G.R. No.

72275 November 13, 1991

PACIFIC BANKING CORPORATION, petitioner,
vs.
HON INTERMEDIATE APPELLATE COURT AND ROBERTO REGALA, JR., respondents.

FACTS:

On October 24, 1975, defendant Celia Syjuco Regala (hereinafter referred to as Celia Regala for brevity),
applied for and obtained from the plaintiff the issuance and use of Pacificard credit card (Exhs. "A", "A-l",),
under the Terms and Conditions Governing the Issuance and Use of Pacificard (Exh. "B" and hereinafter
referred to as Terms and Conditions), a copy of which was issued to and received by the said defendant on
the date of the application and expressly agreed that the use of the Pacificard is governed by said Terms
and Conditions.

On the same date, the defendant-appelant Robert Regala, Jr., spouse of defendant Celia Regala, executed
a "Guarantor's Undertaking" (Exh. "A-1-a") in favor of the appellee Bank, whereby the latter agreed "jointly
and severally of Celia Aurora Syjuco Regala, to pay the Pacific Banking Corporation upon demand, any and
all indebtedness, obligations, charges or liabilities due and incurred by said Celia Aurora Syjuco Regala with
the use of the Pacificard, or renewals thereof, issued in her favor by the Pacific Banking Corporation".

It was also agreed that "any changes of or novation in the terms and conditions in connection with the
issuance or use of the Pacificard, or any extension of time to pay such obligations, charges or liabilities shall
not in any manner release me/us from responsibility hereunder, it being understood that I fully agree to such
charges, novation or extension, and that this understanding is a continuing one and shall subsist and bind
me until the liabilities of the said Celia Syjuco Regala have been fully satisfied or paid.

Plaintiff-appellee Pacific Banking Corporation has contracted with accredited business establishments to
honor purchases of goods and/or services by Pacificard holders and the cost thereof to be advanced by the
plaintiff-appellee for the account of the defendant cardholder, and the latter undertook to pay any statements
of account rendered by the plaintiff-appellee for the advances thus made within thirty (30) days from the
date of the statement, provided that any overdue account shall earn interest at the rate of 14% per annum
from date of default.

The defendant Celia Regala, as such Pacificard holder, had purchased goods and/or services on credit
(Exh. "C", "C-l" to "C-112") under her Pacificard, for which the plaintiff advanced the cost amounting to
P92,803.98 at the time of the filing of the complaint.

In view of defendant Celia Regala's failure to settle her account for the purchases made thru the use of the
Pacificard, a written demand (Exh. "D") was sent to the latter and also to the defendant Roberto Regala, Jr.
(Exh. " ") under his "Guarantor's Undertaking."

A complaint was subsequently filed in Court for defendant's (sic) repeated failure to settle their obligation.
Defendant Celia Regala was declared in default for her failure to file her answer within the reglementary
period. Defendant-appellant Roberto Regala, Jr., on the other hand, filed his Answer with Counterclaim
admitting his execution of the "Guarantor's Understanding", "but with the understanding that his liability
would be limited to P2,000.00 per month."

In view of the solidary nature of the liability of the parties, the presentation of evidence ex-parte as against
the defendant Celia Regala was jointly held with the trial of the case as against defendant Roberto Regala.

After the presentation of plaintiff's testimonial and documentary evidence, fire struck the City Hall of Manila,
including the court where the instant case was pending, as well as all its records.

Upon plaintiff-appellee's petition for reconstitution, the records of the instant case were duly reconstituted.
Thereafter, the case was set for pre-trial conference with respect to the defendant-appellant Roberto Regala
on plaintiff-appellee's motion, after furnishing the latter a copy of the same. No opposition thereto having
been interposed by defendant-appellant, the trial court set the case for pre-trial conference. Neither did said
defendant-appellant nor his counsel appear on the date scheduled by the trial court for said conference
despite due notice. Consequently, plaintiff-appellee moved that the defendant-appellant Roberto Regala he
declared as in default and that it be allowed to present its evidence ex-parte, which motion was granted. On
July 21, 1983, plaintiff-appellee presented its evidence ex-parte. (pp. 23-26, Rollo)

After trial, the court a quo rendered judgment on December 5, 1983, the dispositive portion of which reads:
WHEREFORE, the Court renders judgment for the plaintiff and against the defendants
condemning the latter, jointly and severally, to pay said plaintiff the amount of P92,803.98, with
interest thereon at 14% per annum, compounded annually, from the time of demand on
November 17, 1978 until said principal amount is fully paid; plus 15% of the principal obligation
as and for attorney's fees and expense of suit; and the costs.
The counterclaim of defendant Roberto Regala, Jr. is dismissed for lack of merit.
SO ORDERED. (pp. 22-23, Rollo)
The defendants appealed from the decision of the court a quo to the Intermediate Appellate Court.
On August 12, 1985, respondent appellate court rendered judgment modifying the decision of the trial court.
Private respondent Roberto Regala, Jr. was made liable only to the extent of the monthly credit limit granted to
Celia Regala, i.e., at P2,000.00 a month and only for the advances made during the one year period of the
card's effectivity counted from October 29, 1975 up to October 29, 1976. The dispositive portion of the decision
states:
WHEREFORE, the judgment of the trial court dated December 5, 1983 is modified only as to
appellant Roberto Regala, Jr., so as to make him liable only for the purchases made by
defendant Celia Aurora Syjuco Regala with the use of the Pacificard from October 29, 1975 up to
October 29, 1976 up to the amount of P2,000.00 per month only, with interest from the filing of
the complaint up to the payment at the rate of 14% per annum without pronouncement as to
costs. (p. 32, Rollo)
A motion for reconsideration was filed by Pacific Banking Corporation which the respondent appellate court
denied for lack of merit on September 19, 1985 (p. 33, Rollo).
On November 8, 1985, Pacificard filed this petition. The petitioner contends that while the appellate court
correctly recognized Celia Regala's obligation to Pacific Banking Corp. for the purchases of goods and services
with the use of a Pacificard credit card in the total amount of P92,803.98 with 14% interest per annum, it erred in
limiting private respondent Roberto Regala, Jr.'s liability only for purchases made by Celia Regala with the use
of the card from October 29, 1975 up to October 29, 1976 up to the amount of P2,000.00 per month with 14%
interest from the filing of the complaint.
There is merit in this petition.

