G.R. No.

220400, March 20, 2019

ANNIE TAN, PETITIONER, v. GREAT HARVEST ENTERPRISES, INC., RESPONDENT.
D E C I S I O N - LEONEN, J.:

Common carriers are obligated to exercise extraordinary diligence over the goods entrusted to their care.
This is due to the nature of their business, with the public policy behind it geared toward achieving
allocative efficiency and minimizing the inherently inequitable dynamics between the parties to the
transaction.

-a Petition for Review on Certiorari 1 filed under Rule 45 of the Rules of Civil Procedure by Annie Tan
(Tan), assailing the March 13, 2015 CA Decision 2 and September 15, 2015 Resolution 3 in CA-G.R. CV No.
100412. The assailed judgments upheld the Regional Trial Court January 3, 2012 Decision 4 in Civil Case
No. Q-94-20745, which granted Great Harvest Enterprises, Inc.'s (Great Harvest) Complaint for sum
of money against Tan.

On February 3, 1994, Great Harvest hired Tan to transport 430 bags of soya beans worth P230,000.00
from. (Tacoma) in Port Area, Manila to Selecta Feeds in Camarin, Novaliches, Quezon City.5

That same day, the bags of soya beans were loaded into Tan's hauling truck. Her employee, Rannie
Sultan Cabugatan (Cabugatan), then delivered the goods to Selecta Feeds.6

At Selecta Feeds, however, the shipment was rejected. Upon learning of the rejection, Great Harvest
instructed Cabugatan to deliver and unload the soya beans at its warehouse in Malabon. Yet, the truck
and its shipment never reached Great Harvest's warehouse.7

On February 7, 1994, Great Harvest asked Tan about the missing delivery. At first, Tan assured Great
Harvest that she would verify the whereabouts of its shipment, but after a series of follow-ups, she
eventually admitted that she could not locate both her truck and Great Harvest's goods.8 She reported
her missing truck to the Western Police District Anti-Carnapping Unit and the National Bureau of
Investigation.9

On February 19, 1994, the National Bureau of Investigation informed Tan that her missing truck had
been found in Cavite. However, the truck had been cannibalized and had no cargo in it.10 Tan spent over
P200,000.00 to have it fixed.11

Tan filed a Complaint against Cabugatan and Rody Karamihan (Karamihan), whom she accused of
conspiring with each other to steal the shipment entrusted to her. 12 An Information13 for theft was filed
against Karamihan, while Cabugatan was charged with qualified theft.14

On March 2, 1994, Great Harvest, through counsel, sent Tan a letter demanding full payment for the
missing bags of soya beans. On April 26, 1994, it sent her another demand letter. Still, she refused to
pay for the missing shipment or settle the matter with Great Harvest. 15 Thus, on June 2, 1994, Great
Harvest filed a Complaint for sum of money against Tan.16

In her Answer, Tan denied that she entered into a hauling contract with Great Harvest, insisting that she
merely accommodated it. Tan also pointed out that since Great Harvest instructed her driver to change
the point of delivery without her consent, it should bear the loss brought about by its deviation from the
original unloading point.17

In its August 4, 2000 Decision, 18 the Regional Trial Court of Manila found Karamihan guilty as an
accessory after the fact of theft, and sentenced him to serve a prison sentence between six (6) months
of arresto mayor maximum to one (1) year of prision correccional minimum. He was also ordered to
indemnify Tan P75,000.00, the amount he had paid Cabugatan for the 430 bags of soya beans. 19

In its January 3, 2012 Decision, 20 the Regional Trial Court of Quezon City granted Great Harvest's
Complaint for sum of money. It found that Tan entered into a verbal contract of hauling with Great
Harvest, and held her responsible for her driver's failure to deliver the soya beans to Great
Harvest.21 The RTC decision rendered in favor of the plaintiff and against the defendant, ordering the
latter:

1. To pay the sum of P230,000.00 with interest thereon at the rate of 12% per annum starting from
June 2, 1994 (when the case was filed) and until paid;
2. To pay the sum of P50,000.00 as Attorney's fees; and
3. Costs against the defendant.

Tan moved for reconsideration of the January 3, 2012 Decision, but was denied in the RTC’s November
21, 2012 Order.23

Tan filed an Appeal, but the Court of Appeals dismissed it in its March 13, 2015 Decision. 24

In January 3, 2012 Decision, the CA found that the parties' standard business practice when the recipient
would reject the cargo was to deliver it to Great Harvest's warehouse. Thus, contrary to Tan's claim,
there was no deviation from the original destination. 25

The Court of Appeals also held that the cargo loss was due to Tan's failure to exercise the extraordinary
level of diligence required of her as a common carrier, as she did not provide security for the cargo or
take out insurance on it.26

Tan moved for reconsideration, but her Motion was denied by the Court of Appeals in its September 15,
2015 Resolution.28

Thus, Tan filed her Petition for Review on Certiorari, 29 maintaining that her Petition falls under the
exceptions to a Rule 45 petition since the assailed Court of Appeals Decision was based on a
misapprehension of facts.30

Petitioner contends that she is not liable for the loss of the soya beans and points out that the agreement
with respondent Great Harvest was to deliver them to Selecta Feeds, an obligation with which she
complied. She claims that what happened after that was beyond her control. When Selecta Feeds
rejected the soya beans and respondent directed Cabugatan to deliver the goods to its warehouse,
respondent superseded her previous instruction to Cabugatan to return the goods to Tacoma, the loading
point. Hence, she was no longer required to exercise the extraordinary diligence demanded of her as a
common carrier.31

Tan opines that she is not liable for the value of the lost soya beans since the truck hijacking was a
fortuitous event and because "the carrier is not an insurer against all risks of travel." 32

She prayed for: (1) P500,000.00 in actual damages to compensate for the expenses she incurred in
looking for and fixing her truck; (2) P500,000.00 in moral damages for the stress and mental anguish
she experienced in searching for her truck and the missing soya beans; (3) P500,000.00 in exemplary
damages to deter respondent from filing a similar baseless complaint in the future; and (4) P200,000.00
as attorney's fees. On the other hand, if she is found liable to respondent, petitioner concedes that her
liability should only be pegged at P75,000.00, the actual price Karamihan paid for respondent's
shipment.33

On January 25, 2016,34 respondent was directed to comment on the petition but it manifested 35 that it
was waiving its right to file a comment.

The sole issue - is whether or not petitioner Annie Tan should be held liable for the value of the stolen
soya beans.

The Petition must fail.

The Rules of Court is categorical that only questions of law may be raised in petitions filed under Rule
45, as this Court is not a trier of facts. Further, factual findings of appellate courts, when supported by
substantial evidence, are binding upon this Court.36
However, these rules do admit of exceptions. 37 In particular, petitioner referred to the exception "[w]hen
the judgment is based on a misapprehension of facts"38 to justify the questions of fact in her Petition for
Review on Certiorari.

A careful review of the records of this case convinces us that the assailed judgments of the Court of
Appeals are supported by substantial evidence.

Article 1732 of the Civil Code defines common carriers as "persons, corporations, firms or associations
engaged in the business of carrying or transporting passengers or goods or both, by land, water or
air, for compensation, offering their services to the public." The degree of diligence required of
common carriers in Articles 1733, 1755, and 1756 are:

ARTICLE 1733. Common carriers, from the nature of their business and for reasons of public
policy, are bound to observe extraordinary diligence in the vigilance over the goods and for the safety of
the passengers transported by them, according to all the circumstances of each case.

ARTICLE 1755. 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.

ARTICLE 1756. In case of death of 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.

Law and economics provide the policy justification of our existing jurisprudence. The extraordinary
diligence required by the law of common carriers is primarily due to the nature of their business, with
the public policy behind it geared toward achieving allocative efficiency between the parties to the
transaction.

Allocative efficiency is an economic term that describes an optimal market where customers are
willing to pay for the goods produced. 39 Thus, both consumers and producers benefit and stability is
achieved.

The notion of common carriers is synonymous with public service under Commonwealth Act No. 146
or the Public Service Act.40 Due to the public nature of their business, common carriers are compelled
to exercise extraordinary diligence since they will be burdened with the externalities or the cost of
the consequences of their contract of carriage if they fail to take the precautions expected of them.

Common carriers are mandated to internalize or shoulder the costs under the contracts of carriage. This
is so because a contract of carriage is structured in such a way that passengers or shippers surrender
total control over their persons or goods to common carriers, fully trusting that the latter will safely and
timely deliver them to their destination. In light of this inherently inequitable dynamics— and the
potential harm that might befall passengers or shippers if common carriers exercise less than
extraordinary diligence— the law is constrained to intervene and impose sanctions on common carriers
for the parties to achieve allocative efficiency. 41

Here, petitioner is a common carrier obligated to exercise extraordinary diligence 42 over the goods
entrusted to her. Her responsibility began from the time she received the soya beans from respondent's
broker and would only cease after she has delivered them to the consignee or any person with the right
to receive them.43

Petitioner's argument is that her contract of carriage with respondent was limited to delivering the
soya beans to Selecta Feeds. Thus, when Selecta Feeds refused to accept the delivery, she directed her
driver to return the shipment to the loading point. Respondent refutes petitioner's claims and asserts
that their standing agreement was to deliver the shipment to respondent's nearest warehouse in case
the consignee refused the delivery.
After listening to the testimonies of both parties, xxx respondent was able to prove its contract of
carriage with petitioner. It also found the testimony of respondent's witness, Cynthia Chua (Chua), to be
more believable over that of petitioner when it came to the details of their contract of carriage:

Defendant's assertion that the diversion of the goods was done without her consent and knowledge is
self-serving and is effectively belied by the positive testimony of witness Cynthia Chua, Account Officer
of plaintiff corporation (page 23, TSN, March 26, 1996). Equally self-serving is defendant's claim that she
is not liable for the loss of the soya beans (sic) considering that the plaintiff has no existing contract with
her. Such a sweeping submission is also belied by the testimony of plaintiff's witness Cynthia Chua who
categorically confirmed the existing business relationship of plaintiff and defendant for hauling and
delivery of goods as well as the arrangement to deliver the rejected goods to the plaintiff's nearest
warehouse in the event that goods are rejected by the consignee with prior approval of the consignor
(page 11, TSN, March 26, 1996).44

The trial court's appreciation of Chua's testimony was upheld by the Court of Appeals:

Verily, the testimony alone of appellee's Account Officer, Cynthia Chua, dispels the contrary allegations
made by appellant in so far as the nature of their business relationship is concerned. Consistently and
without qualms, said witness narrated the details respecting the company's relations with the appellant
and the events that transpired before, during and after the perfection of the contract and the subsequent
loss of the subject cargo. Said testimony and the documentary exhibits, i.e., the Tacoma waybill and the
appellee's waybill, prove the perfection and existence of the disputed verbal contract.

Emphatically, from the aforesaid waybills, it was duly established that while verbal, the parties herein
has (sic) agreed for the hauling and delivery of the soya beans from the company's broker to the
intended recipient. It was further proven by evidence that appellant had agreed and consented to the
delivery of the soya beans to the company's nearest warehouse in case the cargo goods had been
rejected by the recipient as it had been the practice between the parties. 45 (Citation omitted)

This Court accords the highest respect to the trial court's assessment of a witness' credibility, as it was in
a better position to observe the witness' demeanor while testifying. 46 We see no reason to disturb the
factual findings of the lower courts, especially since they were supported by substantial evidence.

Furthermore, Article 1734 of the Civil Code holds a common carrier fully responsible for the goods
entrusted to him or her, unless there is enough evidence to show that the loss, destruction, or
deterioration of the goods falls under any of the enumerated exceptions:

ARTICLE 1734. Common carriers are responsible for the loss, destruction, or deterioration of the
goods, unless the same is due to any of the following causes only:

(1) Flood, storm, earthquake, lightning, or other natural disaster or calamity;

(2) Act of the public enemy in war, whether international or civil;
(3) Act or omission of the shipper or owner of the goods;
(4) The character of the goods or defects in the packing or in the containers;
(5) Order or act of competent public authority.

Nothing in the records shows that any of these exceptions caused the loss of the soya beans. Petitioner
failed to deliver the soya beans to respondent because her driver absconded with them. She cannot shift
the blame for the loss to respondent's supposed diversion of the soya beans from the loading point to
respondent's warehouse, as the evidence has conclusively shown that she had agreed beforehand to
deliver the cargo to respondent's warehouse if the consignee refused to accept it. 47

Finally, petitioner's reliance on De Guzman v. Court of Appeals 48 is misplaced. There, the common carrier
was absolved of liability because the goods were stolen by robbers who used "grave or irresistible threat,
violence[,] or force"49 to hijack the goods. De Guzman viewed the armed hijack as a fortuitous event:
Under Article 1745 (6) above, a common carrier is held responsible — and will not be allowed to divest
or to diminish such responsibility — even for acts of strangers like thieves or robbers, except where such
thieves or robbers in fact acted "with grave or irresistible threat, violence or force." We believe and so
hold that the limits of the duty of extraordinary diligence in the vigilance over the goods carried are
reached where the goods are lost as a result of a robbery which is attended by "grave or irresistible
threat, violence[,] or force."50

In contrast to De Guzman, the loss of the soya beans here was not attended by grave or irresistible
threat, violence, or force. Instead, it was brought about by petitioner's failure to exercise extraordinary
diligence when she neglected vetting her driver or providing security for the cargo and failing to take out
insurance on the shipment's value. As the Court of Appeals held:

Besides, as the records would show, appellant did not observe extra-ordinary (sic) diligence in the
conduct of her business as a common carrier. In breach of their agreement, appellant did not provide
security while the goods were in transit and she also did not pay for the insurance coverage of said
goods. These measures could have prevented the hijacking (sic) or could have ensured the payment of
the damages sustained by the appellee.51

WHEREFORE, the Petition is DENIED. Petitioner Annie Tan is directed to pay respondent Great Harvest
Enterprises, Inc. the sum of Two Hundred Thirty Thousand Pesos (P230,000.00) with interest at the rate
of twelve percent (12%) per annum from June 2, 1994 until June 30, 2013, and at the rate of six
percent (6%) per annum from July 1, 2013 until its full satisfaction. She is further directed to pay Fifty
Thousand Pesos (P50,000.00) as attorney's fees and the costs of suit.

SO ORDERED.

G.R. No. 210950

MILAGROS P. ENRIQUEZ, Petitioner vs. THE MERCANTILE INSURANCE CO., INC., Respondent
D E C I S I O N - LEONEN, J.:

A surety bond remains effective until the action or proceeding is finally decided, resolved, or terminated, regardless of
whether the applicant fails to renew the bond. The applicant will be liable to the surety for any payment the surety makes
on the bond, but only up to the amount of this bond.

This is a Petition for Review on Certiorari1 assailing the August 13, 2013 Decision2 and January 14, 2014 Resolution3 of
the Court of Appeals in CA-G.R. CV No. 95955, which affirmed the Regional Trial Court's finding that Milagros P.
Enriquez (Enriquez) was liable for the full amount of the replevin bond issued by The Mercantile Insurance Company,
Inc. (Mercantile Insurance).

Sometime in 2003, Enriquez filed a Complaint for Replevin 4 against Wilfred Asuten (Asuten) before the Regional Trial
Court of Angeles City, Pampanga. This Complaint, docketed as Civil Case No. 10846, 5 was for the recovery of her
Toyota Hi-Ace van valued at ₱300,000.00.6 Asuten allegedly refused to return her van, claiming that it was given by
Enriquez's son as a consequence of a gambling deal.7

Enriquez applied for a replevin bond from Mercantile Insurance. On February 24, 2003, Mercantile Insurance issued
Bond No. 138 for ₱600,000.00,8 which had a period of one (1) year or until February 24, 2004. Enriquez also executed
an indemnity agreement with Mercantile Insurance, where she agreed to indemnify the latter "for all damages,
payments, advances, losses, costs, taxes, penalties, charges, attorney's fees and expenses of whatever kind and
nature"9 that it would incur as surety of the replevin bond. 10

On May 24, 2004, the Regional Trial Court issued an Order11 dismissing the Complaint without prejudice due to
Enriquez's continued failure to present evidence.

The Regional Trial Court found that Enriquez surrendered the van to the Bank of the Philippine Islands, San Fernando
Branch but did not comply when ordered to return it to the sheriff within 24 hours from receipt of the Regional Trial Court
March 15, 2004 Order.12 She also did not comply with prior court orders to prove payment of her premiums on the
replevin bond or to post a new bond. Thus, the Regional Trial Court declared Bond No. 138 forfeited. Mercantile
Insurance was given l 0 days to produce the van or to show cause why judgment should not be rendered against it for
the amount of the bond.13
On July 12, 2004, the Regional Trial Court held a hearing on the final forfeiture of the bond where it was found that
Mercantile Insurance failed to produce the van, and that Bond No. 138 had already expired. 14 In an Order15 issued on the
same day, the Regional Trial Court directed Mercantile Insurance to pay Asuten the amount of ₱600,000.00.

Mercantile Insurance wrote to Enriquez requesting the remittance of ₱600,000.00 to be paid on the replevin bond. 16 Due
to Enriquez's failure to remit the amount, Mercantile Insurance paid Asuten ₱600,000.00 on September 3, 2004, in
compliance with the Regional Trial Court July 12, 2004 Order. 17 It was also constrained to file a collection suit against
Enriquez with the Regional Trial Court of Manila.18

In her defense, Enriquez claimed that her daughter-in-law, Asela, filed the Complaint for Replevin in her name and that
Asela forged her signature in the indemnity agreement. She also argued that she could not be held liable since the
replevin bond had already expired.19

In its July 23, 2010 Decision,20 the Regional Trial Court ruled in favor of Mercantile Insurance. It found that non-payment
of the premiums did not cause the replevin bond to expire. Thus, Enriquez was still liable for the reimbursement made
by the surety on the bond. The Regional Trial Court likewise pointed out that Enriquez made "conflicting claims" of
having applied for the bond and then later claiming that her daughter-in-law was the one who applied for it. 21 The
dispositive portion of the Regional Trial Court July 23, 2010 Decision read:

WHEREFORE, judgment is hereby rendered in favor of plaintiff The Mercantile Insurance Co., Inc. and against
defendant Milagros P. Enriquez, as follows:

(i) Ordering defendant Milagros P. Enriquez to pay plaintiff the claim of ₱600,000.00 enforced under the Indemnity
Agreement plus legal interest at the rate of 12% per annum from date of judicial demand on October 22, 2004, until fully
paid;

(ii) Ordering defendant Milagros P. Enriquez to pay attorney's fees fixed in the reasonable amount of ₱50,000.00;

(iii) Ordering defendant Milagros P. Enriquez to pay the costs of suit.

SO ORDERED.22

Enriquez appealed23 with the Court of Appeals, arguing that the replevin bond had already expired; therefore, she could
not have been liable under the indemnity agreement. She also averred that even assuming that she was still liable under
the indemnity agreement, she should not pay the full amount considering that the value of the van was only
₱300,000.00.24

On August 13, 2013, the Court of Appeals rendered a Decision 25 affirming the Regional Trial Court's July 23, 2010
Decision.

The Court of Appeals held that under the Guidelines on Corporate Surety Bonds, 26 the lifetime of any bond issued in any
court proceeding shall be from court approval until the case is finally terminated. Thus, it found that the replevin bond
and indemnity agreement were still in force and effect when Mercantile Insurance paid ₱600,000.00 to Asuten. 27

The Court of Appeals likewise found that Enriquez was "bound by the incontestability of payments clause" in the
indemnity agreement, which stated that she would be held liable for any payment made by the surety under the bond,
regardless of the actual cost of the van.28 It held that the issue of whether Enriquez was liable for the full amount of the
replevin bond should have been raised before the Regional Trial Court in the Complaint for Replevin, and not in her
appeal.29

Enriquez moved for reconsideration30 but was denied by the Court of Appeals in its January 14, 2014
Resolution.31 Hence, this Petition32 was filed before this Court.

Petitioner argues that when respondent paid Asuten on September 3, 2004, the indemnity agreement was no longer in
force and effect since the bond expired on February 24, 2004. 33 She claims that the indemnity agreement was a contract
of adhesion, and that respondent "intended the agreement to be so comprehensive and all-encompassing to the point of
being ambiguous."34

Petitioner contends that even assuming that the indemnity agreement could be enforced, she should not have been held
liable for the full amount of the bond. Citing Rule 60, Section 2 of the Rules of Court, she argues that a judgment on
replevin is only "either for the delivery of the property or for its value in case delivery cannot be made and for such
damages as either party may prove, with costs." 35

Respondent, on the other hand, contends that the present action has already prescribed, considering that Rule 60,
Section 10, in relation to Rule 57, Section 20 of the Rules of Court, mandates that any objection on the award should be
raised in the trial court where the complaint for replevin is filed. It argues that since petitioner only raised the objection
before the Court of Appeals, her action should have been barred. 36

Respondent likewise points out that the forfeiture of the bond was due to petitioner's own negligence. It asserts that in
the proceedings before the Regional Trial Court, Enriquez failed to present her evidence, and it was only when she filed
an appeal that she raised her objections.37 It argues that the Guidelines on Corporate Surety Bonds specify that the
expiry of the bond shall be after the court proceeding is finally decided; hence, the bond was still in effect when
respondent paid Asuten.38

The sole issue for this Court's resolution is whether or not petitioner Milagros P. Enriquez should be made liable for the
full amount of the bond paid by respondent The Mercantile Insurance Co., Inc. as surety, in relation to a previous case
for replevin filed by petitioner.

