Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-25494 June 14, 1972

NICOLAS SANCHEZ, plaintiff-appellee,
vs.
SEVERINA RIGOS, defendant-appellant.

Santiago F. Bautista for plaintiff-appellee.

Jesus G. Villamar for defendant-appellant.

CONCEPCION, C.J.:p

Appeal from a decision of the Court of First Instance of Nueva Ecija to the Court of Appeals, which certified the case to Us, upon the ground that it
involves a question purely of law.

The record shows that, on April 3, 1961, plaintiff Nicolas Sanchez and defendant Severina Rigos executed an
instrument entitled "Option to Purchase," whereby Mrs. Rigos "agreed, promised and committed ... to sell"
to Sanchez the sum of P1,510.00, a parcel of land situated in the barrios of Abar and Sibot, municipality of
San Jose, province of Nueva Ecija, and more particularly described in Transfer Certificate of Title No. NT-
12528 of said province, within two (2) years from said date with the understanding that said option shall be
deemed "terminated and elapsed," if "Sanchez shall fail to exercise his right to buy the property" within the
stipulated period. Inasmuch as several tenders of payment of the sum of Pl,510.00, made by Sanchez within
said period, were rejected by Mrs. Rigos, on March 12, 1963, the former deposited said amount with the
Court of First Instance of Nueva Ecija and commenced against the latter the present action, for specific
performance and damages.

After the filing of defendant's answer — admitting some allegations of the complaint, denying other
allegations thereof, and alleging, as special defense, that the contract between the parties "is a unilateral
promise to sell, and the same being unsupported by any valuable consideration, by force of the New Civil
Code, is null and void" — on February 11, 1964, both parties, assisted by their respective counsel, jointly
moved for a judgment on the pleadings. Accordingly, on February 28, 1964, the lower court rendered
judgment for Sanchez, ordering Mrs. Rigos to accept the sum judicially consigned by him and to execute, in
his favor, the requisite deed of conveyance. Mrs. Rigos was, likewise, sentenced to pay P200.00, as attorney's
fees, and other costs. Hence, this appeal by Mrs. Rigos.

This case admittedly hinges on the proper application of Article 1479 of our Civil Code, which provides:

ART. 1479. A promise to buy and sell a determinate thing for a price certain is reciprocally
demandable.
 An accepted unilateral promise to buy or to sell a determinate thing for a price certain is
binding upon the promissor if the promise is supported by a consideration distinct from the
price.

In his complaint, plaintiff alleges that, by virtue of the option under consideration, "defendant agreed and
committed to sell" and "the plaintiff agreed and committed to buy" the land described in the option, copy of
which was annexed to said pleading as Annex A thereof and is quoted on the margin.1 Hence, plaintiff
maintains that the promise contained in the contract is "reciprocally demandable," pursuant to the first
paragraph of said Article 1479. Although defendant had really "agreed, promised and committed" herself to
sell the land to the plaintiff, it is not true that the latter had, in turn, "agreed and committed himself " to buy
said property. Said Annex A does not bear out plaintiff's allegation to this effect. What is more, since Annex A
has been made "an integral part" of his complaint, the provisions of said instrument form part "and
parcel"2 of said pleading.

The option did not impose upon plaintiff the obligation to purchase defendant's property. Annex A is not a
"contract to buy and sell." It merely granted plaintiff an "option" to buy. And both parties so understood it, as
indicated by the caption, "Option to Purchase," given by them to said instrument. Under the provisions
thereof, the defendant "agreed, promised and committed" herself to sell the land therein described to the
plaintiff for P1,510.00, but there is nothing in the contract to indicate that her aforementioned agreement,
promise and undertaking is supported by a consideration "distinct from the price" stipulated for the sale of
the land.

Relying upon Article 1354 of our Civil Code, the lower court presumed the existence of said consideration,
and this would seem to be the main factor that influenced its decision in plaintiff's favor. It should be noted,
however, that:

(1) Article 1354 applies to contracts in general, whereas the second paragraph of Article 1479 refers to
"sales" in particular, and, more specifically, to "an accepted unilateral promise to buy or to sell." In other
words, Article 1479 is controlling in the case at bar.

(2) In order that said unilateral promise may be "binding upon the promisor, Article 1479 requires the
concurrence of a condition, namely, that the promise be "supported by a consideration distinct from the
price." Accordingly, the promisee can not compel the promisor to comply with the promise, unless the
former establishes the existence of said distinct consideration. In other words, the promisee has the burden
of proving such consideration. Plaintiff herein has not even alleged the existence thereof in his complaint.

(3) Upon the other hand, defendant explicitly averred in her answer, and pleaded as a special defense, the
absence of said consideration for her promise to sell and, by joining in the petition for a judgment on the
pleadings, plaintiff has impliedly admitted the truth of said averment in defendant's answer. Indeed as early
as March 14, 1908, it had been held, in Bauermann v. Casas,3 that:

One who prays for judgment on the pleadings without offering proof as to the truth of his
own allegations, and without giving the opposing party an opportunity to introduce
evidence, must be understood to admit the truth of all the material and relevant allegations
of the opposing party, and to rest his motion for judgment on those allegations taken
together with such of his own as are admitted in the pleadings. (La Yebana Company vs.
Sevilla, 9 Phil. 210). (Emphasis supplied.)

This view was reiterated in Evangelista v. De la Rosa4 and Mercy's Incorporated v. Herminia Verde.5
Squarely in point is Southwestern Sugar & Molasses Co. v. Atlantic Gulf & Pacific Co.,6 from which We quote:

The main contention of appellant is that the option granted to appellee to sell to it barge
No. 10 for the sum of P30,000 under the terms stated above has no legal effect because it is
not supported by any consideration and in support thereof it invokes article 1479 of the new
Civil Code. The article provides:

"ART. 1479. A promise to buy and sell a determinate thing for a price
certain is reciprocally demandable.

An accepted unilateral promise to buy or sell a determinate thing for a price

certain is binding upon the promisor if the promise is supported by a
consideration distinct from the price."

On the other hand, Appellee contends that, even granting that the "offer of option" is not
supported by any consideration, that option became binding on appellant when the
appellee gave notice to it of its acceptance, and that having accepted it within the period of
option, the offer can no longer be withdrawn and in any event such withdrawal is
ineffective. In support this contention, appellee invokes article 1324 of the Civil Code which
provides:

"ART. 1324. When the offerer has allowed the offeree a certain period to
accept, the offer may be withdrawn any time before acceptance by
communicating such withdrawal, except when the option is founded upon
consideration as something paid or promised."

There is no question that under article 1479 of the new Civil Code "an option to sell," or "a
promise to buy or to sell," as used in said article, to be valid must be "supported by a
consideration distinct from the price." This is clearly inferred from the context of said article
that a unilateral promise to buy or to sell, even if accepted, is only binding if supported by
consideration. In other words, "an accepted unilateral promise can only have a binding
effect if supported by a consideration which means that the option can still be
withdrawn, even if accepted, if the same is not supported by any consideration. It is not
disputed that the option is without consideration. It can therefore be withdrawn
notwithstanding the acceptance of it by appellee.

It is true that under article 1324 of the new Civil Code, the general rule regarding offer and
acceptance is that, when the offerer gives to the offeree a certain period to accept, "the
offer may be withdrawn at any time before acceptance" except when the option is founded
upon consideration, but this general rule must be interpreted as modified by the provision of
article 1479 above referred to, which applies to "a promise to buy and sell" specifically. As
already stated, this rule requires that a promise to sell to be valid must be supported by a
consideration distinct from the price.

We are not oblivious of the existence of American authorities which hold that an offer, once
accepted, cannot be withdrawn, regardless of whether it is supported or not by a
consideration (12 Am. Jur. 528). These authorities, we note, uphold the general
rule applicable to offer and acceptance as contained in our new Civil Code. But we are
prevented from applying them in view of the specific provision embodied in article 1479.
 While under the "offer of option" in question appellant has assumed a clear obligation to
sell its barge to appellee and the option has been exercised in accordance with its terms,
and there appears to be no valid or justifiable reason for appellant to withdraw its offer, this
Court cannot adopt a different attitude because the law on the matter is clear. Our
imperative duty is to apply it unless modified by Congress.

However, this Court itself, in the case of Atkins, Kroll and Co., Inc. v. Cua Hian Tek,8 decided later
that Southwestern Sugar & Molasses Co. v. Atlantic Gulf & Pacific Co.,9 saw no distinction between Articles
1324 and 1479 of the Civil Code and applied the former where a unilateral promise to sell similar to the one
sued upon here was involved, treating such promise as an option which, although not binding as a contract in
itself for lack of a separate consideration, nevertheless generated a bilateral contract of purchase and sale
upon acceptance. Speaking through Associate Justice, later Chief Justice, Cesar Bengzon, this Court said:

Furthermore, an option is unilateral: a promise to sell at the price fixed whenever the
offeree should decide to exercise his option within the specified time. After accepting the
promise and before he exercises his option, the holder of the option is not bound to buy. He
is free either to buy or not to buy later. In this case, however, upon accepting herein
petitioner's offer a bilateral promise to sell and to buy ensued, and the respondent ipso
facto assumed the obligation of a purchaser. He did not just get the right subsequently to
buy or not to buy. It was not a mere option then; it was a bilateral contract of sale.

Lastly, even supposing that Exh. A granted an option which is not binding for lack of
consideration, the authorities hold that:

"If the option is given without a consideration, it is a mere offer of a

contract of sale, which is not binding until accepted. If, however,
acceptance is made before a withdrawal, it constitutes a binding contract of
sale, even though the option was not supported by a sufficient
consideration. ... . (77 Corpus Juris Secundum, p. 652. See also 27 Ruling
Case Law 339 and cases cited.)

"It can be taken for granted, as contended by the defendant, that the
option contract was not valid for lack of consideration. But it was, at least,
an offer to sell, which was accepted by letter, and of the acceptance the
offerer had knowledge before said offer was withdrawn. The concurrence
of both acts — the offer and the acceptance — could at all events have
generated a contract, if none there was before (arts. 1254 and 1262 of the
Civil Code)." (Zayco vs. Serra, 44 Phil. 331.)

In other words, since there may be no valid contract without a cause or consideration, the promisor is not
bound by his promise and may, accordingly, withdraw it. Pending notice of its withdrawal, his accepted
promise partakes, however, of the nature of an offer to sell which, if accepted, results in a perfected contract
of sale.

This view has the advantage of avoiding a conflict between Articles 1324 — on the general principles on
contracts — and 1479 — on sales — of the Civil Code, in line with the cardinal rule of statutory construction
that, in construing different provisions of one and the same law or code, such interpretation should be
favored as will reconcile or harmonize said provisions and avoid a conflict between the same. Indeed, the
presumption is that, in the process of drafting the Code, its author has maintained a consistent philosophy or
position. Moreover, the decision in Southwestern Sugar & Molasses Co. v. Atlantic Gulf & Pacific
Co., 10 holding that Art. 1324 is modified by Art. 1479 of the Civil Code, in effect, considers the latter as
an exception to the former, and exceptions are not favored, unless the intention to the contrary is clear, and
it is not so, insofar as said two (2) articles are concerned. What is more, the reference, in both the second
paragraph of Art. 1479 and Art. 1324, to an option or promise supported by or founded upon a consideration,
strongly suggests that the two (2) provisions intended to enforce or implement the same principle.

Upon mature deliberation, the Court is of the considered opinion that it should, as it hereby reiterates the
doctrine laid down in the Atkins, Kroll & Co. case, and that, insofar as inconsistent therewith, the view
adhered to in the Southwestern Sugar & Molasses Co. case should be deemed abandoned or modified.

WHEREFORE, the decision appealed from is hereby affirmed, with costs against defendant-appellant Severina
Rigos. It is so ordered.

Reyes, J.B.L., Makalintal, Zaldivar, Teehankee, Barredo and Makasiar, JJ., concur.

Castro, J., took no part.

Separate Opinions

ANTONIO, J., concurring:

I concur in the opinion of the Chief Justice.

I fully agree with the abandonment of the view previously adhered to in Southwestern Sugar & Molasses Co.
vs. Atlantic Gulf and Pacific Co.,1 which holds that an option to sell can still be withdrawn, even if accepted, if
the same is not supported by any consideration, and the reaffirmance of the doctrine in Atkins, Kroll & Co.,
Inc. vs. Cua Hian Tek,2 holding that "an option implies ... the legal obligation to keep the offer (to sell) open
for the time specified;" that it could be withdrawn before acceptance, if there was no consideration for the
option, but once the "offer to sell" is accepted, a bilateral promise to sell and to buy ensues, and the
offeree ipso facto assumes the obligations of a purchaser. In other words, if the option is given without a
consideration, it is a mere offer to sell, which is not binding until accepted. If, however, acceptance is made
before a withdrawal, it constitutes a binding contract of sale. The concurrence of both acts — the offer and
the acceptance — could in such event generate a contract.

While the law permits the offeror to withdraw the offer at any time before acceptance even before the
period has expired, some writers hold the view, that the offeror can not exercise this right in an arbitrary or
capricious manner. This is upon the principle that an offer implies an obligation on the part of the offeror to
maintain in such length of time as to permit the offeree to decide whether to accept or not, and therefore
cannot arbitrarily revoke the offer without being liable for damages which the offeree may suffer. A contrary
view would remove the stability and security of business transactions.3

In the present case the trial court found that the "Plaintiff (Nicolas Sanchez) had offered the sum of
Pl,510.00 before any withdrawal from the contract has been made by the Defendant (Severina Rigos)." Since
Rigos' offer sell was accepted by Sanchez, before she could withdraw her offer, a bilateral reciprocal contract
— to sell and to buy — was generated.
Separate Opinions

ANTONIO, J., concurring:

I concur in the opinion of the Chief Justice.

I fully agree with the abandonment of the view previously adhered to in Southwestern Sugar & Molasses Co.
vs. Atlantic Gulf and Pacific Co.,1 which holds that an option to sell can still be withdrawn, even if accepted, if
the same is not supported by any consideration, and the reaffirmance of the doctrine in Atkins, Kroll & Co.,
Inc. vs. Cua Hian Tek,2 holding that "an option implies ... the legal obligation to keep the offer (to sell) open
for the time specified;" that it could be withdrawn before acceptance, if there was no consideration for the
option, but once the "offer to sell" is accepted, a bilateral promise to sell and to buy ensues, and the
offeree ipso facto assumes the obligations of a purchaser. In other words, if the option is given without a
consideration, it is a mere offer to sell, which is not binding until accepted. If, however, acceptance is made
before a withdrawal, it constitutes a binding contract of sale. The concurrence of both acts — the offer and
the acceptance — could in such event generate a contract.

While the law permits the offeror to withdraw the offer at any time before acceptance even before the
period has expired, some writers hold the view, that the offeror can not exercise this right in an arbitrary or
capricious manner. This is upon the principle that an offer implies an obligation on the part of the offeror to
maintain in such length of time as to permit the offeree to decide whether to accept or not, and therefore
cannot arbitrarily revoke the offer without being liable for damages which the offeree may suffer. A contrary
view would remove the stability and security of business transactions.3

In the present case the trial court found that the "Plaintiff (Nicolas Sanchez) had offered the sum of
Pl,510.00 before any withdrawal from the contract has been made by the Defendant (Severina Rigos)." Since
Rigos' offer sell was accepted by Sanchez, before she could withdraw her offer, a bilateral reciprocal contract
— to sell and to buy — was generated.

G.R. No. 147839 June 8, 2006

GAISANO CAGAYAN, INC. Petitioner,

vs.
INSURANCE COMPANY OF NORTH AMERICA, Respondent.

DECISION

AUSTRIA-MARTINEZ, J.:

Before the Court is a petition for review on certiorari of the Decision1 dated October 11, 2000 of the Court of
Appeals (CA) in CA-G.R. CV No. 61848 which set aside the Decision dated August 31, 1998 of the Regional
Trial Court, Branch 138, Makati (RTC) in Civil Case No. 92-322 and upheld the causes of action for damages of
Insurance Company of North America (respondent) against Gaisano Cagayan, Inc. (petitioner); and the CA
Resolution dated April 11, 2001 which denied petitioner's motion for reconsideration.
The factual background of the case is as follows:

Intercapitol Marketing Corporation (IMC) is the maker of Wrangler Blue Jeans. Levi Strauss (Phils.) Inc. (LSPI)
is the local distributor of products bearing trademarks owned by Levi Strauss & Co.. IMC and LSPI separately
obtained from respondent fire insurance policies with book debt endorsements. The insurance policies
provide for coverage on "book debts in connection with ready-made clothing materials which have been sold
or delivered to various customers and dealers of the Insured anywhere in the Philippines."2 The policies
defined book debts as the "unpaid account still appearing in the Book of Account of the Insured 45 days after
the time of the loss covered under this Policy."3 The policies also provide for the following conditions:

1. Warranted that the Company shall not be liable for any unpaid account in respect of the
merchandise sold and delivered by the Insured which are outstanding at the date of loss for a period
in excess of six (6) months from the date of the covering invoice or actual delivery of the
merchandise whichever shall first occur.

2. Warranted that the Insured shall submit to the Company within twelve (12) days after the close of
every calendar month all amount shown in their books of accounts as unpaid and thus become
receivable item from their customers and dealers. x x x4

xxxx

Petitioner is a customer and dealer of the products of IMC and LSPI. On February 25, 1991, the Gaisano
Superstore Complex in Cagayan de Oro City, owned by petitioner, was consumed by fire. Included in the
items lost or destroyed in the fire were stocks of ready-made clothing materials sold and delivered by IMC
and LSPI.

On February 4, 1992, respondent filed a complaint for damages against petitioner. It alleges that IMC and
LSPI filed with respondent their claims under their respective fire insurance policies with book debt
endorsements; that as of February 25, 1991, the unpaid accounts of petitioner on the sale and delivery of
ready-made clothing materials with IMC was P2,119,205.00 while with LSPI it was P535,613.00; that
respondent paid the claims of IMC and LSPI and, by virtue thereof, respondent was subrogated to their rights
against petitioner; that respondent made several demands for payment upon petitioner but these went
unheeded.5

In its Answer with Counter Claim dated July 4, 1995, petitioner contends that it could not be held liable
because the property covered by the insurance policies were destroyed due to fortuities event or force
majeure; that respondent's right of subrogation has no basis inasmuch as there was no breach of contract
committed by it since the loss was due to fire which it could not prevent or foresee; that IMC and LSPI never
communicated to it that they insured their properties; that it never consented to paying the claim of the
insured.6

At the pre-trial conference the parties failed to arrive at an amicable settlement.7 Thus, trial on the merits
ensued.

On August 31, 1998, the RTC rendered its decision dismissing respondent's complaint.8 It held that the fire
was purely accidental; that the cause of the fire was not attributable to the negligence of the petitioner; that
it has not been established that petitioner is the debtor of IMC and LSPI; that since the sales invoices state
that "it is further agreed that merely for purpose of securing the payment of purchase price, the above-
described merchandise remains the property of the vendor until the purchase price is fully paid", IMC and
LSPI retained ownership of the delivered goods and must bear the loss.

Dissatisfied, petitioner appealed to the CA.9 On October 11, 2000, the CA rendered its decision setting aside
the decision of the RTC. The dispositive portion of the decision reads:

WHEREFORE, in view of the foregoing, the appealed decision is REVERSED and SET ASIDE and a new one is
entered ordering defendant-appellee Gaisano Cagayan, Inc. to pay:

1. the amount of P2,119,205.60 representing the amount paid by the plaintiff-appellant to the
insured Inter Capitol Marketing Corporation, plus legal interest from the time of demand until fully
paid;

2. the amount of P535,613.00 representing the amount paid by the plaintiff-appellant to the insured
Levi Strauss Phil., Inc., plus legal interest from the time of demand until fully paid.

With costs against the defendant-appellee.

SO ORDERED.10

The CA held that the sales invoices are proofs of sale, being detailed statements of the nature, quantity and
cost of the thing sold; that loss of the goods in the fire must be borne by petitioner since
the proviso contained in the sales invoices is an exception under Article 1504 (1) of the Civil Code, to the
general rule that if the thing is lost by a fortuitous event, the risk is borne by the owner of the thing at the
time the loss under the principle of res perit domino; that petitioner's obligation to IMC and LSPI is not the
delivery of the lost goods but the payment of its unpaid account and as such the obligation to pay is not
extinguished, even if the fire is considered a fortuitous event; that by subrogation, the insurer has the right to
go against petitioner; that, being a fire insurance with book debt endorsements, what was insured was the
vendor's interest as a creditor.11

Petitioner filed a motion for reconsideration12 but it was denied by the CA in its Resolution dated April 11,
2001.13

Hence, the present petition for review on certiorari anchored on the following Assignment of Errors:

THE COURT OF APPEALS ERRED IN HOLDING THAT THE INSURANCE IN THE INSTANT CASE WAS ONE OVER
CREDIT.

THE COURT OF APPEALS ERRED IN HOLDING THAT ALL RISK OVER THE SUBJECT GOODS IN THE INSTANT CASE
HAD TRANSFERRED TO PETITIONER UPON DELIVERY THEREOF.

THE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS AUTOMATIC SUBROGATION UNDER ART. 2207
OF THE CIVIL CODE IN FAVOR OF RESPONDENT.14

Anent the first error, petitioner contends that the insurance in the present case cannot be deemed to be over
credit since an insurance "on credit" belies not only the nature of fire insurance but the express terms of the
policies; that it was not credit that was insured since respondent paid on the occasion of the loss of the
insured goods to fire and not because of the non-payment by petitioner of any obligation; that, even if the
insurance is deemed as one over credit, there was no loss as the accounts were not yet due since no prior
demands were made by IMC and LSPI against petitioner for payment of the debt and such demands came
from respondent only after it had already paid IMC and LSPI under the fire insurance policies.15

As to the second error, petitioner avers that despite delivery of the goods, petitioner-buyer IMC and LSPI
assumed the risk of loss when they secured fire insurance policies over the goods.

Concerning the third ground, petitioner submits that there is no subrogation in favor of respondent as no
valid insurance could be maintained thereon by IMC and LSPI since all risk had transferred to petitioner upon
delivery of the goods; that petitioner was not privy to the insurance contract or the payment between
respondent and its insured nor was its consent or approval ever secured; that this lack of privity forecloses
any real interest on the part of respondent in the obligation to pay, limiting its interest to keeping the insured
goods safe from fire.

For its part, respondent counters that while ownership over the ready- made clothing materials was
transferred upon delivery to petitioner, IMC and LSPI have insurable interest over said goods as creditors who
stand to suffer direct pecuniary loss from its destruction by fire; that petitioner is liable for loss of the ready-
made clothing materials since it failed to overcome the presumption of liability under Article 126516 of the
Civil Code; that the fire was caused through petitioner's negligence in failing to provide stringent measures of
caution, care and maintenance on its property because electric wires do not usually short circuit unless there
are defects in their installation or when there is lack of proper maintenance and supervision of the property;
that petitioner is guilty of gross and evident bad faith in refusing to pay respondent's valid claim and should
be liable to respondent for contracted lawyer's fees, litigation expenses and cost of suit.17

As a general rule, in petitions for review, the jurisdiction of this Court in cases brought before it from the CA
is limited to reviewing questions of law which involves no examination of the probative value of the evidence
presented by the litigants or any of them.18 The Supreme Court is not a trier of facts; it is not its function to
analyze or weigh evidence all over again.19 Accordingly, findings of fact of the appellate court are generally
conclusive on the Supreme Court.20

Nevertheless, jurisprudence has recognized several exceptions in which factual issues may be resolved by this
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 CA 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 petitioner's 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; and (11) when the CA manifestly overlooked certain relevant facts
not disputed by the parties, which, if properly considered, would justify a different conclusion.21 Exceptions
(4), (5), (7), and (11) apply to the present petition.

At issue is the proper interpretation of the questioned insurance policy. Petitioner claims that the CA erred in
construing a fire insurance policy on book debts as one covering the unpaid accounts of IMC and LSPI since
such insurance applies to loss of the ready-made clothing materials sold and delivered to petitioner.

The Court disagrees with petitioner's stand.

It is well-settled that when the words of a contract are plain and readily understood, there is no room for
construction.22 In this case, the questioned insurance policies provide coverage for "book debts in connection
with ready-made clothing materials which have been sold or delivered to various customers and dealers of
the Insured anywhere in the Philippines."23 ; and defined book debts as the "unpaid account still appearing in
the Book of Account of the Insured 45 days after the time of the loss covered under this Policy."24 Nowhere is
it provided in the questioned insurance policies that the subject of the insurance is the goods sold and
delivered to the customers and dealers of the insured.

Indeed, when the terms of the agreement are clear and explicit that they do not justify an attempt to read
into it any alleged intention of the parties, the terms are to be understood literally just as they appear on the
face of the contract.25 Thus, what were insured against were the accounts of IMC and LSPI with petitioner
which remained unpaid 45 days after the loss through fire, and not the loss or destruction of the goods
delivered.

Petitioner argues that IMC bears the risk of loss because it expressly reserved ownership of the goods by
stipulating in the sales invoices that "[i]t is further agreed that merely for purpose of securing the payment of
the purchase price the above described merchandise remains the property of the vendor until the purchase
price thereof is fully paid."26

The Court is not persuaded.

The present case clearly falls under paragraph (1), Article 1504 of the Civil Code:

ART. 1504. Unless otherwise agreed, the goods remain at the seller's risk until the ownership therein is
transferred to the buyer, but when the ownership therein is transferred to the buyer the goods are at the
buyer's risk whether actual delivery has been made or not, except that:

(1) Where delivery of the goods has been made to the buyer or to a bailee for the buyer, in pursuance of the
contract and the ownership in the goods has been retained by the seller merely to secure performance by
the buyer of his obligations under the contract, the goods are at the buyer's risk from the time of such
delivery; (Emphasis supplied)

xxxx

Thus, when the seller retains ownership only to insure that the buyer will pay its debt, the risk of loss is borne
by the buyer.27 Accordingly, petitioner bears the risk of loss of the goods delivered.

IMC and LSPI did not lose complete interest over the goods. They have an insurable interest until full
payment of the value of the delivered goods. Unlike the civil law concept of res perit domino, where
ownership is the basis for consideration of who bears the risk of loss, in property insurance, one's interest is
not determined by concept of title, but whether insured has substantial economic interest in the property.28

Section 13 of our Insurance Code defines insurable interest as "every interest in property, whether real or
personal, or any relation thereto, or liability in respect thereof, of such nature that a contemplated peril
might directly damnify the insured." Parenthetically, under Section 14 of the same Code, an insurable interest
in property may consist in: (a) an existing interest; (b) an inchoate interest founded on existing interest; or (c)
an expectancy, coupled with an existing interest in that out of which the expectancy arises.
Therefore, an insurable interest in property does not necessarily imply a property interest in, or a lien upon,
or possession of, the subject matter of the insurance, and neither the title nor a beneficial interest is requisite
to the existence of such an interest, it is sufficient that the insured is so situated with reference to the
property that he would be liable to loss should it be injured or destroyed by the peril against which it is
insured.29 Anyone has an insurable interest in property who derives a benefit from its existence or would
suffer loss from its destruction.30Indeed, a vendor or seller retains an insurable interest in the property sold
so long as he has any interest therein, in other words, so long as he would suffer by its destruction, as where
he has a vendor's lien.31 In this case, the insurable interest of IMC and LSPI pertain to the unpaid accounts
appearing in their Books of Account 45 days after the time of the loss covered by the policies.

The next question is: Is petitioner liable for the unpaid accounts?

Petitioner's argument that it is not liable because the fire is a fortuitous event under Article 117432 of the Civil
Code is misplaced. As held earlier, petitioner bears the loss under Article 1504 (1) of the Civil Code.

Moreover, it must be stressed that the insurance in this case is not for loss of goods by fire but for
petitioner's accounts with IMC and LSPI that remained unpaid 45 days after the fire. Accordingly, petitioner's
obligation is for the payment of money. As correctly stated by the CA, where the obligation consists in the
payment of money, the failure of the debtor to make the payment even by reason of a fortuitous event shall
not relieve him of his liability.33 The rationale for this is that the rule that an obligor should be held exempt
from liability when the loss occurs thru a fortuitous event only holds true when the obligation consists in the
delivery of a determinate thing and there is no stipulation holding him liable even in case of fortuitous event.
It does not apply when the obligation is pecuniary in nature.34

Under Article 1263 of the Civil Code, "[i]n an obligation to deliver a generic thing, the loss or destruction of
anything of the same kind does not extinguish the obligation." If the obligation is generic in the sense that the
object thereof is designated merely by its class or genus without any particular designation or physical
segregation from all others of the same class, the loss or destruction of anything of the same kind even
without the debtor's fault and before he has incurred in delay will not have the effect of extinguishing the
obligation.35 This rule is based on the principle that the genus of a thing can never perish. Genus nunquan
perit.36 An obligation to pay money is generic; therefore, it is not excused by fortuitous loss of any specific
property of the debtor.37

Thus, whether fire is a fortuitous event or petitioner was negligent are matters immaterial to this case. What
is relevant here is whether it has been established that petitioner has outstanding accounts with IMC and
LSPI.

With respect to IMC, the respondent has adequately established its claim. Exhibits "C" to "C-22"38 show that
petitioner has an outstanding account with IMC in the amount of P2,119,205.00. Exhibit "E"39 is the check
voucher evidencing payment to IMC. Exhibit "F"40 is the subrogation receipt executed by IMC in favor of
respondent upon receipt of the insurance proceeds. All these documents have been properly identified,
presented and marked as exhibits in court. The subrogation receipt, by itself, is sufficient to establish not only
the relationship of respondent as insurer and IMC as the insured, but also the amount paid to settle the
insurance claim. The right of subrogation accrues simply upon payment by the insurance company of the
insurance claim.41 Respondent's action against petitioner is squarely sanctioned by Article 2207 of the Civil
Code which provides:

Art. 2207. If the plaintiff's property has been insured, and he has received indemnity from the insurance
company for the injury or loss arising out of the wrong or breach of contract complained of, the insurance
company shall be subrogated to the rights of the insured against the wrongdoer or the person who has
violated the contract. x x x

Petitioner failed to refute respondent's evidence.

As to LSPI, respondent failed to present sufficient evidence to prove its cause of action. No evidentiary weight
can be given to Exhibit "F Levi Strauss",42 a letter dated April 23, 1991 from petitioner's General Manager,
Stephen S. Gaisano, Jr., since it is not an admission of petitioner's unpaid account with LSPI. It only confirms
the loss of Levi's products in the amount of P535,613.00 in the fire that razed petitioner's building on
February 25, 1991.

Moreover, there is no proof of full settlement of the insurance claim of LSPI; no subrogation receipt was
offered in evidence. Thus, there is no evidence that respondent has been subrogated to any right which LSPI
may have against petitioner. Failure to substantiate the claim of subrogation is fatal to petitioner's case for
recovery of the amount of P535,613.00.

WHEREFORE, the petition is partly GRANTED. The assailed Decision dated October 11, 2000 and Resolution
dated April 11, 2001 of the Court of Appeals in CA-G.R. CV No. 61848 are AFFIRMED with
the MODIFICATIONthat the order to pay the amount of P535,613.00 to respondent is DELETED for lack of
factual basis.

No pronouncement as to costs.

SO ORDERED.

MA. ALICIA AUSTRIA-MARTINEZ

Associate Justice

WE CONCUR:

ARTEMIO V. PANGANIBAN
Chief Justice
Chairperson

(On Leave)
CONSUELO YNARES-SANTIAGO ROMEO J. CALLEJO, SR.
Associate Justice Asscociate Justice

MINITA V. CHICO-NAZARIO
Associate Justice

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, it is hereby certified that the conclusions in the above
Decision were reached in consultation before the case was assigned to the writer of the opinion of the
Court's Division.
ARTEMIO V. PANGANIBAN
Chief Justice

EN BANC 32 scra 547

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

ROSENDO O. CHAVES, Plaintiff-Appellant, v. FRUCTUOSO GONZALES, Defendant-Appellee.

Chaves, Elio, Chaves & Associates, for Plaintiff-Appellant.

Sulpicio E. Platon, for Defendant-Appellee.

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

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

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

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

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

DECISION

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

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

The appealed judgment, which is brief, is hereunder quoted in full: jg c:chanr obles. com.ph

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

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

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

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

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

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

"SO ORDERED." cralaw virtua1aw library

The error of the court a quo, according to the plaintiff-appellant, Rosendo O. Chaves, is that it awarded only the value of the missing
parts of the typewriter, instead of the whole cost of labor and materials that went into the repair of the machine, as provided for in
Article 1167 of the Civil Code, reading as follows: jgc: chanr obles. com.ph

"ART. 1167. If a person obliged to do something fails to do it, the same shall be executed at his cost.

This same rule shall be observed if he does it in contravention of the tenor of the obligation. Furthermore it may be decreed that what
has been poorly done he undone." cralaw virtua1aw library

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

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

The appealed judgment states that the "plaintiff delivered to the defendant . . . a portable typewriter for routine cleaning and
servicing" ; that the defendant was not able to finish the job after some time despite repeated reminders made by the plaintiff" ; that
the "defendant merely gave assurances, but failed to comply with the same" ; and that "after getting exasperated with the delay of the
repair of the typewriter", the plaintiff went to the house of the defendant and asked for its return, which was done. The inferences
derivable from these findings of fact are that the appellant and the appellee had a perfected contract for cleaning and servicing a
typewriter; that they intended that the defendant was to finish it at some future time although such time was not specified; and that
such time had passed without the work having been accomplished, far the defendant returned the typewriter cannibalized and
unrepaired, which in itself is a breach of his obligation, without demanding that he should be given more time to finish the job, or
compensation for the work he had already done. The time for compliance having evidently expired, and there being a breach of
contract by non-performance, it was academic for the plaintiff to have first petitioned the court to fix a period for the performance of
the contract before filing his complaint in this case. Defendant cannot invoke Article 1197 of the Civil Code for he virtually admitted
non-performance by returning the typewriter that he was obliged to repair in a non-working condition, with essential parts missing.
The fixing of a period would thus be a mere formality and would serve no purpose than to delay (cf. Tiglao. Et. Al. V. Manila Railroad
Co. 98 Phil. 18l).

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

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

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

IN VIEW OF THE FOREGOING REASONS, the appealed judgment is hereby modified, by ordering the defendant-appellee to pay, as he is
hereby ordered to pay, the plaintiff-appellant the sum of P89.85, with interest at the legal rate from the filing of the complaint. Costs in
all instances against appellee Fructuoso Gonzales.

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

Barredo, J., did not take part.

221 scra 119

Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

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

SOCIAL SECURITY SYSTEM, petitioner,

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

The Solicitor General for petitioner.

K.V. Faylona & Associates for private respondents.

DECISION

CAMPOS, JR., J p:

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

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

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

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

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

The Order of October 6, 1980 dismissing the complaint followed the submission by the parties on
September 19, 1980 of the following stipulation of Facts:

"1. On October 6, 1971, plaintiff approved the application of defendant Moonwalk for an interim loan
in the amount of THIRTY MILLION PESOS (P30,000,000.00) for the purpose of developing and
constructing a housing project in the provinces of Rizal and Cavite;

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

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

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

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

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

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

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

"9. In a letter dated December 21, 1979, defendant's counsel told plaintiff that it had completely paid
its obligations to SSS;
"10. The genuineness and due execution of the documents marked as Annex (sic) 'A' to 'O'
inclusive, of the Complaint and the letter dated December 21, 1979 of the defendant's counsel to the
plaintiff are admitted.

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

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

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

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

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

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

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

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

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

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

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

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

"an accessory obligation which the parties attach to a principal obligation for the purpose of insuring
the performance thereof by imposing on the debtor a special presentation (generally consisting in
the payment of a sum of money) in case the obligation is not fulfilled or is irregularly or inadequately
fulfilled" (3 Castan 8th Ed. p. 118).
Now an accessory obligation has been defined as that attached to a principal obligation in order to
complete the same or take its place in the case of breach (4 Puig Peña Part 1 p. 76). Note therefore
that an accessory obligation is dependent for its existence on the existence of a principal obligation.
A principal obligation may exist without an accessory obligation but an accessory obligation cannot
exist without a principal obligation. For example, the contract of mortgage is an accessory obligation
to enforce the performance of the main obligation of indebtedness. An indebtedness can exist
without the mortgage but a mortgage cannot exist without the indebtedness, which is the principal
obligation. In the present case, the principal obligation is the loan between the parties. The
accessory obligation of a penal clause is to enforce the main obligation of payment of the loan. If
therefore the principal obligation does not exist the penalty being accessory cannot exist.

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

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

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

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

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

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

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

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

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

Article 1226 of the Civil Code provides:

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

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

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

"Now when is the penalty deemed demandable in accordance with the provisions of the Civil Code?
We must make a distinction between a positive and a negative obligation. With regard to obligations
which are positive (to give and to do), the penalty is demandable when the debtor is in mora; hence,
the necessity of demand by the debtor unless the same is excused . . ." 8
When does delay arise? Under the Civil Code, delay begins from the time the obligee judicially or
extrajudicially demands from the obligor the performance of the obligation.

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

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

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

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

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

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

Nowhere in this case did it appear that SSS demanded from Moonwalk the payment of its monthly
amortizations. Neither did it show that petitioner demanded the payment of the stipulated penalty
upon the failure of Moonwalk to meet its monthly amortization. What the complaint itself showed was
that SSS tried to enforce the obligation sometime in September, 1977 by foreclosing the real estate
mortgages executed by Moonwalk in favor of SSS. But this foreclosure did not push through upon
Moonwalk's requests and promises to pay in full. The next demand for payment happened on
October 1, 1979 when SSS issued a Statement of Account to Moonwalk. And in accordance with
said statement, Moonwalk paid its loan in full. What is clear, therefore, is that Moonwalk was never
in default because SSS never compelled performance. Though it tried to foreclose the mortgages,
SSS itself desisted from doing so upon the entreaties of Moonwalk. If the Statement of Account
could properly be considered as demand for payment, the demand was complied with on time.
Hence, no delay occurred and there was, therefore, no occasion when the penalty became
demandable and enforceable. Since there was no default in the performance of the main obligation
— payment of the loan — SSS was never entitled to recover any penalty, not at the time it made the
Statement of Account and certainly, not after the extinguishment of the principal obligation because
then, all the more that SSS had no reason to ask for the penalties. Thus, there could never be any
occasion for waiver or even mistake in the application for payment because there was nothing for
SSS to waive as its right to enforce the penalty did not arise.
SSS, however, in buttressing its claim that it never waived the penalties, argued that the funds it held
were trust funds and as trustee, the petitioner could not perform acts affecting the funds that would
diminish property rights of the owners and beneficiaries thereof. To support its claim, SSS cited the
case of United Christian Missionary Society v. Social Security Commission. 14

We looked into the case and found out that it is not applicable to the present case as it dealt not with
the right of the SSS to collect penalties which were provided for in contracts which it entered into but
with its right to collect premiums and its duty to collect the penalty for delayed payment or non-
payment of premiums. The Supreme Court, in that case, stated:

"No discretion or alternative is granted respondent Commission in the enforcement of the law's
mandate that the employer who fails to comply with his legal obligation to remit the premiums to the
System within the prescribed period shall pay a penalty of three (3%) per month. The prescribed
penalty is evidently of a punitive character, provided by the legislature to assure that employers do
not take lightly the State's exercise of the police power in the implementation of the Republic's
declared policy "to develop, establish gradually and perfect a social security system which shall be
suitable to the needs of the people throughout the Philippines and (to) provide protection to
employers against the hazards of disability, sickness, old age and death . . ."

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

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

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

xxx xxx xxx

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

SO ORDERED.

Narvasa, C .J ., Padilla, Regalado and Nocon, JJ ., concur.

G.R. No. 115129. February 12, 1997

IGNACIO BARZAGA, petitioner, vs. COURT OF APPEALS and

ANGELITO ALVIAR, respondents.

DECISION
BELLOSILLO, J.:

The Fates ordained that Christmas 1990 be bleak for Ignacio Barzaga and his
family. On the nineteenth of December Ignacio's wife succumbed to a debilitating ailment
after prolonged pain and suffering. Forewarned by her attending physicians of her
impending death, she expressed her wish to be laid to rest before Christmas day to spare
her family from keeping lonely vigil over her remains while the whole of Christendom
celebrate the Nativity of their Redeemer.
Drained to the bone from the tragedy that befell his family yet preoccupied with
overseeing the wake for his departed wife, Ignacio Barzaga set out to arrange for her
interment on the twenty-fourth of December in obedience semper fidelis to her dying
wish. But her final entreaty, unfortunately, could not be carried out. Dire events conspired
to block his plans that forthwith gave him and his family their gloomiest Christmas ever.
This is Barzaga's story. On 21 December 1990, at about three o`clock in the
afternoon, he went to the hardware store of respondent Angelito Alviar to inquire about
the availability of certain materials to be used in the construction of a niche for his wife. He
also asked if the materials could be delivered at once. Marina Boncales, Alviar's
storekeeper, replied that she had yet to verify if the store had pending deliveries that
afternoon because if there were then all subsequent purchases would have to be
delivered the following day. With that reply petitioner left.
At seven o' clock the following morning, 22 December, Barzaga returned to Alviar's
hardware store to follow up his purchase of construction materials. He told the store
employees that the materials he was buying would have to be delivered at the Memorial
Cemetery in Dasmarias, Cavite, by eight o'clock that morning since his hired workers
were already at the burial site and time was of the essence. Marina Boncales agreed to
deliver the items at the designated time, date and place. With this assurance, Barzaga
purchased the materials and paid in full the amount of P2,110.00. Thereafter he joined
his workers at the cemetery, which was only a kilometer away, to await the delivery.
 The construction materials did not arrive at eight o'clock as promised. At nine o' clock,
the delivery was still nowhere in sight. Barzaga returned to the hardware store to inquire
about the delay. Boncales assured him that although the delivery truck was not yet around
it had already left the garage and that as soon as it arrived the materials would be brought
over to the cemetery in no time at all. That left petitioner no choice but to rejoin his workers
at the memorial park and wait for the materials.
By ten o'clock, there was still no delivery. This prompted petitioner to return to the
store to inquire about the materials. But he received the same answer from respondent's
employees who even cajoled him to go back to the burial place as they would just follow
with his construction materials.
After hours of waiting - which seemed interminable to him - Barzaga became
extremely upset. He decided to dismiss his laborers for the day. He proceeded to the
police station, which was just nearby, and lodged a complaint against Alviar. He had his
complaint entered in the police blotter. When he returned again to the store he saw the
delivery truck already there but the materials he purchased were not yet ready for
loading. Distressed that Alviar's employees were not the least concerned, despite his
impassioned pleas, Barzaga decided to cancel his transaction with the store and look for
construction materials elsewhere.
In the afternoon of that day, petitioner was able to buy from another store. But since
darkness was already setting in and his workers had left, he made up his mind to start his
project the following morning, 23 December.But he knew that the niche would not be finish
in time for the scheduled burial the following day. His laborers had to take a break on
Christmas Day and they could only resume in the morning of the twenty-sixth. The niche
was completed in the afternoon and Barzaga's wife was finally laid to rest. However, it
was two-and-a-half (2-1/2) days behind schedule.
On 21 January 1991, tormented perhaps by his inability to fulfill his wife's dying wish,
Barzaga wrote private respondent Alviar demanding recompense for the damage he
suffered. Alviar did not respond. Consequently, petitioner sued him before the Regional
Trial Court.[1]
Resisting petitioner's claim, private respondent contended that legal delay could not
be validly ascribed to him because no specific time of delivery was agreed upon between
them. He pointed out that the invoices evidencing the sale did not contain any stipulation
as to the exact time of delivery and that assuming that the materials were not delivered
within the period desired by petitioner, the delivery truck suffered a flat tire on the way to
the store to pick up the materials. Besides, his men were ready to make the delivery by
ten-thirty in the morning of 22 December but petitioner refused to accept them. According
to Alviar, it was this obstinate refusal of petitioner to accept delivery that caused the delay
in the construction of the niche and the consequent failure of the family to inter their loved
one on the twenty-fourth of December, and that, if at all, it was petitioner and no other
who brought about all his personal woes.
Upholding the proposition that respondent incurred in delay in the delivery of the
construction materials resulting in undue prejudice to petitioner, the trial court ordered
respondent Alviar to pay petitioner (a) P2,110.00 as refund for the purchase price of the
materials with interest per annum computed at the legal rate from the date of the filing of
the complaint, (b) P5,000.00 as temperate damages, (c) P20,000.00 as moral damages,
(d) P5,000.00 as litigation expenses, and (e) P5,000.00 as attorney's fees.
On appeal, respondent Court of Appeals reversed the lower court and ruled that there
was no contractual commitment as to the exact time of delivery since this was not
indicated in the invoice receipts covering the sale.[2]
The arrangement to deliver the materials merely implied that delivery should be made
within a reasonable time but that the conclusion that since petitioner's workers were
already at the graveyard the delivery had to be made at that precise moment, is non-
sequitur. The Court of Appeals also held that assuming that there was delay, petitioner
still had sufficient time to construct the tomb and hold his wife's burial as she wished.
We sustain the trial court. An assiduous scrutiny of the record convinces us that
respondent Angelito Alviar was negligent and incurred in delay in the performance of his
contractual obligation. This sufficiently entitles petitioner Ignacio Barzaga to be
indemnified for the damage he suffered as a consequence of delay or a contractual
breach. The law expressly provides that those who in the performance of their obligation
are guilty of fraud, negligence, or delay and those who in any manner contravene the
tenor thereof, are liable for damages.[3]
Contrary to the appellate court's factual determination, there was a specific time
agreed upon for the delivery of the materials to the cemetery. Petitioner went to private
respondent's store on 21 December precisely to inquire if the materials he intended to
purchase could be delivered immediately. But he was told by the storekeeper that if there
were still deliveries to be made that afternoon his order would be delivered the following
day. With this in mind Barzaga decided to buy the construction materials the following
morning after he was assured of immediate delivery according to his time frame. The
argument that the invoices never indicated a specific delivery time must fall in the face of
the positive verbal commitment of respondent's storekeeper. Consequently it was no
longer necessary to indicate in the invoices the exact time the purchased items were to
be brought to the cemetery. In fact, storekeeper Boncales admitted that it was her custom
not to indicate the time of delivery whenever she prepared invoices. [4]
Private respondent invokes fortuitous event as his handy excuse for that "bit of delay"
in the delivery of petitioner's purchases. He maintains that Barzaga should have allowed
his delivery men a little more time to bring the construction materials over to the cemetery
since a few hours more would not really matter and considering that his truck had a flat
tire. Besides, according to him, Barzaga still had sufficient time to build the tomb for his
wife.
This is a gratuitous assertion that borders on callousness. Private respondent had no
right to manipulate petitioner's timetable and substitute it with his own. Petitioner had a
deadline to meet. A few hours of delay was no piddling matter to him who in his
bereavement had yet to attend to other pressing family concerns. Despite this,
respondent's employees still made light of his earnest importunings for an immediate
delivery. As petitioner bitterly declared in court " x x x they (respondent's employees) were
making a fool out of me."[5]
 We also find unacceptable respondent's justification that his truck had a flat tire, for
this event, if indeed it happened, was forseeable according to the trial court, and as such
should have been reasonably guarded against.The nature of private respondent's
business requires that he should be ready at all times to meet contingencies of this
kind. One piece of testimony by respondent's witness Marina Boncales has caught our
attention - that the delivery truck arrived a little late than usual because it came from a
delivery of materials in Langcaan, Dasmarias, Cavite.[6] Significantly, this information was
withheld by Boncales from petitioner when the latter was negotiating with her for the
purchase of construction materials. Consequently, it is not unreasonable to suppose that
had she told petitioner of this fact and that the delivery of the materials would
consequently be delayed, petitioner would not have bought the materials
from respondent's hardware store but elsewhere which could meet his time
requirement. The deliberate suppression of this information by itself manifests a certain
degree of bad faith on the part of respondent's storekeeper.
The appellate court appears to have belittled petitioner's submission that under the
prevailing circumstances time was of the essence in the delivery of the materials to the
grave site. However, we find petitioner's assertion to be anchored on solid ground. The
niche had to be constructed at the very least on the twenty-second of December
considering that it would take about two (2) days to finish the job if the interment was to
take place on the twenty-fourth of the month. Respondent's delay in the delivery of the
construction materials wasted so much time that construction of the tomb could start only
on the twenty-third. It could not be ready for the scheduled burial of petitioner's wife. This
undoubtedly prolonged the wake, in addition to the fact that work at the cemetery had to
be put off on Christmas day.
This case is clearly one of non-performance of a reciprocal obligation.[7] In their
contract of purchase and sale, petitioner had already complied fully with what was
required of him as purchaser, i.e., the payment of the purchase price of P2,110.00. It was
incumbent upon respondent to immediately fulfill his obligation to deliver the goods
otherwise delay would attach.
We therefore sustain the award of moral damages. It cannot be denied that petitioner
and his family suffered wounded feelings, mental anguish and serious anxiety while
keeping watch on Christmas day over the remains of their loved one who could not be
laid to rest on the date she herself had chosen. There is no gainsaying the inexpressible
pain and sorrow Ignacio Barzaga and his family bore at that moment caused no less by
the ineptitude, cavalier behavior and bad faith of respondent and his employees in the
performance of an obligation voluntarily entered into.
We also affirm the grant of exemplary damages. The lackadaisical and feckless
attitude of the employees of respondent over which he exercised supervisory authority
indicates gross negligence in the fulfillment of his business obligations. Respondent Alviar
and his employees should have exercised fairness and good judgment in dealing with
petitioner who was then grieving over the loss of his wife. Instead of commiserating with
him, respondent and his employees contributed to petitioner's anguish by causing him to
bear the agony resulting from his inability to fulfill his wife's dying wish.
 We delete however the award of temperate damages. Under Art. 2224 of the Civil
Code, temperate damages are more than nominal but less than compensatory, and may
be recovered when the court finds that some pecuniary loss has been suffered but the
amount cannot, from the nature of the case, be proved with certainty. In this case, the
trial court found that plaintiff suffered damages in the form of wages for the hired workers
for 22 December 1990 and expenses incurred during the extra two (2) days of the
wake. The record however does not show that petitioner presented proof of the actual
amount of expenses he incurred which seems to be the reason the trial court awarded to
him temperate damages instead. This is an erroneous application of the concept of
temperate damages. While petitioner may have indeed suffered pecuniary losses, these
by their very nature could be established with certainty by means of payment receipts. As
such, the claim falls unequivocally within the realm of actual or compensatory
damages. Petitioner's failure to prove actual expenditure consequently conduces to a
failure of his claim. For in determining actual damages, the court cannot rely on mere
assertions, speculations, conjectures or guesswork but must depend on competent proof
and on the best evidence obtainable regarding the actual amount of loss.[8]
We affirm the award of attorney's fees and litigation expenses. Award of damages,
attorney's fees and litigation costs is left to the sound discretion of the court, and if such
discretion be well exercised, as in this case, it will not be disturbed on appeal.[9]
WHEREFORE, the decision of the Court of Appeals is REVERSED and SET ASIDE
except insofar as it GRANTED on a motion for reconsideration the refund by private
respondent of the amount of P2,110.00 paid by petitioner for the construction
materials. Consequently, except for the award of P5,000.00 as temperate damages which
we delete, the decision of the Regional Trial Court granting petitioner (a) P2,110.00 as
refund for the value of materials with interest computed at the legal rate per annum from
the date of the filing of the case; (b) P20,000.00 as moral damages; (c) P10,000.00 as
exemplary damages; (d) P5,000.00 as litigation expenses; and (4) P5,000.00 as
attorney's fees, is AFFIRMED. No costs.
SO ORDERED.
Padilla, (Chairman), Vitug, Kapunan, and Hermosisima, Jr., JJ., concur.