The pertinent portion of the "Guarantor's Undertaking" which private respondent Roberto Regala, Jr. signed in
favor of Pacific Banking Corporation provides:
I/We, the undersigned, hereby agree, jointly and severally with Celia Syjuco Regala to pay the
Pacific Banking Corporation upon demand any and all indebtedness, obligations, charges or
liabilities due and incurred by said Celia Syjuco Regala with the use of the Pacificard or renewals
thereof issued in his favor by the Pacific Banking Corporation. Any changes of or Novation in the
terms and conditions in connection with the issuance or use of said Pacificard, or any extension
of time to pay such obligations, charges or liabilities shall not in any manner release me/us from
the responsibility hereunder, it being understood that the undertaking is a continuing one and
shall subsist and bind me/us until all the liabilities of the said Celia Syjuco Regala have been fully
satisfied or paid. (p. 12, Rollo)
The undertaking signed by Roberto Regala, Jr. although denominated "Guarantor's Undertaking," was in
substance a contract of surety. As distinguished from a contract of guaranty where the guarantor binds himself to
the creditor to fulfill the obligation of the principal debtor only in case the latter should fail to do so, in a contract
of suretyship, the surety binds himself solidarily with the principal debtor (Art. 2047, Civil Code of the
Philippines).
We need not look elsewhere to determine the nature and extent of private respondent Roberto Regala, Jr.'s
undertaking. As a surety he bound himself jointly and severally with the debtor Celia Regala "to pay the Pacific
Banking Corporation upon demand, any and all indebtedness, obligations, charges or liabilities due and incurred
by said Celia Syjuco Regala with the use of Pacificard or renewals thereof issued in (her) favor by Pacific
Banking Corporation." This undertaking was also provided as a condition in the issuance of the Pacificard to
Celia Regala, thus:
5. A Pacificard is issued to a Pacificard-holder against the joint and several signature of a third
party and as such, the Pacificard holder and the guarantor assume joint and several liabilities for
any and all amount arising out of the use of the Pacificard. (p. 14, Rollo)
The respondent appellate court held that "all the other rights of the guarantor are not thereby lost by the
guarantor becoming liable solidarily and therefore a surety." It further ruled that although the surety's liability is
like that of a joint and several debtor, it does not make him the debtor but still the guarantor (or the surety),
relying on the case of Government of the Philippines v. Tizon. G.R. No. L-22108, August 30, 1967, 20 SCRA
1182. Consequently, Article 2054 of the Civil Code providing for a limited liability on the part of the guarantor or
debtor still applies.
It is true that under Article 2054 of the Civil Code, "(A) guarantor may bind himself for less, but not for more than
the principal debtor, both as regards the amount and the onerous nature of the conditions. 2 It is likewise not disputed by
the parties that the credit limit granted to Celia Regala was P2,000.00 per month and that Celia Regala succeeded in using the card beyond the original
period of its effectivity, October 29, 1979. We do not agree however, that Roberto Jr.'s liability should be limited to that extent. Private respondent Roberto
Regala, Jr., as surety of his wife,expressly bound himself up to the extent of the debtor's (Celia) indebtedness likewise expressly waiving any "discharge in
case of any change or novation of the terms and conditions in connection with the issuance of the Pacificard credit card." Roberto, in fact, made his
commitment as a surety a continuing one, binding upon himself until all the liabilities of Celia Regala have been fully paid. All these were clear under the
"Guarantor's Undertaking" Roberto signed, thus:

. . . Any changes of or novation in the terms and conditions in connection with the issuance or
use of said Pacificard, or any extension of time to pay such obligations, charges or liabilities shall
not in any manner release me/us from the responsibility hereunder, it being understood that the
undertaking is a continuing one and shall subsist and bind me/us until all the liabilities of the said
Celia Syjuco Regala have been fully satisfied or paid. (p. 12, supra; emphasis supplied)
Private respondent Roberto Regala, Jr. had been made aware by the terms of the undertaking of future changes
in the terms and conditions governing the issuance of the credit card to his wife and that, notwithstanding, he
voluntarily agreed to be bound as a surety. As in guaranty, a surety may secure additional and future debts of the
principal debtor the amount of which is not yet known (see Article 2053, supra).

The application by respondent court of the ruling in Government v. Tizon, supra is misplaced. It was held in that
case that:
. . . although the defendants bound themselves in solidum, the liability of the Surety under its
bond would arise only if its co-defendants, the principal obligor, should fail to comply with the
contract. To paraphrase the ruling in the case of Municipality of Orion vs. Concha, the liability of
the Surety is "consequent upon the liability" of Tizon, or "so dependent on that of the principal
debtor" that the Surety "is considered in law as being the same party as the debtor in relation to
whatever is adjudged, touching the obligation of the latter"; or the liabilities of the two defendants
herein "are so interwoven and dependent as to be inseparable." Changing the expression, if the
defendants are held liable, their liability to pay the plaintiff would be solidary, but the nature of the
Surety's undertaking is such that it does not incur liability unless and until the principal debtor is
held liable.
A guarantor or surety does not incur liability unless the principal debtor is held liable. It is in this sense that a
surety, although solidarily liable with the principal debtor, is different from the debtor. It does not mean, however,
that the surety cannot be held liable to the same extent as the principal debtor. The nature and extent of the
liabilities of a guarantor or a surety is determined by the clauses in the contract of suretyship(see PCIB v. CA, L34959, March 18, 1988, 159 SCRA 24).
ACCORDINGLY, the petition is GRANTED. The questioned decision of respondent appellate court is SET ASIDE
and the decision of the trial court is REINSTATED.
SO ORDERED.

Industrial Management vs National Labor Relations

Facts:
In September 1984, private respondent Enrique Sulit, Socorro Mahinay, Esmeraldo Pegarido,
Tita Bacusmo, Gino Niere, Virginia Bacus, Roberto Nemenzo, Dariogo, and Roberto Alegarbes
filed a complaint with the Department of Labor and Employment, Regional Arbitration Branch
No. VII in Cebu City against Filipinas Carbon Mining Corporation, Gerardo Sicat, Antonio
Gonzales, Chiu Chin Gin, Lo Kuan Chin, and petitioner Industrial Management Development
Corporation (INIMACO), for payment of separation pay and unpaid wages.
In a Decision dated March 10, 1987, Labor Arbiter Bonifacio B. Tumamak held that:
"RESPONSIVE, to all the foregoing, judgment is hereby entered, ordering respondents Filipinas
Carbon and Mining Corp. Gerardo Sicat, Antonio Gonzales/Industrial Management
Development Corp. (INIMACO), Chiu Chin Gin and Lo Kuan Chin, to pay complainants Enrique
Sulit, the total award of P82,800.00; ESMERALDO PEGARIDO the full award of P19,565.00;
Roberto Nemenzo the total sum of P29,623.60 and DARIO GO the total award of P6,599.71, or
the total aggregate award of ONE HUNDRED THIRTY-EIGHT THOUSAND FIVE HUNDRED
EIGHTY-EIGHT PESOS AND 31/100 (P138,588.31) to be deposited with this Commission within
ten (10) days from receipt of this Decision for appropriate disposition. All other claims are
hereby Dismiss (sic) for lack of merit.
No appeal was filed within the reglementary period thus, the above Decision became final and
executory.
On June 16, 1987, the Labor Arbiter issued a writ of execution but it was returned unsatisfied.
On August 26, 1987, the Labor Arbiter issued an Alias Writ of Execution which ordered thus:.
"NOW THEREFORE, by virtue of the powers vested in me by law, you are hereby commanded
to proceed to the premises of respondents Antonio Gonzales/Industrial Management
Development Corporation (INIMACO) situated at Barangay Lahug, Cebu City, in front of La
Curacha Restaurant, and/or to Filipinas Carbon and Mining corporation and Gerardo Sicat at
4th Floor Universal RE-Bldg. 106 Paseo de Roxas, Legaspi Village, Makati Metro Manila and at
Philippine National Bank, Escolta, Manila respectively, and collect the aggregate award of ONE