Replevin is an action for the recovery of personal property. 39 It is both a principal remedy and a provisional relief. When
utilized as a principal remedy, the objective is to recover possession of personal property that may have been wrongfully
detained by another. When sought as a provisional relief, it allows a plaintiff to retain the contested property duringthe
pendency of the action. In Tillson v. Court of Appeals :40

The term replevin is popularly understood as "the return to or recovery by a person of goods or chattels claimed to be
wrongfully taken or detained upon the person's giving security to try the matter in court and return the goods if defeated
in the action;" "the writ by or the common-law action in which goods and chattels are replevied," i.e., taken or gotten
back by a writ for replevin;" and to replevy, means to recover possession by an action of replevin; to take possession of
goods or chattels under a replevin order. Bouvier's Law Dictionary defines replevin as "a form of action which lies to
regain the possession of personal chattels which have been taken from the plaintiff unlawfully ... , (or as) the writ by
virtue of which the sheriff proceeds at once to take possession of the property therein described and transfer it to the
plaintiff upon his giving pledges which are satisfactory to the sheriff to prove his title, or return the chattels taken if he fail
so to do;" the same authority states that the term, "to replevy" means "to re-deliver goods which have been distrained to
the original possessor of them, on his giving pledges in an action of replevin." The term therefore may refer either to the
action itself, for the recovery of personality, or the provisional remedy traditionally associated with it, by which
possession of the property may be obtained by the plaintiff and retained during the pendency of the action. In this
jurisdiction, the provisional remedy is identified in Rule 60 of the Rules of Court as an order for delivery of personal
property.41

Similarly, in BA Finance Corporation v. Court of Appeals:42

Replevin, broadly understood, is both a form of principal remedy and of a provisional relief. It may refer either to the
action itself, i.e., to regain the possession of personal chattels being wrongfully detained from the plaintiff by another, or
to the provisional remedy that would allow the plaintiff to retain the thing during the pendency of the action and hold
it pendente lite. The action is primarily possessory in nature and generally determines nothing more than the right of
possession. Replevin is so usually described as a mixed action, being partly in rem and partly in personam-in
rem insofar as the recovery of specific property is concerned, and in personam as regards to damages involved. As an
"action in rem," the gist of the replevin action is the right of the plaintiff to obtain possession of specific personal property
by reason of his being the owner or of his having a special interest therein. Consequently, the person in possession of
the property sought to be replevied is ordinarily the proper and only necessary party defendant, and the plaintiff is not
required to so join as defendants other persons claiming a right on the property but not in possession thereof. Rule 60 of
the Rules of Court allows an application for the immediate possession of the property but the plaintiff must show that he
has a good legal basis, i.e., a clear title thereto, for seeking such interim possession. 43

As a provisional remedy, a party may apply for an order for the delivery of the property before the commencement of the
action or at any time before an answer is filed.44 Rule 60 of the Rules of Court outlines the procedure for the application
of a writ of replevin. Rule 60, Section 2 requires that the party seeking the issuance of the writ must first file the required
affidavit and a bond in an amount that is double the value of the property:
Section 2. Affidavit and bond. - The applicant must show by his own affidavit or that of some other person who
personally knows the facts:

(a) That the applicant is the owner of the property claimed, particularly describing it, or is entitled to the possession
thereof;

(b) That the property is wrongfully detained by the adverse party, alleging the cause of detention thereof according to the
best of his knowledge, information, and belief;

(c) That the property has not been di strained or taken for a tax assessment or a fine pursuant to law, or seized under a
writ of execution or preliminary attachment, or otherwise placed under custodia legis, or if so seized, that it is exempt
from such seizure or custody; and

(d) The actual market value of the property.

The applicant must also give a bond, executed to the adverse party in double the value of the property as stated in the
affidavit aforementioned, for the return of the property to the adverse party if such return be adjudged, and for the
payment to the adverse party of such sum as he may recover from the applicant in the action. 45

Once the affidavit is filed and the bond is approved by the court, the court issues an order and a writ of seizure requiring
the sheriff to take the property into his or her custody. 46 If there is no further objection to the bond filed within five (5)
days from the taking of the property, the sheriff shall deliver it to the applicant. 47 The contested property remains in the
applicant's custody until the court determines, after a trial on the issues, which among the parties has the right of
possession.48

In Civil Case No. 10846, petitioner Enriquez filed a replevin case against Asuten for the recovery of the Toyota Hi-Ace
van valued at ₱300,000.00.49 She applied for a bond in the amount of ₱600,000.00 with respondent in Asuten's favor.
The Regional Trial Court approved the bond and ordered the sheriff to recover the van from Asuten and to deliver it to
petitioner. While the van was in petitioner's custody, the Regional Trial Court dismissed the case without prejudice for
failure to prosecute. Thus, it ordered the sheriff to restore the van to Asuten. When petitioner failed to produce the van,
the Regional Trial Court directed respondent to pay Asuten the amount of the bond.

There was no trial on the merits. The Regional Trial Court's dismissal for failure to prosecute was a dismissal without
prejudice to re-filing. In this particular instance, any writ of seizure, being merely ancillary to the main action,
becomes functus oficio. The parties returned to the status quo as if no case for replevin had been filed. Thus, upon the
dismissal of the case, it was imperative for petitioner to return the van to Asuten. In Advent Capital and Finance
Corporation v. Young:50

We agree with the Court of Appeals in directing the trial com1 to return the seized car to Young since this is the
necessary consequence of the dismissal of the replevin case for failure to prosecute without prejudice. Upon the
dismissal of the replevin case for failure to prosecute, the writ of seizure, which is merely ancillary in nature,
became functus officio and should have been lifted. There was no adjudication on the merits, which means that there
was no determination of the issue who has the better right to possess the subject car. Advent cannot therefore retain
possession of the subject car considering that it was not adjudged as the prevailing party entitled to the remedy of
replevin.

Contrary to Advent's view, Olympia International Inc. v. Court of Appeals applies to this case. The dismissal of the
replevin case for failure to prosecute results in the restoration of the parties' status prior to litigation, as if no complaint
was filed at all. To let the writ of seizure stand after the dismissal of the complaint would be adjudging Advent as the
prevailing party, when precisely no decision on the merits had been rendered. Accordingly, the parties must be reverted
to their status quo ante. Since Young possessed the subject car before the filing of the replevin case, the same must be
returned to him, as if no complaint was filed at all. 51

Petitioner argues that she should not have been made liable for the bond despite her failure to return the van,
considering that it was effective only until February 24, 2004, and that she did not renew or post another bond.

De Guia v. Alto Surety & Insurance, Co.52 requires that any application on the bond be made after hearing but before the
entry of judgment. Otherwise, the surety can no longer be made liable under thebond:

Construing and applying these provisions of the Rules, we have held in a long line of cases that said provisions are
mandatory and require the application upon the bond against the surety or bondsmen and the award thereof to be made
after hearing and before the entry of final judgment in the case; that if the judgment under execution contains no
directive for the surety to pay, and the proper party fails to make any claim for such directive before such judgment had
become final and executory, the surety or bondsman cannot be later made liable under the bond. The purpose of the
aforementioned rules is to avoid multiplicity of suits. 53

For this reason, a surety bond remains effective until the action or proceeding is finally decided, resolved, or terminated.
This condition is deemed incorporated in the contract between the applicant and the surety, regardless of whether they
failed to expressly state it. Under the Guidelines on Corporate Surety Bonds: 54

VII. LIFETIME OF BONDS IN CRIMINAL AND CIVIL ACTIONS/SPECIAL PROCEEDINGS

Unless and until the Supreme Court directs otherwise, 55 the lifetime or duration of the effectivity of any bond issued in
criminal and civil actions/special proceedings, or in any proceeding or incident therein shall be from its approval by the
court, until the action or proceeding is finally decided, resolved or terminated. This condition must be incorporated in the
terms and condition of the bonding contract and shall bind the parties notwithstanding their failure to expressly state the
same in the said contract or agreement. (Emphasis supplied)

Civil Case No. 10846 is a rare instance where the writ of seizure is dissolved due to the dismissal without prejudice, but
the bond stands because the case has yet to be finally terminated by the Regional Trial Court.

The peculiar circumstances in this case arose when petitioner failed to return the van to Asuten, despite the dismissal of
her action. This is an instance not covered by the Rules of Court or jurisprudence. In its discretion, the Regional Trial
Court proceeded to rule on the forfeiture of the bond. As a result, respondent paid Asuten twice the value of the van
withheld by petitioner. Respondent, thus, seeks to recover this amount from petitioner, despite the van only being worth
half the amount of the bond.

Of all the provisional remedies provided in the Rules of Court, only Rule 60, Section 2 56 requires that the amount of the
bond be double the value of the property. The other provisional remedies provide that the amount be fixed by court or be
merely equal to the value of the property:

Provisional Remedies

Rule 57 - Preliminary Attachment

Section 4. Condition of applicant's bond. - The party applying for the order must thereafter give a bond executed to the
adverse party in the amount fixed by the court in its order granting the issuance of the writ, conditioned that the latter will
pay all the costs which may be adjudged to the adverse party and all damages which he may sustain by reason of the
attachment, if the court shall finally adjudge that the applicant was not entitled thereto.

....

Section 12. Discharge of attachment upon giving counter-bond. - After a writ of attachment has been enforced, the party
whose property has been attached, or the person appearing on his behalf, may move for the discharge of the
attachment wholly or in part on the security given. The court shall, after due notice and hearing, order the discharge of
the attachment if the movant makes a cash deposit, or files a counter-bond executed to the attaching party with the clerk
of the court where the application is made, in an amount equal to that fixed by the court in the order of attachment,
exclusive of costs. But if the attachment is sought to be discharged with respect to a particular property, the counter-
bond shall be equal to the value of that property as determined by the court. In either case, the cash deposit or the
counter-bond shall secure the payment of any judgment that the attaching party may recover in the action. A notice of
the deposit shall forthwith be served on the attaching party. Upon the discharge of an attachment in accordance with the
provisions of this section, the property attached, or the proceeds of any sale thereof, shall be delivered to the party
making the deposit or giving the counter-bond, or to the person appearing on his behalf, the deposit or counter-bond
aforesaid standing in place of the property so released. Should such counter-bond for any reason be found to be or
become insufficient, and the party furnishing the same fail to file an additional counter-bond, the attaching party may
apply for a new order of attachment.

....

Section 14. Proceedings where property claimed by third person. - If the property attached is claimed by any person
other than the party against whom attachment had been issued or his agent, and such person makes an affidavit of his
title thereto, or right to the possession thereof, stating the grounds of such right or title, and serves such affidavit upon
the sheriff while the latter has possession of the attached property, and a copy thereof upon the attaching party, the
sheriff shall not be bound to keep the property under attachment, unless the attaching party or his agent, on demand of
the sheriff, shall file a bond approved by the court to indemnify the third-party claimant in a sum not less than the value
of the property levied upon. In case of disagreement as to such value, the same shall be decided by the court issuing
the writ of attachment. No claim for damages for the taking or keeping of the property may be enforced against the bond
unless the action therefor is filed within one hundred twenty (120) days from the date of the filing of the bond.

....

Rule 58 - Preliminary Injunction

Section 4. Verified application and bond for preliminary injunction or temporary restraining order. - A preliminary
injunction or temporary restraining order may be granted only when:

....

(b) Unless exempted by the court, the applicant files with the court where the action or proceeding is pending, a bond
executed to the party or person enjoined, in an amount to be fixed by the court, to the effect that the applicant will pay to
such party or person all damages which he may sustain by reason of the injunction or temporary restraining order if the
court should finally decide that the applicant was not entitled thereto. Upon approval of the requisite bond, a writ of
preliminary injunction shall be issued.

....

Section 6. Grounds for objection to, or for motion of dissolution of, injunction or restraining order. - The application for
injunction or restraining order may be denied, upon a showing of its insufficiency. The injunction or restraining order may
also be denied, or, if granted, may be dissolved, on other grounds upon affidavits of the party or person enjoined, which
may be opposed by the applicant also by affidavits. It may further be denied, or, if granted, may be dissolved, if it
appears after hearing that although the applicant is entitled to the injunction or restraining order, the issuance or
continuance thereof, as the case may be, would cause irreparable damage to the party or person enjoined while the
applicant can be fully compensated for such damages as he may suffer, and the former files a bond in an amount fixed
by the court conditioned that he will pay all damages which the applicant may suffer by the denial or the dissolution of
the injunction or restraining order. If it appears that the extent of the preliminary injunction or restraining order granted is
too great, it may be modified.

....

Rule 59 - Receivership

Section 2. Bond on appointment of receiver. - Before issuing the order appointing a receiver the court shall require the
applicant to file a bond executed to the party against whom the application is presented, in an amount to be fixed by the
court, to the effect that the applicant will pay such party all damages he may sustain by reason of the appointment of
such receiver in case the applicant shall have procured such appointment without sufficient cause; and the court may, in
its discretion, at any time after the appointment, require an additional bond as further security for such damages.

Section 3. Denial of application or discharge of receiver. - The application may be denied, or the receiver discharged,
when the adverse party files a bond executed to the applicant, in an amount to be fixed by the court, to the effect that
such party will pay the applicant all damages he may suffer by reason of the acts, omissions, or other matters specified
in the application as ground for such appointment. The receiver may also be discharged if it is shown that his
appointment was obtained without sufficient cause.

....

Rule 60 - Replevin

Section 7. Proceedings where property claimed by third person. - If the property taken is claimed by any person other
than the party against whom the writ of replevin had been issued or his agent, and such person makes an affidavit of his
title thereto, or right to the possession thereof, stating the grounds therefor, and serves such affidavit upon the sheriff
while the latter has possession of the property and a copy thereof upon the applicant, the sheriff shall not be bound to
keep the property under replevin or deliver it to the applicant unless the applicant or his agent, on demand of said
sheriff, shall file a bond approved by the court to indemnify the third-party claimant in a sum not less than the value of
the property under replevin as provided in section 2 hereof. In case of disagreement as to such value, the court shall
determine the same. No claim for damages for the taking or keeping of the property may be enforced against the bond
unless the action therefor is filed within one hundred twenty (120) days from the date of the filing of the
bond.57 (Emphasis supplied)

However, there is a rationale to the requirement that the bond for a writ of seizure in a replevin be double the value of
the property. The bond functions not only to indemnify the defendant in case the property is lost, but also to answer for
any damages that may be awarded by the court if the judgment is rendered in defendant's favor. In Citibank, N.A. v.
Court of Appeals:58

It should be noted that a replevin bond is intended to indemnify the defendant against any loss that he may suffer by
reason of its being compelled to surrender the possession of the disputed property pending trial of the action. The same
may also be answerable for damages if any when judgment is rendered in favor of the defendant or the party against
whom a writ of replevin was issued and such judgment includes the return of the property to him. Thus, the requirement
that the bond be double the actual value of the properties litigated upon. Such is the case because the bond will answer
for the actual loss to the plaintiff, which corresponds to the value of the properties sought to be recovered and for
damages, if any.59

Any application of the bond in a replevin case, therefore, is premised on the judgment rendered in favor of the
defendant. Thus, the Rules of Court imply that there must be a prior judgment on the merits before there can be any
application on the bond:

Rule 60 -Replevin

Section 9. Judgment. - After trial of the issues, the court shall determine who has the right of possession to and the
value of the property and shall render judgment in the alternative for the delivery thereof to the party entitled to the
same, or for its value in case delivery cannot be made, and also for such damages as either party may prove, with costs.

Section 10. Judgment to include recovery against sureties. - The amount, if any, to be awarded to any party upon any
bond filed in accordance with the provisions of this Rule, shall be claimed, ascertained, and granted under the same
procedure as prescribed in section 20 of Rule 57.

The Rules of Court likewise require that for the defendant to be granted the full amount of the bond, he or she must first
apply to the court for damages. These damages will be awarded only after a proper hearing:

Rule 57 - Preliminary Attachment

Section 20. Claim for damages on account of improper, irregular or excessive attachment. - An application for damages
on account of improper, irregular or excessive attachment must be filed before the trial or before appeal is perfected or
before the judgment becomes executory, with due notice to the attaching party and his surety or sureties, setting forth
the facts showing his right to damages and the amount thereof. Such damages may be awarded only after proper
hearing and shall be included in the judgment on the main case.

If the judgment on the appellate court be favorable to the party against whom the attachment was issued, he must claim
damages sustained during the pendency of the appeal by filing an application in the appellate court, with notice to the
party in whose favor the attachment was issued or his surety or sureties, before the judgment of the appellate court
becomes executory. The appellate court may allow the application to be heard and decided by the trial court.

Nothing herein contained shall prevent the party against whom the attachment was issued from recovering in the same
action the damages awarded to him from any property of the attaching party not exempt from execution should the bond
or deposit given by the latter be insufficient or fail to fully satisfy the award.

Forfeiture of the replevin bond, therefore, requires first, a judgment on the merits in the defendant's favor,
and second, an application by the defendant for damages. Neither circumstance appears in this case. When petitioner
failed to produce the van, equity demanded that Asuten be awarded only an amount equal to the value of the van. The
Regional Trial Court would have erred in ordering the forfeiture of the entire bond in Asuten's favor, considering that
there was no trial on the merits or an application by Asuten for damages. This judgment could have been reversed had
petitioner appealed the Regional Trial Court's May 24, 2004 Order in Civil Case No. 10846. Unfortunately, she did not.
Respondent was, thus, constrained to follow the Regional Trial Court's directive to pay Asuten the full amount of the
bond.
 II

This is a simple case for collection of a sum of money. Petitioner cannot substitute this case for her lost appeal in Civil
Case No. 10846.

In applying for the replevin bond, petitioner voluntarily undertook with respondent an Indemnity Agreement, which
provided:

INDEMNIFICATION - to indemnify the SURETY for all damages, payments, advances, losses, costs, taxes, penalties,
charges, attorney's fees and expenses of whatever kind and nature that the SURETY may at any time sustain or incur
as a consequence of having become a surety upon the above-mentioned bond, and to pay, reimburse and make good
to the SURETY, its successors and assigns, all sums or all money which it shall pay or become liable to pay by virtue of
said bond even if said payment/s or liability exceeds the amount of the bond ....

INCONTESTABILITY OF PAYMENTS MADE BY THE SURETY - any payment or disbursement made by the surety on
account of the abovementioned bond, either in the belief that the SURETY was obligated to make such payment or in
the belief that said payment was necessary in order to avoid a greater loss or obligation for which the SURETY might be
liable by virtue of the . . . above-mentioned bond, shall be final, and will not be contested by the undersigned, who jointly
and severally bind themselves to indemnify the SURETY for any of such payment or disbursement. 60

Basic is the principle that "a contract is law between the parties" 61 for as long as it is "not contrary to law, morals, good
customs, public order, or public policy."62 Under their Indemnity Agreement, petitioner held herself liable for any payment
made by respondent by virtue of the replevin bond.

Petitioner contends that the Indemnity Agreement was a contract of adhesion since respondent made the extent of
liability "so comprehensive and all-encompassing to the point of being ambiguous." 63

A contract of insurance is, by default, a contract of adhesion. It is prepared by the insurance company and might contain
terms and conditions too vague for a layperson to understand; hence, they are construed liberally in favor of the insured.
In Verendia v. Court of Appeals:64

Basically a contract of indemnity, an insurance contract is the law between the parties. Its terms and conditions
constitute the measure of the insurer's liability and compliance therewith is a condition precedent to the insured's right to
recovery from the insurer. As it is also a contract of adhesion, an insurance contract should be liberally construed in
favor of the insured and strictly against the insurer company which usually prepares it. 65

Respondent, however, does not seek to recover an amount which exceeds the amount of the bond or any "damages,
payments, advances, losses, costs, taxes, penalties, charges, attorney's fees and expenses of whatever kind and
nature,"66 all of which it could have sought under the Indemnity Agreement. It only seeks to recover from petitioner the
amount of the bond, or ₱600,000.00.

Respondent paid ₱600,000.00 to Asuten pursuant to a lawful order of the Regional Trial Court in Civil Case No. 10846.
If there were any errors in the judgment of the Regional Trial Court, as discussed above, petitioner could have appealed
this. Petitioner, however, chose to let Civil Case No. 10846 lapse into finality. This case cannot now be used as a
substitute for her lost appeal.

It is clear from the antecedents that any losses which petitioner has suffered were due to the consequences of her
actions, or more accurately, her inactions.1âwphi1 Civil Case No. 10846, which she filed, was dismissed due to her
failure to prosecute. The Regional Trial Court forfeited the replevin bond which she had filed because she refused to
return the property. She is now made liable for the replevin bond because she failed to appeal its forfeiture.

WHEREFORE, the Petition is DENIED. The August 13, 2013 Decision and January 14, 2014 Resolution of the Court of
Appeals in CAG. R. CV No. 95955 are AFFIRMED.

SO ORDERED.

G.R. No. 211780, November 21, 2018

 CEZAR YATCO REAL ESTATE SERVICES, INC., GRD PROPERTY
RESOURCES, INC., GAMALIEL PASCUAL, JR., MA. LOURDES LIMJAP
PASCUAL, AND AURORA PIJUAN, Petitioners, v. BEL-AIR VILLAGE
ASSOCIATION, INC., REPRESENTED BY ITS PRESIDENT ANTONIO
GUERRERO, AND THE REGISTER OF DEEDS, Respondents.

DECISION

LEONEN, J.:

In contract interpretation, courts must first determine whether a stipulation is

ambiguous or susceptible of multiple interpretations. If no ambiguity is found
and the terms of the contract clearly reflect the intentions of the contracting
parties, the stipulation will be interpreted as it is written.