218 SCRA 777

[ GR No. 100594, Mar 10, 1993 ]

BINALBAGAN TECH INC. v. CA +

DECISION

MELO, J.:
The petition for review on certiorari now before us seeks to reverse the
decision of the Court of Appeals promulgated on March 27, 1991 in CA-G.R.
CV No. 24635 (de Pano, Cacdac (P), and VaiIoces, JJ.).

The facts of the case, as borne out by the record, are as follows:

On May 11, 1967, private respondents, through Angelina P. Echaus, in her

capacity as Judicial Administrator of the intestate estate of Luis B.
Puentevella, executed a Contract to Sell and a Deed of Sale of forty-two
subdivision lots within the Phib-Khik Subdivision of the Puentevella family,
conveying and transferring said lots to petitioner Binalbagan Tech., Inc.
(hereinafter referred to as Binalbagan). In turn, Binalbagan, through its
president, petitioner Hermilo J. Nava (hereinafter referred to as Nava),
executed an Acknowledgment of Debt with Mortgage Agreement,
mortgaging said lots in favor of the estate of Puentevella.

Upon the transfer to Binalbagan of titles to the 42 subdivision lots, said

petitioner took possession of the lots and the building and improvements
thereon. Binalbagan started operating a school on the property from 1967
when the titles and possession of the lots were transferred to it.

It appears that there was a pending case, Civil Case No. 7435 of Regional
Trial Court stationed at Himamaylan, Negros Occidental. Relative to said
case we shall quote the findings of fact of the Court of Appeals in its
decision dated October 30, 1978 in CA-G.R. No. 42211-R:

To have a better perspective of the background facts leading to the filing of

this instant case on appeal, there is a need to make reference to the
circumstances surrounding the filing of Civil Case No. 7435, to wit:

The intestate estate of the late Luis B. Puentevella as registered owner of

several subdivision lots, specifically mentioned in paragraph 2 of plaintiffs'
complaint, thru Judicial Administratrix, Angelina L. Puentevella sold said
aforementioned lots to Raul Javellana with the condition that the vendee-
promisee would not transfer his rights to said lots without the express
consent of Puentevella and that in case of the cancellation of the contract by
reason of the violation of any of the terms thereof, all payments therefor
made and all improvements introduced on the property shall pertain to the
promissor and shall be considered as rentals for the use and occupation
thereof.

Javellana having failed to pay the installments for a period of five years,
Civil Case No. 7435 was filed by defendant Puentevella against Raul
Javellana and the Southern Negros Colleges which was impleaded as a
party defendant it being in actual possession thereof, for the rescission of
their contract to sell and the recovery of possession of the lots and buildings
with damages.

Accordingly, after trial, judgment was rendered in favor of Puentevella and

thereafter, defendants Deputy Sheriffs served a copy of the writ of
execution on the Acting Director of the Southern Negros College and
delivered possession of the lots and buildings to defendant Puentevella's
representative, Mrs. Manuel Gentapanan, and further levied execution on
the books and school equipment, supplies, library, apparatus, etc. to satisfy
the monetary portion of the judgment under execution on October 27, 1967.
Said books, equipment, etc. as reflected in the Depositary Receipt, (Exh.
"B") dated October 28, 1965, were delivered by the Sheriffs to the Acting
Director of the Southern Negros College as depositary of the same.

Came December 29, 1965 when the plaintiffs in the instant case on appeal
filed their Third-Party Claim based on an alleged Deed of Sale executed in
their favor by spouses Jose and Lolita Lopez, thus Puentevella was
constrained to assert physical possession of the premises to counteract the
fictitious and unenforceable claim of herein plaintiffs.

Upon the filing of the instant case for injunction and damages on January
3, 1966, an ex-parte writ of preliminary injunction was issued by the
Honorable Presiding Judge Carlos Abiera, which order, however, was
elevated to the Honorable Court of Appeals which issued a writ of
preliminary injunction ordering Judge Carlos Abiera or any other persons
or persons in his behalf to refrain from further enforcing the injunction
issued by him in this case and from further issuing any other writs or
prohibitions which would in any manner, affect the enforcement of the
judgment rendered in Civil Case 7435, pending the finality of the decision
of the Honorable Court of Appeals in the latter case. Thus, defendant
Puentevella was restored to the possession of the lots and buildings subject
of this case. However, plaintiffs filed a petition for review with the Supreme
Court which issued a restraining order against the sale of the properties
claimed by the spouses-plaintiffs [in Abierra vs. Court of Appeals, 45 SCRA
314].
When the Supreme Court dissolved the aforesaid injunction issued by the
Court of Appeals, possession of the building and other property was taken
from petitioner Binalbagan and given to the third-party claimants, the de la
Cruz spouses. Petitioner Binalbagan transferred its school to another
location. In the meantime, an appeal was interposed by the defendants in
Civil Case No. 293 with the Court of Appeals where the appeal was docketed
as CA-G.R. No. 42211-R. On October 30, 1978, the Court of Appeals
rendered judgment, reversing the appealed decision in Civil Case No. 293.
On April 29, 1981, judgment was entered in CA-G.R. No. 42211, and the
record of the case was remanded to the court of origin on December 22,
1981. Consequently, in 1982, the judgment in Civil Case No. 7435 was
finally executed and enforced, and petitioner was restored to the possession
of the subdivision lots on May 31, 1982. It will be noted that petitioner was
not in possession of the lots from 1974 to May 31, 1982.

After petitioner Binalbagan was again placed in possession of the

subdivision lots, private respondent Angelina Echaus demanded payment
from petitioner Binalbagan for the subdivision lots, enclosing in the letter
of demand a statement of account as of September 1982 showing a total
amount due of P367,509.93, representing the price of the land and accrued
interest as of that date.

As petitioner Binalbagan failed to effect payment, private respondent

Angelina P, Echaus filed on October 8, 1982 Civil Case No. 1354 of the
Regional Trial Court of the Sixth Judicial Region stationed in Himamaylan,
Negros Occidental against petitioner's for recovery of title and damages. An
amended complaint was filed by private respondent Angelina P. Echaus by
including her mother, brothers, and sisters as co-plaintiffs, which was
admitted by the trial court on March 18, 1983.

After trial, the trial court rendered a decision on August 30, 1989, the
dispositive portion of which reads as follows:

IN VIEW OF THE FOREGOING, and inasmuch as there is no fraud and

since the action on the written contract, Exh. "C", has long prescribed,
judgment is hereby rendered in favor of the defendants and against the
plaintiffs dismissing the amended complaint.
The counterclaim is likewise dismissed for lack of sufficient proof. Each
shall bear their respective expenses of litigation. (pp. 71-72, Rollo)
Private respondents appealed to the Court of Appeals which rendered a
decision on March 27, 1991, disposing:

WHEREFORE, premises considered, the appealed decision is REVERSED

and SET ASIDE and a new one is rendered ordering the appellee
Binalbagan Tech. Inc, through any of its officers, to execute a deed of
conveyance or any other instrument, transferring and returning unto the
appellants the ownership and titles of the subject 42 subdivision lots. Costs
against appellees. (pp. 51-52, Rollo)
Thus, this petition for review on certiorari wherein petitioners assign the
following alleged errors of the Court of Appeals:

First Error

The Court of Appeals erred in holding that the cause of action of the
respondents has not prescribed.

Second Error

The Court of Appeals erred in holding that Civil Case No. 293 interrupts the
running of the period of the prescription.

Third Error

The Court of Appeals erred in citing the cases of David-Garlitos and Rivero
vs. Rivero to support its contention that the period of prescription was
interrupted in the case at bar.

Fourth Error

The finding of facts of the Honorable Court of Appeals in reversing the

lower court decision has no basis and is contradicted by the evidence on
record of the case at bar as well as the admission of parties." (p. 16, Rollo)
The main issue of this case is: Whether private respondents' cause of action
in Civil Case No. 1354 is barred by prescription.

On this point the Court of Appeals held:

As it is evident that there was an interruption during the period from 1974
up to 1982, the period of prescription, as correctly maintained by the
appellants, was tolled during such period, due to the injunctive writ in Civil
Case No. 293 as discussed earlier when the vendors could not maintain the
vendee in possession, and consequently was in no position to legally
demand payment of the price. Accordingly, while it may be conceded that
appellants' cause of action to demand performance had accrued on June 10,
1967 due to the appellee institution's default in the payment of the first
installment which became due on that date, the running of prescription was
interrupted in 1974 when, from the words of the lower court itself, "the
Supreme Court reversed the Court of Appeal's decision and dissolved the
injunction which the latter court had earlier issued in Civil Case No. 293,
possession of the building and other properties was taken from defendant
Binalbagan Tech. Inc. and given to the de la Cruz spouses, through
Southern Negros College". And the period of prescription commenced to
run anew only on May 31, 1982 when the appellants were finally able to
fully implement the already executory judgment in Case No. 7435, and thus
restore appellees in possession of the 42 subdivision lots.

In other words, the period of prescription was interrupted, because from

1974 up to 1982, the appellants themselves could not have restored unto the
appellees the possession of the 42 subdivision lots precisely because of the
preliminary injunction mentioned elsewhere. Consequently, the appellants
could not have prospered in any suit to compel performance or payment
from the appellees-buyers, because the appellants themselves were in no
position to perform their own corresponding obligation to deliver to and
maintain said buyers in possession of the lots subject matter of the sale.
(Article 1458, 1495, 1537, Civil Code). (pp. 49-50, Rollo)
We agree with the Court of Appeals.

A party to a contract cannot demand performance of the other party's

obligations unless he is in a position to comply with his own obligations.
Similarly, the right to rescind a contract can be demanded only if a party
thereto is ready, willing and able to comply with his own obligations
thereunder (Art. 1191, Civil Code; Seva vs. Berwin, 48 Phil. 581 [1926];
Paras, Civil Code of the Philippines, 12th ed. Vol. IV, p. 200). In a contract
of sale, the vendor is bound to transfer the ownership of and deliver, as well
as warrant, the thing which is the object of the sale (Art. 1495, Civil Code);
he warrants that the buyer shall, from the time ownership is passed, have
and enjoy the legal and peaceful possession of the thing -

Art. 1547. In a contract of sale, unless a contrary intention appears, there is:

(1) An implied warranty on the part of the seller that he has a right to sell
the thing at the time when the ownership is to pass, and that the buyer shall
from that time have and enjoy the legal and peaceful possession of the
thing.

xxx
As afore-stated, petitioner was evicted from the subject subdivision lots in
1974 by virtue of a court order in Civil Case No. 293 and reinstated to the
possession thereof only in 1982. During the period, therefore, from 1974 to
1982, seller private respondent Angelina Echaus' warranty against eviction
given to buyer petitioner was breached though, admittedly, through no fault
of her own. It follows that during that period, 1974 to 1982, private
respondent Echaus was not in a legal position to demand compliance of the
prestation of petitioner to pay the price of said subdivision lots. In short,
her right to demand payment was suspended during that period, 1974-
1982.

The prescriptive period within which to institute an action upon a written

contract is ten years (Art. 1144, Civil Code). The cause of action of private
respondent Echaus is based on the deed of sale aforementioned. The deed
of sale whereby private respondent Echaus transferred ownership of the
subdivision lots was executed on May 11, 1967. She filed Civil Case No. 1354
for recovery of title and damages only on October 8, 1982. From May 11,
1967 to October 8, 1982, more than fifteen (15) years elapsed. Seemingly,
the 10-year prescriptive period had expired before she brought her action to
recover title. However, the period 1974 to 1982 should be deducted in
computing the prescriptive period for the reason that, as above discussed,
from 1974 to 1982, private respondent Echaus was not in a legal position to
initiate action against petitioner since as afore-stated, through no fault of
hers, her warranty against eviction was breached. In the case of Daniel vs.
Garlitos, (95 Phil. 387 [1954]), it was held that a court order deferring
action on the execution of judgment suspended the running of the 5-year
period for execution of a judgment. Here the execution of the judgment in
Civil Case No. 7435 was stopped by the writ of preliminary injunction
issued in Civil Case No. 293. It was only when Civil Case No. 293 was
dismissed that the writ of execution in Civil Cse No. 7435 could be
implemented and petitioner Binalbagan restored to the possession of the
subject lots.

Deducting eight years (1974 to 1982) from the period 1967 to 1982, only
seven years elapsed. Consequently, Civil Case No. 1354 was filed within the
10-year prescriptive period. Working against petitioner's position too is the
principle against unjust enrichment which would certainly be the result if
petitioner is allowed to own the 42 lots without full payment thereof.

WHEREFORE, the petition is DENIED and the decision of the Court of

Appeals in CA-G.R. CV No. 24635 is AFFIRMED.
SO ORDERED.

Feliciano, (Acting Chairman), Bidin, Davide, Jr., and Romero, JJ., concur.

* Hugo E. Gutierrez, Jr., J., On Terminal Leave.

165 SCRA 1

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. L-30056 August 30, 1988

MARCELO AGCAOILI, plaintiff-appellee
vs.
GOVERNMENT SERVICE INSURANCE SYSTEM, defendant-appellant.

Artemio L. Agcaoili for plaintiff-appellee.

Office of the Government Corporate Counsel for defendant-appellant.

NARVASA, J.:

The appellant Government Service Insurance System, (GSIS, for short) having approved the application of the appellee Agcaoili for the
purchase of a house and lot in the GSIS Housing Project at Nangka Marikina, Rizal, subject to the condition that the latter should forthwith
occupy the house, a condition that Agacoili tried to fulfill but could not for the reason that the house was absolutely uninhabitable; Agcaoili,
after paying the first installment and other fees, having thereafter refused to make further payment of other stipulated installments until GSIS
had made the house habitable; and appellant having refused to do so, opting instead to cancel the award and demand the vacation by
Agcaoili of the premises; and Agcaoili having sued the GSIS in the Court of First Instance of Manila for specific performance with damages
and having obtained a favorable judgment, the case was appealled to this Court by the GSIS. Its appeal must fail.

The essential facts are not in dispute. Approval of Agcaoili's aforementioned application for
purchase 1 was contained in a letter 2 addressed to Agcaoili and signed by GSIS Manager
Archimedes Villanueva in behalf of the Chairman-General Manager, reading as follows:

Please be informed that your application to purchase a house and lot in our GSIS
Housing Project at Nangka, Marikina, Rizal, has been approved by this Office. Lot
No. 26, Block No. (48) 2, together with the housing unit constructed thereon, has
been allocated to you.

You are, therefore, advised to occupy the said house immediately.

If you fail to occupy the same within three (3) days from receipt of this notice, your
application shall be considered automatically disapproved and the said house and lot
will be awarded to another applicant.

Agcaoili lost no time in occupying the house. He could not stay in it, however, and had to leave the
very next day, because the house was nothing more than a shell, in such a state of incompleteness
that civilized occupation was not possible: ceiling, stairs, double walling, lighting facilities, water
connection, bathroom, toilet kitchen, drainage, were inexistent. Agcaoili did however ask a homeless
friend, a certain Villanueva, to stay in the premises as some sort of watchman, pending completion
of the construction of the house. Agcaoili thereafter complained to the GSIS, to no avail.

The GSIS asked Agcaoili to pay the monthly amortizations and other fees. Agcaoili paid the first
monthly installment and the incidental fees, 3 but refused to make further payments until and unless
the GSIS completed the housing unit. What the GSIS did was to cancel the award and require
Agcaoili to vacate the premises. 4 Agcaoili reacted by instituting suit in the Court of First Instance of
Manila for specific performance and damages. 5 Pending the action, a written protest was lodged by
other awardees of housing units in the same subdivision, regarding the failure of the System to
complete construction of their own houses. 6 Judgment was in due course rendered ,7 on the basis of
the evidence adduced by Agcaoili only, the GSIS having opted to dispense with presentation of its
own proofs. The judgment was in Agcaoili's favor and contained the following dispositions, 8 to wit:
 1) Declaring the cancellation of the award (of a house and lot) in favor of plaintiff
(Mariano Agcaoili) illegal and void;

2) Ordering the defendant (GSIS) to respect and enforce the aforesaid award to the
plaintiff relative to Lot No. 26, Block No. (48) 2 of the Government Service Insurance
System (GSIS) low cost housing project at Nangka Marikina, Rizal;

3) Ordering the defendant to complete the house in question so as to make the same
habitable and authorizing it (defendant) to collect the monthly amortization thereon
only after said house shall have been completed under the terms and conditions
mentioned in Exhibit A ;and

4) Ordering the defendant to pay P100.00 as damages and P300.00 as and for
attorney's fees, and costs.

Appellant GSIS would have this Court reverse this judgment on the argument that—

1) Agcaoili had no right to suspend payment of amortizations on account of the incompleteness of

his housing unit, since said unit had been sold "in the condition and state of completion then existing
... (and) he is deemed to have accepted the same in the condition he found it when he accepted the
award;" and assuming indefiniteness of the contract in this regard, such circumstance precludes a
judgment for specific performance. 9

2) Perfection of the contract of sale between it and Agcaoili being conditioned upon the latter's
immediate occupancy of the house subject thereof, and the latter having failed to comply with the
condition, no contract ever came into existence between them ;10

3) Agcaoili's act of placing his homeless friend, Villanueva, in possession, "without the prior or
subsequent knowledge or consent of the defendant (GSIS)" operated as a repudiation by Agcaoili of
the award and a deprivation of the GSIS at the same time of the reasonable rental value of the
property. 11

Agcaoili's offer to buy from GSIS was contained in a printed form drawn up by the latter, entitled
"Application to Purchase a House and/or Lot." Agcaoili filled up the form, signed it, and submitted
it.12 The acceptance of the application was also set out in a form (mimeographed) also prepared by
the GSIS. As already mentioned, this form sent to Agcaoili, duly filled up, advised him of the
approval of his "application to purchase a house and lot in our GSIS Housing Project at NANGKA,
MARIKINA, RIZAL," and that "Lot No. 26, Block No. (48) 2, together with the housing unit
constructed thereon, has been allocated to you." Neither the application form nor the acceptance or
approval form of the GSIS — nor the notice to commence payment of a monthly amortizations,
which again refers to "the house and lot awarded" — contained any hint that the house was
incomplete, and was being sold "as is," i.e., in whatever state of completion it might be at the time.
On the other hand, the condition explicitly imposed on Agcaoili — "to occupy the said house
immediately," or in any case within three (3) days from notice, otherwise his "application shall be
considered automatically disapproved and the said house and lot will be awarded to another
applicant" — would imply that construction of the house was more or less complete, and it was by
reasonable standards, habitable, and that indeed, the awardee should stay and live in it; it could not
be interpreted as meaning that the awardee would occupy it in the sense of a pioneer or settler in a
rude wilderness, making do with whatever he found available in the envirornment.

There was then a perfected contract of sale between the parties; there had been a meeting of the
minds upon the purchase by Agcaoili of a determinate house and lot in the GSIS Housing Project at
Nangka Marikina, Rizal at a definite price payable in amortizations at P31.56 per month, and from
that moment the parties acquired the right to reciprocally demand performance. 13 It was, to be sure,
the duty of the GSIS, as seller, to deliver the thing sold in a condition suitable for its enjoyment by
the buyer for the purpose contemplated ,14 in other words, to deliver the house subject of the contract
in a reasonably livable state. This it failed to do.

It sold a house to Agcaoili, and required him to immediately occupy it under pain of cancellation of
the sale. Under the circumstances there can hardly be any doubt that the house contemplated was
one that could be occupied for purposes of residence in reasonable comfort and convenience. There
would be no sense to require the awardee to immediately occupy and live in a shell of a house, a
structure consisting only of four walls with openings, and a roof, and to theorize, as the GSIS does,
that this was what was intended by the parties, since the contract did not clearly impose upon it the
obligation to deliver a habitable house, is to advocate an absurdity, the creation of an unfair
situation. By any objective interpretation of its terms, the contract can only be understood as
imposing on the GSIS an obligation to deliver to Agcaoili a reasonably habitable dwelling in return for
his undertaking to pay the stipulated price. Since GSIS did not fulfill that obligation, and was not
willing to put the house in habitable state, it cannot invoke Agcaoili's suspension of payment of
amortizations as cause to cancel the contract between them. It is axiomatic that "(i)n reciprocal
obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a
proper manner with what is incumbent upon him."15

Nor may the GSIS succeed in justifying its cancellation of the award to Agcaoili by the claim that the
latter had not complied with the condition of occupying the house within three (3) days. The record
shows that Agcaoili did try to fulfill the condition; he did try to occupy the house but found it to be so
uninhabitable that he had to leave it the following day. He did however leave a friend in the structure,
who being homeless and hence willing to accept shelter even of the most rudimentary sort, agreed
to stay therein and look after it. Thus the argument that Agcaoili breached the agreement by failing
to occupy the house, and by allowing another person to stay in it without the consent of the GSIS,
must be rejected as devoid of merit.

Finally, the GSIS should not be heard to say that the agreement between it and Agcaoili is silent, or
imprecise as to its exact prestation Blame for the imprecision cannot be imputed to Agcaoili; it was
after all the GSIS which caused the contract to come into being by its written acceptance of
Agcaoili's offer to purchase, that offer being contained in a printed form supplied by the GSIS. Said
appellant having caused the ambiguity of which it would now make capital, the question of
interpretation arising therefrom, should be resolved against it.

It will not do, however, to dispose of the controversy by simply declaring that the contract between
the parties had not been validly cancelled and was therefore still in force, and that Agcaoili could not
be compelled by the GSIS to pay the stipulated price of the house and lot subject of the contract until
and unless it had first completed construction of the house. This would leave the contract hanging or
in suspended animation, as it were, Agcaoili unwilling to pay unless the house were first completed,
and the GSIS averse to completing construction, which is precisely what has been the state of affairs
between the parties for more than twenty (20) years now. On the other hand, assuming it to be
feasible to still finish the construction of the house at this time, to compel the GSIS to do so so that
Agcaoili's prestation to pay the price might in turn be demanded, without modifying the price therefor,
would not be quite fair. The cost to the GSIS of completion of construction at present prices would
make the stipulated price disproportionate, unrealistic.

The situation calls for the exercise by this Court of its equity jurisdiction, to the end that it may
render complete justice to both parties.
 As we . . reaffirmed in Air Manila, Inc. vs. Court of Industrial Relations (83 SCRA
579, 589 [1978]). "(E)quity as the complement of legal jurisdiction seeks to reach and
do complete justice where courts of law, through the inflexibility of their rules and
want of power to adapt their judgments to the special circumstances of cases, are
incompetent so to do. Equity regards the spirit of and not the letter, the intent and not
the form, the substance rather than the circumstance, as it is variously expressed by
different courts... " 16

In this case, the Court can not require specific performance of the contract in question according to
its literal terms, as this would result in inequity. The prevailing rule is that in decreeing specific
performance equity requires 17 —

... not only that the contract be just and equitable in its provisions, but that the
consequences of specific performance likewise be equitable and just. The general
rule is that this equitable relief will not be granted if, under the circumstances of the
case, the result of the specific enforcement of the contract would be harsh,
inequitable, oppressive, or result in an unconscionable advantage to the plaintiff . .

In the exercise of its equity jurisdiction, the Court may adjust the rights of parties in accordance with
the circumstances obtaining at the time of rendition of judgment, when these are significantly
different from those existing at the time of generation of those rights.

The Court is not restricted to an adjustment of the rights of the parties as they existed
when suit was brought, but will give relief appropriate to events occuring ending the
suit. 18

While equitable jurisdiction is generally to be determined with reference to the

situation existing at the time the suit is filed, the relief to be accorded by the decree is
governed by the conditions which are shown to exist at the time of making thereof,
and not by the circumstances attending the inception of the litigation. In making up
the final decree in an equity suit the judge may rightly consider matters arising after
suit was brought. Therefore, as a general rule, equity will administer such relief as
the nature, rights, facts and exigencies of the case demand at the close of the trial or
at the time of the making of the decree. 19

That adjustment is entirely consistent with the Civil Law principle that in the exercise of rights a
person must act with justice, give everyone his due, and observe honesty and good
faith. 20 Adjustment of rights has been held to be particularly applicable when there has been a
depreciation of currency.

Depreciation of the currency or other medium of payment contracted for has

frequently been held to justify the court in withholding specific performance or at least
conditioning it upon payment of the actual value of the property contracted for. Thus,
in an action for the specific performance of a real estate contract, it has been held
that where the currency in which the plaintiff had contracted to pay had greatly
depreciated before enforcement was sought, the relief would be denied unless the
complaint would undertake to pay the equitable value of the land. (Willard & Tayloe
[U.S.] 8 Wall 557,19 L. Ed 501; Doughdrill v. Edwards, 59 Ala 424) 21

In determining the precise relief to give, the Court will "balance the equities" or the respective
interests of the parties, and take account of the relative hardship that one relief or another may
occasion to them .22
The completion of the unfinished house so that it may be put into habitable condition, as one form of relief to the plaintiff Agcaoili, no longer
appears to be a feasible option in view of the not inconsiderable time that has already elapsed. That would require an adjustment of the price
of the subject of the sale to conform to present prices of construction materials and labor. It is more in keeping with the realities of the
situation, and with equitable norms, to simply require payment for the land on which the house stands, and for the house itself, in its
unfinished state, as of the time of the contract. In fact, this is an alternative relief proposed by Agcaoili himself, i.e., "that judgment issue . .
(o)rdering the defendant (GSIS) to execute a deed of sale that would embody and provide for a reasonable amortization of payment on the
basis of the present actual unfinished and uncompleted condition, worth and value of the said house. 23

WHEREFORE, the judgment of the Court a quo insofar as it invalidates and sets aside the
cancellation by respondent GSIS of the award in favor of petitioner Agcaoili of Lot No. 26, Block No.
(48) 2 of the GSIS low cost housing project at Nangka, Marikina, Rizal, and orders the former to
respect the aforesaid award and to pay damages in the amounts specified, is AFFIRMED as being in
accord with the facts and the law. Said judgments is however modified by deleting the requirement
for respondent GSIS "to complete the house in question so as to make the same habitable," and
instead it is hereby ORDERED that the contract between the parties relative to the property above
described be modified by adding to the cost of the land, as of the time of perfection of the contract,
the cost of the house in its unfinished state also as of the time of perfection of the contract, and
correspondingly adjusting the amortizations to be paid by petitioner Agcaoili, the modification to be
effected after determination by the Court a quo of the value of said house on the basis of the
agreement of the parties, or if this is not possible by such commissioner or commissioners as the
Court may appoint. No pronouncement as to costs.

SO ORDERED.

Cruz, Gancayco, Aquino and Medialdea, JJ., concur.

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

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

DECISION
BELLOSILLO, J.:
 This case involves the proper interpretation of the contract entered into between the
parties.
Sometime in April 1987 petitioner Jacinto M. Tanguilig doing business under the
name and style J. M. T.Engineering and General Merchandising proposed to respondent
Vicente Herce Jr. to construct a windmill system for him. After some negotiations they
agreed on the construction of the windmill for a consideration of P60,000.00 with a one-
year guaranty from the date of completion and acceptance by respondent Herce Jr. of the
project. Pursuant to the agreement respondent paid petitioner a down payment
of P30,000.00 and an installment payment of P15,000.00, leaving a balance
of P15,000.00.
On 14 March 1988, due to the refusal and failure of respondent to pay the balance,
petitioner filed a complaint to collect the amount. In his Answer before the trial court
respondent denied the claim saying that he had already paid this amount to the San Pedro
General Merchandising Inc. (SPGMI) which constructed the deep well to which the
windmill system was to be connected. According to respondent, since the deep well
formed part of the system the payment he tendered to SPGMI should be credited to his
account by petitioner. Moreover, assuming that he owed petitioner a balance
of P15,000.00, this should be offset by the defects in the windmill system which caused
the structure to collapse after a strong wind hit their place.[1]
Petitioner denied that the construction of a deep well was included in the agreement
to build the windmill system, for the contract price of P60,000.00 was solely for the
windmill assembly and its installation, exclusive of other incidental materials needed for
the project. He also disowned any obligation to repair or reconstruct the system and
insisted that he delivered it in good and working condition to respondent who accepted
the same without protest. Besides, its collapse was attributable to a typhoon,
a force majeure, which relieved him of any liability.
In finding for plaintiff, the trial court held that the construction of the
deep well was not part of the windmillproject as evidenced clearly by the letter proposals
submitted by petitioner to respondent.[2] It noted that "[i]f the intention of the parties is to
include the construction of the deep well in the project, the same should be stated in the
proposals. In the absence of such an agreement, it could be safely concluded that the
construction of the deep well is not a part of the project undertaken by the plaintiff."[3] With
respect to the repair of the windmill, the trial court found that "there is no clear and
convincing proof that the windmill system fell down due to the defect of the construction."[4]
The Court of Appeals reversed the trial court. It ruled that the construction of the deep
well was included in the agreement of the parties because the term "deep well" was
mentioned in both proposals. It also gave credence to the testimony of respondent's
witness Guillermo Pili, the proprietor of SPGMI which installed the deep well, that
petitioner Tanguilig told him that the cost of constructing the deep well would be deducted
from the contract price of P60,000.00. Upon these premises the appellate court concluded
that respondent's payment of P15,000.00 to SPGMI should be applied to his remaining
balance with petitioner thus effectively extinguishing his contractual obligation. However,
it rejected petitioner's claim of force majeure and ordered the latter to reconstruct the
windmill in accordance with the stipulated one-year guaranty.
 His motion for reconsideration having been denied by the Court of Appeals, petitioner
now seeks relief from this Court. He raises two issues: firstly, whether the agreement to
construct the windmill system included the installation of a deep well
and, secondly, whether petitioner is under obligation to reconstruct the windmill after it
collapsed.
We reverse the appellate court on the first issue but sustain it on the second.
The preponderance of evidence supports the finding of the trial court that the
installation of a deep well was not included in the proposals of petitioner to construct a
windmill system for respondent. There were in fact two (2) proposals: one dated 19 May
1987 which pegged the contract price at P87,000.00 (Exh. "1"). This was rejected by
respondent. The other was submitted three days later, i.e., on 22 May 1987 which
contained more specifications but proposed a lower contract price of P60,000.00 (Exh.
"A"). The latter proposal was accepted by respondent and the construction immediately
followed. The pertinent portions of the first letter-proposal (Exh. "1") are
reproducedhereunder -

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

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

UNIT CONTRACT PRICE P87,000.00

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

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

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

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

One (1) lot - Float valve.

One (1) lot - Concreting materials foundation.

F. O. B. Laguna
Contract Price P60,000.00

Notably, nowhere in either proposal is the installation of a deep well mentioned, even
remotely. Neither is there an itemization or description of the materials to be used in
constructing the deep well. There is absolutely no mention in the two (2) documents that
a deep well pump is a component of the proposed windmill system. The contract prices
fixed in both proposals cover only the features specifically described therein and no
other. While the words "deep well" and "deep well pump" are mentioned in both, these do
not indicate that a deep well is part of the windmill system. They merely describe the type
of deep well pump for which the proposed windmill would be suitable. As correctly pointed
out by petitioner, the words "deep well" preceded by the prepositions "for" and"suitable
for" were meant only to convey the idea that the proposed windmill would be appropriate
for a deep well pump with a diameter of 2 to 3 inches. For if the real intent of petitioner
was to include a deep well in the agreement to construct a windmill, he would have used
instead the conjunctions "and" or "with." Since the terms of the instruments are clear and
leave no doubt as to their meaning they should not be disturbed.
Moreover, it is a cardinal rule in the interpretation of contracts that the intention of the
parties shall be accorded primordial consideration[5] and, in case of doubt, their
contemporaneous and subsequent acts shall be principally considered.[6] An examination
of such contemporaneous and subsequent acts of respondent as well as the attendant
circumstances does not persuade us to uphold him.
Respondent insists that petitioner verbally agreed that the contract price
of P60,000.00 covered the installation of a deep well pump. He contends that since
petitioner did not have the capacity to install the pump the latter agreed to have a third
party do the work the cost of which was to be deducted from the contract price. To prove
his point, he presented Guillermo Pili of SPGMI who declared that petitioner Tanguilig
approached him with a letter from respondent Herce Jr. asking him to build a deep well
pump as "part of the price/contract which Engineer (Herce) had with Mr. Tanguilig."[7]
We are disinclined to accept the version of respondent. The claim of Pili that Herce
Jr. wrote him a letter is unsubstantiated. The alleged letter was never presented in court
by private respondent for reasons known only to him. But granting that this written
communication existed, it could not have simply contained a request for Pili to install a
deep well; it would have also mentioned the party who would pay for the undertaking. It
strains credulity that respondent would keep silent on this matter and leave it all to
petitioner Tanguilig to verbally convey to Pili thatthe deep well was part of the windmill
construction and that its payment would come from the contract price of P60,000.00.
We find it also unusual that Pili would readily consent to build a deep well the payment
for which would come supposedly from the windmill contract price on the mere
representation of petitioner, whom he had never met before, without a written commitment
at least from the former. For if indeed the deep well were part of the windmill project, the
contract for its installation would have been strictly a matter between petitioner and Pili
himself with the former assuming the obligation to pay the price. That it was respondent
Herce Jr. himself who paid for the deep well by handing over to Pili the amount
of P15,000.00 clearly indicates that the contract for the deep well was not part of the
windmill project but a separate agreement between respondent and Pili. Besides, if the
price of P60,000.00 included the deep well, the obligation of respondent was to pay the
entire amount to petitioner without prejudice to any action that Guillermo Pili or SPGMI
may take, if any, against the latter. Significantly, when asked why he tendered payment
directly to Pili and not to petitioner, respondent explained, rather lamely, that he did it
"because he has (sic) the money, so (he) just paid the money in his possession."[8]
Can respondent claim that Pili accepted his payment on behalf of
petitioner? No. While the law is clear that "payment shall be made to the person in
whose favor the obligation has been constituted, or his successor in
interest, or any person authorized to receive it,".[9] It does not appear from the record
that Pili and/or SPGMI was so authorized.
Respondent cannot claim the benefit of the law concerning "payments made by a
third person."[10] The Civil Code provisions do not apply in the instant case because no
creditor-debtor relationship between petitioner and Guillermo Pili and/or SPGMI has been
established regarding the construction of the deep well. Specifically, witness Pili did not
testify that he entered into a contract with petitioner for the construction of respondent's
deep well. If SPGMI was really commissioned by petitioner to construct the deep well, an
agreement particularly to this effect should have been entered into.
The contemporaneous and subsequent acts of the parties concerned effectively belie
respondent's assertions.These circumstances only show that the construction of the well
by SPGMI was for the sole account of respondent and that petitioner merely supervised
the installation of the well because the windmill was to be connected to it.There is no legal
nor factual basis by which this Court can impose upon petitioner an obligation he did not
expressly assume nor ratify.
The second issue is not a novel one. In a long line of cases[11] this Court has
consistently held that in order for a party to claim exemption from liability by reason of
fortuitous event under Art. 1174 of the Civil Code the event should be the sole
and proximate cause of the loss or destruction of the object of the
contract. In Nakpil vs. Court of Appeals,[12] four (4) requisites must concur: (a) the cause
of the breach of the obligation must be independent of the will of the debtor; (b) the event
must be either unforeseeable or unavoidable; (c) the event must be such as to render it
impossible for the debtor to fulfill his obligation in a normal manner; and, (d) the debtor
must be free from any participation in or aggravation of the injury to the creditor.
Petitioner failed to show that the collapse of the windmill was due solely to a fortuitous
event. Interestingly, the evidence does not disclose that there was actually a typhoon on
the day the windmill collapsed. Petitioner merelystated that there was a "strong wind." But
a strong wind in this case cannot be fortuitous - unforeseeable nor unavoidable. On the
contrary, a strong wind should be present in places where windmills are constructed,
otherwise the windmills will not turn.
The appellate court correctly observed that "given the newly-constructed windmill
system, the same would not have collapsed had there been no inherent defect in it which
could only be attributable to the appellee." [13] It emphasized that
respondent had in his favor the presumption that
"things have happened according to theordinary course of nature and the ordinary habits
of life."[14] This presumption has not been rebutted by petitioner.
Finally, petitioner's argument that private respondent was already in default in the
payment of his outstanding balance of P15,000.00 and hence should bear his own loss,
is untenable. In reciprocal obligations, neither party incurs in delay if the other does not
comply or is not ready to comply in a proper manner with what is incumbent upon
him.[15] When the windmill failed to function properly it became incumbent upon petitioner
to institute the proper repairs in accordance with the guaranty stated in the contract. Thus,
respondent cannot be said to have incurred in delay; instead, it is petitioner who should
bear the expenses for the reconstruction of the windmill.Article 1167 of the Civil Code is
explicit on this point that if a person obliged to do something fails to do it, the same shall
be executed at his cost.
WHEREFORE, the appealed decision is MODIFIED. Respondent VICENTE HERCE
JR. is directed to pay petitioner JACINTO M. TANGUILIG the balance of P15,000.00 with
interest at the legal rate from the date of the filing of the complaint. In return, petitioner is
ordered to "reconstruct subject defective windmill system, in accordance with the one-
year guaranty"[16]and to complete the same within three (3) months from the finality of this
decision.
SO ORDERED.
Padilla, (Chairman), Vitug, Kapunan, and Hermosisima, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 182963 June 3, 2013

SPOUSES DEO AGNER and MARICON AGNER, Petitioners,

vs.
BPI FAMILY SAVINGS BANK, INC., Respondent.

DECISION

PERALTA, J.:

This is a petition for review on certiorari assailing the April 30, 2007 Decision1 and May 19, 2008
Resolution2of the Court of Appeals in CAG.R. CV No. 86021, which affirmed the August 11, 2005
Decision3 of the Regional Trial Court, Branch 33, Manila City.

On February 15, 2001, petitioners spouses Deo Agner and Maricon Agner executed a Promissory
Note with Chattel Mortgage in favor of Citimotors, Inc. The contract provides, among others, that: for
receiving the amount of Php834, 768.00, petitioners shall pay Php 17,391.00 every 15th day of each
succeeding month until fully paid; the loan is secured by a 2001 Mitsubishi Adventure Super Sport;
and an interest of 6% per month shall be imposed for failure to pay each installment on or before the
stated due date.4

On the same day, Citimotors, Inc. assigned all its rights, title and interests in the Promissory Note
with Chattel Mortgage to ABN AMRO Savings Bank, Inc. (ABN AMRO), which, on May 31, 2002,
likewise assigned the same to respondent BPI Family Savings Bank, Inc.5

For failure to pay four successive installments from May 15, 2002 to August 15, 2002, respondent,
through counsel, sent to petitioners a demand letter dated August 29, 2002, declaring the entire
obligation as due and demandable and requiring to pay Php576,664.04, or surrender the mortgaged
vehicle immediately upon receiving the letter.6 As the demand was left unheeded, respondent filed
on October 4, 2002 an action for Replevin and Damages before the Manila Regional Trial Court
(RTC).

A writ of replevin was issued.7 Despite this, the subject vehicle was not seized.8 Trial on the merits
ensued. On August 11, 2005, the Manila RTC Br. 33 ruled for the respondent and ordered
petitioners to jointly and severally pay the amount of Php576,664.04 plus interest at the rate of 72%
per annum from August 20, 2002 until fully paid, and the costs of suit.

Petitioners appealed the decision to the Court of Appeals (CA), but the CA affirmed the lower court’s
decision and, subsequently, denied the motion for reconsideration; hence, this petition.

Before this Court, petitioners argue that: (1) respondent has no cause of action, because the Deed
of Assignment executed in its favor did not specifically mention ABN AMRO’s account receivable
from petitioners; (2) petitioners cannot be considered to have defaulted in payment for lack of
competent proof that they received the demand letter; and (3) respondent’s remedy of resorting to
both actions of replevin and collection of sum of money is contrary to the provision of Article 14849 of
the Civil Code and the Elisco Tool Manufacturing Corporation v. Court of Appeals10ruling.

The contentions are untenable.

With respect to the first issue, it would be sufficient to state that the matter surrounding the Deed of
Assignment had already been considered by the trial court and the CA. Likewise, it is an issue of fact
that is not a proper subject of a petition for review under Rule 45. An issue is factual when the doubt
or difference arises as to the truth or falsehood of alleged facts, or when the query invites calibration
of the whole evidence, considering mainly the credibility of witnesses, existence and relevancy of
specific surrounding circumstances, their relation to each other and to the whole, and the
probabilities of the situation.11 Time and again, We stress that this Court is not a trier of facts and
generally does not weigh anew evidence which lower courts have passed upon.

As to the second issue, records bear that both verbal and written demands were in fact made by
respondent prior to the institution of the case against petitioners.12 Even assuming, for argument’s
sake, that no demand letter was sent by respondent, there is really no need for it because petitioners
legally waived the necessity of notice or demand in the Promissory Note with Chattel Mortgage,
which they voluntarily and knowingly signed in favor of respondent’s predecessor-in-interest. Said
contract expressly stipulates:

In case of my/our failure to pay when due and payable, any sum which I/We are obliged to pay
under this note and/or any other obligation which I/We or any of us may now or in the future owe to
the holder of this note or to any other party whether as principal or guarantor x x x then the entire
sum outstanding under this note shall, without prior notice or demand, immediately become due and
payable. (Emphasis and underscoring supplied)
A provision on waiver of notice or demand has been recognized as legal and valid in Bank of the
Philippine Islands v. Court of Appeals,13 wherein We held:

The Civil Code in Article 1169 provides that one incurs in delay or is in default from the time the
obligor demands the fulfillment of the obligation from the obligee. However, the law expressly
provides that demand is not necessary under certain circumstances, and one of these
circumstances is when the parties expressly waive demand. Hence, since the co-signors expressly
waived demand in the promissory notes, demand was unnecessary for them to be in default.14

Further, the Court even ruled in Navarro v. Escobido15 that prior demand is not a condition precedent
to an action for a writ of replevin, since there is nothing in Section 2, Rule 60 of the Rules of Court
that requires the applicant to make a demand on the possessor of the property before an action for a
writ of replevin could be filed.