HUNDRED THIRTY-EIGHT THOUSAND FIVE HUNDRED EIGHTY-EIGHT PESOS AND THIRTY ONE
CENTAVOS (P138,588.31) and thereafter turn over said amount to complainants ENRIQUE
SULIT, ESMERALDO PEGARIDO, ROBERTO NEMENZO AND DARIO GO or to this Office for
appropriate disposition. Should you fail to collect the said sum in cash, you are hereby
authorized to cause the satisfaction of the same on the movable or immovable property(s) of
respondents not exempt from execution. You are to return this writ sixty (6) (sic) days from
your receipt hereof, together with your corresponding report.
"You may collect your legal expenses from the respondents as provided for by law.
"SO ORDERED."[2]
The petitioner filed a "Motion to Quash Alias Writ of Execution and Set Aside Decision,"[3]
alleging among others that the alias writ of execution altered and changed the tenor of the
decision by changing the liability of therein respondents from joint to solidary, by the insertion
of the words "AND/OR" between "Antonio Gonzales/Industrial Management Development
Corporation and Filipinas Carbon and Mining Corporation, et al.". The Labor however denied
the motion.
The petitioner subsequently appealed the Labor Arbiters Order to the respondent NLRC but
the same dismissed the appeal.
On July 31, 1989, petitioner filed a "Motion To Compel Sheriff To Accept Payment Of
P23,198.05 Representing One Sixth Pro Rata Share of Respondent INIMACO As Full and Final
Satisfaction of Judgment As to Said Respondent."[6] The private respondents opposed the
motion. In an Order[7] dated August 15, 1989, the Labor Arbiter denied the motion and ruled
that The Sheriff of this Office is order (sic) to accept INIMACOs tender payment (sic) of the
sum of P23,198.05, as partial satisfaction of the judgment and to proceed with the
enforcement of the Alias Writ of Execution of the levied properties, now issued by this Office,
for the full and final satisfaction of the monetary award granted in the instant case.
Petitioner appealed the above Order of the Labor Arbiter but this was again dismissed by the
respondent NLRC.
Dissatisfied with the foregoing, petitioner filed the instant case, alleging that the respondent
NLRC committed grave abuse of discretion in affirming the Order of the Labor Arbiter which
declared the liability of petitioner to be solidary.
The only issue in this petition is whether petitioners liability pursuant to the Decision of the
Labor Arbiter dated March 10, 1987, is solidary or not.
Held:
Upon careful examination of the pleadings filed by the parties, the Court finds that petitioner
INIMACOs liability is not solidary but merely joint and that the respondent NLRC acted with
grave abuse of discretion in upholding the Labor Arbiters Alias Writ of Execution and
subsequent Orders to the effect that petitioners liability is solidary.
A solidary or joint and several obligation is one in which each debtor is liable for the entire
obligation, and each creditor is entitled to demand the whole obligation.[9] In a joint
obligation each obligor answers only for a part of the whole liability and to each obligee
belongs only a part of the correlative rights.
Well-entrenched is the rule that solidary obligation cannot lightly be inferred.[11] There is a
solidary liability only when the obligation expressly so states, when the law so provides or
when the nature of the obligation so requires.[12]
In the dispositive portion of the Labor Arbiter, the word "solidary" does not appear. The said
fallo expressly states the following respondents therein as liable, namely: Filipinas Carbon and
Mining Corporation, Gerardo Sicat, Antonio Gonzales, Industrial Management Development
Corporation (petitioner INIMACO), Chiu Chin Gin, and Lo Kuan Chin. Nor can it be inferred
therefrom that the liability of the six (6) respondents in the case below is solidary, thus their
liability should merely be joint.
Granting that the Labor Arbiter has committed a mistake in failing to indicate in the
dispositive portion that the liability of respondents therein is solidary, the correction -- which is
substantial -- can no longer be allowed in this case because the judgment has already become
final and executory. Scc-alr
It is an elementary principle of procedure that the resolution of the court in a given issue as
embodied in the dispositive part of a decision or order is the controlling factor as to
settlement of rights of the parties.[15] Once a decision or order becomes final and executory,
it is removed from the power or jurisdiction of the court which rendered it to further alter or

amend it.[16] It thereby becomes immutable and unalterable and any amendment or
alteration which substantially affects a final and executory judgment is null and void for lack
of jurisdiction, including the entire proceedings held for that purpose.[17] An order of
execution which varies the tenor of the judgment or exceeds the terms thereof is a nullity.
Also, the Alias Writ of Execution is null and void because it varied the tenor of the judgment in
that it sought to enforce the final judgment against "Antonio Gonzales/Industrial Management
Development Corp. (INIMACO) and/or Filipinas Carbon and Mining Corp. and Gerardo Sicat,"
which makes the liability solidary. Ca-lrsc
WHEREFORE, the petition is hereby GRANTED. The Resolution dated September 4, 1991 of the
respondent National Labor Relations is hereby declared NULL and VOID. The liability of the
respondents in RAB-VII-0711-84 pursuant to the Decision of the Labor Arbiter dated March 10,
1987 should be, as it is hereby, considered joint and petitioners payment which has been
accepted considered as full satisfaction of its liability, without prejudice to the enforcement of
the award, against the other five (5) respondents in the said case.
SO ORDERED.

