metro Manila on September 14, 1978, plaintiffs-appellants with the assistance of licensed morticians and certain personnel of defendant-appellant (sic) caused the opening of the concrete vault on September 15, 1978; that upon opening the vault, the following became apparent to the plaintiffsappellants: (a) the interior walls of the concrete vault showed evidence of total flooding; (b) the coffin was entirely damaged by water, filth and silt causing the wooden parts to warp and separate and to crack the viewing glass panel located directly above the head and torso of the deceased; (c) the entire lining of the coffin, the clothing of the deceased, and the exposed parts of the deceased's remains were damaged and soiled by the action of the water and silt and were also coated with filth.

Due to the alleged unlawful and malicious breach by the defendant-appellee of its obligation to deliver a defect-free concrete vault designed to protect the remains of the deceased and the coffin against the elements which resulted in the desecration of deceased's grave and in the alternative, because of defendant-appellee's gross negligence conformably to Article 2176 of the New Civil Code in failing to seal the concrete vault, the complaint prayed that judgment be rendered ordering defendant-appellee to pay plaintiffs-appellants P30,000.00 for actual damages, P500,000.00 for moral damages, exemplary damages in the amount determined by the court, 20% of defendant-appellee's total liability as attorney's fees, and expenses of litigation and costs of suit. 2
In dismissing the complaint, the trial court held that the contract between the parties did not guarantee that the cement vault would be waterproof; that there could be no quasi-delict because the defendant was not guilty of any fault or negligence, and because there was a pre-existing contractual relation between the Syquias and defendant Manila Memorial Park Cemetery, Inc.. The trial court also noted that the father himself, Juan Syquia, chose the gravesite despite knowing that said area had to be constantly sprinkled with water to keep the grass green and that water would eventually seep through the vault. The trial court also accepted the explanation given by defendant for boring a hole at the bottom side of the vault: "The hole had to be bored through the concrete vault because if it has no hole the vault will (sic) float and the grave would be filled with water and the digging would caved (sic) in the earth, the earth would caved (sic) in the (sic) fill up the grave." 3 From this judgment, the Syquias appealed. They alleged that the trial court erred in holding that the contract allowed the flooding of the vault; that there was no desecration; that the boring of the hole was justifiable; and in not awarding damages. The Court of Appeals in the Decision 4 dated December 7, 1990 however, affirmed the judgment of dismissal. Petitioner's motion for reconsideration was denied in a Resolution dated April 25, 1991. 5 Unsatisfied with the respondent Court's decision, the Syquias filed the instant petition. They allege herein that the Court of Appeals committed the following errors when it: 1. held that the contract and the Rules and Resolutions of private respondent allowed the flooding of the vault and the entrance thereto of filth and silt;

2. held that the act of boring a hole was justifiable and corollarily, when it held that no act of desecration was committed; 3. overlooked and refused to consider relevant, undisputed facts, such as those which have been stipulated upon by the parties, testified to by private respondent's witnesses, and admitted in the answer, which could have justified a different conclusion; 4. held that there was no tort because of a pre-existing contract and the absence of fault/negligence; and 5. did not award the P25,000.00 actual damages which was agreed upon by the parties, moral and exemplary damages, and attorney's fees. At the bottom of the entire proceedings is the act of boring a hole by private respondent on the vault of the deceased kin of the bereaved petitioners. The latter allege that such act was either a breach of private respondent's contractual obligation to provide a sealed vault, or, in the alternative, a negligent act which constituted a quasi-delict. Nonetheless, petitioners claim that whatever kind of negligence private respondent has committed, the latter is liable for desecrating the grave of petitioners' dead. In the instant case, We are called upon to determine whether the Manila Memorial Park Cemetery, Inc., breached its contract with petitioners; or, alternatively, whether private respondent was guilty of a tort. We understand the feelings of petitioners and empathize with them. Unfortunately, however, We are more inclined to answer the foregoing questions in the negative. There is not enough ground, both in fact and in law, to justify a reversal of the decision of the respondent Court and to uphold the pleas of the petitioners. With respect to herein petitioners' averment that private respondent has committed culpa aquiliana, the Court of Appeals found no negligent act on the part of private respondent to justify an award of damages against it. Although a pre-existing contractual relation between the parties does not preclude the existence of a culpa aquiliana, We find no reason to disregard the respondent's Court finding that there was no negligence. Art. 2176. Whoever by act or omission causes damage to another, there being fault or negligence, is obliged to pay for the damage done. Such fault or negligence, if there is no preexisting contractual relation between the parties, is called a quasi-delict . . . . (Emphasis supplied). In this case, it has been established that the Syquias and the Manila Memorial Park Cemetery, Inc., entered into a contract entitled "Deed of Sale and Certificate of Perpetual Care" 6 on August 27, 1969. That agreement governed the relations of the parties and defined their respective rights and obligations. Hence, had there been actual negligence on the part of the Manila Memorial Park Cemetery, Inc., it would be held liable not for a quasi-delict or culpa aquiliana, but for culpa contractual as provided by Article 1170 of the Civil Code, to wit: Those who in the performance of their obligations are guilty of fraud, negligence, or delay, and those who in any manner contravene the tenor thereof, are liable for damages. The Manila Memorial Park Cemetery, Inc. bound itself to provide the concrete box to be send in the interment. Rule 17 of the Rules and Regulations of private respondent provides that:

Rule 17. Every earth interment shall be made enclosed in a concrete box, or in an outer wall of stone, brick or concrete, the actual installment of which shall be made by the employees of the Association. 7
Pursuant to this above-mentioned Rule, a concrete vault was provided on July 27, 1978, the day before the interment, and was, on the same day, installed by private respondent's employees in the grave which was dug earlier. After the burial, the vault was covered by a cement lid. Petitioners however claim that private respondent breached its contract with them as the latter held out in the brochure it distributed that the . . . lot may hold single or double internment (sic) underground in sealed concrete

vault." 8 Petitioners claim that the vault provided by private respondent was not sealed, that is, not waterproof. Consequently, water seeped through the cement enclosure and damaged everything inside it. We do not agree. There was no stipulation in the Deed of Sale and Certificate of Perpetual Care and in the Rules and Regulations of the Manila Memorial Park Cemetery, Inc. that the vault would be waterproof. Private respondent's witness, Mr. Dexter Heuschkel, explained that the term "sealed" meant "closed." 9 On the other hand, the word "seal" is defined as . . . any of various closures or fastenings . . . that cannot be opened without rupture and that serve as a check against tampering or unauthorized opening." 10 The meaning that has been given by private respondent to the word conforms with the cited dictionary definition. Moreover, it is also quite clear that "sealed" cannot be equated with "waterproof". Well settled is the rule that when the terms of the contract are clear and leave no doubt as to the intention of the contracting parties, then the literal meaning of the stipulation shall control. 11 Contracts should be interpreted according to their literal meaning and should not be interpreted beyond their obvious intendment. 12 As ruled by the respondent Court:

When plaintiff-appellant Juan J. Syquia affixed his signature to the Deed of Sale (Exhibit "A") and the attached Rules and Regulations (Exhibit "1"), it can be assumed that he has accepted defendant-appellee's undertaking to merely provide a concrete vault. He can not now claim that said concrete vault must in addition, also be waterproofed (sic). It is basic that the parties are bound by the terms of their contract, which is the law between them (Rizal Commercial Banking Corporation vs. Court of Appeals, et al. 178 SCRA 739). Where there is nothing in the contract which is contrary to law, morals, good customs, public order, or public policy, the validity of the contract must be sustained (Phil. American Insurance Co. vs. Judge Pineda, 175 SCRA 416). Consonant with this ruling, a contracting party cannot incur a liability more than what is expressly specified in his undertaking. It cannot be extended by implication, beyond the terms of the contract (Rizal Commercial Banking Corporation vs. Court of Appeals, supra). And as a rule of evidence, where the terms of an agreement are reduced to writing, the document itself, being constituted by the parties as the expositor of their intentions, is the only instrument of evidence in respect of that agreement which the law will recognize, so long as its (sic) exists for the purpose of evidence (Starkie, Ev., pp. 648, 655, Kasheenath vs. Chundy, 5 W.R. 68 cited in Francisco, Revised Rules of Court in the Phil. p. 153, 1973 Ed.). And if the terms of the contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control (Santos vs. CA, et al., G. R. No. 83664, Nov. 13, 1989; Prudential Bank & Trust Co. vs. Community Builders Co., Inc., 165 SCRA 285; Balatero vs. IAC, 154 SCRA 530). 13
We hold, therefore, that private respondent did not breach the tenor of its obligation to the Syquias. While this may be so, can private respondent be liable for culpa aquiliana for boring the hole on the vault? It cannot be denied that the hole made possible the entry of more water and soil than was natural had there been no hole. The law defines negligence as the "omission of that diligence which is required by the nature of the obligation and corresponds with the circumstances of the persons, of the time and of the place." 14 In the absence of stipulation or legal provision providing the contrary, the diligence to be observed in the performance of the obligation is that which is expected of a good father of a family. The circumstances surrounding the commission of the assailed act boring of the hole negate the allegation of negligence. The reason for the act was explained by Henry Flores, Interment Foreman, who said that: Q It has been established in this particular case that a certain Vicente Juan Syquia was interred on July 25, 1978 at the Paraaque Cemetery of the Manila Memorial Park Cemetery, Inc., will you please tell the Hon. Court what or whether you have participation in connection with said internment (sic)?

A A day before Juan (sic) Syquia was buried our personnel dug a grave. After digging the next morning a vault was taken and placed in the grave and when the vault was placed on the grave a hole was placed on the vault so that water could come into the vault because it was raining heavily then because the vault has no hole the vault will float and the grave would be filled with water and the digging would caved (sic) in and the earth, the earth would (sic) caved in and fill up the grave. 15 (Emphasis ours)
Except for the foreman's opinion that the concrete vault may float should there be a heavy rainfall, from the abovementioned explanation, private respondent has exercised the diligence of a good father of a family in preventing the accumulation of water inside the vault which would have resulted in the caving in of earth around the grave filling the same with earth. Thus, finding no evidence of negligence on the part of private respondent, We find no reason to award damages in favor of petitioners. In the light of the foregoing facts, and construed in the language of the applicable laws and jurisprudence, We are constrained to AFFIRM in toto the decision of the respondent Court of Appeals dated December 7, 1990. No costs. SO ORDERED. Narvasa, C.J., Feliciano, Regalado and Nocon, JJ., concur .

FEBTC vs CA

FAR EAST BANK AND TRUST COMPANY, petitioner, vs. THE HONORABLE COURT OF APPEALS, LUIS A. LUNA and CLARITA S. LUNA, respondents.

VITUG, J.: Some time in October 1986, private respondent Luis A. Luna applied for, and was accorded, a FAREASTCARD issued by petitioner Far East Bank and Trust Company ("FEBTC") at its Pasig Branch. Upon his request, the bank also issued a supplemental card to private respondent Clarita S. Luna. In August 1988, Clarita lost her credit card. FEBTC was forthwith informed. In order to replace the lost card, Clarita submitted an affidavit of loss. In cases of this nature, the bank's internal security procedures and policy would appear to be to meanwhile so record the lost card, along with the principal card, as a "Hot Card" or "Cancelled Card" in its master file. On 06 October 1988, Luis tendered a despedida lunch for a close friend, a Filipino-American, and another guest at the Bahia Rooftop Restaurant of the Hotel Intercontinental Manila. To pay for the lunch, Luis presented his FAREASTCARD to the attending waiter who promptly had it verified through a telephone call to the bank's Credit Card Department. Since the card was not honored, Luis was forced to pay in cash the bill amounting to P588.13. Naturally, Luis felt embarrassed by this incident. In a letter, dated 11 October 1988, private respondent Luis Luna, through counsel, demanded from FEBTC the payment of damages. Adrian V. Festejo, a vice-president of the bank, expressed the bank's apologies to Luis. In his letter, dated 03 November 1988, Festejo, in part, said:

In cases when a card is reported to our office as lost, FAREASTCARD undertakes the necessary action to avert its unauthorized use (such as tagging the card as hotlisted), as it is always our intention to protect our cardholders.

An investigation of your case however, revealed that FAREASTCARD failed to inform you about its security policy. Furthermore, an overzealous employee of the Bank's Credit Card Department did not consider the possibility that it may have been you who was presenting the card at that time (for which reason, the unfortunate incident occurred). 1
Festejo also sent a letter to the Manager of the Bahia Rooftop Restaurant to assure the latter that private respondents were "very valued clients" of FEBTC. William Anthony King, Food and Beverage Manager of the Intercontinental Hotel, wrote back to say that the credibility of private respondent had never been "in question." A copy of this reply was sent to Luis by Festejo. Still evidently feeling aggrieved, private respondents, on 05 December 1988, filed a complaint for damages with the Regional Trial Court ("RTC") of Pasig against FEBTC. On 30 March 1990, the RTC of Pasig, given the foregoing factual settings, rendered a decision ordering FEBTC to pay private respondents (a) P300,000.00 moral damages; (b) P50,000.00 exemplary damages; and (c) P20,000.00 attorney's fees. On appeal to the Court of Appeals, the appellate court affirmed the decision of the trial court. Its motion for reconsideration having been denied by the appellate court, FEBTC has come to this Court with this petition for review. There is merit in this appeal. In culpa contractual, moral damages may be recovered where the defendant is shown to have acted in bad faith or with malice in the breach of the contract. 2 The Civil Code provides: Art. 2220. Willful injury to property may be a legal ground for awarding moral damages if the court should find that, under the circumstances, such damages are justly due. The same rule applies to breaches of contract where the defendant acted fraudulently or in bad faith. (Emphasis supplied) Bad faith, in this context, includes gross, but not simple, negligence. 3 Exceptionally, in a contract of carriage, moral damages are also allowed in case of death of a passenger attributable to the fault (which is presumed 4) of the common carrier. 5 Concededly, the bank was remiss in indeed neglecting to personally inform Luis of his own card's cancellation. Nothing in the findings of the trial court and the appellate court, however, can sufficiently indicate any deliberate intent on the part of FEBTC to cause harm to private respondents. Neither could FEBTC's negligence in failing to give personal notice to Luis be considered so gross as to amount to malice or bad faith. Malice or bad faith implies a conscious and intentional design to do a wrongful act for a dishonest purpose or moral obliquity; it is different from the negative idea of negligence in that malice or bad faith contemplates a state of mind affirmatively operating with furtive design or ill will. 6 We are not unaware of the previous rulings of this Court, such as in American Express International, Inc., vs.Intermediate Appellate Court (167 SCRA 209) and Bank of Philippine Islands vs. Intermediate Appellate Court(206 SCRA 408), sanctioning the application of Article 21, in relation to Article 2217 and Article 2219 7 of the Civil Code to a contractual breach similar to the case at bench. Article 21 states: Art. 21. Any person who wilfully causes loss or injury to another in a manner that is contrary to morals, good customs or public policy shall compensate the latter for the damage. Article 21 of the Code, it should be observed, contemplates a conscious act to cause harm. Thus, even if we are to assume that the provision could properly relate to a breach of contract, its application can be warranted only when

the defendant's disregard of his contractual obligation is so deliberate as to approximate a degree of misconduct certainly no less worse than fraud or bad faith. Most importantly, Article 21 is a mere declaration of a general principle in human relations that clearly must, in any case, give way to the specific provision of Article 2220 of the Civil Code authorizing the grant of moral damages in culpa contractual solely when the breach is due to fraud or bad faith. Mr. Justice Jose B.L. Reyes, in his ponencia in Fores vs. Miranda 8 explained with great clarity the predominance that we should give to Article 2220 in contractual relations; we quote: Anent the moral damages ordered to be paid to the respondent, the same must be discarded. We have repeatedly ruled (Cachero vs. Manila Yellow Taxicab Co. Inc., 101 Phil. 523; 54 Off. Gaz., [26], 6599; Necesito, et al. vs. Paras, 104 Phil., 75; 56 Off. Gaz., [23] 4023), that moral damages are not recoverable in damage actions predicated on a breach of the contract of transportation, in view of Articles 2219 and 2220 of the new Civil Code, which provide as follows: Art. 2219. Moral damages may be recovered in the following and analogous cases: (1) A criminal offense resulting in physical injuries; (2) Quasi-delicts causing physical injuries; xxx xxx xxx Art. 2220. Wilful injury to property may be a legal ground for awarding moral damages if the court should find that, under the circumstances, such damages are justly due. The same rule applies to breaches of contract where the defendant acted fraudulently or in bad faith. By contrasting the provisions of these two articles it immediately becomes apparent that: (a) In case of breach of contract (including one of transportation) proof of bad faith or fraud ( dolus), i.e., wanton or deliberately injurious conduct, is essential to justify an award of moral damages; and (b) That a breach of contract can not be considered included in the descriptive term "analogous cases" used in Art. 2219; not only because Art. 2220 specifically provides for the damages that are caused contractual breach, but because the definition of quasi-delict in Art. 2176 of the Code expressly excludes the cases where there is a "preexisitng contractual relations between the parties." Art. 2176. Whoever by act or omission causes damage to another, there being fault or negligence, is obliged to pay for the damage done. Such fault or negligence, if there is no pre-existing contractual relation between the parties, is called a quasi-delict and is governed by the provisions of this Chapter. The exception to the basic rule of damages now under consideration is a mishap resulting in the death of a passenger, in which case Article 1764 makes the common carrier expressly subject to the rule of Art. 2206, that entitles the spouse, descendants and ascendants of the deceased passenger to "demand moral damages for mental anguish by reason of the death of the deceased" (Necesito vs. Paras, 104 Phil. 84, Resolution on motion to reconsider, September 11, 1958). But the exceptional rule of Art. 1764 makes it all the more evident that where the injured passenger does not die, moral damages are not recoverable unless it is proved that the carrier was guilty of malice or bad faith. We think it is clear that the mere carelessness of the carrier's driver does not per se constitute or justify an inference of malice or bad faith on the part of the carrier; and in the case at bar there is no other evidence of such malice to support the award of moral damages by the Court of Appeals. To award moral damages for breach of contract, therefore, without proof of bad faith or malice on the part of the defendant, as required by Art. 2220, would be to violate the clear provisions of the law, and constitute unwarranted judicial legislation. xxx xxx xxx

The distinction between fraud, bad faith or malice in the sense of deliberate or wanton wrong doing and negligence (as mere carelessness) is too fundamental in our law to be ignored (Arts. 1170-1172); their consequences being clearly differentiated by the Code. Art. 2201. In contracts and quasi-contracts, the damages for which the obligor who acted in good faith is liable shall be those that are the natural and probable consequences of the breach of the obligation, and which the parties have foreseen or could have reasonably foreseen at the time the obligation was constituted. In case of fraud, bad faith, malice or wanton attitude, the obligor shall be responsible for all damages which may be reasonably attributed to the non-performance of the obligation. It is to be presumed, in the absence of statutory provision to the contrary, that this difference was in the mind of the lawmakers when in Art. 2220 they limited recovery of moral damages to breaches of contract in bad faith. It is true that negligence may be occasionally so gross as to amount to malice; but the fact must be shown in evidence, and a carrier's bad faith is not to be lightly inferred from a mere finding that the contract was breached through negligence of the carrier's employees. The Court has not in the process overlooked another rule that a quasi-delict can be the cause for breaching a contract that might thereby permit the application of applicable principles on tort 9 even where there is a preexisting contract between the plaintiff and the defendant (Phil. Airlines vs. Court of Appeals, 106 SCRA 143; Singson vs. Bank of Phil. Islands, 23 SCRA 1117; and Air France vs. Carrascoso, 18 SCRA 155). This doctrine, unfortunately, cannot improve private respondents' case for it can aptly govern only where the act or omission complained of would constitute an actionable tort independently of the contract. The test (whether a quasi-delict can be deemed to underlie the breach of a contract) can be stated thusly: Where, without a pre-existing contract between two parties, an act or omission can nonetheless amount to an actionable tort by itself, the fact that the parties are contractually bound is no bar to the application of quasi-delict provisions to the case. Here, private respondents' damage claim is predicated solely on their contractual relationship; without such agreement, the act or omission complained of cannot by itself be held to stand as a separate cause of action or as an independent actionable tort. The Court finds, therefore, the award of moral damages made by the court a quo, affirmed by the appellate court, to be inordinate and substantially devoid of legal basis. Exemplary or corrective damages, in turn, are intended to serve as an example or as correction for the public good in addition to moral, temperate, liquidated or compensatory damages (Art. 2229, Civil Code; seePrudenciado vs. Alliance Transport System, 148 SCRA 440; Lopez vs. Pan American World Airways, 16 SCRA 431). In criminal offenses, exemplary damages are imposed when the crime is committed with one or more aggravating circumstances (Art. 2230, Civil Code). In quasi-delicts, such damages are granted if the defendant is shown to have been so guilty of gross negligence as to approximate malice ( See Art. 2231, Civil Code; CLLC E.G. Gochangco Workers Union vs. NLRC, 161 SCRA 655; Globe Mackay Cable and Radio Corp. vs. CA, 176 SCRA 778). In contracts and quasi-contracts, the court may award exemplary damages if the defendant is found to have acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner (Art. 2232, Civil Code; PNB vs. Gen. Acceptance and Finance Corp., 161 SCRA 449). Given the above premises and the factual circumstances here obtaining, it would also be just as arduous to sustain the exemplary damages granted by the courts below ( see De Leon vs. Court of Appeals, 165 SCRA 166). Nevertheless, the bank's failure, even perhaps inadvertent, to honor its credit card issued to private respondent Luis should entitle him to recover a measure of damages sanctioned under Article 2221 of the Civil Code providing thusly: Art. 2221. Nominal damages are adjudicated in order that a right of the plaintiff, which has been violated or invaded by the defendant, may be vindicated or recognized, and not for the purpose of indemnifying the plaintiff for any loss suffered by him. Reasonable attorney's fees may be recovered where the court deems such recovery to be just and equitable (Art. 2208, Civil Code). We see no issue of sound discretion on the part of the appellate court in allowing the award thereof by the trial court.

WHEREFORE, the petition for review is given due course. The appealed decision is MODIFIED by deleting the award of moral and exemplary damages to private respondents; in its stead, petitioner is ordered to pay private respondent Luis A. Luna an amount of P5,000.00 by way of nominal damages. In all other respects, the appealed decision is AFFIRMED. No costs. SO ORDERED.

Bricktown vs Amor-Tierra

BRICKTOWN DEVELOPMENT CORP. (its new corporate name MULTINATIONAL REALTY DEVELOPMENT CORPORATION) and MARIANO Z. VERALDE, petitioners, vs. AMOR TIERRA DEVELOPMENT CORPORATION and the HON. COURT OF APPEALS, respondents. Tabaquero, Dela Torre, Simando & Associates for petitioners. Robles, Ricafrente & Aguirre Law Firm for private respondent.