Also, petitioners’ representation that they have not received a demand letter is completely
inconsequential as the mere act of sending it would suffice. Again, We look into the Promissory Note
with Chattel Mortgage, which provides:

All correspondence relative to this mortgage, including demand letters, summonses, subpoenas, or
notifications of any judicial or extrajudicial action shall be sent to the MORTGAGOR at the address
indicated on this promissory note with chattel mortgage or at the address that may hereafter be
given in writing by the MORTGAGOR to the MORTGAGEE or his/its assignee. The mere act of
sending any correspondence by mail or by personal delivery to the said address shall be valid and
effective notice to the mortgagor for all legal purposes and the fact that any communication is not
actually received by the MORTGAGOR or that it has been returned unclaimed to the MORTGAGEE
or that no person was found at the address given, or that the address is fictitious or cannot be
located shall not excuse or relieve the MORTGAGOR from the effects of such notice.16 (Emphasis
and underscoring supplied)

The Court cannot yield to petitioners’ denial in receiving respondent’s demand letter. To note, their
postal address evidently remained unchanged from the time they executed the Promissory Note with
Chattel Mortgage up to time the case was filed against them. Thus, the presumption that "a letter
duly directed and mailed was received in the regular course of the mail"17 stands in the absence of
satisfactory proof to the contrary.

Petitioners cannot find succour from Ting v. Court of Appeals18 simply because it pertained to
violation of Batas Pambansa Blg. 22 or the Bouncing Checks Law. As a higher quantum of proof –
that is, proof beyond reasonable doubt – is required in view of the criminal nature of the case, We
found insufficient the mere presentation of a copy of the demand letter allegedly sent through
registered mail and its corresponding registry receipt as proof of receiving the notice of dishonor.

Perusing over the records, what is clear is that petitioners did not take advantage of all the
opportunities to present their evidence in the proceedings before the courts below. They miserably
failed to produce the original cash deposit slips proving payment of the monthly amortizations in
question. Not even a photocopy of the alleged proof of payment was appended to their Answer or
shown during the trial. Neither have they demonstrated any written requests to respondent to furnish
them with official receipts or a statement of account. Worse, petitioners were not able to make a
formal offer of evidence considering that they have not marked any documentary evidence during
the presentation of Deo Agner’s testimony.19

Jurisprudence abounds that, in civil cases, one who pleads payment has the burden of proving it; the
burden rests on the defendant to prove payment, rather than on the plaintiff to prove non-
payment.20 When the creditor is in possession of the document of credit, proof of non-payment is not
needed for it is presumed.21 Respondent's possession of the Promissory Note with Chattel Mortgage
strongly buttresses its claim that the obligation has not been extinguished. As held in Bank of the
Philippine Islands v. Spouses Royeca:22

x x x The creditor's possession of the evidence of debt is proof that the debt has not been
discharged by payment. A promissory note in the hands of the creditor is a proof of indebtedness
rather than proof of payment. In an action for replevin by a mortgagee, it is prima facie evidence that
the promissory note has not been paid. Likewise, an uncanceled mortgage in the possession of the
mortgagee gives rise to the presumption that the mortgage debt is unpaid.23

Indeed, when the existence of a debt is fully established by the evidence contained in the record, the
burden of proving that it has been extinguished by payment devolves upon the debtor who offers
such defense to the claim of the creditor.24 The debtor has the burden of showing with legal certainty
that the obligation has been discharged by payment.25

Lastly, there is no violation of Article 1484 of the Civil Code and the Court’s decision in Elisco Tool
Manufacturing Corporation v. Court of Appeals.26

In Elisco, petitioner's complaint contained the following prayer:

WHEREFORE, plaintiffs pray that judgment be rendered as follows:

ON THE FIRST CAUSE OF ACTION

Ordering defendant Rolando Lantan to pay the plaintiff the sum of ₱39,054.86 plus legal interest
from the date of demand until the whole obligation is fully paid;

ON THE SECOND CAUSE OF ACTION

To forthwith issue a Writ of Replevin ordering the seizure of the motor vehicle more particularly
described in paragraph 3 of the Complaint, from defendant Rolando Lantan and/or defendants Rina
Lantan, John Doe, Susan Doe and other person or persons in whose possession the said motor
vehicle may be found, complete with accessories and equipment, and direct deliver thereof to
plaintiff in accordance with law, and after due hearing to confirm said seizure and plaintiff's
possession over the same;

PRAYER COMMON TO ALL CAUSES OF ACTION

1. Ordering the defendant Rolando Lantan to pay the plaintiff an amount equivalent to
twenty-five percent (25%) of his outstanding obligation, for and as attorney's fees;

2. Ordering defendants to pay the cost or expenses of collection, repossession, bonding fees
and other incidental expenses to be proved during the trial; and

3. Ordering defendants to pay the costs of suit.

Plaintiff also prays for such further reliefs as this Honorable Court may deem just and equitable
under the premises.27

The Court therein ruled:

The remedies provided for in Art. 1484 are alternative, not cumulative. The exercise of one bars the
exercise of the others. This limitation applies to contracts purporting to be leases of personal
property with option to buy by virtue of Art. 1485. The condition that the lessor has deprived the
lessee of possession or enjoyment of the thing for the purpose of applying Art. 1485 was fulfilled in
this case by the filing by petitioner of the complaint for replevin to recover possession of movable
property. By virtue of the writ of seizure issued by the trial court, the deputy sheriff seized the vehicle
on August 6, 1986 and thereby deprived private respondents of its use. The car was not returned to
private respondent until April 16, 1989, after two (2) years and eight (8) months, upon issuance by
the Court of Appeals of a writ of execution.

Petitioner prayed that private respondents be made to pay the sum of ₱39,054.86, the amount that
they were supposed to pay as of May 1986, plus interest at the legal rate. At the same time, it
prayed for the issuance of a writ of replevin or the delivery to it of the motor vehicle "complete

with accessories and equipment." In the event the car could not be delivered to petitioner, it was
prayed that private respondent Rolando Lantan be made to pay petitioner the amount of ₱60,000.00,
the "estimated actual value" of the car, "plus accrued monthly rentals thereof with interests at the
rate of fourteen percent (14%) per annum until fully paid." This prayer of course cannot be granted,
even assuming that private respondents have defaulted in the payment of their obligation. This led
the trial court to say that petitioner wanted to eat its cake and have it too.28

In contrast, respondent in this case prayed:

(a) Before trial, and upon filing and approval of the bond, to forthwith issue a Writ of Replevin
ordering the seizure of the motor vehicle above-described, complete with all its accessories
and equipments, together with the Registration Certificate thereof, and direct the delivery
thereof to plaintiff in accordance with law and after due hearing, to confirm the said seizure;

(b) Or, in the event that manual delivery of the said motor vehicle cannot be effected to
render judgment in favor of plaintiff and against defendant(s) ordering them to pay to plaintiff,
jointly and severally, the sum of ₱576,664.04 plus interest and/or late payment charges
thereon at the rate of 72% per annum from August 20, 2002 until fully paid;

(c) In either case, to order defendant(s) to pay jointly and severally:

(1) the sum of ₱297,857.54 as attorney’s fees, liquidated damages, bonding fees and
other expenses incurred in the seizure of the said motor vehicle; and

(2) the costs of suit.

Plaintiff further prays for such other relief as this Honorable Court may deem just and equitable in
the premises.29

Compared with Elisco, the vehicle subject matter of this case was never recovered and delivered to
respondent despite the issuance of a writ of replevin. As there was no seizure that transpired, it
cannot be said that petitioners were deprived of the use and enjoyment of the mortgaged vehicle or
that respondent pursued, commenced or concluded its actual foreclosure. The trial court, therefore,
rightfully granted the alternative prayer for sum of money, which is equivalent to the remedy of
"exacting fulfillment of the obligation." Certainly, there is no double recovery or unjust enrichment30 to
speak of.1âwphi1
All the foregoing notwithstanding, We are of the opinion that the interest of 6% per month should be
equitably reduced to one percent (1%) per month or twelve percent (12%) per annum, to be
reckoned from May 16, 2002 until full payment and with the remaining outstanding balance of their
car loan as of May 15, 2002 as the base amount.

Settled is the principle which this Court has affirmed in a number of cases that stipulated interest
rates of three percent (3%) per month and higher are excessive, iniquitous, unconscionable, and
exorbitant.31 While Central Bank Circular No. 905-82, which took effect on January 1, 1983,
effectively removed the ceiling on interest rates for both secured and unsecured loans, regardless of
maturity, nothing in the said circular could possibly be read as granting carte blanche authority to
lenders to raise interest rates to levels which would either enslave their borrowers or lead to a
hemorrhaging of their assets.32 Since the stipulation on the interest rate is void for being contrary to
morals, if not against the law, it is as if there was no express contract on said interest rate; thus, the
interest rate may be reduced as reason and equity demand.33

WHEREFORE, the petition is DENIED and the Court AFFIRMS WITH MODIFICATION the April 30,
2007 Decision and May 19, 2008 Resolution of the Court of Appeals in CA-G.R. CV No. 86021.
Petitioners spouses Deo Agner and Maricon Agner are ORDERED to pay, jointly and severally,
respondent BPI Family Savings Bank, Inc. ( 1) the remaining outstanding balance of their auto loan
obligation as of May 15, 2002 with interest at one percent ( 1 o/o) per month from May 16, 2002 until
fully paid; and (2) costs of suit.

SO ORDERED.

DIOSDADO M. PERALTA
Associate Justice

WE CONCUR:

PRESBITERO J. VELASCO, JR.

Associate Justice
Chairperson

ROBERTO A. ABAD JOSE CATRAL MENDOZA

Associate Justice Associate Justice

MARVIC MARIO VICTOR F. LEONEN

Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision had been reached in consultation before the case
was assigned to the writer of the opinion of the Court's Division.

PRESBITERO J. VELASCO, JR.

Associate Justice
Chairperson, Third Division

Republic of the Philippines

Supreme Court
 Manila

SECOND DIVISION

SOLAR HARVEST, INC.,

Petitioner, G.R. No. 176868
Present:

CARPIO, J.,
- versus - Chairperson,
NACHURA,
PERALTA,
ABAD, and
MENDOZA, JJ.
DAVAO CORRUGATED CARTON CORPORATION,
Respondent.
Promulgated:

July 26, 2010

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

DECISION

NACHURA, J.:
Petitioner seeks a review of the Court of Appeals (CA) Decision[1] dated September
21, 2006 and Resolution[2] dated February 23, 2007, which denied petitioners
motion for reconsideration. The assailed Decision denied petitioners claim for
reimbursement for the amount it paid to respondent for the manufacture of
corrugated carton boxes.

The case arose from the following antecedents:

In the first quarter of 1998, petitioner, Solar Harvest, Inc., entered into an
agreement with respondent, Davao Corrugated Carton Corporation, for the
purchase of corrugated carton boxes, specifically designed for petitioners business
of exporting fresh bananas, at US$1.10 each. The agreement was not reduced into
writing. To get the production underway, petitioner deposited, on March 31, 1998,
US$40,150.00 in respondents US Dollar Savings Account with Westmont Bank, as
full payment for the ordered boxes.

Despite such payment, petitioner did not receive any boxes from respondent. On
January 3, 2001, petitioner wrote a demand letter for reimbursement of the
amount paid.[3] On February 19, 2001, respondent replied that the boxes had been
completed as early as April 3, 1998 and that petitioner failed to pick them up from
the formers warehouse 30 days from completion, as agreed upon. Respondent
mentioned that petitioner even placed an additional order of 24,000 boxes, out of
which, 14,000 had been manufactured without any advanced payment from
petitioner. Respondent then demanded petitioner to remove the boxes from the
factory and to pay the balance of US$15,400.00 for the additional boxes
and P132,000.00 as storage fee.
On August 17, 2001, petitioner filed a Complaint for sum of money and damages
against respondent. The Complaint averred that the parties agreed that the boxes
will be delivered within 30 days from payment but respondent failed to
manufacture and deliver the boxes within such time. It further alleged

6. That repeated follow-up was made by the plaintiff for the immediate
production of the ordered boxes, but every time, defendant [would] only
show samples of boxes and ma[k]e repeated promises to deliver the said
ordered boxes.
7. That because of the failure of the defendant to deliver the ordered
boxes, plaintiff ha[d] to cancel the same and demand payment and/or
refund from the defendant but the latter refused to pay and/or refund
the US$40,150.00 payment made by the former for the ordered boxes.[4]

In its Answer with Counterclaim,[5] respondent insisted that, as early as April 3,

1998, it had already completed production of the 36,500 boxes, contrary to
petitioners allegation. According to respondent, petitioner, in fact, made an
additional order of 24,000 boxes, out of which, 14,000 had been completed without
waiting for petitioners payment. Respondent stated that petitioner was to pick up
the boxes at the factory as agreed upon, but petitioner failed to do so. Respondent
averred that, on October 8, 1998, petitioners representative, Bobby Que (Que),
went to the factory and saw that the boxes were ready for pick up. On February 20,
1999, Que visited the factory again and supposedly advised respondent to sell the
boxes as rejects to recoup the cost of the unpaid 14,000 boxes, because petitioners
transaction to ship bananas to China did not materialize. Respondent claimed that
the boxes were occupying warehouse space and that petitioner should be made to
pay storage fee at P60.00 per square meter for every month from April 1998. As
counterclaim, respondent prayed that judgment be rendered ordering petitioner
to pay $15,400.00, plus interest, moral and exemplary damages, attorneys fees,
and costs of the suit.
In reply, petitioner denied that it made a second order of 24,000 boxes and that
respondent already completed the initial order of 36,500
boxes and 14,000 boxes out of the second order. It maintained that

respondent only manufactured a sample of the ordered boxes and that respondent
could not have produced 14,000 boxes without the required pre-payments.[6]
During trial, petitioner presented Que as its sole witness. Que testified that he
ordered the boxes from respondent and deposited the money in respondents
account.[7] He specifically stated that, when he visited respondents factory, he saw
that the boxes had no print of petitioners logo.[8] A few months later, he followed-
up the order and was told that the company had full production, and thus, was
promised that production of the order would be rushed. He told respondent that it
should indeed rush production because the need for the boxes was urgent.
Thereafter, he asked his partner, Alfred Ong, to cancel the order because it was
already late for them to meet their commitment to ship the bananas to China.[9] On
cross-examination, Que further testified that China Zero Food, the Chinese
company that ordered the bananas, was sending a ship to Davao to get the
bananas, but since there were no cartons, the ship could not proceed. He said that,
at that time, bananas from Tagum Agricultural Development Corporation (TADECO)
were already there. He denied that petitioner made an additional order of 24,000
boxes. He explained that it took three years to refer the matter to counsel because
respondent promised to pay.[10]

For respondent, Bienvenido Estanislao (Estanislao) testified that he met Que

in Davao in October 1998 to inspect the boxes and that the latter got samples of
them. In February 2000, they inspected the boxes again and Que got more
samples. Estanislao said that petitioner did not pick up the boxes because the ship
did not arrive.[11] Jaime Tan (Tan), president of respondent, also testified that his
company finished production of the 36,500 boxes on April 3, 1998 and that
petitioner made a second order of 24,000 boxes. He said that the agreement was
for respondent to produce the boxes and for petitioner to pick them up from the
warehouse.[12] He also said that the reason why petitioner did not pick up the boxes
was that the ship that was to carry the bananas did not arrive.[13] According to him,
during the last visit of Que and Estanislao, he asked them to withdraw the boxes
immediately because they were occupying a big space in his plant, but they,
instead, told him to sell the cartons as rejects. He was able to sell 5,000 boxes
at P20.00 each for a total of P100,000.00. They then told him to apply the said
amount to the unpaid balance.
In its March 2, 2004 Decision, the Regional Trial Court (RTC) ruled that respondent
did not commit any breach of faith that would justify rescission of the contract and
the consequent reimbursement of the amount paid by petitioner. The RTC said that
respondent was able to produce the ordered boxes but petitioner failed to obtain
possession thereof because its ship did not arrive. It thus dismissed the complaint
and respondents counterclaims, disposing as follows:

WHEREFORE, premises considered, judgment is hereby rendered in favor

of defendant and against the plaintiff and, accordingly, plaintiffs
complaint is hereby ordered DISMISSED without pronouncement as to
cost. Defendants counterclaims are similarly dismissed for lack of merit.
SO ORDERED.[14]

Petitioner filed a notice of appeal with the CA.

On September 21, 2006, the CA denied the appeal for lack of merit.[15] The appellate
court held that petitioner failed to discharge its burden of proving what it claimed
to be the parties agreement with respect to the delivery of the boxes. According to
the CA, it was unthinkable that, over a period of more than two years, petitioner
did not even demand for the delivery of the boxes. The CA added that even
assuming that the agreement was for respondent to deliver the boxes, respondent
would not be liable for breach of contract as petitioner had not yet demanded from
it the delivery of the boxes.[16]
Petitioner moved for reconsideration,[17] but the motion was denied by the CA in
its Resolution of February 23, 2007.[18]
In this petition, petitioner insists that respondent did not completely manufacture
the boxes and that it was respondent which was obliged to deliver the boxes to
TADECO.
We find no reversible error in the assailed Decision that would justify the grant of
this petition.
Petitioners claim for reimbursement is actually one for rescission (or resolution) of
contract under Article 1191 of the Civil Code, which reads:
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.
 The right to rescind a contract arises once the other party defaults in the
performance of his obligation. In determining when default occurs, Art. 1191
should be taken in conjunction with Art. 1169 of the same law, which provides:

Art. 1169. Those obliged to deliver or to do something incur in delay from

the time the obligee judicially or extrajudicially demands from them the
fulfillment of their obligation.
However, the demand by the creditor shall not be necessary in order that
delay may exist:

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

(2) When from the nature and the circumstances of the

obligation it appears that the designation of the time when the
thing is to be delivered or the service is to be rendered was a
controlling motive for the establishment of the contract; or

(3) When demand would be useless, as when the obligor has

rendered it beyond his power to perform.
In reciprocal obligations, neither party incurs in delay if the other does
not comply or is not ready to comply in a proper manner with what is
incumbent upon him. From the moment one of the parties fulfills his
obligation, delay by the other begins.

In reciprocal obligations, as in a contract of sale, the general rule is that the

fulfillment of the parties respective obligations should be simultaneous. Hence, no
demand is generally necessary because, once a party fulfills his obligation and the
other party does not fulfill his, the latter automatically incurs in delay. But when
different dates for performance of the obligations are fixed, the default for each
obligation must be determined by the rules given in the first paragraph of the
present article,[19] that is, the other party would incur in delay only from the
moment the other party demands fulfillment of the formers obligation. Thus, even
in reciprocal obligations, if the period for the fulfillment of the obligation is fixed,
demand upon the obligee is still necessary before the obligor can be considered in
default and before a cause of action for rescission will accrue.
Evident from the records and even from the allegations in the complaint was the
lack of demand by petitioner upon respondent to fulfill its obligation to
manufacture and deliver the boxes. The Complaint only alleged that petitioner
made a follow-up upon respondent, which, however, would not qualify as a
demand for the fulfillment of the obligation. Petitioners witness also testified that
they made a follow-up of the boxes, but not a demand. Note is taken of the fact
that, with respect to their claim for reimbursement, the Complaint alleged and the
witness testified that a demand letter was sent to respondent. Without a previous
demand for the fulfillment of the obligation, petitioner would not have a cause of
action for rescission against respondent as the latter would not yet be considered
in breach of its contractual obligation.
Even assuming that a demand had been previously made before filing the present
case, petitioners claim for reimbursement would still fail, as the circumstances
would show that respondent was not guilty of breach of contract.
The existence of a breach of contract is a factual matter not usually reviewed in a
petition for review under Rule 45.[20] The Court, in petitions for review, limits its
inquiry only to questions of law. After all, it is not a trier of facts, and findings of
fact made by the trial court, especially when reiterated by the CA, must be given
great respect if not considered as final.[21] In dealing with this petition, we will not
veer away from this doctrine and will thus sustain the factual findings of the CA,
which we find to be adequately supported by the evidence on record.

As correctly observed by the CA, aside from the pictures of the finished boxes and
the production report thereof, there is ample showing that the boxes had already
been manufactured by respondent. There is the testimony of Estanislao who
accompanied Que to the factory, attesting that, during their first visit to the
company, they saw the pile of petitioners boxes and Que took samples
thereof. Que, petitioners witness, himself confirmed this incident. He testified that
Tan pointed the boxes to him and that he got a sample and saw that it was
blank. Ques absolute assertion that the boxes were not manufactured is, therefore,
implausible and suspicious.

In fact, we note that respondents counsel manifested in court, during trial, that his
client was willing to shoulder expenses for a representative of the court to visit the
plant and see the boxes.[22] Had it been true that the boxes were not yet completed,
respondent would not have been so bold as to challenge the court to conduct an
ocular inspection of their warehouse. Even in its Comment to this petition,
respondent prays that petitioner be ordered to remove the boxes from its factory
site,[23] which could only mean that the boxes are, up to the present, still in
respondents premises.

We also believe that the agreement between the parties was for petitioner to pick
up the boxes from respondents warehouse, contrary to petitioners allegation.
Thus, it was due to petitioners fault that the boxes were not delivered to TADECO.

Petitioner had the burden to prove that the agreement was, in fact, for respondent
to deliver the boxes within 30 days from payment, as alleged in the Complaint. Its
sole witness, Que, was not even competent to testify on the terms of the
agreement and, therefore, we cannot give much credence to his testimony. It
appeared from the testimony of Que that he did not personally place the order with
Tan, thus:

Q. No, my question is, you went to Davao City and placed your order
there?
A. I made a phone call.

Q. You made a phone call to Mr. Tan?

 A. The first time, the first call to Mr. Alf[re]d Ong. Alfred Ong has a contact
with Mr. Tan.

Q. So, your first statement that you were the one who placed the order
is not true?
A. Thats true. The Solar Harvest made a contact with Mr. Tan and I
deposited the money in the bank.

Q. You said a while ago [t]hat you were the one who called Mr. Tan and
placed the order for 36,500 boxes, isnt it?
A. First time it was Mr. Alfred Ong.

Q. It was Mr. Ong who placed the order[,] not you?

A. Yes, sir.[24]

Q. Is it not a fact that the cartons were ordered through Mr. Bienvenido
Estanislao?
A. Yes, sir.[25]

Moreover, assuming that respondent was obliged to deliver the boxes, it

could not have complied with such obligation. Que, insisting that the boxes had not
been manufactured, admitted that he did not give respondent the authority to
deliver the boxes to TADECO:

Q. Did you give authority to Mr. Tan to deliver these boxes to TADECO?
A. No, sir. As I have said, before the delivery, we must have to check the
carton, the quantity and quality. But I have not seen a single
carton.
 Q. Are you trying to impress upon the [c]ourt that it is only after the boxes
are completed, will you give authority to Mr. Tan to deliver the
boxes to TADECO[?]
A. Sir, because when I checked the plant, I have not seen any carton. I
asked Mr. Tan to rush the carton but not[26]

Q. Did you give any authority for Mr. Tan to deliver these boxes to
TADECO?
A. Because I have not seen any of my carton.

Q. You dont have any authority yet given to Mr. Tan?

A. None, your Honor.[27]

Surely, without such authority, TADECO would not have allowed respondent to
deposit the boxes within its premises.

In sum, the Court finds that petitioner failed to establish a cause of action for
rescission, the evidence having shown that respondent did not commit any breach
of its contractual obligation. As previously stated, the subject boxes are still within
respondents premises. To put a rest to this dispute, we therefore relieve
respondent from the burden of having to keep the boxes within its premises and,
consequently, give it the right to dispose of them, after petitioner is given a period
of time within which to remove them from the premises.

WHEREFORE, premises considered, the petition is DENIED. The Court of Appeals

Decision dated September 21, 2006 and Resolution dated February 23, 2007
are AFFIRMED. In addition, petitioner is given a period
of 30 days from notice within which to cause the removal of the 36,500
boxes from respondents warehouse. After the lapse of said period and petitioner
fails to effect such removal, respondent shall have the right to dispose of the boxes
in any manner it may deem fit.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-16662 January 31, 1962

VET BROS and CO., INC., plaintiff,

vs.
JOSE S. MOVIDO, ET AL., defendants,
JOSE S. MOVIDO, defendant-appellee,
LUZON SURETY CO., INC., surety-appellant.

Tolentino and Garcia for surety-appellant.

Francisco Astilla for dependant-appellee.

LABRADOR, J.:

Appeal by the Luzon Surety Co., Inc., from an order dated August 24, 1957 of the Court of First
Instance of Leyte, Hon. Lorenzo C. Garlitos, presiding, in Civil Case No. 850 of that court, entitled
"Vet Bros & Co., Inc., plaintiff, versus Jose S. Movido, the Provincial Sheriff of Leyte and the
Provincial Sheriff of Samar, defendants." The order issues a writ of execution against the P2,000
bond of the Luzon Surety Company in said case..

On June 13, 1951, the Vet Bros & Co., Inc. filed a complaint against Jose S. Movido, the Provincial
Sheriff of Leyte, and that of Samar, praying, among other things, for the issuance of a writ of
preliminary injunction to enjoin said defendants from proceeding with the sale of plaintiff's properties.
The properties of the plaintiff were caused to be sold to satisfy the judgment of the lower court in
Civil Case No. 441, entitled "Jose S. Movido, plaintiff, versus Vet Bros & Co., Inc., defendant.".

It is alleged in the complaint that the Provincial Sheriff of Samar, proceeded on May 14, 1951, with
the attachment of certain properties of the plaintiff, giving notice thereof to him, notwithstanding the
fact that Civil Case No. 441 was already terminated and closed, and the claim of defendant Movido
had already been satisfied by the plaintiff.

Upon the filing of the complaint in said Civil Case No. 850, the writ of preliminary injunction was
issued upon its presentation of a P2,000 bond of the Luzon Surety Co., Inc., wherein the surety
company undertook to pay the defendants "all such damages as such party may sustain by the
reason of the Writ of Preliminary Injunction, if the Court finally decides that the Plaintiff is not entitled
thereto." (p. 16, R. O. A).1äw phï1.ñët

In his answer to the complaint, defendant Movido denies payment to him by the plaintiff of the
unpaid balance of P6,000, plus interest, as per judgment of the court in said Civil Case No. 441.

The case having been set for hearing on April 22, 1952, the plaintiff failed to appear, so the court
dismissed the case. The order of dismissal reads as follows:.

Por incomparecencia de la demandante, no obstante estar debidamente notificada de la

vista de este asunto para esta dia, y no estandode acuerdo con la ley ni con los
Reglamentos, la peticion de posposicion por telegrama del abogado de la demandante, se
deniega la posposicion y sesobresee la demanda, con las contas a cargo de la demandante.
Se deja sin efecto el interdicto prohibitorio preliminar dictado en este asunto contralos
demandados. (p. 24, R. O. A.).

Two motions for reconsideration filed by the plaintiff having been denied, the afore-quoted order of
dismissal became final and executory. Consequently, on May 4, 1957, Movido filed a motion for the
issuance of a writ of execution against the bond of the surety company. The lower court, after
considering said motion and the opposition thereto filed by the surety company, issued the order
appealed from, relying solely on our decision in the case of Bautista v. Joaquin, 46 Phil. 885. A
motion for reconsideration of the order granting the writ of execution was denied, so the surety
company has prosecuted this appeal before this Court. Pending appeal, the lower court ordered the
substitution of appellee Movido, who had died, by his wife and children..

The appellee did not file a brief, and this Court ordered the appeal in this case to take its course
without said brief..

The liability of the appellant upon its bond is governed by the provisions of Section 9, Rule 60 and
Section 20, Rule 59, both of the Rules of Court, which read as follows:.

Sec. 9. Judgment to include damages against party and sureties. — Upon the trial, the
amount of damages to be awarded to the plaintiff, or to the defendant, as the case may be,
upon the bond of the other party, shall be claimed, ascertained, and awarded under the
same procedure as prescribed in section 20 of Rules 59." (Rule 60) .

Sec. 20 .... Such damages may be awarded only upon application and after proper hearing,
and shall be included in the final judgment. The application must be filed before the trial or, in
the discretion of the court, before entry of the final judgment, with due notice to the plaintiff
and his surety or sureties, setting forth the facts showing his right to damages and the
amount thereof. ... (Rule 59).

In its bond, the appellant undertook to pay the defendants only such damages that they may sustain
by reason of the issuance of the writ of preliminary injunction. And such bond cannot be extended
beyond the bounds of its contents. There is neither claim nor evidence of damages sustained by
Movido as a result of the issuance of the injunction. And this was the reason also why the lower
court did not award damages to the defendants in its order of dismissal of April 22, 1952.
Consequently, there can be no execution against the bonds, there is nothing in the judgment of
dismissal sentencing the plaintiff or it surety to pay damages.

As the judgment is against the defendant personally, not against the surety on his
counterbond, the execution to be issued must be against the property of the defendant only
 and it cannot issue against petitioner thereon. As a matter of fact, the order complained of
was issued to secure a judgment against the surety on the counterbond of defendant, which
shows the absence of a judgment against surety to be executed. A judgment against a
defendant cannot per se be enforced by execution against the surety on his counterbond;
a judgment against the surety MUST first be secured, before his counterbond may be
proceeded against." (Visayan Surety & Insurance Co. vs. Aquino et al., G.R. No. L-8107,
April 29, 1955; see also Port Motors, Inc. v. Raposas, et al., G.R. No. L-9645, Jan. 23, 1957;
Visayan Surety vs. Pascual, G.R. No. L-2961, March 23, 1949; Facundo v. Tan, 77 Phil. 740;
Liberty Construction v. Pecson, G.R. No. L-3694, May 24, 1951; Cruz v. Manila Surety, G.R.
No. L-5268, Feb. 23, 1953.) .

It is intimidated in the pleadings in the court below that the amount of damages for which the surety
should be liable upon its bond is the amount of the judgment sought to be enforced in Civil Case No.
441, which amount was not collected by appellee Movido by reason of the issuance of the writ of
preliminary injunction in the case at bar.

The surety bond executed by the appellant does not refer to any judgment, or to the judgment being
executed in Civil Case No. 441. The bond only responds for "all such damages as such party
(defendant Movido) may sustain by reason of the Writ of Preliminary Injunction, if the Court finally
decides that the Plaintiff is not entitled thereto." There is no final judgment in the case at bar, in
which the court made a finding that the plaintiff is not entitled to the writ of preliminary injunction. The
judgment was an order of dismissal for failure of the plaintiff to appear; it did not declare that the
plaintiff was not entitled to writ of preliminary injunction. Consequently, there is no legal basis for
making the surety liable upon its bond.

It is to be noted that the injunction was issued in another case, Civil Case No. 850, and not in the old
case, Civil Case No. 441, where judgment for Movido was issued and execution issued. The plaintiff
herein would have presented, instead of filing this independent action, an ordinary motion Case No.
441 to suspend the enforcement of the writ of execution and the proceedings therein, upon the filing
of a bond. Even if such motion would have been presented, the bond would still not be liable, for
there is no proof that damages were caused Movido by the issuance of the injunction and there is no
judgment to that effect. In such a situation, once the injunction was to enforce the writ of execution
and proceed with the sale of the properties attached by the sheriff in the old case No. 441.

Our decision in the case of Bautista vs. Joaquin, supra, cited by the court a quo in its order, is not
applicable to the case at bar. In that case, we held that the bond filed for the dissolution of a writ of
attachment answers for the amount of the judgment. In accordance with Section 12 Rule 59 of the
Rules of Court, the bond thus given by the defendant to release the property attached stands in the
place of the property released. Consequently, the surety directly answers for whatever judgment the
plaintiff may recover, in the action. The case of Bautista v. Joaquin is, therefore, entirely different
from the case before this Court.

IN VIEW OF THE FOREGOING CONSIDERATIONS, the order appealed from is set aside. With
costs against the heirs of appellee Jose S. Movido..

Padilla, Bautista Angelo, Reyes, J.B.L., Barrera, Paredes, Dizon and De Leon, JJ., concur.
Bengzon, C.J., took no part.
G.R. No. 140047 July 13, 2004

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 (hereinafter Philguarantee) sought
[1]

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 TherapyMedical 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. Later, or on 8 April 1981, respondent 3-Plex, not being accredited by or
[3]

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. However, on 2 May 1981, 3-Plex and VPECI entered into an
[4]

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. To comply with these requirements,
[6]

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 were issued by Philguarantee to the Rafidain Bank
[8]

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 (Performance Bond Guarantee) in the amount of ID271,808/610
[10]

and Letter of Guarantee No. 81-195-F (Advance Payment Guarantee) in the

[11]

amount ofID541,608/901, both for a term of eighteen months from 25 May

1981. These letters of guarantee were secured by (1) a Deed of
Undertaking executed by respondents VPECI, Spouses Vicente P. Eusebio
[12]

and Soledad C. Eusebio, 3-Plex, and Spouses Eduardo E. Santos and

Iluminada Santos; and (2) a surety bond issued by respondent First Integrated
[13]

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 for the construction of the Institute of Physical
[15]

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. The surety bond was also extended for another period of one
[17]

year, from 12 May 1982 to 12 May 1983. The Performance Bond was further
[18]

extended twelve times with validity of up to 8 December 1986, while the

[19]

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. The surety bond was likewise extended to 8 May
[20]

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. It also wrote SOB protesting the call for lack of factual or legal
[23]

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. Subsequently, or on 19 November 1986, respondent VPECI advised
[24]
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. Then, on 6 May 1988, the petitioner paid to Al
[30]

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. When the
[32]

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 ofP100,000 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, the Court of Appeals affirmed the trial courts
[34]

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. In [40]

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. The factual findings of the Court of Appeals are normally not
[43]

reviewable by us under Rule 45 of the Rules of Court except when they are at
variance with those of the trial court. The trial court and the Court of Appeals
[44]

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, pertains to the essential or intrinsic validity of
[45]

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 orproper
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. Philippine courts would do well to adopt the first and most basic rule
[47]

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. Another authority
[49]

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. It is the non-
[52]

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 reveal that the
[54]

agreement between the parties was a periodic payment by the Project owner
to the contractor depending on the percentage of accomplishment within the
period. The payments were, in turn, to be used by the contractor to finance
[55]

the subsequent phase of the work. However, as explained by VPECI in its

[56]

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. Besides, no demand has yet been made by SOB against the
[60]

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. It could also set
[62]

up compensation as regards what the creditor SOB may owe the principal
debtor VPECI. In this case, however, the petitioner has clearly waived these
[63]

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 verbale sent
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. 81-194-F?
As a rule, a guarantor who pays for a debtor should be indemnified by the
latter and would be legally subrogated to the rights which the creditor has
[67]

against the debtor. However, a person who makes payment without the
[68]

knowledge or against the will of the debtor has the right to recover only insofar
as the payment has been beneficial to the debtor. If the obligation was subject
[69]
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. When the petitioner guarantor in this
[71]

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, the [72]

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.
Panganiban, Ynares-Santiago, Carpio, and Azcuna, JJ., concur.
G.R. No. 171428 November 11, 2013

ALEJANDRO V. TANKEH, Petitioner,

vs.
DEVELOPMENT BANK OF THE PHILIPPINES, STERLING SHIPPING LINES, INC., RUPERTO V.
TANKEH, VICENTE ARENAS, and ASSET PRIVATIZATION TRUST, Respondents.

DECISION

LEONEN, J.:

This is a Petition for Review on Certiorari praying that the assailed October 25, 2005 Decision and
the February 9, 2006 Resolution of the Court of Appeals1 be reversed, and that the January 4, 1996
Decision of the Regional Trial Court of Manila Branch 32 be affirmed. Petitioner prays that this Court
grant his claims for moral damages and attorney’s fees, as proven by the evidence.

Respondent Ruperto V. Tankeh is the president of Sterling Shipping Lines, Inc. It was incorporated
on April 23, 1979 to operate ocean-going vessels engaged primarily in foreign trade.2 Ruperto V.
Tankeh applied for a $3.5 million loan from public respondent Development Bank of the Philippines
for the partial financing of an ocean-going vessel named the M/V Golden Lilac. To authorize the
loan, Development Bank of the Philippines required that the following conditions be met:

1) A first mortgage must be obtained over the vessel, which by then had been renamed the M/V
Sterling Ace;

2) Ruperto V. Tankeh, petitioner Dr. Alejandro V. Tankeh, Jose Marie Vargas, as well as
respondents Sterling Shipping Lines, Inc. and Vicente Arenas should become liable jointly and
severally for the amount of the loan;

3) The future earnings of the mortgaged vessel, including proceeds of Charter and Shipping
Contracts, should be assigned to Development Bank of the Philippines; and

4) Development Bank of the Philippines should be assigned no less than 67% of the total subscribed
and outstanding voting shares of the company. The percentage of shares assigned should be
maintained at all times, and the assignment was to subsist as long as the assignee, Development
Bank of the Philippines, deemed it necessary during the existence of the loan.3

According to petitioner Dr. Alejandro V. Tankeh, Ruperto V. Tankeh approached him sometime in
1980.4 Ruperto informed petitioner that he was operating a new shipping line business. Petitioner
claimed that respondent, who is also petitioner’s younger brother, had told him that petitioner would
be given one thousand (1,000) shares to be a director of the business. The shares were worth
₱1,000,000.00.5

On May 12, 1981, petitioner signed the Assignment of Shares of Stock with Voting Rights.6 Petitioner
then signed the May 12, 1981 promissory note in December 1981. He was the last to sign this note
as far as the other signatories were concerned.7 The loan was approved by respondent Development
Bank of the Philippines on March 18, 1981. The vessel was acquired on September 29, 1981 for
$5.3 million.8 On December 3, 1981, respondent corporation Sterling Shipping Lines, Inc. through
respondent Ruperto V. Tankeh executed a Deed of Assignment in favor of Development Bank of the
Philippines. The deed stated that the assignor, Sterling Shipping Lines, Inc.:
x x x does hereby transfer and assign in favor of the ASSIGNEE (DBP), its successors and assigns,
future earnings of the mortgaged M/V "Sterling Ace," including proceeds of charter and shipping
contracts, it being understood that this assignment shall continue to subsist for as long as the
ASSIGNOR’S obligation with the herein ASSIGNEE remains unpaid.9

On June 16, 1983, petitioner wrote a letter to respondent Ruperto V. Tankeh saying that he was
severing all ties and terminating his involvement with Sterling Shipping Lines, Inc.10 He required that
its board of directors pass a resolution releasing him from all liabilities, particularly the loan contract
with Development Bank of the Philippines. In addition, petitioner asked that the private respondents
notify Development Bank of the Philippines that he had severed his ties with Sterling Shipping Lines,
Inc.11

The accounts of respondent Sterling Shipping Lines, Inc. in the Development Bank of the Philippines
were transferred to public respondent Asset Privatization Trust on June 30, 1986.12

Presently, respondent Asset Privatization Trust is known as the Privatization and Management
Office. Asset Privatization Trust was a government agency created through Presidential
Proclamation No. 50, issued in 1986. Through Administrative Order No. 14, issued by former
President Corazon Aquino dated February 3, 1987, assets including loans in favor of Development
Bank of the Philippines were ordered to be transferred to the national government. In turn, the
management and facilitation of these assets were delegated to Asset Privatization Trust, pursuant to
Presidential Proclamation No. 50. In 1999, Republic Act No. 8758 was signed into law, and it
provided that the corporate term of Asset Privatization Trust would end on December 31, 2000. The
same law empowered the President of the Philippines to determine which office would facilitate the
management of assets held by Asset Privatization Trust. Thus, on December 6, 2000, former
President Joseph E. Estrada signed Executive Order No. 323, creating the Privatization
Management Office. Its present function is to identify disposable assets, monitor the progress of
privatization activities, and approve the sale or divestment of assets with respect to price and buyer.13

On January 29, 1987, the M/V Sterling Ace was sold in Singapore for $350,000.00 by Development
Bank of the Philippines’ legal counsel Atty. Prospero N. Nograles. When petitioner came to know of
the sale, he wrote respondent Development Bank of the Philippines to express that the final price
was inadequate, and therefore, the transaction was irregular. At this time, petitioner was still bound
as a debtor because of the promissory note dated May 12, 1981, which petitioner signed in
December of 1981. The promissory note subsisted despite Sterling Shipping Lines, Inc.’s
assignment of all future earnings of the mortgaged M/V Sterling Ace to Development Bank of the
Philippines. The loan also continued to bind petitioner despite Sterling Shipping Lines, Inc.’s cash
equity contribution of ₱13,663,200.00 which was used to cover part of the acquisition cost of the
vessel, pre-operating expenses, and initial working capital.14

Petitioner filed several Complaints15 against respondents, praying that the promissory note be
declared null and void and that he be absolved from any liability from the mortgage of the vessel and
the note in question.

In the Complaints, petitioner alleged that respondent Ruperto V. Tankeh, together with Vicente L.
Arenas, Jr. and Jose Maria Vargas, had exercised deceit and fraud in causing petitioner to bind
himself jointly and severally to pay respondent Development Bank of the Philippines the amount of
the mortgage loan.16 Although he had been made a stockholder and director of the respondent
corporation Sterling Shipping Lines, Inc., petitioner alleged that he had never invested any amount in
the corporation and that he had never been an actual member of the board of directors.17 He alleged
that all the money he had supposedly invested was provided by respondent Ruperto V. Tankeh.18 He
claimed that he only attended one meeting of the board. In that meeting, he was introduced to two
directors representing Development Bank of the Philippines, namely, Mr. Jesus Macalinag and Mr.
Gil Corpus. Other than that, he had never been notified of another meeting of the board of directors.

Petitioner further claimed that he had been excluded deliberately from participating in the affairs of
the corporation and had never been compensated by Sterling Shipping Lines, Inc. as a director and
stockholder.19 According to petitioner, when Sterling Shipping Lines, Inc. was organized, respondent
Ruperto V. Tankeh had promised him that he would become part of the administration staff and
oversee company operations. Respondent Ruperto V. Tankeh had also promised petitioner that the
latter’s son would be given a position in the company.20 However, after being designated as vice
president, petitioner had not been made an officer and had been alienated from taking part in the
respondent corporation.21

Petitioner also alleged that respondent Development Bank of the Philippines had been inexcusably
negligent in the performance of its duties.22 He alleged that Development Bank of the Philippines
must have been fully aware of Sterling Shipping Lines, Inc.’s financial situation. Petitioner claimed
that Sterling Shipping Lines, Inc. was controlled by the Development Bank of the Philippines
because 67% of voting shares had been assigned to the latter.23Furthermore, the mortgage contracts
had mandated that Sterling Shipping Lines, Inc. "shall furnish the DBP with copies of the minutes of
each meeting of the Board of Directors within one week after the meeting. Sterling Shipping Lines
Inc. shall likewise furnish DBP its annual audited financial statements and other information or data
that may be needed by DBP as its accommodations [sic] with DBP are outstanding."24 Petitioner
further alleged that the Development Bank of the Philippines had allowed "highly questionable
acts"25 to take place, including the gross undervaluing of the M/V Sterling Aces.26 Petitioner alleged
that one day after Development Bank of the Philippines’ Atty. Nograles sold the vessel, the ship was
re-sold by its buyer for double the amount that the ship had been bought.27

As for respondent Vicente L. Arenas, Jr., petitioner alleged that since Arenas had been the treasurer
of Sterling Shipping Lines, Inc. and later on had served as its vice president, he was also
responsible for the financial situation of Sterling Shipping Lines, Inc.

Lastly, in the Amended Complaint dated April 16, 1991, petitioner impleaded respondent Asset
Privatization Trust for being the agent and assignee of the M/V Sterling Ace.

In their Answers28 to the Complaints, respondents raised the following defenses against petitioner:
Respondent Development Bank of the Philippines categorically denied receiving any amount from
Sterling Shipping Lines, Inc.’s future earnings and from the proceeds of the shipping contracts. It
maintained that equity contributions could not be deducted from the outstanding loan obligation that
stood at ₱245.86 million as of December 31, 1986. Development Bank of the Philippines also
maintained that it is immaterial to the case whether the petitioner is a "real stockholder" or merely a
"pseudo-stockholder" of the corporation.29 By affixing his signature to the loan agreement, he was
liable for the obligation. According to Development Bank of the Philippines, he was in pari delicto
and could not be discharged from his obligation. Furthermore, petitioner had no cause of action
against Development Bank of the Philippines since this was a case between family members, and
earnest efforts toward compromise should have been complied with in accordance with Article 222
of the Civil Code of the Philippines.30

Respondent Ruperto V. Tankeh stated that petitioner had voluntarily signed the promissory note in
favor of Development Bank of the Philippines and with full knowledge of the consequences.
Respondent Tankeh also alleged that he did not employ any fraud or deceit to secure petitioner’s
involvement in the company, and petitioner had been fully aware of company operations. Also, all
that petitioner had to do to avoid liability had been to sell his shareholdings in the company.31
Respondent Asset Privatization Trust raised that petitioner had no cause of action against them
since Asset Privatization Trust had been mandated under Proclamation No. 50 to take title to and
provisionally manage and dispose the assets identified for privatization or deposition within the
shortest possible period. Development Bank of the Philippines had transferred and conveyed all its
rights, titles, and interests in favor of the national government in accordance with Administrative
Order No. 14. In line with that, Asset Privatization Trust was constituted as trustee of the assets
transferred to the national government to effect privatization of these assets, including respondent
Sterling Shipping Lines, Inc.32 Respondent Asset Privatization Trust also filed a compulsory
counterclaim against petitioner and its co-respondents Sterling Shipping Lines, Inc., Ruperto V.
Tankeh, and Vicente L. Arenas, Jr. for the amount of ₱264,386,713.84.

Respondent Arenas did not file an Answer to any of the Complaints of petitioner but filed a Motion to
Dismiss that the Regional Trial Court denied. Respondent Asset Privatization Trust filed a Cross
Claim against Arenas. In his Answer33 to Asset Privatization Trust’s Cross Claim, Arenas claimed that
he had been released from any further obligation to Development Bank of the Philippines and its
successor Asset Privatization Trust because an extension had been granted by the Development
Bank of the Philippines to the debtors of Sterling Shipping Lines, Inc. and/or Ruperto V. Tankeh,
which had been secured without Arenas’ consent.

The trial proceeded with the petitioner serving as a sole witness for his case. In a January 4, 1996
Decision,34 the Regional Trial Court ruled:

Here, we find –

1. Plaintiff being promised by his younger brother, Ruperto V. Tankeh, 1,000 shares with par
value of ₱1 Million with all the perks and privileges of being stockholder and director of SSLI,
a new international shipping line;

2. That plaintiff will be part of the administration and operation of the business, so with his
son who is with the law firm Romulo Ozaeta Law Offices;

3. But this was merely the come-on or appetizer for the Real McCoy or the primordial end of
congregating the incorporators proposed - - that he sign the promissory note (Exhibit "C"),
the mortgage contract (Exhibit "A"), and deed of assignment so SSLI could get the US $3.5
M loan from DBP to partially finance the importation of vessel M.V. "Golden Lilac" renamed
M.V. "Sterling ACE";

4. True it is, plaintiff was made a stockholder and director and Vice-President in 1979 but he
was never notified of any meeting of the Board except only once, and only to be introduced
to the two (2) directors representing no less than 67% of the total subscribed and
outstanding voting shares of the company. Thereafter, he was excluded from any board
meeting, shorn of his powers and duties as director or Vice-President, and was altogether
deliberately demeaned as an outsider.