This resolves the Verified Petition for Review on Certiorari 1 filed by Cezar Yatco
Real Estate Services, Inc. (Cezar Yatco Real Estate Services), GRD Property
Resources, Inc. (GRD Property Resources), Gamaliel Pascual, Jr. (Gamaliel), Ma.
Lourdes Limjap Pascual (Lourdes), and Aurora Pijuan (Pijuan) assailing the Court
of Appeals September 5, 2013 Decision2 and March 17, 2014 Resolution3 in CA-
G.R. SP. No. 122954, which upheld the Office of the President's May 19, 2011
Resolution,4 declaring the validity of the term extension of Bel-Air Village's Deed
Restrictions.5

Sometime in the 1950s, Makati Development Corporation developed Bel-Air

Village, a residential subdivision in Makati City, and sold lots to interested
buyers.6 The contracts of sale between Makati Development Corporation and the
lot buyers in Bel-Air Village were subjected to specific conditions and easements
embodied in the Deed Restrictions, which had a lifetime of 50 years, or from
January 15, 1957 to January 15, 2007.7

Bel-Air Village Association, Inc. (Association), Bel-Air Village's homeowners'

association, was constituted as a non-stock, non-profit association to promote its
members' best interests. Under its by-laws, all lot owners of Bel-Air Village
automatically became members of the Association.8

Sometime in 1998, the Association created the 2007 Committee to assess and
propose amendments to the Deed Restrictions, in anticipation of its impending
expiration. The 2007 Committee circulated questionnaires among the
homeowners and held meetings to gather input on the proposed amendments. 9

In June 2006, the Association had its annual meeting and discussed the
proposed amendments and revisions to the Deed Restrictions. 10

In September 2006, the Association circulated copies of the proposed

amendments and revisions to the homeowners. 11
In October 2006, in a special board meeting, the Association passed a board
resolution calling for the Deed Restrictions' amendment. 12 The first of the 10
proposed amendments suggested extending the Deed Restrictions' term to
August 23, 2032. The proposed amendment read:
ChanRoblesVirtualawlibrary

Association's deed of restrictions shall remain in force from January 15, 2007
and the term thereof shall be concurrent with the life of the Bel-Air Village
Association, Inc. (Association) or up to August 23, 2032, unless sooner cancelled
in their entirety by a two-thirds vote of members in good standing of the
Association. However, the Association may, from time to time, add new ones,
amend or abolish particular restrictions or parts thereof by majority rule;
provided, however, that the deed of restrictions can be extended by amendment
only if done so concurrently with an extension of the life of the Association. 13
The Association agreed to set on December 12, 2006 a special membership
meeting to submit the board resolution to the homeowners for their
ratification.14

On December 12, 2006, 718 members out of a total of 934 members in good
standing and eligible to vote, attended the special membership meeting. Of the
votes cast, 72% chose to extend the period of the Deed Restrictions, 3%
rejected the extension, and 25% abstained.15

On February 8, 2007, Cezar Yatco Real Estate Services, GRD Property

Resources, Masterman Land Corporation (Masterman), Gamaliel, Lourdes, Sofia
Limjap (Sofia), and Pijuan (collectively, the complainants), who had all voted
against the Deed Restrictions' extension, filed a Verified Complaint 16 before the
Housing and Land Use Regulatory Board.

In their Verified Complaint, the complainants alleged that the Deed Restrictions
was only effective for 50 years, or from January 15, 1957 to January 15, 2007,
as it did not provide for its extension. Thus, the complainants contended that the
Association's resolution extending the Deed Restrictions' effectivity was illegally
and arbitrarily approved.17 They also averred that no quorum was reached in the
December 12, 2006 special membership meeting. 18

Finally, the complainants claimed that they had individually resigned from the
Association; however, they feared that the latter would force them to keep their
membership, abide by its illegal regulations, and extract assessments, which
would be considered as liens on their properties. 19

In its Opposition,20 the Association maintained that the period of effectivity was

an integral part of the Deed Restrictions as showed by its plain wording. Thus, it
may be extended upon a majority vote of the Association's members. 21 It further
denied that the special membership meeting lacked quorum, pointing out that
proxies need not be notarized to be valid.22

In its May 21, 2008 Decision,23 the Housing and Land Use Regulatory Board
Expanded National Capital Region Field Office (Regional Field Office) declared
the extension of the Deed Restrictions as null and void.

The Regional Field Office held that the 50-year term of the Deed Restrictions
could not be classified as a restriction since it merely stated the Deed's
effectivity; hence, the Association's members could not validly amend the term
of effectivity.24

The Regional Field Office also declared that the proxies submitted for the special
membership meeting involved the creation of real rights; thus, they should have
been notarized.25

The dispositive portion of the Regional Field Office May 21, 2008 Decision read:
ChanRoblesVirtualawlibrary

WHEREFORE, the foregoing premises considered, the meetings held by the

Board of Directors held on 10 October 2006, of the Special Membership meeting
held on 12 December 2006, both of respondent Bel Air Village Association, Inc.
(BAVA) in relation to the extension of the effectivity of the Deed Restrictions
annotated on the Transfer Certificates of Title covering the properties of the
complainants, and the imposition of new ones are declared NULL AND VOID.

The Resolutions passed during said meetings in relation to said extension of the
Deed Restrictions and the imposition of new restrictions are likewise declared
NULL AND VOID.

Respondent Bel-Air Village Association, Inc., its agent, and representatives are
hereby ordered to cease and desist from implementing the Resolutions passed
during said meetings. The Registry of Deeds of Makati is likewise ordered to
cease and desist from causing or allowing the annotation of Restrictions on [t]he
Titles covering the properties of the Complainants.

SO ORDERED.26 (Emphasis in the original)

The Association appealed27 this Decision to the Board of Commissioners of the
Housing and Land Use Regulatory Board, to which the complainants filed their
Counter-Memorandum.28

In its December 9, 2008 Decision,29 the Board of Commissioners granted the

appeal, reversing the Regional Field Office May 21, 2008 Decision. It declared
that the Association may extend the Deed Restrictions by a majority vote:
ChanRoblesVirtualawlibrary

The first sentence of par. 6 established the fact that the deed shall have a period
of fifty years. The second sentence starts with the word "However", implying
that while the deed has a duration of fifty years, the same may be extended by
a majority vote of the members.30
The dispositive portion of its Decision read:
ChanRoblesVirtualawlibrary

Wherefore, the instant appeal is granted. The decision of the Regional Office
dated May 21, 2008 is set aside and a new decision is entered declaring the
special meeting of December 12, 2006 as valid, and declaring that the term
subject deed of restrictions was validly extended until August 23, 2032.

So ordered.31
Complainants moved for reconsideration, 32 but their motion was denied in the
Board of Commissioners' January 28, 2009 Resolution. 33 Undaunted, they filed
an Appeal34 before the Office of the President, to which the Association filed a
Reply.35

In its December 29, 2009 Decision,36 the Office of the President reversed the
Board of Commissioners' December 9, 2008 Decision and January 28, 2009
Resolution, and reinstated the Regional Field Office May 21, 2008 Decision. It
held that the Term of Restrictions of the Deed Restrictions may not be increased,
as the 50-year term was not one of the restrictions that may be amended by a
majority vote of the Association's members:
ChanRoblesVirtualawlibrary

This Office does not agree with the HLURB Board of Commissioners. The findings
of Arbiter Babiano are based on sturdier legal foundation. In fact, to any
ordinary mind, the interpretation of the Term of Restrictions is not even
ambiguous. It is quite clear and unequivocal, to wit:
ChanRoblesVirtualawlibrary

"VI - Term of Restrictions

The foregoing restrictions shall remain in force for fifty years from January 15,
1957, unless sooner cancelled in its entirety by two-thirds vote of members in
good standing of the Bel-Air Association. However, the Association may, from
time to time, add new ones, amend or abolish particular restrictions or parts
thereof by majority rule."
It is very clear from the above-quoted provision that the restrictions are given a
term of 50 years. The word "However" in the second sentence does not mean
that the term may be extended, otherwise the framers could easily have stated
the same in wording the provision ("unless sooner cancelled or extended in its
entirety") just like it was done in the Forbes Park Deed of Restrictions (p. 12,
HLURB records). The word "However" only means that while the restrictions
have a term limit of 50 years, the said restrictions may be increased, amended,
or abolished FROM TIME TO TIME; meaning, within the 50[-]year term. The 50[-
]year term is not to be construed as one of the restrictions[;] otherwise[,] it
would be absurd to have a set of restrictions restricting each other. 37
On the issue of proxies, the Office of the President ruled that the Civil Code
should be applied suppletorily to the Corporation Code; thus, the proxy should
be in a public document when the proxy issued is for the conveyance of real
rights over immovable property. In addition, it declared that the complainants
could not be compelled to continue with their membership in the Association. 38
The dispositive portion of the Office of the President's December 29, 2009
Decision read:
ChanRoblesVirtualawlibrary

WHEREFORE, the Decision dated December 9, 2008, and Resolution dated

January 28, 2009, of the HLURB Board of Commissioners are
hereby REVERSED and SET ASIDE. The Decision of Housing and Land Use
Arbiter Michelle Jan B. Babiano dated May 21, 2008, is hereby REINSTATED.

SO ORDERED.39 (Emphasis in the original)

The Association moved for reconsideration, 40 which was granted by the Office of
the President in its May 19, 2011 Resolution.41

In reversing itself, the Office of the President conceded that the 50- year term
was also subject to the Association's amendment upon a majority vote of its
members, as it was an essential element of the Deed Restrictions. 42

The Office of the President also noted that Ayala Land, Inc. (Ayala Land), Makati
Development Corporation's successor-in-interest, confirmed that the 50-year
term was part of the Deed Restrictions.43

The Office of the President swept aside complainants' argument that their forced
membership in the Association violated their right to freedom of association. It
proclaimed that the liberties guaranteed under the Bill of Rights may only be
invoked against the State, not against private individuals. 44

The Office of the President cited Bel Air Village Association, Inc. v.

Dionisio,45 which upheld the terms of the Deed Restrictions against objections
based on the right to freedom of association, since the limitation was not on the
individual, but on property ownership.46

Finally, the Office of the President also reversed its earlier ruling that the lack of
notarization of proxies meant that no quorum had been reached in the special
membership meeting. It held that the Corporation Code, a special law, prevailed
over the Civil Code, a general law, and that the former states that private
corporations' by-laws may provide "the form of proxies of stockholders and
members and the manner of voting them."47

The Office of the President declared that the Association's by-laws did not
provide a proxy form; thus, the Corporation Code should be applied
suppletorily.48 Its May 19, 2011 Resolution read:
ChanRoblesVirtualawlibrary

Evidently, the Corporation Code only prescribes three (3) requisites for the
proxy to be valid, namely: (a) the proxy must be in writing; (b) the proxy must
be signed by the stockholder; and (c) the proxy must be filed before the
scheduled meeting with the corporate secretary. Significantly, all these
requirements have been complied with in this case. 49
Its dispositive portion read:
ChanRoblesVirtualawlibrary
WHEREFORE, premises considered, the Appellee's Motion for Reconsideration is
hereby GRANTED and the Decision dated 29 December 2009 of this Office
is REVERSED and SET ASIDE. Further, the appeal is hereby DISMISSED and
the Decision dated 9 December 2008 and Resolution dated 28 January 2009
both rendered by the Board of Commissioners of the HLURB are REINSTATED.

SO ORDERED.50 (Emphasis in the original)

Complainants moved for reconsideration, 51 but their motion was denied by the
Office of the President's August 9, 2011 Resolution. 52

They filed an Appeal;53 however, it was denied by the Court of Appeals.54

In its September 5, 2013 Decision, the Court of Appeals confirmed that the
Association had the power to extend the Deed Restriction's effectivity, as the 50-
year term was an integral part of the Deed Restrictions and was included among
the restrictions that may be amended by majority vote of the Association
members.55

The Court of Appeals also adopted the Office of the President's disquisition on
proxies. It held that the by-laws governed the required formality of a proxy, and
that proxies need not be embodied in a public document for their validity. It
further affirmed that a quorum of the Association's members voted for the
extension of the term of restrictions.56

The dispositive portion of its Decision read:

ChanRoblesVirtualawlibrary

WHEREFORE, the instant petition for review is DENIED. The Resolution, dated
May 19, 2011 of the Office of the President through Executive Secretary Paquito
N. Ochoa, Jr. reinstating the Decision of the Board of Commissioners of the
HLURB, and the Resolution, dated August 9, 2011, denying petitioners' motion
for reconsideration, are hereby AFFIRMED.
SO ORDERED.57 (Emphasis in the original)

Undaunted, complainants filed a Motion for Reconsideration, 58 but it was denied

in the Court of Appeals March 17, 2014 Resolution. 59

Hence, this Petition.

In their Verified Petition for Review on Certiorari, 60 petitioners Cezar Yatco Real
Estate Services, Inc., GRD Property Resources, Inc., Gamaliel Pascual, Jr., Ma.
Lourdes Limjap Pascual, and Aurora Pijuan maintain that although private
respondent Bel-Air Village Association has power to shorten the Deed
Restrictions' period through its members' majority vote, it has no power to
extend its effectivity beyond 50 years.61

Petitioners contend that "a term is not in itself a restriction," 62 as it sets the
period of the Deed Restrictions' effectivity, and is not a limitation on the use of
property.63 They also assert that the power to extend the Deed Restrictions' term
was neither expressly nor impliedly granted to private respondent. 64

Additionally, petitioners underscore that their compulsory membership with

private respondent violates their constitutional right to association, which
includes the freedom to resign or withdraw.65 They add that homeowners'
associations are not indispensable for the upkeep and safety of gated
communities like Bel-Air Village, since the barangay is mandated to provide the
same services that private respondent claims to have been supplying its
members. They highlight that Barangay Bel-Air has been providing these
services to Bel-Air Village, and has more than enough funds for it.66

Finally, petitioners assert that in the December 12, 2007 special membership
meeting, when the term extension was voted upon, the proxies were invalid as
they were not notarized:
ChanRoblesVirtualawlibrary

80. Petitioners respectfully assert that the subject of such meeting was the
extension of the effectivity of the Deed. Further, said meetings involved real
rights over real properties, insofar as restrictions are "real rights constituted
on the corporeal immovable property".

80.1. It bears noting further that a proxy is an agency or authority to perform a

specific act in representation of the principal. The rules on agency are, therefore,
applicable, and are worth considering in determining whether the aforesaid
proxies are defective or not.

80.2. It is provided that, "The power to administer property, or any other

power which has for its object an act appearing or which should appear
in a public document, or should prejudice a third person must appear in
a public document".

80.3. Inasmuch as the power of the representatives who attended the special
meeting involved the creation of real rights, such power or authorization held by
such representatives, should not only have been in writing. It should also have
been in public documents. Unfortunately, the above-mentioned proxies were not
executed in compliance with the afore-cited law.67 (Emphasis in the original,
citations omitted)
In its Comment,68 private respondent stresses that contrary to petitioners'
"legally untenable, erroneously narrow, and, illogical"69 interpretation, the 50-
year term of the Deed Restrictions could be extended. Its Comment read:
ChanRoblesVirtualawlibrary

3.4. A plain reading of [Article VI - Term of Restrictions], without having to go

into semantics and statutory construction, readily shows that the fifty-year term
can be amended. The first sentence states that the restrictions have a period of
fifty (50) years, and the second sentence qualifies that while the restrictions
have a duration of fifty (50) years, the same may be amended (either shortened
or extended), by majority vote of the members. 70
Private respondent states that the Deed Restrictions' term is a necessary
element of the restrictive covenant between lot buyers and sellers. Hence, it
may be validly amended through a majority vote of its members. 71

Likewise, private respondent asserts that the primary consideration in

interpreting a restrictive covenant like the Deed Restrictions is the intention of
the parties. It points out that the Makati Development Corporation, through its
successor-in-interest Ayala Land, confirmed that the 50-year term is part of the
Deed Restrictions, and thus, may be amended. 72

Private respondent maintains that it did not violate petitioners' constitutional

right to freedom of association since the Bill of Rights could only be invoked
against the State, not private individuals.73 It points out that in Bel Air Village
Association Inc., this Court has already ruled on the validity of the limitations
contained in the Deed Restrictions, and found that they were not contrary to
"provisions of laws, morals, good customs, public order[,] or public policy." 74

Private respondent likewise disputes petitioners' claim that the proxies in the
December 12, 2007 special membership meeting should have been notarized. It
says that petitioners were mistaken to insist that a proxy's validity depends on
the subject matter to be taken up in the special membership meeting. 75 Its
Comment read:
ChanRoblesVirtualawlibrary

3.53. The subject matter of the members' meeting is irrelevant for purposes of

determining the validity of a proxy. The rule on proxies, i.e. Section 58 of the
Corporation Code, makes no qualification on the subject matter of the members'
meeting, such that, regardless of the subject matter, the same requirements
apply. Had it been the intention of the law to inquire into the subject matter of a
members' meeting, it could have easily qualified it in the law.

3.54. Even R.A. 9904 (Magna Carta for Homeowners and Homeowners'

Associations) does not impose this requirement. It only states that "Association
members may vote in person or by proxy in all meetings of members. Proxies
shall be in writing, signed by the member and filed before the scheduled
meeting with the association secretary." Thus, R.A. 9904 it (sic) even confirms
the consistent SEC ruling and the principles laid down in the Corporation Code.

3.55. Furthermore, a proxy to vote shares of stock is an authority given by the

holder of the stock, who has the right to vote, to another to exercise his voting
rights. Clearly, the object of a proxy is the transfer of the personal right of a
stockholder or member to vote in a designated stockholders' or members'
meeting, and cannot in any manner be construed as a creation of real rights.

3.56. Considering that the object of a proxy is the transfer of a personal right,
Articles 1358 and 1878 of the Civil Code on the necessity of a public document
and a special power of attorney, do not apply.76 (Emphasis in the original,
citations omitted)
Private respondent further points out that Article 1358 of the Civil Code does not
require that acts or contracts be notarized for their validity, but only for their
efficacy, "so that after the existence of said contract has been admitted, the
party bound may be compelled to execute the proper document." 77 Assuming
that the proxies in the special membership meeting were notarized, it further
opines that the remedy is not to void their votes or the meeting, but to demand
that the assignor issue notarized proxies.78

Finally, private respondent states that while Article 1878 of the Civil Code
requires a special power of attorney in specific cases, the lack of authority does
not automatically void a contract entered into, since the principal can still
expressly or impliedly ratify the acts executed by its agent. It adds that its
members' continued silence means that they never disputed the authority of the
proxy holders to act on their behalf.79

In their Reply,80 petitioners continue to insist that the Deed Restrictions' term of

effectivity, while part of the covenant between the parties, is not a restriction
per se.81 They stated:
ChanRoblesVirtualawlibrary

4. Petitioners respectfully posit the difference between the term and the
restriction. The term is that part of the Deed which sets the period within which
the restrictions shall be effective. But a term is not in itself a restriction. Apart
from said restrictions, such term or period cannot stand alone. It loses its
significance if there is no restriction to speak of. Its relevance is solely
dependent upon the existence of the restrictions.
4.1. A restriction carries a technical definition. A restriction, or more often
referred to as a servitude or easement, is defined by Spanish Civilist Sanchez
Roman as a "real right constituted on the corporeal immovable property of
another, by virtue of which the owner of the latter has to refrain from doing or
to allow that someone do something on his property, for the benefit of another
thing or person."82 (Citation omitted)
Petitioners then question Ayala Land's personality to issue the opinion on the
contracting parties' intention since it was not the original seller. They also
maintain that under the parol evidence rule, when an agreement has been
reduced to writing, the parties cannot present evidence that will change the
terms of the written agreement.83

The issues for this Court's resolution are as follows:

ChanRoblesVirtualawlibrary

First, whether or not private respondent Bel-Air Village Association, Inc.'s

members can, by majority vote, extend the Deed Restrictions' term of
effectivity;

Second, whether or not the extension of the Deed Restrictions' term of

effectivity was validly voted upon by a majority of private respondent Bel Air
Village Association, Inc.'s members; and

Finally, whether or not petitioners Cezar Yatco Real Estate Services, Inc., GRD
Property Resources, Inc., Gamaliel Pascual, Jr., Ma. Lourdes Limjap Pascual, and
Aurora Pijuan can be compelled to maintain their membership with respondent
Bel-Air Village Association, Inc.

The cardinal rule84 in contract interpretation is found in Article 1370 of the Civil
Code,85 which provides:
ChanRoblesVirtualawlibrary

Article 1370. If the terms of a contract are clear and leave no doubt upon the
intention of the contracting parties, the literal meaning of its stipulations shall
control.

If the words appear to be contrary to the evident intention of the parties, the
latter shall prevail over the former. 86
In Abad v. Goldloop Properties, Inc.,87 this Court ruled:
ChanRoblesVirtualawlibrary

The cardinal rule in the interpretation of contracts is embodied in the first

paragraph of Article 1370 of the Civil Code: "[i]f the terms of a contract are
clear and leave no doubt upon the intention of the contracting parties, the literal
meaning of its stipulations shall control." This provision is akin to the "plain
meaning rule" applied by Pennsylvania courts, which assumes that the intent of
the parties to an instrument is "embodied in the writing itself, and when the
words are clear and unambiguous the intent is to be discovered only from the
express language of the agreement." It also resembles the "four comers" rule, a
principle which allows courts in some cases to search beneath the semantic
surface for clues to meaning. A court's purpose in examining a contract is to
interpret the intent of the contracting parties, as objectively manifested by
them. The process of interpreting a contract requires the court to make a
preliminary inquiry as to whether the contract before it is ambiguous. A contract
provision is ambiguous if it is susceptible of two reasonable alternative
interpretations. Where the written terms of the contract are not ambiguous and
can only be read one way, the court will interpret the contract as a matter of
law. If the contract is determined to be ambiguous, then the interpretation of
the contract is left to the court, to resolve the ambiguity in the light of the
intrinsic evidence.88 (Emphasis in the original, citation omitted)
As held in Abad, courts must first determine whether or not a stipulation in a
contract is ambiguous or susceptible of multiple interpretations. Absent any
ambiguity, or when the terms of the contract are found to clearly reflect the
intentions of the contracting parties, the stipulation will be interpreted as it is
written, and will be treated as the binding law between the contracting parties. 89

The Deed Restrictions annotated on the land title issued to the lot buyers in Bel-
Air Subdivision stated:
ChanRoblesVirtualawlibrary

BEL-AIR SUBDIVISION
DEED RESTRICTIONS
I - BEL-AIR ASSOCIATION

The owner of this lot/s or his successors[-]in[-]interest is required to be and is

automatically a member of the Bel-Air Association and must abide by such rules
and regulations laid down by the Association in the interest of the sanitation,
security[,] and the general welfare of the community. The Association will also
provide for and collect assessments, which will constitute as a lien on the
property junior only to liens of the government for taxes and to voluntary
mortgages for sufficient consideration entered into in good faith.