VITUG, J.: A contract, once perfected, has the force of law between the parties with which they are bound to comply in good faith and from which neither one may renege without the consent of the other. The autonomy of contracts allows the parties to establish such stipulations, clauses, terms and conditions as they may deem appropriate provided only that they are not contrary to law, morals, good customs, public order or public policy. The standard norm in the performance of their respective covenants in the contract, as well as in the exercise of their rights thereunder, is expressed in the cardinal principle that the parties in that juridical relation must act with justice, honesty and good faith. These basic tenets, once again, take the lead in the instant controversy. Private respondent reminds us that the factual findings of the trial court, sustained by the Court of Appeals, should be considered binding on this Court in this petition. We concede to this reminder since, indeed, there appears to be no valid justification in the case at bench for us to take an exception from the rule. We shall, therefore, momentarily paraphrase these findings. On 31 March 1981, Bricktown Development Corporation (herein petitioner corporation), represented by its President and co-petitioner Mariano Z. Velarde, executed two Contracts to Sell (Exhs. "A" and "B") in favor of Amor Tierra Development Corporation (herein private respondent), represented in these acts by its Vice-President, Moises G. Petilla, covering a total of 96 residential lots, situated at the Multinational Village Subdivision, La Huerta, Paraaque, Metro Manila, with an aggregate area of 82,888 square meters. The total price of P21,639,875.00 was stipulated to be paid by private respondent in such amounts and maturity dates, as follows: P2,200,000.00 on 31 March 1981; P3,209,968.75 on 30 June 1981; P4,729,906.25 on 31 December 1981; and the balance of P11,500,000.00 to be paid by means of an assumption by private respondent of petitioner corporation's mortgage liability to the Philippine Savings Bank or, alternatively, to be made payable in cash. On even date, 31 March 1981, the parties executed a Supplemental Agreement (Exh. "C"), providing that private respondent would additionally pay to petitioner corporation the amounts of P55,364.68, or 21% interest on the balance of downpayment for the period from 31 March to 30 June 1981, and of P390,369.37 representing interest paid by petitioner corporation to the Philippine Savings Bank in updating the bank loan for the period from 01 February to 31 March 1981. Private respondent was only able to pay petitioner corporation the sum of P1,334,443.21 (Exhs. "A" to "K"). In the meanwhile, however, the parties continued to negotiate for a possible modification of their agreement, although nothing conclusive would appear to have ultimately been arrived at. Finally, on 12 October 1981, petitioner corporation, through its legal counsel, sent private respondent a "Notice of Cancellation of Contract" (Exh. "D") on account of the latter's continued failure to pay the installment due 30 June

1981 and the interest on the unpaid balance of the stipulated initial payment. Petitioner corporation advised private respondent, however, that it (private respondent) still had the right to pay its arrearages within 30 days from receipt of the notice "otherwise the actual cancellation of the contract (would) take place." Several months later, or on 26 September 1983, private respondent, through counsel, demanded (Exh. "E") the refund of private respondent's various payments to petitioner corporation, allegedly "amounting to P2,455,497.71," with interest within fifteen days from receipt of said letter, or, in lieu of a cash payment, to assign to private respondent an equivalent number of unencumbered lots at the same price fixed in the contracts. The demand, not having been heeded, private respondent commenced, on 18 November 1983, its action with the court a quo. 1 Following the reception of evidence, the trial court rendered its decision, the dispositive portion of which read: In view of all the foregoing, judgment is hereby rendered as follows: 1. Declaring the Contracts to Sell and the Supplemental Agreement (Exhibits "A", "B" and "C") rescinded; 2. Ordering the [petitioner] corporation, Bricktown Development Corporation, also known as Multinational Realty Development Corporation, to return to the [private respondent] the amount of One Million Three Hundred Thirty Four Thousand Four Hundred Forty-Three Pesos and Twenty-One Centavos (P1,334,443.21) with interest at the rate of Twelve (12%) percent per annum, starting November 18, 1983, the date when the complaint was filed, until the amount is fully paid; 3. Ordering the [petitioner] corporation to pay the [private respondent] the amount of Twentyfive Thousand (P25,000.00) Pesos, representing attorney's fees; 4. Dismissing [petitioner's] counterclaim for lack of merit; and 5. With costs against the [petitioner] corporation.

SO ORDERED. 2
On appeal, the appellate court affirmed in toto the trial court's findings and judgment. In their instant petition, petitioners contend that the Court of Appeals has erred in ruling that (1) By petitioners' acts, conduct and representation, they themselves delayed or prevented the performance of the contracts to sell and the supplemental agreement and were thus estopped from cancelling the same. (2) Petitioners were no justified in resolving the contracts to sell and the supplemental agreement. (3) The cancellation of the contract required a positive act on the part of petitioners giving private respondent the sixty (60) day grace period provided in the contracts to sell; and (4) In not holding that the forfeiture of the P1,378,197.48 was warranted under the liquidated damages provisions of the contracts to sell and the supplemental agreement and was not iniquitous nor unconscionable. The core issues would really come down to (a) whether or not the contracts to sell were validly rescinded or cancelled by petitioner corporation and, in the affirmative, (b) whether or not the amounts already remitted by private respondent under said contracts were rightly forfeited by petitioner corporation. Admittedly, the terms of payment agreed upon by the parties were not met by private respondent. Of a total selling price of P21,639,875.00, private respondent was only able to remit the sum of P1,334,443.21 which was even short of the stipulated initial payment of P2,200,000.00. No additional payments, it would seem, were made. A

notice of cancellation was ultimately made months after the lapse of the contracted grace period. Paragraph 15 of the Contracts to Sell provided thusly:

15. Should the PURCHASER fail to pay when due any of the installments mentioned in stipulation No. 1 above, the OWNER shall grant the purchaser a sixty (60)-day grace period within which to pay the amount/s due, and should the PURCHASER still fail to pay the due amount/s within the 60-day grace period, the PURCHASER shall have the right to ex-parte cancel or rescind this contract, provided, however, that the actual cancellation or rescission shall take effect only after the lapse of thirty (30) days from the date of receipt by the PURCHASER of the notice of cancellation of this contract or the demand for its rescission by a notarial act, and thereafter, the OWNER shall have the right to resell the lot/s subject hereof to another buyer and all payments made, together with all improvements introduced on the aforementioned lot/s shall be forfeited in favor of the OWNER as liquidated damages, and in this connection, the PURCHASER obligates itself to peacefully vacate the aforesaid lot/s without necessity of notice or demand by the OWNER. 3
A grace period is a right, not an obligation, of the debtor. When unconditionally conferred, such as in this case, the grace period is effective without further need of demand either calling for the payment of the obligation or for honoring the right. The grace period must not be likened to an obligation, the non-payment of which, under Article 1169 of the Civil Code, would generally still require judicial or extrajudicial demand before "default" can be said to arise. 4 Verily, in the case at bench, the sixty-day grace period under the terms of the contracts to sell became ipso factooperative from the moment the due payments were not met at their stated maturities. On this score, the provisions of Article 1169 of the Civil Code would find no relevance whatsoever. The cancellation of the contracts to sell by petitioner corporation accords with the contractual covenants of the parties, and such cancellation must be respected. It may be noteworthy to add that in a contract to sell, the non-payment of the purchase price (which is normally the condition for the final sale) can prevent the obligation to convey title from acquiring any obligatory force (Roque vs. Lapuz, 96 SCRA 741; Agustin vs. Court of Appeals, 186 SCRA 375). The forfeiture of the payments thus far remitted under the cancelled contracts in question, given the factual findings of both the trial court and the appellate court, must be viewed differently. While clearly insufficient to justify a foreclosure of the right of petitioner corporation to rescind or cancel its contracts with private respondent, the series of events and circumstances described by said courts to have prevailed in the interim between the parties, however, warrant some favorable consideration by this Court. Petitioners do not deny the fact that there has indeed been a constant dialogue between the parties during the period of their juridical relation. Concededly, the negotiations that they have pursued strictly did not result in the novation, either extinctive or modificatory, of the contracts to sell; nevertheless, this Court is unable to completely disregard the following findings of both the trial court and the appellate court. Said the trial court:

It has been duly established through the testimony of plaintiff's witnesses Marcosa Sanchez and Vicente Casas that there were negotiations to enter into another agreement between the parties, after March 31, 1981. The first negotiation took place before June 30, 1981, when Moises Petilla and Renato Dragon, Vice-President and president, respectively, of the plaintiff corporation, together with Marcosa Sanchez, went to the office of the defendant corporation and made some proposals to the latter, thru its president, the defendant Mariano Velarde. They told the defendant Velarde of the plaintiff's request for the division of the lots to be purchased into smaller lots and the building of town houses or smaller houses therein as these kinds of houses can be sold easily than big ones. Velarde replied that subdivision owners would not consent to the building of small houses. He, however, made two counter-proposals, to wit: that the defendant corporation would assign to the plaintiff a number of lots

corresponding to the amounts the latter had already paid, or that the defendant corporation may sell the corporation itself, together with the Multinational Village Subdivision, and its other properties, to the plaintiff and the latter's sister companies engaged in the real estate business. The negotiations between the parties went on for sometime but nothing definite was accomplished. 5
For its part, the Court of Appeals observed:

We agree with the court a quo that there is, therefore, reasonable ground to believe that because of the negotiations between the parties, coupled with the fact that the plaintiff never took actual possession of the properties and the defendants did not also dispose of the same during the pendency of said negotiations, the plaintiff was led to believe that the parties may ultimately enter into another agreement in place of the "contracts to sell." There was, evidently, no malice or bad faith on the part of the plaintiff in suspending payments. On the contrary, the defendants not only contributed, but had consented to the delay or suspension of payments. They did not give the plaintiff a categorical answer that their counter-proposals will not materialize. 6
In fine, while we must conclude that petitioner corporation still acted within its legal right to declare the contracts to sell rescinded or cancelled, considering, nevertheless, the peculiar circumstances found to be extant by the trial court, confirmed by the Court of Appeals, it would be unconscionable, in our view, to likewise sanction the forfeiture by petitioner corporation of payments made to it by private respondent. Indeed, in the opening statement of this ponencia, we have intimated that the relationship between parties in any contract must always be characterized and punctuated by good faith and fair dealing. Judging from what the courts below have said, petitioners did fall well behind that standard. We do not find it equitable, however, to adjudge any interest payment by petitioners on the amount to be thus refunded, computed from judicial demand, for, indeed, private respondent should not be allowed to totally free itself from its own breach. WHEREFORE, the appealed decision is AFFIRMED insofar as it declares valid the cancellation of the contracts in question but MODIFIED by ordering the refund by petitioner corporation of P1,334,443.21 with 12% interest per annum to commence only, however, from the date of finality of this decision until such refund is effected. No costs. SO ORDERED. Bidin, Romero and Melo, JJ., concur.

Taguba vs de leon

BERLIN TAGUBA AND SEBASTIANA DOMINGO, SPOUSES PEDRO ASUNCION AND MARING ASUNCION,petitioners, vs. MARIA PERALTA VDA. DE DE LEON AND THE HONORABLE COURT OF APPEALS, respondents. Eligio A. Labog for petitioners. Romeo B. Calixto for respondents.

CUEVAS, J.:

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This is a Petition to Review on Certiorari, the decision of the defunct Court of Appeals in its CA-G.R. No. 65357-R which reversed on appeal the decision of the then Court of First Instance of Isabela in Civil Case No. Br. II-1215, entitled "Maria Peralta Vda. de De Leon, versus Berlin Taguba and Sebastiana Domingo" for "Specific Performance with Preliminary Mandatory Injunction with Damages". Berlin Taguba married to Sebastiana Domingo (now petitioner) is the owner of a residential lot with an area of 3,129 square meters located at Cauayan, Isabela. Spouses Pedro Asuncion and Marita Lungab, (also petitioners) and herein private respondent Maria Peralta Vda. de De Leon, were separately occupying portions of the aforementioned lot as lessees. On August 27, 1972, Berlin Taguba sold a portion of the said lot consisting of 400 square meters to private respondent Maria Peralta Vda de De Leon. The portion sold comprises the area occupied by the Asuncions and private respondent Vda de De Leon. The deed evidencing said sale was denominated as "Deed of Conditional Sale", 1 the only salient terms and conditions of which reads
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NOW THEREFORE, for and in consideration of the sum of Eighteen Thousand (P18,000.00) Pesos, Philippine Currency, (P45.00 per sq. m.) to be paid in the manner herein below specified, the VENDOR hereby SELL, CEDE, TRANSFER, and CONVEY unto and in favor of the VENDEE, her heirs, executors, administrators or assigns the above-described portion. The aforesaid sum of P18,000.00 shall be paid at the residence of the VENDOR as follows: a) P3,500.00 Philippine Currency upon the signing and executed petition of this contract; b) To pay the amount of at least One Thousand (P1,000.00) Pesos, Philippine Currency MONTHLY to commence September 1972, until the whole amount would have been paid on or before December 3, 1972; c) That failure to pay the VENDOR the whole balance on December 31, 1972, the VENDEE shall be given an extension of Six (6) months with interest (legal rate) after which VENDOR may INCREASE the purchase price to P50.00 per sq. m. which the VENDEE agrees should she fail to pay within said period of time. Alleging that she (private respondent) had already paid the sum of P12,500.00 and had tendered payment of the balance of P5,500.00 to complete the stipulated purchase price of P18,000.00 to petitioner Berlin Taguba in May 1973 within the grace period but the latter refused to receive payment; and that since negotiations for settlement with the intervention of Governor Dy failed, private respondent instituted on April 29, 1976 a complaint for Specific Performance with Preliminary Mandatory Injunction with Damages against Spouses Berlin Taguba and Sebastiana Domingo, in the then Court of First Instance of Isabela (Civil Case No. II-1215.) In their Answer, Spouses Taguba admitted the sale of the property, but claimed that private respondent failed to comply with her obligation under the Deed of Conditional Sale despite the several extensions granted her, by reason of which petitioner was compelled but with the express knowledge and consent and even upon the proposal of private respondent, to negotiate the sale of a portion of the property sold, to the Spouses Asuncion who were actually in possession thereof. Petitioner further alleged that the parties had appeared before Governor Dy, who mediated to settle the dispute between them and that in the said conference, they had agreed that private respondent and the Asuncion spouses will buy only the portions which they respectively and actually as lessees. The Asuncion spouses intervened and filed their Answer in Intervention alleging that they bought in good faith that portion of the land they actually occupy after private respondent defaulted in her undertaking in their contract with petitioner Berlin Taguba and after a confrontation in the house of Governor Faustino N. Dy. After trial, the lower court rendered judgment, the dispositive portion of which reads as follows

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1) Ordering a cadastral survey by a competent Geodetic Engineer of the actual area occupied by the plaintiff and the intervenors; 2) Ordering the defendant Berlin Taguba to execute a deed of absolute sale in favor of the plaintiff of the actual area actually occupied by her;

3) Ordering Berlin Taguba to reimburse the plaintiff of whatever amount he received from the plaintiff in excess of the costs of the area actually occupied by plaintiff at P45.00 per square meter; 4) The cost of survey shag be borne by the plaintiff and intervenor share and share alike; 5) The order granting preliminary injunction against plaintiff dated July 13, 1978 is hereby declared permanent. Without special pronouncement as to costs. SO ORDERED.

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On appeal under CA-G.R. No. 65357-R, the then Court of Appeals reversed the decision of the lower court in a decision promulgated on October 22, 1981, the dispositive portion of which reads as follows
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WHEREFORE, the decision of the lower court is hereby SET ASIDE and a new judgment rendered as follows: 1) Ordering defendant Berlin Taguba to execute a deed of absolute sale in favor of plaintiff over the 400 square meter portion of his property described in Exhibit "A" upon the payment by plaintiff of the sum of P7,500.00 within thirty (30) days from receipt of notice from the Clerk of Court of the lower court of receipt of the records of the case from the Court of Appeals as provided for in the last paragraph of Section 1, Rule 39 in relation to Section 11, Rule 51 of the Rules of Court; 2) Declaring the deed of sale executed by defendant Taguba in favor of defendant Asuncion in April 19, 1974, Exhibit '3' and void or of no force and effect in view of the prior sale of the property covered under said deed to plaintiff on August 27, 1972 Exhibit "A", 3) Ordering defendant Berlin Taguba to reimburse defendant Pedro Asuncion the purchase price received by him under the deed of sale of April 19, 1974, Exhibit "3"; and 4) Ordering defendants jointly and severally to deliver to plaintiff possession of the property described in Exhibit "A" with an area of 400 square meters, the portion sold by defendant Taguba to plaintiff. With costs against defendants-appellees. SO ORDERED.

1w ph1.t

The motion for reconsideration of the aforesaid decision filed by petitioner Spouses Taguba and Spouses Asuncion having been denied, they now come before this Court through the instant petition praying that the decision of the then Court of Appeals be set aside and the decision of the lower court be affirmed in toto. The petition is without merit. We agree with respondent Court of Appeals (now Intermediate Appellate Court) that the contract of sale between petitioner Berlin Taguba and private respondent Maria Peralta Vda. de De Leon 2 was absolute in nature. Despite the denomination of the deed as a "Deed of Conditional Sale" a reading of the conditions (earlier quoted in this decision) therein set forth reveals the contrary. Nowhere in the said contract in question could we find a proviso or stipulation to the effect that title to the property sold is reserved in the vendor 3 until full payment of the purchase price. There is also no stipulation giving the vendor (petitioner Taguba) the right to unilaterally rescind the contract the moment the vendee (private respondent de Leon) fails to pay within a fixed period. 4 Indeed, a reading of the contract in its entirety would show that the only right of petitioner Taguba as vendor was to collect interest at the legal rate if private respondent-vendee fails to pay the full purchase price of P18,000.00 up to December 31, 1972 and to increase the price from P45.00 to P50.00 per square meter if vendee still fails to pay within the six months grace period from December 31, 1972. Thus Par. C of the deed providest.hqw

c) That failure to pay the VENDOR the whole balance on December 31, 1972, the VENDEE shall be given an extension of six (6) months with interest (legal rate) after which VENDOR may INCREASE the purchase price to P50.00 per sq. m. which the VENDEE agrees should she fail to pay within said period of time. Considering, therefore, the nature of the transaction between petitioner Taguba and private respondent, which We affirm and sustain to be a contract of sale, absolute in nature 5 the applicable provision is Article 1592 of the New Civil Code, which states
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Art. 1592. In the sale of immovable property,eventhough 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 notarial act. After the demand the court may not grant him a new term. (Emphasis supplied) In the case at bar, it is undisputed that petitioner Taguba never notified private respondent by notarial act that he was rescinding the contract, and neither had he filed a suit in court to rescind the sale. Finally, it has been ruled that "where time is not of the essence of the agreement, a slight delay on the part of one party in the performance of his obligation is not a sufficient ground for the rescission of the agreement. 6Considering that in the instant case, private respondent had already actually paid the sum of P12,500.00 of the total stipulated purchase price of P18,000.00 and had tendered payment of the balance of P5,500.00 within the grace period of six months from December 31, 1972, equity and justice mandate that she be given additional period within which to complete payment of the purchase price. 7 With the respect to the sale executed by petitioner Taguba in favor of the other petitioners, the Asuncion spouses, on April 19, 1974 of 233 square meters portion of his property which is a part of the 400 square meters previously sold to private respondent de Leon, We find that said sale cannot prevail over the previous sale in favor of private respondent. The Asuncion spouses cannot be considered buyers in good faith because they were aware of the earlier sale to private respondent. 8 WHEREFORE, the judgment of respondent Appellate Court is hereby AFFIRMED with costs against petitioners. SO ORDERED.

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Marin vs Adil

AQUILINA P. MARIN and ANTONIO S. MARIN, SR., petitioners, vs. JUDGE MIDPANTAO L. ADIL, Branch 11, CFI, Iloilo; PROVINCIAL SHERIFF, CFI, South Cotabato; REGISTER OF DEEDS, General Santos City; MANUEL, P. ARMADA and ARISTON P. ARMADA, now substituted by his heirs, respondents. G.R. No. L-49018 July 16, 1984 AQUILINA P. MARIN, petitioner, vs. JUDGE MIDPANTAO L. ADIL, CFI of Iloilo, MANUEL P. ARMADA and ARISTON P. ARMADA, now substituted by his heirs, EVA SALAZAR VDA. DE ARMADA, ARISTON, JR., DONALD and CRISTINA, all surnamed ARMADA, and Heirs of MARGARITA M. ARMADA-HONORIO, respondents. M.R. Flores and D. Marin-Flores for petitioners. Renato D. Munez for private respondents.

AQUINO, J.: This case is about the rescission of a deed of exchange. In a 1963 document, Aquiline P. Marin assigned to the brothers Manuel P. Armada and Ariston P. Armada her hereditary share in the testate estate of her deceased mother, Monica Pacificar Vda. de Provido, situated in January, Iloilo in exchange for the land of the Armadas located in Cotabato covered by TCT No. 7252 and other properties in that province. The exchange would be rescindible when it is definitely ascertained that the parties have respectively no right to the properties sought to be exchanged. The exchange did not mean that the parties were definitely entitled to the properties being exchanged but it was executed "in anticipation of a declaration of said right". The deed of exchange reads as follows: DEED OF EXCHANGE WITH QUITCLAIM KNOW ALL MEN BY THESE PRESENTS: This DEED OF EXCHANGE WITH QUITCLAIM, made and entered into by and between: AQUILINA P. MARIN, of legal age, Filipino, married, to Antonio S. Marin, with residence and postal address at Bo. 8, Marbel, Koronadal, Province of Cotabato, hereinafter designated as MARIN; and MANUEL P. ARMADA, Filipino, of legal age, single, with residence and postal address at the Municipality of January, Province of Iloilo, Philippines, for him and in behalf of his brother, ARISTON P. ARMADA, likewise Filipino, of legal age, single, with residence and postal address at Stockton, California, U.S.A., hereinafter designated as the ARMADAS; WITNESSETH: WHEREAS, AQUILINA P. MARIN, is one of the legitimate children and compulsory heirs of the deceased MONICA PACIFICAR VDA DE PROVIDO, who died testate in the Municipality of January, Province of Iloilo Philippines, on June 3, 1960; WHEREAS, AQUILINA P. MARIN was named as an heir in that certain LAST WILL AND TESTAMENT executed by the said MONICA PACIFICAR VDA DE PROVIDO, on October 20, 1959, and duly acknowledged on the same date, before Sr. MANUEL B. LAURO, Notary Public for and in the Province of Iloilo, as per Doc. No. 262, Page No. 95, Book No. 1, Series of 1959, of his Notarial Register, a photostatic copy of which is hereto attached and made an integral part of this AGREEMENT as Annex A; WHEREAS, it is specifically provided in the attached LAST WILL AND TESTAMENT OF MONICA PACIFICAR VDA DE PROVIDO that AQUILINA P. MARIN will share equally with her co-heirs the estate of the decedent consisting of personal properties and registered and unregistered lands situated in the Municipality of January, Province of Iloilo Philippines: WHEREAS, the ARMADAS desire to acquire all the rights, interests, titles and participations that AQUILINA P. MARIN may have over the real and personal properties of MONICA PACIFICAR VDA DE PROVIDO aforementioned because of the proximity of the said properties to them, being residents of January, Iloilo, while AQUILINA P. MARIN is presently residing in Cotabato, Philippines; WHEREAS, AQUILINA P. MARIN does by these presents hereby WAGE and QUITCLAIM all her rights, interests, titles and participations in all the real and personal properties of her deceased mother, MONICA PACIFICAR VDA DE PROVIDO, in favor of the ARMADAS, in

exchange for whatever rights, interests, titles and participations the latter may have or could have in any real or personal properties situated at Cetabato, Philippines; NOW, THEREFORE,, for and ii consideration of the foregoing premises, and for such other good and valuable considerations, the parties hereto hereby covenant and stipulate as follows, to wit: 1. That AQUILINA P. MARIN hereby transfers, assigns, cede conveys and quitclaims unto the said ARMADAS, their heirs, successors and assigns, all her rights, titles, interests and participations in any and all real and personal properties representing her legitimate share in the estate of her deceased mother, the late MONICA PACIFICAR VDA DE PROVIDO, situated at the Municipality of January, Iloilo; 2. That the ARMADAS by virtue of these presents hereby likewise cede, transfer, assign, convey and quitclaim in favor of the said AQUILINA P. MARIN by way of exchange, all their rights, interests, titles and participations, that they may have or could have in any and all real and personal properties situated at the Province of Cotabato, Philippines, more particularly in that parcel of land formerly covered by TCT No. V-2354 and now covered by TCT No. 252 of the Cotabato Registry: 3. That, the ARMADAS know for a fact that the properties being assigned and quit-claimed in their favor by AQUILINA P. MARIN have long been and continue to be productive and are more valuable than the properties which they are exchange in under this document; 4. That both parties hereto hereby acknowledge that the e exchange contained herein operates to their individual and mutual benefit and advantage, for the reason that the property being ceded, transferred, conveyed and unclaimed by one party to the other is situated in the place where either is a resident resulting in better administration of the aforementioned properties; 5. That both parties furthermore acknowledge that the exchange contemplated herein is made in perfect good faith, and not attended by fraud, mistake, misrepresentation or the like and that they have no further claim for additional price or consideration against each other, both declaring that the properties received by way of exchange under this document is adequate consideration for the properties quit-claimed; 6. That the parties hereto intend this AGREEMENT to be absolute and irrevocable, except only when it is eventually ascertained and finally determined that they have respectively no right, interest, title or participation in any property, real or personal, which they have assigned or quitclaimed in favor of each other, and in the event of mutual restitution by reason of the above eventuality, the parties hereto are not , liable for any fruits or benefits which they may have received from the aforementioned properties during the existence and efficacy of this AGREEMENT and that no damage could be claimed by one against the other 7. That it is specifically understood and agreed that the execution of this document by parties parties hereto shall in no way be construed as an acknowledgment on his or part that the other is or are entitled in the properties heretofore quit-claimed but only in anticipation of a declaration of said right; 8. That the parties hereto shall take possession of and make use of the properties subject of this DEED OF EXCHANGE AND QUITCLAIM upon the signing of the same; 9. That the parties hereto hereby agree that the lawful ownership and possession of each shall be protected by the other against any and all claims of any person or persons; 10. That to make this AGREEMENT valid, binding and effective Live, both parties hereby authorize each other the registration of this document with the register of Deeds of Iloilo, and the ARMADAS likewise grant a similar authority to MARIN IN WITNESS WHEREOF, the parties hereto have affixed their hand this 13 th day of June, 1963.