5. What kind of a company is SSLI who treated one of their incorporators, one of their
Directors and their paper Vice-President in 1979 by preventing him access to corporate
books, to corporate earnings, or losses, and to any compensation or remuneration
whatsoever? Whose President and Treasurer did not submit the required SEC yearly report?
Who did not remit to DBP the proceeds on charter mortgage contracts on M/V Sterling Ace?

6. The M/V Sterling Ace was already in the Davao Port when it was then diverted to
Singapore to be disposed on negotiated sale, and not by public bidding contrary to COA
 Circular No. 86-264 and without COA’s approval. Sterling Ace was seaworthy but was sold
as scrap in Singapore. No foreclosure with public bidding was made in contravention of the
Promissory Note to recover any deficiency should DBP seeks [sic] to recover it on the
outstanding mortgage loan. Moreover the sale was done after the account and asset (nay,
now only a liability) were transferred to APT. No approval of SSLI Board of Directors to the
negotiated sale was given.

7. Plaintiff’s letter to his brother President, Ruperto V. Tankeh, dated June 15, 1983 (Exhibit
"D") his letter thru his lawyer to DBP (Exhibit "J") and another letter to it (Exhibit "K") show no
estoppel on his part as he consistently and continuously assailed the several injurious acts of
defendants while assailing the Promissory Note itself x x x (Citations omitted) applying the
maxim: Rencintiatio non praesumitur. By this Dr. Tankeh never waived the right to question
the Promissory Note contract terms. He did not ratify, by concurring acts, express or tacit,
after the reasons had surfaced entitling him to render the contract voidable, defendants’ acts
in implementing or not the conditions of the mortgage, the promissory note, the deed of
assignment, the lack of audit and accounting, and the negotiated sale of MV Sterling Ace. He
did not ratify defendants [sic] defective acts (Art. 1396, New Civil Code (NCC).

The foregoing and the following essays, supported by evidence, the fraud committed by plaintiff’s
brother before the several documents were signed (SEC documents, Promissory Note, Mortgage
(MC) Contract, assignment (DA)), namely:

1. Ruperto V. Tankeh approaches his brother Alejandro to tell the latter of his new shipping
business. The project was good business proposal [sic].

2. Ruperto tells Alejandro he’s giving him shares worth ₱1 Million and he’s going to be a
Director.

3. He tells his brother that he will be part of the company’s Administration and Operations
and his eldest son will be in it, too.

4. Ruperto tells his brother they need a ship, they need to buy one for the business, and they
therefore need a loan, and they could secure a loan from DBP with the vessel brought to
have a first mortgage with DBP but anyway the other two directors and comptroller will be
from DBP with a 67% SSLI shares voting rights.

Without these insidious, devastating and alluring words, without the machinations used by defendant
Ruperto V. Tankeh upon the doctor, without the inducement and promise of ownership of shares and
the exercise of administrative and operating functions, and the partial financing by one of the best
financial institutions, the DBP, plaintiff would not have agreed to join his brother; and the
safeguarding of the Bank’s interest by its nominated two (2) directors in the Board added to his
agreeing to the new shipping business. His consent was vitiated by the fraud before the several
contracts were consummated.

This alone convenes [sic] this Court to annul the Promissory Note as it relates to plaintiff himself.

Plaintiff also pleads annulment on ground of equity. Article 19, NCC, provides him the way as it
requires every person, in the exercise of his rights and performance of his duties, to act with justice,
give everyone his due, and observe honesty and good faith (Velayo vs. Shell Co. of the Phils., G.R.
L-7817, October 31, 1956). Not to release him from the clutch of the Promissory Note when he was
never made a part of the operation of the SSLI, when he was not notified of the Board Meetings,
when the corporation nary remitted earnings of M/V Sterling Ace from charter or shipping contracts
to DBP, when the SSLI did not comply with the deed of assignment and mortgage contract, and
when the vessel was sold in Singapore (he, learning of the sale only from the newspapers) in
contravention of the Promissory Note, and which he questioned, will be an injustice, inequitable, and
even iniquitous to plaintiff. SSLI and the private defendants did not observe honesty and good faith
to one of their incorporators and directors. As to DBP, the Court cannot put demerits on what
plaintiff’s memorandum has pointed out:

While defendant DBP did not exercise the caution and prudence in the discharge of their functions to
protect its interest as expected of them and worst, allowed the perpetuation of the illegal acts
committed in contrast to the virtues they publicly profess, namely: "palabra de honor, delicadeza,
katapatan, kaayusan, pagkamasinop at kagalingan" Where is the vision banking they have for our
country?

Had DBP listened to a cry in the wilderness – that of the voice of the doctor – the doctor would not
have allowed the officers and board members to defraud DBP and he would demand of them to hew
and align themselves to the deed of assignment.

Prescinding from the above, plaintiff’s consent to be with SSLI was vitiated by fraud. The fact that
defendant Ruperto Tankeh has not questioned his liability to DBP or that Jose Maria Vargas has
been declared in default do not detract from the fact that there was attendant fraud and that there
was continuing fraud insofar as plaintiff is concerned.

Ipinaglaban lang ni Doctor ang karapatan niya. Kung wala siyang sense of righteous indignation and
fairness, tatahimik na lang siya, sira naman ang pinangangalagaan niyang pangalan, honor and
family prestige [sic] (Emphasis provided).35

xxxx

All of the defendants’ counterclaims and cross-claims x x x including plaintiff’s and the other
defendants’ prayer for damages are not, for the moment, sourced and proven by substantial
evidence, and must perforce be denied and dismissed.

WHEREFORE, this Court, finding and declaring the Promissory Note (Exhibit "C") and the Mortgage
Contract (Exhibit "A") null and void insofar as plaintiff DR. ALEJANDRO V. TANKEH is concerned,
hereby ANNULS and VOIDS those documents as to plaintiff, and it is hereby further ordered that he
be released from any obligation or liability arising therefrom.

All the defendants’ counterclaims and cross-claims and plaintiff’s and defendants’ prayer for
damages are hereby denied and dismissed, without prejudice.

SO ORDERED.36

Respondents Ruperto V. Tankeh, Asset Privatization Trust, and Arenas immediately filed their
respective Notices of Appeal with the Regional Trial Court. The petitioner filed a Motion for
Reconsideration with regard to the denial of his prayer for damages. After this Motion had been
denied, he then filed his own Notice of Appeal.

In a Decision37 promulgated on October 25, 2005, the Third Division of the Court of Appeals reversed
the trial court’s findings. The Court of Appeals held that petitioner had no cause of action against
public respondent Asset Privatization Trust. This was based on the Court of Appeals’ assessment of
the case records and its findings that Asset Privatization Trust did not commit any act violative of the
right of petitioner or constituting a breach of Asset Privatization Trust’s obligations to petitioner. The
Court of Appeals found that petitioner’s claim for damages against Asset Privatization Trust was
based merely on his own self-serving allegations.38

As to the finding of fraud, the Court of Appeals held that:

xxxx

In all the complaints from the original through the first, second and third amendments, the plaintiff
imputes fraud only to defendant Ruperto, to wit:

4. That on May 12, 1981, due to the deceit and fraud exercised by Ruperto V. Tankeh, plaintiff,
together with Vicente L. Arenas, Jr. and Jose Maria Vargas signed a promissory note in favor of the
defendant, DBP, wherein plaintiff bound himself to jointly and severally pay the DBP the amount of
the mortgage loan. This document insofar as plaintiff is concerned is a simulated document
considering that plaintiff was never a real stockholder of Sterling Shipping Lines, Inc. (Emphasis
provided)

More allegations of deceit were added in the Second Amended Complaint, but they are also
attributed against Ruperto:

6. That THE DECEIT OF DEFENDANT RUPERTO V. TANKEH IS SHOWN BY THE FACT THAT
when the Sterling Shipping Lines, Inc. was organized in 1980, Ruperto V. Tankeh promised plaintiff
that he would be a part of the administration staff so that he could oversee the operation of the
company. He was also promised that his son, a lawyer, would be given a position in the company.
None of these promsies [sic] was complied with. In fact he was not even allowed to find out the data
about the income and expenses of the company.

7. THAT THE DECEIT OF RUPERTO V. TANKEH IS ALSO SHOWN BY THE FACT THAT
PLAINTIFF WAS INVITED TO ATTEND THE BOARD MEETING OF THE STERLING SHIPPING
LINES INC. ONLY ONCE, WHICH WAS FOR THE SOLE PURPOSE OF INTRODUCING HIM TO
THE TWO DIRECTORS OF THE DBP IN THE BOARD OF THE STERLING SHIPPING LINES,
INC., NAMELY, MR. JESUS MACALINAG AND MR. GIL CORPUS. THEREAFTER HE WAS
NEVER INVITED AGAIN. PLAINTIFF WAS NEVER COMPENSATED BY THE STERLING
SHIPPING LINES, INC. FOR HIS BEING A SO-CALLED DIRECTOR AND STOCKHOLDER.

xxxx

8-A THAT A WEEK AFTER SENDING THE ABOVE LETTER PLAINTIFF MADE EARNEST
EFFORTS TOWARDS A COMPROMISE BETWEEN HIM AND HIS BROTHER RUPERTO V.
TANKEH, WHICH EFFORTS WERE SPURNED BY RUPERTO V. TANKEH, AND ALSO AFTER
THE NEWS OF THE SALE OF THE ‘STERLING ACE’ WAS PUBLISHED AT THE NEWSPAPER,
PLAINTIFF TRIED ALL EFFORTS TO CONTACT RUPERTO V. TANKEH FOR THE PURPOSE OF
ARRIVING AT SOME COMPROMISE, BUT DEFENDANT RUPERTO V. TANKEH AVOIDED ALL
CONTACTS WITH THE PLAINTIFF UNTIL HE WAS FORCED TO SEEK LEGAL ASSISTANCE
FROM HIS LAWYER.

In the absence of any allegations of fraud and/or deceit against the other defendants, namely, the
DBP, Vicente Arenas, Sterling Shipping Lines, Inc., and the Asset Privatization Trust, the plaintiff’s
evidence thereon should only be against Ruperto, since a plaintiff is bound to prove only the
allegations of his complaint. In any case, no evidence of fraud or deceit was ever presented against
defendants DBP, Arenas, SSLI and APT.
As to the evidence against Ruperto, the same consists only of the testimony of the plaintiff. None of
his documentary evidence would prove that Ruperto was guilty of fraud or deceit in causing him to
sign the subject promissory note.39

xxxx

Analyzing closely the foregoing statements, we find no evidence of fraud or deceit. The mention of a
new shipping lines business and the promise of a free 1,000-share and directorship in the
corporation do not amount to insidious words or machinations. In any case, the shipping business
was indeed established, with the plaintiff himself as one of the incorporators and stockholders with a
share of 4,000, worth ₱4,000,000.00 of which ₱1,000,000.00 was reportedly paid up. As such, he
signed the Articles of Incorporation and the corporation’s By-Laws which were registered with the
Securities and Exchange Commission in April 1979. It was not until May 12, 1981 that he signed the
questioned promissory note. From his own declaration at the witness stand, the plaintiff signed the
promissory note voluntarily. No pressure, force or intimidation was made to bear upon him. In fact,
according to him, only a messenger brought the paper to him for signature. The promised shares of
stock were given and recorded in the plaintiff’s name. He was made a director and Vice-President of
SSLI. Apparently, only the promise that his son would be given a position in the company remained
unfulfilled. However, the same should have been threshed out between the plaintiff and his brother,
defendant Ruperto, and its non-fulfillment did not amount to fraud or deceit, but was only an
unfulfilled promise.

It should be pointed out that the plaintiff is a doctor of medicine and a seasoned businessman. It
cannot be said that he did not understand the import of the documents he signed. Certainly he knew
what he was signing. He should have known that being an officer of SSLI, his signing of the
promissory note together with the other officers of the corporation was expected, as the other
officers also did. It cannot therefore be said that the promissory note was simulated. The same is a
contract validly entered into, which the parties are obliged to comply with.40 (Citations omitted)

The Court of Appeals ruled that in the absence of any competent proof, Ruperto V. Tankeh did not
commit any fraud. Petitioner Alejandro V. Tankeh was unable to prove by a preponderance of
evidence that fraud or deceit had been employed by Ruperto to make him sign the promissory note.
The Court of Appeals reasoned that:

Fraud is never presumed but must be proved by clear and convincing evidence, mere
preponderance of evidence not even being adequate. Contentions must be proved by competent
evidence and reliance must be had on the strength of the party’s evidence and not upon the
weakness of the opponent’s defense. The plaintiff clearly failed to discharge such burden.41 (Citations
omitted)

With that, the Court of Appeals reversed and set aside the judgment and ordered that plaintiff’s
Complaint be dismissed. Petitioner filed a Motion for Reconsideration dated October 25, 2005 that
was denied in a Resolution42promulgated on February 9, 2006.

Hence, this Petition was filed.

In this Petition, Alejandro V. Tankeh stated that the Court of Appeals seriously erred and gravely
abused its discretion in acting and deciding as if the evidence stated in the Decision of the Regional
Trial Court did not exist. He averred that the ruling of lack of cause of action had no leg to stand on,
and the Court of Appeals had unreasonably, whimsically, and capriciously ignored the ample
evidence on record proving the fraud and deceit perpetrated on the petitioner by the respondent. He
stated that the appellate court failed to appreciate the findings of fact of the lower court, which are
generally binding on appellate courts. He also maintained that he is entitled to damages and
attorney's fees due to the deceit and machinations committed by the respondent.

In his Memorandum, respondent Ruperto V. Tankeh averred that petitioner had chosen the wrong
remedy. He ought to have filed a special civil action of certiorari and not a Petition for Review.
Petitioner raised questions of fact, and not questions of law, and this required the review or
evaluation of evidence. However, this is not the function of this Court, as it is not a trier of facts. He
also contended that petitioner had voluntarily entered into the loan agreement and the position with
Sterling Shipping Lines, Inc. and that he did not fraudulently induce the petitioner to enter into the
contract.

Respondents Development Bank of the Philippines and Asset Privatization Trust also contended that
petitioner's mode of appeal had been wrong, and he had actually sought a special civil action of
certiorari. This alone merited its dismissal.

The main issue in this case is whether the Court of Appeals erred in finding that respondent Rupert
V. Tankeh did not commit fraud against the petitioner.

The Petition is partly granted.

Before disposing of the main issue in this case, this Court needs to address a procedural issue
raised by respondents. Collectively, respondents argue that the Petition is actually one of certiorari
under Rule 65 of the Rules of Court43 and not a Petition for Review on Certiorari under Rule
45.44 Thus, petitioner’s failure to show that there was neither appeal nor any other plain, speedy or
adequate remedy merited the dismissal of the Complaint.

Contrary to respondent’s imputation, the remedy contemplated by petitioner is clearly that of a Rule
45 Petition for Review. In Tagle v. Equitable PCI Bank,45 this Court made the distinction between a
Rule 45 Petition for Review on Certiorari and a Rule 65 Petition for Certiorari:

Certiorari is a remedy designed for the correction of errors of jurisdiction, not errors of judgment. In
1âw phi 1

Pure Foods Corporation v. NLRC, we explained the simple reason for the rule in this light: When a
court exercises its jurisdiction, an error committed while so engaged does not deprive it of the
jurisdiction being exercised when the error is committed x x x. Consequently, an error of judgment
that the court may commit in the exercise of its jurisdiction is not correctable through the original civil
action of certiorari.

xxxx

Even if the findings of the court are incorrect, as long as it has jurisdiction over the case, such
correction is normally beyond the province of certiorari. Where the error is not one of jurisdiction, but
of an error of law or fact a mistake of judgment, appeal is the remedy.

In this case, what petitioner seeks to rectify may be construed as errors of judgment of the Court of
Appeals. These errors pertain to the petitioner’s allegation that the appellate court failed to uphold
the findings of facts of the lower court. He does not impute any error with respect to the Court of
Appeals’ exercise of jurisdiction. As such, this Petition is simply a continuation of the appellate
process where a case is elevated from the trial court of origin, to the Court of Appeals, and to this
Court via Rule 45.
Contrary to respondents’ arguments, the allegations of petitioner that the Court of Appeals
"committed grave abuse of discretion"46 did not ipso facto render the intended remedy that of
certiorari under Rule 65 of the Rules of Court.47

In any case, even if the Petition is one for the special civil action of certiorari, this Court has the
discretion to treat a Rule 65 Petition for Certiorari as a Rule 45 Petition for Review on Certiorari. This
is allowed if (1) the Petition is filed within the reglementary period for filing a Petition for review; (2)
when errors of judgment are averred; and (3) when there is sufficient reason to justify the relaxation
of the rules.48 When this Court exercises this discretion, there is no need to comply with the
requirements provided for in Rule 65.

In this case, petitioner filed his Petition within the reglementary period of filing a Petition for
Review.49 His Petition assigns errors of judgment and appreciation of facts and law on the part of the
Court of Appeals. Thus, even if the Petition was designated as one that sought the remedy of
certiorari, this Court may exercise its discretion to treat it as a Petition for Review in the interest of
substantial justice.

We now proceed to the substantive issue, that of petitioner’s imputation of fraud on the part of
respondents. We are required by the circumstances of this case to review our doctrines of fraud that
are alleged to be present in contractual relations.

Types of Fraud in Contracts

Fraud is defined in Article 1338 of the Civil Code as:

x x x fraud when, through insidious words or machinations of one of the contracting parties, the other
is induced to enter into a contract which, without them, he would not have agreed to.

This is followed by the articles which provide legal examples and illustrations of fraud.

Art. 1339. Failure to disclose facts, when there is a duty to reveal them, as when the parties are
bound by confidential relations, constitutes fraud. (n)

Art. 1340. The usual exaggerations in trade, when the other party had an opportunity to know the
facts, are not in themselves fraudulent. (n)

Art. 1341. A mere expression of an opinion does not signify fraud, unless made by an expert and the
other party has relied on the former's special knowledge. (n)

Art. 1342. Misrepresentation by a third person does not vitiate consent, unless such
misrepresentation has created substantial mistake and the same is mutual. (n)

Art. 1343. Misrepresentation made in good faith is not fraudulent but may constitute error. (n)

The distinction between fraud as a ground for rendering a contract voidable or as basis for an award
of damages is provided in Article 1344:

In order that fraud may make a contract voidable, it should be serious and should not have been
employed by both contracting parties.

Incidental fraud only obliges the person employing it to pay damages. (1270)
There are two types of fraud contemplated in the performance of contracts: dolo incidente or
incidental fraud and dolo causante or fraud serious enough to render a contract voidable.

In Geraldez v. Court of Appeals,50 this Court held that:

This fraud or dolo which is present or employed at the time of birth or perfection of a contract may
either be dolo causante or dolo incidente. The first, or causal fraud referred to in Article 1338, are
those deceptions or misrepresentations of a serious character employed by one party and without
which the other party would not have entered into the contract. Dolo incidente, or incidental fraud
which is referred to in Article 1344, are those which are not serious in character and without which
the other party would still have entered into the contract. Dolo causante determines or is the
essential cause of the consent, while dolo incidente refers only to some particular or accident of the
obligation. The effects of dolo causante are the nullity of the contract and the indemnification of
damages, and dolo incidente also obliges the person employing it to pay damages.51

In Solidbank Corporation v. Mindanao Ferroalloy Corporation, et al.,52 this Court elaborated on the
distinction between dolo causante and dolo incidente:

Fraud refers to all kinds of deception -- whether through insidious machination, manipulation,
concealment or misrepresentation -- that would lead an ordinarily prudent person into error after
taking the circumstances into account. In contracts, a fraud known as dolo causante or causal fraud
is basically a deception used by one party prior to or simultaneous with the contract, in order to
secure the consent of the other. Needless to say, the deceit employed must be serious. In
contradistinction, only some particular or accident of the obligation is referred to by incidental fraud
or dolo incidente, or that which is not serious in character and without which the other party would
have entered into the contract anyway.53

Under Article 1344, the fraud must be serious to annul or avoid a contract and render it voidable.
This fraud or deception must be so material that had it not been present, the defrauded party would
not have entered into the contract. In the recent case of Spouses Carmen S. Tongson and Jose C.
Tongson, et al., v. Emergency Pawnshop Bula, Inc.,54 this Court provided some examples of what
constituted dolo causante or causal fraud:

Some of the instances where this Court found the existence of causal fraud include: (1) when the
seller, who had no intention to part with her property, was "tricked into believing" that what she
signed were papers pertinent to her application for the reconstitution of her burned certificate of title,
not a deed of sale; (2) when the signature of the authorized corporate officer was forged; or (3) when
the seller was seriously ill, and died a week after signing the deed of sale raising doubts on whether
the seller could have read, or fully understood, the contents of the documents he signed or of the
consequences of his act.55 (Citations omitted)

However, Article 1344 also provides that if fraud is incidental, it follows that this type of fraud is not
serious enough so as to render the original contract voidable.

A classic example of dolo incidente is Woodhouse v. Halili.56 In this case, the plaintiff Charles
Woodhouse entered into a written agreement with the defendant Fortunato Halili to organize a
partnership for the bottling and distribution of soft drinks. However, the partnership did not come into
fruition, and the plaintiff filed a Complaint in order to execute the partnership. The defendant filed a
Counterclaim, alleging that the plaintiff had defrauded him because the latter was not actually the
owner of the franchise of a soft drink bottling operation. Thus, defendant sought the nullification of
the contract to enter into the partnership. This Court concluded that:
x x x from all the foregoing x x x plaintiff did actually represent to defendant that he was the holder of
the exclusive franchise. The defendant was made to believe, and he actually believed, that plaintiff
had the exclusive franchise. x x x The record abounds with circumstances indicative that the fact that
the principal consideration, the main cause that induced defendant to enter into the partnership
agreement with plaintiff, was the ability of plaintiff to get the exclusive franchise to bottle and
distribute for the defendant or for the partnership. x x x The defendant was, therefore, led to the
belief that plaintiff had the exclusive franchise, but that the same was to be secured for or transferred
to the partnership. The plaintiff no longer had the exclusive franchise, or the option thereto, at the
time the contract was perfected. But while he had already lost his option thereto (when the contract
was entered into), the principal obligation that he assumed or undertook was to secure said
franchise for the partnership, as the bottler and distributor for the Mission Dry Corporation. We
declare, therefore, that if he was guilty of a false representation, this was not the causal
consideration, or the principal inducement, that led plaintiff to enter into the partnership agreement.

But, on the other hand, this supposed ownership of an exclusive franchise was actually the
consideration or price plaintiff gave in exchange for the share of 30 percent granted him in the net
profits of the partnership business. Defendant agreed to give plaintiff 30 per cent share in the net
profits because he was transferring his exclusive franchise to the partnership. x x x.

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

We conclude from the above that while the representation that plaintiff had the exclusive franchise
did not vitiate defendant's consent to the contract, it was used by plaintiff to get from defendant a
share of 30 per cent of the net profits; in other words, by pretending that he had the exclusive
franchise and promising to transfer it to defendant, he obtained the consent of the latter to give him
(plaintiff) a big slice in the net profits. This is the dolo incidente defined in article 1270 of the Spanish
Civil Code, because it was used to get the other party's consent to a big share in the profits, an
incidental matter in the agreement.57

Thus, this Court held that the original agreement may not be declared null and void. This Court also
said that the plaintiff had been entitled to damages because of the refusal of the defendant to enter
into the partnership. However, the plaintiff was also held liable for damages to the defendant for the
misrepresentation that the former had the exclusive franchise to soft drink bottling operations.

To summarize, if there is fraud in the performance of the contract, then this fraud will give rise to
damages. If the fraud did not compel the imputing party to give his or her consent, it may not serve
as the basis to annul the contract, which exhibits dolo causante. However, the party alleging the
existence of fraud may prove the existence of dolo incidente.

This may make the party against whom fraud is alleged liable for damages.

Quantum of Evidence to Prove the Existence of Fraud and the Liability of the Parties

The Civil Code, however, does not mandate the quantum of evidence required to prove actionable
fraud, either for purposes of annulling a contract (dolo causante) or rendering a party liable for
damages (dolo incidente). The definition of fraud is different from the quantum of evidence needed
to prove the existence of fraud. Article 1338 provides the legal definition of fraud. Articles 1339 to
1343 constitute the behavior and actions that, when in conformity with the legal provision, may
constitute fraud.
Jurisprudence has shown that in order to constitute fraud that provides basis to annul contracts, it
must fulfill two conditions. First, the fraud must be dolo causante or it must be fraud in obtaining the
consent of the party. Second, this fraud must be proven by clear and convincing evidence. In Viloria
v. Continental Airlines,58 this Court held that:

Under Article 1338 of the Civil Code, there is fraud when, through insidious words or machinations of
one of the contracting parties, the other is induced to enter into a contract which, without them, he
would not have agreed to. In order that fraud may vitiate consent, it must be the causal (dolo
causante), not merely the incidental (dolo incidente), inducement to the making of the contract. In
Samson v. Court of Appeals, causal fraud was defined as "a deception employed by one party prior
to or simultaneous to the contract in order to secure the consent of the other." Also, fraud must be
serious and its existence must be established by clear and convincing evidence. (Citations omitted)59

In Viloria, this Court cited Sierra v. Court of Appeals60 stating that mere preponderance of evidence
will not suffice in proving fraud.

Fraud must also be discounted, for according to the Civil Code:

Art. 1338. There is fraud when, through insidious words or machinations of one of the contracting
parties, the other is induced to enter into a contract which without them, he would not have agreed
to.

Art. 1344. In order that fraud may make a contract voidable, it should be serious and should not
have been employed by both contracting parties.

To quote Tolentino again, the "misrepresentation constituting the fraud must be established by full,
clear, and convincing evidence, and not merely by a preponderance thereof. The deceit must be
serious. The fraud is serious when it is sufficient to impress, or to lead an ordinarily prudent person
into error; that which cannot deceive a prudent person cannot be a ground for nullity. The
circumstances of each case should be considered, taking into account the personal conditions of the
victim."61

Thus, to annul a contract on the basis of dolo causante, the following must happen: First, the deceit
must be serious or sufficient to impress and lead an ordinarily prudent person to error. If the
allegedly fraudulent actions do not deceive a prudent person, given the circumstances, the deceit
here cannot be considered sufficient basis to nullify the contract. In order for the deceit to be
considered serious, it is necessary and essential to obtain the consent of the party imputing fraud.
To determine whether a person may be sufficiently deceived, the personal conditions and other
factual circumstances need to be considered.

Second, the standard of proof required is clear and convincing evidence. This standard of proof is
derived from American common law. It is less than proof beyond reasonable doubt (for criminal
cases) but greater than preponderance of evidence (for civil cases). The degree of believability is
higher than that of an ordinary civil case. Civil cases only require a preponderance of evidence to
meet the required burden of proof. However, when fraud is alleged in an ordinary civil case involving
contractual relations, an entirely different standard of proof needs to be satisfied. The imputation of
fraud in a civil case requires the presentation of clear and convincing evidence. Mere allegations will
not suffice to sustain the existence of fraud. The burden of evidence rests on the part of the plaintiff
or the party alleging fraud. The quantum of evidence is such that fraud must be clearly and
convincingly shown.

The Determination of the Existence of Fraud in the Present Case

We now determine the application of these doctrines regarding fraud to ascertain the liability, if any,
of the respondents.

Neither law nor jurisprudence distinguishes whether it is dolo incidente or dolo causante that must
be proven by clear and convincing evidence. It stands to reason that both dolo incidente and dolo
causante must be proven by clear and convincing evidence. The only question is whether this fraud,
when proven, may be the basis for making a contract voidable (dolo causante), or for awarding
damages (dolo incidente), or both.

Hence, there is a need to examine all the circumstances thoroughly and to assess the personal
circumstances of the party alleging fraud. This may require a review of the case facts and the
evidence on record.

In general, this Court is not a trier of facts. It makes its rulings based on applicable law and on
standing jurisprudence. The findings of the Court of Appeals are generally binding on this Court
provided that these are supported by the evidence on record. In the recent case of Medina v. Court
of Appeals,62 this Court held that:

It is axiomatic that a question of fact is not appropriate for a petition for review on certiorari under
Rule 45. This rule provides that the parties may raise only questions of law, because the Supreme
Court is not a trier of facts. Generally, we are not duty-bound to analyze again and weigh the
evidence introduced in and considered by the tribunals below. When supported by substantial
evidence, the findings of fact of the Court of Appeals are conclusive and binding on the parties and
are not reviewable by this Court, unless the case falls under any of the following recognized
exceptions: (1) When the conclusion is a finding grounded entirely on speculation, surmises and
conjectures; (2) When the inference made is manifestly mistaken, absurd or impossible; (3) Where
there is a grave abuse of discretion; (4) When the judgment is based on a misapprehension of facts;
(5) When the findings of fact are conflicting; (6) When the Court of Appeals, in making its findings,
went beyond the issues of the case and the same is contrary to the admissions of both appellant and
appellee; (7) When the findings are contrary to those of the trial court; (8) When the findings of fact
are conclusions without citation of specific evidence on which they are based; (9) When the facts set
forth in the petition as well as in the petitioner’s main and reply briefs are not disputed by the
respondents; and (10) When the findings of fact of the Court of Appeals are premised on the
supposed absence of evidence and contradicted by the evidence on record. (Emphasis provided)63

The trial court and the Court of Appeals had appreciated the facts of this case differently.

The Court of Appeals was not correct in saying that petitioner could only raise fraud as a ground to
annul his participation in the contract as against respondent Rupert V. Tankeh, since the petitioner
did not make any categorical allegation that respondents Development Bank of the Philippines,
Sterling Shipping Lines, Inc., and Asset Privatization Trust had acted fraudulently. Admittedly, it was
only in the Petition before this Court that the petitioner had made the allegation of a "well-
orchestrated fraud"64 by the respondents. However, Rule 10, Section 5 of the Rules of Civil
Procedure provides that:

Amendment to conform to or authorize presentation of evidence. — When issues not raised by the
pleadings are tried with the express or implied consent of the parties they shall be treated in all
respects as if they had been raised in the pleadings. Such amendment of the pleadings as may be
necessary to cause them to conform to the evidence and to raise these issues may be made upon
motion of any party at any time, even after judgment; but failure to amend does not effect the result
of the trial of these issues. If evidence is objected to at the trial on the ground that it is not within the
issues made by the pleadings, the court may allow the pleadings to be amended and shall do so
with liberality if the presentation of the merits of the action and the ends of substantial justice will be
subserved thereby. The court may grant a continuance to enable the amendment to be made. (5a)

In this case, the commission of fraud was an issue that had been tried with the implied consent of
the respondents, particularly Sterling Shipping Lines, Inc., Asset Privatization Trust, Development
Bank of the Philippines, and Arenas. Hence, although there is a lack of a categorical allegation in the
pleading, the courts may still be allowed to ascertain fraud.

The records will show why and how the petitioner agreed to enter into the contract with respondent
Ruperto V. Tankeh:

ATTY. VELAYO: How did you get involved in the business of the Sterling Shipping Lines,
Incorporated" [sic]

DR. TANKEH: Sometime in the year 1980, I was approached by Ruperto Tankeh mentioning to me
that he is operating a new shipping lines business and he is giving me free one thousand shares
(1,000) to be a director of this new business which is worth one million pesos (₱1,000,000.00.),

ATTY. VELAYO: Are you related to Ruperto V. Tankeh?

DR. TANKEH: Yes, sir. He is my younger brother.

ATTY. VELAYO: Did you accept the offer?

DR. TANKEH: I accepted the offer based on his promise to me that I will be made a part of the
administration staff so that I can oversee the operation of the business plus my son, the eldest one
who is already a graduate lawyer with a couple of years of experience in the law firm of Romulo
Ozaeta Law Offices (TSN, April 28, 1988, pp. 10-11.).65

The Second Amended Complaint of petitioner is substantially reproduced below to ascertain the
claim:

xxxx

2. That on May 12, 1981, due to the deceit and fraud exercised by Ruperto V. Tankeh,
plaintiff, together with Vicente L. Arenas, Jr. and Jose Maria Vargas, signed a promissory
note in favor of the defendant DBP, wherein plaintiff bound himself to jointly and severally
pay the DBP the amount of the mortgage loan. This document insofar as plaintiff is
concerned is a simulated document considering that plaintiff was never a real stockholder of
the Sterling Shipping Lines, Inc.

3. That although plaintiff’s name appears in the records of Sterling Shipping Lines, Inc. as
one of its incorporators, the truth is that he had never invested any amount in said
corporation and that he had never been an actual member of said corporation. All the money
supposedly invested by him were put by defendant Ruperto V. Tankeh. Thus, all the shares
of stock under his name in fact belongs to Ruperto V. Tankeh. Plaintiff was invited to attend
the board meeting of the Sterling Shipping Lines, Inc. only once, which was for the sole
purpose of introducing him to the two directors of the DBP, namely, Mr. Jesus Macalinag and
Mr. Gil Corpus. Thereafter he was never invited again. Plaintiff was never compensated by
the Sterling Shipping Lines, Inc. for his being a so-called director and stockholder. It is clear
 therefore that the DBP knew all along that plaintiff was not a true stockholder of the
company.

4. That THE DECEIT OF DEFENDANT RUPERTO V. TANKEH IS SHOWN BY THE FACT

THAT when the Sterling Shipping Lines, Inc. was organized in 1980, Ruperto V. Tankeh
promised plaintiff that he would be a part of the administration staff so that he could oversee
the operation of the company. He was also promised that his son, a lawyer, would be given a
position in the company. None of these promises was complied with. In fact, he was not even
allowed to find out the data about the income and expenses of the company.

5. THAT THE DECEIT OF RUPERTO V. TANKEH IS ALSO SHOWN BY THE FACT THAT
PLAINTIFF WAS INVITED TO ATTEND THE BOARD MEETING OF THE STERLING
SHIPPING LINES, INC. ONLY ONCE, WHICH WAS FOR THE SOLE PUPOSE OF
INTRODUCING HIM TO THE TWO DIRECTORS OF THE DBP IN THE BOARD OF THE
STERLING SHIPPING LINES, INC., NAMELY, MR. JESUS MACALINAG AND MR. GIL
CORPUS. THEREAFTER HE WAS NEVER INVITED AGAIN. PLAINTIFF WAS NEVER
COMPENSATED BY THE STERLING SHIPPING LINES, INC. FOR HIS BEING A SO-
CALLED DIRECTOR AND STOCKHOLDER.

6. That in 1983, upon realizing that he was only being made a tool to realize the purposes of
Ruperto V. Tankeh, plaintiff officially informed the company by means of a letter dated June
15, 1983 addressed to the company that he has severed his connection with the company,
and demanded among others, that the company board of directors pass a resolution
releasing him from any liabilities especially with reference to the loan mortgage contract with
the DBP and to notify the DBP of his severance from the Sterling Shipping Lines, Inc.

8-A. THAT A WEEK AFTER SENDING THE ABOVE LETTER, PLAINTIFF MADE EARNEST
EFFORTS TOWARDS A COMPROMISE BETWEEN HIM AND HIS BROTHER RUPERTO
V. TANKEH, WHICH EFFORTS WERE SPURNED BY RUPERTO V. TANKEH, AND ALSO
AFTER THE NEWS OF THE SALE OF THE "STERLING ACE" WAS PUBLISHED AT THE
NEWSPAPER [sic], PLAINTIFF TRIED ALL EFFORTS TO CONTACT RUPERTO V.
TANKEH FOR THE PURPOSE OF ARRIVING AT SOME COMPROMISE, BUT
DEFENDANT RUPERTO V. TANKEH AVOIDED ALL CONTACTS [sic] WITH THE
PLAINTIFF UNTIL HE WAS FORCED TO SEEK LEGAL ASSISTANCE FROM HIS
LAWYER.66

In his Answer, respondent Ruperto V. Tankeh stated that:

COMES NOW defendant RUPERTO V. TANKEH, through the undersigned counsel, and to the
Honorable Court, most respectfully alleges:

xxxx

3. That paragraph 4 is admitted that herein answering defendant together with the plaintiff
signed the promissory note in favor of DBP but specifically denied that the same was done
through deceit and fraud of herein answering defendant the truth being that plaintiff signed
said promissory note voluntarily and with full knowledge of the consequences thereof; it is
further denied that said document is a simulated document as plaintiff was never a real
stockholder of the company, the truth being those alleged in the special and affirmative
defenses;
 4. That paragraphs 5,6,7,8 and 8-A are specifically denied specially the imputation of deceit
and fraud against herein answering defendant, the truth being those alleged in the special
and affirmative defenses;

xxxx

SPECIAL AND AFFIRMATIVE DEFENSES x x x

8. The complaint states no cause of action as against herein answering defendant;

9. The Sterling Shipping Lines, Inc. was a legitimate company organized in accordance with
the laws of the Republic of the Philippines with the plaintiff as one of the incorporators;

10. Plaintiff as one of the incorporators and directors of the board was fully aware of the by-
laws of the company and if he attended the board meeting only once as alleged, the reason
thereof was known only to him;

11. The Sterling Shipping Lines, Inc. being a corporation acting through its board of directors,
herein answering defendant could not have promised plaintiff that he would be a part of the
administration staff;

12. As member of the board, plaintiff had all the access to the data and records of the
company; further, as alleged in the complaint, plaintiff has a son who is a lawyer who could
have advised him;

13. Assuming plaintiff wrote a letter to the company to sever his connection with the
company, he should have been aware that all he had to do was sell all his holdings in the
company;

14. Herein answering defendant came to know only of plaintiff’s alleged predicament when
he received the summons and copy of the complaint; x x x.67

An assessment of the allegations in the pleadings and the findings of fact of both the trial court and
appellate court based on the evidence on record led to the conclusion that there had been no dolo
causante committed against the petitioner by Ruperto V. Tankeh.

The petitioner had given his consent to become a shareholder of the company without contributing a
single peso to pay for the shares of stock given to him by Ruperto V. Tankeh. This fact was admitted
by both petitioner and respondent in their respective pleadings submitted to the lower court.

In his Amended Complaint,68 the petitioner admitted that "he had never invested any amount in said
corporation and that he had never been an actual member of said corporation. All the money
supposedly invested by him were put up by defendant Ruperto V. Tankeh."69 This fact alone should
have already alerted petitioner to the gravity of the obligation that he would be undertaking as a
member of the board of directors and the attendant circumstances that this undertaking would entail.
It also does not add any evidentiary weight to strengthen petitioner’s claim of fraud. If anything, it
only strengthens the position that petitioner’s consent was not obtained through insidious words or
deceitful machinations.

Article 1340 of the Civil Code recognizes the reality of some exaggerations in trade which negates
fraud. It reads:
Art. 1340. The usual exaggerations in trade, when the other party had an opportunity to know the
facts, are not in themselves fraudulent.

Given the standing and stature of the petitioner, he was in a position to ascertain more information
about the contract.

Songco v. Sellner70 serves as one of the key guidelines in ascertaining whether a party is guilty of
fraud in obtaining the consent of the party claiming that fraud existed. The plaintiff Lamberto Songco
sought to recover earnings from a promissory note that defendant George Sellner had made out to
him for payment of Songco’s sugar cane production. Sellner claimed that he had refused to pay
because Songco had promised that the crop would yield 3,000 piculs of sugar, when in fact, only
2,017 piculs of sugar had been produced. This Court held that Sellner would still be liable to pay the
promissory note, as follows:

Notwithstanding the fact that Songco's statement as to the probable output of his crop was
disingenuous and uncandid, we nevertheless think that Sellner was bound and that he must pay the
price stipulated. The representation in question can only be considered matter of opinion as the cane
was still standing in the field, and the quantity of the sugar it would produce could not be known with
certainty until it should be harvested and milled. Undoubtedly Songco had better experience and
better information on which to form an opinion on this question than Sellner. Nevertheless the latter
could judge with his own eyes as to the character of the cane, and it is shown that he measured the
fields and ascertained that they contained 96 1/2 hectares.

xxxx

The law allows considerable latitude to seller's statements, or dealer's talk; and experience teaches
that it is exceedingly risky to accept it at its face value. The refusal of the seller to warrant his
estimate should have admonished the purchaser that that estimate was put forth as a mere opinion;
and we will not now hold the seller to a liability equal to that which would have been created by a
warranty, if one had been given.

xxxx

It is not every false representation relating to the subject matter of a contract which will render it void.
It must be as to matters of fact substantially affecting the buyer's interest, not as to matters of
opinion, judgment, probability, or expectation. (Long vs. Woodman, 58 Me., 52; Hazard vs. Irwin, 18
Pick. [Mass.], 95; Gordon vs. Parmelee, 2 Allen [Mass.], 212; Williamson vs. McFadden, 23 Fla.,
143, 11 Am. St. Rep., 345.) When the purchaser undertakes to make an investigation of his own,
and the seller does nothing to prevent this investigation from being as full as he chooses to make it,
the purchaser cannot afterwards allege that the seller made misrepresentations. (National Cash
Register Co. vs. Townsend, 137 N. C., 652, 70 L. R. A., 349; Williamson vs. Holt, 147 N. C., 515.)

We are aware that where one party to a contract, having special or expert knowledge, takes
advantage of the ignorance of another to impose upon him, the false representation may afford
ground for relief, though otherwise the injured party would be bound. But we do not think that the fact
that Songco was an experienced farmer, while Sellner was, as he claims, a mere novice in the
business, brings this case within that exception.71

The following facts show that petitioner was fully aware of the magnitude of his undertaking:

First, petitioner was fully aware of the financial reverses that Sterling Shipping Lines, Inc. had been
undergoing, and he took great pains to release himself from the obligation.
Second, his background as a doctor, as a bank organizer, and as a businessman with experience in
the textile business and real estate should have apprised him of the irregularity in the contract that
he would be undertaking. This meant that at the time petitioner gave his consent to become a part of
the corporation, he had been fully aware of the circumstances and the risks of his participation.
Intent is determined by the acts.

Finally, the records showed that petitioner had been fully aware of the effect of his signing the
promissory note. The bare assertion that he was not privy to the records cannot counteract the fact
that petitioner himself had admitted that after he had severed ties with his brother, he had written a
letter seeking to reach an amicable settlement with respondent Rupert V. Tankeh. Petitioner’s
actions defied his claim of a complete lack of awareness regarding the circumstances and the
contract he had been entering.

The required standard of proof – clear and convincing evidence – was not met. There was no dolo
causante or fraud used to obtain the petitioner’s consent to enter into the contract. Petitioner had the
opportunity to become aware of the facts that attended the signing of the promissory note. He even
admitted that he has a lawyer-son who the petitioner had hoped would assist him in the
administration of Sterling Shipping Lines, Inc. The totality of the facts on record belies petitioner’s
claim that fraud was used to obtain his consent to the contract given his personal circumstances and
the applicable law.

However, in refusing to allow petitioner to participate in the management of the business,

respondent Ruperto V. Tankeh was liable for the commission of incidental fraud. In Geraldez, this
Court defined incidental fraud as "those which are not serious in character and without which the
other party would still have entered into the contract."72

Although there was no fraud that had been undertaken to obtain petitioner’s consent, there was
fraud in the performance of the contract. The records showed that petitioner had been unjustly
excluded from participating in the management of the affairs of the corporation. This exclusion from
the management in the affairs of Sterling Shipping Lines, Inc. constituted fraud incidental to the
performance of the obligation.

This can be concluded from the following circumstances.

First, respondent raised in his Answer that petitioner "could not have promised plaintiff that he would
be a part of the administration staff"73 since petitioner had been fully aware that, as a corporation,
Sterling Shipping Lines, Inc. acted through its board of directors. Respondent admitted that petitioner
had been "an incorporator and member of the board of directors"74 and that petitioner "was fully
aware of the by-laws of the company."75 It was incumbent upon respondent to act in good faith and to
ensure that petitioner would not be excluded from the affairs of Sterling Shipping Lines, Inc. After all,
respondent asserted that petitioner had entered into the contract voluntarily and with full consent.

Second, respondent claimed that if petitioner was intent on severing his connection with the
company, all that petitioner had to do was to sell all his holdings in the company. Clearly, the
respondent did not consider the fact that the sale of the shares of stock alone did not free petitioner
from his liability to Development Bank of the Philippines or Asset Privatization Trust, since the latter
had signed the promissory and had still been liable for the loan. A sale of petitioners’ shares of stock
would not have negated the petitioner’s responsibility to pay for the loan.

Third, respondent Ruperto V. Tankeh did not rebuff petitioner’s claim that the latter only received
news about the sale of the vessel M/V Sterling Ace through the media and not as one of the board
members or directors of Sterling Shipping Lines, Inc.
All in all, respondent Ruperto V. Tankeh’s bare assertion that petitioner had access to the records
cannot discredit the fact that the petitioner had been effectively deprived of the opportunity to
actually engage in the operations of Sterling Shipping Lines, Inc. Petitioner had a reasonable
expectation that the same level of engagement would be present for the duration of their working
relationship. This would include an undertaking in good faith by respondent Ruperto V. Tankeh to be
transparent with his brother that he would not automatically be made part of the company’s
administration.

However, this Court finds there is nothing to support the assertion that Sterling Shipping Lines, Inc.
and Arenas committed incidental fraud and must be held liable. Sterling Shipping Lines, Inc. acted
through its board of directors, and the liability of respondent Tankeh cannot be imposed on Sterling
Shipping Lines, Inc. The shipping line has a separate and distinct personality from its officers, and
petitioner’s assertion that the corporation conspired with the respondent Ruperto V. Tankeh to
defraud him is not supported by the evidence and the records of the case.

As for Arenas, in Lim Tanhu v. Remolete,76 this Court held that:

In all instances where a common cause of action is alleged against several defendants, some of
whom answer and the others do not, the latter or those in default acquire a vested right not only to
own the defense interposed in the answer of their co-defendant or co-defendants not in default but
also to expect a result of the litigation totally common with them in kind and in amount whether
favorable or unfavorable. The substantive unity of the plaintiffs’ cause against all the defendants is
carried through to its adjective phase as ineluctably demanded by the homogeneity and indivisibility
of justice itself.77

As such, despite Arenas’ failure to submit his Answer to the Complaint or his declaration of default,
his liability or lack thereof is concomitant with the liability attributed to his co-defendants or co-
respondents. However, unlike respondent Ruperto V. Tankeh’s liability, there is no action or series of
actions that may be attributed to Arenas that may lead to an inference that he was liable for
incidental fraud. In so far as the required evidence for both Sterling Shipping Lines, Inc. and Arenas
is concerned, there is no basis to justify the claim of incidental fraud.

In addition, respondents Development Bank of the Philippines and Asset Privatization Trust or
Privatization and Management Office cannot be held liable for fraud. Incidental fraud cannot be
attributed to the execution of their actions, which were undertaken pursuant to their mandated
functions under the law. "Absent convincing evidence to the contrary, the presumption of regularity in
the performance of official functions has to be upheld."78

The Obligation to Pay Damages

As such, respondent Ruperto V. Tankeh is liable to his older brother, petitioner Alejandro, for
damages. The obligation to pay damages to petitioner is based on several provisions of the Civil
Code.