II - USE OF LOTS

Subject to such amendments, and additional restrictions, reservations,

servitudes, etc., as the Bel-Air Association may from time to time adopt and
prescribe this lot is subject to the following restrictions:
ChanRoblesVirtualawlibrary

a. This lot/s shall not be subdivided. However, three or more lots may
be consolidated and subdivided into a lesser number of lots provided
that none of the resulting lots be smaller in area than the smallest lot
before the consolidation and that the consolidation and subdivision
plan be duly approved by the governing body of the Bel-Air
Association.

b. This lot/s shall only be used for residential purposes.

c. Only one single family house may be constructed on a single lot,

although separate servant's quarters or garage may be built.

d. Commercial or advertising signs shall not be placed, constructed, or

erected on this lot. Name plates and professional signs of home
owners are permitted so long as they do not exceed 80 x 40
centimeters in size.

e. No cattle, pigs, sheep, goats, ducks, geese, roosters[,] or rabbits

shall be maintained on the lot, except that pets may be maintained
but must be controlled in accordance with the rulings of the
Association. The term "pets" includes chickens not in commercial
quantities.

f. The property is subject to an easement of two (2) meters within the

lot and adjacent to the rear and sides thereof not fronting a street for
the purpose of drainage, sewage, water[,] and other public facilities
as may be necessary and desirable, and the owner, lessee[,] or his
representative shall permit access thereto by authorized
representatives of the Bel-Air Association or public utility entities for
the purposes for which the easement is created.
 g. This lot/s shall not be used for any immoral or illegal trade or activity.

h. The owner and/or lessee of this lot/s shall at all times keep the grass
cut and trimmed to reduce the fire hazard of the property.

III - BUILDINGS AND ARCHITECTURE

a. All buildings on this lot/s must be of strong materials.

b. Building/s shall not be higher than 9 meters above the ground

directly beneath the point in question.

c. All building plans must be approved by the

Association before construction begins.

d. Minimum cost of the main residence of this lot shall not be less than
P15,000 but this figure may be adjusted by the Association from time
to time.

e. All buildings, including garage, servant's quarters, or parts thereof

(covered terraces, porte cocheres) must be constructed at a distance
of not less than from (sic) 3 meters from boundary fronting a street/s
(not including pedestrian paths) and not less than 2 meters from the
other boundaries of this lot. Completely open and unroofed terraces
are not included in these restrictions.

IV - SEWAGE DISPOSAL

Sewage disposal must be by means of septic tanks or into a sewage system. If

septic tanks are used, they must be maintained in sanitary condition at all times.

V - WALLS

Walls on the perimeter of this property shall not exceed 2 meters in height,
except that no restriction as to height applies to walls made of live vegetation.

VI - TERM OF RESTRICTIONS

The foregoing restrictions shall remain in force for fifty years from January 15,
1957, unless sooner cancelled in its entirety by two-thirds vote of members in
good standing of the Bel-Air Association. However, the Association may, from
time to time, add new ones, amend or abolish particular restrictions [or] parts
thereof by majority rule.

VII - ENFORCEMENT OF RESTRICTIONS

The foregoing restrictions may be enjoined and/or enforced by court action by

the Bel-Air Association or by the Makati Development Corporation or its assigns,
or by any registered owner of land[.]90
Unsurprisingly, the parties present differing interpretations on the Deed
Restrictions' term of effectivity. Petitioners claim that a plain reading of the Deed
Restrictions would show that the term is not a restriction which can be validly
amended by private respondent's members, as it is not a limitation on the use of
property. They also assert that the Deed Restrictions never expressly or
impliedly authorized private respondent to extend its term of effectivity. 91

In contrast, private respondent insists that a plain reading of the Deed

Restrictions would show that the term of restrictions may be amended by a
majority vote of the members. It emphasizes that the term of effectivity is a
necessary element of the Deed Restrictions; thus, its members may validly
extend its effectivity.92

The Deed Restrictions is a restrictive covenant that governs how lot owners can
use or enjoy their properties. It was annotated on the land titles issued to the lot
owners and it is not disputed that lot owners are bound by these annotations
under Section 39 of Act 496, or the Land Registration Act, which provides:
ChanRoblesVirtualawlibrary

Section 39. Every applicant receiving a certificate of title in pursuance of a

decree of registration, and every subsequent purchaser of registered land who
takes a certificate of title for value in good faith, shall hold the same free of all
encumbrance except those noted on said certificate, and any of the following
incumbrances which may be subsisting, namely:
ChanRoblesVirtualawlibrary

First. Liens, claims, or rights arising or existing under the laws or Constitution of
the United States or of the Philippine Islands which the statutes of the Philippine
Islands can not require to appear of record in the registry.

Second. Taxes within two years after the same have become due and payable.

Third. Any public highway, way, or private way established by law, where the
certificate of title does not state that the boundaries of such highway or way
have been determined. But if there are easements or other rights appurtenant to
a parcel of registered land which for any reason have failed to be registered,
such easements or rights shall remain so appurtenant notwithstanding such
failure, and shall be held to pass with the land. until cut off or extinguished by
the registration of the servient estate, or in any other manner. 93 (Emphasis
supplied)
Petitioners admit that the Deed Restrictions may be canceled by a majority vote
of private respondent's members. Nonetheless, they claim that private
respondent had no authority to extend the Deed Restrictions' term of effectivity.

Petitioners are mistaken.

The Deed Restrictions is divided into seven (7) parts, with its term of effectivity
provided for as follows:
ChanRoblesVirtualawlibrary

VI - TERM OF RESTRICTIONS

The foregoing restrictions shall remain in force for fifty years from January 15,
1957, unless sooner cancelled in its entirety by two thirds vote of members in
good standing of the Bel-Air Association. However, the Association may, from
time to time, add new ones, amend or abolish particular restrictions [or] parts
thereof by majority rule.94
Read as a whole, the Deed Restrictions as a restrictive covenant was intended
for the "sanitation, security and the general welfare of the
community,"95 providing the rules and regulations for the lot owners' privacy and
continued enjoyment of their property.

Petitioners' interpretation of limiting amendments to so-called restrictions, then

declaring that the term is not a restriction, cannot be upheld. A plain reading of
Part VI, or the Term of Restrictions, would show that the term of effectivity was
not set in stone, and that private respondent was empowered to cancel it
altogether, through its members' majority vote. The contracting parties' clear
intention was to give the lot owners freedom to establish rules and regulations,
under which they could best use their properties and protect their interests. This
is apparent from the second sentence: "However, the Association may, from
time to time, add new ones, amend or abolish particular restrictions [or] parts
thereof by majority rule."96

This freedom granted to private respondent was confirmed by Ayala Land,

Makati Development Corporation's successor-in-interest, when it stated that it
was never its intention to prohibit the lot owners from extending the term of the
Deed Restrictions:
ChanRoblesVirtualawlibrary

The current controversy in Bel-Air Village Association, Inc. (BAVA) concerning

the extension of the Deed Restrictions has come to our attention. More
particularly, we understand that there is a claim by some quarters that it was
the intention of the Makati Development Corporation, the original seller of lots in
Bel-Air Village, "to withhold the power to extend the Deed of Restrictions beyond
the fifty years annotated in the owner's title."

As successor[-]in[-]interest of the former Makati Development Corporation

(MDC), we wish to clarify that it was never the intention to deny the lot-
owners/homeowners the right to extend the Deed Restrictions, nor was this
situation contemplated with the preparation of the Deed Restrictions or the
original deeds of sale between MDC and the original buyers of lots in Bel-Air
Village. This is evident in the fact that Section VI, the provision on amendment,
states that "the association may, from time to time, . . . amend . . .
particular restrictions or parts thereof by majority rule." Clearly, the term of
restrictions is  part of the restrictions and could therefore, be
amended.97 (Emphasis supplied)
The Court of Appeals thus correctly ruled that the term of restrictions was also
subject to amendment by a majority vote of private respondent's members:
ChanRoblesVirtualawlibrary

Reading Article VI in its entirety will show that the restrictions embodied in the
Deed shall be enforceable for 50 years. This is immediately followed by the
following proviso, "However, the Association may, from time to time, add
new ones, amend or abolish particular restrictions or parts thereof by
majority rule." The proviso clearly states that [the Association] is empowered
under a specific provision in the Deed Restrictions to amend or abolish particular
restrictions or parts thereof by majority rule. Note that the term of restrictions
is an integral part of the Deed. Necessarily, when Article VI states that the
restrictions may be amended, the amendment can go as far as amending the
entire Deed Restrictions including the term or duration of the restrictions, which
is part and parcel of the Deed.

Corollarily, when [the Association] extended the effectivity of the Deed

Restrictions, it did so in the context of amending particular restrictions as
provided in Article VI.

The import of Article VI is so clear that it precludes the Court from giving a
different interpretation. In many instances, the Supreme Court underscored
that, as a rule, if the statute is clear, plain and free from ambiguity, it must be
given its literal meaning and applied without interpretation. 98 (Emphasis in the
original)
II

A proxy is a form of agency created in instances when a person is unable to

personally cast his or her vote; hence, the act of voting is delegated to another
person.

Section 89 of Batas Pambansa Blg. 68, or the Corporation Code of the

Philippines,99 recognizes a member's right to vote by proxy. Section 58 then
provides that a proxy shall be in writing, signed by the member, and filed with
the corporate secretary before the scheduled meeting:
ChanRoblesVirtualawlibrary

Section 58. Proxies. - Stockholders and members may vote in person or by

proxy in all meetings of stockholders or members. Proxies shall be in writing,
signed by the stockholder or member and filed before the scheduled meeting
with the corporate secretary. Unless otherwise provided in the proxy, it shall be
valid only for the meeting for which it is intended. No proxy shall be valid and
effective for a period longer than five (5) years at any one time. 100
However, the Corporation Code also empowers the members to provide for their
own proxy requirements in their by-laws, as seen in Section 47(4), which
provides:
ChanRoblesVirtualawlibrary

Section 47. Contents of by-laws. - Subject to the provisions of the Constitution,

this Code, other special laws, and the articles of incorporation, a private
corporation may provide in its by-laws for:
ChanRoblesVirtualawlibrary
....

4. The form for proxies of stockholders and members and the manner of voting
them[.]
Nonetheless, in the absence of additional formal requirements for proxies in the
by-laws, the basic requirements for a written proxy submitted prior to the
scheduled meeting under Section 58 govern.

Again, the Court of Appeals did not err when it upheld the validity of the
submitted proxies and the overwhelming vote to extend the Deed Restrictions
term of effectivity, thus:
ChanRoblesVirtualawlibrary

The Court therefore finds it whimsical for [petitioners] to insist that the special
BAVA membership meeting did not constitute a quorum solely based on its lame
excuse that the proxy letters during said meeting were not notarized and lacking
in authority or specific grant of power to approve the extension of the effectivity
of the term of restrictions. The adjudication of this matter by the Office of the
President through Executive Secretary Paquito N. Ochoa, Jr. is worthy of respect
by the Court, thus:
ChanRoblesVirtualawlibrary

"In this regard, Section 47 (4) of the Corporation Code categorically states that
private corporations may provide in their by-laws for the 'form of proxies of
stockholders and members and the manner of voting them.' Consistent
therewith, Section 89 of the same Code provides: '[u]nless otherwise provided
by the articles of incorporation or by-laws, a member may vote by proxy in
accordance with the provisions of the Code.' In addition, Section 30 of
Resolution No. 770 of the HLURB Board of Commissioners (Framework for
Governance of Homeowners Associations) states that (P)roxies shall be in
writing and signed by the member. . . . There is no requirement that the
same be notarized. Thus, the recognized rule and practice on proxy form
is summarized as follows . . . the formalities of a proxy may be provided
for in the [b]y-[l]aws. In the absence of any provision in the [b]y-laws,
the proxy need not comply with the minimum requirements provided for
in Section 58 . . . Hence the by-laws of BAVA is controlling insofar as execution
of proxies is concerned . . . the entire [b]y-laws of BAVA readily reveals
that nowhere therein is it required that the proxy forms be in any
particular form, much less be in a public document or through a special
power of attorney."101 (Emphasis in the original)
III

The issue of compulsory membership in a homeowners' association like private

respondent was discussed at length in Bel Air Village Association, Inc.,102 which
explained that compulsory membership is an annotation on a lot owner's
certificate of title. Hence, petitioners were bound by this annotation:
ChanRoblesVirtualawlibrary

There is no dispute that Transfer Certificate of Title No. 81136 covering the
subject parcel of land issued in the name of the petitioner contains
an annotation to the effect that the lot owner becomes an automatic member of
the respondent Bel-Air Association and must abide by such rules and regulations
laid down by the Association in the interest of the sanitation, security[,] and the
general welfare of the community. It is likewise not disputed that the provision
on automatic membership was expressly annotated on the petitioner's Transfer
Certificate of Title and on the title of his predecessor-in-interest.

The question, therefore, boils down to whether or not the petitioner is bound by
such annotation:
ChanRoblesVirtualawlibrary

Section 39 of Act 496 (The Land Registration Act) states:

ChanRoblesVirtualawlibrary

"Sec. 39. Every person receiving a certificate of title in pursuance of a decree of

registration, and every subsequent purchaser of registered land who takes a
certificate of title for value in good faith shall hold the same free of all
encumbrances except those noted on said certificate . . . ["]
Thus, in the case of Tanchoco v. Aquino, (154 SCRA 1[1987]), we ruled that
purchasers of a registered land are bound by the annotations found at the back
of the certificate of title covering the subject parcel of land. . . .

....

In effect, the petitioner's contention that he has no privity of contract with the
respondent association is not persuasive. When the petitioner voluntarily bought
the subject parcel of land it was understood that he took the same free of all
encumbrances except notations at the back of the certificate of title, among
them, that he automatically becomes a member of the respondent association. 103
Bel Air Village Association, Inc.104 also underscored that the constitutional
guarantee of freedom of association can only be invoked against the State, and
does not apply to private transactions, like a sale, where a condition was validly
imposed by the vendor.105

Finally, PADCOM Condominium Corporation v. Ortigas Center Association,

Inc.106 reiterated that automatic membership in a homeowners' association does
not violate lot owners' right to freedom of association because they were not
forced to buy their lots from the developer:
ChanRoblesVirtualawlibrary

Neither are we convinced by PADCOM's contention that the automatic

membership clause is a violation of its freedom of association. PADCOM was
never forced to join the association. It could have avoided such membership by
not buying the land from TDC. Nobody forced it to buy the land when it bought
the building with the annotation of the condition or lien on the Certificate of Title
thereof and accepted the Deed. PADCOM voluntarily agreed to be bound by and
respect the condition, and thus to join the Association.107
WHEREFORE, premises considered, the Petition is DENIED. The assailed Court
of Appeals September 5, 2013 Decision and March 17, 2014 Resolution in CA-
G.R. SP. No. 122954 are AFFIRMED.
SO ORDERED.

G.R. No. 207526, October 03, 2018

THE INSULAR ASSURANCE CO., LTD., Petitioner, v. THE HEIRS OF JOSE H.

ALVAREZ, Respondents.

G.R. No. 210156, October 3, 2018

UNION BANK OF THE PHILIPPINES, Petitioner, v. HEIRS OF JOSE H.

ALVAREZ, Respondents.

DECISION

LEONEN, J.:

The Insurance Code dispenses with proof of fraudulent intent in cases of

rescission due to concealment, but not so in cases of rescission due to false
representations. When an abundance of available documentary evidence can be
referenced to demonstrate a design to defraud, presenting a singular document
with an erroneous entry does not qualify as clear and convincing proof of
fraudulent intent. Neither does belatedly invoking just one other document,
which was not even authored by the alleged miscreant.

This resolves the consolidated Petitions for Review on Certiorari, under Rule 45
of the 1997 Rules of Civil Procedure. The first, docketed as G.R. No.
207526,1 was brought by The Insular Life Assurance Co., Ltd. (Insular Life). The
second, docketed as G.R. No. 210156,2 was brought by Union Bank of the
Philippines (UnionBank). These consolidated petitions seek the reversal of the
assailed Court of Appeals May 21, 2013 Decision3 and November 6, 2013
Resolution4 in CA-G.R. CV No. 91820.

The assailed Court of Appeals May 21, 2013 Decision denied Insular Life's and
UnionBank's separate appeals and affirmed the January 29, 2007 Decision 5 of
Branch 148, Regional Trial Court, Makati City. The Regional Trial Court ruled in
favor of Jose H. Alvarez's (Alvarez) heirs 6 (the Heirs of Alvarez) in their action
for specific performance against Insular Life and UnionBank. It ordered
compliance with the insurance undertaking on the Group Mortgage Redemption
Insurance covering a loan obtained by Alvarez from UnionBank by applying its
proceeds as payment for that loan. It also nullified the extrajudicial foreclosure
ensuing from the non-payment of Alvarez's loan, and required UnionBank to
reconvey title and ownership over the foreclosed property to Alvarez's estate.
Lastly, it ordered Insular Life's and UnionBank's payment of attorney's fees and
costs of suit.7
The assailed Court of Appeals November 6, 2013 Resolution denied UnionBank's
Motion for Reconsideration.8

Alvarez and his wife, Adelina, owned a residential lot with improvements covered
by Transfer Certificate of Title (TCT) No. C-315023 and registered in the
Caloocan City Registry of Deeds.9

On June 18, 1997, Alvarez applied for and was granted a housing loan by
UnionBank in the amount of P648,000.00. This loan was secured by a
promissory note,10 a real estate mortgage over the lot,11 and a mortgage
redemption insurance taken on the life of Alvarez with UnionBank as beneficiary.
Alvarez was among the mortgagors included in the list of qualified debtors
covered by the Group Mortgage Redemption Insurance that UnionBank had with
Insular Life.12

Alvarez passed away on April 17, 1998.13 In May 1998, UnionBank filed with
Insular Life a death claim under Alvarez's name pursuant to the Group Mortgage
Redemption Insurance. In line with Insular Life's standard procedures,
UnionBank was required to submit documents to support the claim. These
included: (1) Alvarez's birth, marriage, and death certificates; (2) the attending
physician's statement; (3) the claimant's statement; and (4) Alvarez's statement
of account.14

Insular Life denied the claim after determining that Alvarez was not eligible for
coverage as he was supposedly more than 60 years old at the time of his loan's
approval.15

With the claim's denial, the monthly amortizations of the loan stood unpaid.
UnionBank sent the Heirs of Alvarez a demand letter,16 giving them 10 days to
vacate the lot. Subsequently, on October 4, 1999, the lot was foreclosed and
sold at a public auction with UnionBank as the highest bidder. 17

On February 14, 2001, the Heirs of Alvarez filed a Complaint18 for Declaration of

Nullity of Contract and Damages against UnionBank, a certain Alfonso P. Miranda
(Miranda), who supposedly benefitted from the loan, and the insurer which was
identified only as John Doe.19 The Heirs of Alvarez denied knowledge of any loan
obtained by Alvarez.20

The Heirs of Alvarez claimed that after Alvarez's death, they came upon a
document captioned "Letter of Undertaking," which appeared to have been sent
by UnionBank to Miranda. In this document, UnionBank bound itself to deliver to
Miranda P466,000.00 of the approved P648,000.00 housing loan, provided that
Miranda would deliver to it TCT No. C-315023, "free from any liens and/or
encumbrances."21
The Complaint was later amended and converted into one for specific
performance22 to include a demand against Insular Life to fulfill its obligation as
an insurer under the Group Mortgage Redemption Insurance.23

In its defense, UnionBank asserted that the Heirs of Alvarez could not feign
ignorance over the existence of the loan and mortgage considering the Special
Power of Attorney24 executed by Adelina in favor of her late husband, which
authorized him to apply for a housing loan with UnionBank.25

For its part, Insular Life maintained that based on the documents submitted by
UnionBank, Alvarez was no longer eligible under the Group Mortgage
Redemption Insurance since he was more than 60 years old when his loan was
approved.26

In its January 29, 2007 Decision,27 the Regional Trial Court ruled in favor of the
Heirs of Alvarez. It found no indication that Alvarez had any fraudulent intent
when he gave UnionBank information about his age and date of birth. It
explained that UnionBank initiated and negotiated the Group Mortgage
Redemption Insurance with Insular Life, and that "ordinary customers will not
know about [insurance policies such as this] unless it is brought to their
knowledge by the bank."28 It noted that if UnionBank's personnel were mindful of
their duties and if Alvarez appeared to be disqualified for the insurance, they
should have immediately informed him of his disqualification. It emphasized that
in evaluating Alvarez's worthiness for the loan, UnionBank had been in
possession of materials sufficient to inform itself of Alvarez's personal
circumstances. It added that if Insular Life had any doubt on the information
that UnionBank had provided, it should have inquired further instead of relying
solely on the information readily available to it and immediately refusing to
pay.29

The dispositive portion of the Regional Trial Court's January 29, 2007 Decision
read:

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

plaintiffs and against defendants order (sic):

1. Defendants to comply with the insurance undertaking under Mortgage

Redemption Insurance Policy No. G-098496 by paying its proceeds to be applied
as payment of the outstanding loan obligation of deceased Jose H. Alvarez with
defendant Union Bank;

2. The extrajudicial foreclosure of the real estate mortgage over Jose H.

Alvarez's TCT No. C-315023 a nullity and without legal force and effect and to
release the mortgage encumbrance thereon;
3. Defendant Union Bank to reconvey the title and ownership over TCT No. C-
315023 to the Estate of the deceased Jose H. Alvarez for the benefit of his heirs
and successors-in-interest;

4. Defendants jointly and severally to pay the plaintiffs the sum of P50,000.00
as and for attorney's fees;

5. Defendants jointly and severally to pay the costs of the suit.

SO ORDERED.30

UnionBank31 and Insular Life32 filed separate appeals before the Court of

Appeals.