(SGD.) AQUILINA P. MARIN (SGD.) MANUEL P. ARMADA (For himself and in behalf of his brother, Ariston P. Armada) (SGD.) ANTONIO S. MARIN (Witness and Notarial Acknowledgement are omitted) As background, it should be stated that the Armadas and Mrs. Marin are first cousins. The Armadas in 1963 expected to inherit some lots in General Santos City from their uncle, Proceso Pacificar, who died in 1954. Mrs. Marin, who resided in Koronadal, Cotabato, had hereditary rights in the estates of her parents, the deceased spouses, Francisco Provido and Monica Pacificar, of Janiuay Iloilo, where died in 1938 and 1960, respectively. Manuel P. Armada resided in Janiuay. In 1963, when the deed of exchange was executed, the estate of Proceso Pacificar, in which the Armadas expected to inherit a part, had been adjudicated to Soledad Pronido- Elevencionado a sister of Mrs. Marin and a first cousin also of the Armadas. Soledad claimed to be the sole heir of Proceso. So, the Armadas and the other heirs had to sue Soledad. The protracted litigation ended in a compromise in 1976 when the Armadas were awarded Lots 906-A-2 and 906A-3, located in Barrio lagao, General Santos City with a total area of 8,124 square meters, Mrs. Marin never possessed these two lots. They were supposed to be exchange for her proindiviso share in her parents' estate in Janiuay. Did Mrs. Marin inherit actually anything from her parents? The answer is nothing. She chose to forget the deed. Her conduct showed that she considered herself not bound by it. Five years after that deed, or on November 14, 1968, she agreed to convey to her sister, Aurora Provido-Collado, her interest in two lots in January in payment of her obligation amounting to P1,700. Then, in the extra-judicial partition of her parents' estate on June 25, 1977 (where the instant case for rescission was already pending), her share with a total area of 9,010 square meters, was formally adjudicated to Aurora. It was stated therein that Mrs. Marin "has waived, renounced and quit-claimed her share" in favor of Aurora. As already stated, that share was supposed to be exchanged for the two lots in General Santos City which the Armadas received in 1976 after a pestiferous litigation. The Armadas filed the instant rescissory action against Mrs. Marin on December 7, 1976. They overlooked the fact that Ariston P. Armada was not bound at all by the deed since Manuel. who signed the deed for aim, had no authority to do so Manuel was not the attorney-in-fact of Ariston (See Art. 1403 [1], Civil Code). There was no trial. The case was submitted on the pleadings. The sole issue resolved by the trial court was prescription. It held that the Armadas' action had not prescribed because their right to rescind accrued only in 1976 when they discovered that Mrs. Marin could not perform her obligation under the deed since she had assigned her hereditary rights to her sister. Judge Midpantao L. Adil rescinded the deed of exchange, ordered restitution of whatever might have been received by Mrs. Marin, released the Armadas from their obligation under said deed and ordered Mrs. Marin to pay the Armadas P10,000 as moral and exemplary damages and P3,000 as attorney's fees. Mrs. Marin appealed to this Court on legal issues (L-49018). Judge Adil issued an order of execution pending appeal which Mrs. Marin assailed by certiorari in this Court. The enforcement of the execution was restrained by this Court (L-47986). The two related cases have been consolidated. It is evident from the deed of exchange that the intention of the parties relative to the lots, which are the objects of the exchange, cannot be definitely ascertained. We hold that this circumstance renders the exchange void or inexistent (Art. 1378, 2nd par. and Art. 1409 [6], Civil Code). Thus, as already noted, it is provided in paragraph 7 that the deed should not be construed as an acknowledgment by the Armadas and Mrs. Marin that they are entitled to the properties involved therein and that it was executed "in anticipation of a declaration of" their rights to the properties.

Then, it is stipulated in paragraph 8 that the parties should take possession and make use of the properties involved in the deed. The two provisions are irreconcilable because paragraph contemplates that the properties are still to be awarded or adjudicated to the parties whereas paragraph 8 envisages a situation where the parties have already control and possession thereof. It should be noted that in paragraph 7 of Mrs. Marin's answer with affirmative defense she avers therein that her 1968 agreement with her sister means that she would convey her properties to the latter (Aurora) when the Armadas should be "adjudged to be without rights or interests to any properties in General Santos City" (p. 47, Rollo of L-49018). Such a qualifications is not found in her agreement with her sister. The instant rescissory action may be treated as an action to declare void the deed of exchange. The action to declare the inexistence of a contract does not prescribe (Art. 1410, Civil Code). The properties covered by the deed should have been specified and described. A perusal of the deed gives the impression that it involves many properties. In reality, it refers only to 8,124 square meters of land, which the Armadas would inherit from their uncle in General Santos City, and to the 9,000 square meters representing theproindiviso share of Mrs. Marin in her parents' estate. As we have seen, Mrs. Marin rendered impossible the performance of her obligation under the deed. Because of that impossibility, the Armadas could rescind extrajudicially the deed of exchange (Art. 1191 Civil Code; 4 Tolentino, civil Code, 1973 Ed., pp. 171-172). If Mrs. Marin should sue the Armadas, her action would be barred under the rule of exceptio non adimpleti contractus (plaintiff is not entitled to sue because he has not performed his part of the agreement). As no evidence was presented in this case, we cannot sustain the award of P10,000 as moral and exemplary damages and P3,000 as attorney's fees. WHEREFORE, the trial court's judgment and the order of execution pending appeal are set aside. The deed of exchange is hereby declared void and inexistent. The annotation thereof on TCT Nos. 10833 and 10834 should be cancelled. The Armadas' claim for damages and attorney's fees is denied. Aquilina Provido-Mrin's counterclaim is dismissed. No costs. SO ORDERED.

McLauglin vs CA

LUISA F. MCLAUGHLIN, petitioner, vs. THE COURT OF APPEALS AND RAMON FLORES, respondents. R.C. Domingo Jr. & Associates for private respondent.

FERIA, Actg. C.J.

This is an appeal by certiorari from the decision of the Court of Appeals, the dispositive part of which reads as follows: IN VIEW OF THE FOREGOING PREMISES, the petition for certiorari and mandamus is hereby GRANTED and the Orders of respondent court dated November 21 and 27 both 1980 are hereby nullified and set aside and respondent Judge is ordered to order private respondent to accept petitioner's Pacific Banking Corporation certified manager's Check No. MC-A-000311

dated November 17, 1980 in the amount of P76,059.71 in full settlement of petitioner's obligation, or another check of equivalent kind and value, the earlier check having become stale. On February 28, 1977, petitioner Luisa F. McLaughlin and private respondent Ramon Flores entered into a contract of conditional sale of real property. Paragraph one of the deed of conditional sale fixed the total purchase price of P140,000.00 payable as follows: a) P26,550.00 upon the execution of the deed; and b) the balance of P113,450.00 to be paid not later than May 31, 1977. The parties also agreed that the balance shall bear interest at the rate of 1% per month to commence from December 1, 1976, until the full purchase price was paid. On June 19, 1979, petitioner filed a complaint in the then Court of First Instance of Rizal (Civil Case No. 33573) for the rescission of the deed of conditional sale due to the failure of private respondent to pay the balance due on May 31, 1977. On December 27, 1979, the parties submitted a Compromise Agreement on the basis of which the court rendered a decision on January 22, 1980. In said compromise agreement, private respondent acknowledged his indebtedness to petitioner under the deed of conditional sale in the amount of P119,050.71, and the parties agreed that said amount would be payable as follows: a) P50,000.00 upon signing of the agreement; and b) the balance of P69,059.71 in two equal installments on June 30, 1980 and December 31, 1980. As agreed upon, private respondent paid P50,000.00 upon the signing of the agreement and in addition he also paid an "escalation cost" of P25,000.00. Under paragraph 3 of the Compromise Agreement, private respondent agreed to pay one thousand (P l,000.00) pesos monthly rental beginning December 5, 1979 until the obligation is duly paid, for the use of the property subject matter of the deed of conditional sale. Paragraphs 6 and 7 of the Compromise Agreement further state: That the parties are agreed that in the event the defendant (private respondent) fails to comply with his obligations herein provided, the plaintiff (petitioner) will be entitled to the issuance of a writ of execution rescinding the Deed of Conditional Sale of Real Property. In such eventuality, defendant (private respondent) hereby waives his right to appeal to (from) the Order of Rescission and the Writ of Execution which the Court shall render in accordance with the stipulations herein provided for. That in the event of execution all payments made by defendant (private respondent) will be forfeited in favor of the plaintiff (petitioner) as liquidated damages. On October 15, 1980, petitioner wrote to private respondent demanding that the latter pay the balance of P69,059.71 on or before October 31, 1980. This demand included not only the installment due on June 30, 1980 but also the installment due on December 31, 1980. On October 30, 1980, private respondent sent a letter to petitioner signifying his willingness and intention to pay the full balance of P69,059.71, and at the same time demanding to see the certificate of title of the property and the tax payment receipts. Private respondent states on page 14 of his brief that on November 3, 1980, the first working day of said month, he tendered payment to petitioner but this was refused acceptance by petitioner. However, this does not appear in the decision of the Court of Appeals. On November 7, 1980, petitioner filed a Motion for Writ of Execution alleging that private respondent failed to pay the installment due on June 1980 and that since June 1980 he had failed to pay the monthly rental of P l,000.00. Petitioner prayed that a) the deed of conditional sale of real property be declared rescinded with forfeiture of all payments as liquidated damages; and b) the court order the payment of Pl,000.00 back rentals since June 1980 and the eviction of private respondent. On November 14, 1980, the trial court granted the motion for writ of execution.

On November 17, 1980, private respondent filed a motion for reconsideration tendering at the same time a Pacific Banking Corporation certified manager's check in the amount of P76,059.71, payable to the order of petitioner and covering the entire obligation including the installment due on December 31, 1980. However, the trial court denied the motion for reconsideration in an order dated November 21, 1980 and issued the writ of execution on November 25, 1980. In an order dated November 27, 1980, the trial court granted petitioner's ex-parte motion for clarification of the order of execution rescinding the deed of conditional sale of real property. On November 28, 1980, private respondent filed with the Court of Appeals a petition for certiorari and prohibition assailing the orders dated November 21 and 27, 1980. As initially stated above, the appellate court nullified and set aside the disputed orders of the lower court. In its decision, the appellate court ruled in part as follows: The issue here is whether respondent court committed a grave abuse of discretion in issuing the orders dated November 21, 1980 and November 27,1980. The general rule is that rescission will not be permitted for a slight or casual breach of the contract, but only for such breaches as are substantial and fundamental as to defeat the object of the parties in making the agreement. (Song Fo & Co. vs. Hawaiian-Philippine Co., 47 Phil. 821) In aforesaid case, it was held that a delay in payment for a small quantity of molasses, for some twenty days is not such a violation of an essential condition of the contract as warrants rescission for non-performance. In Universal Food Corp. vs. Court of Appeals, 33 SCRA 1, the Song Fo ruling was reaffirmed. In the case at bar, McLaughlin wrote Flores on October 15, 1980 demanding that Flores pay the balance of P69,059.71 on or before October 31, 1980. Thus it is undeniable that despite Flores' failure to make the payment which was due on June 1980, McLaughlin waived whatever right she had under the compromise agreement as incorporated in the decision of respondent court, to demand rescission. xxx xxx xxx It is significant to note that on November 17, 1980, or just seventeen (17) days after October 31, 1980, the deadline set by McLaughlin, Flores tendered the certified manager's check. We hold that the Song Fo ruling is applicable herein considering that in the latter case, there was a 20-day delay in the payment of the obligation as compared to a 17-day delay in the instant case. Furthermore, as held in the recent case of New Pacific Timber & Supply Co., Inc. vs. Hon. Alberto Seneris, L-41764, December 19, 1980, it is the accepted practice in business to consider a cashier's or manager's check as cash and that upon certification of a check, it is equivalent to its acceptance (Section 187, Negotiable Instrument Law) and the funds are thereby transferred to the credit of the creditor (Araneta v. Tuason, 49 O.G. p. 59). In the New Pacific Timber & Supply Co., Inc. case, the Supreme Court further held that the object of certifying a check is to enable the holder thereof to use it as money, citing the ruling in PNB vs. National City Bank of New York, 63 Phil. 711. In the New Pacific Timber case, it was also ruled that the exception in Section 63 of the Central Bank Act that the clearing of a check and the subsequent crediting of the amount thereof to the account of the creditor is equivalent to delivery of cash, is applicable to a payment through a certified check. Considering that Flores had already paid P101,550.00 under the contract to sell, excluding the monthly rentals paid, certainly it would be the height of inequity to have this amount forfeited in

favor McLaughlin. Under the questioned orders, McLaughlin would get back the property and still keep P101,550.00. Petitioner contends that the appellate court erred in not observing the provisions of Article No. 1306 of the Civil Code of the Philippines and in having arbitrarily abused its judicial discretion by disregarding the penal clause stipulated by the parties in the compromise agreement which was the basis of the decision of the lower court. We agree with the appellate court that it would be inequitable to cancel the contract of conditional sale and to have the amount of P101,550.00 (P l48,126.97 according to private respondent in his brief) already paid by him under said contract, excluding the monthly rentals paid, forfeited in favor of petitioner, particularly after private respondent had tendered the amount of P76,059.71 in full payment of his obligation. In the analogous case of De Guzman vs. Court of Appeals, this Court sustained the order of the respondent judge denying the petitioners' motion for execution on the ground that the private respondent had substantially complied with the terms and conditions of the compromise agreement, and directing the petitioners to immediately execute the necessary documents transferring to the private respondent the title to the properties (July 23, 1985, 137 SCRA 730). In the case at bar, there was also substantial compliance with the compromise agreement. Petitioner invokes the ruling of the Court in its Resolution of November 16, 1978 in the case of Luzon Brokerage Co., Inc. vs. Maritime Building Co., Inc., to the effect that Republic Act 6552 (the Maceda Law) "recognizes and reaffirms the vendor's right to cancel the contract to sell upon breach and non-payment of the stipulated installments but requires a grace period after at least two years of regular installment payments ... . " (86 SCRA 305, 329) On the other hand, private respondent also invokes said law as an expression of public policy to protect buyers of real estate on installments against onerous and oppressive conditions (Section 2 of Republic Act No. 6552). Section 4 of Republic Act No. 6552 which took effect on September 14, 1972 provides as follows: In case where less than two years of installments were paid, the seller shall give the buyer a grace period of not less than sixty days from the date the installment became due. If the buyer fails to pay the installments due at the expiration of the grace period, the seller may cancel the contract after thirty days from receipt by the buyer of the notice of the cancellation or the demand for rescission of the contract by a notarial act. Section 7 of said law provides as follows: Any stipulation in any contract hereafter entered into contrary to the provisions of Sections 3, 4, 5 and 6, shall be null and void. The spirit of these provisions further supports the decision of the appellate court. The record does not contain the complete text of the compromise agreement dated December 20, 1979 and the decision approving it. However, assuming that under the terms of said agreement the December 31, 1980 installment was due and payable when on October 15, 1980, petitioner demanded payment of the balance of P69,059.71 on or before October 31, 1980, petitioner could cancel the contract after thirty days from receipt by private respondent of the notice of cancellation. Considering petitioner's motion for execution filed on November 7, 1980 as a notice of cancellation, petitioner could cancel the contract of conditional sale after thirty days from receipt by private respondent of said motion. Private respondent's tender of payment of the amount of P76,059.71 together with his motion for reconsideration on November 17, 1980 was, therefore, well within the thirty-day period grants by law.. The tender made by private respondent of a certified bank manager's check payable to petitioner was a valid tender of payment. The certified check covered not only the balance of the purchase price in the amount of P69,059.71, but also the arrears in the rental payments from June to December, 1980 in the amount of P7,000.00, or a total of P76,059.71. On this point the appellate court correctly applied the ruling in the case of New Pacific Timber & Supply Co., Inc. vs. Seneris (101 SCRA 686, 692-694) to the case at bar. Moreover, Section 49, Rule 130 of the Revised Rules of Court provides that:

An offer in writing to pay a particular sum of money or to deliver a written instrument or specific property is, if rejected, equivalent to the actual production and tender of the money, instrument, or property. However, although private respondent had made a valid tender of payment which preserved his rights as a vendee in the contract of conditional sale of real property, he did not follow it with a consignation or deposit of the sum due with the court. As this Court has held: The rule regarding payment of redemption prices is invoked. True that consignation of the redemption price is not necessary in order that the vendor may compel the vendee to allow the repurchase within the time provided by law or by contract. (Rosales vs. Reyes and Ordoveza, 25 Phil. 495.) We have held that in such cases a mere tender of payment is enough, if made on time, as a basis for action against the vendee to compel him to resell. But that tender does not in itself relieve the vendor from his obligation to pay the price when redemption is allowed by the court. In other words, tender of payment is sufficient to compel redemption but is not in itself a payment that relieves the vendor from his liability to pay the redemption price. " (Paez vs. Magno, 83 Phil. 403, 405) On September 1, 1986, the Court issued the following resolution Considering the allegation in petitioner's reply brief that the Manager's Check tendered by private respondent on November 17, 1980 was subsequently cancelled and converted into cash, the Court RESOLVED to REQUIRE the parties within ten (10) days from notice to inform the Court whether or not the amount thereof was deposited in court and whether or not private respondent continued paying the monthly rental of P1,000.00 stipulated in the Compromise Agreement. In compliance with this resolution, both parties submitted their respective manifestations which confirm that the Manager's Check in question was subsequently withdrawn and replaced by cash, but the cash was not deposited with the court. According to Article 1256 of the Civil Code of the Philippines, if the creditor to whom tender of payment has been made refuses without just cause to accept it, the debtor shall be released from responsibility by the consignation of the thing or sum due, and that consignation alone shall produce the same effect in the five cases enumerated therein; Article 1257 provides that in order that the consignation of the thing (or sum) due may release the obligor, it must first be announced to the persons interested in the fulfillment of the obligation; and Article 1258 provides that consignation shall be made by depositing the thing (or sum) due at the disposal of the judicial authority and that the interested parties shall also be notified thereof. As the Court held in the case of Soco vs. Militante, promulgated on June 28, 1983, after examining the above-cited provisions of the law and the jurisprudence on the matter: Tender of payment must be distinguished from consignation. Tender is the antecedent of consignation, that is, an act preparatory to the consignation, which is the principal, and from which are derived the immediate consequences which the debtor desires or seeks to obtain. Tender of payment may be extrajudicial, while consignation is necessarily judicial, and the priority of the first is the attempt to make a private settlement before proceeding to the solemnities of consignation. (8 Manresa 325). (123 SCRA 160,173) In the above-cited case of De Guzman vs. Court of Appeals (137 SCRA 730), the vendee was released from responsibility because he had deposited with the court the balance of the purchase price. Similarly, in the abovecited case of New Pacific Timber & Supply Co., Inc. vs. Seneris (101 SCRA 686), the judgment debtor was released from responsibility by depositing with the court the amount of the judgment obligation. In the case at bar, although as above stated private respondent had preserved his rights as a vendee in the contract of conditional sale of real property by a timely valid tender of payment of the balance of his obligation which was not accepted by petitioner, he remains liable for the payment of his obligation because of his failure to deposit the amount due with the court. In his manifestation dated September 19, 1986, private respondent states that on September 16, 1980, he purchased a Metrobank Cashier's Check No. CC 004233 in favor of petitioner Luisa F. McLaughlin in the amount

of P76,059.71, a photocopy of which was enclosed and marked as Annex "A- 1;" but that he did not continue paying the monthly rental of Pl,000.00 because, pursuant to the decision of the appellate court, petitioner herein was ordered to accept the aforesaid amount in full payment of herein respondent's obligation under the contract subject matter thereof. However, inasmuch as petitioner did not accept the aforesaid amount, it was incumbent on private respondent to deposit the same with the court in order to be released from responsibility. Since private respondent did not deposit said amount with the court, his obligation was not paid and he is liable in addition for the payment of the monthly rental of Pl,000.00 from January 1, 1981 until said obligation is duly paid, in accordance with paragraph 3 of the Compromise Agreement. Upon full payment of the amount of P76,059.71 and the rentals in arrears, private respondent shall be entitled to a deed of absolute sale in his favor of the real property in question. WHEREFORE, the decision of the Court of Appeals is AFFIRMED with the following modifications: (a) Petitioner is ordered to accept from private respondent the Metrobank Cashier's Check No. CC 004233 in her favor in the amount of P76,059.71 or another certified check of a reputable bank drawn in her favor in the same amount; (b) Private respondent is ordered to pay petitioner, within sixty (60) days from the finality of this decision, the rentals in arrears of P l,000.00 a month from January 1, 1981 until full payment thereof; and (c) Petitioner is ordered to execute a deed of absolute sale in favor of private respondent over the real property in question upon full payment of the amounts as provided in paragraphs (a) and (b) above. No costs. SO ORDERED.