MARIVELES SHPYARD VS CA
CONSTRUCTION DEVT. VS ESTRELLA

Spouses Perena vs. Zarate Digest

G.R. No. 157917 : August 29, 2012
SPOUSES TEODORO and NANETTE PERENA, Petitioners, v. SPOUSES NICOLAS and
TERESITA L. ZARATE, PHILIPPINE NATIONAL RAILWAYS, and the COURT OF APPEALS,
Respondents.
BERSAMIN, J.:
FACTS:
Spouses Teodoro and Nanette Peres (Peres) were engaged in the business of transporting students
from their respective residences in Paraque City to Don Bosco in Pasong Tamo, Makati City, and back.
They employed Clemente Alfaro (Alfaro) as driver of the van. Spouses Nicolas and Teresita Zarate
(Zarates) contracted the Peres to transport their son Aaron to and from Don Bosco.
Considering that the students were due at Don Bosco by 7:15 a.m., and that they were already running
late because of the heavy vehicular traffic on the South Superhighway, Alfaro took the van to an
alternate route at about 6:45 a.m. by traversing the narrow path underneath the Magallanes
Interchange. The railroad crossing in the narrow path had no railroad warning signs, or watchmen, or
other responsible persons manning the crossing. In fact, the bamboo barandilla was up, leaving the
railroad crossing open to traversing motorists.
At about the time the van was to traverse the railroad crossing, PNR Commuter No. 302 (train), was in
the vicinity of the Magallanes Interchange travelling northbound. As the train neared the railroad
crossing, Alfaro drove the van eastward across the railroad tracks, closely tailing a large passenger
bus. His view of the oncoming train was blocked because he overtook the passenger bus on its left
side. The train blew its horn to warn motorists of its approach. The passenger bus successfully crossed
the railroad tracks, but the van driven by Alfaro did not. The impact threw nine of the 12 students in the
rear, including Aaron, out of the van. Aaron landed in the path of the train, which dragged his body and
severed his head, instantaneously killing him.
Thus, the Zarates sued the Peres for breach of contract of carriage and the PNR for quasi-delict. The
RTC ruled in favor of the Zarates. On appeal, the CA affirmed the findings of the RTC.

ISSUE: Whether or not the Peres are liable for breach of contract of carriage?
HELD: The petition has no merit.
CIVIL LAW: common carrier; extraordinary diligence
A common carrier is a person, corporation, firm or association engaged in the business of carrying or
transporting passengers or goods or both, by land, water, or air, for compensation, offering such
services to the public. Contracts of common carriage are governed by the provisions on common
carriers of the Civil Code, the Public Service Act, and other special laws relating to transportation. A
common carrier is required to observe extraordinary diligence, and is presumed to be at fault or to
have acted negligently in case of the loss of the effects of passengers, or the death or injuries to
passengers. The true test for a common carrier is not the quantity or extent of the business actually
transacted, or the number and character of the conveyances used in the activity, but whether the
undertaking is a part of the activity engaged in by the carrier that he has held out to the general public
as his business or occupation.
Applying these considerations to the case before us, there is no question that the Peres as the
operators of a school bus service were: (a) engaged in transporting passengers generally as a
business, not just as a casual occupation; (b) undertaking to carry passengers over established roads
by the method by which the business was conducted; and (c) transporting students for a fee. Despite
catering to a limited clientele, the Peres operated as a common carrier because they held themselves
out as a ready transportation indiscriminately to the students of a particular school living within or near
where they operated the service and for a fee.
Article 1755 of the Civil Code specifies that the common carrier should "carry the passengers safely as
far as human care and foresight can provide, using the utmost diligence of very cautious persons, with
a due regard for all the circumstances." To successfully fend off liability in an action upon the death or
injury to a passenger, the common carrier must prove his or its observance of that extraordinary
diligence; otherwise, the legal presumption that he or it was at fault or acted negligently would stand.
According to Article 1759 of the Civil Code, their liability as a common carrier did not cease upon proof
that they exercised all the diligence of a good father of a family in the selection and supervision of their
employee. The Peres were liable for the death of Aaron despite the fact that their driver might have
acted beyond the scope of his authority or even in violation of the orders of the common carrier.
DENIED.

1226: OBLIGATIONS WITH A PENAL CLAUSE

LIGUTAN VS. COURT OF APPEALS
G.R. No. 147465, February 12, 2002
Facts: Ligutan and dela Llana obtained a loan from Security Bank and Trust Co. They executed a promissory note
binding themselves jointly and severally to pay the sum borrowed with an interest of 15.89% per annum upon maturity
and to pay a penalty of 5% every month on the outstanding principal and interest in case of default. In addition, they
agreed to pay 10% of the total amount due by way of attorneys fees if the matter were indorsed to a lawyer for
collection or if a suit were instituted to enforce payment. Ligutan and dela Llana failed to settle the debt. A complaint
for recovery of the amount due was filed with the RTC. The court held, among others, the borrowers were liable for a
3% per month penalty (instead of 5%) and 10% of the total amount of the indebtedness for attorneys fee, in addition
to the principal loan.
Issue: Whether the court is correct in holding the borrowers liable for the penalty.
Held: A penalty clause, expressly recognized by law, is an accessory undertaking to assume greater liability on the part
of an obligor in case of breach of an obligation. It functions to strengthen the coercive force of the obligation and to

provide for what could be the stipulated indemnity without the necessity of proof on the existence and on the measure
of damages caused by the breach. Although the court may not at liberty ignore the freedom of the parties to agree on
such terms and conditions as they see fit, a stipulated penalty, nevertheless may be equitably reduced by the courts if
iniquitous or unconscionable or if the principal obligation has been partly or irregularly complied with. The reduction
is justified by the facts that the borrowers were able to partly comply with their obligations.

Pryce Corporation v PAGCOR (Obligations and Contracts)