In its assailed May 21, 2013 Decision,33 the Court of Appeals affirmed the
Regional Trial Court's ruling. It noted that the errors assigned by Insular Life and
UnionBank to the Regional Trial Court boiled down to the issue of whether or not
Alvarez was guilty of fraudulent misrepresentation as to warrant the rescission
of the Group Mortgage Redemption Insurance obtained by UnionBank on
Alvarez's life. It explained that fraud is never presumed and fraudulent
misrepresentation as a defense of the insurer to avoid liability must be
established by convincing evidence. Insular Life, in this case, failed to establish
this defense. It only relied on Alvarez's Health Statement Form where he wrote
"1942" as his birth year. However, this form alone was insufficient to prove that
he fraudulently intended to misrepresent his age. It noted that aside from the
Health Statement Form, Alvarez had to fill out an application for insurance. This
application would have supported the conclusion that he consistently wrote
"1942" in all the documents that he had submitted to UnionBank. However, the
records made no reference to this document.34

The Court of Appeals added that assuming that fraudulent misrepresentation

entitled Insular Life to rescind the contract, it should have first complied with
certain conditions before it could exercise its right to rescind. The conditions
were:

(1) prior notice of cancellation to [the] insured; (2) notice must be based on the
occurrence after effective date of the policy of one or more grounds mentioned;
(3) must be in writing, mailed or delivered to the insured at the address shown
in the policy; and (4) must state the grounds relied upon provided in Section 64
of the Insurance Code and upon [the] request of [the] insured, to furnish facts
on which cancellation is based.35

None of these conditions were fulfilled. Finally, the letter of denial dated April 8,
1999 was furnished only to UnionBank.36

Insular Life opted to directly appeal before this Court. Its appeal was docketed
as G.R. No. 207526.37 UnionBank, on the other hand, filed its Motion for
Reconsideration (of the Decision dated May 21, 2013),38 which the Court of
Appeals denied in its November 6, 2013 Resolution. 39 UnionBank then filed
before this Court its Petition, docketed as G.R. No. 210156. 40

In its March 12, 2014 Resolution, this Court consolidated Insular Life's and
UnionBank's Petitions.41

In response to the Court of Appeals' reasoning that intent to defraud must be

established, Insular Life pinpoints concealment, rather than fraudulent
misrepresentation, as the key to the validity of its rescission. It asserts that
Alvarez's concealment of his age, whether intentional or unintentional, entitles it
to rescind the insurance contract.42 It claims that proof of fraudulent intent is not
necessary for the insurer to rescind the contract on account of concealment. 43 It
adds that it did not rely solely on Alvarez's Health Statement Form but also on
his representations during the background check conducted by UnionBank where
he said that he was only 55 years old at the time of application. As an insurance
contract is a contract uberrima fides, it claims that it has every right to rely on
Alvarez's good faith in its dealing with him.44

UnionBank claims that the real estate mortgage is not affected by the status of
the Group Mortgage Redemption Insurance as they are two (2) different
contracts. Thus, any concealment made by Alvarez should not result in the
invalidation of the foreclosure.45

For this Court's resolution are the following issues:

First, whether or not petitioner The Insular Life Assurance Co., Ltd. is obliged to
pay Union Bank of the Philippines the balance of Jose H. Alvarez's loan given the
claim that he lied about his age at the time of the approval of his loan; and

Second, whether or not petitioner Union Bank of the Philippines was correct in
proceeding with the foreclosure following Insular Life Assurance Co., Ltd.'s
refusal to pay.

I.A

Fraud is not to be presumed, for "otherwise, courts would be indulging in

speculations and surmises."46 Moreover, it is not to be established lightly.
Rather, "[i]t must be established by clear and convincing evidence . . . [; a]
mere preponderance of evidence is not even adequate to prove fraud." 47 These
precepts hold true when allegations of fraud are raised as grounds justifying the
invalidation of contracts, as the fraud committed by a party tends to vitiate the
other party's consent.48

Citing Section 27 of the Insurance Code, however, Insular Life asserts that in
cases of rescission due to concealment, i.e., when a party "neglect[s] to
communicate that which [he or she] knows and ought to communicate," 49 proof
of fraudulent intent is not necessary.50

Section 27 reads:

Section 27. A concealment whether intentional or unintentional entitles the

injured party to rescind a contract of insurance. (Emphasis supplied)

The statutory text is unequivocal. Insular Life correctly notes that proof of
fraudulent intent is unnecessary for the rescission of an insurance contract on
account of concealment.

This is neither because intent to defraud is intrinsically irrelevant in

concealment, nor because concealment has nothing to do with fraud. To the
contrary, it is because in insurance contracts, concealing material facts 51 is
inherently fraudulent: "if a material fact is actually known to the [insured], its
concealment must of itself necessarily be a fraud." 52 When one knows a material
fact and conceals it, "it is difficult to see how the inference of a fraudulent intent
or intentional concealment can be avoided."53 Thus, a concealment, regardless of
actual intent to defraud, "is equivalent to a false representation." 54

This Court has long settled this equivalence. Argente v. West Coast Life
Insurance,55 quoting heavily from Joyce's The Law of Insurance, explained how
concealment of material facts in insurance contracts is tantamount to causal
fraud,56 deceptively inducing an insurer into "accepting the risk, or accepting it
at the rate of premium agreed upon."57Argente explained:

One ground for the rescission of a contract of insurance under the Insurance Act
is "a concealment," which in section 25 is defined as "A neglect to communicate
that which a party knows and ought to communicate." Appellant argues that the
alleged concealment was immaterial and insufficient to avoid the policy. We
cannot agree. . . . If the policy was procured by fraudulent representations, the
contract of insurance apparently set forth therein was never legally existent. It
can fairly be assumed that had the true facts been disclosed by the assured, the
insurance would never have been granted.

In Joyce, The Law of Insurance, second edition, volume 3, Chapter LV, is found
the following:

Concealment exists where the assured has knowledge of a fact material to the
risk, and honesty, good faith, and fair dealing requires that he should
communicate it to the assured, but he designedly and intentionally withholds the
same.

Another rule is that if the assured undertakes to state all the circumstances
affecting the risk, a full and fair statement of all is required.
It is also held that the concealment must, in the absence of inquiries, be not
only material, but fraudulent, or the fact must have been intentionally withheld;
so it is held under English law that if no inquiries are made and no fraud or
design to conceal enters into the concealment the contract is not avoided. And it
is determined that even though silence may constitute misrepresentation or
concealment it is not of itself necessarily so as it is a question of fact. Nor is
there a concealment justifying a forfeiture where the fact of insanity is not
disclosed no questions being asked concerning the same. . . .

But it would seem that if a material fact is actually known to the assured, its
concealment must of itself necessarily be a fraud, and if the fact is one which
the assured ought to know, or is presumed to know, the presumption of
knowledge ought to place the assured in the same position as in the former case
with relation to material facts; and if the jury in such cases find the fact
material, and one tending to increase the risk, it is difficult to see how the
inference of a fraudulent intent or intentional concealment can be avoided. And
it is declared that if a material fact is concealed by assured it is equivalent to a
false representation that it does not exist and that the essentials are the truth of
the representations whether they were intended to mislead and did insurer
accept them as true and act upon them to his prejudice. So it is decided that
under a stipulation voiding the policy for concealment or misrepresentation of
any material fact or if his interest is not truly stated or is other than the sole and
unconditional ownership the facts are unimportant that insured did not intend to
deceive or withhold information as to encumbrances even though no questions
were asked. And if insured while being examined for life insurance and knowing
that she had heart disease, falsely stated that she was in good health, and
though she could not read the application, it was explained to her and the
questions asked through an interpreter, and the application like the policy
contained a provision that no liability should be incurred unless the policy was
delivered while the insured was in good health, the court properly directed a
verdict for the insurer, though a witness who was present at the examination
testified that the insured was not asked whether she had heart disease.

....

The basis of the rule vitiating the contract in cases of concealment is that it
misleads or deceives the insurer into accepting the risk, or accepting it at the
rate of premium agreed upon; The insurer, relying upon the belief that the
assured will disclose every material fact within his actual or presumed
knowledge, is misled into a belief that the circumstance withheld does not exist,
and he is thereby induced to estimate the risk upon a false basis that it does not
exist. The principal question, therefore, must be, Was the assurer misled or
deceived into entering a contract obligation or in fixing the premium of insurance
by a withholding of material information or facts within the assured's knowledge
or presumed knowledge?
It therefore follows that the assurer in assuming a risk is entitled to know every
material fact of which the assured has exclusive or peculiar knowledge, as well
as all material facts which directly tend to increase the hazard or risk which are
known by the assured, or which ought to be or are presumed to be known by
him. And a concealment of such facts vitiates the policy. "It does not seem to be
necessary . . . that the . . . suppression of the truth should have been willful." If
it were but an inadvertent omission, yet if it were material to the risk and such
as the plaintiff should have known to be so, it would render the policy void. But
it is held that if untrue or false answers are given in response to inquiries and
they relate to material facts the policy is avoided without regard to the
knowledge or fraud of assured, although under the statute statements are
representations which must be fraudulent to avoid the policy. So under certain
codes the important inquiries are whether the concealment was willful and
related to a matter material to the risk.58 (Emphasis supplied)

Echoing Argente, Saturnino v. Philippine American Life Insurance Co.59 stated:

In this jurisdiction, a concealment, whether intentional or unintentional, entitles

the insurer to rescind the contract of insurance, concealment being defined as
"negligence to communicate that which a party knows and ought to
communicate" (Sections 25 & 26, Act No. 2427). In the case of Argente vs.
West Coast Life Insurance Co., 51 Phil. 725, 732, this Court said, quoting from
Joyce, The Law of Insurance, 2nd ed. Vol. 3:

The basis of the rule vitiating the contract in cases of concealment is that it
misleads or deceives the insurer into accepting the risk, or accepting it at the
rate of premium agreed upon. The insurer, relying upon the belief that the
assured will disclose every material fact within his actual or presumed
knowledge, is misled into a belief that the circumstance withheld does not exist,
and he is thereby induced to estimate the risk upon a false basis that it does not
exist.60

In Vda. de Canilang v. Court of Appeals,61 this Court considered an alternative

version of Section 27, i.e., prior to the Insurance Code's amendment by Batas
Pambansa Blg. 874, which omitted the qualifier "whether intentional or
unintentional." Vda. de Canilang clarified that even without this qualifier, Section
27 still covers '"any concealment' without regard to whether such concealment is
intentional or unintentional,"62 thus:

The Insurance Commissioner had also ruled that the failure of Great Pacific to
convey certain information to the insurer was not "intentional" in nature, for the
reason that Jaime Canilang believed that he was suffering from minor ailment
like a common cold. Section 27 of the Insurance Code of 1978 as it existed from
1974 up to 1985, that is, throughout the time range material for present
purposes, provided that:
Sec. 27. A concealment entitles the injured party to rescind a contract of
insurance.

The preceding statute, Act No. 2427, as it stood from 1914 up to 1974, had

provided:

Sec. 26. A concealment, whether intentional or unintentional, entitles the injured

party to rescind a contract of insurance.

Upon the other hand, in 1985, the Insurance Code of 1978 was amended by B.P.
Blg. 874. This subsequent statute modified Section 27 of the Insurance Code of
1978 so as to read as follows:

Sec. 27. A concealment whether intentional or unintentional entitles the injured

party to rescind a contract of insurance.

The unspoken theory of the Insurance Commissioner appears to have been that
by deleting the phrase "intentional or unintentional," the Insurance Code of 1978
(prior to its amendment by B.P. Blg. 874) intended to limit the kinds of
concealment which generate a right to rescind on the part of the injured party to
"intentional concealments." This argument is not persuasive. As a simple matter
of grammar, it may be noted that "intentional" and "unintentional" cancel each
other out. The net result therefore of the phrase "whether intentional or
unintentional" is precisely to leave unqualified the term "concealment."
Thus, Section 27 of the Insurance Code of 1978 is properly read as referring to
"any concealment" without regard to whether such concealment is intentional or
unintentional. The phrase "whether intentional or unintentional" was in fact
superfluous. The deletion of the phrase "whether intentional or unintentional"
could not have had the effect of imposing an affirmative requirement that a
concealment must be intentional if it is to entitle the injured party to rescind a
contract of insurance. The restoration in 1985 by B.P. Blg. 874 of the phrase
"whether intentional or unintentional" merely underscored the fact that all
throughout (from 1914 to 1985), the statute did not require proof that
concealment must be "intentional" in order to authorize rescission by the injured
party.63 (Emphasis supplied)

Following Vda. de Canilang, this Court was categorical in Sunlife Assurance Co.

of Canada v. Court of Appeals:64 '"good faith' is no defense in concealment." 65

I.B

It does not escape this Court's attention that there have been decisions that
maintained that in cases of concealment, "fraudulent intent on the part of the
insured must be established to entitle the insurer to rescind the
contract."66 However, these decisions proceed from an inordinately segregated
reading of Argente and have not been heedful of plain statutory text. While
focusing on the equivalence between concealment and false representation, they
fail to account for the manifest textual peculiarity whereby the negation of
distinctions between intentional and unintentional acts is found only in Section
27, the provision concerning rescission due to concealment, but not in the
counterpart provision concerning false representations. 67

Ng Gan Zee v. Asian Crusader Life,68 decided in 1983, stated:

Section 27 of the Insurance Law [Act 2427] provides:

Sec. 27. Such party to a contract of insurance must communicate to the other,
in good faith, all facts within his knowledge which are material to the contract,
and which the other has not the means of ascertaining, and as to which he
makes no warranty.

Thus, "concealment exists where the assured had knowledge of a fact material
to the risk, and honesty, good faith, and fair dealing requires that he should
communicate it to the assurer, but he designedly and intentionally withholds the
same."

It has also been held "that the concealment must, in the absence of inquiries, be
not only material, but fraudulent, or the fact must have been intentionally
withheld."

Assuming that the aforesaid answer given by the insured is false, as claimed by
the appellant. Sec. 27 of the Insurance Law, above-quoted, nevertheless
requires that fraudulent intent on the part of the insured be established to
entitle the insurer to rescind the contract. And as correctly observed by the
lower court, "misrepresentation as a defense of the insurer to avoid liability is an
'affirmative' defense. The duty to establish such a defense by satisfactory and
convincing evidence rests upon the defendant. The evidence before the Court
does not clearly and satisfactorily establish that defense." 69 (Emphasis supplied)

Ng Gan Zee makes a fundamental error in interpretation.

Ng Gan Zee's fourth footnote purports that the phrase quoted in the italicized
paragraph was from Argente.70 While the phrase indeed appears in Argente, it is
not Argente itself which stated the quoted phrase; rather, it was Joyce's The Law
of Insurance.

In any case, Ng Gan Zee limited itself to a brief quote from Joyce. It discarded
much of the discussion that Argente lifted from Joyce. Most notably, it discarded
the portion where Joyce explained that concealment is necessarily fraudulent
when the matter that was concealed is "a material fact . . . actually known to
the [insured]."71 Thus, Ng Gan Zee omitted the discussion explaining and
accounting for why proof of actual fraudulent intent may be dispensed with in
cases of concealment, i.e., that concealment of material facts is fraudulent in
and of itself. Contrast this with Saturnino which, though also quoting only briefly
from Argente and Joyce, did not cursorily focus on the equivalence between
concealment and false representations, but rather on the underlying reason for
this equivalence. Ng Gan Zee focused on the result, i.e., equivalence, without
accounting for the cause.

In like manner as Ng Gan Zee, Great Pacific Life v. Court of Appeals72 stated:

The second assigned error refers to an alleged concealment that the petitioner
interposed as its defense to annul the insurance contract. Petitioner contends
that Dr. Leuterio failed to disclose that he had hypertension, which might have
caused his death. Concealment exists where the assured had knowledge of a
fact material to the risk, and honesty, good faith, and fair dealing requires that
he should communicate it to the assured, but he designedly and intentionally
withholds the same.

....

The fraudulent intent on the part of the insured must be established to entitle
the insurer to rescind the contract. Misrepresentation as a defense of the insurer
to avoid liability is an affirmative defense and the duty to establish such defense
by satisfactory and convincing evidence rests upon the insurer. In the case at
bar, the petitioner failed to clearly and satisfactorily establish its defense, and is
therefore liable to pay the proceeds of the insurance. 73 (Emphasis supplied)

So too, Philamcare Health Systems, Inc. v. Court of Appeals74 stated:

The fraudulent intent on the part of the insured must be established to warrant
rescission of the insurance contract. Concealment as a defense for the health
care provider or insurer to avoid liability is an affirmative defense and the duty
to establish such defense by satisfactory and convincing evidence rests upon the
provider or insurer.75 (Emphasis supplied)

Great Pacific Life and Philamcare perpetuate Ng Gan Zee's unfortunate error.

Of the two (2) paragraphs this Court quoted from Great Pacific Life, the first
cites Argente.76 Much like Ng Gan Zee, it quotes an isolated portion of Joyce but
fails to account for that part of Joyce's discussion that explains how fraud
inheres in concealment. The last sentence in this first quoted paragraph merely
reproduces the first paragraph that Argente lifted from Joyce. The second quoted
paragraph cites Ng Gan Zee77 and confounds concealment with
misrepresentation.

The first sentence of the quoted paragraph from Philamcare cites Great Pacific

Life and Ng Gan Zee.78 At this juncture, a contagion of Ng Gan Zee's error can
be observed.
More than misreading Argente and Joyce, Ng Gan Zee, Great Pacific Life,
and Philamcare contradict Section 27's plain text. The statute's clear and
unmistakable text must prevail. For purposes of rescission, Section 27 of the
Insurance Code unequivocally negates any distinction between intentional and
unintentional concealments. Pronouncements in jurisprudence cannot undermine
this explicit legislative intent.

I.C

While Insular Life correctly reads Section 27 as making no distinction between

intentional and unintentional concealment, it erroneously pleads Section 27 as
the proper statutory anchor of this case.

The Insurance Code distinguishes representations from concealments. Chapter

1, Title 4 is on concealments. It spans Sections 26 to 35 of the Insurance
Code;79 it is where Section 27 is found. Chapter 1, Title 5 is on representations.
It spans Sections 36 to 48 of the Insurance Code. 80

Section 26 defines concealment as "[a] neglect to communicate that which a

party knows and ought to communicate." However, Alvarez did not withhold
information on or neglect to state his age. He made an actual declaration and
assertion about it.

What this case involves, instead, is an allegedly false representation. Section 44

of the Insurance Code states, "A representation is to be deemed false when the
facts fail to correspond with its assertions or stipulations." If indeed Alvarez
misdeclared his age such that his assertion fails to correspond with his factual
age, he made a false representation, not a concealment.

At no point does Chapter 1, Title 5 of the Insurance Code replicate Section 27's
language negating the distinction between intentional and unintentional
concealment. Section 45 is Chapter 1, Title 5's counterpart provision to Section
27, and concerns rescission due to false representations. It reads:

Section 45. If a representation is false in a material point, whether affirmative or

promissory, the injured party is entitled to rescind the contract from the time
when the representation becomes false.

Not being similarly qualified as rescission under Section 27, rescission under
Section 45 remains subject to the basic precept of fraud having to be proven by
clear and convincing evidence. In this respect, Ng Gan Zee's and similar cases'
pronouncements on the need for proof of fraudulent intent in cases of
misrepresentation are logically sound, albeit the specific reference to Argente as
ultimate authority is misplaced. Thus, while Great Pacific Life confounded
concealment with misrepresentation by its citation of Ng Gan Zee, it
nevertheless acceptably stated that:
The fraudulent intent on the part of the insured must be established to entitle
the insurer to rescind the contract. Misrepresentation as a defense of the insurer
to avoid liability is an affirmative defense and the duty to establish such defense
by satisfactory and convincing evidence rests upon the insurer. 81

Conformably, subsequent fraud cases citing Great Pacific Life which do not

exclusively concern concealment rightly maintain that "[f]raudulent intent on the
part of the insured must be established to entitle the insurer to rescind the
contract."82 To illustrate, Manila Bankers Life Insurance Corp. v. Aban83 was
correct in explaining:

With the above crucial finding of fact — that it was Sotero who obtained the
insurance for herself — petitioner's case is severely weakened, if not totally
disproved. Allegations of fraud, which are predicated on respondent's alleged
posing as Sotero and forgery of her signature in the insurance application, are at
once belied by the trial and appellate courts' finding that Sotero herself took out
the insurance for herself. "Fraudulent intent on the part of the insured must be
established to entitle the insurer to rescind the contract." In the absence of
proof of such fraudulent intent, no right to rescind arises.84

Concealment applies only with respect to material facts. That is, those facts
which by their nature would clearly, unequivocally, and logically be known by the
insured as necessary for the insurer to calculate the proper risks.