Cortes vs CA

ANTONIO R. CORTES (in his capacity as Administrator of the estate of Claro S. Cortes), petitioner, vs. HON. COURT OF APPEALS and VILLA ESPERANZA DEVELOPMENT CORPORATION, respondents. DECISION YNARES-SANTIAGO, J.: The instant petition for review seeks the reversal of the June 13, 1996 Decision1 of the Court of Appeals in CAG.R. CV No. 47856, setting aside the June 24, 1993 Decision 2 of the Regional Trial Court of Makati, Branch 138, which rescinded the contract of sale entered into by petitioner Antonio Cortes (Cortes) and private respondent Villa Esperanza Development Corporation (Corporation). The antecedents show that for the purchase price of P3,700,000.00, the Corporation as buyer, and Cortes as seller, entered into a contract of sale over the lots covered by Transfer Certificate of Title (TCT) No. 31113-A, TCT No. 31913-A and TCT No. 32013-A, located at Baclaran, Paraaque, Metro Manila. On various dates in 1983, the Corporation advanced to Cortes the total sum of P1,213,000.00. Sometime in September 1983, the parties executed a deed of absolute sale containing the following terms: 3 1. Upon execution of this instrument, the Vendee shall pay unto the Vendor sum of TWO MILLION AND TWO HUNDRED THOUSAND (P2,200,000.00) PESOS, Philippine Currency, less all advances paid by the Vendee to the Vendor in connection with the sale; 2. The balance of ONE MILLION AND FIVE HUNDRED THOUSAND [P1,500,000.00] PESOS, Phil. Currency shall be payable within ONE (1) YEAR from date of execution of this instrument, payment of which shall be secured by an irrevocable standby letter of credit to be issued by any reputable local banking institution acceptable to the Vendor.

xxxx 4. All expense for the registration of this document with the Register of Deeds concerned, including the transfer tax, shall be divided equally between the Vendor and the Vendee. Payment of the capital gains shall be exclusively for the account of the Vendor; 5% commission of Marcosa Sanchez to be deducted upon signing of sale.4 Said Deed was retained by Cortes for notarization. On January 14, 1985, the Corporation filed the instant case 5 for specific performance seeking to compel Cortes to deliver the TCTs and the original copy of the Deed of Absolute Sale. According to the Corporation, despite its readiness and ability to pay the purchase price, Cortes refused delivery of the sought documents. It thus prayed for the award of damages, attorney's fees and litigation expenses arising from Cortes' refusal to deliver the same documents. In his Answer with counterclaim,6 Cortes claimed that the owner's duplicate copy of the three TCTs were surrendered to the Corporation and it is the latter which refused to pay in full the agreed down payment. He added that portion of the subject property is occupied by his lessee who agreed to vacate the premises upon payment of disturbance fee. However, due to the Corporation's failure to pay in full the sum of P2,200,000.00, he in turn failed to fully pay the disturbance fee of the lessee who now refused to pay monthly rentals. He thus prayed that the Corporation be ordered to pay the outstanding balance plus interest and in the alternative, to cancel the sale and forfeit the P1,213,000.00 partial down payment, with damages in either case. On June 24, 1993, the trial court rendered a decision rescinding the sale and directed Cortes to return to the Corporation the amount of P1,213,000.00, plus interest. It ruled that pursuant to the contract of the parties, the Corporation should have fully paid the amount of P2,200,000.00 upon the execution of the contract. It stressed that such is the law between the parties because the Corporation failed to present evidence that there was another agreement that modified the terms of payment as stated in the contract. And, having failed to pay in full the amount of P2,200,000.00 despite Cortes' delivery of the Deed of Absolute Sale and the TCTs, rescission of the contract is proper. In its motion for reconsideration, the Corporation contended that the trial court failed to consider their agreement that it would pay the balance of the down payment when Cortes delivers the TCTs. The motion was, however, denied by the trial court holding that the rescission should stand because the Corporation did not act on the offer of Cortes' counsel to deliver the TCTs upon payment of the balance of the down payment. Thus: The Court finds no merit in the [Corporation's] Motion for Reconsideration. As stated in the decision sought to be reconsidered, [Cortes'] counsel at the pre-trial of this case, proposed that if [the Corporation] completes the down payment agreed upon and make arrangement for the payment of the balances of the purchase price, [Cortes] would sign the Deed of Sale and turn over the certificate of title to the [Corporation]. [The Corporation] did nothing to comply with its undertaking under the agreement between the parties. WHEREFORE, in view of the foregoing considerations, the Motion for Reconsideration is hereby DENIED. SO ORDERED.7 On appeal, the Court of Appeals reversed the decision of the trial court and directed Cortes to execute a Deed of Absolute Sale conveying the properties and to deliver the same to the Corporation together with the TCTs, simultaneous with the Corporation's payment of the balance of the purchase price of P2,487,000.00. It found that the parties agreed that the Corporation will fully pay the balance of the down payment upon Cortes' delivery of the three TCTs to the Corporation. The records show that no such delivery was made, hence, the Corporation was not remiss in the performance of its obligation and therefore justified in not paying the balance. The decretal portion thereof, provides: WHEREFORE, premises considered, [the Corporation's] appeal is GRANTED. The decision appealed from is hereby REVERSED and SET ASIDE and a new judgment rendered ordering [Cortes] to execute a deed of absolute sale conveying to [the Corporation] the parcels of land subject of and described in the deed of absolute sale, Exhibit D. Simultaneously with the execution of the deed of absolute sale and the delivery of the corresponding owner's duplicate copies of TCT Nos. 31113-A, 31931-A and 32013-A of

the Registry of Deeds for the Province of Rizal, Metro Manila, District IV, [the Corporation] shall pay [Cortes] the balance of the purchase price of P2,487,000.00. As agreed upon in paragraph 4 of the Deed of Absolute Sale, Exhibit D, under terms and conditions, "All expenses for the registration of this document (the deed of sale) with the Register of Deeds concerned, including the transfer tax, shall be divided equally between [Cortes and the Corporation]. Payment of the capital gains shall be exclusively for the account of the Vendor; 5% commission of Marcosa Sanchez to be deducted upon signing of sale." There is no pronouncement as to costs. SO ORDERED.8 Cortes filed the instant petition praying that the decision of the trial court rescinding the sale be reinstated. There is no doubt that the contract of sale in question gave rise to a reciprocal obligation of the parties. Reciprocal obligations are those which arise from the same cause, and which each party is a debtor and a creditor of the other, such that the obligation of one is dependent upon the obligation of the other. They are to be performed simultaneously, so that the performance of one is conditioned upon the simultaneous fulfillment of the other. 9 Article 1191 of the Civil Code, states: 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. xxxx As to when said failure or delay in performance arise, Article 1169 of the same Code provides that ART. 1169 xxxx 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. (Emphasis supplied) The issue therefore is whether there is delay in the performance of the parties' obligation that would justify the rescission of the contract of sale. To resolve this issue, we must first determine the true agreement of the parties. The settled rule is that the decisive factor in evaluating an agreement is the intention of the parties, as shown not necessarily by the terminology used in the contract but by their conduct, words, actions and deeds prior to, during and immediately after executing the agreement. As such, therefore, documentary and parol evidence may be submitted and admitted to prove such intention. 10 In the case at bar, the stipulation in the Deed of Absolute Sale was that the Corporation shall pay in full the P2,200,000.00 down payment upon execution of the contract. However, as correctly noted by the Court of Appeals, the transcript of stenographic notes reveal Cortes' admission that he agreed that the Corporation's full payment of the sum of P2,200,000.00 would depend upon his delivery of the TCTs of the three lots. In fact, his main defense in the Answer is that, he performed what is incumbent upon him by delivering to the Corporation the TCTs and the carbon duplicate of the Deed of Absolute Sale, but the latter refused to pay in full the down payment.11 Pertinent portion of the transcript, reads: [Q] Now, why did you deliver these three titles to the plaintiff despite the fact that it has not been paid in full the agreed down payment? A Well, the broker told me that the down payment will be given if I surrender the titles. Q Do you mean to say that the plaintiff agreed to pay in full the down payment of P2,200,000.00 provided you surrender or entrust to the plaintiff the titles?

A Yes, sir.12 What further confirmed the agreement to deliver the TCTs is the testimony of Cortes that the title of the lots will be transferred in the name of the Corporation upon full payment of the P2,200,000.00 down payment. Thus ATTY. ANTARAN Q Of course, you have it transferred in the name of the plaintiff, the title? A Upon full payment. xxxx ATTY. SARTE Q When you said upon full payment, are you referring to the agreed down payment of P2,200,000.00? A Yes, sir.13 By agreeing to transfer title upon full payment of P2,200,000.00, Cortes' impliedly agreed to deliver the TCTs to the Corporation in order to effect said transfer. Hence, the phrase "execution of this instrument" 14 as appearing in the Deed of Absolute Sale, and which event would give rise to the Corporation's obligation to pay in full the amount of P2,200,000.00, can not be construed as referring solely to the signing of the deed. The meaning of "execution" in the instant case is not limited to the signing of a contract but includes as well the performance or implementation or accomplishment of the parties' agreement. 15 With the transfer of titles as the corresponding reciprocal obligation of payment, Cortes' obligation is not only to affix his signature in the Deed, but to set into motion the process that would facilitate the transfer of title of the lots, i.e., to have the Deed notarized and to surrender the original copy thereof to the Corporation together with the TCTs. Having established the true agreement of the parties, the Court must now determine whether Cortes delivered the TCTs and the original Deed to the Corporation. The Court of Appeals found that Cortes never surrendered said documents to the Corporation. Cortes testified that he delivered the same to Manny Sanchez, the son of the broker, and that Manny told him that her mother, Marcosa Sanchez, delivered the same to the Corporation. Q Do you have any proof to show that you have indeed surrendered these titles to the plaintiff? A Yes, sir. Q I am showing to you a receipt dated October 29, 1983, what relation has this receipt with that receipt that you have mentioned? A That is the receipt of the real estate broker when she received the titles. Q On top of the printed name is Manny Sanchez, there is a signature, do you know who is that Manny Sanchez? A That is the son of the broker. xxxx Q May we know the full name of the real estate broker? A Marcosa Sanchez xxxx Q Do you know if the broker or Marcosa Sanchez indeed delivered the titles to the plaintiff?

A That is what [s]he told me. She gave them to the plaintiff. x x x x.16 ATTY. ANTARAN Q Are you really sure that the title is in the hands of the plaintiff? xxxx Q It is in the hands of the broker but there is no showing that it is in the hands of the plaintiff? A Yes, sir. COURT Q How do you know that it was delivered to the plaintiff by the son of the broker? A The broker told me that she delivered the title to the plaintiff. ATTY. ANTARAN Q Did she not show you any receipt that she delivered to [Mr.] Dragon 17 the title without any receipt? A I have not seen any receipt. Q So, therefore, you are not sure whether the title has been delivered to the plaintiff or not. It is only upon the allegation of the broker? A Yes, sir.18 However, Marcosa Sanchez's unrebutted testimony is that, she did not receive the TCTs. She also denied knowledge of delivery thereof to her son, Manny, thus: Q The defendant, Antonio Cortes testified during the hearing on March 11, 1986 that he allegedly gave you the title to the property in question, is it true? A I did not receive the title. Q He likewise said that the title was delivered to your son, do you know about that? A I do not know anything about that.19 What further strengthened the findings of the Court of Appeals that Cortes did not surrender the subject documents was the offer of Cortes' counsel at the pre-trial to deliver the TCTs and the Deed of Absolute Sale if the Corporation will pay the balance of the down payment. Indeed, if the said documents were already in the hands of the Corporation, there was no need for Cortes' counsel to make such offer. Since Cortes did not perform his obligation to have the Deed notarized and to surrender the same together with the TCTs, the trial court erred in concluding that he performed his part in the contract of sale and that it is the Corporation alone that was remiss in the performance of its obligation. Actually, both parties were in delay. Considering that their obligation was reciprocal, performance thereof must be simultaneous. The mutual inaction of Cortes and the Corporation therefore gave rise to a compensation morae or default on the part of both parties because neither has completed their part in their reciprocal obligation. 20 Cortes is yet to deliver the original copy of the notarized Deed and the TCTs, while the Corporation is yet to pay in full the agreed down payment of P2,200,000.00. This mutual delay of the parties cancels out the effects of default, 21 such that it is as if no one is guilty of delay.22

We find no merit in Cortes' contention that the failure of the Corporation to act on the proposed settlement at the pre-trial must be construed against the latter. Cortes argued that with his counsel's offer to surrender the original Deed and the TCTs, the Corporation should have consigned the balance of the down payment. This argument would have been correct if Cortes actually surrendered the Deed and the TCTs to the Corporation. With such delivery, the Corporation would have been placed in default if it chose not to pay in full the required down payment. Under Article 1169 of the Civil Code, from the moment one of the parties fulfills his obligation, delay by the other begins. Since Cortes did not perform his part, the provision of the contract requiring the Corporation to pay in full the down payment never acquired obligatory force. Moreover, the Corporation could not be faulted for not automatically heeding to the offer of Cortes. For one, its complaint has a prayer for damages which it may not want to waive by agreeing to the offer of Cortes' counsel. For another, the previous representation of Cortes that the TCTs were already delivered to the Corporation when no such delivery was in fact made, is enough reason for the Corporation to be more cautious in dealing with him. The Court of Appeals therefore correctly ordered the parties to perform their respective obligation in the contract of sale, i.e., for Cortes to, among others, deliver the necessary documents to the Corporation and for the latter to pay in full, not only the down payment, but the entire purchase price. And since the Corporation did not question the Court of Appeal's decision and even prayed for its affirmance, its payment should rightfully consist not only of the amount of P987,000.00, representing the balance of the P2,200,000.00 down payment, but the total amount of P2,487,000.00, the remaining balance in the P3,700,000.00 purchase price. WHEREFORE, the petition is DENIED and the June 13, 1996 Decision of the Court of Appeals in CA-G.R. CV No. 47856, is AFFIRMED. SO ORDERED.

Yao vs Matela

SPOUSES WILLIAM AND JEANETTE YAO, Petitioners,

G.R. No. 167767 Present: Panganiban, C.J. (Chairperson), Ynares-Santiago, Austria-Martinez, Callejo, Sr., and Chico-Nazario, JJ.

- versus -

CARLOMAGNO B. MATELA, Respondent. x ---------------------------------------------------- x CARLOMAGNO B. MATELA, Petitioner, - versus SPOUSES WILLIAM AND JEANETTE YAO, Respondents. Promulgated: August 29, 2006 G.R. No. 167799

x ---------------------------------------------------------------------------------------- x

DECISION YNARES-SANTIAGO, J.:

These consolidated petitions for review assail the Decision of the Court of Appeals dated September 30, 2004, in CA-G.R.
[3]

[1]

CV No. 75264, which

modified the Decision of

[2]

the Regional Trial Court of Las Pias City, Branch 275 in Civil Case No. 98-0263, as well as the Resolution dated April 15, 2005, denying the motions for reconsideration of both parties. In G.R. No. 167767, spouses William and Jeanette Yao pray that the assailed decision and resolution of the Court of Appeals be reversed and set aside and that the original complaint filed by Carlomagno B. Matela in the lower court be dismissed for lack of merit. In G.R. No. 167799, Matela prays that the judgment of the Court of Appeals be modified by ordering the spouses Yao to pay the amount of P741,482.00 as actual damages instead of P391,582.00, plus interest and attorneys fees. The antecedent facts are as follows: On March 30, 1997, the spouses Yao contracted the services of Matela, a licensed architect, to manage and supervise the construction of a two-unit townhouse at a total cost of P5,090,560.00.
[4]

The construction started in the first week of April 1997 and was completed in April 1998, with additional works costing P300,000.00. Matela alleged that the spouses Yaopaid him the amount of P4,649,078.00, thereby leaving a balance of P741,482.00. P741,482.00 went unheeded, Matela filed a
[5]

When his demand for payment of

[6]

complaint for sum

of

money

with

the Regional Trial Court of Las Pias City which was docketed as LP-98-0263 and raffled to Branch 275. In their answer, the spouses Yao denied that the project was completed in April 1998. Instead, they alleged that Matela abandoned the project without notice. They claimed that they paid Matela the sum of P4,699,610.93 which should be considered as sufficient payment considering that Matela used sub-standard materials causing damage to the project which needed a substantial amount of money to repair. On April 1, 2002, the Regional Trial Court of Las Pias City, Branch 275 rendered judgment in favor of Matela, the dispositive portion of which reads: WHEREFORE, judgment is rendered in favor of [Matela] and against the [spouses Yao] ordering the latter to pay the former the sum of P741,428.00 plus legal

rate of interest from the filing of the Complaint until fully paid and P50,000.00 as and by way of attorneys fees and to pay the costs. SO ORDERED.
[7]

The trial court anchored its decision on the following findings of facts: Defendant spouses engaged the professional services of the plaintiff on March 30, 1997 to manage and supervise the construction of their two unit townhouses in Makati City at the agreed construction cost of P5,090,560.00. The construction started in the first week of April, 1997 and was completed by the plaintiff in April, 1998. Close scrutiny of the evidence reveals that contrary to the allegation of the defendant spouses the construction of the two unit townhouses x x x were completed by the plaintiff. This is shown by the fact that the Building Official of Makati City, after inspection of the construction thereof, issued, the Evaluation Sheet Occupancy Permit (Exhs. E and E-1), Certificate of Completion (Exh. F), Certificate of Occupancy (Exh. G) and Progress Flow Sheet of Occupancy Permit (Exh. G -1). It appears from these documents that the construction was completed on April 5, 1998 (Exh. F) and that after inspection the same was found to have been done in accordance with its plans and specifications (Exh. G). If there (sic) defects were found all over the two unit townhouses, the Building Official of Makati City would not have issued the said documents, which are presumed [8] to have been executed in due course and good faith. The Court of Appeals affirmed the decision of the lower court but modified the amount of actual damages to P391,582.00. The dispositive portion of the decision reads: WHEREFORE, premises considered, the decision of the Regional Trial Court of Las Pias City, Branch 275, in Civil Case No. 98-0263 is hereby MODIFIED in that the [spouses Yao] are hereby ordered to pay actual damages of Three Hundred Ninety One Thousand Five Hundred Eighty Two Pesos (P 391,582.00). The decision of the Regional Trial Court of Las Pias City, Branch 275, dated 1 April 2002 in Civil Case No. 98-0263 is hereby AFFIRMED in all other aspect. SO ORDERED.
[9]

In affirming the findings of the court a quo, the Court of Appeals declared that: As to the second assigned error, defendants-appellants claimed that plaintiffappellee failed to finish the project within the agreed one hundred eighty (180) days. They pointed out that one hundred eighty (180) days from April 1997 ended on October 1997, however, the units were turned over only in April 1998. The Court does not find any merit in this argument either. Any delay in the delivery is cured by acceptance of the thing after delay incurred. (See: Tayong v.

CA, 219 SCRA 480, [1993]). In the present case, defendants-appellants do not deny they [10] took over the townhouse units and have even sold the same. (See: Records, p. 363) Hence these consolidated petitions. In G.R. No. 167799, Matela raised the lone issue of: WHETHER OR NOT [MATELA] IS ENTITLED TO THE ADDITIONAL CONSTRUCTION COST. In G.R. No. 167767, the issue raised by the spouses Yao is: WHETHER OR NOT THE DECISION OF THE COURT OF APPEALS IN NOT DISMISSING THE COMPLAINT [OF MATELA] AND NOT AWARDING THE COUNTER CLAIM [OF THE [12] SPOUSES YAO] IS IN ACCORDANCE WITH LAW AND JURISPRUDENCE. Matela claims that although the spouses Yao did not expressly admit their obligation as regards the additional construction cost of P300,000.00, they impliedly admitted the same as evidenced by the testimony of Jeanette Yao before the court a quo.
[13] [11]

On the other hand, the spouses Yao contend that the complaint for the collection of a sum of money filed by Matela should be dismissed because it was the latter who breached his undertaking by using sub-standard materials and not completing the project. They also allege that the payments they made amounting to P4,699,610.93 should be considered as sufficient payment for the construction of the project. The resolution of the issues raised by the parties require a re-examination of the pieces of evidence presented during the trial of the case. This is an exception to the established rule that in the exercise of our power of review, we only resolve questions of law and not questions of facts. The rule that the Supreme Court does not resolve questions of facts, however, is not absolute. Jurisprudence has recognized several exceptions in which factual issues may be resolved by the Supreme Court, such as: (1) when the findings are grounded entirely on speculation, surmises or conjectures; (2) when the inference made is manifestly mistaken, absurd or impossible; (3) when there is grave abuse of discretion; (4) when the judgment is based on a misapprehension of facts; (5) when the findings of facts are conflicting; (6) when in making its findings the Court of Appeals went beyond the issues of the case, or its findings are contrary to the admissions of both the appellant and the appellee; (7) when the findings are contrary to the trial court; (8) when the findings are conclusions without citation of specific evidence on which they are based; (9) when the facts set forth in the petition as well as in the petitioners main and reply briefs are not disputed by the respondent; (10) when the findings of fact are

premised on the supposed absence of evidence and contradicted by the evidence on record; or (11) when the Court of Appeals manifestly overlooked certain relevant facts not disputed by the parties, which, if properly considered, would justify a different conclusion.
[14]

In the instant case, we find that the factual findings of the trial court and Court of Appeals are contradicted by the evidence on record. Thus, a review of the facts is in order. As agreed by the parties, Matela will construct the townhouses in accordance with the Specification
[15]

while spouses Yao will pay Matela the agreed construction cost based on progress

billings. The spouses Yao will not pay Matela the agreed price in full unless the latter has fully complied with and has discharged his obligations as specified in the contract. In his book on Obligations and Contracts, the late Court of Appeals Justice Desiderio Jurado made the following discussion on reciprocal obligations: Reciprocal obligations are those which are created or established at the same time, out of the same cause, and which result in mutual relationships of creditor and debtor between the parties. These obligations are conditional in the sense that the fulfillment of an obligation by one party depends upon the fulfillment of the obligation by the other. Thus, in a contract of sale of an automobile for P54,000. The vendor is obliged to deliver the automobile to the vendee, while the vendee is obliged to pay the price of P54,000 to the vendor. It is clear that the vendor will not deliver the automobile to the vendee unless the latter pay the price, while the vendee will not pay the price to the vendor unless the latter will deliver the automobile. Hence, in reciprocal obligations, the general rule is that fulfillment by both parties should be simultaneous or at the same time. The rule then is that in reciprocal obligations, one party incurs in delay from the moment the other party fulfills his obligation, while he himself does not comply or is not ready to comply in a proper manner with what is incumbent upon him. If neither party complies or is ready to comply with what is incumbent upon him, the default of one compensates for the default of the other. In such case, there can be no legal delay. These rules may be illustrated by the following example: A sold his automobile to th B for P30,000. They agreed that delivery and payment shall be made on the 15 of November 1980. On that date, A was not ready to deliver the automobile, neither was B ready to pay. In such case, neither party has incurred in delay. If A, however, delivered or was ready to deliver the automobile, but B did not pay or was not ready to pay, then [16] B is said to have incurred in delay. Both the trial court and the Court of Appeals found that Matelas delivery of the project constitutes a faithful discharge of his duties. We find otherwise. Our evaluation of the records reveal that Matela failed to comply with his obligation to construct the townhouses based on the agreed specifications. As such, he cannot be discharged from his obligations by mere delivery of the same to the spouses Yao.