Pryce Corporation v PAGCOR
GR No. 157480
May 6, 2005
RESCISSION OR TERMINATION
FACTS: PAGCOR set up a casino in Pryce Plaza Hotel for a period of 3 years. However, there has been
interruptions in the operations which ultimately caused the operations to cease prematurely upon order
of the Office of the President.
ISSUE:
(1) Whether or not Pryce is entitled to future rentals as provided in the contract even if PAGCOR
contends, as the CA ruled, that Article 1659 of the Civil Code governs; hence, PPC is allegedly no
longer entitled to future rentals, because it chose to rescind the Contract.
(2) Whether or not PAGCOR should be exempt from complying with its contractual obligations due to
fortuitous events
(3) Whether or not the future rentals constitute a penalty clause
CA: The CA ruled that the PAGCOR'S pretermination of the Contract of Lease was unjustified. The
appellate court explained that public demonstrations and rallies could not be considered as fortuitous
events that would exempt the gaming corporation from complying with the latter's contractual
obligations. Therefore, the Contract continued to be effective until PPC elected to terminate it on
November 25, 1993.
Regarding the contentions of PPC, the CA held that under Article 1659 of the Civil Code, PPC had the
right to ask for (1) rescission of the Contract and indemnification for damages; or (2) only
indemnification plus the continuation of the Contract. These two remedies were alternative, not
cumulative, ruled the CA.
As PAGCOR had admitted its failure to pay the rentals for September to November 1993, PPC correctly
exercised the option to terminate the lease agreement.
--------------------------------------------------------------------------------------------------------------APPLICABLE LAW/S: Art. 1659. If the lessor or the lessee should not comply with the obligations set
forth in Articles 1654 and 1657, the aggrieved party may ask for the rescission of the contract and
indemnification for damages, or only the latter, allowing the contract to remain in force. (1556)
Art. 1654. The lessor is obliged:
(1) To deliver the thing which is the object of the contract in such
a condition as to render it fit for the use intended;
(2) To make on the same during the lease all the
necessary repairs in order to keep it suitable for the use to which it has been devoted, unless there is a
stipulation to the contrary;
(3) To maintain the lessee in the peaceful and adequate enjoyment of
the lease for the entire duration of the contract. (1554a)
Art. 1159. Obligations arising from contracts have the force of law between the contracting parties
and should be complied with in good faith. (1091a)
Art. 1226. In obligations with a penal clause, the penalty shall substitute the indemnity for damages
and the payment of interests in case of noncompliance, if there is no stipulation to the contrary.
Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or is guilty of fraud in the
fulfillment of the obligation.

The penalty may be enforced only when it is demandable in accordance with the provisions of this
Code. (1152a)
Art. 1229. The judge shall equitably reduce the penalty when the principal obligation has been partly
or irregularly complied with by the debtor. Even if there has been no performance, the penalty may
also be reduced by the courts if it is iniquitous or unconscionable.
Art. 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall be equitably
reduced if they are iniquitous or unconscionable.
-------------------------------------------------------------------------------------------------------------HELD: (1) Pryce is entitled to future rentals as the provisions are not contrary to law, morals, public
order, or public policy.
The above provisions leave no doubt that the parties have covenanted 1) to give PPC the right to
terminate and cancel the Contract in the event of a default or breach by the lessee; and 2) to make
PAGCOR fully liable for rentals for the remaining term of the lease, despite the exercise of such right to
terminate. Plainly, the parties have voluntarily bound themselves to require strict compliance with the
provisions of the Contract by stipulating that a default or breach, among others, shall give the lessee
the termination option, coupled with the lessor's liability for rentals for the remaining term of the lease.
Article XX (c) provides that, aside from the payment of the rentals corresponding to the remaining
term of the lease, the lessee shall also be liable "for any and all damages, actual or consequential,
resulting from such default and termination of this contract." Having entered into the Contract
voluntarily and with full knowledge of its provisions, PAGCOR must be held bound to its obligations. It
cannot evade further liability for liquidated damages.
(2) PAGCOR is not exempt from complying with the provisions as rallies and demonstrations are not
considered fortuitous events.
In this case, PAGCOR's breach was occasioned by events that, although not fortuitous in law, were in
fact real and pressing. From the CA's factual findings, which are not contested by either party, we find
that PAGCOR conducted a series of negotiations and consultations before entering into the Contract. It
did so not only with the PPC, but also with local government officials, who assured it that the problems
were surmountable. Likewise, PAGCOR took pains to contest the ordinances before the courts, which
consequently declared them unconstitutional. On top of these developments, the gaming corporation
was advised by the Office of the President to stop the games in Cagayan de Oro City, prompting the
former to cease operations prior to September 1993.
Also worth mentioning is the CA's finding that PAGCOR's casino operations had to be suspended for
days on end since their start in December 1992; and indefinitely from July 15, 1993, upon the advice
of the Office of President, until the formal cessation of operations in September 1993. Needless to say,
these interruptions and stoppages meant that PAGCOR suffered a tremendous loss of expected
revenues, not to mention the fact that it had fully operated under the Contract only for a limited time.
(3) Pryce's right to penalty is affirmed but proved iniquitous.
While petitioner's right to a stipulated penalty is affirmed, we consider the claim for future rentals to
the tune of P7,037,835.40 to be highly iniquitous. The amount should be equitably reduced. Under the
circumstances, the advanced rental deposits in the sum of P687,289.50 should be sufficient penalty for
respondent's breach.
Accordingly, respondent is ordered to pay petitioner the additional amount of P687,289.50 as penalty,
which may be set off or applied against the former's advanced rental deposits.
OTHER NOTES:
In legal contemplation, the termination of a contract is not equivalent to its rescission. When an
agreement is terminated, it is deemed valid at inception. Prior to termination, the contract binds the
parties, who are thus obliged to observe its provisions. However, when it is rescinded, it is deemed
inexistent, and the parties are returned to their status quo ante. Hence, there is mutual restitution of
benefits received. The consequences of termination may be anticipated and provided for by the
contract. As long as the terms of the contract are not contrary to law, morals, good customs, public
order or public policy, they shall be respected by courts. The judiciary is not authorized to make or
modify contracts; neither may it rescue parties from disadvantageous stipulations. Courts, however,

are empowered to reduce iniquitous or unconscionable liquidated damages, indemnities and penalties
agreed upon by the parties.
DIFFERENCE BETWEEN RESCISSION & TERMINATION RESCISSION (OR RESOLUTION)
Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors
should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation, with the
payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment,
if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a
period.
This is understood to be without prejudice to the rights of third persons who have acquired the thing,
in accordance with Articles 1385 and 1388 and the Mortgage Law. (1124)
Art. 1659. If the lessor or the lessee should not comply with the obligations set forth in Articles 1654
and 1657, the aggrieved party may ask for the rescission of the contract and indemnification for
damages, or only the latter, allowing the contract to remain in force. (1556)
To rescind is to declare a contract void in its inception and to put an end to it as though it never
were. It is not merely to terminate it and release parties from further obligations to each other but to
abrogate it from the beginning and restore the parties to relative positions which they would have
occupied had no contract ever been made.
Rescission has likewise been defined as the "unmaking of a contract, or its undoing from the
beginning, and not merely its termination." Rescission may be effected by both parties by mutual
agreement; or unilaterally by one of them declaring a rescission of contract without the consent of the
other, if a legally sufficient ground exists or if a decree of rescission is applied for before the courts
TERMINATION (OR CANCELLATION)
The termination or cancellation of a contract would necessarily entail enforcement of its terms prior
to the declaration of its cancellation in the same way that before a lessee is ejected under a lease
contract, he has to fulfill his obligations thereunder that had accrued prior to his ejectment. However,
termination of a contract need not undergo judicial intervention.
"end in time or existence; a close, cessation or conclusion." With respect to a lease or contract, it
means an ending, usually before the end of the anticipated term of such lease or contract, that may be
effected by mutual agreement or by one party exercising one of its remedies as a consequence of the
default of the other