The absence of the requirement of intention definitely increases the onus on the
insured. Between the insured and the insurer, it is true that the latter may have
more resources to evaluate risks. Insurance companies are imbued with public
trust in the sense that they have the obligation to ensure that they will be able
to provide succor to those that enter into contracts with them by being both
frugal and, at the same time, diligent in their assessment of the risk which they
take with every insurance contract. However, even with their tremendous
resources, a material fact concealed by the insured cannot simply be considered
by the insurance company. The insurance company may have huge resources,
but the law does not require it to be omniscient.

On the other hand, when the insured makes a representation, it is incumbent on

them to assure themselves that a representation on a material fact is not false;
and if it is false, that it is not a fraudulent misrepresentation of a material fact.
This returns the burden to insurance companies, which, in general, have more
resources than the insured to check the veracity of the insured's beliefs as to a
statement of fact. Consciousness in defraudation is imperative and it is for the
insurer to show this.

There may be a mistaken impression, on the part of the insured, on the extent
to which precision on one's age may alter the calculation of risks with
definitiveness. Deliberation attendant to an apparently inaccurate declaration is
vital to ascertaining fraud.
 I.D

Spouses Manalo v. Roldan-Confesor85 explained what qualifies as clear and

convincing proof:

Clear and convincing proof is ". . . more than mere preponderance, but not to
extent of such certainty as is required beyond reasonable doubt as in criminal
cases . . ."while substantial evidence ". . . consists of more than a mere scintilla
of evidence but may be somewhat less than a preponderance . . ."
Consequently, in the hierarchy of evidentiary values, We find proof beyond
reasonable doubt at the highest level, followed by clear and convincing evidence,
preponderance of evidence, and substantial evidence, in that order. 86

The assailed Court of Appeals May 21, 2013 Decision discussed the evidentiary
deficiency in Insular Life's cause, i.e., how it relied on nothing but a single piece
of evidence to prove fraudulent intent:

At bar, Insular Life basically relied on the Health Statement form personally
accomplished by Jose Alvarez wherein he wrote that his birth year was 1942.
However, such form alone is not sufficient absent any other indications that he
purposely wrote 1942 as his birth year. It should be pointed out that, apart from
a health statement form, an application for insurance is required first and
foremost to be answered and filled-up. However, the records are deficient of this
application which would eventually depict to Us Jose Alvarez's fraudulent intent
to misrepresent his age. For, if he continually written (sic) 1942 in all the
documents he submitted with UBP and Insular Life then there is really a clear
precursor of his fraudulent intent. Otherwise, a mere Health Statement form
bearing a wrong birth year should not be relied at.

As aptly pointed out by the court a quo:

....

If the defendant Insular Life had any doubt about the information, particularly
the data which are material to the risk, such as the age of the insured, which
defendant Union Bank provided, it is not justified for the insurer to rely solely
therefrom, but it is obligated under the circumstances to make further
inquiry. . . .87

The Court of Appeals' observations are well-taken. Consistent with the

requirement of clear and convincing evidence, it was Insular Life's burden to
establish the merits of its own case. Relative strength as against respondents'
evidence does not suffice.

A single piece of evidence hardly qualifies as clear and convincing. Its contents
could just as easily have been an isolated mistake.
Alvarez must have accomplished and submitted many other documents when he
applied for the housing loan and executed supporting instruments like the
promissory note, real estate mortgage, and Group Mortgage Redemption
Insurance. A design to defraud would have demanded his consistency. He
needed to maintain appearances across all documents. Otherwise, he would
doom his own ruse.

He needed to have been consistent, not only before Insular Life, but even before
UnionBank. Even as it was only Insular Life's approval that was at stake with the
Group Mortgage Redemption Insurance, Alvarez must have realized that as it
was an accessory agreement to his housing loan with UnionBank. Insular Life
was well in a position to verify information, whether through simple cross
referencing or through concerted queries with UnionBank.

Despite these circumstances, the best that Insular Life could come up with
before the Regional Trial Court and the Court of Appeals was a single document.
The Court of Appeals was straightforward, i.e., the most basic document that
Alvarez accomplished in relation to Insular Life must have been an insurance
application form. Strangely, Insular Life failed to adduce even this document—a
piece of evidence that was not only commonsensical, but also one which has
always been in its possession and disposal.

Even now, before this Court, Insular Life has been unable to address the
importuning for it to account for Alvarez's insurance application form. Given the
basic presumption under our rules on evidence "[t]hat evidence willfully
suppressed would be adverse if produced,"88 this raises doubts, perhaps not
entirely on Insular Life's good faith, but, at the very least, on the certainty and
confidence it has in its own evidence.

Rather than demonstrate Alvarez's consistent fraudulent design, Insular Life

comes before this Court pleading nothing but just one other instance when
Alvarez supposedly declared himself to have been 55 years old. It claims that it
did not rely solely on Alvarez's Health Statement Form but also on his
Background Checking Report.89

Reliance on this report is problematic. It was not prepared by Alvarez himself.

Rather, it was accomplished by a UnionBank employee following the conduct of
credit investigation. Insular Life notes a statement by UnionBank's Josefina
Barte that all information in the Background Checking Report was supplied by
Alvarez.90 But this is a self-serving statement, wholly reliant on the assumption
of that employee's flawless performance of her duty to record findings. Precisely,
it is a claim that needed to be vetted. It had to be tested under the crucible of a
court trial, that is, through the rigors of presentation and authentication of
evidence, cross-examination, and personal perusal by a judge. Yet, Insular Life
would now have this Court sustain its appreciation, solely on the strength of its
own representations.
An erroneous statement's dual occurrence in the Health Statement Form and the
Background Checking Report concededly reduces the likelihood of honest
mistakes or overlooked inaccuracies. However, in the context of so many other
documents being available to ascertain the error, a mere dual occurrence does
not definitively establish a fraudulent scheme. This is especially so when the
errors could not be directly and exclusively attributed to a single author.

Pleading just one (1) additional document still fails to establish the consistent
fraudulent design that was Insular Life's burden to prove by clear and convincing
evidence. Insular Life had all the opportunity to demonstrate Alvarez's pattern of
consistently indicating erroneous entries for his age. All it needed to do was to
inventory the documents submitted by Alvarez and note the statements he
made concerning his age. This was not a cumbersome task, yet it failed at it. Its
failure to discharge its burden of proving must thwart its plea for relief from this
Court.

II

Having settled Insular Life's continuing liability under the Group Mortgage
Redemption Insurance, this Court proceeds to the matter of the propriety of
UnionBank's foreclosure.

UnionBank insists that the real estate mortgage is a contract separate and
distinct from the Group Mortgage Redemption Insurance; thus, it should not be
affected by the validity or invalidity of Insular Life's rescission. 91 It also
cites Great Pacific Life, which it claims involves a similar set of facts as this case,
and underscores how this Court in that case did not nullify the foreclosure
despite a finding that the rescission was improper, but instead considered the
foreclosure as a supervening event. 92

Great Pacific Life similarly involved an insurer's rescission of a mortgage

redemption insurance on account of a supposed concealment. This Court
sustained the lower courts' conclusions holding the rescission invalid and
maintaining the insurer's liability to pay the mortgage. However, this Court
considered the foreclosure, which in the interim had been completed, as a
supervening event. Ruling on the basis of equity, this Court concluded that the
insurance proceeds, which should have been paid to the mortgagee, were now
due to the heirs of the insured:

However, we noted that the Court of Appeals' decision was promulgated on May
17, 1993. In private respondent's memorandum, she states that DBP foreclosed
in 1995 their residential lot, in satisfaction of mortgagor's outstanding loan.
Considering this supervening event, the insurance proceeds shall inure to the
benefit of the heirs of the deceased person or his beneficiaries. Equity dictates
that DBP should not unjustly enrich itself at the expense of another (Nemo cum
alterius detrimenio protest). Hence, it cannot collect the insurance proceeds,
after it already foreclosed on the mortgage. The proceeds now rightly belong to
Dr. Leuterio's heirs represented by his widow, herein private respondent
Medarda Leuterio.93

Maglaque v. Planters Development Bank94 sustained a mortgagor's right to

foreclose in the event of a mortgagee's death:

[T]he rule is that a secured creditor holding a real estate mortgage has three (3)
options in case of death of the debtor. These are:

(1) to waive the mortgage and claim the entire debt from the estate of the mortgagor as an ordinary claim;
(2) to foreclose the mortgage judicially and prove any deficiency as an ordinary claim; and
(3) to rely on the mortgage exclusively, foreclosing the same at anytime before it is barred by prescription,
without right to file a claim for any deficiency.95

This is in keeping with Rule 86, Section 7 of the Rules of Court, which states:

Section 7. Mortgage debt due from estate. — A creditor holding a claim against
the deceased secured by mortgage or other collateral security, may abandon the
security and prosecute his claim in the manner provided in this rule, and share
in the general distribution of the assets of the estate; or he may foreclose his
mortgage or realize upon his security, by action in court, making the executor or
administrator a party defendant, and if there is a judgment for a deficiency,
after the sale of the mortgaged premises, or the property pledged, in the
foreclosure or other proceeding to realize upon the security, he may claim his
deficiency judgment in the manner provided in the preceding section; or he may
rely upon his mortgage or other security alone, and foreclose the same at any
time within the period of the statute of limitations, and in that event he shall not
be admitted as a creditor, and shall receive no share in the distribution of the
other assets of the estate; but nothing herein contained shall prohibit the
executor or administrator from redeeming the property mortgaged or pledged,
by paying the debt for which it is held as security, under the direction of the
court, if the court shall adjudge it to be for the best interest of the estate that
such redemption shall be made.

While the mortgagee's right to proceed with foreclosure is settled, this Court
finds the debacle at the heart of this case to have been borne in large, if not
equal measure, by UnionBank's oversight. UnionBank contributed to setting in
motion a course of events that culminated in the unjust foreclosure of Alvarez's
mortgaged lot. As such a contributor, its profiting from the wrongful foreclosure
cannot be condoned.

The Regional Trial Court explained how UnionBank was remiss:

If at the time of the application, Jose H. Alvarez appears disqualified, and the
personnel of the bank is mindful of his duties, then the personnel of the bank
will immediately tell the late Jose H. Alvarez [that] he is not qualified. As it
would appear in this case, there is nothing to show nor indicate that the late
Jose H. Alvarez exhibited any fraudulent intent when the bank was given certain
data such as his age and date of birth. The bank is already in its possession
sufficient materials to inform itself regarding the true and actual age, civil status
and other personal circumstances of Jose Alvarez to merit approval of the loan
applied for. It was the same informative materials from which the defendant
Union Bank lifted the data it provided the defendant Insular Life for the
consummation of the insurance contract, without which, the bank would not
have favorably approved the loan.96

These observations are well-taken.

Great Pacific Life, in considering the insurable interest involved in a mortgage

redemption insurance, discussed:

To resolve the issue, we must consider the insurable interest in mortgaged

properties and the parties to this type of contract. The rationale of a group
insurance policy of mortgagors, otherwise known as the "mortgage redemption
insurance," is a device for the protection of both the mortgagee and the
mortgagor. On the part of the mortgagee, it has to enter into such form of
contract so that in the event of the unexpected demise of the mortgagor during
the subsistence of the mortgage contract, the proceeds from such insurance will
be applied to the payment of the mortgage debt, thereby relieving the heirs of
the mortgagor from paying the obligation. In a similar vein, ample protection is
given to the mortgagor under such a concept so that in the event of death; the
mortgage obligation will be extinguished by the application of the insurance
proceeds to the mortgage indebtedness.97 (Emphasis supplied)

The Regional Trial Court was correct in emphasizing that Alvarez entered into
the Group Mortgage Redemption Insurance entirely upon UnionBank's prodding.
Bank clients are generally unaware of insurance policies such as a mortgage
redemption insurance unless brought to their knowledge by a bank. The
processing of a mortgage redemption insurance was within UnionBank's regular
course of business. It knew the import of truthfully and carefully accomplished
applications. To facilitate the principal contract of the loan and its accessory
obligations such as the real estate mortgage and the mortgage redemption
insurance, UnionBank completed credit appraisals and background checks. Thus,
the Regional Trial Court was correct in noting that UnionBank had been in
possession of materials sufficient to inform itself of Alvarez's personal
circumstances.98

UnionBank was the indispensable nexus between Alvarez and Insular Life. Not
only was it well in a position to address any erroneous information transmitted
to Insular Life, it was also in its best interest to do so. After all, payments by the
insurer relieve it of the otherwise burdensome ordeal of foreclosing a mortgage.
This is not to say that UnionBank was the consummate guardian of the veracity
and accuracy of Alvarez's representations. It is merely to say that given the
circumstances, considering Insular Life's protestation over supposedly false
declarations, UnionBank was in a position to facilitate the inquiry on whether or
not a fraudulent design had been effected. However, rather than actively
engaging in an effort to verify, it appears that UnionBank stood idly by, hardly
bothering to ascertain if other pieces of evidence in its custody would attest to or
belie a fraudulent scheme.

UnionBank approved Alvarez's loan and real estate mortgage, and endorsed the
mortgage redemption insurance to Insular Life. Fully aware of considerations
that could have disqualified Alvarez, it nevertheless acted as though nothing was
irregular. It itself acted as if, and therefore represented that, Alvarez was
qualified. Yet, when confronted with Insular Life's challenge, it readily
abandoned the stance that it had earlier maintained and capitulated to Insular
Life's assertion of fraud.

UnionBank's headlong succumbing casts doubt on its own confidence in the

information in its possession. This, in turn, raises questions on the soundness of
the credit investigation and background checks it had conducted prior to
approving Alvarez' loan.

In Poole-Blunden v. Union Bank of the Philippines,99 this Court emphasized that

the high degree of diligence required of banks "equally holds true in their dealing
with mortgaged real properties, and subsequently acquired through
foreclosure."100 It specifically drew attention to this requisite high degree of
diligence in relation to "[c]redit investigations [which] are standard practice for
banks before approving loans."101

The foreclosure here may well be a completed intervening occurrence, but Great

Pacific Life's leaning to an irremediable supervening event cannot avail. What is
involved here is not the mortgagor's medical history, as in Great Pacific Life,
which the mortgagee bank was otherwise incapable of perfectly ascertaining.
Rather, it is merely the mortgagor's age. This information was easily available
from and verifiable on several documents. UnionBank's passivity and
indifference, even when it was in a prime position to enable a more
conscientious consideration, were not just a cause of Insular Life's rescission
bereft of clear and convincing proof of a design to defraud, but also, ultimately,
of the unjust seizure of Alvarez's property. By this complicity, UnionBank cannot
be allowed to profit. Its foreclosure must be annulled.

WHEREFORE, the Petitions are DENIED. The assailed Court of Appeals May 21,
2013 Decision and November 6, 2013 Resolution in CA G.R. CV No. 91820
are AFFIRMED.

Petitioners Union Bank of the Philippines and The Insular Life Assurance Co., Ltd.
are ordered to comply with the insurance undertaking under Mortgage
Redemption Insurance Policy No. G-098496 by applying its proceeds as payment
of the outstanding loan obligation of deceased Jose H. Alvarez with respondent
Union Bank of the Philippines;

The extrajudicial foreclosure of the real estate mortgage over Jose H. Alvarez's
TCT No. C-315023 is declared null and without legal force and effect;

Petitioner Union Bank of the Philippines is ordered to reconvey the title and
ownership over the lot covered by TCT No. C-315023 to the Estate of the
deceased Jose H. Alvarez for the benefit of his heirs and successors-in-interest;
and

Petitioners Union Bank of the Philippines and The Insular Life Assurance Co., Ltd.
are ordered to jointly and severally pay respondents the Heirs of Jose H. Alvarez
attorney's fees and the costs of suit.

SO ORDERED.

G.R. No. 182307, June 06, 2018

BELINA CANCIO AND JEREMY PAMPOLINA, Petitioners, v. PERFORMANCE

FOREIGN EXCHANGE CORPORATION, Respondent.

DECISION

LEONEN, J.:

When a party assails a lower court's appreciation of the evidence, that party
raises a question of fact that cannot be entertained in a petition for review filed
under Rule 45 of the Rules of Court.

This is a Petition for Review on Certiorari 1 assailing January 31, 2008

Decision2 and March 31, 2008 Resolution3 of the Court of Appeals, which
overturned the Regional Trial Court July 15, 2006 Decision. The Regional Trial
Court found Performance Foreign Exchange Corporation (Performance Forex)
solidarity liable with broker Rolando Hipol (Hipol) for unauthorized trade
transactions he made on Belina Cancio (Cancio) and Jeremy Pampolina's
(Pampolina) joint trading account. The Court of Appeals, however, absolved
Performance Forex from any liability.

Performance Forex is a corporation operating as a financial broker/agent

between market participants in foreign exchange transactions.4

Foreign currency exchange trading or forex trading is the speculative trade of

foreign currency for the sole purpose of gaining profit from the change in
prices.5 The forex market is a "global, decentralized," and essentially "an over-
the-counter (OTC) market where the different currency trading locations around
the globe electronically form a unified, interconnected market entity." 6

Unlike a stock exchange market where the opening and closing of trades rely on
only one (1) or two (2) time zones, a forex market may have overlapping time
zones. Foreign currency, due to its decentralized nature, may be traded in
different financial markets.7 For instance, trading currency using US dollars
would not depend on the business or banking hours only of financial institutions
in the United States.8

Traders are drawn to the forex market since the price of currency constantly
fluctuates. The value of a foreign currency is determined by international capital
flow or the "movement of money from one currency to another." 9 International
capital flow is caused by a number of factors, among which are "a country's
interest rates, inflation situation, [Gross Domestic Product] growth,
employment, trade balance, and other barometers of economic health." 10

Currencies are traded in pairs by speculating the value of one currency against
another.11 One currency, usually the US dollar,12 is considered the "base
currency" while the other currency is a "quote or counter currency." 13 If a trader
speculates that the base currency will be stronger than the counter currency, the
trader will sell the base currency to buy more counter currency. If the trader
speculates that the base currency will be weaker than the counter currency, then
the trader will sell the counter currency to buy more of the base currency. 14 For
example, if a trader speculates that the US dollar will rise in value as against the
Philippine peso, the trader will sell dollars to acquire more pesos. If the trader
speculates that the dollar will weaken against the peso, the trader will sell pesos
to acquire more dollars.

In a standard forex trade, a trader would "open a position" by buying or selling a

certain amount of a particular currency based on its value against the US dollar.
The trader would then hold on to this particular currency until its value
appreciates or depreciates. Once the value changes, the trader then "closes
position" by selling this currency at a higher price or buying it at a lower price;
hence, earning a profit.15 If the trader sells when the value depreciates or buys
when the value appreciates, the trader suffers a loss. Losses, however, are only
realized when the traders close their positions.16

The participants in a forex market are banks, hedge funds, investment firms,
and individual retail traders.17 Unlike banks, hedge funds, and investment firms
that have significant amounts of capital to engage in trade, individual retail
traders often make use of brokers, who "serve as an agent of the customer in
the broader [foreign currency exchange] market, by seeking the best price in
the market for a retail order and dealing on behalf of the retail
customer."18 Individual retail traders also rely on "leverage trading," where
traders can open margin accounts with a financial broker or agent to make use
of that broker or agent's credit line to engage in trade. 19
A margin account is an account where the broker-dealer lends money to the
trader to purchase currency, using the same purchased currency as
collateral.20 Returns will be proportional to the amount deposited.21 Leverage is
determined by the amount that the trader is required to deposit. If a trader has
to deposit US$1,000.00 into a margin account to trade US$100,000.00 in
currency, the margin account has a leverage of 100 to 1.22 This system allows
the trader to control more money in the market than what was originally
deposited.23

Individual retail traders make use of leverage trading and margin accounts since
price movements are usually miniscule. A "pip" is "the smallest unit of price
movement in the exchange rate of a currency pair."24 The goal of every trader in
foreign currency exchange is to earn pips. To underscore how miniscule
expected profits are, pips commonly refer to the price movement of
the fourth decimal place of major currencies. 25 Miniscule price movements, thus,
require large amounts of capital for them to have significant impact on the
profits to be earned.

For example, the current Philippine peso equivalent of one (1) Japanese yen is
P0.4830.26 A pip would be a change from P0.4830 to 0.4831. A P0.0001 price
movement in the purchase of one (1) Japanese yen may not exactly have a
significant effect but when multiplied by a hundred, it will actually mean a
P48.31 increase for every trader betting on the rise of the yen and a P48.31
decrease for those expecting a rise in peso prices. Leverage trading can
substantially magnify profits. Considering, however, that leverage trading is
essentially trade using borrowed money, leverage trading can magnify losses
just as much. Forex trade is, thus, considered a lucrative but risky endeavor
since every trade multiplies profit and loss by a much higher rate than what was
originally invested.

Sometime in 2000, Cancio and Pampolina accepted Hipol's invitation to open a

joint account with Performance Forex. Cancio and Pampolina deposited the
required margin account deposit of US$10,000.00 for trading. The parties
executed an application for the opening of a joint account, 27 with a trust/trading
facilities agreement28 between Performance Forex, and Cancio and Pampolina.
They likewise entered into an agreement for appointment of an agent 29 between
Hipol, and Cancio and Pampolina.30 They agreed that Cancio and Pampolina
would make use of Performance Forex's credit line to trade in the forex market
while Hipol would act as their commission agent and would deal on their behalf
in the forex market.

The trust/trading facilities agreement between Performance Forex, and Cancio

and Pampolina provided:
6. Orders

You hereby irrevocably authorize us to act upon any instructions, whether in

writing, by cable, telex, facsimile or telephone given or purported to be given by
you or your agent or representative which appear whether on their respective
faces (in the case of writing, cable, telex or facsimile) or otherwise to be
bonafide. We shall not be responsible and you shall indemnify us for any losses
incurred as a result of acting upon such instructions should there in fact be any
error commission ambiguities or other irregularities therein or therewith.