The Specification contained the following provisions: D. CARPENTRY WORKS

Lumber This shall be of approved quality, well-seasoned, thoroughly dry, free from large, loose and unsound knots, saps, shakes and other imperfections impairing its durability, strength and appearance. All roof trusses shall be of Apitong, conventional fabrication using wooden plates and machine bolts. Purlins shall be 2x3 (commercial size) apitong or equivalent spaced at 0.60 m. o.c. xxxx All wooden partitions indicated in the drawing shall be double faced thk. ordinary plywood nailed to 2x3 (commercial size) tanguile spaced at 0.60 m. o.c. bothways (wherever available). The ceiling shall be of 3/16 thk plywood (class C) with 2x2 ceiling joist spaced at 0.60 m. o.c. Door jambs shall be of standard type from 2/5 K.D. tanguile or equivalent.
[18] [17]

Contrary to the foregoing, the photographs offered by the spouses Yao as exhibits showed unfinished and uneven ceilings, rotten door jambs and door posts, unfinished wooden partitions and unhinged and unfinished doors.
[19]

Paragraph I, Electrical Works of the Specification contained the following undertaking: The Contractor shall furnish all materials, (or otherwise specified) labor and other services and perform all operations necessary for the complete installation of the Electrical System for the Project in accordance with the drawings and specifications. All electrical work shall be done under the direct supervision of a licensed Electrical Engineer. The Electrical Contractor shall secure the required Electrical Wiring Permit and Certificate of Electrical Inspection and pay the corresponding permit fees. All wiring in ceiling and double walls shall be Neltex Schedule 40 uPVC conduits or equivalent. All [20] installation on concrete shall be in rigid conduit pipes. Furnishing and installation of conduits, boxes, wire gutters, fittings, cabinets, wireways, manholes and covers, supports and accessories for: a. b. c. d. e. Lighting system Convenience Outlets and other Special Purpose Outlets Sub-Feeders/Homeruns from Lighting Panels to Lighting Circuits as indicated on the plans Feeders to all Lighting Panels as indicated on plans. Main Distribution Panel (MDP)

f. g. h. i.

Service Entrance from source of Power to MDP Necessary Concrete Pedestals Telephone System Intercom System

Again, based on the photographs presented as evidence, we find that there were unfinished electrical conduits, electrical outlets with loose wirings and outlets with exposed wires.
[21]

The Specification also provided for several kinds of tiles to be installed on the floors walls.
[23]

[22]

and on the

However, the exhibits showed decaying and unfinished cabinet floors,

[25]

[24]

stairways and
[27]

bathroom floors with missing tiles, fixtures.

[26]

uninstalled bathroom fixtures and exposed plumbing The unpainted walls,

[29]

The bath tub was uninstalled that it can be easily pulled out of its concrete receptacle.
[28]

exhibits also showed unfinished windows,

rusted metalworks and balusters.

[30]

During the trial of the case before the court a quo on October 26, 2000, Jeanette Yao testified as follows: Atty. De Asa, Sr.: Now, you have read Exhibit H and Exhibit 3, I supposed and you understood its contents, isnt it? Jeanette Yao: Yes sir. Q: Now, on page 2 of Exhibit 3 also Exhibit H refers to a paragraph which states to carpentry works, which was bracketed and marked by this representation as Exhibit 3-B. And this refers to the carpentry works. What happened to this condition as contained in the second page of said Exhibit H and Exhibit 3 marked as Exhibit 3-B? Sir, this was not followed. What do you mean it was not followed? I found out during the construction that the wood has termites and some are not properly installed. Going further to this Exhibit H and Exhibit 3. Found page 3 thereon again bracketed as Exhibit 3-C by this representation and I will quote all wooden partition indicated in the drawing shall be double face inches thick ordindary plywood, made two by three (commercial size) tangile space at 0.60 m.o.c both ways (where ever available). Similarly the ceilings shall be of three by sixteen inches thick plywood (-c) with two by two ceilings joys space 0.60 m.o.c. Likewise, door jams shall be of standard size from two feet K.D. tangile. Again was, Mrs. Witness, was this conditions as contained in the specification followed? Not followed sir. Why do you say that it was not followed?

A: Q: A:

Q:

A: Q:

A:

Because I found out that all the bathrooms were no cabinet. That was supposed to have. And when I opened the ceilings, I found out that there are corrugated, GI corrugated inside still attached in the ceiling and a lot of termite also on the door jams.

Atty. De Asa, Sr.: So, further going to Exhibit 3 and Exhibit H is specification under paragraph G denominated specialties, finished hard wares and I will quote unless otherwise specified all hard wares shall be of chromium plated finished. The contractor shall also provide and fit in place other hard wares nor herein executed and mentioned but nevertheless necessary to complete the work. For the record, Your Honor, this was bracketed and marked as defendant Exhibit 3-B. Was this followed? A: Q: A: This was not followed sir. Again why do you say that it was not followed? I found out in the Unit B, Master Bed Room, that there were no showers. There were no faucet. And in the kitchen, there were no wire basket or accessory. In the, all the cabinet, there were no chrome plate or aluminum tube for the hanger of the clothes. All of these were not there.

Atty. De Asa, Sr.: Now, again on the next page, fourth page, there is here encircled the words nelpex scheduled 40 UPDC conduits or equivalent, which again for purposes of record, Your Honor, please this was marked as Exhibit 3 -F for the defendant. Would you kindly explain whether or not this particular encircled words followed us specified. A: They did not followed this, they used the another like the hose orange color not the pipe. Not the pipe, and the, finally, on the last page of this Exhibit, we refer to the modular kitchen by Danielle (door panel only) this was encircled also Your Honor please and marked as Exhibit 3 was this followed by the plaintiff Matela in the construction of the townhouse? No sir they used ordinary wood, plywood, not the panel door by Danielle. Now, summing up this Exhibit 3-B on carpentry, on carpentry works which were not followed 3-C, 3-D, 3-F, and 3-E, if you will translate them into figure or in money, how much would they cost? Around Five Hundred Thousand. Five Hundred Thousand, now, you mentioned all of these defects and matters which were not followed thru it specification was contained in Exhibit H and Exhibit E. What other documents if any do you have to prove that indeed these defects existed? I took photos, sir.

Q:

A: Q:

A: Q:

A:

Q: A: Q:

Photographs, if those photographs will be shown to you, will you be able to recognize them? Yes, sir. Now, during the pre-trial conference, Mrs. Witness, Atty. Margaret Chua marked in evidence several photographs from Exhibit 5, 5-A, up to 5-QQQ. Would you go over the same and tell this Honorable Court, what relation has those with the photograph according to you, you took to prove that you indeed the specifications as contained in Exhibit H and Exhibit 3 as well as the defects in the constructed townhouses were not followed or appears? I will show you one by one, this one. These are the pictures. Yes.

A: Q: A: Court:

Already marked? Atty. De Asa, Sr.: Yes, Your Honor, as exhibit. Q: Now, aside from these pictures Mrs. Witness I have here other pictures referring to Unit A and Unit B of.

Atty. De Asa, Sr.: Im sorry, I will withdraw that, Your Honor. Q: Go over now, each and every picture and explain before this Honorable Court, what specifications were not followed and for what were the defects you found in the constructed townhouses. The concrete moldings that they installed the electrical were not repaired.

A:

Court Interpreter: Witness is referring to Exhibit 5-A. A: And then, the next there is no doorbell for Unit B. Court Interpreter: Witness is referring to Exhibit 5-B. A: And then, 5-C, and D, there is no electrical switch or outlet, no lights. Atty. De Asa, Sr.: No lights referring to: Court Interpreter: 5-E. A: The ceilings there is no electrical, and the ceilings were open and 5 -F, this is the Attic there is no air-con outlet. 5-G, the wall no electrical switch. Also 5-H, no switched, no outlet. Court Interpreter: Same as Exhibit 5-I, 5-K and 5-J. A: 5-L, there are wires, live wires found in the circuit breaker and leave it open.

Atty. De Asa, Sr.: Next. A: 5-M, we installed the cover since it is very dangerous because there are live wires. And letter M, there was. Atty. De Asa, Sr.: 5-N. A: Yeah, 5-N, the water flows in the circuit breaker so, it cause like a fire crackers during the rainy days. Q: A: How about Exhibit 5-O? 5-O, as you can see there are also no outlet. 5-P, no electrical wire, outlet or switch but there is a junction box. 5-Q? There are also junction box, but no wire and no switch covered. 5-R? 5-R, as you can see the ceiling there are GI corrugated, they used this in the flooring and the water flows in here from second floor because there are water leaks. The same with this.

Q: A: Q: A:

Court Interpreter: 5-S. Atty. De Asa, Sr.: 5-S. A: The same. Atty. De Asa, Sr.: The same 5-T? A: They used two inches PVC pipe for the down-spout. It should be three inches as I have seen in the blue print. 5-U, as you can see this is also number two inches pipe. Court Interpreter: Witness is referring to the two inches pipe. A: 5-V, the same with 5-U and 5-W, the pipe is so small.

Atty. De Asa, Sr.: Anyway, these pictures from Exhibit 5, 5-A up to 5-QQQ were all the pictures, which you have taken to establish that the specifications were not followed and that there were defects in the townhouses constructed by Matela? A: Yes, sir. Q: A: Q: A: Now, was these townhouses completed by plaintiff? No. Why do you say no? [31] Since I took photo, he did not follow what we have agreed in the specification.

We cannot rely on the Building Permit, Occupancy

[34]

[32]

Certificate of Completion

[33]

and Certificate of

to prove the projects completion. While it is true that under the Rules of Court, the

issuance of the foregoing documents enjoy the presumption of regularity, however, it is only a disputable presumption, which may be overcome by other evidence. The agreed construction cost of the project was P5,090,560.00, however, the amounts reflected in the Building Permit, the Certificate of Completion and the Certificate of Occupancy are far less. In the Building Permit, the total cost was pegged at P2,191,700.00; in the Certificate of Completion, the actual cost of construction was P2,347,706.81; while in the Certificate of Occupancy the cost of the project as built was declared at P2,341,706.00. Considering the discrepancies, the conclusiveness of the said documents fall when arrayed against the pieces of evidence introduced by the spouses Yao. However, we find that the spouses Yao likewise failed to comply with their undertakings. As alleged by Matela, the spouses Yao made periodic payments to him based on progress billings. This was contained in the Summary of Cash Payments Invoices
[36] [35]

and the Summary of WLY

that he submitted as part of his formal offer of evidence. However, the spouses Yao refused to

pay the balance of the agreed construction cost despite demands. The spouses Yao justified their nonpayment by arguing that Matela abandoned the project and that there were defects in its construction. Evidently, both parties in this case breached their respective obligations. The well entrenched doctrine is that the law does not relieve a party from the effects of an unwise, foolish or disastrous contract, entered into with full awareness of what he was doing and entered into and carried out in good faith. Such a contract will not be discarded even if there was a mistake of law or fact. Courts have no jurisdiction to look into the wisdom of the contract entered into by and between the parties or to render a decision different therefrom. They have no power to relieve parties from obligation voluntarily assumed, simply because their contracts turned out to be disastrous deals or unwise investments.
[37]

However, in situations such as the one discussed above, where it cannot be conclusively

determined which of the parties first violated the contract, equity calls and justice demands that we apply the solution provided in Article 1192 of the Civil Code: Art. 1192. In case both parties have committed a breach of the obligation, the liability of the first infractor shall be equitably tempered by the courts. If it cannot be determined which of the parties first violated the contract, the same shall be deemed extinguished, and each shall bear his own damages. In Camus v. Price, Inc.,
[38]

we held that:

Even assuming, therefore, that the Lessees obligation to insure the building arose after the completion of the construction of the buildings in September, 1951, as the Lessor also defaulted in the performance of his corresponding duty, it can not really be determined with definiteness who of the parties committed the first infraction of the terms of the contract. Under the circumstances, the conclusion reached by the Court of Appeals, that the parties are actually in pari delicto, must be sustained, and the contract deemed extinguished, with the parties suffering their respective losses. In the instant case, the losses to be incurred by the parties will come, as far as Matela is concerned, in the form of the alleged unpaid balance of the construction cost that he is seeking to collect from the spouses Yao. For the latter, the losses that they will bear is the cost of repairing the defects in the project. We consider the amount of P4,699,610.93 which Matela has already received from the spouses Yao, as sufficient payment for his services and the materials used in the project. WHEREFORE, the Decision dated September 30, 2004 of the Court of Appeals in CA-G.R. CV No. 75264 which affirmed with modification the Decision of the RegionalTrial Court of Las Pias City, Branch 275, and its Resolution dated April 15, 2005 denying reconsideration thereof, are REVERSED and SET ASIDE. The contract between spouses William and Jeanette Yao and Carlomagno B. Matela is DEEMED EXTINGUISHED and each of the parties shall bear their own losses.

SO ORDERED. Phil Export vs Eusebio PHILIPPINE EXPORT AND FOREIGN LOAN GUARANTEE CORPORATION, petitioner, vs. V.P. EUSEBIO CONSTRUCTION, INC.; 3-PLEX INTERNATIONAL, INC.; VICENTE P. EUSEBIO; SOLEDAD C. EUSEBIO; EDUARDO E. SANTOS; ILUMINADA SANTOS; AND FIRST INTEGRATED BONDING AND INSURANCE COMPANY, INC., respondents. DECISION DAVIDE, JR., C.J.: This case is an offshoot of a service contract entered into by a Filipino construction firm with the Iraqi Government for the construction of the Institute of Physical Therapy-Medical Center, Phase II, in Baghdad, Iraq, at a time when the Iran-Iraq war was ongoing. In a complaint filed with the Regional Trial Court of Makati City, docketed as Civil Case No. 91-1906 and assigned to Branch 58, petitioner Philippine Export and Foreign Loan Guarantee Corporation[1] (hereinafter Philguarantee) sought reimbursement from the respondents of the sum of money it paid to Al Ahli Bank of Kuwait pursuant to a guarantee it issued for respondent V.P. Eusebio Construction, Inc. (VPECI). The factual and procedural antecedents in this case are as follows:

On 8 November 1980, the State Organization of Buildings (SOB), Ministry of Housing and Construction, Baghdad, Iraq, awarded the construction of the Institute of Physical Therapy Medical Rehabilitation Center, Phase II, in Baghdad, Iraq, (hereinafter the Project) to Ajyal Trading and Contracting Company (hereinafter Ajyal), a firm duly licensed with the Kuwait Chamber of Commerce for a total contract price of ID5,416,089/046 (or about US$18,739,668).[2] On 7 March 1981, respondent spouses Eduardo and Iluminada Santos, in behalf of respondent 3-Plex International, Inc. (hereinafter 3-Plex), a local contractor engaged in construction business, entered into a joint venture agreement with Ajyal wherein the former undertook the execution of the entire Project, while the latter would be entitled to a commission of 4% of the contract price.[3] Later, or on 8 April 1981, respondent 3-Plex, not being accredited by or registered with the Philippine Overseas Construction Board (POCB), assigned and transferred all its rights and interests under the joint venture agreement to VPECI, a construction and engineering firm duly registered with the POCB.[4] However, on 2 May 1981, 3Plex and VPECI entered into an agreement that the execution of the Project would be under their joint management.[5] The SOB required the contractors to submit (1) a performance bond of ID271,808/610 representing 5% of the total contract price and (2) an advance payment bond of ID541,608/901 representing 10% of the advance payment to be released upon signing of the contract.[6] To comply with these requirements, respondents 3-Plex and VPECI applied for the issuance of a guarantee with petitioner Philguarantee, a government financial institution empowered to issue guarantees for qualified Filipino contractors to secure the performance of approved service contracts abroad.[7] Petitioner Philguarantee approved respondents application. Subsequently, letters of guarantee[8] were issued by Philguarantee to the Rafidain Bank of Baghdad covering 100% of the performance and advance payment bonds, but they were not accepted by SOB. What SOB required was a letter-guarantee from Rafidain Bank, the government bank of Iraq. Rafidain Bank then issued a performance bond in favor of SOB on the condition that another foreign bank, not Philguarantee, would issue a counter-guarantee to cover its exposure. Al Ahli Bank of Kuwait was, therefore, engaged to provide a counter-guarantee to Rafidain Bank, but it required a similar counter-guarantee in its favor from the petitioner. Thus, three layers of guarantees had to be arranged.[9] Upon the application of respondents 3-Plex and VPECI, petitioner Philguarantee issued in favor of Al Ahli Bank of Kuwait Letter of Guarantee No. 81-194-F [10] (Performance Bond Guarantee) in the amount of ID271,808/610 and Letter of Guarantee No. 81-195-F[11] (Advance Payment Guarantee) in the amount of ID541,608/901, both for a term of eighteen months from 25 May 1981. These letters of guarantee were secured by (1) a Deed of Undertaking[12] executed by respondents VPECI, Spouses Vicente P. Eusebio and Soledad C. Eusebio, 3-Plex, and Spouses Eduardo E. Santos and Iluminada Santos; and (2) a surety bond[13] issued by respondent First Integrated Bonding and Insurance Company, Inc. (FIBICI). The Surety Bond was later amended on 23 June 1981 to increase the amount of coverage from P6.4 million to P6.967 million and to change the bank in whose favor the petitioners guarantee was issued, from Rafidain Bank to Al Ahli Bank of Kuwait.[14] On 11 June 1981, SOB and the joint venture VPECI and Ajyal executed the service contract[15] for the construction of the Institute of Physical Therapy

Medical Rehabilitation Center, Phase II, in Baghdad, Iraq, wherein the joint venture contractor undertook to complete the Project within a period of 547 days or 18 months. Under the Contract, the Joint Venture would supply manpower and materials, and SOB would refund to the former 25% of the project cost in Iraqi Dinar and the 75% in US dollars at the exchange rate of 1 Dinar to 3.37777 US Dollars.[16] The construction, which was supposed to start on 2 June 1981, commenced only on the last week of August 1981. Because of this delay and the slow progress of the construction work due to some setbacks and difficulties, the Project was not completed on 15 November 1982 as scheduled. But in October 1982, upon foreseeing the impossibility of meeting the deadline and upon the request of Al Ahli Bank, the joint venture contractor worked for the renewal or extension of the Performance Bond and Advance Payment Guarantee. Petitioners Letters of Guarantee Nos. 81-194-F (Performance Bond) and 81-195-F (Advance Payment Bond) with expiry date of 25 November 1982 were then renewed or extended to 9 February 1983 and 9 March 1983, respectively.[17]The surety bond was also extended for another period of one year, from 12 May 1982 to 12 May 1983.[18] The Performance Bond was further extended twelve times with validity of up to 8 December 1986,[19] while the Advance Payment Guarantee was extended three times more up to 24 May 1984 when the latter was cancelled after full refund or reimbursement by the joint venture contractor.[20] The surety bond was likewise extended to 8 May 1987.[21] As of March 1986, the status of the Project was 51% accomplished, meaning the structures were already finished. The remaining 47% consisted in electro-mechanical works and the 2%, sanitary works, which both required importation of equipment and materials.[22] On 26 October 1986, Al Ahli Bank of Kuwait sent a telex call to the petitioner demanding full payment of its performance bond counter-guarantee. Upon receiving a copy of that telex message on 27 October 1986, respondent VPECI requested Iraq Trade and Economic Development Minister Mohammad Fadhi Hussein to recall the telex call on the performance guarantee for being a drastic action in contravention of its mutual agreement with the latter that (1) the imposition of penalty would be held in abeyance until the completion of the project; and (2) the time extension would be open, depending on the developments on the negotiations for a foreign loan to finance the completion of the project.[23] It also wrote SOB protesting the call for lack of factual or legal basis, since the failure to complete the Project was due to (1) the Iraqi governments lack of foreign exchange with which to pay its (VPECIs) accomplishments and (2) SOBs noncompliance for the past several years with the provision in the contract that 75% of the billings would be paid in US dollars.[24] Subsequently, or on 19 November 1986, respondent VPECI advised the petitioner not to pay yet Al Ahli Bank because efforts were being exerted for the amicable settlement of the Project.[25] On 14 April 1987, the petitioner received another telex message from Al Ahli Bank stating that it had already paid to Rafidain Bank the sum of US$876,564 under its letter of guarantee, and demanding reimbursement by the petitioner of what it paid to the latter bank plus interest thereon and related expenses.[26] Both petitioner Philguarantee and respondent VPECI sought the assistance of some government agencies of the Philippines. On 10 August 1987, VPECI requested the Central Bank to hold in abeyance the payment by the petitioner to allow the diplomatic machinery to take its course, for otherwise, the Philippine government , through the Philguarantee and the Central

Bank, would become instruments of the Iraqi Government in consummating a clear act of injustice and inequity committed against a Filipino contractor.[27] On 27 August 1987, the Central Bank authorized the remittance for its account of the amount of US$876,564 (equivalent to ID271, 808/610) to Al Ahli Bank representing full payment of the performance counter-guarantee for VPECIs project in Iraq. [28] On 6 November 1987, Philguarantee informed VPECI that it would remit US$876,564 to Al Ahli Bank, and reiterated the joint and solidary obligation of the respondents to reimburse the petitioner for the advances made on its counter-guarantee.[29] The petitioner thus paid the amount of US$876,564 to Al Ahli Bank of Kuwait on 21 January 1988.[30] Then, on 6 May 1988, the petitioner paid to Al Ahli Bank of Kuwait US$59,129.83 representing interest and penalty charges demanded by the latter bank.[31] On 19 June 1991, the petitioner sent to the respondents separate letters demanding full payment of the amount of P47,872,373.98 plus accruing interest, penalty charges, and 10% attorneys fees pursuant to their joint and solidary obligations under the deed of undertaking and surety bond.[32] When the respondents failed to pay, the petitioner filed on 9 July 1991 a civil case for collection of a sum of money against the respondents before the RTC of Makati City. After due trial, the trial court ruled against Philguarantee and held that the latter had no valid cause of action against the respondents. It opined that at the time the call was made on the guarantee which was executed for a specific period, the guarantee had already lapsed or expired. There was no valid renewal or extension of the guarantee for failure of the petitioner to secure respondents express consent thereto. The trial court also found that the joint venture contractor incurred no delay in the execution of the Project. Considering the Project owners violations of the contract which rendered impossible the joint venture contractors performance of its undertaking, no valid call on the guarantee could be made. Furthermore, the trial court held that no valid notice was first made by the Project owner SOB to the joint venture contractor before the call on the guarantee. Accordingly, it dismissed the complaint, as well as the counterclaims and cross-claim, and ordered the petitioner to pay attorneys fees of P100,000 to respondents VPECI and Eusebio Spouses and P100,000 to 3-Plex and the Santos Spouses, plus costs. [33] In its 14 June 1999 Decision,[34] the Court of Appeals affirmed the trial courts decision, ratiocinating as follows: First, appellant cannot deny the fact that it was fully aware of the status of project implementation as well as the problems besetting the contractors, between 1982 to 1985, having sent some of its people to Baghdad during that period. The successive renewals/extensions of the guarantees in fact, was prompted by delays, not solely attributable to the contractors, and such extension understandably allowed by the SOB (project owner) which had not anyway complied with its contractual commitment to tender 75% of payment in US Dollars, and which still retained overdue amounts collectible by VPECI.