G.R. No. 172384

September 12, 2007

ERMINDA F. FLORENTINO, Petitioner,

vs.
SUPERVALUE, INC., Respondent.
DECISION
CHICO-NAZARIO, J.:
Before this Court is a Petition for Review on Certiorari under Rule 45 of the Revised Rules of Court, filed by
petitioner Erminda F. Florentino, seeking to reverse and set aside the Decision, 1 dated 10 October 2003 and the
Resolution,2 dated 19 April 2006 of the Court of Appeals in CA-G.R. CV No. 73853. The appellate court, in its
assailed Decision and Resolution, modified the Decision dated 30 April 2001 of the Regional Trial Court (RTC) of
Makati, Branch 57, in Civil Case No. 00-1015, finding the respondent Supervalue, Inc., liable for the sum
ofP192,000.00, representing the security deposits made by the petitioner upon the commencement of their
Contract of Lease. The dispositive portion of the assailed appellate courts Decision thus reads:

WHEREFORE, premises considered, the appeal is PARTLY GRANTED. The April 30, 2001 Decision of the
Regional Trial Court of Makati, Branch 57 is therefore MODIFIED to wit: (a) the portion ordering the [herein
respondent] to pay the amount of P192,000.00 representing the security deposits and P50,000.00 as attorneys
fees in favor of the [herein petitioner] as well as giving [respondent] the option to reimburse [petitioner] of the
value of the improvements introduced by the [petitioner] on the leased [premises] should [respondent] choose to
appropriate itself or require the [petitioner] to remove the improvements, is hereby REVERSED and SET ASIDE;
and (b) the portion ordering the return to [petitioner] the properties seized by [respondent] after the former settled
her obligation with the latter is however MAINTAINED.3
The factual and procedural antecedents of the instant petition are as follows:
Petitioner is doing business under the business name "Empanada Royale," a sole proprietorship engaged in the
retail of empanada with outlets in different malls and business establishments within Metro Manila. 4
Respondent, on the other hand, is a domestic corporation engaged in the business of leasing stalls and
commercial store spaces located inside SM Malls found all throughout the country.5
On 8 March 1999, petitioner and respondent executed three Contracts of Lease containing similar terms and
conditions over the cart-type stalls at SM North Edsa and SM Southmall and a store space at SM Megamall. The
term of each contract is for a period of four months and may be renewed upon agreement of the parties. 6
Upon the expiration of the original Contracts of Lease, the parties agreed to renew the same by extending their
terms until 31 March 2000.7
Before the expiration of said Contracts of Lease, or on 4 February 2000, petitioner received two letters from the
respondent, both dated 14 January 2000, transmitted through facsimile transmissions. 8
In the first letter, petitioner was charged with violating Section 8 of the Contracts of Lease by not opening on 16
December 1999 and 26 December 1999.9
Respondent also charged petitioner with selling a new variety of empanada called "mini-embutido" and of
increasing the price of her merchandise from P20.00 to P22.00, without the prior approval of the respondent. 10
Respondent observed that petitioner was frequently closing earlier than the usual mall hours, either because of
non-delivery or delay in the delivery of stocks to her outlets, again in violation of the terms of the contract. A stern
warning was thus given to petitioner to refrain from committing similar infractions in the future in order to avoid
the termination of the lease contract.11
In the second letter, respondent informed the petitioner that it will no longer renew the Contracts of Lease for the
three outlets, upon their expiration on 31 March 2000.12
In a letter-reply dated 11 February 2000, petitioner explained that the "mini-embutido" is not a new variety of
empanada but had similar fillings, taste and ingredients as those of pork empanada; only, its size was reduced in
order to make it more affordable to the buyers.13
Such explanation notwithstanding, respondent still refused to renew its Contracts of Lease with the petitioner. To
the contrary, respondent took possession of the store space in SM Megamall and confiscated the equipment and
personal belongings of the petitioner found therein after the expiration of the lease contract. 14
In a letter dated 8 May 2000, petitioner demanded that the respondent release the equipment and personal
belongings it seized from the SM Megamall store space and return the security deposits, in the sum
of P192,000.00, turned over by the petitioner upon signing of the Contracts of Lease. On 15 June 2000,
petitioner sent respondent another letter reiterating her previous demands, but the latter failed or refused to
comply therewith. 15
On 17 August 2000, an action for Specific Performance, Sum of Money and Damages was filed by the petitioner
against the respondent before the RTC of Makati, Branch 57.16
In her Complaint docketed as Civil Case No. 00-1015, petitioner alleged that the respondent made verbal
representations that the Contracts of Lease will be renewed from time to time and, through the said
representations, the petitioner was induced to introduce improvements upon the store space at SM Megamall in