Article 1157 enumerates the sources of obligations.

Article 1157. Obligations arise from:

(1) Law;

(2) Contracts;
 (3) Quasi-contracts;

(4) Acts or omissions punished by law; and

(5) Quasi-delicts. (1089a)

This enumeration does not preclude the possibility that a single action may serve as the source of
several obligations to pay damages in accordance with the Civil Code. Thus, the liability of
respondent Ruperto V. Tankeh is based on the law, under Article 1344, which provides that the
commission of incidental fraud obliges the person employing it to pay damages.

In addition to this obligation as the result of the contract between petitioner and respondents, there
was also a patent abuse of right on the part of respondent Tankeh. This abuse of right is included in
Articles 19 and 21 of the Civil Code which provide that:

Article 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.

Article 21. Any person who willfully causes loss or injury to another in manner that is contrary to
morals, good customs or public policy shall compensate the latter for the damage.

Respondent Ruperto V. Tankeh abused his right to pursue undertakings in the interest of his
business operations. This is because of his failure to at least act in good faith and be transparent
with petitioner regarding Sterling Shipping Lines, Inc.’s daily operations.

In National Power Corporation v. Heirs of Macabangkit Sangkay,79 this Court held that:

When a right is exercised in a manner not conformable with the norms enshrined in Article 19 and
like provisions on human relations in the Civil Code, and the exercise results to [sic] the damage of
[sic] another, a legal wrong is committed and the wrongdoer is held responsible.80

The damage, loss, and injury done to petitioner are shown by the following circumstances.

First, petitioner was informed by Development Bank of the Philippines that it would still pursue his
liability for the payment of the promissory note. This would not have happened if petitioner had
allowed himself to be fully apprised of Sterling Shipping Lines, Inc.’s financial straits and if he felt
that he could still participate in the company’s operations. There is no evidence that respondent
Ruperto V. Tankeh showed an earnest effort to at least allow the possibility of making petitioner part
of the administration a reality. The respondent was the brother of the petitioner and was also the
primary party that compelled petitioner Alejandro Tankeh to be solidarily bound to the promissory
note. Ruperto V. Tankeh should have done his best to ensure that he had exerted the diligence to
comply with the obligations attendant to the participation of petitioner.

Second, respondent Ruperto V. Tankeh’s refusal to enter into an agreement or settlement with
petitioner after the latter’s discovery of the sale of the M/V Sterling Ace was an action that
constituted bad faith. Due to Ruperto’s refusal, his brother, petitioner Alejandro, became solidarily
liable for an obligation that the latter could have avoided if he had been given an opportunity to
participate in the operations of Sterling Shipping Lines, Inc. The simple sale of all of petitioner’s
shares would not have solved petitioner’s problems, as it would not have negated his liability under
the terms of the promissory note.
Finally, petitioner is still bound to the creditors of Sterling Shipping Lines, Inc., namely, public
respondents Development Bank of the Philippines and Asset Privatization Trust. This is an additional
financial burden for petitioner. Nothing in the records suggested the possibility that Development
Bank of the Philippines or Asset Privatization Trust through the Privatization Management Office will
not pursue or is precluded from pursuing its claim against the petitioner. Although petitioner
Alejandro voluntarily signed the promissory note and became a stockholder and board member,
respondent should have treated him with fairness, transparency, and consideration to minimize the
risk of incurring grave financial reverses.

In Francisco v. Ferrer,81 this Court ruled that moral damages may be awarded on the following bases:

To recover moral damages in an action for breach of contract, the breach must be palpably wanton,
reckless, malicious, in bad faith, oppressive or abusive.

Under the provisions of this law, in culpa contractual or breach of contract, moral damages may be
recovered when the defendant acted in bad faith or was guilty of gross negligence (amounting to bad
faith) or in wanton disregard of his contractual obligation and, exceptionally, when the act of breach
of contract itself is constitutive of tort resulting in physical injuries.

Moral damages may be awarded in breaches of contracts where the defendant acted fraudulently or
in bad faith.

Bad faith does not simply connote bad judgment or negligence, it imports a dishonest purpose or
some moral obliquity and conscious doing of a wrong, a breach of known duty through some motive
or interest or ill will that partakes of the nature of fraud.

xxxx

The person claiming moral damages must prove the existence of bad faith by clear and convincing
evidence for the law always presumes good faith. It is not enough that one merely suffered sleepless
nights, mental anguish, serious anxiety as the result of the actuations of the other party. Invariably
such action must be shown to have been willfully done in bad faith or will ill motive. Mere allegations
of besmirched reputation, embarrassment and sleepless nights are insufficient to warrant an award
for moral damages. It must be shown that the proximate cause thereof was the unlawful act or
omission of the [private respondent] petitioners.

An award of moral damages would require certain conditions to be met, to wit: (1) first, there must be
an injury, whether physical, mental or psychological, clearly sustained by the claimant; (2) second,
there must be culpable act or omission factually established; (3) third, the wrongful act or omission of
the defendant is the proximate cause of the injury sustained by the claimant; and (4) fourth, the
award of damages is predicated on any of the cases stated in Article 2219 of the Civil Code.
(Citations omitted)82

In this case, the four elements cited in Francisco are present. First, petitioner suffered an injury due
to the mental duress of being bound to such an onerous debt to Development Bank of the
Philippines and Asset Privatization Trust. Second, the wrongful acts of undue exclusion done by
respondent Ruperto V. Tankeh clearly fulfilled the same requirement. Third, the proximate cause of
his injury was the failure of respondent Ruperto V. Tankeh to comply with his obligation to allow
petitioner to either participate in the business or to fulfill his fiduciary responsibilities with candor and
good faith. Finally, Article 221983 of the Civil Code provides that moral damages may be awarded in
case of acts and actions referred to in Article 21, which, as stated, had been found to be attributed to
respondent Ruperto V. Tankeh.
In the Appellant’s Brief,84 petitioner asked the Court of Appeals to demand from respondents, except
from respondent Asset Privatization Trust, the amount of five million pesos (₱5,000,000.00). This
Court finds that the amount of five hundred thousand pesos (₱500,000.00) is a sufficient amount of
moral damages.

In addition to moral damages, this Court may also impose the payment of exemplary
damages. Exemplary damages are discussed in Article 2229 of the Civil Code, as follows:
1âwphi1

ART. 2229. Exemplary or corrective damages are imposed, by way of example or correction of the
public good, in addition to moral, temperate, liquidated or compensatory damages.

Exemplary damages are further discussed in Articles 2233 and 2234, particularly regarding the pre-
requisites of ascertaining moral damages and the fact that it is discretionary upon this Court to
award them or not:

ART. 2233. Exemplary damages cannot be recovered as a matter of right; the court will decide
whether or not they should be adjudicated.

ART. 2234. While the amount of the exemplary damages need not be proven, the plaintiff must show
that he is entitled to moral, temperate or compensatory damages before the court may consider the
question of whether or not exemplary damages should be awarded x x x

The purpose of exemplary damages is to serve as a deterrent to future and subsequent parties from
the commission of a similar offense. The case of People v. Rante85 citing People v. Dalisay86 held
that:

Also known as ‘punitive’ or ‘vindictive’ damages, exemplary or corrective damages are intended to
serve as a deterrent to serious wrong doings, and as a vindication of undue sufferings and wanton
invasion of the rights of an injured or a punishment for those guilty of outrageous conduct. These
terms are generally, but not always, used interchangeably. In common law, there is preference in the
use of exemplary damages when the award is to account for injury to feelings and for the sense of
indignity and humiliation suffered by a person as a result of an injury that has been maliciously and
wantonly inflicted, the theory being that there should be compensation for the hurt caused by the
highly reprehensible conduct of the defendant—associated with such circumstances as willfulness,
wantonness, malice, gross negligence or recklessness, oppression, insult or fraud or gross fraud—
that intensifies the injury. The terms punitive or vindictive damages are often used to refer to those
species of damages that may be awarded against a person to punish him for his outrageous
conduct. In either case, these damages are intended in good measure to deter the wrongdoer and
others like him from similar conduct in the future.87

To justify an award for exemplary damages, the wrongful act must be accompanied by bad faith, and
an award of damages would be allowed only if the guilty party acted in a wanton, fraudulent,
reckless or malevolent manner.88 In this case, this Court finds that respondent Ruperto V. Tankeh
acted in a fraudulent manner through the finding of dolo incidente due to his failure to act in a
manner consistent with propriety, good morals, and prudence.

Since exemplary damages ensure that future litigants or parties are enjoined from acting in a
similarly malevolent manner, it is incumbent upon this Court to impose the damages in such a way
that will serve as a categorical warning and will show that wanton actions will be dealt with in a
similar manner. This Court finds that the amount of two hundred thousand pesos (₱200,000.00) is
sufficient for this purpose.
In sum, this Court must act in the best interests of all future litigants by establishing and applying
clearly defined standards and guidelines to ascertain the existence of fraud.

WHEREFORE, this Petition is PARTIALLY GRANTED. The Decision of the Court of Appeals as to
the assailed Decision in so far as the finding of fraud is SUSTAINED with the MODIFICATION that
respondent RUPERTO V. TANKEH be ordered to pay moral damages in the amount of FIVE
HUNDRED THOUSAND PESOS (₱500,000.00) and the amount of TWO HUNDRED THOUSAND
PESOS (₱200,000.00) by way of exemplary damages.

SO ORDERED.

G.R. No.171692 June 3, 2013

SPOUSES DELFIN O. TUMIBAY and AURORA T. TUMIBAY-deceased; GRACE JULIE ANN

TUMIBAY MANUEL, legal representative, Petitioners,
vs.
SPOUSES MELVIN A. LOPEZ and ROWENA GAY T. VISITACION LOPEZ, Respondents.

DECISION

DEL CASTILLO, J.:

In a contract to sell, the seller retains ownership of the property until the buyer has paid the price in
full. A -buyer who covertly usurps the seller's ownership of the property prior to the full payment of
the price is in breach of the contract and the seller is entitled to rescission because the breach is
substantial and fundamental as it defeats the very object of the parties in entering into the contract to
sell.

The Petition for Review on Certiorari1 assails the May 19, 2005 Decision2 of the Court of Appeals
(CA) in CA-G.R. CV No. 79029, which reversed the January 6, 2003 Decision3 of the Regional Trial
Court (RTC) of Malaybalay City, Branch 9 in Civil Case No. 2759-98, and the February 10, 2006
Resolution4 denying petitioner-spouses Delfin O. Tumibay and Aurora5 T. Tumibay’s Motion for
Reconsideration.6

Factual Antecedents

On March 23, 1998, petitioners filed a Complaint7 for declaration of nullity ab initio of sale, and
recovery of ownership and possession of land with the RTC of Malaybalay City. The case was
raffled to Branch 9 and docketed as Civil Case No. 2759-98.

In their Complaint, petitioners alleged that they are the owners of a parcel of land located in
Sumpong, Malaybalay, Bukidnon covered by Transfer Certificate of Title (TCT) No. T-
253348 (subject land) in the name of petitioner Aurora; that they are natural born Filipino citizens but
petitioner Delfin acquired American citizenship while his wife, petitioner Aurora, remained a Filipino
citizen; that petitioner Aurora is the sister of Reynalda Visitacion (Reynalda);9that on July 23, 1997,
Reynalda sold the subject land to her daughter, Rowena Gay T. Visitacion Lopez (respondent
Rowena), through a deed of sale10 for an unconscionable amount of ₱95,000.00 although said
property had a market value of more than ₱2,000,000.00; that the subject sale was done without the
knowledge and consent of petitioners; and that, for these fraudulent acts, respondents should be
held liable for damages. Petitioners prayed that (1) the deed of sale dated July 23, 1997 be declared
void ab initio, (2) the subject land be reconveyed to petitioners, and (3) respondents be ordered to
pay damages.

On May 19, 1998, respondents filed their Answer11 with counterclaim. Respondents averred that on
December 12, 1990, petitioners executed a special power of attorney (SPA)12 in favor of Reynalda
granting the latter the power to offer for sale the subject land; that sometime in 1994, respondent
Rowena and petitioners agreed that the former would buy the subject land for the price of
₱800,000.00 to be paid on installment; that on January 25, 1995, respondent Rowena paid in cash
to petitioners the sum of $1,000.00; that from 1995 to 1997, respondent Rowena paid the monthly
installments thereon as evidenced by money orders; that, in furtherance of the agreement, a deed of
sale was executed and the corresponding title was issued in favor of respondent Rowena; that the
subject sale was done with the knowledge and consent of the petitioners as evidenced by the receipt
of payment by petitioners; and that petitioners should be held liable for damages for filing the subject
Complaint in bad faith. Respondents prayed that the Complaint be dismissed and that petitioners be
ordered to pay damages.

On May 25, 1998, petitioners filed an Answer to Counterclaim.13 Petitioners admitted the existence of
the SPA but claimed that Reynalda violated the terms thereof when she (Reynalda) sold the subject
land without seeking the approval of petitioners as to the selling price. Petitioners also claimed that
the monthly payments from 1995 to 1997 were mere deposits as requested by respondent Rowena
so that she (Rowena) would not spend the same pending their agreement as to the purchase price;
and that Reynalda, acting with evident bad faith, executed the deed of sale in her favor but placed it
in the name of her daughter, respondent Rowena, which sale is null and void because an agent
cannot purchase for herself the property subject of the agency.

Ruling of the Regional Trial Court

On January 6, 2003, the RTC rendered a Decision in favor of petitioners, viz:

WHEREFORE, Decision is hereby rendered, as follows;

(1) Ordering the petitioners, jointly and severally, to return the said amount of $12,000.00 at
the present rate of exchange less the expenses to be incurred for the transfer of the property
in question under the name of the petitioners;

(2) Ordering the Register of Deeds of Bukidnon to cancel TCT No. T-62674 in the name of
the respondent Rowena Gay T. Visitacion-Lopez and to issue a new TCT in the name of the
petitioners;

(3) Ordering respondents, spouses Melvin and Rowena Gay Lopez, to execute a Deed of
Reconveyance in favor of the petitioners, or if said respondents should refuse to do so or are
unable to do so, the Clerk of Court of the RTC and ex-officio Provincial Sheriff to execute
such Deed of Reconveyance;

(4) No x x x damages are awarded. The respective parties must bear their own expenses
except that respondents, jointly and severally, must pay the costs of this suit.

SO ORDERED.14
In ruling in favor of petitioners, the trial court held: (1) the SPA merely authorized Reynalda to offer
for sale the subject land for a price subject to the approval of the petitioners; (2) Reynalda violated
the terms of the SPA when she sold the subject land to her daughter, respondent Rowena, without
first seeking the approval of petitioners as to the selling price thereof; (3) the SPA does not
sufficiently confer on Reynalda the authority to sell the subject land; (4) Reynalda, through fraud and
with bad faith, connived with her daughter, respondent Rowena, to sell the subject land to the latter;
and, (5) the sale contravenes Article 1491, paragraph 2, of the Civil Code which prohibits the agent
from acquiring the property subject of the agency unless the consent of the principal has been given.
The trial court held that Reynalda, as agent, acted outside the scope of her authority under the SPA.
Thus, the sale is null and void and the subject land should be reconveyed to petitioners. The trial
court further ruled that petitioners are not entirely free from liability because they received from
respondent Rowena deposits totaling $12,000.00. Under the principle of unjust enrichment,
petitioners should, thus, be ordered to reimburse the same without interest.

Petitioners filed a partial motion for reconsideration15 praying for the award of attorney’s fees. In its
January 14, 2003 Order16 denying the aforesaid motion, the trial court clarified that the
reimbursement of $12,000.00 in favor of respondents was without interest because there was also
no award of rental income in favor of petitioners. Both parties are deemed mutually compensated
and must bear their own expenses.

From this Decision, respondents appealed to the CA.

Ruling of the Court of Appeals

On May 19, 2005, the CA rendered the assailed Decision reversing the judgment of the trial court,
viz:

WHEREFORE, premises considered, the appealed Decision of the Court a quo is hereby
REVERSED and SET ASIDE. Accordingly, title to the subject property shall remain in the name of
the Appellant ROWENA GAY VISITACION-LOPEZ. The latter and her spouse MELVIN LOPEZ are
directed to pay the balance of Four Hundred Eighty Eight Thousand Pesos (₱488,000.00) to the
petitioners effective within 30 days from receipt of this Decision and in case of delay, to pay the legal
rate of interests [sic] at 12% per annum until fully paid.

SO ORDERED.17

In reversing the trial court’s Decision, the appellate court ruled that: (1) the SPA sufficiently conferred
on Reynalda the authority to sell the subject land; (2) although there is no direct evidence of
petitioners’ approval of the selling price of the subject land, petitioner Aurora’s acts of receiving two
money orders and several dollar checks from respondent Rowena over the span of three years
amount to the ratification of any defect in the authority of Reynalda under the SPA; (3) petitioners
are estopped from repudiating the sale after they had received the deposits totaling $12,000.00; (4)
the sale is not contrary to public policy because there is no rule or law which prohibits the sale of
property subject of the agency between the agent and his children unless it would be in fraud of
creditors which is not the case here; (5) petitioners impliedly ratified the subject SPA and contract of
sale as well as its effects; and, (6) the selling price of ₱800,000.00 for the subject land is deemed
reasonable based on the testimony of respondent Rowena as this was the selling price agreed upon
by her and petitioner Delfin. Considering that respondent Rowena proved that she remitted a total of
$12,000.00 to petitioners and pegging the exchange rate at that time at ₱26.00 per dollar, the
appellate court ruled that ₱312,000.00 of the ₱800,000.00 selling price was already received by
petitioners. Thus, respondents are only liable for the balance of ₱488,000.00.
Hence, this Petition.

Issues

Petitioners raise the following issues for our resolution:

I. Whether the CA erred in resolving the issue in the case at bar.

II. Whether under the SPA Reynalda had the power to sell the subject land.

III. Whether the actuations of petitioner Aurora in receiving money from respondent Rowena
amounted to the ratification of the breach in the exercise of the SPA.

IV. Whether the CA erred in not declaring the sale void on grounds of public policy.

V. Whether the CA erred in adopting the testimony of respondent Rowena as to the

₱800,000.00 selling price of the subject land.18

Petitioners’ Arguments

Petitioners argue that the appellate court went beyond the issues of this case when it ruled that there
was a contract of sale between respondent Rowena and petitioner Aurora because the issues before
the trial court were limited to the validity of the deed of sale dated July 23, 1997 for being executed
by Reynalda beyond the scope of her authority under the SPA. Further, the existence of the alleged
contract of sale was not proven because the parties failed to agree on the purchase price as stated
by petitioner Aurora in her testimony. The money, in cash and checks, given to petitioners from 1995
to 1997 were mere deposits until the parties could agree to the purchase price. Moreover, Reynalda
acted beyond the scope of her authority under the SPA because she was merely authorized to look
for prospective buyers of the subject land. Even assuming that she had the power to sell the subject
land under the SPA, she did not secure the approval as to the price from petitioners before
executing the subject deed of sale, hence, the sale is null and void. Petitioners also contend that
there was no ratification of the subject sale through petitioners’ acceptance of the monthly checks
from respondent Rowena because the sale occurred subsequent to the receipt of the aforesaid
checks. They further claim that the sale was void because it was not only simulated but violates
Article 1491 of the Civil Code which prohibits the agent from acquiring the property subject of the
agency. Here, Reynalda merely used her daughter, respondent Rowena, as a dummy to acquire the
subject land. Finally, petitioners question the determination by the appellate court that the fair market
value of the subject land is ₱800,000.00 for lack of any factual and legal basis.

Respondents’ Arguments

Respondents counter that the issue as to whether there was a perfected contract of sale between
petitioners and respondent Rowena is inextricably related to the issue of whether the deed of sale
dated July 23, 1997 is valid, hence, the appellate court properly ruled on the former. Furthermore,
they reiterate the findings of the appellate court that the receipt of monthly installments constitutes
an implied ratification of any defect in the SPA and deed of sale dated July 23, 1997. They
emphasize that petitioners received a total of $12,000.00 as consideration for the subject land.

Our Ruling

The Petition is meritorious.

As a general rule, we do not disturb the factual findings of the appellate court. However, this case
falls under one of the recognized exceptions thereto because the factual findings of the trial court
and appellate court are conflicting.19Our review of the records leads us to conclude that the following
are the relevant factual antecedents of this case.

Petitioners were the owners of the subject land covered by TCT No. T-25334 in the name of
petitioner Aurora. On December 12, 1990, petitioners, as principals and sellers, executed an SPA in
favor of Reynalda, as agent, to, among others, offer for sale the subject land provided that the
purchase price thereof should be approved by the former. Sometime in 1994, petitioners and
respondent Rowena agreed to enter into an oral contract to sell over the subject land for the price of
₱800,000.00 to be paid in 10 years through monthly installments.

On January 25, 1995, respondent Rowena paid the first monthly installment of $1,000.00 to
petitioner Aurora which was followed by 22 intermittent monthly installments of $500.00 spanning
almost three years. Sometime in 1997, after having paid a total of $10,000.00, respondent Rowena
called her mother, Reynalda, claiming that she had already bought the subject land from petitioners.
Using the aforesaid SPA, Reynalda then transferred the title to the subject land in respondent
Rowena’s name through a deed of sale dated July 23, 1997 without the knowledge and consent of
petitioners. In the aforesaid deed, Reynalda appeared and signed as attorney-in-fact of petitioner
Aurora, as seller, while respondent Rowena appeared as buyer. After which, a new title, i.e., TCT
No. 62674,20 to thesubject land was issued in the name of respondent Rowena.

We explain these factual findings and the consequences thereof below.

Petitioners and respondent

Rowena entered into a contract to sell over the subject land.

Petitioners deny that they agreed to sell the subject land to respondent Rowena for the price of
₱800,000.00 payable in 10 years through monthly installments. They claim that the payments
received from respondent Rowena were for safekeeping purposes only pending the final agreement
as to the purchase price of the subject land.

We are inclined to give credence to the claim of the respondents for the following reasons.

First, the payment of monthly installments was duly established by the evidence on record consisting
of money orders21 and checks22 payable to petitioner Aurora. Petitioners do not deny that they
received 23 monthly installments over the span of almost three years. As of November 30, 1997
(i.e., the date of the last monthly installment), the payments already totaled $12,000.00, to wit:

Date Amount Paid

(in dollars)
January 25, 1995 1,000.0023
February 21, 1995 500.00
March 27, 1995 500.00
April 25, 1995 500.00
June 1, 1995 500.00
 June 30, 1995 500.00
July 31, 1995 500.00
May 29, 1996 500.00
June 30, 1996 500.00
July 31, 1996 500.00
August 31, 1996 500.00
September 30, 1996 500.00
October 29, 1996 500.00
December 31, 1996 500.00
January 31, 1997 500.00
February 28, 1997 500.00
March 31, 1997 500.00
May 31, 1997 500.00
July 19, 1997 500.00
August 31, 1997 500.00
September 30, 1997 500.00
October 31, 1997 500.00
November 30, 1997 500.00
Total 12,000.00

Second, in her testimony, petitioner Aurora claimed that the $1,000.00 in cash that she received
from respondent Rowena on January 25, 1995 was a mere deposit until the purchase price of the
subject land would have been finally agreed upon by both parties.24 However, petitioner Aurora failed
to explain why, after receiving this initial sum of $1,000.00, she thereafter accepted from respondent
Rowena 22 intermittent monthly installments in the amount of $500.00. No attempt was made on the
part of petitioners to return these amounts and it is fair to assume that petitioners benefited
therefrom.

Third, it strains credulity that respondent Rowena would make such monthly installments for a
substantial amount of money and for a long period of time had there been no agreement between
the parties as to the purchase price of the subject land.

We are, thus, inclined to rule that there was, indeed, a contractual agreement between the parties
for the purchase of the subject land and that this agreement partook of an oral contract to sell for the
sum of ₱800,000.00. A contract to sell has been defined as "a bilateral contract whereby the
prospective seller, while expressly reserving the ownership of the subject property despite delivery
thereof to the prospective buyer, binds himself to sell the said property exclusively to the prospective
buyer upon fulfillment of the condition agreed upon, that is, full payment of the purchase price."25 In a
contract to sell, "ownership is retained by the seller and is not to pass until the full payment of the
price x x x."26 It is "commonly entered into so as to protect the seller against a buyer who intends to
buy the property in installments by withholding ownership over the property until the buyer effects full
payment therefor."27

In the case at bar, while there was no written agreement evincing the intention of the parties to enter
into a contract to sell, its existence and partial execution were sufficiently established by, and may
be reasonably inferred from the actuations of the parties, to wit: (1) the title to the subject land was
not immediately transferred, through a formal deed of conveyance, in the name of respondent
Rowena prior to or at the time of the first payment of $1,000.00 by respondent Rowena to petitioner
Aurora on January 25, 1995;28 (2) after this initial payment, petitioners received 22 intermittent
monthly installments from respondent Rowena in the sum of $500.00; and, (3) in her testimony,
respondent Rowena admitted that she had the title to the subject land transferred in her name only
later on or on July 23, 1997, through a deed of sale, because she believed that she had substantially
paid the purchase price thereof,29 and that she was entitled thereto as a form of security for the
installments she had already paid.30

Respondent Rowena was in breach of the contract to sell.

Although we rule that there was a contract to sell over the subject land between petitioners and
respondent Rowena, we find that respondent Rowena was in breach thereof because, at the time
the aforesaid deed of sale was executed on July 23, 1997, the full price of the subject land was yet
to be paid. In arriving at this conclusion, we take judicial notice31 of the prevailing exchange rates at
the time, as published by the Bangko Sentral ng Pilipinas,32 and multiply the same with the monthly
installments respondent Rowena paid to petitioners, as supported by the evidence on record, to wit:

Amount Paid Exchange Rate

Date Peso Equivalent
(in dollars) (peso per dollar)
January 25, 1995 1,000.00 24.7700 24,770.00
February 21, 1995 500.00 25.1140 12,557.00
March 27, 1995 500.00 25.9670 12,983.50
April 25, 1995 500.00 26.0270 13,013.50
June 1, 1995 500.00 25.8040 12,902.00
June 30, 1995 500.00 25.5750 12,787.50
July 31, 1995 500.00 25.5850 12,792.50
May 29, 1996 500.00 26.1880 13,094.00
June 30, 1996 500.00 26.203033 13,101.50
July 31, 1996 500.00 26.2280 13,114.00
August 31, 1996 500.00 26.202034 13,101.00
September 30, 1996 500.00 26.2570 13,128.50
October 29, 1996 500.00 26.2830 13,141.50
December 31, 1996 500.00 26.288035 13,144.00
January 31, 1997 500.00 26.3440 13,172.00
February 28, 1997 500.00 26.3330 13,166.50
 March 31, 1997 500.00 26.3670 13,183.50
May 31, 1997 500.00 26.374036 13,187.00
July 19, 1997 500.00 28.574037 14,287.00
Total 260,626.50

Thus, as of July 19, 1997 or prior to the execution of the deed of sale dated July 23, 1997, the total
amount of monthly installments paid by respondent Rowena to petitioners was only ₱260,626.50 or
32.58%38 of the ₱800,000.00 purchase price. That the full price was yet to be paid at the time of the
subject transfer of title was admitted by respondent Rowena on cross-examination, viz:

ATTY. OKIT:

Q - Let us make this clear. You now admit that x x x you agreed to buy the lot at eight hundred
thousand, to which the Plaintiff x x x agreed. Now based on the dollar rate, your total payment did
not reach x x x eight hundred thousand pesos? Is that correct? [sic]

A - Yes.

Q - Since notwithstanding the fact this eight hundred thousand which you have agreed is not fully
paid why did your mother finalize the deed of sale?

A - My mother is equipped with the SPA to transfer the lot to me only for security purposes but
actually there is no full payment.39 (Emphasis supplied)

Respondent Rowena tried to justify the premature transfer of title by stating that she had
substantially paid the full amount of the purchase price and that this was necessary as a security for
the installments she had already paid. However, her own evidence clearly showed that she had, by
that time, paid only 32.58% thereof. Neither can we accept her justification that the premature
transfer of title was necessary as a security for the installments she had already paid absent proof
that petitioners agreed to this new arrangement. Verily, she failed to prove that petitioners agreed to
amend or novate the contract to sell in order to allow her to acquire title over the subject land even if
she had not paid the price in full.

Significantly, the evidence on record indicates that the premature transfer of title in the name of
respondent Rowena was done without the knowledge and consent of petitioners. In particular,
respondent Rowena’s narration of the events leading to the transfer of title showed that she and her
mother, Reynalda, never sought the consent of petitioners prior to said transfer of title, viz:

COURT:

Q- Why is this check (in the amount of $1,000.00) in your possession now?

A- This is the check I paid to her (referring to petitioner Aurora) which is in cash. [sic]

ATTY. BARROSO:

Q - Now did you continue x x x paying the $500.00 dollar to him (referring to petitioner Delfin)?
A - Yes.

xxxx

Q - Now having stated substantially paid, what did you do with the land subject of this case? [sic]

A - I called my mother who has equipped with SPA to my Uncle that I have already bought the land.
[sic]

Q - And you called your mother?

A - Yes.

xxxx

Q - Then what transpired next?

A - After two years my mother called me if how much I have paid the land and being equipped with
SPA, so she transferred the land to me. [sic]40 (Emphases supplied)

Respondent Rowena’s reliance on the SPA as the authority or consent to effect the premature
transfer of title in her name is plainly misplaced. The terms of the SPA are clear. It merely authorized
Reynalda to sell the subject land at a price approved by petitioners. The SPA could not have
amended or novated the contract to sell to allow respondent Rowena to acquire the title over the
subject land despite non-payment of the price in full for the reason that the SPA was executed four
years prior to the contract to sell. In fine, the tenor of her testimony indicates that respondent
Rowena made a unilateral determination that she had substantially paid the purchase price and that
she is entitled to the transfer of title as a form of security for the installments she had already paid,
reasons, we previously noted, as unjustified.

The contract to sell is rescissible.

Article 1191 of the Civil Code provides:

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 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. x x x

As a general rule, "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."41

In the case at bar, we find that respondent Rowena’s act of transferring the title to the subject land in
her name, without the knowledge and consent of petitioners and despite non-payment of the full
price thereof, constitutes a substantial and fundamental breach of the contract to sell. As previously
noted, the main object or purpose of a seller in entering into a contract to sell is to protect himself
against a buyer who intends to buy the property in installments by withholding ownership over the
property until the buyer effects full payment therefor.42 As a result, the seller’s obligation to convey
and the buyer’s right toconveyance of the property arise only upon full payment of the price. Thus, a
buyer who willfully contravenes this fundamental object or purpose of the contract, by covertly
transferring the ownership of the property in his name at a time when the full purchase price has yet
to be paid, commits a substantial and fundamental breach which entitles the seller to rescission of
the contract.43

Indeed, it would be highly iniquitous for us to rule that petitioners, as sellers, should continue with the
contract to sell even after the discovery of the aforesaid breach committed by respondent Rowena,
as buyer, considering that these acts betrayed in no small measure the trust reposed by petitioners
in her and her mother, Reynalda. Put simply, respondent Rowena took advantage of the SPA, in the
name of her mother and executed four years prior to the contract to sell, to effect the transfer of title
to the subject land in her (Rowena’s) name without the knowledge and consent of petitioners and
despite non-payment of the full price.

We, thus, rule that petitioners are entitled to the rescission of the subject contract to sell.

Petitioners are entitled to moral damages and attorney’s fees while respondent Rowena is entitled to
the reimbursement of the monthly installments with legal interest.

Article 1170 of the Civil Code provides:

Art. 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay,
and those who in any manner contravene the tenor thereof, are liable for damages.

Fraud or malice (dolo) has been defined as a "conscious and intentional design to evade the normal
fulfillment of existing obligations" and is, thus, incompatible with good faith.44 In the case at bar, we
find that respondent Rowena was guilty of fraud in the performance of her obligation under the
subject contract to sell because (1) she knew that she had not yet paid the full price (having paid
only 32.58% thereof) when she had the title to the subject land transferred to her name, and (2) she
orchestrated the aforesaid transfer of title without the knowledge and consent of petitioners. Her own
testimony and documentary evidence established this fact. Where fraud and bad faith have been
established, the award of moral damages is proper.45 Further, under Article 2208(2)46 of the Civil
Code, the award of attorney’s fees is proper where the plaintiff is compelled to litigate with third
persons or incur expenses to protect his interest because of the defendant’s act or omission. Here,
respondent Rowena’s aforesaid acts caused petitioners to incur expenses in litigating their just
claims. We, thus, find respondent Rowena liable for moral damages and attorney’s fees which we fix
at ₱100,000.00 and ₱50,000.00, respectively.47

Anent the monthly installments respondent Rowena paid to petitioners, our review of the records
leads us to conclude that respondent Rowena is entitled to the reimbursement of the same with legal
interest. Although respondent Rowena was clearly unjustified in prematurely and covertly
transferring the title to the subject land in her name, we deplore petitioners’ lack of candor in
prosecuting their claims before the trial court and intent to evade recognition of the monthly
installments that they received from respondent Rowena. The records indicate that, in their
Complaint, petitioners made no mention of the fact that they had entered into a contract to sell with
respondent Rowena and that they had received 23 monthly installments from the latter. The
Complaint merely alleged that the subject sale was done without the knowledge and consent of
petitioners. It was only later on, when respondent Rowena presented the proof of payment of the
monthly installments in her Answer to the Complaint, that this was brought to light to which
petitioners readily admitted. Further, no evidence was presented to prove that respondent Rowena
occupied the subject land or benefited from the use thereof upon commencement of the contract to
sell which would have justified the setting off of rental income against the monthly installments paid
by respondent Rowena to petitioners.

In view of the foregoing, the sums paid by respondent Rowena as monthly installments to petitioners
should, thus, be returned to her with legal interest. The total amount to be reimbursed by petitioners
to respondent Rowena is computed as follows:

Amount Paid Exchange Rate

Date Peso Equivalent
(in dollars) (peso per dollar)
January 25, 1995 1,000.00 24.7700 24,770.00
February 21, 1995 500.00 25.1140 12,557.00
March 27, 1995 500.00 25.9670 12,983.50
April 25, 1995 500.00 26.0270 13,013.50
June 1, 1995 500.00 25.8040 12,902.00
June 30, 1995 500.00 25.5750 12,787.50
July 31, 1995 500.00 25.5850 12,792.50
May 29, 1996 500.00 26.1880 13,094.00
June 30, 1996 500.00 26.2030 13,101.50
July 31, 1996 500.00 26.2280 13,114.00
August 31, 1996 500.00 26.2020 13,101.00
September 30, 1996 500.00 26.2570 13,128.50
October 29, 1996 500.00 26.2830 13,141.50
December 31, 1996 500.00 26.2880 13,144.00
January 31, 1997 500.00 26.3440 13,172.00
February 28, 1997 500.00 26.3330 13,166.50
March 31, 1997 500.00 26.3670 13,183.50
May 31, 1997 500.00 26.3740 13,187.00
July 19, 1997 500.00 28.5740 14,287.00
August 31, 1997 500.00 30.1650 15,082.50
September 30, 1997 500.00 33.8730 16,936.50
October 31, 1997 500.00 34.9380 17,469.00
November 30, 1997 500.00 34.6550 17,327.50
Total 327,442.00
Since this amount is neither a loan nor forbearance of money, we set the interest rate at 6% per
annum computed from the time of the filing of the Answer48 to the Complaint on May 19, 199849 until
finality of judgement and thereafter at 12% per annum until fully paid in accordance with our ruling in
Eastern Shipping Lines, Inc. v. Court of Appeals.50 Petitioners are, thus, ordered to pay respondent
Rowena the sum of ₱327,442.00 with an interest of 6% per annum computed from May 19, 1998
until finality of judgment and thereafter of 12% per annum until fully paid.

The sale of the subject land, effected through the deed of sale dated July 23, 1997, is void.

Having ruled that respondent Rowena was in substantial breach of the contract to sell because she
had the title to the subject land transferred in her name without the knowledge and consent of
petitioners and despite lack of full payment of the purchase price, we now rule on the validity of the
deed of sale dated July 23, 1997 which was used to effect the aforesaid transfer of ownership.

It will be recalled that on December 12, 1990, petitioners, as principals and sellers, executed an SPA
in favor of Reynalda, as agent. The SPA stated in part:

That we spouses, AURORA TUMIBAY and DELFIN TUMIBAY, of legal age and presently residing at
36 Armstrong Drive, Clark, New Jersey, 07066 name, constitute and appoint REYNALDA
VISITACION, widow, of legal age and residing at Don Carlos, Bukidnon, Philippines, to be our true
and lawful Attorney-in-fact, for us and in our name, place and stead and for our use and benefit to do
and perform the following acts and deed:

To administer our real property located in the Province of Bikidnon, Town of Malaybalay, Barrio of
Bantaunon, Towns of Maramag, Paradise, Maramag and Barrio of Kiburiao, Town of Quezon.

To offer for sale said properties, the selling price of which will be subject to our approval.

xxxx

To sign all papers and documents on our behalf in a contract of sale x x x.51.

As can be seen, the SPA gave Reynalda the power and duty to, among others, (1) offer for sale the
subject land to prospective buyers, (2) seek the approval of petitioners as to the selling price thereof,
and (3) sign the contract of sale on behalf of petitioners upon locating a buyer willing and able to
purchase the subject land at the price approved by petitioners. Although the SPA was executed four
years prior to the contract to sell, there would have been no obstacle to its use by Reynalda had the
ensuing sale been consummated according to its terms. However, as previously discussed, when
Reynalda, as attorney-in-fact of petitioner Aurora, signed the subject deed of sale dated July 23,
1997, the agreed price of ₱800,000.00 (which may be treated as the approved price) was not yet
fully paid because respondent Rowena at the time had paid only ₱260,262.50.52 Reynalda,
therefore, acted beyond the scope of her authority because she signed the subject deed of sale, on
behalf of petitioners, at a price of ₱95,000.00 which was not approved by the latter. For her part,
respondent Rowena cannot deny that she was aware of the limits of Reynalda’s power under the
SPA because she (Rowena) was the one who testified that the agreed price for the subject land was
₱800,000.00.

Article 1898 of the Civil Code provides:

Art. 1898. If the agent contracts in the name of the principal, exceeding the scope of his authority,
and the principal does not ratify the contract, it shall be void if the party with whom the agent
contracted is aware of the limits of the powers granted by the principal. In this case, however, the
agent is liable if he undertook to secure the principal’s ratification.

It should be noted that, under Article 1898 of the Civil Code, the principal’s ratification of the acts of
the agent, done beyond the scope of the latter’s authority, may cure the defect in the contract
entered into between the agent and a third person. This seems to be the line of reasoning adopted
by the appellate court in upholding the validity of the subject sale. The appellate court conceded that
there was no evidence that respondents sought the approval of petitioners for the subject sale but it,
nonetheless, ruled that whatever defect attended the sale of the subject land should be deemed
impliedly ratified by petitioners’ acceptance of the monthly installments paid by respondent Rowena.
Though not clearly stated in its Decision, the appellate court seemed to rely on the four monthly
installments (i.e., August 31, September 30, October 31, and November 30, 1997) respondent
Rowena paid to petitioners which the latter presumably received and accepted even after the
execution of the deed of sale dated July 23, 1997.

We disagree.

That petitioners continued to receive four monthly installments even after the premature titling of the
subject land in the name of respondent Rowena, through the deed of sale dated July 23, 1997, did
not, by itself, establish that petitioners ratified such sale. On the contrary, the fact that petitioners
continued to receive the aforesaid monthly installments tended to establish that they had yet to
discover the covert transfer of title in the name of respondent Rowena. As stated earlier, the
evidence on record established that the subject sale was done without petitioners’ knowledge and
consent which would explain why receipt or acceptance by petitioners of the aforementioned four
monthly installments still occurred. Further, it runs contrary to common human experience and
reason that petitioners, as sellers, would forego the reservation or retention of the ownership over
the subject land, which was intended to guarantee the full payment of the price under the contract to
sell, especially so in this case where respondent Rowena, as buyer, had paid only 32.58% of the
purchase price. In a contract to sell, it would be unusual for the seller to consent to the transfer of
ownership of the property to the buyer prior to the full payment of the purchase price because the
reservation of the ownership in the seller is precisely intended to protect the seller from the buyer.
We, therefore, find that petitioners’ claim that they did not ratify the subject sale, which was done
without their knowledge and consent, and that the subsequent discovery of the aforesaid fraudulent
sale led them to promptly file this case with the courts to be more credible and in accord with the
evidence on record. To rule otherwise would be to reward respondent Rowena for the fraud that she
committed on petitioners.

Based on the foregoing, we rule that (1) Reynalda, as agent, acted beyond the scope of her
authority under the SPA when she executed the deed of sale dated July 23, 1997 in favor of
respondent Rowena, as buyer, without the knowledge and consent of petitioners, and conveyed the
subject land to respondent Rowena at a price not approved by petitioners, as principals and sellers,
(2) respondent Rowena was aware of the limits of the authority of Reynalda under the SPA, and (3)
petitioners did not ratify, impliedly or expressly, the acts of Reynalda. Under Article 1898 of the Civil
Code, the sale is void and petitioners are, thus, entitled to the reconveyance of the subject land.

WHEREFORE, the Petition is GRANTED. The May 19, 2005 Decision and February 10, 2006
Resolution of the Court of Appeals in CA-G.R. CV No. 79029 are ANNULLED and SET ASIDE. The
January 6, 2003 Decision of the Regional Trial Court of Malaybalay City, Branch 9 in Civil Case No.
2759-98 is REINSTATED and MODIFIED to read as follows:
 1. The deed of sale dated July 23, 1997 over the subject land, covered by TCT No. T-62674,
between petitioner Aurora, represented by Reynalda as her attorney-in-fact, and respondent
Rowena is declared void.

2. The contract to sell over the subject land, covered by TCT No. T-25334, between
petitioners, as sellers, and respondent Rowena, as buyer, is declared rescinded. 1âw phi1

3. The Register of Deeds of Malaybalay City is ordered to cancel TCT No. T-62674 in the
name of respondent Rowena and to reinstate TCT No. T-25334 in the name of petitioner
Aurora.

4. Respondent Rowena is ordered to pay petitioners the sum of ₱100,000.00 as moral

damages and ₱50,000.00 as attorney’s fees.

5. Petitioners are ordered to pay respondent Rowena the sum of ₱327,442.00 with legal
interest of 6% per annum from May 19, 1998 until finality of this Decision. In case petitioners
fail to pay the amount due upon finality of this Decision, they shall pay legal interest thereon
at the rate of 12% per annum until fully paid.

No costs.

SO ORDERED.

217 SCRA 624

G.R. No. 98695 January 27, 1993
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 complaint1 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,
plaintiff-appellants 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 defendant-appellant (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 Parañaque,
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 plaintiffs-appellants: (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 Decision4 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 pre-existing 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 Parañaque
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 above-mentioned 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.

218 SCRA 397

G.R. No. 108245 November 25, 1994
MANOLO P. SAMSON, petitioner,
vs.
COURT OF APPEALS, SANTOS & SONS, INC., and ANGEL SANTOS, respondents.

Clara Dumandan-Singh for petitioner.

Paterno A. Catacutan for private respondents.

PUNO, J.:

Petitioner MANOLO P. SAMSON prays for the reversal of the Decision of the Court of Appeals,
dated November 27, 1992,1 modifying the decision of the Regional Trial Court of Pasig, Branch 157,
dated November 29, 1990, and absolving private respondent Angel Santos from liability for the
damages sustained by petitioner.

The antecedent facts, as borne by the records, are as follows:

The subject matter of this case is a commercial unit at the Madrigal Building, located at Claro M.
Recto Avenue, Sta. Cruz, Manila. The building is owned by Susana Realty Corporation and the
subject premises was leased to private respondent Angel Santos. The lessee's haberdashery store,
Santos & Sons, Inc., occupied the premises for almost twenty (20) years on a yearly basis.2 Thus,
the lease contract in force between the parties in the year 1983 provided that the term of the lease
shall be one (1) year, starting on August 1, 1983 until July 31, 1984.3

On June 28, 1984, the lessor Susana Realty Corporation, through its representative Mr. Jes Gal R.
Sarmiento, Jr., informed respondents that the lease contract which was to expire on July 31, 1984
would not be renewed.4

Nonetheless, private respondent's lease contract was extended until December 31, 1984.5 Private
respondent also continued to occupy the leased premises beyond the extended term.
On February 5, 1985, private respondent received a letter6 from the lessor, through its Real Estate
Accountant Jane F. Bartolome, informing him of the increase in rentals, retroactive to January
1985, pending renewal of his contract until the arrival of Ms. Ma. Rosa Madrigal (one of the owners
of Susana Realty).

Four days later or on February 9, 1985, petitioner Manolo Samson saw private respondent in the
latter's house and offered to buy the store of Santos & Sons and his right to lease the subject
premises.7 Petitioner was advised to return after a week.

On February 15, 1985, petitioner returned to private respondent's house to confirm his offer. On said
occasion, private respondent presented petitioner with a letter containing his counter proposal, thus:

MANOLO SAMSON
Marikina, Metro Manila

Sir:

In line with our negotiation to sell our rights in the Madrigal building at
Recto, Rizal Avenue, I propose the following:

1. The lease contract between Santos and Sons, Inc. and Madrigal
was impliedly renewed. It will be formally renewed this monthly (sic)
when Tanya Madrigal arrives.

2. To avoid breach of contract with Madrigal, I suggest that you

acquire all our shares in Santos and Sons, Inc.

3. I will answer and pay all obligations of Santos and Sons, Inc. as of
February 28, 1985.

V
e
r
y
t
r
u
l
y
y
o
u
r
s
,

A
n
g
e
l
C
 .
S
a
n
t
o
s

Petitioner affixed his signature on the letter-proposal signifying his acceptance.8 They agreed that the
consideration for the sale of the store and leasehold right of Santos & Sons, Inc. shall be
P300,000.00.

On February 20, 1985, petitioner paid P150,000.00 to private respondent representing the value of
existing improvements in the Santos & Sons store. The parties agreed that the balance of
P150,000.00 shall be paid upon the formal renewal of the lease contract between private respondent
and Susana Realty. It was also a condition precedent to the transfer of the leasehold right of private
respondent to petitioner.9

In March 1985, petitioner began to occupy the Santos & Sons store. He utilized the store for the sale
of his own goods.10

All went well for a few months. In July 1985, however, petitioner received a notice from Susana
Realty, addressed to Santos & Sons, Inc., directing the latter to vacate the leased premises on or
before July 15, 1985. 11 Private respondent failed to renew his lease over the premises and petitioner
was forced to vacate the same on July 16, 1985.