Second, appellant was very much aware of the violations committed by the SOB of its contractual undertakings with VPECI, principally, the payment of foreign currency (US$) for 75% of the total contract price, as well as of the complications and injustice that will result from its payment of the full amount of the performance guarantee, as evident in PHILGUARANTEEs letter dated 13 May 1987 . Third, appellant was fully aware that SOB was in fact still obligated to the Joint Venture and there was still an amount collectible from and still being retained by the project owner, which amount can be set-off with the sum covered by the performance guarantee. Fourth, well-apprised of the above conditions obtaining at the Project site and cognizant of the war situation at the time in Iraq, appellant, though earlier has made representations with the SOB regarding a possible amicable termination of the Project as suggested by VPECI, made a complete turn-around and insisted on acting in favor of the unjustified call by the foreign banks.[35] The petitioner then came to this Court via Rule 45 of the Rules of Court claiming that the Court of Appeals erred in affirming the trial courts ruling that I RESPONDENTS ARE NOT LIABLE UNDER THE DEED OF UNDERTAKING THEY EXECUTED IN FAVOR OF PETITIONER IN CONSIDERATION FOR THE ISSUANCE OF ITS COUNTER-GUARANTEE AND THAT PETITIONER CANNOT PASS ON TO RESPONDENTS WHAT IT HAD PAID UNDER THE SAID COUNTER-GUARANTEE. II PETITIONER CANNOT CLAIM SUBROGATION. III IT IS INIQUITOUS AND UNJUST FOR PETITIONER TO HOLD RESPONDENTS LIABLE UNDER THEIR DEED OF UNDERTAKING.[36] The main issue in this case is whether the petitioner is entitled to reimbursement of what it paid under Letter of Guarantee No. 81-194-F it issued to Al Ahli Bank of Kuwait based on the deed of undertaking and surety bond from the respondents. The petitioner asserts that since the guarantee it issued was absolute, unconditional, and irrevocable the nature and extent of its liability are analogous to those of suretyship. Its liability accrued upon the failure of the respondents to finish the construction of the Institute of Physical Therapy Buildings in Baghdad.

By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so. If a person binds himself solidarily with the principal debtor, the contract is called suretyship. [37] Strictly speaking, guaranty and surety are nearly related, and many of the principles are common to both. In both contracts, there is a promise to answer for the debt or default of another. However, in this jurisdiction, they may be distinguished thus: 1. A surety is usually bound with his principal by the same instrument executed at the same time and on the same consideration. On the other hand, the contract of guaranty is the guarantor's own separate undertaking often supported by a consideration separate from that supporting the contract of the principal; the original contract of his principal is not his contract. 2. A surety assumes liability as a regular party to the undertaking; while the liability of a guarantor is conditional depending on the failure of the primary debtor to pay the obligation. 3. The obligation of a surety is primary, while that of a guarantor is secondary. 4. A surety is an original promissor and debtor from the beginning, while a guarantor is charged on his own undertaking. 5. A surety is, ordinarily, held to know every default of his principal; whereas a guarantor is not bound to take notice of the non-performance of his principal. 6. Usually, a surety will not be discharged either by the mere indulgence of the creditor to the principal or by want of notice of the default of the principal, no matter how much he may be injured thereby. A guarantor is often discharged by the mere indulgence of the creditor to the principal, and is usually not liable unless notified of the default of the principal. [38] In determining petitioners status, it is necessary to read Letter of Guarantee No. 81 -194-F, which provides in part as follows: In consideration of your issuing the above performance guarantee/counter-guarantee, we hereby unconditionally and irrevocably guarantee, under our Ref. No. LG-81-194 F to pay you on your first written or telex demand Iraq Dinars Two Hundred Seventy One Thousand Eight Hundred Eight and fils six hundred ten (ID271,808/610) representing 100% of the performance bond required of V.P. EUSEBIO for the construction of the Physical Therapy Institute, Phase II, Baghdad, Iraq, plus interest and other incidental expenses related thereto. In the event of default by V.P. EUSEBIO, we shall pay you 100% of the obligation unpaid but in no case shall such amount exceed Iraq Dinars (ID) 271,808/610 plus interest and other incidental expenses. (Emphasis supplied)[39] Guided by the abovementioned distinctions between a surety and a guaranty, as well as the factual milieu of this case, we find that the Court of Appeals and the trial court were correct in ruling that the petitioner is a guarantor and not a surety. That the guarantee issued by the petitioner is unconditional and irrevocable does not make the petitioner a surety. As a guaranty, it is still characterized by its subsidiary and conditional quality because it does not take effect

until the fulfillment of the condition, namely, that the principal obligor should fail in his obligation at the time and in the form he bound himself.[40] In other words, an unconditional guarantee is still subject to the condition that the principal debtor should default in his obligation first before resort to the guarantor could be had. A conditional guaranty, as opposed to an unconditional guaranty, is one which depends upon some extraneous event, beyond the mere default of the principal, and generally upon notice of the principals default and reasonable diligence in exhausting proper remedies against the principal.[41] It appearing that Letter of Guarantee No. 81-194-F merely stated that in the event of default by respondent VPECI the petitioner shall pay, the obligation assumed by the petitioner was simply that of an unconditional guaranty, not conditional guaranty. But as earlier ruled the fact that petitioners guaranty is unconditional does not make it a surety. Besides, surety is never presumed. A party should not be considered a surety where the contract itself stipulates that he is acting only as a guarantor. It is only when the guarantor binds himself solidarily with the principal debtor that the contract becomes one of suretyship.[42] Having determined petitioners liability as guarantor, the next question we have to grapple with is whether the respondent contractor has defaulted in its obligations that would justify resort to the guaranty. This is a mixed question of fact and law that is better addressed by the lower courts, since this Court is not a trier of facts. It is a fundamental and settled rule that the findings of fact of the trial court and the Court of Appeals are binding or conclusive upon this Court unless they are not supported by the evidence or unless strong and cogent reasons dictate otherwise.[43] The factual findings of the Court of Appeals are normally not reviewable by us under Rule 45 of the Rules of Court except when they are at variance with those of the trial court. [44] The trial court and the Court of Appeals were in unison that the respondent contractor cannot be considered to have defaulted in its obligations because the cause of the delay was not primarily attributable to it. A corollary issue is what law should be applied in determining whether the respondent contractor has defaulted in the performance of its obligations under the service contract. The question of whether there is a breach of an agreement, which includes default or mora,[45] pertains to the essential or intrinsic validity of a contract. [46] No conflicts rule on essential validity of contracts is expressly provided for in our laws. The rule followed by most legal systems, however, is that the intrinsic validity of a contract must be governed by the lex contractus or proper law of the contract. This is the law voluntarily agreed upon by the parties (the lex loci voluntatis) or the law intended by them either expressly or implicitly (the lex loci intentionis). The law selected may be implied from such factors as substantial connection with the transaction, or the nationality or domicile of the parties.[47] Philippine courts would do well to adopt the first and most basic rule in most legal systems, namely, to allow the parties to select the law applicable to their contract, subject to the limitation that it is not against the law, morals, or public policy of the forum and that the chosen law must bear a substantive relationship to the transaction. [48] It must be noted that the service contract between SOB and VPECI contains no express choice of the law that would govern it. In the United States and Europe, the two rules that now seem to have emerged as kings of the hill are (1) the parties may choose the governing law; and (2) in the absence of such a choice, the applicable law is that of the State that has the most significant relationship to the transaction and the parties.[49] Another authority proposed that all matters relating to the time, place, and manner of performance and valid excuses for non-

performance are determined by the law of the place of performance or lex loci solutionis, which is useful because it is undoubtedly always connected to the contract in a significant way.[50] In this case, the laws of Iraq bear substantial connection to the transaction, since one of the parties is the Iraqi Government and the place of performance is in Iraq. Hence, the issue of whether respondent VPECI defaulted in its obligations may be determined by the laws of Iraq. However, since that foreign law was not properly pleaded or proved, the presumption of identity or similarity, otherwise known as the processual presumption, comes into play. Where foreign law is not pleaded or, even if pleaded, is not proved, the presumption is that foreign law is the same as ours.[51] Our law, specifically Article 1169, last paragraph, of the Civil Code, provides: In reciprocal obligations, neither party incurs in delay if the other party does not comply or is not ready to comply in a proper manner with what is incumbent upon him. Default or mora on the part of the debtor is the delay in the fulfillment of the prestation by reason of a cause imputable to the former. [52] It is the non-fulfillment of an obligation with respect to time.[53] It is undisputed that only 51.7% of the total work had been accomplished. The 48.3% unfinished portion consisted in the purchase and installation of electro-mechanical equipment and materials, which were available from foreign suppliers, thus requiring US Dollars for their importation. The monthly billings and payments made by SOB[54] reveal that the agreement between the parties was a periodic payment by the Project owner to the contractor depending on the percentage of accomplishment within the period. [55] The payments were, in turn, to be used by the contractor to finance the subsequent phase of the work. [56] However, as explained by VPECI in its letter to the Department of Foreign Affairs (DFA), the payment by SOB purely in Dinars adversely affected the completion of the project; thus: 4. Despite protests from the plaintiff, SOB continued paying the accomplishment billings of the Contractor purely in Iraqi Dinars and which payment came only after some delays. 5. SOB is fully aware of the following: 5.2 That Plaintiff is a foreign contractor in Iraq and as such, would need foreign currency (US$), to finance the purchase of various equipment, materials, supplies, tools and to pay for the cost of project management, supervision and skilled labor not available in Iraq and therefore have to be imported and or obtained from the Philippines and other sources outside Iraq. 5.3 That the Ministry of Labor and Employment of the Philippines requires the remittance into the Philippines of 70% of the salaries of Filipino workers working abroad in US Dollars; 5.5 That the Iraqi Dinar is not a freely convertible currency such that the same cannot be used to purchase equipment, materials, supplies, etc. outside of Iraq;

5.6 That most of the materials specified by SOB in the CONTRACT are not available in Iraq and therefore have to be imported; 5.7 That the government of Iraq prohibits the bringing of local currency (Iraqui Dinars) out of Iraq and hence, imported materials, equipment, etc., cannot be purchased or obtained using Iraqui Dinars as medium of acquisition. 8. Following the approved construction program of the CONTRACT, upon completion of the civil works portion of the installation of equipment for the building, should immediately follow, however, the CONTRACT specified that these equipment which are to be installed and to form part of the PROJECT have to be procured outside Iraq since these are not being locally manufactured. Copy f the relevant portion of the Technical Specification is hereto attached as Annex C and made an integral part hereof; 10. Due to the lack of Foreign currency in Iraq for this purpose, and if only to assist the Iraqi government in completing the PROJECT, the Contractor without any obligation on its part to do so but with the knowledge and consent of SOB and the Ministry of Housing & Construction of Iraq, offered to arrange on behalf of SOB, a foreign currency loan, through the facilities of Circle International S.A., the Contractors Sub-contractor and SACE MEDIO CREDITO which will act as the guarantor for this foreign currency loan. Arrangements were first made with Banco di Roma. Negotiation started in June 1985. SOB is informed of the developments of this negotiation, attached is a copy of the draft of the loan Agreement between SOB as the Borrower and Agent. The Several Banks, as Lender, and counter-guaranteed by Istituto Centrale Per II Credito A Medio Termine (Mediocredito) Sezione Speciale Per LAssicurazione Del Credito AllExportazione (Sace). Negotiations went on and continued until it suddenly collapsed due to the reported default by Iraq in the payment of its obligations with Italian government, copy of the news clipping dated June 18, 1986 is hereto attached as Annex D to form an integral part hereof; 15. On September 15, 1986, Contractor received information from Circle International S.A. that because of the news report that Iraq defaulted in its obligations with European banks, the approval by Banco di Roma of the loan to SOB shall be deferred indefinitely, a copy of the letter of Circle International together with the news clippings are hereto attached as Annexes F and F-1, respectively.[57] As found by both the Court of Appeals and the trial court, the delay or the non-completion of the Project was caused by factors not imputable to the respondent contractor. It was rather due mainly to the persistent violations by SOB of the terms and conditions of the contract, particularly its failure to pay 75% of the accomplished work in US Dollars. Indeed, where one of the parties to a contract does not perform in a proper manner the prestation which he is bound to perform under the contract, he is not entitled to demand the performance of the other

party. A party does not incur in delay if the other party fails to perform the obligation incumbent upon him. The petitioner, however, maintains that the payments by SOB of the monthly billings in purely Iraqi Dinars did not render impossible the performance of the Project by VPECI. Such posture is quite contrary to its previous representations. In his 26 March 1987 letter to the Office of the Middle Eastern and African Affairs (OMEAA), DFA, Manila, petitioners Executive Vice-President Jesus M. Taedo stated that while VPECI had taken every possible measure to complete the Project, the war situation in Iraq, particularly the lack of foreign exchange, was proving to be a great obstacle; thus: VPECI has taken every possible measure for the completion of the project but the war situation in Iraq particularly the lack of foreign exchange is proving to be a great obstacle. Our performance counterguarantee was called last 26 October 1986 when the negotiations for a foreign currency loan with the Italian government through Banco de Roma bogged down following news report that Iraq has defaulted in its obligation with major European banks. Unless the situation in Iraq is improved as to allay the banks apprehension, there is no assurance that the project will ever be completed. [58] In order that the debtor may be in default it is necessary that the following requisites be present: (1) that the obligation be demandable and already liquidated; (2) that the debtor delays performance; and (3) that the creditor requires the performance because it must appear that the tolerance or benevolence of the creditor must have ended. [59] As stated earlier, SOB cannot yet demand complete performance from VPECI because it has not yet itself performed its obligation in a proper manner, particularly the payment of the 75% of the cost of the Project in US Dollars. The VPECI cannot yet be said to have incurred in delay. Even assuming that there was delay and that the delay was attributable to VPECI, still the effects of that delay ceased upon the renunciation by the creditor, SOB, which could be implied when the latter granted several extensions of time to the former. [60] Besides, no demand has yet been made by SOB against the respondent contractor. Demand is generally necessary even if a period has been fixed in the obligation. And default generally begins from the moment the creditor demands judicially or extra-judicially the performance of the obligation. Without such demand, the effects of default will not arise.[61] Moreover, the petitioner as a guarantor is entitled to the benefit of excussion, that is, it cannot be compelled to pay the creditor SOB unless the property of the debtor VPECI has been exhausted and all legal remedies against the said debtor have been resorted to by the creditor.[62] It could also set up compensation as regards what the creditor SOB may owe the principal debtor VPECI.[63] In this case, however, the petitioner has clearly waived these rights and remedies by making the payment of an obligation that was yet to be shown to be rightfully due the creditor and demandable of the principal debtor. As found by the Court of Appeals, the petitioner fully knew that the joint venture contractor had collectibles from SOB which could be set off with the amount covered by the performance guarantee. In February 1987, the OMEAA transmitted to the petitioner a copy of a telex dated 10 February 1987 of the Philippine Ambassador in Baghdad, Iraq, informing it of the note verbalesent by the Iraqi Ministry of Foreign Affairs stating that the past due obligations of the joint venture contractor from the petitioner would be deducted from the dues of the two contractors.[64]

Also, in the project situationer attached to the letter to the OMEAA dated 26 March 1987, the petitioner raised as among the arguments to be presented in support of the cancellation of the counter-guarantee the fact that the amount of ID281,414/066 retained by SOB from the Project was more than enough to cover the counter-guarantee of ID271,808/610; thus: 6.1 Present the following arguments in cancelling the counterguarantee: The Iraqi Government does not have the foreign exchange to fulfill its contractual obligations of paying 75% of progress billings in US dollars. It could also be argued that the amount of ID281,414/066 retained by SOB from the proposed project is more than the amount of the outstanding counterguarantee.[65]

In a nutshell, since the petitioner was aware of the contractors outstanding receivables from SOB, it should have set up compensation as was proposed in its project situationer. Moreover, the petitioner was very much aware of the predicament of the respondents. In fact, in its 13 May 1987 letter to the OMEAA, DFA, Manila, it stated: VPECI also maintains that the delay in the completion of the project was mainly due to SOBs violation of contract terms and as such, call on the guarantee has no basis. While PHILGUARANTEE is prepared to honor its commitment under the guarantee, PHILGUARANTEE does not want to be an instrument in any case of inequity committed against a Filipino contractor. It is for this reason that we are constrained to seek your assistance not only in ascertaining the veracity of Al Ahli Banks claim that it has paid Rafidain Bank but possibly averting such an event. As any payment effected by the banks will complicate matters, we cannot help underscore the urgency of VPECIs bid for government intervention for the amicable termination of the contract and release of the performance guarantee. [66] But surprisingly, though fully cognizant of SOBs violations of the service contract and VPECIs outstanding receivables from SOB, as well as the situation obtaining in the Project site compounded by the Iran-Iraq war, the petitioner opted to pay the second layer guarantor not only the full amount of the performance bond counter-guarantee but also interests and penalty charges. This brings us to the next question: May the petitioner as a guarantor secure reimbursement from the respondents for what it has paid under Letter of Guarantee No. 81194-F? As a rule, a guarantor who pays for a debtor should be indemnified by the latter[67] and would be legally subrogated to the rights which the creditor has against the debtor.[68] However, a person who makes payment without the knowledge or against the will of the debtor has the right to recover only insofar as the payment has been beneficial to the debtor.[69] If the obligation was subject to defenses on the part of the debtor, the same defenses which could have been set up against the creditor can be set up against the paying guarantor.[70]

From the findings of the Court of Appeals and the trial court, it is clear that the payment made by the petitioner guarantor did not in any way benefit the principal debtor, given the project status and the conditions obtaining at the Project site at that time. Moreover, the respondent contractor was found to have valid defenses against SOB, which are fully supported by evidence and which have been meritoriously set up against the paying guarantor, the petitioner in this case. And even if the deed of undertaking and the surety bond secured petitioners guaranty, the petitioner is precluded from enforcing the same by reason of the petitioners undue payment on the guaranty. Rights under the deed of undertaking and the surety bond do not arise because these contracts depend on the validity of the enforcement of the guaranty. The petitioner guarantor should have waited for the natural course of guaranty: the debtor VPECI should have, in the first place, defaulted in its obligation and that the creditor SOB should have first made a demand from the principal debtor. It is only when the debtor does not or cannot pay, in whole or in part, that the guarantor should pay.[71] When the petitioner guarantor in this case paid against the will of the debtor VPECI, the debtor VPECI may set up against it defenses available against the creditor SOB at the time of payment. This is the hard lesson that the petitioner must learn. As the government arm in pursuing its objective of providing the necessary support and assistance in order to enable *Filipino exporters and contractors to operate viably under the prevailing economic and business conditions,[72] the petitioner should have exercised prudence and caution under the circumstances. As aptly put by the Court of Appeals, it would be the height of inequity to allow the petitioner to pass on its losses to the Filipino contractor VPECI which had sternly warned against paying the Al Ahli Bank and constantly apprised it of the developments in the Project implementation. WHEREFORE, the petition for review on certiorari is hereby DENIED for lack of merit, and the decision of the Court of appeals in CA-G.R. CV No. 39302 is AFFIRMED. No pronouncement as to costs. SO ORDERED.

Juntilla vs Fontanar

ROBERTO JUNTILLA, petitioner, vs. CLEMENTE FONTANAR, FERNANDO BANZON and BERFOL CAMORO, respondents. Valentin A. Zozobrado for petitioner. Ruperto N. Alfarara for respondents.

GUTIERREZ, JR., J.:

This is a petition for review, on questions of law, of the decision of the Court of First Instance of Cebu which reversed the decision of the City Court of Cebu and exonerated the respondents from any liability arising from a vehicular accident. The background facts which led to the filing of a complaint for breach of contract and damages against the respondents are summarized by the Court of First Instance of Cebu as follows: The facts established after trial show that the plaintiff was a passenger of the public utility jeepney bearing plate No. PUJ-71-7 on the course of the trip from Danao City to Cebu City. The jeepney was driven by defendant Berfol Camoro. It was registered under the franchise of defendant Clemente Fontanar but was actually owned by defendant Fernando Banzon. When the jeepney reached Mandaue City, the right rear tire exploded causing the vehicle to turn turtle. In the process, the plaintiff who was sitting at the front seat was thrown out of the vehicle. Upon landing on the ground, the plaintiff momentarily lost consciousness. When he came to his senses, he found that he had a lacerated wound on his right palm. Aside from this, he suffered injuries on his left arm, right thigh and on his back. (Exh. "D"). Because of his shock and injuries, he went back to Danao City but on the way, he discovered that his "Omega" wrist watch was lost. Upon his arrival in Danao City, he immediately entered the Danao City Hospital to attend to his injuries, and also requested his father-in-law to proceed immediately to the place of the accident and look for the watch. In spite of the efforts of his father-in-law, the wrist watch, which he bought for P 852.70 (Exh. "B") could no longer be found. xxx xxx xxx Petitioner Roberto Juntilla filed Civil Case No. R-17378 for breach of contract with damages before the City Court of Cebu City, Branch I against Clemente Fontanar, Fernando Banzon and Berfol Camoro. The respondents filed their answer, alleging inter alia that the accident that caused losses to the petitioner was beyond the control of the respondents taking into account that the tire that exploded was newly bought and was only slightly used at the time it blew up. After trial, Judge Romulo R. Senining of the Civil Court of Cebu rendered judgment in favor of the petitioner and against the respondents. The dispositive portion of the decision reads: WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendants and the latter are hereby ordered, jointly and severally, to pay the plaintiff the sum of P750.00 as reimbursement for the lost Omega wrist watch, the sum of P246.64 as unrealized salary of the plaintiff from his employer, the further sum of P100.00 for the doctor's fees and medicine, an additional sum of P300.00 for attorney's fees and the costs. The respondents appealed to the Court of First Instance of Cebu, Branch XIV. Judge Leonardo B. Canares reversed the judgment of the City Court of Cebu upon a finding that the accident in question was due to a fortuitous event. The dispositive portion of the decision reads: WHEREFORE, judgment is hereby rendered exonerating the defendants from any liability to the plaintiff without pronouncement as to costs. A motion for reconsideration was denied by the Court of First Instance.

The petitioner raises the following alleged errors committed by the Court of First Instance of Cebu on appeal a. The Honorable Court below committed grave abuse of discretion in failing to take cognizance of the fact that defendants and/or their employee failed to exercise "utmost and/or extraordinary diligence" required of common carriers contemplated under Art. 1755 of the Civil Code of the Philippines. b. The Honorable Court below committed grave abuse of discretion by deciding the case contrary to the doctrine laid down by the Honorable Supreme Court in the case of Necesito et al. v. Paras, et al. We find the petition impressed with merit. The City Court and the Court of First Instance of Cebu found that the right rear tire of the passenger jeepney in which the petitioner was riding blew up causing the vehicle to fall on its side. The petitioner questions the conclusion of the respondent court drawn from this finding of fact. The Court of First Instance of Cebu erred when it absolved the carrier from any liability upon a finding that the tire blow out is a fortuitous event. The Court of First Instance of Cebu ruled that: After reviewing the records of the case, this Court finds that the accident in question was due to a fortuitous event. A tire blow-out, such as what happened in the case at bar, is an inevitable accident that exempts the carrier from liability, there being absence of a showing that there was misconduct or negligence on the part of the operator in the operation and maintenance of the vehicle involved. The fact that the right rear tire exploded, despite being brand new, constitutes a clear case of caso fortuito which can be a proper basis for exonerating the defendants from liability. ... The Court of First Instance relied on the ruling of the Court of Appeals in Rodriguez v. Red Line Transportation Co., CA G.R. No. 8136, December 29, 1954, where the Court of Appeals ruled that: A tire blow-out does not constitute negligence unless the tire was already old and should not have been used at all. Indeed, this would be a clear case of fortuitous event. The foregoing conclusions of the Court of First Instance of Cebu are based on a misapprehension of overall facts from which a conclusion should be drawn. The reliance of the Court of First Instance on the Rodriguez case is not in order. In La Mallorca and Pampanga Bus Co. v. De Jesus, et al. (17 SCRA 23), we held that: Petitioner maintains that a tire blow-out is a fortuitous event and gives rise to no liability for negligence, citing the rulings of the Court of Appeals in Rodriguez v. Red Line Transportation Co., CA G.R. No. 8136, December 29, 1954, and People v. Palapad, CAG.R. No. 18480, June 27, 1958. These rulings, however, not only are not binding on this Court but were based on considerations quite different from those that obtain in the case at bar. The appellate court there made no findings of any specific acts of negligence on the part of the defendants and confined itself to the question of whether or not a tire blow-out, by itself alone and without a showing as to the causative factors, would generate liability. ...