the sum ofP200,000.00, only to find out a year later that the respondent will no longer renew her lease contracts
for all three outlets.17
In addition, petitioner alleged that the respondent, without justifiable cause and without previous demand,
refused to return the security deposits in the amount of P192,000.00.18
Further, petitioner claimed that the respondent seized her equipment and personal belongings found inside the
store space in SM Megamall after the lease contract for the said outlet expired and despite repeated written
demands from the petitioner, respondent continuously refused to return the seized items. 19
Petitioner thus prayed for the award of actual damages in the sum of P472,000.00, representing the sum of
security deposits, cost of improvements and the value of the personal properties seized. Petitioner also asked
for the award of P300,000.00 as moral damages; P50,000.00 as exemplary damages; and P80,000.00 as
attorneys fees and expenses of litigation.20
For its part, respondent countered that petitioner committed several violations of the terms of their Contracts of
Lease by not opening from 16 December 1999 to 26 December 1999, and by introducing a new variety of
empanada without the prior consent of the respondent, as mandated by the provision of Section 2 of the
Contract of Lease. Respondent also alleged that petitioner infringed the lease contract by frequently closing
earlier than the agreed closing hours. Respondent finally averred that petitioner is liable for the
amount P106,474.09, representing the penalty for selling a new variety of empanada, electricity and water bills,
and rental adjustment, among other charges incidental to the lease agreements. Respondent claimed that the
seizure of petitioners personal belongings and equipment was in the exercise of its retaining lien, considering
that the petitioner failed to settle the said obligations up to the time the complaint was filed. 21
Considering that petitioner already committed several breaches of contract, the respondent thus opted not to
renew its Contracts of Lease with her anymore. The security deposits were made in order to ensure faithful
compliance with the terms of their lease agreements; and since petitioner committed several infractions thereof,
respondent was justified in forfeiting the security deposits in the latters favor.
On 30 April 2001, the RTC rendered a Judgment22 in favor of the petitioner and found that the physical takeover
by the respondent of the leased premises and the seizure of petitioners equipment and personal belongings
without prior notice were illegal. The decretal part of the RTC Judgment reads:
WHEREFORE, premises duly considered, judgment is hereby rendered ordering the [herein respondent] to pay
[herein petitioner] the amount of P192,000.00 representing the security deposits made by the [petitioner]
andP50,000.00 as and for attorneys fees.
The [respondent] is likewise ordered to return to the [petitioner] the various properties seized by the former after
settling her account with the [respondent].
Lastly, the [respondent] may choose either to reimburse the [petitioner] one half (1/2) of the value of the
improvements introduced by the plaintiff at SM Megamall should [respondent] choose to appropriate the
improvements to itself or require the [petitioner] to remove the improvements, even though the principal thing
may suffer damage thereby. [Petitioner] shall not, however, cause anymore impairment upon the said leased
premises than is necessary.
The other damages claimed by the plaintiff are denied for lack of merit.
Aggrieved, the respondent appealed the adverse RTC Judgment to the Court of Appeals.
In a Decision23 dated 10 October 2003, the Court of Appeals modified the RTC Judgment and found that the
respondent was justified in forfeiting the security deposits and was not liable to reimburse the petitioner for the
value of the improvements introduced in the leased premises and to pay for attorneys fees. In modifying the
findings of the lower court, the appellate court declared that in view of the breaches of contract committed by the
petitioner, the respondent is justified in forfeiting the security deposits. Moreover, since the petitioner did not
obtain the consent of the respondent before she introduced improvements on the SM Megamall store space, the
respondent has therefore no obligation to reimburse the petitioner for the amount expended in connection with
the said improvements.24 The Court of Appeals, however, maintained the order of the trial court for respondent to
return to petitioner her properties after she has settled her obligations to the respondent. The appellate court
denied petitioners Motion for Reconsideration in a Resolution 25 dated 19 April 2006.

Hence, this instant Petition for Review on Certiorari26 filed by the petitioner assailing the Court of Appeals
Decision. For the resolution of this Court are the following issues:
I. Whether or not the respondent is liable to return the security deposits to the petitions.
II. Whether or not the respondent is liable to reimburse the petitioner for the sum of the improvements
she introduced in the leased premises.
III. Whether or not the respondent is liable for attorneys fees.27
The appellate court, in finding that the respondent is authorized to forfeit the security deposits, relied on the
provisions of Sections 5 and 18 of the Contract of Lease, to wit:
Section 5. DEPOSIT. The LESSEE shall make a cash deposit in the sum of SIXTY THOUSAND PESOS
(P60,000.00) equivalent to three (3) months rent as security for the full and faithful performance to each and
every term, provision, covenant and condition of this lease and not as a pre-payment of rent. If at any time
during the term of this lease the rent is increased[,] the LESSEE on demand shall make an additional deposit
equal to the increase in rent. The LESSOR shall not be required to keep the deposit separate from its general
funds and the deposit shall not be entitled to interest. The deposit shall remain intact during the entire term and
shall not be applied as payment for any monetary obligations of the LESSEE under this contract. If the LESSEE
shall faithfully perform every provision of this lease[,] the deposit shall be refunded to the LESSEE upon the
expiration of this Lease and upon satisfaction of all monetary obligation to the LESSOR.
xxxx
Section 18. TERMINATION. Any breach, non-performance or non-observance of the terms and conditions herein
provided shall constitute default which shall be sufficient ground to terminate this lease, its extension or renewal.
In which event, the LESSOR shall demand that LESSEE immediately vacate the premises, and LESSOR shall
forfeit in its favor the deposit tendered without prejudice to any such other appropriate action as may be legally
authorized.28
Since it was already established by the trial court that the petitioner was guilty of committing several breaches of
contract, the Court of Appeals decreed that she cannot therefore rightfully demand the return of the security
deposits for the same are deemed forfeited by reason of evident contractual violations.
It is undisputed that the above-quoted provision found in all Contracts of Lease is in the nature of a penal clause
to ensure petitioners faithful compliance with the terms and conditions of the said contracts.
A penal clause is an accessory undertaking to assume greater liability in case of breach. It is attached to an
obligation in order to insure performance and has a double function: (1) to provide for liquidated damages, and
(2) to strengthen the coercive force of the obligation by the threat of greater responsibility in the event of
breach.29 The obligor would then be bound to pay the stipulated indemnity without the necessity of proof of the
existence and the measure of damages caused by the breach.30 Article 1226 of the Civil Code states:
Art. 1226. In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the
payment of interests in case of noncompliance, if there is no stipulation to the contrary. Nevertheless, damages
shall be paid if the obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the obligation.
The penalty may be enforced only when it is demandable in accordance with the provisions of this Code.
As a general rule, courts are not at liberty to ignore the freedoms of the parties to agree on such terms and
conditions as they see fit as long as they are not contrary to law, morals, good customs, public order or public
policy. Nevertheless, courts may equitably reduce a stipulated penalty in the contracts in two instances: (1) if the
principal obligation has been partly or irregularly complied with; and (2) even if there has been no compliance if
the penalty is iniquitous or unconscionable in accordance with Article 1229 of the Civil Code which clearly
provides:
Art. 1229. The judge shall equitably reduce the penalty when the principal obligation has been partly or
irregularly complied with by the debtor. Even if there has been no performance, the penalty may also be reduced
by the courts if it is iniquitous or unconscionable. 31