Petitioner then filed an action for damages against private respondent. He imputed fraud and bad
faith against private respondent when the latter stated in his letter-proposal that his lease contract
with Susana Realty has been impliedly renewed. Petitioner claimed that this misrepresentation
induced him to purchase the store of Santos & Sons and the leasehold right of private respondent.

In defense, respondent alleged that their agreement was to the effect that the consideration for the
sale was P300,000.00, broken down as follows: P150,000.00 shall be for the improvements in the
store, and the balance of P150,000.00 shall be for the sale of the leasehold right of Santos & Sons
over the subject premises. The balance shall be paid only after the formal renewal of the lease
contract and its actual transfer to petitioner.

Trial on the merits ensued. On November 29, 1990, the trial court rendered a decision 12 in favor of
petitioner. The dispositive portion reads:

WHEREFORE, AND IN VIEW OF ALL THE FOREGOING, judgment is hereby

rendered in favor of plaintiff Manolo P. Samson and against defendants Santos and
Sons, Inc., and Angel C. Santos, ordering the said defendants to pay jointly and
severally unto the plaintiff:

1. The sum of P150,000.00, representing the cash advance payment

for the store and the right to occupy its leased premises subject
matter of the sale involved, with interest thereon at the legal rate from
the filing of the complaint on November 5, 1985 until the same is fully
paid;
 2. The sum of P70,000.00 representing the cost of additional
improvements of the store sold, also with legal interest from
November 5, 1985 until the full payment thereof;

3. The sum of P150,000.00, representing the loss that the plaintiff

suffered from the sale at bargain prices of the goods taken out of the
store, with legal interest thereon from the (d)ate of this decision until
the same is fully paid;

4. The sum of P100,000.00 representing the profits which plaintiff

failed to realize from the sale of the goods referred to above, with
legal interest thereon from the date of the decision until said amount
is fully paid;

5. The amounts of P100,000.00 and P50,000.00 as moral and

exemplary damages, respectively, also with legal interest thereon,
from the date of this judgment until fully paid; and

6. The sum of P45,000.00 as and for attorney's fees and expenses of

litigation, in addition to judicial costs.

On the defendants' counterclaim, the plaintiff is ordered to return to the defendants

the latter's steel filing cabinet, adding machine, typewriter and all its unused sales
invoices, receipts and blank checks, if the plaintiff still has any of the said papers or
documents.

SO ORDERED.13

Private respondent appealed to the Court of Appeals. In a Decision dated November 27, 1992,14 the
appellate court modified the decision of the trial court after finding that private respondent did not
exercise fraud or bad faith in its dealings with petitioner. The dispositive portion of the impugned
decision reads:

WHEREFORE, the appealed decision is hereby MODIFIED by reducing the amounts

the trial court awarded to appellee Manolo P. Samson in that appellants Santos &
Sons, Inc. and Angel C. Santos are ordered to pay appellee, by way of
reimbursement, the P150,000.00 which the latter gave appellants as advance
payment for their store and lease right with legal interest to be reckoned from the
promulgation date of this decision; and AFFIRMED with respect to the trial court's
judgment ordering appellee to return to appellants the latter's filing cabinet, adding
machine, typewriter, and all their unused sales invoices, receipts and blank checks, if
appellee still has any of these documents. No costs.

SO ORDERED.15

Hence this petition for review with the following assigned errors:

WHETHER OR NOT THE COURT OF APPEALS ERRED IN DISREGARDING THE

FOLLOWING FACTUAL FINDINGS OF THE TRIAL COURT:
 1. THAT RESPONDENTS DELIBERATELY AND FRAUDULENTLY
CONCEALED FROM THE PETITIONER THE FACT THAT THE
LEASE ON THE SUBJECT STORE PREMISES HAD ALREADY
EXPIRED AND WOULD NO LONGER BE RENEWED BY THE
LESSOR.

2. THAT SOLELY BY REASON OF RESPONDENTS' FRAUDULENT

CONDUCT AND BAD FAITH, PETITIONER EXERCISING THE
DILIGENCE REQUIRED UNDER THE CIRCUMSTANCES, THE
LATTER INCURRED DAMAGES AND LOSSES.

II

WHETHER OR NOT THE COURT OF APPEALS ERRED IN HOLDING

RESPONDENTS FREE FROM LIABILITY TO PETITIONER FOR THE DAMAGES
THE LATTER HAD INCURRED ON ACCOUNT OF THE RESPONDENTS' BAD
FAITH.

The pivotal issue in the case at bench is whether or not private respondent Angel Santos committed
fraud or bad faith in representing to petitioner that his contract of lease over the subject premises
has been impliedly renewed by Susana Realty. Undoubtedly, it was this representation which
induced petitioner to enter into the subject contract with private respondent.

We find the petition devoid of merit.

Bad faith is essentially a state of mind affirmatively operating with furtive design or with some motive
of ill-will.16 It does not simply connote bad judgment or negligence. It imports a dishonest purpose or
some moral obliquity and conscious doing of wrong.17 Bad faith is thus synonymous with fraud and
involves a design to mislead or deceive another, not prompted by an honest mistake as to one's
rights or duties, but by some interested or sinister motive.18

In contracts, the kind of fraud that will vitiate consent is one where, through insidious words or
machinations of one of the contracting parties, the other is induced to enter into a contract which,
without them, he would not have agreed to.19 This is known as dolo causante or causal fraud which is
basically a deception employed by one party prior to or simultaneous to the contract in order to
secure the consent of the other.

Petitioner claims that their agreement was that the amount of P300,000.00 is the consideration for
the transfer of private respondent's leasehold right to him and he paid P150,000.00 as downpayment
therefor. He insists that private respondent acted in bad faith in assuring him that his lease contract
with Susana Realty has been impliedly renewed and would be formally renewed upon the arrival of
Tanya Madrigal (representative of Susana Realty). As evidence of private respondent's bad faith,
petitioner stresses that private respondent himself admitted that prior to February 15, 1985, he was
informed by his lawyer that he could not yet sell his lease right to petitioner for his lease over the
premises has not been renewed by Susana Realty Corporation.

After carefully examining the records, we sustain the finding of public respondent Court of Appeals
that private respondent was neither guilty of fraud nor bad faith in claiming that there was implied
renewal of his contract of lease with Susana Realty. The records will bear that the original contract of
lease between the lessor Susana Realty and the lessee private respondent was for a period of one
year, commencing on August 1, 1983 until July 31, 1984. Subsequently, however, private
respondent's lease was extended until December 31, 1984. At this point, it was clear that the lessor
had no intention to renew the lease contract of private respondent for another year. However, on
February 5, 1985, the lessor, thru its Real Estate Accountant, sent petitioner a letter20 of even date,
worded as follows:

February 5, 1985

Mr. Angel Santos

1609-1613 C.M. Recto Avenue
Sta. Cruz, Manila

Dear Mr. Santos:

This is to notify you that the rentals for the 1609-1613 C.M. Recto
Avenue, Sta. Cruz, Manila, which you are leasing with (sic) us has
been increased from P77.81 to P100.00 per square meter retroactive
January 1985 (as you have not vacated the place) pending renewal
of your contract until the arrival of Miss Ma. Rosa A.S. Madrigal.

Thus, your new rate will be PESOS: FOURTEEN THOUSAND TWO

HUNDRED FIFTY ONLY (P14,250.00) since you are occupying One
Hundred Forty-Two and 50/100 square meters.

Please note that we are charging the same for everybody and they all
agreed to pay the new rate.

We do expect your full cooperation with regards (sic) to this matter.

Very truly yours,

(Sgd.) JANE F. BARTOLOME

Accountant-Real Estate

Clearly, this letter led private respondent to believe and conclude that his lease contract was
impliedly renewed and that formal renewal thereof would be made upon the arrival of Tanya
Madrigal. This much was admitted by petitioner himself when he testified during cross-examination
that private respondent initially told him of the fact that his lease contract with Susana Realty
has already expired but he was anticipating its formal renewal upon the arrival of Madrigal. 21 Thus,
from the start, it was known to both parties that, insofar as the agreement regarding the transfer of
private respondent's leasehold right to petitioner was concerned, the object thereof relates to a
future right.22 It is a conditional contract recognized in civil law,23 the efficacy of which depends upon
an expectancy — the formal renewal of the lease contract between private respondent and Susana
Realty.

The records would also reveal that private respondent's lawyer informed him that he could sell the
improvements within the store for he already owned them but the sale of his leasehold right over the
store could not as yet be made for his lease contract had not been actually renewed by Susana
Realty. Indeed, it was precisely pursuant to this advice that private respondent and petitioner agreed
that the improvements in the store shall be sold to petitioner for P150,000.00 24 while the leasehold
right shall be sold for the same amount of P150,000.00, payable only upon the formal renewal of the
lease contract and the actual transfer of the leasehold right to petitioner. 25 The efficacy of the
contract between the parties was thus made dependent upon the happening of this suspensive
condition.

Moreover, public respondent Court of Appeals was correct when it faulted petitioner for failing to
exercise sufficient diligence in verifying first the status of private respondent's lease. We thus quote
with approval the decision of the Court of Appeals when it ruled, thus:

When appellant Angel C. Santos said that the lease contract had expired but that it
was impliedly renewed, that representation should have put appellee on guard. To
protect his interest, appellee should have checked with the lessor whether that was
so, and this he failed to do; or he would have simply deferred his decision on the
proposed sale until Miss Madrigal's arrival, and this appellee also failed to do. In
short, as a buyer of the store and lease right in question — or as a buyer of any
object of commerce for that matter — appellee was charged with the obligation of
caution aptly expressed in the universal maxim caveat emptor. 26

Indeed, petitioner had every opportunity to verify the status of the lease contract of private
respondent with Susana Realty. As held by this Court in the case of Caram, Jr. v. Laureta, 27 the
rule caveat emptor requires the purchaser to be aware of the supposed title of the vendor and he
who buys without checking the vendor's title takes all the risks and losses consequent to such
failure. In the case at bench, the means of verifying for himself the status of private respondent's
lease contract with Susana Realty was open to petitioner. Nonetheless, no effort was exerted by
petitioner to confirm the status of the subject lease right. 28 He cannot now claim that he has been
deceived.

In sum, we hold that under the facts proved, private respondent cannot be held guilty of fraud or bad
faith when he entered into the subject contract with petitioner. Causal fraud or bad faith on the part
of one of the contracting parties which allegedly induced the other to enter into a contract must be
proved by clear and convincing evidence. This petitioner failed to do.

IN VIEW WHEREOF, the appealed decision is hereby AFFIRMED in toto. Costs against petitioner.

SO ORDERED.

Narvasa, C.J., Regalado and Mendoza, JJ., concur.

 FERDINAND A. DELA CRUZ and
RENATO A. DELA CRUZ,
G.R. No. 171961
Petitioners,
Present:

YNARES-SANTIAGO, J.,
Chairperson,
AUSTRIA-MARTINEZ,
- versus -
CHICO-NAZARIO,
NACHURA, and
REYES, JJ.

Promulgated:
AMELIA G. QUIAZON,
Respondent.
November 28, 2008
x-----------------------------------------------------------------------------------------x

DECISION

NACHURA, J.:

Petitioners, Ferdinand and Renato dela Cruz, seek the review of the Court of
Appeals Decision[1] dated January 19, 2006and Resolution dated March 21,
2006. The assailed decision affirmed the Department of Agrarian Reform
Adjudication Board (DARAB) Resolution canceling the Certificate of Land Transfer
(CLT) in the name of petitioners father, Feliciano dela Cruz, and directing
petitioners to vacate the property.
 The case arose from the following antecedents:
Estela Dizon-Garcia, mother of respondent Amelia G. Quiazon, was the
registered owner of a parcel of land covered by Transfer Certificate of Title (TCT)
No. 107576, situated in Sto. Domingo II, Capas, Tarlac. The property was brought
under the coverage of Operation Land Transfer pursuant to Presidential Decree
(P.D.) No. 27.[2] On June 8, 1981, Feliciano dela Cruz, a tenant-farmer, was issued
CLT No. 0-036207[3] over a 3.7200-hectare portion of the said property.
On March 9, 1992, the heirs of Estela Dizon-Garcia executed a Deed of
Extrajudicial Admission and Partition with Waiver adjudicating among themselves
all the properties left by both of their parents, except for the subject property,
which was adjudicated solely in favor of respondent.

On May 15, 1993, respondent filed a Complaint with the Provincial

Adjudication Board of the Department of Agrarian Reform (DAR) against petitioner
Ferdinand dela Cruz, alleging that in 1991, he entered into a leasehold contract with
respondent, by virtue of which he bound himself to deliver 28 cavans of palay as
rental. Since 1991, petitioner Ferdinand dela Cruz allegedly failed to deliver the
stipulated rental because he had already abandoned the landholding. For this
reason, respondent prayed for his ejectment from the property and the
termination of their tenancy relationship.[4]

In his Answer, petitioner Ferdinand dela Cruz, through petitioner Renato dela
Cruz, alleged that the execution of the leasehold contract was erroneous
considering that a CLT had already been issued in favor of his father. He contended
that by virtue of the CLT, they became the owners of the landholding, without any
obligation to pay rentals to respondent but only to pay amortizations to the Land
Bank of the Philippines. He claimed that they paid the rentals until 1992, which
rentals should now be considered as advance payments for the land.[5]

Later, respondent amended the complaint to implead Feliciano and Renato

dela Cruz.[6] The amended complaint alleged that petitioners Ferdinand and
Feliciano dela Cruz were already immigrants to the United States of America
(U.S.A.) and that petitioner Renato dela Cruz, the actual tiller of the land, was a
usurper because his possession of the land was without the consent of the
landowner. Respondent argued that by migrating to the U.S.A., Feliciano was
deemed to have abandoned the landholding, for which reason his CLT should now
be canceled.

In turn, petitioners amended their Answer. They averred that their father
was just temporarily out of the country and that petitioner Renatos possession and
cultivation of the land did not need the consent of the landowner because it was
done in aid of their fathers cultivation of the land.[7]

On November 8, 1993, petitioners began paying amortizations to the Land

Bank of the Philippines.[8]

On December 21, 1993, Provincial Adjudicator Romeo B. Bello dismissed the

complaint based on his finding that the landholding had not been abandoned by
Feliciano considering that petitioner Renato dela Cruz, a member of Felicianos
immediate family, was in actual and physical possession thereof.[9]
Respondent filed a Motion for Reconsideration. In an Order[10] dated June 8,
1994, the Provincial Adjudicator denied respondents motion for reconsideration
for lack of merit and directed the Municipal Agrarian Reform Office of Capas, Tarlac,
to determine whether the amortizations had been fully paid and, if so, to issue an
Emancipation Patent.

On July 11, 1994, respondent filed a Notice of Appeal from said

decision.[11] During the pendency of the appeal, respondent executed, on October
6, 1994, a Deed of Conveyance and Waiver of her rights over the subject property
in favor of her siblings.[12] She then filed her Appeal Memorandum on November
29, 1994.[13] The appeal was docketed as DARAB Case No. 3335.
 Unknown to petitioners, respondent and her siblings, as heirs of Estela
Dizon-Garcia, had filed an Application for Retention before the DAR Regional Office
for Region III, as early as June 1, 1994.[14] The application was granted on February
8, 1996. The dispositive portion of the Regional Directors Order reads:

WHEREFORE, all premises considered, Order is hereby issued, as

follows:

1. GRANTING the application for retention of the Heirs of Estela

Dizon-Garcia over a landholding covered by TCT No. 107576,
with a total area of 12.5431, located at Sto. Domingo, Capas,
Tarlac, to be divided among the heirs as follows:

Rosita Garcia - 3.9641 has.

Buena Garcia - 2.5796 has.
Bella Garcia - 3.0000 has.
Estellita Garcia - 3.0000 has.

2. ORDERING the herein landowners-applicant to maintain in

peaceful possession the tenants of the subject landholding,
namely: Renato dela Cruz, Carlos Aquino and Francisco
Manayang as leaseholders; and

3. DIRECTING the herein landowners-applicant to cause the

segregation of the retained area at their own expense and to
submit report to this Office within thirty (30) days from receipt
hereof.
 SO ORDERED.[15]

In a letter[16] dated April 15, 1996, the heirs of Feliciano dela Cruz prayed for
the setting aside of the said order. DAR Secretary Ernesto D. Garilao treated the
letter as an appeal but, nevertheless, denied the same in an Order[17] dated May
13, 1997.

On July 7, 1999, the DARAB finally dismissed respondents appeal (DARAB

Case No. 3335) from the decision of the Provincial Adjudicator.[18] This decision
became final and executory.[19]

On October 19, 1999, respondent filed a Petition for Relief from

Judgment,[20] claiming that she just arrived from the U.S.A. on September 10, 1999
and it was only then that she found out about the July 7, 1999 DARAB Decision. She
purportedly tried to contact her counsel only to discover that he died on December
21, 1994. Respondent insisted that petitioners had already abandoned the
landholding and failed to pay the lease and amortization payments therefor, thus,
the cancellation of their CLT was justified. She argued that the CLT was rendered
moot by the DARs grant of their application for retention of their property which
included the subject landholding.

In its Resolution dated February 7, 2001, the DARAB granted the petition for
relief from judgment. The DARAB set aside its July 7, 1999 Decision primarily based
on the DAR Order granting the application for retention, as well as its finding that
Ferdinand and Feliciano dela Cruz abandoned the subject landholding when they
went to the U.S.A. The dispositive portion of the Resolution reads:

WHEREFORE, all of the above premises considered, and in the

interest of agrarian justice, the decision of this Board dated July 7, 1999 is
hereby SET ASIDE, and a new one is entered:
 1. Declaring the dissolution of the tenancy relationship between
the parties-litigants;

2. Declaring the cancellation of the CLT issued in the name

of defendant Feliciano dela Cruz, the land subject thereof being
part of the retention area of petitioner per order dated
February 8, 1996; and

3. Ordering the respondents or any person acting in their behalf

to vacate the subject land in favor of the petitioner.

SO ORDERED.[21]

On August 7, 2002, the DARAB denied petitioners motion for

reconsideration. On November 27, 2003, the DARAB likewise denied petitioners Ex-
Parte Manifestation with Motion and Comments and Manifestation.[22]

Petitioners thereafter filed a petition for review with the Court of Appeals
(CA). Pending the resolution of the appeal, Feliciano dela Cruz passed away.

On January 19, 2006, the CA denied the petition. On March 21, 2006, the CA
also denied petitioners motion for reconsideration. Consequently, petitioners filed
this petition for review on certiorari based on the following grounds:

A.
THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN AFFIRMING
THE DECISION OF THE DARAB IN DSCA NO. 0151, WHICH GAVE DUE
COURSE TO THE PETITION FOR RELIEF FROM JUDGMENT.
 B.
THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN AFFIRMING
THE DECISION OF THE DARAB IN DSCA NO. 0151 WHEREBY IT WAS RULED
THAT PETITIONERS HAD THE OBLIGATION TO PAY LEASE RENTALS AND
WERE GUILTY OF ABANDONMENT.

C.
THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN AFFIRMING
THE DECISION OF THE DARAB IN DSCA NO. 0151 WHEREBY IT WAS RULED
THAT RESPONDENT HAD THE RIGHT TO RETAIN THE SUBJECT PROPERTY
BY VIRTUE OF THE DECISION IN THE DAR RETENTION CASE.[23]

Petitioners argue that there was no basis for the grant of the petition for
relief from judgment because it was respondents own neglect, and not her counsels
demise, that caused the loss of her right to appeal. They claim that as early as June
5, 1995, respondent personally knew of the death of her lawyer and she could have
employed a new counsel by then. To elaborate, petitioners narrate that, in another
case pending before the Regional Trial Court (RTC) of Capas, Tarlac in which
respondent is plaintiff, she was ordered to replace her former counsel and a new
counsel, in fact, entered his appearance therein on June 5, 1995.[24] And even
assuming that respondent learned about the July 7, 1999 DARAB Decision only on
September 10, 1999, she could have filed her appeal with the CA within 15 days
from the said date.

Secondly, petitioners contend that respondent had no legal standing to file

the petition for relief from judgment because she no longer had any interest in the
subject property since respondent already waived her rights over the same in favor
of her siblings.
 In addition, petitioners posit that with the issuance of the CLT in favor of their
father, their tenancy relationship with respondent ceased, and ownership over the
subject property was effectively transferred to them. In any case, they deny that
they have abandoned the landholding as it is still being cultivated by petitioner
Renato dela Cruz, son of the farmer-beneficiary. Assuming that they have
abandoned the property, the right of action to oust them from the property lies
with the Republic of the Philippines to whom the property will revert.

Finally, petitioners assert that the DAR Decision in the retention case is null
and void for lack of due process; hence, the DARAB erred in relying on the said
decision. They complain that they were not impleaded as parties in the said case,
nor were they given notice of its filing. Petitioners likewise point out that the
retention right of the heirs, who merely succeeded to the rights of their mother,
the landowner, should be limited to five hectares only.

The petition is meritorious.

At the outset, we sustain respondents personality to file the petition for

relief from judgment. A petition for relief from judgment is a remedy available to a
party who, through fraud, accident, mistake or excusable negligence, was
prevented from taking an appeal from a judgment or final order therein. The
personality to file a petition for relief from judgment, therefore, resides in a person
who is a party to the principal case. This legal standing is not lost by the mere
transfer of the disputed property pendente lite. The original party does not lose his
personality as a real party-in-interest merely because of the transfer of interest to
another pendente lite.[25]
 Nonetheless, even as we acknowledge the legal personality of respondent,
we hold that the DARAB, as sustained by the CA, erred in granting the petition for
relief from judgment.

A petition for relief from judgment is an equitable remedy that is allowed

only in exceptional cases when there is no other available or adequate
remedy. When a party has another remedy available to him, which may be either
a motion for new trial or appeal from an adverse decision of the trial court, and he
was not prevented by fraud, accident, mistake or excusable negligencefrom filing
such motion or taking such appeal, he cannot avail himself of this remedy. Indeed,
relief will not be granted to a party who seeks avoidance from the effects of the
judgment when the loss of the remedy at law was due to his own negligence;
otherwise, the petition for relief can be used to revive the right to appeal which
had been lost thru inexcusable negligence.[26]

In this case, respondents failure to avail herself of a motion for

reconsideration or an appeal to the CA was due to her inexcusable negligence.
Negligence to be excusable must be one which ordinary diligence and prudence
could not have guarded against.[27] We note that a copy of the July 7, 1999 DARAB
Decision was in fact served on the respondent herself at her residence, based on
her narration that when she arrived from the U.S.A., her helper handed to her the
envelope containing the DARAB Decision.[28] By her own account, she arrived
on September 10, 1999. She cannot, therefore, feign ignorance of the said decision
and blame the death of her counsel for such ignorance.

Moreover, we cannot disregard the fact that respondent was able to engage
the services of a new counsel to represent her in another case pending before the
RTC as early as June 5, 1995, in compliance with the courts directive for her to hire
a substitute for her deceased counsel. Given this, respondent cannot claim lack of
knowledge of the death of her former counsel, and use it as an excuse for her failure
to file a motion for reconsideration or an appeal from the said DARAB Decision.
 Besides, the case had been pending before the DARAB for almost five
years. To recall, she filed, through counsel, her notice of appeal on July 11, 1994 and
her Appeal Memorandum on November 29, 1994. Her former counsel died barely
a month later (December 21, 1994). Had respondent bothered to check the status
of the case, she would have discovered her counsels demise. Parties are not
expected to simply sit back and await the outcome of their case. They should be
assiduous in keeping track of the status of any litigation to which they are a
party. By allowing almost five years to lapse without monitoring the status of her
appeal, respondent exhibited a total lack of vigilance tantamount to inexcusable
negligence.
Not only did the DARAB err in granting the petition for relief from judgment,
it also erred in canceling the petitioners CLT and ordering them to vacate the
property based on a finding that petitioners had abandoned the landholding.
However, contrary to petitioners posture, the issuance of a CLT does not vest
full ownership in the holder.[29] The issuance of the CLT does not sever the tenancy
relationship between the landowner and the tenant-farmer. A certificate of land
transfer merely evinces that the grantee thereof is qualified to avail himself of the
statutory mechanism for the acquisition of ownership of the land tilled by him as
provided under P.D. No. 27. It is not a muniment of title that vests in the
farmer/grantee absolute ownership of his tillage. [30] It is only after compliance with
the conditions which entitle a farmer/grantee to an emancipation patent that he
acquires the vested right of absolute ownership in the landholdinga right which
then would have become fixed and established, and no longer open to doubt or
controversy.[31]

For this reason, the landowner retains an interest over the property that
gives him the right to file the necessary action to evict the tenant from the
landholding should there be an abandonment despite the fact that land acquired
under P.D. No. 27 will not revert to the landowner.[32]

Nonetheless, we agree with petitioners that they have not abandoned the
subject landholding, as in fact they have continuously cultivated the property.
Abandonment requires (a) a clear and absolute intention to renounce a right or
claim or to desert a right or property; and (b) an external act by which that intention
is expressed or carried into effect. The intention to abandon implies a departure,
with the avowed intent of never returning, resuming or claiming the right and the
interest that have been abandoned.[33] The immigration of the original farmer-
beneficiary to the U.S.A. did not necessarily result in the abandonment of the
landholding, considering that one of his sons, petitioner Renato dela Cruz,
continued cultivating the land. Personal cultivation, as required by law, includes
cultivation of the land by the tenant (lessee) himself or with the aid of the
immediate farm household, which refers to the members of the family of the
tenant and other persons who are dependent upon him for support and who
usually help him in the [agricultural] activities.[34]

Without doubt, the landowners right of retention may be exercised over

tenanted land despite the issuance of a CLT to farmer-beneficiaries.[35] However,
the cancellation of a CLT over the subject landholding as a necessary consequence
of the landowners exercise of his right of retention is within the jurisdiction of the
DAR Secretary, not the DARAB, as it does not involve an agrarian dispute.[36]

Under Section 1(g), Rule II of the then DARAB Rules of Procedure,[37] matters
involving strictly the administrative implementation of agrarian laws shall be the
exclusive prerogative of and cognizable by the Secretary of the DAR. Although
Section 1(f) of the said Rules provides that the DARAB shall have jurisdiction over
cases involving the issuance of a CLT and the administrative correction thereof, it
should be understood that for the DARAB to exercise jurisdiction in such cases,
there must be an agrarian dispute between the landowner and the tenant.[38]

In Tenants of the Estate of Dr. Jose Sison v. Court of Appeals,[39] the Court
sustained the authority or jurisdiction of the DAR Secretary to cancel the CLT issued
to tenant-beneficiaries after the landowners right to retain the subject landholding
was upheld. The Court ruled that the issuance, recall or cancellation of certificates
of land transfer falls within the Secretarys administrative jurisdiction as
implementor of P.D. No. 27.

To conclude, respondents remedy is to raise before the DAR Secretary the

matter of cancellation of petitioners CLT as an incident of the order granting the
landowners application for retention over the said landholding. In the same forum,
petitioners can raise the issue of the validity of the DAR order granting the
application for retention based on their claim of denial of due process, or in a
separate action specifically filed to assail the validity of the judgment.
A collateral attack against a judgment is generally not allowed, unless the judgment
is void upon its face or its nullity is apparent by virtue of its own recitals.[40]

But as a reminder to respondent, this tack can achieve only the cancellation
of petitioners CLT. Under Sec. 6 of R.A. No. 6657, if the area retained is tenanted,
the tenant shall have the option to choose whether to remain therein or be a
beneficiary in the same or another agricultural land with similar or comparable
features. Petitioners may not be ejected from the subject landholding even if their
CLT is canceled, unless they choose to be beneficiaries of another agricultural land.

WHEREFORE, premises considered, the petition is GRANTED. The January

19, 2006 Decision and March 21, 2006 Resolution of the Court of Appeals
are REVERSED and SET ASIDE. Consequently, the February 7, 2001 DARAB Decision
granting the petition for relief from judgment is SET ASIDE and the July 7,
1999 DARAB Decision is REINSTATED.

SO ORDERED.
 222 SCRA 24
G.R. No. 102970 May 13, 1993

LUZAN SIA, petitioner,

vs.
COURT OF APPEALS and SECURITY BANK and TRUST COMPANY, respondents.

Asuncion Law Offices for petitioner.

Cauton, Banares, Carpio & Associates for private respondent

DAVIDE, JR., J.:

The Decision of public respondent Court of Appeals in CA-G.R. CV No. 26737, promulgated on 21
August 1991,1reversing and setting aside the Decision, dated 19 February 1990, 2 of Branch 47 of
the Regional Trial Court (RTC) of Manila in Civil Case No. 87-42601, entitled "LUZAN
SIA vs. SECURITY BANK and TRUST CO.," is challenged in this petition for review
on certiorari under Rule 45 of the Rules Court.

Civil Case No. 87-42601 is an action for damages arising out of the destruction or loss of the stamp
collection of the plaintiff (petitioner herein) contained in Safety Deposit Box No. 54 which had been
rented from the defendant pursuant to a contract denominated as a Lease Agreement. 3 Judgment
therein was rendered in favor of the dispositive portion of which reads:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the

plaintiff and against the defendant, Security Bank & Trust Company, ordering the
defendant bank to pay the plaintiff the sum of —

a) Twenty Thousand Pesos (P20,000.00), Philippine Currency, as actual damages;

b) One Hundred Thousand Pesos (P100,000.00), Philippine Currency, as moral

damages; and

c) Five Thousand Pesos (P5,000.00), Philippine Currency, as attorney's fees and

legal expenses.

The counterclaim set up by the defendant are hereby dismissed for lack of merit.

No costs.

SO ORDERED.4

The antecedent facts of the present controversy are summarized by the public respondent in its
challenged decision as follows:

The plaintiff rented on March 22, 1985 the Safety Deposit Box No. 54 of the
defendant bank at its Binondo Branch located at the Fookien Times Building, Soler
St., Binondo, Manila wherein he placed his collection of stamps. The said safety
 deposit box leased by the plaintiff was at the bottom or at the lowest level of the
safety deposit boxes of the defendant bank at its aforesaid Binondo Branch.

During the floods that took place in 1985 and 1986, floodwater entered into the
defendant bank's premises, seeped into the safety deposit box leased by the plaintiff
and caused, according to the plaintiff, damage to his stamps collection. The
defendant bank rejected the plaintiff's claim for compensation for his damaged
stamps collection, so, the plaintiff instituted an action for damages against the
defendant bank.

The defendant bank denied liability for the damaged stamps collection of the plaintiff
on the basis of the "Rules and Regulations Governing the Lease of Safe Deposit
Boxes" (Exhs. "A-1", "1-A"), particularly paragraphs 9 and 13, which reads (sic):

"9. The liability of the Bank by reason of the lease, is limited to the exercise of the
diligence to prevent the opening of the safe by any person other than the Renter, his
authorized agent or legal representative;

xxx xxx xxx

"13. The Bank is not a depository of the contents of the safe and it has neither the
possession nor the control of the same. The Bank has no interest whatsoever in said
contents, except as herein provided, and it assumes absolutely no liability in
connection therewith."

The defendant bank also contended that its contract with the plaintiff over safety
deposit box No. 54 was one of lease and not of deposit and, therefore, governed by
the lease agreement (Exhs. "A", "L") which should be the applicable law; that the
destruction of the plaintiff's stamps collection was due to a calamity beyond
obligation on its part to notify the plaintiff about the floodwaters that inundated its
premises at Binondo branch which allegedly seeped into the safety deposit box
leased to the plaintiff.

The trial court then directed that an ocular inspection on (sic) the contents of the
safety deposit box be conducted, which was done on December 8, 1988 by its clerk
of court in the presence of the parties and their counsels. A report thereon was then
submitted on December 12, 1988 (Records, p. 98-A) and confirmed in open court by
both parties thru counsel during the hearing on the same date (Ibid., p. 102) stating:

"That the Safety Box Deposit No. 54 was opened by both plaintiff
Luzan Sia and the Acting Branch Manager Jimmy B. Ynion in the
presence of the undersigned, plaintiff's and defendant's counsel. Said
Safety Box when opened contains two albums of different sizes and
thickness, length and width and a tin box with printed word 'Tai Ping
Shiang Roast Pork in pieces with Chinese designs and character."

Condition of the above-stated Items —

"Both albums are wet, moldy and badly damaged.

 1. The first album measures 10 1/8 inches in length, 8 inches in width and 3/4 in
thick. The leaves of the album are attached to every page and cannot be lifted
without destroying it, hence the stamps contained therein are no longer visible.

2. The second album measure 12 1/2 inches in length, 9 3/4 in width 1 inch thick.
Some of its pages can still be lifted. The stamps therein can still be distinguished but
beyond restoration. Others have lost its original form.

3. The tin box is rusty inside. It contains an album with several pieces of papers stuck
up to the cover of the box. The condition of the album is the second abovementioned
album."5

The SECURITY BANK AND TRUST COMPANY, hereinafter referred to as SBTC, appealed the trial
court's decision to the public respondent Court of Appeals. The appeal was docketed as CA-G.R. CV
No. 26737.

In urging the public respondent to reverse the decision of the trial court, SBTC contended that the
latter erred in (a) holding that the lease agreement is a contract of adhesion; (b) finding that the
defendant had failed to exercise the required diligence expected of a bank in maintaining the safety
deposit box; (c) awarding to the plaintiff actual damages in the amount of P20,000.00, moral
damages in the amount of P100,000.00 and attorney's fees and legal expenses in the amount of
P5,000.00; and (d) dismissing the counterclaim.

On 21 August 1991, the respondent promulgated its decision the dispositive portion of which reads:

WHEREFORE, the decision appealed from is hereby REVERSED and instead the
appellee's complaint is hereby DISMISSED. The appellant bank's counterclaim is
likewise DISMISSED. No costs.6

In reversing the trial court's decision and absolving SBTC from liability, the public respondent found
and ruled that:

a) the fine print in the "Lease Agreement " (Exhibits "A" and "1" ) constitutes the terms and
conditions of the contract of lease which the appellee (now petitioner) had voluntarily and knowingly
executed with SBTC;

b) the contract entered into by the parties regarding Safe Deposit Box No. 54 was not a contract of
deposit wherein the bank became a depositary of the subject stamp collection; hence, as contended
by SBTC, the provisions of Book IV, Title XII of the Civil Code on deposits do not apply;

c) The following provisions of the questioned lease agreement of the safety deposit box limiting
SBTC's liability:

9. The liability of the bank by reason of the lease, is limited to the exercise of the
diligence to prevent the opening of the Safe by any person other than the Renter, his
authorized agent or legal representative.

xxx xxx xxx

13. The bank is not a depository of the contents of the Safe and it has neither the
possession nor the control of the same. The Bank has no interest whatsoever in said
 contents, except as herein provided, and it assumes absolutely no liability in
connection therewith.

are valid since said stipulations are not contrary to law, morals, good customs, public order or public
policy; and

d) there is no concrete evidence to show that SBTC failed to exercise the required diligence in
maintaining the safety deposit box; what was proven was that the floods of 1985 and 1986, which
were beyond the control of SBTC, caused the damage to the stamp collection; said floods were
fortuitous events which SBTC should not be held liable for since it was not shown to have
participated in the aggravation of the damage to the stamp collection; on the contrary, it offered its
services to secure the assistance of an expert in order to save most of the stamps, but the appellee
refused; appellee must then bear the lose under the principle of "res perit domino."

Unsuccessful in his bid to have the above decision reconsidered by the public
respondent, 7 petitioner filed the instant petition wherein he contends that:

IT WAS A GRAVE ERROR OR AN ABUSE OF DISCRETION ON THE PART OF

THE RESPONDENT COURT WHEN IT RULED THAT RESPONDENT SBTC DID
NOT FAIL TO EXERCISE THE REQUIRED DILIGENCE IN MAINTAINING THE
SAFETY DEPOSIT BOX OF THE PETITIONER CONSIDERING THAT
SUBSTANTIAL EVIDENCE EXIST (sic) PROVING THE CONTRARY.

II

THE RESPONDENT COURT SERIOUSLY ERRED IN EXCULPATING PRIVATE

RESPONDENT FROM ANY LIABILITY WHATSOEVER BY REASON OF THE
PROVISIONS OF PARAGRAPHS 9 AND 13 OF THE AGREEMENT (EXHS. "A"
AND "A-1").

III

THE RESPONDENT COURT SERIOUSLY ERRED IN NOT UPHOLDING THE

AWARDS OF THE TRIAL COURT FOR ACTUAL AND MORAL DAMAGES,
INCLUDING ATTORNEY'S FEES AND LEGAL EXPENSES, IN FAVOR OF THE
PETITIONER.8

We subsequently gave due course the petition and required both parties to submit their respective
memoranda, which they complied with.9

Petitioner insists that the trial court correctly ruled that SBTC had failed "to exercise the required
diligence expected of a bank maintaining such safety deposit box . . . in the light of the
environmental circumstance of said safety deposit box after the floods of 1985 and 1986." He argues
that such a conclusion is supported by the evidence on record, to wit: SBTC was fully cognizant of
the exact location of the safety deposit box in question; it knew that the premises were inundated by
floodwaters in 1985 and 1986 and considering that the bank is guarded twenty-four (24) hours a day
, it is safe to conclude that it was also aware of the inundation of the premises where the safety
deposit box was located; despite such knowledge, however, it never bothered to inform the petitioner
of the flooding or take any appropriate measures to insure the safety and good maintenance of the
safety deposit box in question.

SBTC does not squarely dispute these facts; rather, it relies on the rule that findings of facts of the
Court of Appeals, when supported by substantial exidence, are not reviewable on appeal
by certiorari. 10

The foregoing rule is, of course, subject to certain exceptions such as when there exists a disparity
between the factual findings and conclusions of the Court of Appeals and the trial court. 11 Such a
disparity obtains in the present case.

As We see it, SBTC's theory, which was upheld by the public respondent, is that the "Lease
Agreement " covering Safe Deposit Box No. 54 (Exhibit "A and "1") is just that — a contract of lease
— and not a contract of deposit, and that paragraphs 9 and 13 thereof, which expressly limit the
bank's liability as follows:

9. The liability of the bank by reason of the lease, is limited to the exercise of the
diligence to prevent the opening of the Safe by any person other than the Renter, his
autliorized agent or legal representative;

xxx xxx xxx

13. The bank is not a depository of the contents of the Safe and it has neither the
possession nor the control of the same. The Bank has no interest whatsoever said
contents, except as herein provided, and it assumes absolutely no liability in
connection therewith. 12

are valid and binding upon the parties. In the challenged decision, the public respondent further
avers that even without such a limitation of liability, SBTC should still be absolved from any
responsibility for the damage sustained by the petitioner as it appears that such damage was
occasioned by a fortuitous event and that the respondent bank was free from any participation in the
aggravation of the injury.

We cannot accept this theory and ratiocination. Consequently, this Court finds the petition to be
impressed with merit.

In the recent case CA Agro-Industrial Development Corp. vs. Court of Appeals, 13 this Court explicitly
rejected the contention that a contract for the use of a safety deposit box is a contract of lease
governed by Title VII, Book IV of the Civil Code. Nor did We fully subscribe to the view that it is a
contract of deposit to be strictly governed by the Civil Code provision on deposit; 14 it is, as We
declared, a special kind of deposit. The prevailing rule in American jurisprudence — that the relation
between a bank renting out safe deposit boxes and its customer with respect to the contents of the
box is that of a bailor and bailee, the bailment for hire and mutual benefit 15 — has been adopted in
this jurisdiction, thus:

In the context of our laws which authorize banking institutions to rent out safety
deposit boxes, it is clear that in this jurisdiction, the prevailing rule in the United
States has been adopted. Section 72 of the General Banking Act [R.A. 337, as
amended] pertinently provides:
"Sec. 72. In addition to the operations specifically authorized elsewhere in this Act,
banking institutions other than building and loan associations may perform the
following services:

(a) Receive in custody funds, documents, and valuable objects, and

rent safety deposit boxes for the safequarding of such effects.

xxx xxx xxx

The banks shall perform the services permitted under subsections (a), (b) and (c) of
this section as depositories or as agents. . . ."(emphasis supplied)

Note that the primary function is still found within the parameters of a contract
of deposit, i.e., the receiving in custody of funds, documents and other valuable
objects for safekeeping. The renting out of the safety deposit boxes is not
independent from, but related to or in conjunction with, this principal function. A
contract of deposit may be entered into orally or in writing (Art. 1969, Civil Code] and,
pursuant to Article 1306 of the Civil Code, the parties thereto may establish such
stipulations, clauses, terms and conditions as they may deem convenient, provided
they are not contrary to law, morals, good customs, public order or public policy. The
depositary's responsibility for the safekeeping of the objects deposited in the case at
bar is governed by Title I, Book IV of the Civil Code. Accordingly, the depositary
would be liable if, in performing its obligation, it is found guilty of fraud, negligence,
delay or contravention of the tenor of the agreement [Art. 1170, id.]. In the absence
of any stipulation prescribing the degree of diligence required, that of a good father of
a family is to be observed [Art. 1173, id.]. Hence, any stipulation exempting the
depositary from any liability arising from the loss of the thing deposited on account of
fraud, negligence or delay would be void for being contrary to law and public policy.
In the instant case, petitioner maintains that conditions 13 and l4 of the questioned
contract of lease of the safety deposit box, which read:

"13. The bank is a depositary of the contents of the safe and it has neither the
possession nor control of the same.

"14. The bank has no interest whatsoever in said contents, except as herein
expressly provided, and it assumes absolutely no liability in connection therewith."

are void as they are contrary to law and public policy. We find Ourselves in
agreement with this proposition for indeed, said provisions are inconsistent with the
respondent Bank's responsibility as a depositary under Section 72 (a) of the General
Banking Act. Both exempt the latter from any liability except as contemplated in
condition 8 thereof which limits its duty to exercise reasonable diligence only with
respect to who shall be admitted to any rented safe, to wit:

"8. The Bank shall use due diligence that no unauthorized person
shall be admitted to any rented safe and beyond this, the Bank will
not be responsible for the contents of any safe rented from it."

Furthermore condition 13 stands on a wrong premise and is contrary to the actual

practice of the Bank. It is not correct to assert that the Bank has neither the
possession nor control of the contents of the box since in fact, the safety deposit box
itself is located in its premises and is under its absolute control; moreover, the
 respondent Bank keeps the guard key to the said box. As stated earlier, renters
cannot open their respective boxes unless the Bank cooperates by presenting and
using this guard key. Clearly then, to the extent above stated, the foregoing
conditions in the contract in question are void and ineffective. It has been said:

"With respect to property deposited in a safe-deposit box by a

customer of a safe-deposit company, the parties, since the relation is
a contractual one, may by special contract define their respective
duties or provide for increasing or limiting the liability of the deposit
company, provided such contract is not in violation of law or public
policy. It must clearly appear that there actually was such a special
contract, however, in order to vary the ordinary obligations implied by
law from the relationship of the parties; liability of the deposit
company will not be enlarged or restricted by words of doubtful
meaning. The company, in renting safe-deposit boxes, cannot
exempt itself from liability for loss of the contents by its own fraud or
negligence or that, of its agents or servants, and if a provision of the
contract may be construed as an attempt to do so, it will be held
ineffective for the purpose. Although it has been held that the lessor
of a safe-deposit box cannot limit its liability for loss of the contents
thereof through its own negligence, the view has been taken that
such a lessor may limit its liability to some extent by agreement or
stipulation ."[10 AM JUR 2d., 466]. (citations omitted) 16

It must be noted that conditions No. 13 and No. 14 in the Contract of Lease of Safety Deposit Box
in CA Agro-Industrial Development Corp. are strikingly similar to condition No. 13 in the instant case.
On the other hand, both condition No. 8 in CA Agro-Industrial Development Corp. and condition No.
9 in the present case limit the scope of the exercise of due diligence by the banks involved to merely
seeing to it that only the renter, his authorized agent or his legal representative should open or have
access to the safety deposit box. In short, in all other situations, it would seem that SBTC is not
bound to exercise diligence of any kind at all. Assayed in the light of Our aforementioned
pronouncements in CA Agro-lndustrial Development Corp., it is not at all difficult to conclude that
both conditions No. 9 and No. 13 of the "Lease Agreement" covering the safety deposit box in
question (Exhibits "A" and "1") must be stricken down for being contrary to law and public policy as
they are meant to exempt SBTC from any liability for damage, loss or destruction of the contents of
the safety deposit box which may arise from its own or its agents' fraud, negligence or delay.
Accordingly, SBTC cannot take refuge under the said conditions.

Public respondent further postulates that SBTC cannot be held responsible for the destruction or
loss of the stamp collection because the flooding was a fortuitous event and there was no showing of
SBTC's participation in the aggravation of the loss or injury. It states:

Article 1174 of the Civil Code provides:

"Except in cases expressly specified by the law, or when it is

otherwise declared by stipulation, or when the nature of the obligation
requires the assumption of risk, no person shall be responsible for
those events which could not be foreseen, or which, though foreseen,
were inevitable.'

In its dissertation of the phrase "caso fortuito" the Enciclopedia Jurisdicada

Española 17 says: "In a legal sense and, consequently, also in relation to contracts, a "caso fortuito" prevents
 (sic) 18 the following essential characteristics: (1) the cause of the unforeseen ands 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 one debtor to fulfill his obligation in a normal manner; and (4)
the obligor must be free from any participation in the aggravation of the injury resulting to the creditor." (cited in
Servando vs. Phil., Steam Navigation Co., supra). 19

Here, the unforeseen or unexpected inundating floods were independent of the will of
the appellant bank and the latter was not shown to have participated in aggravating
damage (sic) to the stamps collection of the appellee. In fact, the appellant bank
offered its services to secure the assistance of an expert to save most of the then
good stamps but the appelle refused and let (sic) these recoverable stamps inside
the safety deposit box until they were ruined. 20

Both the law and authority cited are clear enough and require no further elucidation. Unfortunately,
however, the public respondent failed to consider that in the instant case, as correctly held by the
trial court, SBTC was guilty of negligence. The facts constituting negligence are enumerated in the
petition and have been summarized in thisponencia. SBTC's negligence aggravated the injury or
damage to the stamp collection. SBTC was aware of the floods of 1985 and 1986; it also knew that
the floodwaters inundated the room where Safe Deposit Box No. 54 was located. In view thereof, it
should have lost no time in notifying the petitioner in order that the box could have been opened to
retrieve the stamps, thus saving the same from further deterioration and loss. In this respect, it failed
to exercise the reasonable care and prudence expected of a good father of a family, thereby
becoming a party to the aggravation of the injury or loss. Accordingly, the aforementioned fourth
characteristic of a fortuitous event is absent Article 1170 of the Civil Code, which reads:

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

thus comes to the succor of the petitioner. The destruction or loss of the stamp collection which was,
in the language of the trial court, the "product of 27 years of patience and diligence" 21 caused the
petitioner pecuniary loss; hence, he must be compensated therefor.

We cannot, however, place Our imprimatur on the trial court's award of moral damages. Since the
relationship between the petitioner and SBTC is based on a contract, either of them may be held
liable for moral damages for breach thereof only if said party had acted fraudulently or in bad
faith. 22 There is here no proof of fraud or bad faith on the part of SBTC.