In the case at bar, there are specific acts of negligence on the part of the respondents. The records show that the passenger jeepney turned turtle and jumped into a ditch immediately after its right rear tire exploded. The evidence shows that the passenger jeepney was running at a very fast speed before the accident. We agree with the observation of the petitioner that a public utility jeep running at a regular and safe speed will not jump into a ditch when its right rear tire blows up. There is also evidence to show that the passenger jeepney was overloaded at the time of the accident. The petitioner stated that there were three (3) passengers in the front seat and fourteen (14) passengers in the rear. While it may be true that the tire that blew-up was still good because the grooves of the tire were still visible, this fact alone does not make the explosion of the tire a fortuitous event. No evidence was presented to show that the accident was due to adverse road conditions or that precautions were taken by the jeepney driver to compensate for any conditions liable to cause accidents. The sudden blowing-up, therefore, could have been caused by too much air pressure injected into the tire coupled by the fact that the jeepney was overloaded and speeding at the time of the accident. In Lasam v. Smith (45 Phil. 657), we laid down the following essential characteristics of caso fortuito: xxx xxx xxx ... In a legal sense and, consequently, also in relation to contracts, a caso fortuito presents the following essential characteristics: (1) The cause of the unforeseen and unexpected occurrence, or of the failure of the debtor to comply with his obligation, must be independent of the human will. (2) It must be impossible to foresee the event which constitutes the caso fortuito, or if it can be foreseen, it must be impossible to avoid. (3) The occurrence must be such as to render it impossible for the debtor to fulfill his obligation in a normal manner. And (4) the obligor (debtor) must be free from any participation in the aggravation of the injury resulting to the creditor. (5 Encyclopedia Juridica Espanola, 309.) In the case at bar, the cause of the unforeseen and unexpected occurrence was not independent of the human will. The accident was caused either through the negligence of the driver or because of mechanical defects in the tire. Common carriers should teach their drivers not to overload their vehicles, not to exceed safe and legal speed limits, and to know the correct measures to take when a tire blows up thus insuring the safety of passengers at all times. Relative to the contingency of mechanical defects, we held in Necesito, et al. v. Paras, et al. (104 Phil. 75), that: ... The preponderance of authority is in favor of the doctrine that a passenger is entitled to recover damages from a carrier for an injury resulting from a defect in an appliance purchased from a manufacturer, whenever it appears that the defect would have been discovered by the carrier if it had exercised the degree of care which under the circumstances was incumbent upon it, with regard to inspection and application of the necessary tests. For the purposes of this doctrine, the manufacturer is considered as being in law the agent or servant of the carrier, as far as regards the work of constructing the appliance. According to this theory, the good repute of the manufacturer will not relieve the carrier from liability' (10 Am. Jur. 205, s, 1324; see also Pennsylvania R. Co. v. Roy, 102 U.S. 451; 20 L. Ed. 141; Southern R. Co. v. Hussey, 74 ALR 1172; 42 Fed. 2d 70; and Ed Note, 29 ALR 788.: Ann. Cas. 1916E 929). The rationale of the carrier's liability is the fact that the passenger has neither choice nor control over the carrier in the selection and use of the equipment and appliances in use by the carrier. Having no privity whatever with the manufacturer or vendor of the defective equipment, the passenger has no remedy against him, while the carrier

usually has. It is but logical, therefore, that the carrier, while not an insurer of the safety of his passengers, should nevertheless be held to answer for the flaws of his equipment if such flaws were at all discoverable. ... It is sufficient to reiterate that the source of a common carrier's legal liability is the contract of carriage, and by entering into the said contract, it binds itself to carry the passengers safely as far as human care and foresight can provide, using the utmost diligence of a very cautious person, with a due regard for all the circumstances. The records show that this obligation was not met by the respondents. The respondents likewise argue that the petitioner cannot recover any amount for failure to prove such damages during the trial. The respondents submit that if the petitioner was really injured, why was he treated in Danao City and not in Mandaue City where the accident took place. The respondents argue that the doctor who issued the medical certificate was not presented during the trial, and hence not crossexamined. The respondents also claim that the petitioner was not wearing any wrist watch during the accident. It should be noted that the City Court of Cebu found that the petitioner had a lacerated wound on his right palm aside from injuries on his left arm, right thigh and on his back, and that on his way back to Danao City, he discovered that his "Omega" wrist watch was lost. These are findings of facts of the City Court of Cebu which we find no reason to disturb. More so when we consider the fact that the Court of First Instance of Cebu impliedly concurred in these matters when it confined itself to the question of whether or not the tire blow out was a fortuitous event. WHEREFORE, the decision of the Court of First Instance of Cebu, Branch IV appealed from is hereby REVERSED and SET ASIDE, and the decision of the City Court of Cebu, Branch I is REINSTATED, with the modification that the damages shall earn interest at 12% per annum and the attorney's fees are increased to SIX HUNDRED PESOS (P600.00). Damages shall earn interests from January 27, 1975. SO ORDERED.

Ace-Agro Devt vs CA ACE-AGRO DEVELOPMENT CORPORATION, petitioner, vs. COURT OF APPEALS and COSMOS BOTTLING CORPORATION, respondents. DECISION MENDOZA, J.: This case originated in a complaint for damages for breach of contract which petitioner filed against private respondent. From the decision of the Regional Trial Court, Branch 72, Malabon, Metro Manila, finding private respondent guilty of breach of contract and ordering it to pay damages, private respondent appealed to the Court of Appeals which reversed the trial courts decision and dismissed the complaint for lack of merit. Petitioner in turn moved for a reconsideration, but its motion was denied. Hence, this petition for review on certiorari. The facts are as follows:

Petitioner Ace-Agro Development Corporation and private respondent Cosmos Bottling Corporation are corporations duly organized and existing under Philippine laws. Private respondent Cosmos Bottling Corp. is engaged in the manufacture of soft drinks. Since 1979 petitioner Ace-Agro Development Corp. (Ace-Agro) had been cleaning soft drink bottles and repairing wooden shells for Cosmos, rendering its services within the company premises in San Fernando, Pampanga. The parties entered into service contracts which they renewed every year. On January 18, 1990, they signed a contract covering the period January 1, 1990 to December 31, 1990. Private respondent had earlier contracted the services of Aren Enterprises in view of the fact that petitioner could handle only from 2,000 to 2,500 cases a day and could not cope with private respondents daily production of 8,000 cases. Unlike petitioner, Aren Enterprises rendered service outside private respondents plant. On April 25, 1990, fire broke out in private respondents plant, destroying, among other places, the area where petitioner did its work. As a result, petitioners work was stopped. On May 15, 1990, petitioner asked private respondent to allow it to resume its service, but petitioner was advised that on account of the fire, which had practically burned all . . . old soft drink bottles and wooden shells, private respondent was terminating their contract. Petitioner expressed surprise at the termination of the contract and requested private respondent, on June 13, 1990, to reconsider its decision and allow petitioner to resume its work in order to cushion the sudden impact of the unemployment of many of *its+ workers. As it received no reply from private respondent, petitioner, on June 20, 1990, informed its employees of the termination of their employment. Petitioners memorandum [1] read: MEMORANDUM TO : All Workers/Union Members THRU : Mr. Angelito B. Catalan Local Chapter President Bisig Manggagawa sa Ace Agro-NAFLU This is to inform you that the Cosmos Bottling Corp. has sent a letter to Ace Agro-Development Corp. terminating our contract with them. However, we are still doing what we can to save our contract and resume our operations, though this might take some time. We will notify you whatever would be the outcome of our negotiation with them in due time. Truly yours, ACE AGRO-DEVELOPMENT CORP. (Sgd.) ANTONIO L. ARQUIZA Manager

This led the employees to file a complaint for illegal dismissal before the Labor Arbiter against petitioner and private respondent. On July 17, 1990, petitioner sent another letter to private respondent, reiterating its request for reconsideration. Its letter [2] read: COSMOS BOTTLING CORPORATION San Isidro, MacArthur Highway San Fernando, Pampanga Attention: Mr. Norman P. Uy General Services Manager Gentlemen: In our letter to you dated June 13, 1990 seeking your kind reconsideration of your sudden drastic decision to terminate our mutually beneficial contract of long standing, it is more than a month now but our office has not received a reply from you. Our workers, who have been anxiously waiting for the resumption of the operations and who are the ones most affected by your sudden decision, are now becoming restless due to the financial difficulties they are now suffering. We are, therefore, again seeking for the reconsideration of your decision to help alleviate the sufferings of the displaced workers, which we also have to consider for humanitarian reason. Yours very truly, ACE AGRO-DEVELOPMENT CORP. (Sgd.) ANTONIO I. ARQUIZA Manager In response, private respondent advised petitioner on August 28, 1990 that the latter could resume the repair of wooden shells under terms similar to those contained in its contract but work had to be done outside the company premises. Private respondents letter [3] read: MR. ANTONIO I. ARQUIZA Manager ACE-AGRO DEVELOPMENT CORPORATION 165 J.P. Bautista Street Malabon, Metro Manila Dear Mr. Arquiza: We are pleased to inform you that COSMOS BOTTLING CORPORATION, San Fernando Plant is again accepting job-out contract for the repair of our wooden shells.

Work shall be done outside the premises of the plant and under similar terms you previously had with the company. We intend to give you priority so please see or contact me at my office soonest for the particulars regarding the job. Here is looking forward to doing business with you at the earliest possible time. (Sgd.) DANILO M. DE CASTRO Plant General Manager Petitioner refused the offer, claiming that to do its work outside the companys premises would make it (petitioner) incur additional costs for transportation which will eat up the meager profits that *it+ realizes from its original contract with Cosmos. In subsequent meetings with Danilo M. de Castro, Butch Cea and Norman Uy of Cosmos, petitioners manager, Antonio I. Arquiza, asked for an extension of the term of the contract in view of the suspension of work. But its request was apparently turned down. On November 7, 1990, private respondent advised petitioner that the latter could then resume its work inside the plant in accordance with its original contract with Cosmos. Private respondents letter [4] stated: MR. ANTONIO I. ARQUIZA General Manager Ace-Agro Development Corporation 165 J. P. Bautista St., Malabon Metro Manila Dear Mr. Arquiza: This is to officially inform you that you can now resume the repair of wooden shells inside the plant according to your existing contract with the Company. Please see Mr. Ener G. Ocampo, OIC-PDGS, on your new job site in the Plant. Very truly yours, COSMOS BOTTLING CORPORATION (Sgd.) MICHAEL M. ALBINO VP-Luzon/Plant General Manager On November 17, 1990, petitioner rejected private respondents offer, this time, citing the fact that there was a pending labor case. Its letter [5] to private respondent stated: Mr. Michael M. Albino VP-Luzon/Plant General Manager Cosmos Bottling Corporation San Fernando, Pampanga

Dear Mr. Albino, This is in connection with your letter dated November 7, 1990 regarding the resumption of the repair of your wooden shells inside San Fernando, Pampanga Plant according to the existing contract with your company. At present, there is a pending case before the Department of Labor and Employment in San Fernando, Pampanga which was a result of the premature termination of the said existing contract with your company. In view of that, we find it proper for us to work for the resolution of the said pending case and include in the Compromise Agreement the matter of the resumption of the repair of wooden shells in your San Fernando, Pampanga Plant. Thank you very much. Very truly yours, ACE CORP. (Sgd.) ANTONIO I. ARQUIZA Manager On January 3, 1991, petitioner brought this case against private respondent for breach of contract and damages in the Regional Trial Court of Malabon. It complained that the termination of its service contract was illegal and arbitrary and that, as a result, it stood to lose profits and to be held liable to its employees for backwages, damages and/or separation pay. On January 16, 1991, a decision was rendered in the labor case, finding petitioner liable for the claims of its employees. Petitioner was ordered to reinstate the employees and pay them backwages. However, private respondent Cosmos was absolved from the employees claims on the ground that there was no privity of contract between them and private respondent. On the other hand, in its decision rendered on November 21, 1991, the RTC found private respondent guilty of breach of contract and ordered it to pay damages to petitioner. Petitioners claim for reimbursement for what it had paid to its employees in the labor case was denied. The dispositive portion of the trial courts decision read: WHEREFORE, premises considered, judgment is hereby rendered in favor of plaintiff Ace-Agro Development Corporation and against defendant Cosmos Bottling Corporation, ordering the latter to pay to the former the following: a) The amount of P1,008,418.01 as actual damages; b) P100,000.00 as corrective or exemplary damages; c) The amount of P50,000.00 as and for attorneys fees; and d) Costs and expenses of litigation. Defendants counterclaims are dismissed. AGRO-DEVELOPMENT

SO ORDERED. Private respondent appealed to the Court of Appeals, which on December 29, 1994, reversed the trial courts decision and dismissed petitioners complaint. The appellate court found that it was petitioner which had refused to resume work, after failing to secure an extension of its contract. Petitioner now seeks a review of the Court of Appeals decision. First. Petitioner claims that the appellate court erred in ruling that respondent was justified in unilaterally terminating the contract on account of a force majeure. Quite possibly it did not understand the appellate courts decision, or it would not be contending that there was no valid cause for the termination of the contract but only for its suspension. The following is what the appellate court said: [6] Article 1231 of the New Civil Code on extinguishment of obligations does not specifically mention unilateral termination as a mode of extinguishment of obligation but, according to Tolentino, there are other causes of extinguishment of obligations which are not expressly provided for in this chapter (Tolentino, Civil Code of the Phils., Vol. IV, 1986 ed., p. 273). He further said: But in some contracts, either because of its indeterminate duration or because of the nature of the prestation which is its object, one of the parties may free himself from the contractual tie by his own will (unilateral extinguishment); x x x. (p. 274-275, Ibid) And that was just what defendant-appellant did when it unilaterally terminated the agreement it had with plaintiff-appellee by sending the May 23, 1990 letter. As per its letter, the reason given by defendant-appellant for unilaterally terminating the agreement was because the April 25, 1990 fire practically burned all of the softdrink bottles and wooden shells which plaintiffappellee was working on under the agreement. What defendant-appellant was trying to say was that the prestation or the object of their agreement had been lost and destroyed in the above-described fire. Apparently, the defendant-appellant would like this situation to fall within what -- according to Tolentino -- would be: x x x (O)bligations may be extinguished by the happening of unforeseen events, under whose influence the obligation would never have been contracted, because in such cases, the very basis upon which the existence of the obligation is founded would be wanting. Both parties admitted that the April 25, 1990 fire was a force majeure or unforeseen event and that the same even burned practically all the softdrink bottles and wooden shells -- which are the objects of the agreement. But the story did not end there. It is true that defendant-appellant still had other bottles that needed cleaning and wooden shells that needed repairing (pp. 110-111, orig. rec.); therefore, the suspension of the work of the plaintiff-appellee brought about by the fire is, at best, temporary as found by the trial court . Hence, plaintiff-appellees letters of reconsideration of the termination of the agreement addressed to defendant-appellant dated June 13, 1990 and July 17, 1990. It is obvious that what petitioner thought was the appellate courts ruling is merely its summary of private respondents allegations. Precisely the appellate court does not agree with

private respondent, that is why, in the last paragraph of the above excerpt, the court says that there was no cause for terminating the contract but at most a temporary suspension of work. The court thus rejects private respondents claim that, as a result of the fire, the obligation of contract must be deemed to have been extinguished. Nonetheless, the Court of Appeals found that private respondent had reconsidered its decision to terminate the contract and tried to accommodate the request of petitioner, first, by notifying petitioner on August 28, 1990 that it could resume work provided that this was done outside the premises and, later, on November 7, 1990, by notifying petitioner that it could then work in its premises, under the terms of their contract. However, petitioner unjustifiably refused the offer because it wanted an extension of the contract to make up for the period of inactivity. As the Court of Appeals said in its decision: [7] It took defendant-appellant time to make a reply to plaintiff-appellees letters. But when it did on August 28, 1990, it granted plaintiff-appellee priority to resume its work under the terms of their agreement (but outside its premises), and the plaintiff-appellee refused the same on the ground that working outside the defendant-appellants San Fernando Plant would mean added transportation costs that would offset any profit it would earn. The appellee was without legal ground to refuse resumption of work as offered by the appellant, under the terms of their above agreement. It could not legally insist on staying inside property it did not own, nor was under lease to it . . . . In its refusal to resume its work because of the additional transportation costs to be brought about by working outside the appellants San Fernando plant, the appellee could be held liable for damages for breach of contract. . . . . Thereafter, appellant sent its November 7, 1990 letter to appellee, this time specifically stating that plaintiff-appellee can now resume work in accordance with their existing agreement. This time, it could not be denied that by the tenor of the letter, appellant was willing to honor its agreement with appellee, that it had finally made a reconsideration of appellees plea to resume work under the contract. But again, plaintiff-appellee refused this offer to resume work. Why did the appellee refuse to resume work? Its November 17, 1990 letter stated that it had something to do with the settlement of the NLRC case filed against it by its employees. But that was not the real reason. In his cross-examination, the witness for appellee stated that its real reason for refusing to resume work with the appellant was -- as in its previous refusal -- because it wanted an extension of the period or duration of the contract beyond December 31, 1991, to cover the period within which it was unable to work. The agreement between the appellee and the appellant is with a resolutory period, beginning from January 1, 1990 and ending on December 31, 1990. When the fire broke out on April 25, 1990, there resulted a suspension of the appellees work as per agreement. But this suspension of work due to force majeure did not merit an automatic extension of the period of the agreement between them. According to Tolentino: The stipulation that in the event of a fortuitous event or force majeure the contract shall be deemed suspended during the said period does not mean that the happening of any of those

events stops the running of the period the contract has been agreed upon to run. It only relieves the parties from the fulfillment of their respective obligations during that time. If during six of the thirty years fixed as the duration of a contract, one of the parties is prevented by force majeure to perform his obligation during those years, he cannot after the expiration of the thirty-year period, be compelled to perform his obligation for six more years to make up for what he failed to perform during the said six years, because it would in effect be an extension of the term of the contract. The contract is stipulated to run for thirty years, and the period expires on the thirtieth year; the period of six years during which performance by one of the parties is prevented by force majeure cannot be deducted from the period stipulated. In fine, the appellant withdrew its unilateral termination of its agreement with appellee in its letter dated November 7, 1990. But the appellees refusal to resume work was, in effect, a unilateral termination of the parties agreement -- an act that was without basis. When the appellee asked for an extension of the period of the contract beyond December 31, 1990 it was, in effect, asking for a new contract which needed the consent of defendant-appellant. The appellee might be forgiven for its first refusal (pertaining to defendant-appellants August 28, 1990 letter), but the second refusal must be construed as a breach of contract by plaintiffappellee. . . . The Court of Appeals was right that petitioner had no basis for refusing private respondents offer unless petitioner was allowed to carry out its work in the company premises. That petitioner would incur additional cost for transportation was not a good reason for its refusal. Petitioner has not shown that on August 28, 1990, when it was notified of the private respondents offer, the latters premises had so far been restored so as to permit petitioner to resume work there. In fact, even when petitioner was finally allowed to resume work within the plant, it was not in the former work place but in a new one, which shows that private respondents reason for not granting petitioners request was not just a pretext. Nor was petitioner justified in refusing to resume work on November 7 when it was again notified by petitioner to work. Although it cited the pending labor case as reason for turning down private respondents offer, it would appear that the real reason for petitioners refusal was the fact that the term of the contract was expiring in two months and its request for an extension was not granted. But, as the appellate court correctly ruled, the suspension of work under the contract was brought about by force majeure. Therefore, the period during which work was suspended did not justify an extension of the term of the contract. [8] For the fact is that the contract was subject to a resolutory period which relieved the parties of their respective obligations but did not stop the running of the period of their contract. The truth of the matter is that while private respondent had made efforts towards accommodation, petitioner was unwilling to make adjustments as it insisted that it cannot profitably resume operation under the same terms and conditions [of] the terminated contract but with an outside work venue [as] transportation costs alone will eat up the meager profit that Ace-Agro realizes from its original contract. [9] While this so- called job-out offer of private respondent had the effect of varying the terms of the contract in the sense that it could increase its cost, what petitioner did not seem to realize was that the change was brought about by circumstances not of private respondents making. Again when private respondent finally advised petitioner on November 7, 1990 to work under the strict terms of its contract and inside the plant, petitioner thought only of its interest

by insisting that the contract be extended. Petitioners manager, Antonio I. Arquiza, testified that he tried to secure a term extension for his company but his request was turned down because the management of private respondent wanted a new contract after the expiration of the contract on December 31, 1990. Arquiza testified: [10] A [Butch Cea] told me that Cosmos is agreeable to allow us to resume our operation and when I inquired about the extension of the contract he told me that I better refer the matter to Mr. Norman Uy. . . . . Q Did you see Mr. Norman Uy? A Yes, sir, when I went to see Mr. Norman Uy he asked me why I was there and he told me why I did not start operation I told him that what we are expecting that Mr. Cea would give me the formal letter regarding the resumption of the operation and honoring of contract and he said that our price was so high and if we are willing to use said contract and when I said yes he told me that we will just send you a letter considering that another contractor repairing our damaged shells and cleaning of dirty bottles. When I asked him that does that mean that the meeting I had with Mr. Cea, he told me that was null and void and he told me that Mr. Cea want a new contract.