In ascertaining whether the penalty is unconscionable or not, this court set out the following standard in Ligutan
v. Court of Appeals,32 to wit:
The question of whether a penalty is reasonable or iniquitous can be partly subjective and partly objective. Its
resolution would depend on such factor as, but not necessarily confined to, the type, extent and purpose of the
penalty, the nature of the obligation, the mode of breach and its consequences, the supervening realities, the
standing and relationship of the parties, and the like, the application of which, by and large, is addressed to the
sound discretion of the court. xxx.
In the instant case, the forfeiture of the entire amount of the security deposits in the sum of P192,000.00 was
excessive and unconscionable considering that the gravity of the breaches committed by the petitioner is not of
such degree that the respondent was unduly prejudiced thereby. It is but equitable therefore to reduce the
penalty of the petitioner to 50% of the total amount of security deposits.
It is in the exercise of its sound discretion that this court tempered the penalty for the breaches committed by the
petitioner to 50% of the amount of the security deposits. The forfeiture of the entire sum of P192,000.00 is
clearly a usurious and iniquitous penalty for the transgressions committed by the petitioner. The respondent is
therefore under the obligation to return the 50% of P192,000.00 to the petitioner.
Turning now to the liability of the respondent to reimburse the petitioner for one-half of the expenses incurred for
the improvements on the leased store space at SM Megamall, the following provision in the Contracts of Lease
will enlighten us in resolving this issue:
Section 11. ALTERATIONS, ADDITIONS, IMPROVEMENTS, ETC. The LESSEE shall not make any alterations,
additions, or improvements without the prior written consent of LESSOR; and all alterations, additions or
improvements made on the leased premises, except movable or fixtures put in at LESSEEs expense and which
are removable, without defacing the buildings or damaging its floorings, shall become LESSORs property
without compensation/reimbursement but the LESSOR reserves the right to require the removal of the said
alterations, additions or improvements upon expiration of the lease.
The foregoing provision in the Contract of Lease mandates that before the petitioner can introduce any
improvement on the leased premises, she should first obtain respondents consent. In the case at bar, it was not
shown that petitioner previously secured the consent of the respondent before she made the improvements on
the leased space in SM Megamall. It was not even alleged by the petitioner that she obtained such consent or
she at least attempted to secure the same. On the other hand, the petitioner asserted that respondent allegedly
misrepresented to her that it would renew the terms of the contracts from time to time after their expirations, and
that the petitioner was so induced thereby that she expended the sum of P200,000.00 for the improvement of
the store space leased.
This argument was squarely addressed by this court in Fernandez v. Court of Appeals, 33 thus:
The Court ruled that the stipulation of the parties in their lease contract "to be renewable" at the option of both
parties stresses that the faculty to renew was given not to the lessee alone nor to the lessor by himself but to the
two simultaneously; hence, both must agree to renew if a new contract is to come about.
Petitioners contention that respondents had verbally agreed to extend the lease indefinitely is inadmissible to
qualify the terms of the written contract under the parole evidence rule, and unenforceable under the statute of
frauds.34
Moreover, it is consonant with human experience that lessees, before occupying the leased premises, especially
store spaces located inside malls and big commercial establishments, would renovate the place and introduce
improvements thereon according to the needs and nature of their business and in harmony with their trademark
designs as part of their marketing ploy to attract customers. Certainly, no inducement or misrepresentation from
the lessor is necessary for this purpose, for it is not only a matter of necessity that a lessee should re-design its
place of business but a business strategy as well.
In ruling that the respondent is liable to reimburse petitioner one half of the amount of improvements made on
the leased store space should it choose to appropriate the same, the RTC relied on the provision of Article 1678
of the Civil Code which provides:

Art. 1678. If the lessee makes, in good faith, useful improvements which are suitable to the use for which the
lease is intended, without altering the form or substance of the property leased, the lessor upon the termination
of the lease shall pay the lessee one-half of the value of the improvements at that time. Should the lessor refuse
to reimburse said amount, the lessee may remove the improvements, even though the principal thing may suffer
damage thereby. He shall not, however, cause any more impairment upon the property leased than is necessary.
While it is true that under the above-quoted provision of the Civil Code, the lessor is under the obligation to pay
the lessee one-half of the value of the improvements made should the lessor choose to appropriate the
improvements, Article 1678 however should be read together with Article 448 and Article 546 of the same
statute, which provide:
Art. 448. The owner of the land on which anything has been built, sown or planted in good faith, shall have the
right to appropriate as his own the works, sowing or planting, after payment of the indemnity provided for in
articles 546 and 548, or to oblige the one who built or planted to pay the price of the land, and the one who
sowed, the proper rent. However, the builder or planter cannot be obliged to buy the land if its value is
considerably more than that of the building or trees. In such case, he shall pay reasonable rent, if the owner of
the land does not choose to appropriate the building or trees after proper indemnity. The parties shall agree
upon the terms of the lease and in case of disagreement, the court shall fix the terms thereof.
xxxx
Art. 546. Necessary expenses shall be refunded to every possessor; but only possessor in good faith may retain
the thing until he has been reimbursed therefor.
Useful expenses shall be refunded only to the possessor in good faith with the same right of retention, the
person who has defeated him in the possession having the option of refunding the amount of the expenses or of
paying the increase in value which the thing may have acquired by reason thereof.
Thus, to be entitled to reimbursement for improvements introduced on the property, the petitioner must be
considered a builder in good faith. Further, Articles 448 and 546 of the Civil Code, which allow full
reimbursement of useful improvements and retention of the premises until reimbursement is made, apply only to
a possessor in good faith, i.e., one who builds on land with the belief that he is the owner thereof. A builder in
good faith is one who is unaware of any flaw in his title to the land at the time he builds on it. 35 In this case, the
petitioner cannot claim that she was not aware of any flaw in her title or was under the belief that she is the
owner of the subject premises for it is a settled fact that she is merely a lessee thereof.
1wphi1

In Geminiano v. Court of Appeals,36 this Court was emphatic in declaring that lessees are not possessors or
builders in good faith, thus:
Being mere lessees, the private respondents knew that their occupation of the premises would continue only for
the life of the lease. Plainly, they cannot be considered as possessors nor builders in good faith.
In a plethora of cases, this Court has held that Article 448 of the Civil Code, in relation to Article 546 of the same
Code, which allows full reimbursement of useful improvements and retention of the premises until
reimbursement is made, applies only to a possessor in good faith, i.e., one who builds on land with the belief that
he is the owner thereof. It does not apply where one's only interest is that of a lessee under a rental contract;
otherwise, it would always be in the power of the tenant to "improve" his landlord out of his property.
Since petitioners interest in the store space is merely that of the lessee under the lease contract, she cannot
therefore be considered a builder in good faith. Consequently, respondent may appropriate the improvements
introduced on the leased premises without any obligation to reimburse the petitioner for the sum expended.
Anent the claim for attorneys fees, we resolve to likewise deny the award of the same. Attorneys fees may be
awarded when a party is compelled to litigate or to incur expenses to protect its interest by reason of unjustified
act of the other.37
In the instant petition, it was not shown that the respondent unjustifiably refused to grant the demands of the
petitioner so as to compel the latter to initiate legal action to enforce her right. As we have found herein, there is
basis for respondents refusal to return to petitioner the security deposits and to reimburse the costs of the
improvements in the leased premises. The award of attorneys fees is therefore not proper in the instant case.

WHEREFORE, premises considered, the instant Petition is PARTLY GRANTED. The Court of Appeals Decision
dated 10 October 2003 in CA-G.R. CV No. 73853 is hereby AFFIRMED with the MODIFICATION that the
respondent may forfeit only 50% of the total amount of the security deposits in the sum of P192,000.00, and
must return the remaining 50% to the petitioner. No costs.
SO ORDERED.

1231: PAYMENT/ EFFECT OF DEATH