WHEREFORE, the instant petition is hereby GRANTED. The challenged Decision and Resolution of
the public respondent Court of Appeals of 21 August 1991 and 21 November 1991, respectively, in
CA-G.R. CV No. 26737, are hereby SET ASIDE and the Decision of 19 February 1990 of Branch 47
of the Regional Trial Court of Manila in Civil Case No. 87-42601 is hereby REINSTATED in full,
except as to the award of moral damages which is hereby set aside.

Costs against the private respondent.

SO ORDERED.

Feliciano, Bidin, Romero and Melo, JJ., concur.

 33 SCRA 65
G.R. No. L-25906 May 28, 1970

PEDRO D. DIOQUINO, plaintiff-appellee,

vs.
FEDERICO LAUREANO, AIDA DE LAUREANO and JUANITO LAUREANO, defendants-
appellants.

Pedro D. Dioquino in his own behalf.

Arturo E. Valdomero, Jose L. Almario and Rolando S. Relova for defendants-appellants.

FERNANDO, J.:

The present lawsuit had its origin in a relationship, if it could be called such, the use of a car owned
by plaintiff Pedro D. Dioquino by defendant Federico Laureano, clearly of a character casual and
temporary but unfortunately married by an occurrence resulting in its windshield being damaged. A
stone thrown by a boy who, with his other companions, was thus engaged in what undoubtedly for
them must have been mistakenly thought to be a none too harmful prank did not miss its mark.
Plaintiff would hold defendant Federico Laureano accountable for the loss thus sustained, including
in the action filed the wife, Aida de Laureano, and the father, Juanito Laureano. Plaintiff prevail in the
lower court, the judgment however going only against the principal defendant, his spouse and his
father being absolved of any responsibility. Nonetheless, all three of them appealed directly to us,
raising two questions of law, the first being the failure of the lower court to dismiss such a suit as no
liability could have been incurred as a result of a fortuitous event and the other being its failure to
award damages against plaintiff for the unwarranted inclusion of the wife and the father in this
litigation. We agree that the lower court ought to have dismissed the suit, but it does not follow that
thereby damages for the inclusion of the above two other parties in the complaint should have been
awarded appellants.

The facts as found by the lower court follow: "Attorney Pedro Dioquino, a practicing lawyer of
Masbate, is the owner of a car. On March 31, 1964, he went to the office of the MVO, Masbate, to
register the same. He met the defendant Federico Laureano, a patrol officer of said MVO office, who
was waiting for a jeepney to take him to the office of the Provincial Commander, PC, Masbate.
Attorney Dioquino requested the defendant Federico Laureano to introduce him to one of the clerks
in the MVO Office, who could facilitate the registration of his car and the request was graciously
attended to. Defendant Laureano rode on the car of Atty. Dioquino on his way to the P.C. Barracks
at Masbate. While about to reach their destination, the car driven by plaintiff's driver and with
defendant Federico Laureano as the sole passenger was stoned by some 'mischievous boys,' and
its windshield was broken. Defendant Federico Laureano chased the boys and he was able to catch
one of them. The boy was taken to Atty. Dioquino [and] admitted having thrown the stone that broke
the car's windshield. The plaintiff and the defendant Federico Laureano with the boy returned to the
P.C. barracks and the father of the boy was called, but no satisfactory arrangements [were] made
about the damage to the
windshield."1
It was likewise noted in the decision now on appeal: "The defendant Federico Laureano refused to
file any charges against the boy and his parents because he thought that the stone-throwing was
merely accidental and that it was due to force majeure. So he did not want to take any action and
after delaying the settlement, after perhaps consulting a lawyer, the defendant Federico Laureano
refused to pay the windshield himself and challenged that the case be brought to court for judicial
adjudication. There is no question that the plaintiff tried to convince the defendant Federico
Laureano just to pay the value of the windshield and he even came to the extent of asking the wife to
convince her husband to settle the matter amicably but the defendant Federico Laureano refused to
make any settlement, clinging [to] the belief that he could not be held liable because a minor child
threw a stone accidentally on the windshield and therefore, the same was due to force majeure."2

1. The law being what it is, such a belief on the part of defendant Federico Laureano was justified.
The express language of Art. 1174 of the present Civil Code which is a restatement of Art. 1105 of
the Old Civil Code, except for the addition of the nature of an obligation requiring the assumption of
risk, compels such a conclusion. It reads thus: "Except in cases expressly specified by the law, or
when it is otherwise declared by stipulation, or when the nature of the obligation requires the
assumption of risk, no person shall be responsible for those events which could not be, foreseen, or
which, though foreseen were inevitable." Even under the old Civil Code then, as stressed by us in
the first decision dating back to 1908, in an opinion by Justice Mapa, the rule was well-settled that in
the absence of a legal provision or an express covenant, "no one should be held to account for
fortuitous cases."3 Its basis, as Justice Moreland stressed, is the Roman law principle major casus
est, cui humana infirmitas resistere non potest.4Authorities of repute are in agreement, more
specifically concerning an obligation arising from contract "that some extraordinary circumstance
independent of the will of the obligor, or of his employees, is an essential element of a caso
fortuito."5 If it could be shown that such indeed was the case, liability is ruled out. There is no
requirement of "diligence beyond what human care and foresight can provide."6

The error committed by the lower court in holding defendant Federico Laureano liable appears to be
thus obvious. Its own findings of fact repel the motion that he should be made to respond in
damages to the plaintiff for the broken windshield. What happened was clearly unforeseen. It was a
fortuitous event resulting in a loss which must be borne by the owner of the car. An element of
reasonableness in the law would be manifestly lacking if, on the circumstances as thus disclosed,
legal responsibility could be imputed to an individual in the situation of defendant Laureano. Art.
1174 of the Civil Code guards against the possibility of its being visited with such a reproach.
Unfortunately, the lower court was of a different mind and thus failed to heed its command.

It was misled, apparently, by the inclusion of the exemption from the operation of such a provision of
a party assuming the risk, considering the nature of the obligation undertaken. A more careful
analysis would have led the lower court to a different and correct interpretation. The very wording of
the law dispels any doubt that what is therein contemplated is the resulting liability even if caused by
a fortuitous event where the party charged may be considered as having assumed the risk incident
in the nature of the obligation to be performed. It would be an affront, not only to the logic but to the
realities of the situation, if in the light of what transpired, as found by the lower court, defendant
Federico Laureano could be held as bound to assume a risk of this nature. There was no such
obligation on his part.

Reference to the leading case of Republic v. Luzon Stevedoring Corp.7 will illustrate when the nature
of the obligation is such that the risk could be considered as having been assumed. As noted in the
opinion of Justice J.B.L. Reyes, speaking for the Court: "The appellant strongly stresses the
precautions taken by it on the day in question: that it assigned two of its most powerful tugboats to
tow down river its barge L-1892; that it assigned to the task the more competent and experienced
among its patrons, had the towlines, engines and equipment double-checked and inspected; that it
instructed its patrons to take extra-precautions; and concludes that it had done all it was called to do,
and that the accident, therefore, should be held due to force majeure or fortuitous event." Its next
paragraph explained clearly why the defense of caso fortuito or force majeure does not lie. Thus:
"These very precautions, however, completely destroy the appellant's defense. For caso
fortuito or force majeure (which in law are identical in so far as they exempt an obligor from liability)
by definition, are extraordinary events not foreseeable or avoidable, 'events that could not be
foreseen, or which, though foreseen, were inevitable' (Art. 1174, Civil Code of the Philippines). It is,
therefore, not enough that the event should not have been foreseen or participated, as is commonly
believed, but it must be one impossible to foresee or to avoid. The mere difficulty to foresee the
happening is not impossibility to foresee the same: un hecho no constituye caso fortuito por la sola
circunstancia de que su existencia haga mas dificil o mas onerosa la accion diligente del presente
ofensor' (Peirano Facio, Responsibilidad Extra-contractual, p. 465; Mazeaud, Traite de la
Responsibilite Civile, Vol. 2, sec. 1569). The very measures adopted by appellant prove that the
possibility of danger was not only foreseeable, but actually foreseen, and was not caso fortuito."

In that case then, the risk was quite evident and the nature of the obligation such that a party could
rightfully be deemed as having assumed it. It is not so in the case before us. It is anything but that. If
the lower court, therefore, were duly mindful of what this particular legal provision contemplates, it
could not have reached the conclusion that defendant Federico Laureano could be held liable. To
repeat, that was clear error on its part.

2. Appellants do not stop there. It does not suffice for them that defendant Federico Laureano would
be freed from liability. They would go farther. They would take plaintiff to task for his complaint
having joined the wife, Aida de Laureano, and the father, Juanita Laureano. They were far from
satisfied with the lower court's absolving these two from any financial responsibility. Appellants
would have plaintiff pay damages for their inclusion in this litigation. We are not disposed to view the
matter thus.

It is to be admitted, of course, that plaintiff, who is a member of the bar, ought to have exercised
greater care in selecting the parties against whom he would proceed. It may be said that his view of
the law that would consider defendant Federico Laureano liable on the facts as thus disclosed, while
erroneous, is not bereft of plausibility. Even the lower court, mistakenly of course, entertained similar
view. For plaintiff, however, to have included the wife and the father would seem to indicate that his
understanding of the law is not all that it ought to have been.

Plaintiff apparently was not entirely unaware that the inclusion in the suit filed by him was
characterized by unorthodoxy. He did attempt to lend some color of justification by explicitly setting
forth that the father was joined as party defendant in the case as he was the administrator of the
inheritance of an undivided property to which defendant Federico Laureano could lay claim and that
the wife was likewise proceeded against because the conjugal partnership would be made to
respond for whatever liability would be adjudicated against the husband.

It cannot be said that such an attempt at justification is impressed with a high persuasive quality. Far
from it. Nonetheless, mistaken as plaintiff apparently was, it cannot be concluded that he was
prompted solely by the desire to inflict needless and unjustified vexation on them. Considering the
equities of the situation, plaintiff having suffered a pecuniary loss which, while resulting from a
fortuitous event, perhaps would not have occurred at all had not defendant Federico Laureano
borrowed his car, we, feel that he is not to be penalized further by his mistaken view of the law in
including them in his complaint. Well-worth paraphrasing is the thought expressed in a United States
Supreme Court decision as to the existence of an abiding and fundamental principle that the
expenses and annoyance of litigation form part of the social burden of living in a society which seeks
to attain social control through law.8
WHEREFORE, the decision of the lower court of November 2, 1965 insofar as it orders defendant
Federico Laureano to pay plaintiff the amount of P30,000.00 as damages plus the payment of costs,
is hereby reversed. It is affirmed insofar as it dismissed the case against the other two defendants,
Juanita Laureano and Aida de Laureano, and declared that no moral damages should be awarded
the parties. Without pronouncement as to costs.

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Teehankee, Barredo and Villamor, JJ.,
concur.

Castro. J., is on leave.

97 SCRA 118

G.R. No. L-6648 July 25, 1955

VICTORIAS PLANTERS ASSOCIATION, INC., NORTH NEGROS PLANTERS ASSOCIATION,

INC., FERNANDO GONZAGA, JOSE GASTON and CESAR L. LOPEZ, on their own behalf and
on behalf of other sugar cane planters in Manapla, Cadiz and Victorias Districts, petitioners-
appellees,
vs.
VICTORIAS MILLING CO., INC., respondent-appellant.

Ross, Selph, Carrascoso and Janda for appellant.

Tañada, Pelaez and Teehankee for appellees.

PADILLA, J.:

This is an action for declaratory judgment under Rule 66. The relief prayed for calls for an
interpretation of contracts entered into by and between the sugar cane planters in the districts of
Manapla, Cadiz and Victorias, Occidental Negros, and the Victorias Milling Company, Inc. After
issues had been joined the parties submitted the case for judgment upon the testimony of Jesus
Jose Ossorio and the following stipulation of facts:

1. That petitioners Victorias Planters Association, Inc. and North Negros Planters
Association, Inc. are non-stock corporations duly established and existing under and by
virtue of the laws of the Philippines, with main offices at Victorias, Negros Occidental, and
Manapla, Negros Occidental, respectively, and were organized by, and are composed of,
sugar cane planters in the districts of Victorias, Manapla and Cadiz, respectively, having
been established principally as the representative entities of the numerous sugar cane
planters in said districts whose sugar cane productions are milled by the respondent
corporation, with the main object of safeguarding their interests and of taking up with the
latter problems and questions which from time to time, may come up between the said
respondent corporation the said sugar cane planters; the other petitioners are Filipinos, of
legal age, and together with numerous other sugar cane planters who own sugar cane
producing properties at Victorias, Manapla, and Cadiz Districts, Negros Occidental, are bona
fide officials and members of either one of the two petitioner associations; that petitioner
Fernando Gonzaga is a resident of Victorias, Negros Occidental, petitioner Jose Gaston is a
resident of Victorias, Negros Occidental, and petitioner Cesar L. Lopez is a resident of
Bacolod City, Negros Occidental; and that said petitioners bring this action for the benefit
and on behalf of all their fellow sugar cane planters, owners of sugar cane producing lands in
the said districts of Victorias, Manapla, and Cadiz, whose sugar cane productions are milled
by respondent corporation, and who are so numerous that it would be impractical to include
them all as parties herein;

2. That respondent Victorias Milling Co., Inc. is a corporation likewise duly organized and
established under and by virtue of the laws of the Philippines, with main offices at Ayala
Building Manila, where it may be served with summons;

3. That at various dates, from the year 1917 to 1934, the sugar cane planters pertaining to
the districts of Manapla and Cadiz, Negros Occidental, executed identical milling contracts,
setting forth the terms and conditions under which the sugar central "North Negros Sugar
Co. Inc." would mill the sugar produced by the sugar cane planters of the Manapla and Cadiz
districts;

A copy of the standard form of said milling contracts with North Negros Sugar Co., Inc. is
hereto attached and made an integral part hereof as Annex "A.

As may be seen from the said standard form of milling contract, Annex "A," the sugar cane
planters of Manapla and Cadiz, Negros Occidental had executed on November 17, 1916 with
Miguel J. Ossorio, a contract entitled "Contrato de la Central Azucarrera de 300 Toneladas,"
whereby said Miguel J. Ossorio was given a period up to December 31, 1916 within which to
make a study of and decide whether he would construct a sugar central or mill with a
capacity of milling 300 tons of sugar cane every 24 hours and setting forth the mutual
obligations and undertakings of such central and the planters and the terms and conditions
under which the sugar cane produced by said sugar can planters would be milled in the
event of the construction of such sugar central by said Miguel J. Ossorio. Such central was in
fact constructed by said Miguel J. Ossorio in Manapla, Negros Occidental, through the North
Negros Sugar Co., Inc., where after the standard form of milling contracts (Annex "A") were
executed, as above stated.

The parties cannot stipulate as to the milling contracts executed by the planters by Victorias,
Negros Occidental, other than as follows; a number of them executed such milling contracts
with the North Negros Sugar Co., Inc., as per the standard forms hereto attached and made
an integral part as Annexes "B" and "B-1," while a number of them executed milling contracts
with the Victorias Milling Co., Inc., which was likewise organized by Miguel J. Ossorio and
which had constructed another Central at Victorias, Negros Occidental, as per the standard
form hereto attached and made an integral part hereof as Annex "C".

4. The North Negros Sugar Co., Inc. had its first molienda or milling during the 1918-1919
crop year, and the Victorias Milling Co., had its first molienda or milling during the 1921-1922
crop year.

Subsequent moliendas or millings took place every successive crop year thereafter, except
the 6-year period, comprising 4 years of the last World War II and 2 years of post-war
reconstruction of respondent's central at Victorias, Negros Occidental.

5. That after the liberation, the North Negros Sugar Co., Inc. did not reconstruct its destroyed
central at Manapla, Negros Occidental, and in 1946, it advised the North Negros Planters
 Association, Inc. that it had made arrangements with the respondent Victorias Milling Co.,
Inc. for said respondent corporation to mill the sugar cane produced by the planters of
Manapla and Cadiz holding milling contracts with it. Thus, after the war, all the sugar cane
produced by the planters of petitioner associations, in Manapla, Cadiz, as well as in
Victorias, who held milling contracts, were milled in only one central, that of the respondent
corporation at Victorias;

6. Beginning with the year 1948, and in the following years, when the planters-members of
the North Negros Planters Association, Inc. considered that the stipulated 30-year period of
their milling contracts executed in the year 1918 had already expired and terminated in the
crop year 1947-1948, and the planters-members of the Victorias Planters Association, Inc.
likewise considered the stipulated 30-year period of their milling contracts, as having likewise
expired and terminated in the crop year 1948-1949, under the pertinent provisions of the
standard milling contract (Annex "A") on the duration thereof, which provided in Par. 21
thereof as follows:

(a) Que entregaran a la Central de la `North Negros Sugar Co., Inc.' o a la que se construya
en Victorias por Don Miguel J. Ossorio o sus cesionarios por espacio de treinta (30) años
desde la primera molienda, la caña que produzcan sus respectivas haciendas, obligandose
ademas a sembrar anualmente con cañadulce por lo menos en tres quintas partes de su
extension total apropiado para caña, incluyendo en esta denominacion tanto la siembra con
puntas nuevas como el cultivo del retoño o cala-anan y sujetando la siembra a las epocas
convenientes designadas por el comite de hacenderos a fin de poder proporcionar caña a la
Central de conformidad con las clausulas 17 y 18 de esta escritura.

xxx xxx xxx

(i) Los hacenderos' imponen sobre sus haciendas mencionadas y citadas en esta escritura
servidumbres voluntarias a favor de Don Miguel J. Ossorio de sembrar caña por lo menos
en tres quintas partes (3/5) de su extension superficial y entregar la caña que produzcan a
Don Miguel J. Ossorio, de acuerdo con este contrato, por espacio de treinta (30) años, a
contar un (1) año desde la fecha de la primera molienda. repeated representation were
made with respondent corporation for negotiations regarding the execution of new milling
contracts which would take into consideration the charged circumstances presently
prevailing in the sugar industry as compared with those prevailing over 30 years ago and
would provide for an increased participation in the milled sugar for the benefit of the planters
and their workers.

7. That notwithstanding these repeated representations made by the herein petitioners with
the respondent corporation for the negotiation and execution of new milling contracts, the
herein respondent has refused and still refuses to accede to the same, contending that under
the provisions of the mining contract (Annex "A".) "It is the view of the majority of the
stockholder-investors, that our contracts with the planters call for 30 years of milling — not
30 years in time" and that "as there was no milling during 4 years of the recent war and two
years of reconstruction, when these six years are added on to the earliest of our contracts in
Manapla, the contracts by this view terminate in the autumn of 1952," and the "the contracts
for the Victorias Planters would terminate in 1957, and still later for those in the Cadiz
districts," and that "apart from the contractual agreements, the Company believes these war
and reconstruction years accrue to it in equity.

The trial court rendered judgment the dispositive part of which is —

 Wherefore, the Court renders judgment in favor of the petitioners and against the respondent
and declares that the milling contracts executed between the sugar cane planters of
Victorias, Manapla and Cadiz, Negros Occidental, and the respondent corporation or its
predecessors-in-interest, the North Negros Sugar Co., Inc., expired and terminated upon the
lapse of the therein stipulated 30-year period, and that respondent corporation is not entitled
to claim any extension of or addition to the said 30-year term or period of said milling
contracts by virtue of an equivalent to 6 years of the last war and reconstruction of its central,
during which there was no planting and/or milling.

From this judgment the respondent corporation has appealed.

The appellant contends that the term stipulated in the contracts is thirty milling years and not thirty
calendar years and postulates that the planters fulfill their obligation — the six installments of their
indebtedness--which they failed to perform during the six milling years from 1941-42 to 1946-47. The
reason the planters failed to deliver the sugar cane was the war or a fortuitious event. The appellant
ceased to run its mill due to the same cause.

Fortuitious event relieves the obligor from fulfilling a contractual obligation.1 The fact that the
contracts make reference to "first milling" does not make the period of thirty years one of thirty milling
years. The term "first milling" used in the contracts under consideration was for the purpose of
reckoning the thirty-year period stipulated therein. Even if the thirty-year period provided for in the
contracts be construed as milling years, the deduction or extension of six years would not be
justified. At most on the last year of the thirty-year period stipulated in the contracts the delivery of
sugar cane could be extended up to a time when all the amount of sugar cane raised and harvested
should have been delivered to the appellant's mill as agreed upon. The seventh paragraph of Annex
"C", not found in the earlier contracts (Annexes "A", "B", and "B-1"), quoted by the appellant in its
brief, where the parties stipulated that in the event of flood, typhoon, earthquake, or other force
majeure, war, insurrection, civil commotion, organized strike, etc., the contract shall be deemed
suspended during said period, does not mean that the happening of any of those events stops the
running of the period agreed upon. It only relieves the parties from the fulfillment of their respective
obligations during that time — the planters from delivering sugar cane and the central from milling it.
In order that the central, the herein appellant, may be entitled to demand from the other parties the
fulfillment of their part in the contracts, the latter must have been able to perform it but failed or
refused to do so and not when they were prevented by force majeure such as war. To require the
planters to deliver the sugar cane which they failed to deliver during the four years of the Japanese
occupation and the two years after liberation when the mill was being rebuilt is to demand from the
obligors the fulfillment of an obligation which was impossible of performance at the time it became
due. Nemo tenetur ad impossibilia. The obligee not being entitled to demand from the obligors the
performance of the latters' part of the contracts under those circumstances cannot later on demand
its fulfillment. The performance of what the law has written off cannot be demanded and required.
The prayer that the plaintiffs be compelled to deliver sugar cane to the appellant for six more years
to make up for what they failed to deliver during those trying years, the fulfillment of which was
impossible, if granted, would in effect be an extension of the term of the contracts entered into by
and between the parties.

In accord with the rule laid down in the case of Lacson vs. Diaz, 47 Off. Gaz., Supp. No. 12, p. 337,
where despite the fact that the lease contract stipulated seven sugar crops and not seven crop years
as the term thereof, we held that such stipulation contemplated seven consecutive agricultural years
and affirmed the judgment which declared that the leasee was not entitled to an extension of the
term of the lease for the number of years the country was occupied by the Japanese Army during
which no sugar cane was planted2 we are of the opinion and so hold that the thirty-year period
stipulated in the contracts expired on the thirtieth agricultural year. The period of six years — four
during the Japanese occupation when the appellant did not operate its mill and the last two during
which the appellant reconstructed its mill — cannot be deducted from the thirty-year period
stipulated in the contracts.

The judgment appealed from is affirmed, with costs against the appellant.

Bengzon, Acting C. J., Montemayor, Reyes, A., Jugo, Bautista Angelo, Labrador, Concepcion, and
Reyes, J. B. L., JJ., concur.

G.R. No. 119729 January 21, 1997

ACE-AGRO DEVELOPMENT CORPORATION, petitioner,
vs.
COURT OF APPEALS and COSMOS BOTTLING CORPORATION, respondents.

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 court's 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 respondent's daily production
of 8,000 cases. Unlike petitioner, Aren Enterprises rendered service outside private respondent's
plant.

On April 25, 1990, fire broke out in private respondent's plant, destroying, among other places, the
area where petitioner did its work. As a result, petitioner's 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. Petitioner's 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 letter2 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 respondent's 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 company's 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 Ceña and Norman Uy of Cosmos, petitioner's 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 respondent's
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 respondent's 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 AGRO-DEVELOPMENT 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. Petitioner's claim
for reimbursement for what it had paid to its employees in the labor case was denied. The dispositive
portion of the trial court's 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 attorney's fees; and

d) Costs and expenses of litigation.

Defendant's counterclaims are dismissed.

SO ORDERED.

Private respondent appealed to the Court of Appeals, which on December 29, 1994, reversed the
trial court's decision and dismissed petitioner's 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 court's 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); . . . (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 plaintiff-appellee 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:

. . . (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-appellee's 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 court's ruling is merely its summary of
private respondent's 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 respondent's 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-appellee's 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-
appellant's 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 appellant's San Fernando plant, the
appellee could be held liable for damages for breach of contract.

xxx xxx xxx

 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 appellee's 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 appellee's 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 appellee's 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-appellant's August 28, 1990 letter), but the second refusal
must be construed as a breach of contract by plaintiff-appellee. . . .

The Court of Appeals was right that petitioner had no basis for refusing private respondent's 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 respondent's offer, the latter's
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 respondent's reason for not granting petitioner's
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
respondent's offer, it would appear that the real reason for petitioner's 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 respondent's 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. Petitioner's 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 Ceña] 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.

xxx xxx xxx

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. Ceña 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. Ceña, he told me that
was null and void and he told me that Mr. Ceña want a new contract.

As already stated, because the suspension of work was due to force majeure, there was no
justification for petitioner's 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 [petitioner's] 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 respondent's offer was
limited to the repairs of wooden shells and this had to be done outside the company's 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 petitioner's complaint. There was never an issue whether the company's offer
included the cleaning of bottles. Both parties understood private respondent's offer as including the
cleaning of empty soft drink bottles and the repair of the wooden crates. Rather, the discussions
between petitioner and private respondent's 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 petitioner's 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 petitioner's, they did not affect private
respondent's business relation with petitioner. Despite private respondent's 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 respondent's 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.

Regalado, Romero, Puno and Torres, Jr., JJ., concur.

21 SCRA 279
G.R. No. L-21749 September 29, 1967

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,

vs.
LUZON STEVEDORING CORPORATION, defendant-appellant.

Office of the Solicitor General for plaintiff-appellee.

H. San Luis and L.V. Simbulan for defendant-appellant.

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

The present case comes by direct appeal from a decision of the Court of First Instance of Manila
(Case No. 44572) adjudging the defendant-appellant, Luzon Stevedoring Corporation, liable in
damages to the plaintiff-appellee Republic of the Philippines.

In the early afternoon of August 17, 1960, barge L-1892, owned by the Luzon Stevedoring
Corporation was being towed down the Pasig river by tugboats "Bangus" and "Barbero"1 also
belonging to the same corporation, when the barge rammed against one of the wooden piles of the
Nagtahan bailey bridge, smashing the posts and causing the bridge to list. The river, at the time, was
swollen and the current swift, on account of the heavy downpour of Manila and the surrounding
provinces on August 15 and 16, 1960.

Sued by the Republic of the Philippines for actual and consequential damage caused by its
employees, amounting to P200,000 (Civil Case No. 44562, CFI of Manila), defendant Luzon
Stevedoring Corporation disclaimed liability therefor, on the grounds that it had exercised due
diligence in the selection and supervision of its employees; that the damages to the bridge were
caused by force majeure; that plaintiff has no capacity to sue; and that the Nagtahan bailey bridge is
an obstruction to navigation.

After due trial, the court rendered judgment on June 11, 1963, holding the defendant liable for the
damage caused by its employees and ordering it to pay to plaintiff the actual cost of the repair of the
Nagtahan bailey bridge which amounted to P192,561.72, with legal interest thereon from the date of
the filing of the complaint.

Defendant appealed directly to this Court assigning the following errors allegedly committed by the
court a quo, to wit:

I — The lower court erred in not holding that the herein defendant-appellant had exercised
the diligence required of it in the selection and supervision of its personnel to prevent
damage or injury to others. 1awphîl.nèt

II — The lower court erred in not holding that the ramming of the Nagtahan bailey bridge by
barge L-1892 was caused by force majeure.

III — The lower court erred in not holding that the Nagtahan bailey bridge is an obstruction, if
not a menace, to navigation in the Pasig river.
 IV — The lower court erred in not blaming the damage sustained by the Nagtahan bailey
bridge to the improper placement of the dolphins.

V — The lower court erred in granting plaintiff's motion to adduce further evidence in chief
after it has rested its case.

VI — The lower court erred in finding the plaintiff entitled to the amount of P192,561.72 for
damages which is clearly exorbitant and without any factual basis.

However, it must be recalled that the established rule in this jurisdiction is that when a party appeals
directly to the Supreme Court, and submits his case there for decision, he is deemed to have waived
the right to dispute any finding of fact made by the trial Court. The only questions that may be raised
are those of law (Savellano vs. Diaz, L-17441, July 31, 1963; Aballe vs. Santiago, L-16307, April 30,
1963; G.S.I.S. vs. Cloribel, L-22236, June 22, 1965). A converso, a party who resorts to the Court of
Appeals, and submits his case for decision there, is barred from contending later that his claim was
beyond the jurisdiction of the aforesaid Court. The reason is that a contrary rule would encourage
the undesirable practice of appellants' submitting their cases for decision to either court in
expectation of favorable judgment, but with intent of attacking its jurisdiction should the decision be
unfavorable (Tyson Tan, et al. vs. Filipinas Compañia de Seguros) et al., L-10096, Res. on Motion to
Reconsider, March 23, 1966). Consequently, we are limited in this appeal to the issues of law raised
in the appellant's brief.

Taking the aforesaid rules into account, it can be seen that the only reviewable issues in this appeal
are reduced to two:

1) Whether or not the collision of appellant's barge with the supports or piers of the Nagtahan
bridge was in law caused by fortuitous event or force majeure, and

2) Whether or not it was error for the Court to have permitted the plaintiff-appellee to
introduce additional evidence of damages after said party had rested its case.

As to the first question, considering that the Nagtahan bridge was an immovable and stationary
object and uncontrovertedly provided with adequate openings for the passage of water craft,
including barges like of appellant's, it is undeniable that the unusual event that the barge, exclusively
controlled by appellant, rammed the bridge supports raises a presumption of negligence on the part
of appellant or its employees manning the barge or the tugs that towed it. For in the ordinary course
of events, such a thing does not happen if proper care is used. In Anglo American Jurisprudence,
the inference arises by what is known as the "res ipsa loquitur" rule (Scott vs. London Docks Co., 2
H & C 596; San Juan Light & Transit Co. vs. Requena, 224 U.S. 89, 56 L. Ed., 680; Whitwell vs.
Wolf, 127 Minn. 529, 149 N.W. 299; Bryne vs. Great Atlantic & Pacific Tea Co., 269 Mass. 130; 168
N.E. 540; Gribsby vs. Smith, 146 S.W. 2d 719).

The appellant strongly stresses the precautions taken by it on the day in question: that it assigned
two of its most powerful tugboats to tow down river its barge L-1892; that it assigned to the task the
more competent and experienced among its patrons, had the towlines, engines and equipment
double-checked and inspected; that it instructed its patrons to take extra precautions; and concludes
that it had done all it was called to do, and that the accident, therefore, should be held due to force
majeure or fortuitous event.

These very precautions, however, completely destroy the appellant's defense. For caso
fortuito or force majeure(which in law are identical in so far as they exempt an obligor from
liability)2 by definition, are extraordinary events not foreseeable or avoidable, "events that could
not be foreseen, or which, though foreseen, were inevitable" (Art. 1174, Civ. Code of the
Philippines). It is, therefore, not enough that the event should not have been foreseen or anticipated,
as is commonly believed, but it must be one impossible to foresee or to avoid. The mere difficulty to
foresee the happening is not impossibility to foresee the same: "un hecho no constituye caso fortuito
por la sola circunstancia de que su existencia haga mas dificil o mas onerosa la accion diligente del
presento ofensor" (Peirano Facio, Responsibilidad Extra-contractual, p. 465; Mazeaud Trait de la
Responsibilite Civil, Vol. 2, sec. 1569). The very measures adopted by appellant prove that the
possibility of danger was not only foreseeable, but actually foreseen, and was not caso fortuito.

Otherwise stated, the appellant, Luzon Stevedoring Corporation, knowing and appreciating the perils
posed by the swollen stream and its swift current, voluntarily entered into a situation involving
obvious danger; it therefore assured the risk, and can not shed responsibility merely because the
precautions it adopted turned out to be insufficient. Hence, the lower Court committed no error in
holding it negligent in not suspending operations and in holding it liable for the damages caused.

It avails the appellant naught to argue that the dolphins, like the bridge, were improperly located.
Even if true, these circumstances would merely emphasize the need of even higher degree of care
on appellant's part in the situation involved in the present case. The appellant, whose barges and
tugs travel up and down the river everyday, could not safely ignore the danger posed by these
allegedly improper constructions that had been erected, and in place, for years.

On the second point: appellant charges the lower court with having abused its discretion in the
admission of plaintiff's additional evidence after the latter had rested its case. There is an insinuation
that the delay was deliberate to enable the manipulation of evidence to prejudice defendant-
appellant.

We find no merit in the contention. Whether or not further evidence will be allowed after a party
offering the evidence has rested his case, lies within the sound discretion of the trial Judge, and this
discretion will not be reviewed except in clear case of abuse.3

In the present case, no abuse of that discretion is shown. What was allowed to be introduced, after
plaintiff had rested its evidence in chief, were vouchers and papers to support an item of P1,558.00
allegedly spent for the reinforcement of the panel of the bailey bridge, and which item already
appeared in Exhibit GG. Appellant, in fact, has no reason to charge the trial court of being unfair,
because it was also able to secure, upon written motion, a similar order dated November 24, 1962,
allowing reception of additional evidence for the said defendant-appellant.4

WHEREFORE, finding no error in the decision of the lower Court appealed from, the same is hereby
affirmed. Costs against the defendant-appellant.

Concepcion, C.J., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Angeles and Fernando, JJ., concur.
Bengzon, J.P. J., on leave, took no part.
ASSET PRIVATIZATION TRUST, G.R. No. 167195
Petitioner,
Present:

CARPIO MORALES, J.,*

- versus - Acting Chairperson,
TINGA,
VELASCO, JR.,
LEONARDO-DE CASTRO,** and
BRION, JJ.

T.J. ENTERPRISES,
Respondent. Promulgated:
May 8, 2009
x----------------------------------------------------------------------------------x

DECISION

TINGA, J.::
This is a Rule 45 petition[1] which seeks the reversal of the Court of Appeals
decision[2] and resolution[3] affirming the RTCs decision[4] holding petitioner liable for
actual damages for breach of contract.

Petitioner Asset Privatization Trust[5] (petitioner) was a government entity

created for the purpose to conserve, to provisionally manage and to dispose assets
of government institutions.[6] Petitioner had acquired from the Development Bank of
the Philippines (DBP) assets consisting of machinery and refrigeration equipment
which were then stored at Golden City compound, Pasay City. The compound was
then leased to and in the physical possession of Creative Lines, Inc., (Creative
Lines). These assets were being sold on an as-is-where-is basis.

On 7 November 1990, petitioner and respondent entered into an absolute deed

of sale over certain machinery and refrigeration equipment identified as Lots Nos.
2, 3 and 5. Respondent paid the full amount of P84,000.00 as evidenced by
petitioners Receipt No. 12844. After two (2) days, respondent demanded the delivery
of the machinery it had purchased. Sometime in March 1991, petitioner issued Gate
Pass No. 4955. Respondent was able to pull out from the compound the properties
designated as Lots Nos. 3 and 5. However, during the hauling of Lot No. 2 consisting
of sixteen (16) items, only nine (9) items were pulled out by respondent. The seven
(7) items that were left behind consisted of the following: (1) one (1) Reefer Unit 1;
(2) one (1) Reefer Unit 2; (3) one (1) Reefer Unit 3; (4) one (1) unit blast freezer
with all accessories; (5) one (1) unit chest freezer; (6) one (1) unit room air-
conditioner; and (7) one (1) unit air compressor. Creative Lines employees prevented
respondent from hauling the remaining machinery and equipment.

Respondent filed a complaint for specific performance and damages against

petitioner and Creative Lines. During the pendency of the case, respondent was able
[7]

to pull out the remaining machinery and equipment. However, upon inspection it
was discovered that the machinery and equipment were damaged and had missing
parts.

Petitioner argued that upon the execution of the deed of sale it had complied
with its obligation to deliver the object of the sale since there was no stipulation to
the contrary. It further argued that being a sale on an as-is-where-is basis, it was the
duty of respondent to take possession of the property. Petitioner claimed that there
was already a constructive delivery of the machinery and equipment.

The RTC ruled that the execution of the deed of absolute sale did not result in
constructive delivery of the machinery and equipment. It found that at the time of
the sale, petitioner did not have control over the machinery and equipment and, thus,
could not have transferred ownership by constructive delivery. The RTC ruled that
petitioner is liable for breach of contract and should pay for the actual damages
suffered by respondent.

On petitioners appeal, the Court of Appeals affirmed in toto the decision of

the RTC.

Hence this petition.

 Before this Court, petitioner raises issues by attributing the following errors
to the Court of Appeals, to wit:

I.

The Court of Appeals erred in not finding that petitioner had

complied with its obligation to make delivery of the properties
subject of the contract of sale.

II.

The Court of Appeals erred in not considering that the sale was on
an as-is-where-is basis wherein the properties were sold in the
condition and in the place where they were located.

III.

The Court of Appeals erred in not considering that respondents

acceptance of petitioners disclaimer of warranty forecloses
respondents legal basis to enforce any right arising from the
contract.

IV.

The reason for the failure to make actual delivery of the properties
was not attributable to the fault and was beyond the control of
petitioner. The claim for damages against petitioner is therefore
bereft of legal basis.[8]

The first issue hinges on the determination of whether there was a constructive
delivery of the machinery and equipment upon the execution of the deed of absolute
sale between petitioner and respondent.

The ownership of a thing sold shall be transferred to the vendee upon the
actual or constructive delivery thereof.[9] The thing sold shall be understood as
delivered when it is placed in the control and possession of the vendee. [10]
 As a general rule, when the sale is made through a public instrument, the
execution thereof shall be equivalent to the delivery of the thing which is the object
of the contract, if from the deed the contrary does not appear or cannot clearly be
inferred. And with regard to movable property, its delivery may also be made by the
delivery of the keys of the place or depository where it is stored or kept. [11] In order
for the execution of a public instrument to effect tradition, the purchaser must be
placed in control of the thing sold.[12]

However, the execution of a public instrument only gives rise to a prima

facie presumption of delivery. Such presumption is destroyed when the delivery is
not effected because of a legal impediment. It is necessary that the vendor shall
[13]

have control over the thing sold that, at the moment of sale, its material delivery
could have been made.[14] Thus, a person who does not have actual possession of the
thing sold cannot transfer constructive possession by the execution and delivery of
a public instrument.[15]
In this case, there was no constructive delivery of the machinery and equipment upon
the execution of the deed of absolute sale or upon the issuance of the gate pass since
it was not petitioner but Creative Lines which had actual possession of the property.
The presumption of constructive delivery is not applicable as it has to yield to the
reality that the purchaser was not placed in possession and control of the property.

On the second issue, petitioner posits that the sale being in an as-is-where-
is basis, respondent agreed to take possession of the things sold in the condition
where they are found and from the place

where they are located. The phrase as-is where-is basis pertains solely to the physical
condition of the thing sold, not to its legal situation.[16] It is merely descriptive of the
state of the thing sold. Thus, the as-is where-is basis merely describes the actual state
and location of the machinery and equipment sold by petitioner to respondent. The
depiction does not alter petitioners responsibility to deliver the property to
respondent.
 Anent the third issue, petitioner maintains that the presence of the disclaimer
of warranty in the deed of absolute sale absolves it from all warranties, implied or
otherwise. The position is untenable.

The vendor is bound to transfer the ownership of and deliver, as well as

warrant the thing which is the object of the sale.[17] Ownership of the thing sold is
acquired by the vendee from the moment it its delivered to him in any of the ways
specified in articles 1497 to 1501, or in any other manner signifying an agreement
that the possession is transferred from the vendor to the vendee. [18] A perusal of the
deed of absolute sale shows that both the vendor and the vendee represented
and warranted to each other that each had all the requisite power and
authority to enter into the deed of absolute sale and that they shall

perform each of their respective obligations under the deed of absolute in accordance
with the terms thereof.[19] As previously shown, there was no actual or constructive
delivery of the things sold. Thus, petitioner has not performed its obligation to
transfer ownership and possession of the things sold to respondent.

As to the last issue, petitioner claims that its failure to make actual delivery
was beyond its control. It posits that the refusal of Creative Lines to allow the hauling
of the machinery and equipment was unforeseen and constituted a fortuitous event.

The matter of fortuitous events is governed by Art. 1174 of the Civil Code
which provides that except in cases expressly specified by the law, or when it is
otherwise declared by stipulation, or when the nature of the obligation requires
assumption of risk, no person shall be responsible for those events which could not
be foreseen, or which though foreseen, were inevitable. The elements of a fortuitous
event are: (a) the cause of the unforeseen and unexpected occurrence, must have
been independent of human will; (b) the event that constituted the caso fortuito must
have been impossible to foresee or, if foreseeable, impossible to avoid; (c) the
occurrence must have been such as to render it impossible for the debtors to fulfill
their obligation in a normal manner, and; (d) the obligor must have been free from
any participation in the aggravation of the resulting injury to the creditor.[20]

A fortuitous event may either be an act of God, or natural occurrences such as

floods or typhoons, or an act of man such as riots, strikes or wars.[21] However, when
the loss is found to be partly the result of a persons participationwhether by active
intervention, neglect or failure to actthe whole occurrence is humanized and
removed from the rules applicable to a fortuitous event.[22]

We quote with approval the following findings of the Court of Appeals, to

wit:

We find that Creative Lines refusal to surrender the property to the

vendee does not constitute force majeure which exculpates APT from the
payment of damages. This event cannot be considered unavoidable or
unforeseen. APT knew for a fact that the properties to be sold were housed
in the premises leased by Creative Lines. It should have made
arrangements with Creative Lines beforehand for the smooth and orderly
removal of the equipment. The principle embodied in the act of God
doctrine strictly requires that the act must be one occasioned exclusively
by the violence of nature and all human agencies are to be excluded from
creating or entering into the cause of the mischief. When the effect, the
cause of which is to be considered, is found to be in part the result of the
participation of man, whether it be from active intervention or neglect, or
failure to act, the whole occurrence is thereby humanized, as it were, and
removed from the rules applicable to the acts of God.[23]

Moreover, Art. 1504 of the Civil Code provides that where actual delivery has
been delayed through the fault of either the buyer or seller the goods are at the risk
of the party in fault. The risk of loss or deterioration of the goods sold does not pass
to the buyer until there is actual or constructive delivery thereof. As previously
discussed, there was no actual or constructive delivery of the machinery and
equipment. Thus, the risk of loss or deterioration of property is borne by petitioner.
Thus, it should be liable for the damages that may arise from the delay.

Assuming arguendo that Creative Lines refusal to allow the hauling of the
machinery and equipment is a fortuitous event, petitioner will still be liable for
damages. This Court agrees with the appellate courts findings on the matter of
damages, thus:
Article 1170 of the Civil Code states: 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. 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. The trial court correctly awarded actual
[24]

damages as pleaded and proven during trial.[25]

WHEREFORE, the Court AFFIRMS in toto the Decision of the Court of

Appeals dated 31 August 2004. Cost against petitioner.

SO ORDERED.
G.R. No. 146018 June 25, 2003

EDGAR COKALIONG SHIPPING LINES, INC., Petitioner,

vs.
UCPB GENERAL INSURANCE COMPANY, INC., Respondent.

EDGAR COKALIONG SHIPPING LINES, INC., petitioner, vs. UCPB

GENERAL INSURANCE COMPANY, INC., respondent.

DECISION
PANGANIBAN, J.:

The liability of a common carrier for the loss of goods may, by stipulation in the bill of
lading, be limited to the value declared by the shipper. On the other hand, the liability of
the insurer is determined by the actual value covered by the insurance policy and the
insurance premiums paid therefor, and not necessarily by the value declared in the bill of
lading.

The Case

Before the Court is a Petition for Review[1] under Rule 45 of the Rules of Court, seeking
to set aside the August 31, 2000 Decision[2] and the November 17, 2000 Resolution[3] of
the Court of Appeals[4] (CA) in CA-GR SP No. 62751. The dispositive part of the Decision
reads:

IN THE LIGHT OF THE FOREGOING, the appeal is GRANTED. The Decision

appealed from is REVERSED. [Petitioner] is hereby condemned to pay to
[respondent] the total amount of P148,500.00, with interest thereon, at the rate of 6%
per annum, from date of this Decision of the Court. [Respondents] claim for attorneys
fees [is] DISMISSED. [Petitioners] counterclaims are DISMISSED. [5]

The assailed Resolution denied petitioners Motion for Reconsideration.

On the other hand, the disposition of the Regional Trial Courts[6] Decision,[7] which was
later reversed by the CA, states:

WHEREFORE, premises considered, the case is hereby DISMISSED for lack of

merit.

No cost. [8]

The Facts
 The facts of the case are summarized by the appellate court in this wise:

Sometime on December 11, 1991, Nestor Angelia delivered to the Edgar Cokaliong
Shipping Lines, Inc. (now Cokaliong Shipping Lines), [petitioner] for brevity, cargo
consisting of one (1) carton of Christmas dcor and two (2) sacks of plastic toys, to be
transported on board the M/V Tandag on its Voyage No. T-189 scheduled to depart
from Cebu City, on December 12, 1991, for Tandag, Surigao del Sur. [Petitioner]
issued Bill of Lading No. 58, freight prepaid, covering the cargo. Nestor Angelia was
both the shipper and consignee of the cargo valued, on the face thereof, in the amount
of P6,500.00. Zosimo Mercado likewise delivered cargo to [petitioner], consisting of
two (2) cartons of plastic toys and Christmas decor, one (1) roll of floor mat and one
(1) bundle of various or assorted goods for transportation thereof from Cebu City to
Tandag, Surigao del Sur, on board the said vessel, and said voyage. [Petitioner]
issued Bill of Lading No. 59 covering the cargo which, on the face thereof, was
valued in the amount of P14,000.00. Under the Bill of Lading, Zosimo Mercado was
both the shipper and consignee of the cargo.

On December 12, 1991, Feliciana Legaspi insured the cargo, covered by Bill of
Lading No. 59, with the UCPB General Insurance Co., Inc., [respondent] for
brevity, for the amount of P100,000.00 against all risks under Open Policy No.
002/91/254 for which she was issued, by [respondent], Marine Risk Note No.
18409 on said date. She also insured the cargo covered by Bill of Lading No. 58, with
[respondent], for the amount of P50,000.00, under Open Policy No. 002/91/254 on
the basis of which [respondent] issued Marine Risk Note No. 18410 on said date.

When the vessel left port, it had thirty-four (34) passengers and assorted cargo on
board, including the goods of Legaspi. After the vessel had passed by the Mandaue-
Mactan Bridge, fire ensued in the engine room, and, despite earnest efforts of the
officers and crew of the vessel, the fire engulfed and destroyed the entire vessel
resulting in the loss of the vessel and the cargoes therein. The Captain filed the
required Marine Protest.