As already stated, because the suspension of work was due to force majeure, there was no justification for petitioners demand for an extension of the terms of the contract. Private respondent was justified in insisting that after the expiration of the contract, the parties must negotiate a new one as they had done every year since the start of their business relations in 1979. Second. Petitioner slams the Court of Appeals for ruling that it was *petitioners+ unjustified refusal which finally terminated the contract between the parties. This contention is likewise without merit. Petitioner may not be responsible for the termination of the contract, but neither is private respondent, since the question in this case is whether private respondent is guilty of breach of contract. The trial court held that private respondent committed a breach of contract because, even as its August 28, 1990 letter allowed petitioner to resume work, private respondents offer was limited to the repairs of wooden shells and this had to be done outside the companys premises. On the other hand, the final offer made on November 7, 1990, while allowing the repair of wooden shells *to be done+ inside the plant according to your contract with the company, was still limited to the repair of the wooden shells, when the fact was that the parties contract was both for the repair of wooden crates and for the cleaning of soft drink bottles. But this was not the petitioners complaint. There was never an issue whether the companys offer included the cleaning of bottles. Both parties understood private respondents offer as including the cleaning of empty soft drink bottles and the repair of the wooden crates. Rather, the discussions between petitioner and private respondents representatives focused first, on the insistence of petitioner that it be allowed to work inside the company plant and, later, on its request for the extension of the life of the contract. Petitioner claims that private respondent had a reason to want to terminate the contract and that was to give the business to Aren Enterprises, as the latter offered its services at a much

lower rate than petitioner. Aren Enterprises rate was P2.50 per shell while petitioners rates were P4.00 and P6.00 per shell for ordinary and super sized bottles, respectively. [11] The contention has no basis in fact. The contract between private respondent and Aren Enterprises had been made on March 29, 1990 - before the fire broke out. The contract between petitioner and private respondent did not prohibit the hiring by private respondent of another service contractor. With private respondent hitting production at 8,000 bottles of soft drinks per day, petitioner could clearly not handle the business, since it could clean only 2,500 bottles a day. [12] These facts show that although Aren Enterprises rate was lower than petitioners, they did not affect private respondents business relation with petitioner. Despite private respondents contract with Aren Enterprises, private respondent continued doing business with petitioner and would probably have done so were it not for the fire. On the other hand, Aren Enterprises could not be begrudged for being allowed to continue rendering service even after the fire because it was doing its work outside private respondents plant. For that matter, after the fire, private respondent on August 28, 1990 offered to let petitioner resume its service provided this was done outside the plant. Petitioner may not be to blame for the failure to resume work after the fire, but neither is private respondent. Since the question is whether private respondent is guilty of breach of contract, the fact that private respondent is blameless can only lead to the conclusion that the appealed decision is correct. WHEREFORE, the petition for review is DENIED and the decision of the Court of Appeals is AFFIRMED. SO ORDERED.

Philcomsat vs Globe

PHILIPPINE COMMUNICATIONS SATELLITE CORPORATION, petitioner, vs. GLOBE TELECOM, INC. (formerly Globe Mckay Cable and Radio Corporation), respondents. x-----------------------------x GLOBE TELECOM, INC., petitioner, vs. PHILIPPINE COMMUNICATION SATELLITE CORPORATION, respondent. DECISION TINGA, J.: Before the Court are two Petitions for Review assailing the Decision of the Court of Appeals, dated 27 February 2001, in CA-G.R. CV No. 63619.1 The facts of the case are undisputed. For several years prior to 1991, Globe Mckay Cable and Radio Corporation, now Globe Telecom, Inc. (Globe), had been engaged in the coordination of the provision of various communication facilities for the military bases of the United States of America (US) in Clark Air Base, Angeles, Pampanga and Subic Naval Base in Cubi Point,

Zambales. The said communication facilities were installed and configured for the exclusive use of the US Defense Communications Agency (USDCA), and for security reasons, were operated only by its personnel or those of American companies contracted by it to operate said facilities. The USDCA contracted with said American companies, and the latter, in turn, contracted with Globe for the use of the communication facilities. Globe, on the other hand, contracted with local service providers such as the Philippine Communications Satellite Corporation (Philcomsat) for the provision of the communication facilities. On 07 May 1991, Philcomsat and Globe entered into an Agreement whereby Philcomsat obligated itself to establish, operate and provide an IBS Standard B earth station (earth station) within Cubi Point for the exclusive use of the USDCA.2 The term of the contract was for 60 months, or five (5) years. 3 In turn, Globe promised to pay Philcomsat monthly rentals for each leased circuit involved. 4 At the time of the execution of the Agreement, both parties knew that the Military Bases Agreement between the Republic of the Philippines and the US (RP-US Military Bases Agreement), which was the basis for the occupancy of the Clark Air Base and Subic Naval Base in Cubi Point, was to expire in 1991. Under Section 25, Article XVIII of the 1987 Constitution, foreign military bases, troops or facilities, which include those located at the US Naval Facility in Cubi Point, shall not be allowed in the Philippines unless a new treaty is duly concurred in by the Senate and ratified by a majority of the votes cast by the people in a national referendum when the Congress so requires, and such new treaty is recognized as such by the US Government. Subsequently, Philcomsat installed and established the earth station at Cubi Point and the USDCA made use of the same. On 16 September 1991, the Senate passed and adopted Senate Resolution No. 141, expressing its decision not to concur in the ratification of the Treaty of Friendship, Cooperation and Security and its Supplementary Agreements that was supposed to extend the term of the use by the US of Subic Naval Base, among others. 5 The last two paragraphs of the Resolution state: FINDING that the Treaty constitutes a defective framework for the continuing relationship between the two countries in the spirit of friendship, cooperation and sovereign equality: Now, therefore, be it Resolved by the Senate, as it is hereby resolved, To express its decision not to concur in the ratification of the Treaty of Friendship, Cooperation and Security and its Supplementary Agreements, at the same time reaffirming its desire to continue friendly relations with the government and people of the United States of America.6 On 31 December 1991, the Philippine Government sent a Note Verbale to the US Government through the US Embassy, notifying it of the Philippines termination of the RP -US Military Bases Agreement. The Note Verbalestated that since the RP-US Military Bases Agreement, as amended, shall terminate on 31 December 1992, the withdrawal of all US military forces from Subic Naval Base should be completed by said date. In a letter dated 06 August 1992, Globe notified Philcomsat of its intention to discontinue the use of the earth station effective 08 November 1992 in view of the withdrawal of US military personnel from Subic Naval Base after the termination of the RP-US Military Bases Agreement. Globe invoked as basis for the letter of termination Section 8 (Default) of the Agreement, which provides: Neither party shall be held liable or deemed to be in default for any failure to perform its obligation under this Agreement if such failure results directly or indirectly from force majeure or fortuitous event. Either party is thus precluded from performing its obligation until such force majeure or fortuitous event shall terminate. For the purpose of this paragraph, force majeure shall mean circumstances beyond the control of the party involved including, but not limited to, any law, order, regulation, direction or request of the Government of the Philippines, strikes or other labor difficulties, insurrection riots, national emergencies, war, acts of public enemies, fire, floods, typhoons or other catastrophies or acts of God. Philcomsat sent a reply letter dated 10 August 1992 to Globe, stating that "we expect [Globe] to know its commitment to pay the stipulated rentals for the remaining terms of the Agreement even after [Globe] shall have discontinue[d] the use of the earth station after November 08, 1992." 7 Philcomsat referred to Section 7 of the Agreement, stating as follows: 7. DISCONTINUANCE OF SERVICE

Should [Globe] decide to discontinue with the use of the earth station after it has been put into operation, a written notice shall be served to PHILCOMSAT at least sixty (60) days prior to the expected date of termination. Notwithstanding the non-use of the earth station, [Globe] shall continue to pay PHILCOMSAT for the rental of the actual number of T1 circuits in use, but in no case shall be less than the first two (2) T1 circuits, for the remaining life of the agreement. However, should PHILCOMSAT make use or sell the earth station subject to this agreement, the obligation of [Globe] to pay the rental for the remaining life of the agreement shall be at such monthly rate as may be agreed upon by the parties. 8 After the US military forces left Subic Naval Base, Philcomsat sent Globe a letter dated 24 November 1993 demanding payment of its outstanding obligations under the Agreement amounting to US$4,910,136.00 plus interest and attorneys fees. However, Globe refused to heed Philcomsats demand. On 27 January 1995, Philcomsat filed with the Regional Trial Court of Makati a Complaint against Globe, praying that the latter be ordered to pay liquidated damages under the Agreement, with legal interest, exemplary damages, attorneys fees and costs of suit. The case was raffled to Branch 59 of said court. Globe filed an Answer to the Complaint, insisting that it was constrained to end the Agreement due to the termination of the RP-US Military Bases Agreement and the non-ratification by the Senate of the Treaty of Friendship and Cooperation, which events constituted force majeure under the Agreement. Globe explained that the occurrence of said events exempted it from paying rentals for the remaining period of the Agreement. On 05 January 1999, the trial court rendered its Decision, the dispositive portion of which reads: WHEREFORE, premises considered, judgment is hereby rendered as follows: 1. Ordering the defendant to pay the plaintiff the amount of Ninety Two Thousand Two Hundred Thirty Eight US Dollars (US$92,238.00) or its equivalent in Philippine Currency (computed at the exchange rate prevailing at the time of compliance or payment) representing rentals for the month of December 1992 with interest thereon at the legal rate of twelve percent (12%) per annum starting December 1992 until the amount is fully paid; 2. Ordering the defendant to pay the plaintiff the amount of Three Hundred Thousand (P300,000.00) Pesos as and for attorneys fees; 3. Ordering the DISMISSAL of defendants counterclaim for lack of merit; and 4. With costs against the defendant. SO ORDERED.9 Both parties appealed the trial courts Decision to the Court of Appeals. Philcomsat claimed that the trial court erred in ruling that: (1) the non-ratification by the Senate of the Treaty of Friendship, Cooperation and Security and its Supplementary Agreements constitutes force majeure which exempts Globe from complying with its obligations under the Agreement; (2) Globe is not liable to pay the rentals for the remainder of the term of the Agreement; and (3) Globe is not liable to Philcomsat for exemplary damages. Globe, on the other hand, contended that the RTC erred in holding it liable for payment of rent of the earth station for December 1992 and of attorneys fees. It explained that it terminated Philcomsats services on 08 November 1992; hence, it had no reason to pay for rentals beyond that date. On 27 February 2001, the Court of Appeals promulgated its Decision dismissing Philcomsats appeal for lack of merit and affirming the trial courts finding that certain events constituting force majeure under Section 8 the Agreement occurred and justified the non-payment by Globe of rentals for the remainder of the term of the Agreement. The appellate court ruled that the non-ratification by the Senate of the Treaty of Friendship, Cooperation and Security, and its Supplementary Agreements, and the termination by the Philippine Government of the RP-US Military Bases Agreement effective 31 December 1991 as stated in the Phil ippine Governments Note Verbale to

the US Government, are acts, directions, or requests of the Government of the Philippines which constitute force majeure. In addition, there were circumstances beyond the control of the parties, such as the issuance of a formal order by Cdr. Walter Corliss of the US Navy, the issuance of the letter notification from ATT and the complete withdrawal of all US military forces and personnel from Cubi Point, which prevented further use of the earth station under the Agreement. However, the Court of Appeals ruled that although Globe sought to terminate Philcomsats services by 08 November 1992, it is still liable to pay rentals for the December 1992, amounting to US$92,238.00 plus interest, considering that the US military forces and personnel completely withdrew from Cubi Point only on 31 December 1992.10 Both parties filed their respective Petitions for Review assailing the Decision of the Court of Appeals. In G.R. No. 147324,11 petitioner Philcomsat raises the following assignments of error: A. THE HONORABLE COURT OF APPEALS ERRED IN ADOPTING A DEFINITION OF FORCE MAJEUREDIFFERENT FROM WHAT ITS LEGAL DEFINITION FOUND IN ARTICLE 1174 OF THE CIVIL CODE, PROVIDES, SO AS TO EXEMPT GLOBE TELECOM FROM COMPLYING WITH ITS OBLIGATIONS UNDER THE SUBJECT AGREEMENT. B. THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT GLOBE TELECOM IS NOT LIABLE TO PHILCOMSAT FOR RENTALS FOR THE REMAINING TERM OF THE AGREEMENT, DESPITE THE CLEAR TENOR OF SECTION 7 OF THE AGREEMENT. C. THE HONORABLE OCURT OF APPEALS ERRED IN DELETING THE TRIAL COURTS AWARD OF ATTORNEYS FEES IN FAVOR OF PHILCOMSAT. D. THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT GLOBE TELECOM IS NOT LIABLE TO PHILCOMSAT FOR EXEMPLARY DAMAGES.12 Philcomsat argues that the termination of the RP-US Military Bases Agreement cannot be considered a fortuitous event because the happening thereof was foreseeable. Although the Agreement was freely entered into by both parties, Section 8 should be deemed ineffective because it is contrary to Article 1174 of the Civil Code. Philcomsat posits the view that the validity of the parties definition of force majeure in Section 8 of the Agreement as "circumstances beyond the control of the party involved including, but not limited to, any law, order, regulation, direction or request of the Government of the Philippines, strikes or other labor difficulties, insurrection riots, national emergencies, war, acts of public enemies, fire, floods, typhoons or other catastrophies or acts of God," should be deemed subject to Article 1174 which defines fortuitous events as events which could not be foreseen, or which, though foreseen, were inevitable. 13 Philcomsat further claims that the Court of Appeals erred in holding that Globe is not liable to pay for the rental of the earth station for the entire term of the Agreement because it runs counter to what was plainly stipulated by the parties in Section 7 thereof. Moreover, said ruling is inconsistent with the appellate courts pronouncement that Globe is liable to pay rentals for December 1992 even though it terminated Philcomsats services effective 08 November 1992, because the US military and personnel completely withdrew from Cubi Point only in December 1992. Philcomsat points out that it was Globe which proposed the five-year term of the Agreement, and that the other provisions of the Agreement, such as Section 4.114 thereof, evince the intent of Globe to be bound to pay rentals for the entire five-year term.15 Philcomsat also maintains that contrary to the app ellate courts findings, it is entitled to attorneys fees and exemplary damages.16 In its Comment to Philcomsats Petition, Globe asserts that Section 8 of the Agreement is not contrary to Article 1174 of the Civil Code because said provision does not prohibit parties to a contract from providing for other instances when they would be exempt from fulfilling their contractual obligations. Globe also claims that the termination of the RP-US Military Bases Agreement constitutes force majeure and exempts it from complying with its obligations under the Agreement.17 On the issue of the propriety of awarding attorneys fees and exemplary damages to Philcomsat, Globe maintains that Philcomsat is not entitled thereto because in refusing to pay rentals for the remainder of the term of the Agreement, Globe only acted in accordance with its rights. 18

In G.R. No. 147334,19 Globe, the petitioner therein, contends that the Court of Appeals erred in finding it liable for the amount of US$92,238.00, representing rentals for December 1992, since Philcomsats services were actually terminated on 08 November 1992.20 In its Comment, Philcomsat claims that Globes petition should be dismissed as it raises a factual issue which is not cognizable by the Court in a petition for review on certiorari.21 On 15 August 2001, the Court issued a Resolution giving due course to Philcomsats Petition in G.R. No. 147324 and required the parties to submit their respective memoranda. 22 Similarly, on 20 August 2001, the Court issued a Resolution giving due course to the Petition filed by Globe inG.R. No. 147334 and required both parties to submit their memoranda. 23 Philcomsat and Globe thereafter filed their respective Consolidated Memoranda in the two cases, reiterating their arguments in their respective petitions. The Court is tasked to resolve the following issues: (1) whether the termination of the RP-US Military Bases Agreement, the non-ratification of the Treaty of Friendship, Cooperation and Security, and the consequent withdrawal of US military forces and personnel from Cubi Point constitute force majeure which would exempt Globe from complying with its obligation to pay rentals under its Agreement with Philcomsat; (2) whether Globe is liable to pay rentals under the Agreement for the month of December 1992; and (3) whether Philcomsat is entitled to attorneys fees and exemplary damages. No reversible error was committed by the Court of Appeals in issuing the assailed Decision; hence the petitions are denied. There is no merit is Philcomsats argument that Section 8 of the Agreement cannot be given effect because the enumeration of events constituting force majeure therein unduly expands the concept of a fortuitous event under Article 1174 of the Civil Code and is therefore invalid. In support of its position, Philcomsat contends that under Article 1174 of the Civil Code, an event must be unforeseen in order to exempt a party to a contract from complying with its obligations therein. It insists that since the expiration of the RP-US Military Bases Agreement, the non-ratification of the Treaty of Friendship, Cooperation and Security and the withdrawal of US military forces and personnel from Cubi Point were not unforeseeable, but were possibilities known to it and Globe at the time they entered into the Agreement, such events cannot exempt Globe from performing its obligation of paying rentals for the entire five-year term thereof. However, Article 1174, which exempts an obligor from liability on account of fortuitous events or force majeure, refers not only to events that are unforeseeable, but also to those which are foreseeable, but inevitable: Art. 1174. Except in cases 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. A fortuitous event under Article 1174 may either be an "act of God," or natural occurrences such as floods or typhoons,24 or an "act of man," such as riots, strikes or wars. 25 Philcomsat and Globe agreed in Section 8 of the Agreement that the following events shall be deemed events constituting force majeure: 1. Any law, order, regulation, direction or request of the Philippine Government; 2. Strikes or other labor difficulties; 3. Insurrection; 4. Riots;

5. National emergencies; 6. War; 7. Acts of public enemies; 8. Fire, floods, typhoons or other catastrophies or acts of God; 9. Other circumstances beyond the control of the parties. Clearly, the foregoing are either unforeseeable, or foreseeable but beyond the control of the parties. There is nothing in the enumeration that runs contrary to, or expands, the concept of a fortuitous event under Article 1174. Furthermore, under Article 130626 of the Civil Code, parties to a contract may establish such stipulations, clauses, terms and conditions as they may deem fit, as long as the same do not run counter to the law, morals, good customs, public order or public policy. 27 Article 1159 of the Civil Code also provides that "[o]bligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith." 28 Courts cannot stipulate for the parties nor amend their agreement where the same does not contravene law, morals, good customs, public order or public policy, for to do so would be to alter the real intent of the parties, and would run contrary to the function of the courts to give force and effect thereto.29 Not being contrary to law, morals, good customs, public order, or public policy, Section 8 of the Agreement which Philcomsat and Globe freely agreed upon has the force of law between them. 30 In order that Globe may be exempt from non-compliance with its obligation to pay rentals under Section 8, the concurrence of the following elements must be established: (1) the event must be independent of the human will; (2) the occurrence must render it impossible for the debtor to fulfill the obligation in a normal manner; and (3) the obligor must be free of participation in, or aggravation of, the injury to the creditor. 31 The Court agrees with the Court of Appeals and the trial court that the abovementioned requisites are present in the instant case. Philcomsat and Globe had no control over the non-renewal of the term of the RP-US Military Bases Agreement when the same expired in 1991, because the prerogative to ratify the treaty extending the life thereof belonged to the Senate. Neither did the parties have control over the subsequent withdrawal of the US military forces and personnel from Cubi Point in December 1992: Obviously the non-ratification by the Senate of the RP-US Military Bases Agreement (and its Supplemental Agreements) under its Resolution No. 141. ( Exhibit "2") on September 16, 1991 is beyond the control of the parties. This resolution was followed by the sending on December 31, 1991 o[f] a "Note Verbale" (Exhibit "3") by the Philippine Government to the US Government notifying the latter of the formers termination of the RP-US Military Bases Agreement (as amended) on 31 December 1992 and that accordingly, the withdrawal of all U.S. military forces from Subic Naval Base should be completed by said date. Subsequently, defendant [Globe] received a formal order from Cdr. Walter F. Corliss II Commander USN dated July 31, 1992 and a notification from ATT dated July 29, 1992 to terminate the provision of T1s services (via an IBS Standard B Earth Station) effective November 08, 1992. Plaintiff [Philcomsat] was furnished with copies of the said order and letter by the defendant on August 06, 1992. Resolution No. 141 of the Philippine Senate and the Note Verbale of the Philippine Government to the US Government are acts, direction or request of the Government of the Philippines and circumstances beyond the control of the defendant. The formal order from Cdr. Walter Corliss of the USN, the letter notification from ATT and the complete withdrawal of all the military forces and personnel from Cubi Point in the year-end 1992 are also acts and circumstances beyond the control of the defendant. Considering the foregoing, the Court finds and so holds that the afore-narrated circumstances constitute "force majeure or fortuitous event(s) as defined under paragraph 8 of the Agreement.

From the foregoing, the Court finds that the defendant is exempted from paying the rentals for the facility for the remaining term of the contract. As a consequence of the termination of the RP-US Military Bases Agreement (as amended) the continued stay of all US Military forces and personnel from Subic Naval Base would no longer be allowed, hence, plaintiff would no longer be in any position to render the service it was obligated under the Agreement. To put it blantly (sic), since the US military forces and personnel left or withdrew from Cubi Point in the year end December 1992, there was no longer any necessity for the plaintiff to continue maintaining the IBS facility.32 (Emphasis in the original.) The aforementioned events made impossible the continuation of the Agreement until the end of its five-year term without fault on the part of either party. The Court of Appeals was thus correct in ruling that the happening of such fortuitous events rendered Globe exempt from payment of rentals for the remainder of the term of the Agreement. Moreover, it would be unjust to require Globe to continue paying rentals even though Philcomsat cannot be compelled to perform its corresponding obligation under the Agreement. As noted by the appellate court: We also point out the sheer inequity of PHILCOMSATs position. PHILCOMSAT would like to charge GLOBE rentals for the balance of the lease term without there being any corresponding telecommunications service subject of the lease. It will be grossly unfair and iniquitous to hold GLOBE liable for lease charges for a service that was not and could not have been rendered due to an act of the government which was clearly beyond GLOBEs control. The binding effect of a contract on both parties is based on the principle that the obligations arising from contracts have the force of law between the contracting parties, and there must be mutuality between them based essentially on their equality under which it is repugnant to have one party bound by the contract while leaving the other party free therefrom (Allied Banking Corporation v. Court of Appeals, 284 SCRA 357).33 With respect to the issue of whether Globe is liable for payment of rentals for the month of December 1992, the Court likewise affirms the appellate courts ruling that Globe should pay the same. Although Globe alleged that it terminated the Agreement with Philcomsat effective 08 November 1992 pursuant to the formal order issued by Cdr. Corliss of the US Navy, the date when they actually ceased using the earth station subject of the Agreement was not established during the trial. 34 However, the trial court found that the US military forces and personnel completely withdrew from Cubi Point only on 31 December 1992. 35 Thus, until that date, the USDCA had control over the earth station and had the option of using the same. Furthermore, Philcomsat could not have removed or rendered ineffective said communication facility until after 31 December 1992 because Cubi Point was accessible only to US naval personnel up to that time. Hence, the Court of Appeals did not err when it affirmed the trial courts ruling that Globe is liable for payment of rentals until December 1992. Neither did the appellate court commit any error in holding that Philcomsat is not entitled to attorney s fees and exemplary damages. The award of attorneys fees is the exception rather than the rule, and must be supported by factual, legal and equitable justifications.36 In previously decided cases, the Court awarded attorneys fees where a party acted in gross and evident bad faith in refusing to satisfy the other partys claims and compelled the former to litigate to protect his rights;37 when the action filed is clearly unfounded, 38 or where moral or exemplary damages are awarded.39 However, in cases where both parties have legitimate claims against each other and no party actually prevailed, such as in the present case where the claims of both parties were sustained in part, an award of attorneys fees would not be warranted.40 Exemplary damages may be awarded in cases involving contracts or quasi-contracts, if the erring party acted in a wanton, fraudulent, reckless, oppressive or malevolent manner. 41 In the present case, it was not shown that Globe acted wantonly or oppressively in not heeding Philcomsa ts demands for payment of rentals. It was established during the trial of the case before the trial court that Globe had valid grounds for refusing to comply with its contractual obligations after 1992. WHEREFORE, the Petitions are DENIED for lack of merit. The assailed Decision of the Court of Appeals in CAG.R. CV No. 63619 is AFFIRMED. SO ORDERED.