....

Commission Agent

You acknowledge and agree that the commission agent (one Mr/Ms Ronald (sic)
M. Hipol) who introduced you to us in connection with this Facility is your agent
and we are in no way responsible for his actions or any warranties or
representations he may have made (whether expressly on our behalf or not) and
that pursuant to his having introduced you to us, we will (if you accept this
Facility) pay him a commission based on your trading with us (details of which
will be applied to you on request). Should you choose to also vest in him trading
authority on your behalf please do so only after considering the matter carefully,
for we shall not be responsible nor liable for any abuse of the authority you may
confer on him. This will be regarded strictly as a private matter between you and
him. You further acknowledge that for our own protection and commercial
purpose you are aware of the terms of the trading agreement between the
commission agent and ourselves where the commission agent is to trade for
you.31
All parties agreed that the trading would only be executed by Cancio and
Pampolina, or, upon instructions to their agent, Hipol. The trading orders to
Hipol would be coursed through phone calls from Cancio and Pampolina.32

From March 9, 2000 to April 4, 2000, Cancio and Pampolina earned

US$7,223.98. They stopped trading for more or less two (2) weeks, after which,
however, Cancio again instructed Hipol to execute trading currency orders.
When she called to close her position, Hipol told her that he would talk to her
personally.33

Cancio later found out that Hipol never executed her orders. Hipol confessed to
her that he made unauthorized transactions using their joint account from April
5, 2000 to April 12, 2000. The unauthorized transactions resulted in the loss of
all their money, leaving a negative balance of US$35.72 in their Statement of
Account. Cancio later informed Pampolina about the problem. 34

Pampolina met with two (2) Performance Forex officers, Dave Almarinez and Al
Reyes, to complain about Hipol's unauthorized trading on their account and to
confront them about his past unauthorized trades with Performance Forex's
other client,35 Justine Dela Rosa.36 The officers apologized for Hipol's actions and
promised to settle their account. However, they stayed quiet about Hipol's past
unauthorized trading.37

Performance Forex offered US$5,000.00 to settle the matter but Cancio and
Pampolina rejected this offer. Their demand letters to Hipol were also
unheeded.38 Thus, they filed a Complaint39 for damages against Performance
Forex and Hipol before the Regional Trial Court of Mandaluyong City.

Hipol was declared in default. Since the parties were unable to come to a
settlement, trial commenced.40

During trial, Performance Forex's General Manager for Sales and Marketing
Jonathan Reyes Ocampo (Ocampo) testified that clients could trade through two
(2) types of brokers. The first type is the independent broker, or one who is
already experienced in trading and merely attends Performance Forex's
orientation trainings to know its policies and regulations. The second type is an
in-house broker or business relations officer, who is new to the business and has
to be supervised by the sales and marketing managers. He stated that Hipol was
an Investment Portfolio Manager, or an independent broker who not only
provided information from financial experts but also executed orders on behalf of
the clients.41

Performance Forex Senior Manager Gabriel Erazo (Erazo) added that in-house
brokers usually cater to walk-in clients and are stationed in the company
premises while independent brokers, like Hipol, seek clients and introduce them
to the company.42

Ocampo likewise testified that clients must first sign a Purchase Order Form
before Performance Forex could authorize an order transaction. Every
transaction must have its own Purchase Order Form.43 Erazo confirmed that
dealings were still done manually at the time of the questioned transactions, and
that clients or agents must submit an actual signed Purchase Order Form. 44

Ocampo confirmed that they paid a "goodwill offer," i.e. the return of the
broker's commission, to their client Justine Dela Rosa for Hipol's alleged
unauthorized transactions. He also testified that Hipol's accreditation had to be
cancelled after Pampolina complained against him to protect the reputation of
the company.45

On July 15, 2006, the Regional Trial Court rendered its Decision 46 finding
Performance Forex and Hipol solidarity liable to Cancio and Pampolina for
damages.

According to the Regional Trial Court, Performance Forex should have disclosed
to Cancio and Pampolina that Hipol made similar unauthorized trading activities
in the past, which could have affected their consent to Hipol's appointment as
their agent. It also noted that innocent third persons should not be prejudiced
due to Performance Forex's failure to adopt the necessary measures to prevent
unauthorized trading by its agents.47 The dispositive portion of the Regional Trial
Court July 15, 2006 Decision read:
ACCORDINGLY, judgment is hereby rendered in favor of the plaintiffs and
against the defendants PERFORMANCE FOREIGN EXCHANGE CORPORATION and
ROLANDO HIPOL. Both defendants are jointly and severally liable to pay the
plaintiffs the following:

a. the amount of US$17,223.98 or its peso equivalent plus legal interest from
the filing of the complaint until the whole obligation is fully paid.

b. the amount of Php50,000.00 as attorney's fees; Php100,000.00 moral

damages and Php100,000.00 exemplary damages.

c. cost of suit

SO ORDERED.48
Performance Forex appealed this Decision to the Court of Appeals, arguing that
it had adequate safeguards concerning dealings with commission agents, and
that it was Cancio and Pampolina who vested Hipol with "broad powers to
conduct trading on their behalf."49

On January 31, 2008, the Court of Appeals rendered its Decision50 granting the
appeal.

According to the Court of Appeals, Performance Forex was a trading facility that
acted only on whatever their clients or their representatives would order. It was
not privy to anything that happened between its clients and their
representatives.51 It found that Cancio admitted to giving Hipol pre-signed
authorizations to trade; hence, Performance Forex relied on these orders and on
Hipol's designation as their agent to facilitate the trades from April 5, 2000 to
April 9, 2000.52

The Court of Appeals likewise found that Performance Forex's non disclosure of
Hi pol's prior unauthorized transactions with another client was irrelevant since
he was an independent broker who was not employed with Performance Forex.
Thus, Performance Forex had no legal duty to disclose any prior misconduct to
its clients. It also noted that the trust/trading facilities agreement between
Cancio and Pampolina, and Performance Forex contained a provision freeing
itself from any liability from losses incurred by acting on the instructions of its
clients or their authorized representatives. Thus, the Court of Appeals concluded
that Cancio and Pampolina's action should only be against Hipol.53 The
dispositive portion of the Court of Appeals January 31, 2008 Decision read:
WHEREFORE, the appeal is hereby GRANTED. Appellant Performance Foreign
Exchange Corporation is hereby released from liability.

SO ORDERED.54
Cancio and Pampolina moved for reconsideration but were denied by the Court
of Appeals in its March 31, 2008 Resolution.55 Hence, this Petition56 was filed
before this Court.

Petitioners Cancio and Pampolina argue that bonafide transactions in respondent

Performance Forex's facility depends on signed purchase order forms from
clients. They allege that there were only 10 purchase order forms signed by
petitioner Cancio and yet respondent executed 29 transactions on their account,
in clear breach of its assurance that only bonafide transactions would be
honored.57 They likewise point out that respondent was aware of similar
unauthorized transactions by Hipol in the past and even settled the complaint
against him, but respondent neglected to inform petitioners about them, thus,
failing to observe the degree of care, precaution, and vigilance for the protection
of petitioners' interests.58 They claim that in view of respondent's bad faith and
breach of its contractual obligations, it is liable for actual damages, exemplary
damages, and moral damages with attorney's fees.59

Respondent counters that it was unnecessary to examine other purchase order

forms since "petitioners' cause of action against respondent is grounded on
defendant Hipol's purported unauthorized trading transactions which occurred
during the period 4 to 12 April 2000 and no other."60 It likewise insists that it
cannot be held liable for damages caused by Hipol considering that it is not
Hipol's employer and that any losses suffered were due to "the very broad and
vast powers"61 that petitioners gave him to transact on their behalf. It also
points out that according to the trust/trading facilities agreement, petitioners
agreed that respondent would not be responsible for any act, warranty, or
representation made by their agent on their behalf; thus, it cannot be held liable
for any damages claimed.62

Respondent asserts that the Petition should be dismissed outright since

petitioners failed to attach the necessary documents to support their Petition. It
also submits that the Petition raises questions of fact by asking this Court to
examine the probative value of the evidence introduced before the Regional Trial
Court and the Court of Appeals.63

Petitioners, on the other hand, counter that there was substantial compliance by
their subsequent submission of the required documents. 64 They claim that they
only raise questions of law since the facts have been settled. What they argue is
merely the Court of Appeals' application of the law given the facts of the case. 65

From the arguments of the parties, this Court is asked to resolve the issue of
whether or not respondent Performance Forex Exchange Corporation should be
held solidarity liable with petitioners Belina Cancio and Jeremy Pampolina's
broker, Hipol, for damages due to the latter's unauthorized transactions in the
foreign currency exchange trading market. Before this issue can be resolved,
this Court must first pass upon the procedural issues of whether or not the
Petition should be dismissed for petitioners' failure to attach necessary
pleadings, and whether or not the Petition raises questions of fact.

The failure to attach material portions of the record will not necessarily cause
the outright dismissal of the petition. While Rule 45, Section 4 of the Rules of
Court requires that the petition "be accompanied by ... such material portions of
the record as would support the petition,"66 this Court may still give due course if
there is substantial compliance with the Rules.67 Rule 45, Section 7 states:
Section 7. Pleadings and documents that may be required; sanctions. - For
purposes of determining whether the petition should be dismissed or denied
pursuant to section 5 of this Rule, or where the petition is given due course
under section 8 hereof, the Supreme Court may require or allow the filing of
such pleadings, briefs, memoranda or documents as it may deem necessary
within such periods and under such conditions as it may consider appropriate,
and impose the corresponding sanctions in case of non-filing or unauthorized
filing of such pleadings and documents or non-compliance with the conditions
therefor.68
In E.I. Dupont Nemours v. Francisco,69 this Court stated that a petition for
review under Rule 45 may still be given due course if the petitioner later submits
the required documents, thus:
[A] petition lacking an essential pleading or part of the case record may still be
given due course or reinstated (if earlier dismissed) upon showing that petitioner
later submitted the documents required, or that it will serve the higher interest
of justice that the case be decided on the merits. 70
In this instance, petitioners submitted the assailed Court of Appeals January 31,
2008 Decision in their Petition,71 which quoted substantial portions of the
Regional Trial Court June 15, 2006 Decision; the Regional Trial Court's records;
and the Court of Appeals' rollo. They likewise attached in their Reply a copy of
the Complaint,72 the Balance Ledger for Dealings,73 and the Purchase Order
Forms74 presented before the Regional Trial Court. These documents more than
suffice to substantiate petitioners' claims.

II

This Court is not a trier of facts. Factual findings of the lower courts will not be
disturbed by this Court if supported by substantial evidence. 75 Thus, Rule 45 of
the Rules of Court requires that a petition for review on certiorari only raise
questions of law.76
The distinction between a question of fact and a question of law is settled.
In Century Iron Works v. Bañas:77
A question of law arises when there is doubt as to what the law is on a certain
state of facts, while there is a question of fact when the doubt arises as to the
truth or falsity of the alleged facts. For a question to be one of law, the question
must not involve an examination of the probative value of the evidence
presented by the litigants or any of them. The resolution of the issue must rest
solely on what the law provides on the given set of circumstances. Once it is
clear that the issue invites a review of the evidence presented, the question
posed is one of fact.

Thus, the test of whether a question is one of law or of fact is not the appellation
given to such question by the party raising the same; rather, it is whether the
appellate court can determine the issue raised without reviewing or evaluating
the evidence, in which case, it is a question of law; otherwise it is a question of
fact.78
Appeal is not a matter of right but of sound judicial discretion. 79

While questions of fact are generally not entertained by this Court, there are, of
course, ce1iain permissible exceptions, summarized in Medina v. Mayor Asistio,
Jr.:80
(1) When the conclusion is a finding grounded entirely on speculation, surmises
or 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) The findings of the Court of Appeals are
contrary to those of the trial court ...; (8) When the findings of fact are
conclusions without citation of specific evidence on which they are based ...; (9)
When the facts set forth in the petition as well as in the petitioners' main and
reply briefs are not disputed by the respondents ...; and (10) The finding of fact
of the Court of Appeals is premised on the supposed absence of evidence and is
contradicted by the evidence on record ...81 (Citations omitted)
A case falling under any of these exceptions, however, does not automatically
require this Court's review. In Pascual v. Burgos,82 this Court explained that a
party cannot merely claim that his or her case falls under any of the exceptions;
he or she "must demonstrate and prove"83 that a review of the factual findings is
necessary.

In this instance, petitioners do not plead that their case falls under any of the
exceptions since their contention is that their Petition only raises questions of
law. They claim that this Court "need not probe into the entirety of evidence on
record, as the falsity or veracity of the facts, as stated in the assailed decision,
[is] not in issue."84
Petitioners, however, contradict this when they submit that while "[t]here is no
doubt as to the existence of the ... facts," the Court of Appeals' legal conclusions
were "contradictory to its very findings" and that the case was "differently ruled,
and correctly so, by the [Regional Trial Court]." 85 This argument, otherwise
stated, assails the Court of Appeals' appreciation of the evidence and not merely
its application of the law. This is clear when petitioners argue that:
29. Despite finding only two (2) purchase order forms for the twelve (12)
enumerated transactions, the [Court of Appeals] still found no badge of
negligence or breach of contractual obligation on the part of respondent. This is
very much contradictory to its very findings that all trading transactions must be
accompanied by purchase order forms, being the obligation of respondent to
secure the orders of petitioners.86
In Pascual, this Court stated that there is a question of fact "when the issue
presented before this court is the correctness of the lower courts' appreciation of
the evidence presented by the parties."87 To determine whether a lower court
erred in the appreciation of evidence, this Court must also examine the records
to see if there was evidence that was overlooked or if certain pieces of evidence
were given undue weight. Thus, petitioners cannot evade having raised
questions of fact before this Court by simply arguing that the facts are not
disputed.

This Court has previously stated that "[n]egligence, that is, a failure to comply
with some duty of care owed by one to another, is a mixed question of law and
fact."88 There is a question of law as to the duty of care owed by a defendant to
a plaintiff. The existence of negligence, however, is determined by facts and
evidence, which makes it a question of fact.89

The review of a finding of negligence involves a question of fact. 90 It is

evidentiary in nature. It requires an examination of the evidence presented by
the parties to determine the basis of this negligence. 91 This Court has likewise
held that determination of the existence of a breach of contract is a question of
fact.92

A petition for review filed under Rule 45 of the Rules of Court that assails the
Court of Appeals' failure to find negligence or breach of contract based on the
evidence presented is essentially raising questions of fact. This Court will uphold
the findings of the Court of Appeals unless the case falls under certain
exceptions, which must first be properly pleaded and substantiated. Otherwise,
this Court must apply the general rule and deny the petition.

III

Even if this Court were to liberally review the factual findings of the Court of
Appeals, the Petition would still be denied. A principal who gives broad and
unbridled authorization to his or her agent cannot later hold third persons who
relied on that authorization liable for damages that may arise from the agent's
fraudulent acts.

Petitioners opened a joint account with respondent, through their broker, Hipol,
to engage in foreign currency exchange trading. Respondent had a leverage
system of trading,93 wherein clients may use its credit line to facilitate
transactions. This means that clients may actually trade more than what was
actually in their accounts, signifying a higher degree of risk. The contract
between petitioners and respondent provided that respondent was irrevocably
authorized to follow bonafide instructions from petitioners or their broker:
6. Orders

You hereby irrevocably authorize us to act upon any instructions, whether in

writing, by cable, telex, facsimile or telephone given or purported to be given by
you or your agent or representative which appear whether on their respective
faces (in the case of writing, cable, telex or facsimile) or otherwise to be
bonafide. We shall not be responsible and you shall indemnify us for any losses
incurred as a result of acting upon such instructions should there in fact be any
error commission ambiguities or other irregularities therein or therewith. 94
According to respondent, for instructions to be considered "bonafide," there
must be a signed purchase order form from the client:
[Direct Examination]
Q
[B]ased on your testimony you said that every transaction is to be accompanied
by a purchase order form which purchase order form is signed by the client?
[Gabriel Erazo]
A
Yes, sir.
Q
By transaction[,] am I correct to say that this [is] either a buy or sell
transaction?
A
Yes, sir.
Q
And whether it be for one (1) lot, two (2) lots, or three (3) lots, there should be
a purchase order form?
A
Yes, sir.
Q
So without this purchase order form[,] no transaction can be entered into?
A
Yes, sir, because the [dealer] will not accept [an] order without [a] purchase
order form.
Q
Just supposing[,] Mr. Witness[,] that a transaction was entered without a
purchase order form, what happens to the transaction?
A
Basically[,] there will be no transaction if there is no purchase order form
because the dealer will ask for the purchase order form before they will execute
the order, sir.
Q
So no incident will there be a transaction entered without a purchase order form
signed by the client?
A
Yes, sir.95
Petitioner Cancio admitted to giving "[b]etween five (5) to ten (10)" pre-signed
documentation"96 to facilitate their transactions.97 Indeed, 10 signed purchase
order forms were presented as evidence dated March 15, 2000, 98 March 17,
2000,99 March 20, 2000,100 March 21, 2000,101 March 24, 2000,102 March 29,
2000,103 March 31, 2000,104 April 4, 2000,105 April 5, 2000,106 and April 9, 2000.107

Petitioners argue that there were 29 total transactions, as evidenced by the

Balance Ledger for Dealings,108 which means that 19 of the transactions were
unauthorized. The Balance Ledger reads:
BOUGHT SOLD
UNIT
DATE
NO.
PRICE
DATE
NO.
PRICE
COMMISSION
PROFIT/LOSS
NEW BALANCE
BALANCE BROUGHT FORWARD ->
0.00
***MARGIN IN***
10,000.00
2
16/03/00
39)
1.6607
0)
1.6590
10,009.72
2
16/03/00
39)
 1.6607
17/03/00
8)
1.6630(L)
-140.00
276.61
9,990.08
3
0)
106.75
17/03/00
33)
106.65
9,990.08
3
20/03/00
25)
106.50(L)
17/03/00
33)
106.65
-210.00
422.54
10,202.62
1
0)
107.08
21/03/00
22)
107.00
 
10,185.26
1
0)
106.98
21/03/00
22)
107.00
 
10,167.90
1
0)
107.43
21/03/00
22)
107.00
 
10,115.82
2
0)
107.43
23/03/00
3)
107.55
 
10,115.82
1
24/03/00
40)
107.10(L)
21/03/00
22)
107.00
-70.00
-93.37
11,028.54
2
24/03/00
16)
106.90(L)
23/03/00
3)
107.55
-140.00
1,216.09
11,028.54
1
29/03/00
25)
105.77
0)
105.45
 
11,020.90
1
29/03/00
25)
105.77
0)
105.40
 
11,013.26
1
29/03/00
25)
105.77
31/03/00
5)
106.00(L)
-70.00
216.98
13,444.70
2
31/03/00
33)
104.80(L)
31/03/00
4)
105.60
-140.00
1,526.72
13,444.70
1
31/03/00
34)
104.80(L)
31/03/00
8)
106.05
-70.00
1,192.75
13,444.70
1
31/03/00
53)
102.50
0)
102.35
 
13,444.70
1
31/03/00
70)
103.03
0)
102.35
 
13,444.70
3
0)
102.45
31/03/00
54)
102.10
 
13,444.70
1
31/03/00
43)
103.00
0)
102.35
 
13,444.70
12
-840.00
4,758.32  
BALANCE BROUGHT FORWARD ->
13,444.70
1
31/03/00
43)
103.00
03/04/00
1)
104.00(L)
-70.00
961.54
17,298.98
1
31/03/00
70)
103.03
03/04/00
13)
104.70(L)
-70.00
1,595.03
17,298.98
1
31/03/00
53)
102.50
03/04/00
 14)
104.70(L)
-70.00
2,101.24
17,298.98
2
03/04/00
12)
104.83
03/04/00
21)
104.62(L)
-140.00
-401.45
17,298.98
3
0)
104.90
31/03/00
54)
102.10
 
17,298.98
3
0)
105.00
31/03/00
54)
102.10
 
17,223.98
3
04/04/00
26)
105.75
0)
104.90
 
17,223.98
1
04/04/00
26)
105.75
05/04/00
31)
105.27(L)
 -70.00
-455.97
16,630.65
3
0)
104.95
31/03/00
54)
102.10
 
16,630.65
2
04/04/00
26)
105.75
0)
104.85
 
16,630.65
2
04/04/00
26)
105.75
06/04/00
4)
104.77(L)
-140.00
-1,870.76
14,567.81
3
0)
104.80
31/03/00
54)
102.10
 
14,567.81
3
0)
105.50
31/03/00
54)
102.10
 
14,411.56
3
 10/04/00
36)
106.90
0)
106.40
 
14,336.56
3
0)
106.50
31/03/00
54)
102.10
 
14,336.56
3
0)
107.07
31/03/00
54)
102.10
 
14,261.56
3
10/04/00
36)
106.90
0)
106.97
 
14,261.56
3
10/04/00
36)
106.90
12/04/00
22)
105.85(L)
-210.00
-2,975.91
-35.72
3
12/04/00
21)
105.95(L)
31/03/00
 54)
102.10
-210.00
-10,901.37
-35.72
14  
-980.00
-11,947.65
Petitioners' argument would have been correct if each transaction was counted
for every buy and sell. During petitioner Cancio's crossexamination, respondent's
counsel counted by date of transaction, thus, counting 27 transactions.
Petitioner Cancio, however, clarified that they had a "buy and out" type of
transaction. Each "open position" and "close position" would be considered as
only one (1) transaction:109
Q
Allow me to count the number of transactions here and see how far we could go
in this kind of questioning. From March 9 to April 4, I counted twenty[-]seven
(27) transactions. And out of these twenty-seven (27) transactions you said that
you are responsible for five (5) of them?
A
Those are not twenty[-seven] (27) transactions[,] Sir.
Q
What are those?
A
Because there is what we call "buy" and "out," Sir. So, the "buy and out" is
considered as one (1) transaction only, Sir.
Q
So, how many transactions are there on [these] orders?
A
We made about ten (10)[,] Sir.110
According to respondent, each "buy and out" should be covered by one (1)
purchase order form. The actual count then of the transactions, according to
petitioners' own enumeration of the dealings,111 should be:
TRANSACTION
DATE

 [OPEN NEW POSITION]

LOTS
PRICE
DATE

 [CLOSE POSITION]
LOTS
PRICE
1
March 16, 2000 [Buy]
2
1.6607
March 17, 2000 [Sell]
2
1.6630
2
March 17, 2000 [Sell]
3
106.65
March 20, 2000 [Buy]
3
106.50
3
March 21, 2000 [Sell]
1
107.00
March 24, 2000 [Buy]
1
107.10
4
March 23, 2000 [Sell]
2
107.55
March 24, 2000 [Buy]
2
106.90
5
March 29, 2000 [Buy]
1
105.77
March 31, 2000 [Sell]
1
106.00
6
March 31, 2000 [Sell]
2
105.60
March 31, 2000 [Buy]
2
104.80
7
March 31, 2000 [Sell]
2
106.05
March 31, 2000 [Buy]
 2
104.80
8
March 31, 2000 [Buy]
1
102.50
April 3, 2000 [Sell]
1
104.70
9
March 31, 2000 [Buy]
1
103.03
April 3, 2000 [Sell]
1
104.70
10
March 31, 2000 [Sell]
3
102.10
April 12, 2000 [Buy]
3
105.95
11
March 31, 2000 [Buy]
1
103.00
April 3, 2000 [Sell]
1
104.00
12
April 3, 2000 [Sell]
2
104.62
April 3, 2000 [Buy]
2
104.83
13
April 4, 2000 [Buy]
3
105.75
April 5, 2000 [Sell]
1
105.27
14
April 6, 2000 [Sell]
 2
104.77
15
April 10, 2000 [Buy]
3
106.90
April 12, 2000 [Sell]
3
105.85
Thus, by petitioners' own count, there were 15 transactions, not 29
transactions.112 According to the Balance Ledger, commission was deducted from
petitioners' account 15 times. Thus, commission was deducted for every
successful transaction, not for every time a "buy" or "sell" was made.