Shortly thereafter, Feliciana Legaspi filed a claim, with [respondent], for the value of
the cargo insured under Marine Risk Note No. 18409 and covered by Bill of Lading
No. 59. She submitted, in support of her claim, a Receipt, dated December 11, 1991,
purportedly signed by Zosimo Mercado, and Order Slips purportedly signed by him
for the goods he received from Feliciana Legaspi valued in the amount
of P110,056.00. [Respondent] approved the claim of Feliciana Legaspi and drew and
issued UCPB Check No. 612939, dated March 9, 1992, in the net amount
of P99,000.00, in settlement of her claim after which she executed a Subrogation
Receipt/Deed, for said amount, in favor of [respondent]. She also filed a claim for the
value of the cargo covered by Bill of Lading No. 58. She submitted to [respondent]
a Receipt, dated December 11, 1991 and Order Slips, purportedly signed by Nestor
Angelia for the goods he received from Feliciana Legaspi valued
at P60,338.00. [Respondent] approved her claim and remitted to Feliciana Legaspi the
net amount of P49,500.00, after which she signed a Subrogation Receipt/Deed, dated
March 9, 1992, in favor of [respondent].

On July 14, 1992, [respondent], as subrogee of Feliciana Legaspi, filed a complaint

anchored on torts against [petitioner], with the Regional Trial Court of Makati City,
for the collection of the total principal amount of P148,500.00, which it paid to
Feliciana Legaspi for the loss of the cargo, praying that judgment be rendered in its
favor and against the [petitioner] as follows:

WHEREFORE, it is respectfully prayed of this Honorable Court that after due

hearing, judgment be rendered ordering [petitioner] to pay [respondent] the following.

1. Actual damages in the amount of P148,500.00 plus interest thereon at the legal rate
from the time of filing of this complaint until fully paid;

2. Attorneys fees in the amount of P10,000.00; and

3. Cost of suit.

[Respondent] further prays for such other reliefs and remedies as this Honorable Court
may deem just and equitable under the premises.

[Respondent] alleged, inter alia, in its complaint, that the cargo subject of its
complaint was delivered to, and received by, [petitioner] for transportation to Tandag,
Surigao del Sur under Bill of Ladings, Annexes A and B of the complaint; that the
loss of the cargo was due to the negligence of the [petitioner]; and that Feliciana
Legaspi had executed Subrogation Receipts/Deeds in favor of [respondent] after
paying to her the value of the cargo on account of the Marine Risk Notes it issued in
her favor covering the cargo.

In its Answer to the complaint, [petitioner] alleged that: (a) [petitioner] was cleared by the Board
of Marine Inquiry of any negligence in the burning of the vessel; (b) the complaint stated no
cause of action against [petitioner]; and (c) the shippers/consignee had already been paid the
value of the goods as stated in the Bill of Lading and, hence, [petitioner] cannot be held liable
for the loss of the cargo beyond the value thereof declared in the Bill of Lading.

After [respondent] rested its case, [petitioner] prayed for and was allowed, by the Court a quo, to
take the depositions of Chester Cokaliong, the Vice-President and Chief Operating Officer of
[petitioner], and a resident of Cebu City, and of Noel Tanyu, an officer of the Equitable Banking
Corporation, in Cebu City, and a resident of Cebu City, to be given before the Presiding Judge of
Branch 106 of the Regional Trial Court of Cebu City. Chester Cokaliong and Noel Tanyu did
testify, by way of deposition, before the Court and declared inter alia, that: [petitioner] is a
family corporation like the Chester Marketing, Inc.; Nestor Angelia had been doing business
with [petitioner] and Chester Marketing, Inc., for years, and incurred an account with Chester
Marketing, Inc. for his purchases from said corporation; [petitioner] did issue Bills of Lading
Nos. 58 and 59 for the cargo described therein with Zosimo Mercado and Nestor Angelia as
shippers/consignees, respectively; the engine room of the M/V Tandag caught fire after it passed
the Mandaue/Mactan Bridge resulting in the total loss of the vessel and its cargo; an
investigation was conducted by the Board of Marine Inquiry of the Philippine Coast Guard
which rendered a Report, dated February 13, 1992 absolving [petitioner] of any responsibility on
account of the fire, which Report of the Board was approved by the District Commander of the
Philippine Coast Guard; a few days after the sinking of the vessel, a representative of the Legaspi
Marketing filed claims for the values of the goods under Bills of Lading Nos. 58 and 59 in
behalf of the shippers/consignees, Nestor Angelia and Zosimo Mercado; [petitioner] was able to
ascertain, from the shippers/consignees and the representative of the Legaspi Marketing that the
cargo covered by Bill of Lading No. 59 was owned by Legaspi Marketing and consigned to
Zosimo Mercado while that covered by Bill of Lading No. 58 was purchased by Nestor Angelia
from the Legaspi Marketing; that [petitioner] approved the claim of Legaspi Marketing for the
value of the cargo under Bill of Lading No. 59 and remitted to Legaspi Marketing the said
amount under Equitable Banking Corporation Check No. 20230486 dated August 12, 1992, in
the amount of P14,000.00 for which the representative of the Legaspi Marketing signed Voucher
No. 4379, dated August 12, 1992, for the said amount of P14,000.00 in full payment of claims
under Bill of Lading No. 59; that [petitioner] approved the claim of Nestor Angelia in the
amount of P6,500.00 but that since the latter owed Chester Marketing, Inc., for some purchases,
[petitioner] merely set off the amount due to Nestor Angelia under Bill of Lading No. 58 against
his account with Chester Marketing, Inc.; [petitioner]lost/[misplaced] the original of the check
after it was received by Legaspi Marketing, hence, the production of the microfilm copy by Noel
Tanyu of the Equitable Banking Corporation; [petitioner] never knew, before settling with
Legaspi Marketing and Nestor Angelia that the cargo under both Bills of Ladingwere insured
with [respondent], or that Feliciana Legaspi filed claims for the value of the cargo with
[respondent] and that the latter approved the claims of Feliciana Legaspi and paid the total
amount of P148,500.00 to her; [petitioner] came to know, for the first time, of the payments by
[respondent] of the claims of Feliciana Legaspi when it was served with the summons and
complaint, on October 8, 1992; after settling his claim, Nestor Angelia x x x executed
the Release and Quitclaim, dated July 2, 1993, and Affidavit, dated July 2, 1993 in favor of
[respondent]; hence, [petitioner] was absolved of any liability for the loss of the cargo covered
by Bills of Lading Nos. 58 and 59; and even if it was, its liability should not exceed the value of
the cargo as stated in the Bills of Lading.

[Petitioner] did not anymore present any other witnesses on its evidence-in-chief. x x
x[9] (Citations omitted)

Ruling of the Court of Appeals

 The CA held that petitioner had failed to prove that the fire which consumed the vessel
and its cargo was caused by something other than its negligence in the upkeep,
maintenance and operation of the vessel.[10]
Petitioner had paid P14,000 to Legaspi Marketing for the cargo covered by Bill of
Lading No. 59. The CA, however, held that the payment did not extinguish petitioners
obligation to respondent, because there was no evidence that Feliciana Legaspi (the
insured) was the owner/proprietor of Legaspi Marketing. The CA also pointed out the
impropriety of treating the claim under Bill of Lading No. 58 -- covering cargo valued
therein at P6,500 -- as a setoff against Nestor Angelias account with Chester Enterprises,
Inc.
Finally, it ruled that respondent is not bound by the valuation of the cargo under the
Bills of Lading, x x x nor is the value of the cargo under said Bills of Lading conclusive on
the [respondent]. This is so because, in the first place, the goods were insured with the
[respondent] for the total amount of P150,000.00, which amount may be considered as
the face value of the goods.[11]
Hence this Petition.[12]

Issues

Petitioner raises for our consideration the following alleged errors of the CA:
I

The Honorable Court of Appeals erred, granting arguendo that petitioner is liable, in
holding that petitioners liability should be based on the actual insured value of the
goods and not from actual valuation declared by the shipper/consignee in the bill of
lading.

II

The Court of Appeals erred in not affirming the findings of the Philippine Coast
Guard, as sustained by the trial court a quo, holding that the cause of loss of the
aforesaid cargoes under Bill of Lading Nos. 58 and 59 was due to force majeure and
due diligence was [exercised] by petitioner prior to, during and immediately after the
fire on [petitioners] vessel.

III

The Court of Appeals erred in not holding that respondent UCPB General Insurance
has no cause of action against the petitioner. [13]

In sum, the issues are: (1) Is petitioner liable for the loss of the goods? (2) If it is liable,
what is the extent of its liability?
 This Courts Ruling

The Petition is partly meritorious.

First Issue:
Liability for Loss

Petitioner argues that the cause of the loss of the goods, subject of this case, was
force majeure. It adds that its exercise of due diligence was adequately proven by the
findings of the Philippine Coast Guard.
We are not convinced. The uncontroverted findings of the Philippine Coast Guard
show that the M/V Tandag sank due to a fire, which resulted from a crack in the auxiliary
engine fuel oil service tank. Fuel spurted out of the crack and dripped to the heating
exhaust manifold, causing the ship to burst into flames. The crack was located on the
side of the fuel oil tank, which had a mere two-inch gap from the engine room walling,
thus precluding constant inspection and care by the crew.
Having originated from an unchecked crack in the fuel oil service tank, the fire could
not have been caused by force majeure. Broadly speaking, force majeure generally
applies to a natural accident, such as that caused by a lightning, an earthquake, a tempest
or a public enemy.[14] Hence, fire is not considered a natural disaster or calamity. In Eastern
Shipping Lines, Inc. v. Intermediate Appellate Court,[15] we explained:

x x x. This must be so as it arises almost invariably from some act of man or by

human means. It does not fall within the category of an act of God unless caused by
lighting or by other natural disaster or calamity. It may even be caused by the actual
fault or privity of the carrier.

Article 1680 of the Civil Code, which considers fire as an extraordinary fortuitous
event refers to leases or rural lands where a reduction of the rent is allowed when
more than one-half of the fruits have been lost due to such event, considering that the
law adopts a protective policy towards agriculture.

As the peril of fire is not comprehended within the exceptions in Article 1734, supra,
Article 1735 of the Civil Code provides that in all cases other than those mentioned in
Article 1734, the common carrier shall be presumed to have been at fault or to have
acted negligently, unless it proves that it has observed the extraordinary diligence
required by law.

Where loss of cargo results from the failure of the officers of a vessel to inspect their
ship frequently so as to discover the existence of cracked parts, that loss cannot be
attributed to force majeure, but to the negligence of those officials. [16]
 The law provides that a common carrier is presumed to have been negligent if it fails
to prove that it exercised extraordinary vigilance over the goods it transported. Ensuring
the seaworthiness of the vessel is the first step in exercising the required vigilance.
Petitioner did not present sufficient evidence showing what measures or acts it had
undertaken to ensure the seaworthiness of the vessel. It failed to show when the last
inspection and care of the auxiliary engine fuel oil service tank was made, what the normal
practice was for its maintenance, or some other evidence to establish that it had exercised
extraordinary diligence. It merely stated that constant inspection and care were not
possible, and that the last time the vessel was dry-docked was in November
1990. Necessarily, in accordance with Article 1735[17] of the Civil Code, we hold petitioner
responsible for the loss of the goods covered by Bills of Lading Nos. 58 and 59.

Second Issue:
Extent of Liability

Respondent contends that petitioners liability should be based on the actual insured
value of the goods, subject of this case. On the other hand, petitioner claims that its
liability should be limited to the value declared by the shipper/consignee in the Bill of
Lading.
The records[18] show that the Bills of Lading covering the lost goods contain the
stipulation that in case of claim for loss or for damage to the shipped merchandise or
property, [t]he liability of the common carrier x x x shall not exceed the value of the goods
as appearing in the bill of lading.[19] The attempt by respondent to make light of this
stipulation is unconvincing. As it had the consignees copies of the Bills of Lading, [20] it
could have easily produced those copies, instead of relying on mere allegations and
suppositions. However, it presented mere photocopies thereof to disprove petitioners
evidence showing the existence of the above stipulation.
A stipulation that limits liability is valid[21] as long as it is not against public
policy. In Everett Steamship Corporation v. Court of Appeals,[22] the Court stated:

A stipulation in the bill of lading limiting the common carriers liability for loss or
destruction of a cargo to a certain sum, unless the shipper or owner declares a greater
value, is sanctioned by law, particularly Articles 1749 and 1750 of the Civil Code
which provides:

Art. 1749. A stipulation that the common carriers liability is limited to the value of the
goods appearing in the bill of lading, unless the shipper or owner declares a greater
value, is binding.

Art. 1750. A contract fixing the sum that may be recovered by the owner or shipper
for the loss, destruction, or deterioration of the goods is valid, if it is reasonable and
just under the circumstances, and has been freely and fairly agreed upon.
Such limited-liability clause has also been consistently upheld by this Court in a
number of cases. Thus, in Sea-Land Service, Inc. vs. Intermediate Appellate Court, we
ruled:

It seems clear that even if said section 4 (5) of the Carriage of Goods by Sea Act did
not exist, the validity and binding effect of the liability limitation clause in the bill of
lading here are nevertheless fully sustainable on the basis alone of the cited Civil
Code Provisions. That said stipulation is just and reasonable is arguable from the fact
that it echoes Art. 1750 itself in providing a limit to liability only if a greater value is
not declared for the shipment in the bill of lading. To hold otherwise would amount to
questioning the justness and fairness of the law itself, and this the private respondent
does not pretend to do. But over and above that consideration, the just and reasonable
character of such stipulation is implicit in it giving the shipper or owner the option of
avoiding accrual of liability limitation by the simple and surely far from onerous
expedient of declaring the nature and value of the shipment in the bill of lading.

Pursuant to the afore-quoted provisions of law, it is required that the stipulation

limiting the common carriers liability for loss must be reasonable and just under the
circumstances, and has been freely and fairly agreed upon.

The bill of lading subject of the present controversy specifically provides, among
others:

18. All claims for which the carrier may be liable shall be adjusted and settled on the
basis of the shippers net invoice cost plus freight and insurance premiums, if paid, and
in no event shall the carrier be liable for any loss of possible profits or any
consequential loss.

The carrier shall not be liable for any loss of or any damage to or in any connection
with, goods in an amount exceeding One Hundred Thousand Yen in Japanese
Currency (100,000.00) or its equivalent in any other currency per package or
customary freight unit (whichever is least) unless the value of the goods higher than
this amount is declared in writing by the shipper before receipt of the goods by the
carrier and inserted in the Bill of Lading and extra freight is paid as required.

The above stipulations are, to our mind, reasonable and just. In the bill of lading, the
carrier made it clear that its liability would only be up to One Hundred Thousand
(Y100,000.00) Yen. However, the shipper, Maruman Trading, had the option to
declare a higher valuation if the value of its cargo was higher than the limited
liability of the carrier. Considering that the shipper did not declare a higher
valuation, it had itself to blame for not complying with the stipulations. (Italics
supplied)
 In the present case, the stipulation limiting petitioners liability is not contrary to public
policy. In fact, its just and reasonable character is evident. The shippers/consignees may
recover the full value of the goods by the simple expedient of declaring the true value of
the shipment in the Bill of Lading. Other than the payment of a higher freight, there was
nothing to stop them from placing the actual value of the goods therein. In fact, they
committed fraud against the common carrier by deliberately undervaluing the goods in
their Bill of Lading, thus depriving the carrier of its proper and just transport fare.
Concededly, the purpose of the limiting stipulation in the Bill of Lading is to protect
the common carrier. Such stipulation obliges the shipper/consignee to notify the common
carrier of the amount that the latter may be liable for in case of loss of the goods. The
common carrier can then take appropriate measures -- getting insurance, if needed, to
cover or protect itself. This precaution on the part of the carrier is reasonable and
prudent. Hence, a shipper/consignee that undervalues the real worth of the goods it seeks
to transport does not only violate a valid contractual stipulation, but commits a fraudulent
act when it seeks to make the common carrier liable for more than the amount it declared
in the bill of lading.
Indeed, Zosimo Mercado and Nestor Angelia misled petitioner by undervaluing the
goods in their respective Bills of Lading. Hence, petitioner was exposed to a risk that was
deliberately hidden from it, and from which it could not protect itself.
It is well to point out that, for assuming a higher risk (the alleged actual value of the
goods) the insurance company was paid the correct higher premium by Feliciana Legaspi;
while petitioner was paid a fee lower than what it was entitled to for transporting the goods
that had been deliberately undervalued by the shippers in the Bill of Lading. Between the
two of them, the insurer should bear the loss in excess of the value declared in the Bills
of Lading. This is the just and equitable solution.
In Aboitiz Shipping Corporation v. Court of Appeals,[23] the description of the nature
and the value of the goods shipped were declared and reflected in the bill of lading, like
in the present case. The Court therein considered this declaration as the basis of the
carriers liability and ordered payment based on such amount. Following this ruling,
petitioner should not be held liable for more than what was declared by the
shippers/consignees as the value of the goods in the bills of lading.
We find no cogent reason to disturb the CAs finding that Feliciana Legaspi was the
owner of the goods covered by Bills of Lading Nos. 58 and 59. Undoubtedly, the goods
were merely consigned to Nestor Angelia and Zosimo Mercado, respectively; thus,
Feliciana Legaspi or her subrogee (respondent) was entitled to the goods or, in case of
loss, to compensation therefor. There is no evidence showing that petitioner paid her for
the loss of those goods. It does not even claim to have paid her.
On the other hand, Legaspi Marketing filed with petitioner a claim for the lost goods
under Bill of Lading No. 59, for which the latter subsequently paid P14,000. But nothing
in the records convincingly shows that the former was the owner of the
goods. Respondent was, however, able to prove that it was Feliciana Legaspi who owned
those goods, and who was thus entitled to payment for their loss. Hence, the claim for the
goods under Bill of Lading No. 59 cannot be deemed to have been extinguished, because
payment was made to a person who was not entitled thereto.
With regard to the claim for the goods that were covered by Bill of Lading No. 58 and
valued at P6,500, the parties have not convinced us to disturb the findings of the CA that
compensation could not validly take place. Thus, we uphold the appellate courts ruling on
this point.
WHEREFORE, the Petition is hereby PARTIALLY GRANTED. The assailed Decision
is MODIFIED in the sense that petitioner is ORDERED to pay respondent the sums
of P14,000 and P6,500, which represent the value of the goods stated in Bills of Lading
Nos. 59 and 58, respectively. No costs.
SO ORDERED.
Puno, (Chairman), Sandoval-Gutierrez, Corona, and Carpio-Morales, JJ., concur.

G.R. No. 113003 October 17, 1997

ALBERTA YOBIDO and CRESENCIO YOBIDO, petitioners,
vs.
COURT OF APPEALS, LENY TUMBOY, ARDEE TUMBOY and JASMIN TUMBOY, respondents.

ROMERO, J.:

In this petition for review on certiorari of the decision of the Court of Appeals, the issue is whether or
not the explosion of a newly installed tire of a passenger vehicle is a fortuitous event that exempts
the carrier from liability for the death of a passenger.

On April 26, 1988, spouses Tito and Leny Tumboy and their minor children named Ardee and
Jasmin, bearded at Mangagoy, Surigao del Sur, a Yobido Liner bus bound for Davao City. Along
Picop Road in Km. 17, Sta. Maria, Agusan del Sur, the left front tire of the bus exploded. The bus fell
into a ravine around three (3) feet from the road and struck a tree. The incident resulted in the death
of 28-year-old Tito Tumboy and physical injuries to other passengers.

On November 21, 1988, a complaint for breach of contract of carriage, damages and attorney's fees
was filed by Leny and her children against Alberta Yobido, the owner of the bus, and Cresencio
Yobido, its driver, before the Regional Trial Court of Davao City. When the defendants therein filed
their answer to the complaint, they raised the affirmative defense of caso fortuito. They also filed a
third-party complaint against Philippine Phoenix Surety and Insurance, Inc. This third-party
defendant filed an answer with compulsory counterclaim. At the pre-trial conference, the parties
agreed to a stipulation of facts.1

Upon a finding that the third party defendant was not liable under the insurance contract, the lower
court dismissed the third party complaint. No amicable settlement having been arrived at by the
parties, trial on the merits ensued.
The plaintiffs asserted that violation of the contract of carriage between them and the defendants
was brought about by the driver's failure to exercise the diligence required of the carrier in
transporting passengers safely to their place of destination. According to Leny Tumboy, the bus left
Mangagoy at 3:00 o'clock in the afternoon. The winding road it traversed was not cemented and was
wet due to the rain; it was rough with crushed rocks. The bus which was full of passengers had
cargoes on top. Since it was "running fast," she cautioned the driver to slow down but he merely
stared at her through the mirror. At around 3:30 p.m., in Trento, she heard something explode and
immediately, the bus fell into a ravine.

For their part, the defendants tried to establish that the accident was due to a fortuitous event.
Abundio Salce, who was the bus conductor when the incident happened, testified that the 42-seater
bus was not full as there were only 32 passengers, such that he himself managed to get a seat. He
added that the bus was running at a speed of "60 to 50" and that it was going slow because of the
zigzag road. He affirmed that the left front tire that exploded was a "brand new tire" that he mounted
on the bus on April 21, 1988 or only five (5) days before the incident. The Yobido Liner secretary,
Minerva Fernando, bought the new Goodyear tire from Davao Toyo Parts on April 20, 1988 and she
was present when it was mounted on the bus by Salce. She stated that all driver applicants in
Yobido Liner underwent actual driving tests before they were employed. Defendant Cresencio
Yobido underwent such test and submitted his professional driver's license and clearances from the
barangay, the fiscal and the police.

On August 29, 1991, the lower court rendered a decision2 dismissing the action for lack of merit. On
the issue of whether or not the tire blowout was a caso fortuito, it found that "the falling of the bus to
the cliff was a result of no other outside factor than the tire blow-out." It held that the ruling in the La
Mallorca and Pampanga Bus Co. v. De Jesus3 that a tire blowout is "a mechanical defect of the
conveyance or a fault in its equipment which was easily discoverable if the bus had been subjected
to a more thorough or rigid check-up before it took to the road that morning" is inapplicable to this
case. It reasoned out that in said case, it was found that the blowout was caused by the established
fact that the inner tube of the left front tire "was pressed between the inner circle of the left wheel
and the rim which had slipped out of the wheel." In this case, however, "the cause of the explosion
remains a mystery until at present." As such, the court added, the tire blowout was "a caso
fortuito which is completely an extraordinary circumstance independent of the will" of the defendants
who should be relieved of "whatever liability the plaintiffs may have suffered by reason of the
explosion pursuant to Article 11744 of the Civil Code."

Dissatisfied, the plaintiffs appealed to the Court of Appeals. They ascribed to the lower court the
following errors: (a) finding that the tire blowout was a caso fortuito; (b) failing to hold that the
defendants did not exercise utmost and/or extraordinary diligence required of carriers under Article
1755 of the Civil Code, and (c) deciding the case contrary to the ruling in Juntilla v. Fontanar,5 and
Necesito v. Paras.6

On August 23, 1993, the Court of Appeals rendered the Decision7 reversing that of the lower court. It
held that:

To Our mind, the explosion of the tire is not in itself a fortuitous event. The cause of the blow-
out, if due to a factory defect, improper mounting, excessive tire pressure, is not an
unavoidable event. On the other hand, there may have been adverse conditions on the road
that were unforeseeable and/or inevitable, which could make the blow-out a caso fortuito.
The fact that the cause of the blow-out was not known does not relieve the carrier of liability.
Owing to the statutory presumption of negligence against the carrier and its obligation to
exercise the utmost diligence of very cautious persons to carry the passenger safely as far
as human care and foresight can provide, it is the burden of the defendants to prove that the
 cause of the blow-out was a fortuitous event. It is not incumbent upon the plaintiff to prove
that the cause of the blow-out is not caso-fortuito.

Proving that the tire that exploded is a new Goodyear tire is not sufficient to discharge
defendants' burden. As enunciated in Necesito vs. Paras, the passenger has neither choice
nor control over the carrier in the selection and use of its equipment, and the good repute of
the manufacturer will not necessarily relieve the carrier from liability.

Moreover, there is evidence that the bus was moving fast, and the road was wet and rough.
The driver could have explained that the blow-out that precipitated the accident that caused
the death of Toto Tumboy could not have been prevented even if he had exercised due care
to avoid the same, but he was not presented as witness.

The Court of Appeals thus disposed of the appeal as follows:

WHEREFORE, the judgment of the court a quo is set aside and another one entered
ordering defendants to pay plaintiffs the sum of P50,000.00 for the death of Tito Tumboy,
P30,000.00 in moral damages, and P7,000.00 for funeral and burial expenses.

SO ORDERED.

The defendants filed a motion for reconsideration of said decision which was denied on November 4,
1993 by the Court of Appeals. Hence, the instant petition asserting the position that the tire blowout
that caused the death of Tito Tumboy was a caso fortuito. Petitioners claim further that the Court of
Appeals, in ruling contrary to that of the lower court, misapprehended facts and, therefore, its
findings of fact cannot be considered final which shall bind this Court. Hence, they pray that this
Court review the facts of the case.

The Court did re-examine the facts and evidence in this case because of the inapplicability of the
established principle that the factual findings of the Court of Appeals are final and may not be
reviewed on appeal by this Court. This general principle is subject to exceptions such as the one
present in this case, namely, that the lower court and the Court of Appeals arrived at diverse factual
findings.8 However, upon such re-examination, we found no reason to overturn the findings and
conclusions of the Court of Appeals.

As a rule, when a passenger boards a common carrier, he takes the risks incidental to the mode of
travel he has taken. After all, a carrier is not an insurer of the safety of its passengers and is not
bound absolutely and at all events to carry them safely and without injury.9 However, when a
passenger is injured or dies while travelling, the law presumes that the common carrier is negligent.
Thus, the Civil Code provides:

Art. 1756. In case of death or injuries to passengers, common carriers are presumed to have
been at fault or to have acted negligently, unless they prove that they observed extraordinary
diligence as prescribed in articles 1733 and 1755.

Article 1755 provides that "(a) common carrier is bound to carry the passengers safely as far as
human care and foresight can provide, using the utmost diligence of very cautious persons, with a
due regard for all the circumstances." Accordingly, in culpa contractual, once a passenger dies or is
injured, the carrier is presumed to have been at fault or to have acted negligently. This disputable
presumption may only be overcome by evidence that the carrier had observed extraordinary
diligence as prescribed by Articles 1733,10 1755 and 1756 of the Civil Code or that the death or injury
of the passenger was due to a fortuitous event.11 Consequently, the court need not make an express
finding of fault or negligence on the part of the carrier to hold it responsible for damages sought by
the passenger.12

In view of the foregoing, petitioners' contention that they should be exempt from liability because the
tire blowout was no more than a fortuitous event that could not have been foreseen, must fail. A
fortuitous event is possessed of the following characteristics: (a) the cause of the unforeseen and
unexpected occurrence, or the failure of the debtor to comply with his obligations, must be
independent of human will; (b) it must be impossible to foresee the event which constitutes the caso
fortuito, or if it can be foreseen, it must be impossible to avoid; (c) the occurrence must be such as to
render it impossible for the debtor to fulfill his obligation in a normal manner; and (d) the obliger must
be free from any participation in the aggravation of the injury resulting to the creditor.13 As Article
1174 provides, no person shall be responsible for a fortuitous event which could not be foreseen, or
which, though foreseen, was inevitable. In other words, there must be an entire exclusion of human
agency from the cause of injury or loss.14

Under the circumstances of this case, the explosion of the new tire may not be considered a
fortuitous event. There are human factors involved in the situation. The fact that the tire was new did
not imply that it was entirely free from manufacturing defects or that it was properly mounted on the
vehicle. Neither may the fact that the tire bought and used in the vehicle is of a brand name noted for
quality, resulting in the conclusion that it could not explode within five days' use. Be that as it may, it
is settled that an accident caused either by defects in the automobile or through the negligence of its
driver is not a caso fortuito that would exempt the carrier from liability for damages.15

Moreover, a common carrier may not be absolved from liability in case of force majeure or fortuitous
event alone. The common carrier must still prove that it was not negligent in causing the death or
injury resulting from an accident.16 This Court has had occasion to state:

While it may be true that the tire that blew-up was still good because the grooves 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.17

It is interesting to note that petitioners proved through the bus conductor, Salce, that the bus was
running at "60-50" kilometers per hour only or within the prescribed lawful speed limit. However, they
failed to rebut the testimony of Leny Tumboy that the bus was running so fast that she cautioned the
driver to slow down. These contradictory facts must, therefore, be resolved in favor of liability in view
of the presumption of negligence of the carrier in the law. Coupled with this is the established
condition of the road — rough, winding and wet due to the rain. It was incumbent upon the defense
to establish that it took precautionary measures considering partially dangerous condition of the
road. As stated above, proof that the tire was new and of good quality is not sufficient proof that it
was not negligent. Petitioners should have shown that it undertook extraordinary diligence in the
care of its carrier, such as conducting daily routinary check-ups of the vehicle's parts. As the late
Justice J.B.L. Reyes said:

It may be impracticable, as appellee argues, to require of carriers to test the strength of each
and every part of its vehicles before each trip; but we are of the opinion that a due regard for
the carrier's obligations toward the traveling public demands adequate periodical tests to
determine the condition and strength of those vehicle portions the failure of which may
endanger the safety of the passengers.18
Having failed to discharge its duty to overthrow the presumption of negligence with clear and
convincing evidence, petitioners are hereby held liable for damages. Article 176419 in relation to
Article 220620 of the Civil Code prescribes the amount of at least three thousand pesos as damages
for the death of a passenger. Under prevailing jurisprudence, the award of damages under Article
2206 has been increased to fifty thousand pesos (P50,000.00).21

Moral damages are generally not recoverable in culpa contractual except when bad faith had been
proven. However, the same damages may be recovered when breach of contract of carriage results
in the death of a passenger,22 as in this case. Exemplary damages, awarded by way of example or
correction for the public good when moral damages are awarded,23 may likewise be recovered in
contractual obligations if the defendant acted in wanton, fraudulent, reckless, oppressive, or
malevolent manner.24 Because petitioners failed to exercise the extraordinary diligence required of a
common carrier, which resulted in the death of Tito Tumboy, it is deemed to have acted
recklessly.25 As such, private respondents shall be entitled to exemplary damages.

WHEREFORE, the Decision of the Court of Appeals is hereby AFFIRMED subject to the
modification that petitioners shall, in addition to the monetary awards therein, be liable for the award
of exemplary damages in the amount of P20,000.00. Costs against petitioners.

SO ORDERED.

Narvasa, C.J., Melo, Francisco and Panganiban, JJ., concur.

25 SCRA 597
EN BANC

G.R. No. L-25301 October 26, 1968

GOLD STAR MINING CO., INC., petitioner,

vs.
MARTA LIM-JIMENA, CARLOS JIMENA, GLORIA JIMENA, AURORA JIMENA, JAIME JIMENA,
DANTE JIMENA, JORGE JIMENA, JOYCE JIMENA, as legal heirs of the deceased VICTOR
JIMENA, and JOSE HIDALGO, respondents.

Emiliano S. Samson and R. Balderrama-Samson for petitioner.

Leandro Sevilla and Ramon C. Aquino for respondents.

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

From an affirmance in toto by the Court of Appeals1 of a decision of the Court of First Instance of
Manila,2specifically the portion thereof condemning Gold Star Mining Co., Inc. to pay Marta Lim Vda.
de Jimena, et al., the sum of P30,691.92 solidarily with Ananias Isaac Lincallo for violation of an
injunction this appeal is taken.

It is of record that in 1937, Ananias Isaac Lincallo bound himself in writing to turn to Victor Jimena
one-half (1/2) of the proceeds from all mining claims that he would purchase with the money to be
advanced by the latter. This agreement was later on modified (in a 1939 notarial instrument duly
registered with the Register of Deeds of Marinduque in his capacity as mining recorder) so as to
include in the equal sharing arrangement not only the proceeds from several mining claims, which by
that time had already been purchased by Lincallo with various sums totalling P5,800.00 supplied by
Jimena, but also the lands constituting the same, and so as to bind thereby their "heirs, assigns, or
legal representatives." Apparently, the mining rights over part of the claims were assigned by
Lincallo to Gold Star Mining Co., Inc., sometime before World War Il because in 1950 the
corporation paid him P5,000 in consideration of, and as a quitclaim for, pre-war royalties.

On several occasions thereafter, the mining claims in question were made subject-matter of
contracts entered into by Lincallo in his own name and for his benefit alone without the slightest
intimation of Jimena's interests over the same. Thus, on 19 September 1951, Lincallo and one
Alejandro Marquez, as separate owners of particular mining claims, entered into an agreement with
Gold Star Mining Co., Inc., the assignee thereof, regarding allotment to Lincallo of 45% of the
royalties due from the corporation. Four months later, Lincallo, Marquez and Congressman Panfilo
Manguerra, again as owners, leased certain mining claims to Jacob Cabarrus, who, in turn,
transferred to Marinduque Iron Mines Agents, Inc., his rights under the lease contract. By virtue of
still another contract executed by these lessors on 29 February 1952, 43% of the royalties due from
Marinduque Iron Mines Agents, Inc., were agreed upon to be paid to Lincallo.

As early as August, 1939 and down to September, 1952, Jimena repeatedly apprised Gold Star
Mining Co., Inc., and Marinduque Iron Mines Agents, Inc., of his interests over the mining claims so
assigned and/or leased by Lincallo and, accordingly, demanded recognition and payment of his one-
half share in all the royalties, allocated and paid and, thereafter, to be paid to the latter. Both
corporations, however, ignored Jimena's demands.

Payment of the P5,800 advanced for the purchase of the mining claims, as well as the one-half
share in the royalties paid by the two corporations, were also repeatedly demanded by Jimena from
Lincallo. Acknowledging Jimena's contractual claim, Lincallo off and on promised to settle his
obligations. And on 14 July 1952, Lincallo promised for the last time, to settle everything on or before
the 30th day of the same month.

Lincallo, however, did not only fail to settle his accounts with Jimena but transferred on 16 August
1952, a month after he promised to pay Jimena, 35 of his 45% share in the royalties due from Gold
Star Mining Co., Inc., to one Gregorio Tolentino, a salaried employee, for an alleged consideration of
P10,000.00.

On 2 September 1954, Jimena commenced a suit against Lincallo for recovery of his advances and
his one-half share in the royalties. Gold Star Mining Co., Inc., and Marinduque Iron Mines, Inc.,
together with Tolentino, were later joined as defendants.

On 17 September 1954, the trial court issued, upon petition of Jimena, a writ of preliminary injunction
restraining Gold Star Mining Co., Inc., and Marinduque Iron Mines Agents, Inc., from paying royalties
during the pendency of the case to Lincallo, his assigns or legal representatives. Despite the
injunction, however, Gold Star Mining Co., Inc., was found out to have paid P30, 691.92 to Lincallo
and Tolentino. Said corporation claimed later on (on appeal) that the injunction had been
superseded and/or dissolved on 25 May 1955 by the trial court's grant of Jimena's petition for a writ
of preliminary attachment "to supersede the writ of preliminary injunction previously issued." But as
the grant was conditioned upon filing of a bond to be approved by the trial court, no writ of
attachment was issued because the bond offered by Jimena was disapproved.3
Jimena and Tolentino died successively during the pendency of the case in the trial court and were,
accordingly, substituted by their respective widows and children.

After a protracted trial, the lower court rendered a decision, the dispositive portion of which reads as
follows:

IN VIEW WHEREOF, judgment is rendered:

1. Declaring the plaintiffs —

(a) as successors in interest of Victor Jimena to be entitled to 1/2 of the 45% share of
the royalties of defendant Lincallo under the latter's contract with Gold Star, Exh. D or
Exh. D-l, dated September 19, 1951;

(b) to 1/2 of the 43% shares of the rental of defendant Lincallo under his contract with
Jesus (Jacob) Cabarrus assigned to Marinduque Iron Mines, and his contract with
Alejandro Marquez, dated December 5, 1951, and February 29, 1952, Exhs. J and J-
1; .

(c) and condemning defendants Gold Star and Marinduque Iron Mines to pay direct
to plaintiffs said 1/2 shares of the royalties until said contracts are terminated;

2. Condemning defendant Lincallo to pay unto plaintiffs, as successors in interest of Victor

Jimena —

(a) the sum of P5,800 with legal interest from the date of the filing of the complaint;

(b) the sum of P40,167.52 which is the 1/2 share of the royalties paid by Gold Star
unto Lincallo as of the September 14, 1957;

(c) the sum of P3,235.64 which is the 1/2 share of Jimena on the rentals amounting
to P6,471.27 corresponding to Lincallo's share paid by Marinduque Iron Mines unto
Lincallo from December, 1951 to August 25, 1954; under Exhibit N;

(d) P1,000.00 as attorneys fees;

3. Declaring that the deed of sale, Exh. H, dated August 16, 1952, between defendant
Lincallo and Gregorio Tolentino was effective and transferred only 1/2 of the 45% (43%)
share of Lincallo, and ordering Gold Star Mining Company to make payment hereafter unto
plaintiffs, pursuant to this decision on the royalties due unto Lincallo, notwithstanding the
cession unto Tolentino, so that of the royalties due unto Lincallo 1/2 should always be paid
by Gold Star unto plaintiffs notwithstanding said session, Exh. H, unto Tolentino by Lincallo;

4. Judgment is also rendered condemning the estate of Gregorio Tolentino but not the heirs
personally, to pay unto plaintiffs the sum of P24,386.51 with legal interest from the date of
the filing of the complaint against Gregorio Tolentino.

5. Judgment is rendered condemning defendant Gold Star Mining Company to pay to

plaintiffs solidarily with Lincallo and to be imputed to Lincallo's liability under this judgment
unto Jimena, the sum of P30,691.92;
 6. Judgment is rendered condemning defendant Marinduque Iron Mines to pay unto plaintiffs
the sum of P7,330.36;

7. The counterclaims of defendants are dismissed;

8. Costs against defendant Lincallo.

SO ORDERED. (Emphasis supplied.)

From this judgment, all four defendants, namely, Lincallo, the widow and children of Tolentino, and
the two corporations, appealed to the Court of Appeals. The appeal interposed by Marinduque Iron
Mines Agents, Inc., was, however, withdrawn, while that of Lincallo was dismissed for the failure to
file brief. Pending outcome of the appeal, the royalties due from Gold Star Mining Co., Inc., were
required to be deposited with the trial court, as per order of 17 June 1958 issued by the same court.
In compliance therewith, Gold Star Mining Co., Inc., made a judicial deposit in the amount of
P30,691.92.

On 8 October 1965, the Court of Appeals handed down a decision sustaining in its entirety that of
the trial court. Gold Star Mining Co., Inc., moved for reconsideration of said decision insofar as its
adjudged solidary liability with Lincallo to pay to the Jimenas the sum of P30,691.92 "for flagrant
violation of the injunction" was concerned. The motion was denied. Hence, the present appeal.

Petitioner Gold Star Mining Co., Inc., argues that the Court of Appeals' decision finding that
respondents Jimenas have a cause of action against it, and condemning it to pay the sum of
P30,691.92 for violation of an allegedly non-existent injunction, are reversible errors. Reasons: As to
respondents Jimena's cause of action, the same does not allegedly appear in the complaint filed
against petitioner corporation. And as to the P30,691.92 penalty for violation of the injunction, the
same can not allegedly be imposed because (1) the sum of P30,691.92 was not prayed for, (2) the
injunction in question had already been superseded and/or dissolved by the trial court's grant of
Jimena's petition for writ of preliminary attachment; and (3) the corporation was never charged,
heard, nor found guilty in accordance with, and pursuant to, the provisions, of Rule 64 of the (Old)
Rules of Court.

We are of the same opinion with the Court of Appeals that respondents Jimenas have a cause of
action against petitioner corporation and that the latter's joinder as one of the defendants before the
trial court is fitting and proper. Said the Court of Appeals, and we adopt the same:

There first assigned error is the Trial Court erred in not dismissing this instant action as
"there is no privity of contract between Gold Star and Jimena." This contention is without
merit.

The situation at bar is similar to the status of the first and second mortgagees of a duly
registered real estate mortgage. While there exists no privity of contract between them, yet
the common subject-matter supplies the juridical link.

Here the evidence overwhelmingly established that Jimena made prewar and postwar
demands upon Gold Star for the payment of his 1/2 share of the royalties but all in vain so he
(Jimena) was constrained to implead Gold Star because it refused to recognize his right.
 Jimena now seeks for accounting of the royalties paid by Gold Star to Lincallo, and for direct
payment to himself of his share of the royalties. This relief cannot be granted without joining
the Gold Star specially in the face of the attitude it had displayed towards Jimena.

Borrowing the Spanish maxim cited by Jimena's counsel, "el deudor de mi deudor es deudor
mio," this legal maxim finds sanction in Article 1177, new Civil Code which provides that
"creditors, after having pursued the property in possession of the debtor to satisfy their
claims, may exercise all the rights and bring all the actions of the latter (debtor) for the same
purpose, save those which are inherent in his person; they may also impugn the acts which
the debtor may have done to defraud them (1111)."

From another standpoint, equally valid and acceptable, it can be said that Lincallo, in
transferring the mining claims to Gold Star (without disclosing that Jimena was a co-owner
although Gold Star had knowledge of the fact as shown by the proofs heretofore mentioned)
acted as Jimena's agent with respect to Jimena's share of the claims.

Under such conditions, Jimena has an action against Gold Star, pursuant to Article 1883,
New Civil Code, which provides that the principal may sue the person with whom the agent
dealt with in his (agent's) own name, when the transaction "involves things belonging to the
principal."

As counsel for Jimena has correctly contended, "the remedy of garnishment suggested by
Gold Star is utterly inadequate for the enforcement of Jimena's right against Lincallo
because Jimena wanted an accounting and wanted to receive directly his share of the
royalties from Gold Star. That recourse is not open to Jimena unless Gold Star is made a
party in this action."

Coming now to the violation of the injunction, we observe that the facts speak for themselves.
Considering that no writ of preliminary attachment was issued by the trial court, the condition for its
issuance not having been met by Jimena, nothing can be said to have superseded the writ of
preliminary injunction in question. The preliminary injunction was, therefore, subsisting and evidently
violated by petitioner corporation when it paid the sum of P30,691.92 to Lincallo and Tolentino.

Gold Star Mining Co., Inc., insists that it may not be penalized for breach of the injunction, issued by
the court of origin, without prior written charge for indirect contempt, and due hearing, citing section
3 of Rule 64 of the old Rules of Court, now Rule 71 of the Revised Rules. We fail to see any merit in
this contention, as it misses the true nature and intent of the award of P30,691.92 to Jimena,
payable by Gold Star and Lincallo's estate.

Said award is not so much a penalty against petitioner as a decree of restitution, in order to make
the violated injunction effective, as it should be, by placing the parties in the same condition as if the
injunction had been fully obeyed. If Gold Star Mining Co., Inc., had only heeded the injunction and
had not paid to Lincallo the royalties of P30,691.92, such amount would now be available for the
satisfaction of the claims of Jimena and his heirs against Lincallo. By sentencing Gold Star Mining
Co., Inc., to pay, for the account of Lincallo, the sum aforesaid, the court merely endeavoured to
prevent its award from being rendered pro tanto nugatory and ineffective, and thus make it
conformable to law and justice.

That the questioned award was not intended to be a penalty against appellant Gold Star Mining Co.,
Inc., is shown by the provision in the judgment that the P30,691.92 to be paid by it to Jimena is "to
be imputed to Lincallo's liability under this judgment." The court thus left the way open for Gold Star
Mining Co., Inc., to recover later the whole amount from Lincallo, whether by direct action against
him or by deducting it from the royalties that may fall due under his 1951 contract with appellant.

That the recovery of this particular amount was not specifically sought in the complaint is of no
moment, since the complaint prayed in general for "other equitable relief."

WHEREFORE, finding no reversible error in the decision appealed from, the same is affirmed, with
costs against petitioner-appellant, Gold Star Mining Co., Inc.

Concepcion, C.J., Dizon, Makalintal, Sanchez, Castro, Angeles, Fernando and Capistrano,
JJ., concur.
Zaldivar, J., is on leave.

G.R. No. 16008 September 29, 1921

IN RE WILL OF THE DECEASED LUCINA ANDRADA, LUCILA ARCE, petitioner-appellant.

J. Dorado, J. Tirol, and J. Hontiveros for appellant.

STREET, J.:

Lucina Andrada died on June 5, 19919, in the Municipality of Capiz, Province of Capiz; and soon
thereafter a petition was presented to the Cour of First Instance of Capiz by Lucila Arce to establish
a document purporting to be the last will and testament of the deceased. Upon hearing the petition,
his Honor, Judge Antonio Villareal, declared that the document in question had not been executed in
conformity with the requirements of section 618 of the Coe of Civil Procedure, as amended by Act
No. 2645 of the Philippine Legislature. He therefore refused to admit the purported will to probate,
and the petitioner appealed.

The attesting clause of the will in question is incorporated in the will itself, constituting the last
paragraph thereof; and its defect consists in the fact that it does not state the number of sheets or
pages upon which the will is written, though it does state that the testatrix and the instrumental
witnesses signed on every page, as is in fact obvious from an inspection of the instrument. Each of
the pages moreover bears successively the Visayan words, "isa," "duha," "tatlo," "apat," "lima,"
which mean respectively "one," "two," "three," "four," "five," Visayan being the dialect in which the
instrument is written.

By section 618 of the Code of Civil Procedure, as amended by Act No. 2645, it is required that each
and every page of the will shall be numbered correlatively in letters and that the attesting clause
shall state the number of sheets or pages used.

Without decising in this case whether the will in question is rendered invalid by reason of the manner
in which the pages are numbered, the court is unanimous upon the point that the defect pointed out
in the attesting clause is fatal. The law plainly says that the attestation shall state the number of
sheets or pages used, the eident purpose being to safeguard the document from the possiblity of the
interpolation of additional pages or the omission of some of the pages actually used. It is true that
this point is also safeguarded by the other two requirements that the pages shall be consecutively
lettered and that each page shall be singed on the left margin by the testator and the witnesses. In
light of these requirements it is really difficult to see any practical necessity for the additional
requirement that the attesting clause shall state the number of sheets or pages used. Nevertheless,
it cannot be denied that the last mentioned requirement affords additional secuirty against the
danger that the will may be tampered with; and as the Legislature has seen fit to prescribe this
requirement, it must be considered material.

In two cases we have held that the failure to comply with the strict requirements of this law does not
invalidate the instrument, but the irregularities presented in those cases were entirely rivial, the
defect in one case being that a willin which the dispositive part consisted of a single sheet was not
signed in the margin in addition to being signed at the bottom (In re will of Abangan, 40 Phil., 476); in
the others, that the pages comprising the body of the will were signed by the testator and witnesses
on the right margin instead of the left (Avera vs. Garcia and Rodriguez, p. 145, ante). In the case
now before us the defect is, in our opinion, of more significance; and the rule here applicable is that
enunciated in Caraig vs. Tatlonghari, R.G. No. 12558, decided March 23, 1918, not reported, and (In
re estate of Saguinsim, 41 Phil., 875), in each of which the will was held to be invalid.

It results that the trial judge did not err in refusing probate of the will, and the judgment must be
affirmed. It is so ordered, with costs against the appellant.

Johnson, Araullo, Avanceña and Villamor, JJ., concur.