Interestingly, the eleventh and twelfth transactions occurred when petitioners

were still actively trading. This means that they executed more instructions to
Hipol than what was covered by the signed purchase order forms that he held,
without complaint. Petitioner Pampolina even testified that they were constantly
aware of the status of their account when they were trading:
Q
How did you get to know that you accumulated around $7,000.00 for your
account?
A
Because every time that we execute orders[,] we take a position[,] and at the
same time[,] we monitor also the rate of the position that we are taking and we
also relieve orders to take profit. So, as long as we relieve orders to take
profit[,] we know that we are making money.113
Petitioners would have been aware that respondent could execute instructions
relayed by Hipol even without the required purchase order form. Otherwise, they
would have stopped executing orders upon their tenth transaction. Even if this
Court were to apply petitioners' argument that a "buy" and a "sell" is counted as
one (1) transaction each, that would still mean that there were 23 transactions
made when petitioners were actively trading. There would still be 13 orders that
petitioners relayed to Hipol over and above the 10 pre-signed purchase order
forms that he held.

Moreover, petitioners assail the alleged unauthorized transactions executed after

April 4, 2000, when they allegedly stopped relaying instructions to Hipol. These
alleged unauthorized transactions, they argue, breached respondent's
contractual obligation to execute only bonafide instructions from petitioners.
From the table above, these transactions would refer to the thirteenth,
fourteenth, and fifteenth transactions.

Respondents, however, presented signed purchase order forms for the contested
transactions occurring after April 4, 2000, namely, the purchase order forms
dated April 4, 2000,114 April 5, 2000,115 and April 9, 2000.116 If there was any
breach committed by respondent, it occurred when petitioners actively traded
and they would have been aware of this breach, not when they stopped trading.

Respondent likewise did not have the duty to disclose to petitioners any previous
infractions committed by their agent.

Hipol, petitioners' agent, was not employed with respondent. He was categorized
as an independent broker for commission. In Behn, Meyer, and Co. v. Nolting:117
A broker is generally defined as one who is engaged, for others, on a
commission, negotiating contracts relative to property with the custody of which
he has no concern; the negotiator between other parties. never acting in his own
name, but in the name of those who employed him; he is strictly a middleman
and for some purposes the agent of both parties.118
When Hipol became petitioners' agent, he had committed only one (1) known
prior infraction against a client of respondent. Respondent might have been
construed this as an isolated incident that did not warrant heightened scrutiny.
Hipol's infraction committed against petitioners was his second known infraction.
Respondent cancelled his accreditation when petitioners informed them of his
unauthorized transactions.

It would be different if Hipol committed a series of infractions and respondent

continued to accredit him. In that instance, respondent would have been
complicit to Hipol's wrongdoings. Respondent, not being Hipol's employer, had
no power of discipline over him. It could only cancel his accreditation, which it
did after a second incident was reported. This was the extent by which
respondent was obligated to act on Hipol's infractions.

Moreover, petitioners and respondent signed and agreed to absolve respondent

from actions, representations, and warranties of their agent made on their
behalf, thus:
Commission Agent

You acknowledge and agree that the commtssiOn agent (one Mr/Ms Ronald (sic)
M. Hipol) who introduced you to us in connection with this Facility is your agent
and we are in no way responsible for his actions or any warranties or
representations he may have made (whether expressly on our behalf or not) and
that pursuant to his having introduced you to us, we will (if you accept this
Facility) pay him a commission based on your trading with us (details of which
will be applied to you on request). Should you choose to also vest in him trading
authority on your behalf please do so only after considering the matter carefully,
for we shall not be responsible nor liable for any abuse of the authority you may
confer on him. This will be regarded strictly as a private matter between you and
him. You further acknowledge that for our own protection and commercial
purpose you are aware of the terms of the trading agreement between the
commission agent and ourselves where the commission agent is to trade for
you.119
Petitioners conferred trading authority to Hipol. Respondent was not obligated to
question whether Hipol exceeded that authority whenever he made purchase
orders. Respondent was likewise not privy on how petitioners instructed Hipol to
carry out their orders. It did not assign Hipol to be petitioners' agent. Hipol was
the one who approached petitioners and offered to be their agent. Petitioners
were highly educated120 and were "[a]lready knowledgeable in playing in this
foreign exchange trading."121 They would have been aware of the extent of
authority they granted to Hipol when they handed to him 10 pre-signed blank
purchase order forms. Under Article 1900 of the Civil Code:
Article 1900. So far as third persons are concerned, an act is deemed to have
been performed within the scope of the agent's authority, if such act is within
the terms of the power of attorney, as written, even if the agent has in fact
exceeded the limits of his authority according to an understanding between the
principal and the agent.
Before a claimant can be entitled to damages, "the claimant should satisfactorily
show the existence of the factual basis of damages and its causal connection to
defendant's acts."122 The acts of petitioners' agent, Hipol, were the direct cause
of their injury. There is no reason to hold respondent liable for actual and moral
damages. Since the basis for moral damages has not been established, there
would likewise be no basis to recover exemplary damages 123 and attorney's
fees124 from respondent. If there was any fault, the fault remains with
petitioners' agent and him alone.

The State has already taken notice of the high risks involved in foreign exchange
leverage trading. In the prior case of Securities and Exchange Commission v.
Performance Foreign Exchange Corporation,125 the Securities and Exchange
Commission tried to issue a cease-and-desist order against respondent for
trading foreign currency futures contracts without the proper license.

This Court invalidated the cease-and-desist order upon finding that it was
improperly issued. It also took note that even the Securities and Exchange
Commission was unsure of whether foreign currency exchange trading
constituted futures commodity trading, and that it had to request the Bangko
Sentral ng Pilipinas for its advice. The Bangko Sentral ng Pilipinas' reply read:
Dear Ms. Bautista,

This refers to your letter dated February 8, 2001 requesting for a definitive
statement that the foreign currency leverage trading engage[d] in by private
corporations, particularly, Performance Foreign Exchange Corporation (PFEC), is
a financial derivatives transaction and that it can only be undertaken by banks
or non-bank financial intermediaries performing quasi-banking functions and/or
its subsidiaries/affiliates.
As indicated in your description of the transactions and the documents
submitted, the foreign currency leverage trading, subject of your query, is
essentially similar in mechanics to currency future trading, particularly with
respect to the margin requirements, standard contract size, and daily market-
to-market of open position. However, it does not fall under the category of
futures trading because it is not exchangetraded. Further, we can not classify it
as being financial derivatives transactions as we consider the transaction as
plain currency margin trading, which by its mechanics, involve the set-up of
margin and nondelivery of the currencies involved.

In view of the foregoing facts, the activities of the aforesaid corporation are not
covered by [the Bangko Sentral ng Pilipinas'] guidelines on derivative licensing.

We hope we have satisfactorily clarified your concerns.

Very truly yours,

(Sgd.)
AMANDO M. TETANGCO, JR.126 (Emphasis supplied)
Nonetheless, the Securities and Exchange Commission persisted in regulating
entities involved in foreign exchange leverage trading, issuing the following
Advisory:
SEC ADVISORY

20 October 2016

FOREIGN EXCHANGE TRADING

The advisory is prompted by the complaints of retail investors who lost their
moneys to forex trading.

The public is advised that TRADING OF COMMODITIES FUTURES CONTRACTS IN

THE PHILIPPINES (including Foreign Exchange Trading as consistently held by
the Commission) and the pertinent RULES ARE STILL SUSPENDED pursuant to
Paragraph 4 of Rule II of the Amended Rules and Regulations implementing the
Securities Regulation Code.

Based on the reports, huge amount of money has been invested (usually in US
dollars) in forex trading corporations where investors opened margin accounts to
enable them to trade in foreign currency. The so-called "experts" of the forex
trading corporations execute foreign trade positions in behalf of the investors on
the representation that investors shall gain profit as in the stock market.

It has to be reiterated that under Section 11 of the Securities Regulation Code

"no person shall offer, sell or enter into commodity futures contract except in
accordance with rules and regulations and orders of the Commission may
prescribe in the public interest".
The investors should also take the cue from the ruling laid down in Onapal v.
Court of Appeals (G.R. No. 90707, February 3, 1993) where the Supreme Court
stated in this wise: "xxx The payments made under said contract were payments
of difference in prices arising out of the rise or fall in the market price above or
below the contract price thus making it purely gambling and declared null and
void by law."

The public is encouraged to report to the Commission entities operating Foreign

Exchange Trading and those acting as agents of these operators. 127
Considering, however, that the legality of foreign exchange leverage trading is
not in issue in this case, this Court will not delve further into the current
regulations affecting it. It has been concluded that foreign exchange leverage
trading is known to be risky and may lead to substantial losses for investors.
Petitioners, who were experienced in this kind of trading, should have been more
careful in the conduct of their affairs.

Currency trading adds no new good or service into the market that would be of
use to real persons. Instead, it has the tendency to alter the price of real goods
and services to the detriment of those who manufacture, labor, and consume
products. It may alter the real value of goods and services on the basis of a
rumor or anything else that will cause a herd of speculative traders to move one
way or the other. Put in another way, those who participate in it must be
charged with knowledge that getting rich in this way is accompanied with great
risk. Given its real effects on the real economy and on real people, it will be
unfair for this Court to provide greater warranties to the parties in currency
trading. They should bear their own risks perhaps to learn that their capital is
better invested more responsibly and for the greater good of society.

Be that as it may, to arrive at these conclusions, this Court has to extensively

review the evidence submitted by the parties. If, as petitioners claim, the
Petition only raised pure questions of law, there would have been no need to re-
examine the evidence. As it stands, the Petition must be denied.

WHEREFORE, the Petition is DENIED. The January 31, 2008 Decision and
March 31, 2008 Resolution of the Court of Appeals in CA-G.R. CV No. 88439
are AFFIRMED.

SO ORDERED.

G.R. No. 205409, June 13, 2018

CITIGROUP, INC., Petitioner, v. CITYSTATE SAVINGS BANK,

INC. Respondent.

DECISION
 LEONEN, J.:

This resolves a Petition for Review on Certiorari 1 assailing the August 29, 2012
Decision2 and the January 15, 2013 Resolution3 of the Court of Appeals in CA-
G.R. SP No. 109679.

The facts which led to the controversy before this Court, as summarized by the
Court of Appeals, are as follows:

Petitioner Citigroup, Inc. is a corporation duly organized under the laws of the
State of Delaware engaged in banking and financial services.

In the late 1970s, Citibank N.A., a wholly-owned subsidiary of petitioner,

installed its first automated teller machines in over a hundred New York City
branches. In 1984, Citibank N.A., Philippine Branch, began the development of
its domestic Automated Teller Machine (ATM) network, and started operating
ATMs and issuing ATM cards in the Philippines. Citibank N.A., Philippine Branch
then joined Bancnet Inc. ("Bancnet") in 1990, the first year Bancnet commenced
operations. To date, Citibank N.A., Philippine Branch has six branches and 22
ATMs in the Philippines.

In 2005, Citibank Savings, Inc. became an indirect wholly-owned subsidiary of

Citibank, N.A. As a pre-existing thrift bank, it offered ATM services in the
Philippines in 1995 and joined Bancnet in 2005. Citibank Savings, Inc. now has
36 branches and 27 ATMs in the Philippines.

Combining the branches and ATMs of Citibank N.A., Philippine Branch and
Citibank Savings, Inc., there are a total of 42 branches and 29 ATMs in the
Philippines marketed and identified to the public under the CITI family of marks.

The ATM cards issued by Citibank N.A., Philippine Branch and Citibank Savings,
Inc. are labelled "CITICARD". The trademark CITICARD is owned by Citibank
N.A. and is registered in the [Intellectual Property Office] of the Philippines on
27 September 1995 under Registration Number 34731.

In addition, petitioner or Citibank N.A., a wholly-owned subsidiary of petitioner,

owns the following other trademarks currently registered with the Philippine
[Intellectual Property Office], to wit: "CITI and arc design", "CITIBANK",
"CITIBANK PAYLINK", "CITIBANK SPEEDCOLLECT", "CITIBANKING", "CITICARD",
"CITICORP", "CITIFINANCIAL", "CITIGOLD", "CITIGROUP", "CITIPHONE
BANKING'', and "CITISERVICE".

On the other hand, sometime in the mid-nineties, a group of Filipinos and

Singaporean companies formed a consortium to establish respondent Citystate
Savings Bank, Inc. The consortium included established Singaporean companies,
specifically Citystate Insurance Group and Citystate Management Group Holdings
Pte, Ltd.

Respondent's registered mark has in its name affixed a lion's head, which is
likened to the national symbol of Singapore, the Merlion. On 08 August 1997,
respondent opened its initial branch in Makati City. From then on, it endeavored
to expand its branch network. At present it has 19 branches in key cities and
municipalities including 3 branches in the province of Bulacan and 1 in Cebu
City. Respondent had also established off site ATMs in key locations in the
Philippines as one of its banking products and services.

In line with this, respondent filed an application for registration with the
[Intellectual Property Office] on 21 June 2005 of the trademark "CITY CASH
WITH GOLDEN LION'S HEAD" for its ATM service, under Application Serial No.
42005005673.4
After respondent Citystate Savings Bank, Inc. (Citystate) applied for registration
of its trademark "CITY CASH WITH GOLDEN LION'S HEAD" with the Intellectual
Property Office, Citigroup, Inc. (Citigroup) filed an opposition to Citystate's
application. Citigroup claimed that the "CITY CASH WITH GOLDEN LION'S HEAD"
mark is confusingly similar to its own "CITI" marks. 5 After an exchange of
pleadings, the Director of the Bureau of Legal Affairs of the Intellectual Property
Office rendered a Decision6 dated November 20, 2008. The Intellectual Property
Office concluded that the dominant features of the marks were the words "CITI"
and "CITY," which were almost the same in all aspects. It further ratiocinated
that Citigroup had the better right over the mark, considering that 'its "CITI" and
"CITI"-related marks have been registered with the Intellectual Property Office,
as well as with the United States Patent and Trademark Office, covering
"financial services" under Class 36 of the International Classification of
Goods.7 Thus, applying the dominancy test and considering that Citystate's
dominant feature of the applicant's mark was identical or confusingly similar to a
registered trademark, the Intellectual Property Office ruled that approving it
would be contrary to Section 138 of the Intellectual Property Code and
Citigroup's exclusive right to use its marks.

This was appealed to the Office of the Director General of the Intellectual
Property Office. In a Decision8 dated July 3, 2009, Director General Adrian S.
Cristobal, Jr. (Director General Cristobal) reversed the November 20, 2008
Decision of the Director of the Bureau of Legal Affairs and gave due course to
Citystate's trademark application. He made a visual comparison of the parties'
respective marks and considered the golden lion head device to be the
prominent or dominant feature of Citystate's mark, and not the word "CITY."
Thus, Citystate's mark did not resemble Citigroup's mark such that deception or
confusion was likely. Director General Cristobal found plausible Citystate's
explanation for choosing "CITYSTATE," i.e., that its name was based on the
country of Singapore, which was referred to as "city-state," and that the golden
lion head device was similar to the national symbol of Singapore,
the merlion.9 He appreciated that availing of the products and services related to
the parties' marks would entail very detailed procedures, like sales
representatives explaining the products and clients filling up and submitting
application forms, such that customers would necessarily be well informed and
not confused.10

Thus, Citigroup filed a Petition for Review 11 before the Court of Appeals, which
dismissed the petition. The Court of Appeals found that Director General
Cristobal did not act with grave abuse of discretion in ruling that the parties'
trademarks were not confusingly similar, and in giving due course to Citystate's
trademark application.12 It found that Citystate's mark was not confusingly or
deceptively similar to Citigroup's marks:
[Citystate's] trademark is the entire "CITY CASH WITH GOLDEN LION'S HEAD".
Although the words "CITY CASH" are prominent, the entirety of the trademark
must be considered, and focus should not be made solely on the phonetic
similarity of the words "CITY" and "CITI".

The dissimilarities between the two marks are noticeable and substantial.
[Citystate's] mark, "CITY CASH WITH GOLDEN LION'S HEAD", has an insignia of
a golden lion's head at the left side of the words "CITY CASH", while
[Citigroup's] "CITI" mark usually has an arc between the two I's. A further
scrutiny of the other "CITI" marks of [Citigroup] would show that their font type,
font size, and color schemes of the said "CITI" marks vary for each product or
service. Most of the time, [Citigroup's] "CITI" mark is joined with another term
to form a single word, with each product or service having different font types
and color schemes. On the contrary, the trademark of [Citystate] consists of the
words "CITY CASH", with a golden lion's head emblem on the left side. It is,
therefore, improbable that the public would immediately and naturally conclude
that [Citystate's] "CITY CASH WITH GOLDEN LION'S HEAD" is but another
variation under [Citigroup's] "CITI" marks.

Verily, the variations in the appearance of the "CITI" marks by [Citigroup], when
conjoined with other words, would dissolve the alleged similarity between them
and the trademark of [Citystate]. These dissimilarities, and the insignia of a
golden lion's head before the words "CITY CASH" in the mark of [Citystate]
would sufficiently acquaint and apprise the public that [Citystate's] trademark
"CITY CASH WITH GOLDEN LION'S HEAD" is not connected with the "CITI"
marks of [Citigroup].

Moreover, more credit should be given to the "ordinary purchaser." Cast in this
particular controversy, the ordinary purchaser is not the "completely unwary
consumer" but is the "ordinarily intelligent buyer" considering the type of
product involved. It bears to emphasize that the mark "CITY CASH WITH
GOLDEN LION'S HEAD" is a mark of [Citystate] for its ATM services which it
offers to the public. It cannot be gainsaid that an ATM service is not an ordinary
product which could be obtained at any store without the public noticing its
association with the banking institution that provides said service. Naturally, the
customer must first open an account with a bank before it could avail of its ATM
service. Moreover, the name of the banking institution is written and posted
either inside or outside the ATM booth, not to mention the fact that the name of
the bank that operates the ATM is constantly flashed at the screen of the ATM
itself. With this, the public would accordingly be apprised that [Citystate's] "CITY
CASH" is an ATM service of [Citystate], and not that of [Citigroup's]. 13 (Citation
omitted)
Thus, the Court of Appeals quoted Director General Cristobal:
In evaluating the relevance of the prefix "CITI", due attention should be given
not only to the other features of the competing marks but also to the attendant
circumstances of the case. Otherwise, a blind adherence to [Citigroup's] claim
over the prefix CITI is tantamount to handing it a monopoly of all marks with
such prefix or with a prefix that sounds alike but with a different spelling like the
word "city". Accordingly, the kind of products and services involved should
likewise be scrutinized.

....

Thus, this Court finds no cogent reason to believe [Citigroup's] contention that
consumers may confuse the products and services covered by the competing
trademarks as coming from the same source of origin. The fear that the
consumer may mistake the products as to the source or origin, or that the
consumers seeking its products and services will be redirected or diverted to
[Citystate], is unfounded. The products or services involved are not the ordinary
everyday products that one can just pick up in a supermarket or grocery stores
(sic). These products generally require sales representatives explaining to their
prospective customers the features of and entitlements thereto. Availing the
products and services involved follows certain procedures that ordinarily and
routinely gives the prospective customers or clients opportunity to know exactly
with whom they are dealing with (sic). The procedures usually include the clients
filling-up and submitting a pro-forma application form and other documentary
requirements, which means that the person is wel[l]informed and thus, cannot
be misled into believing that the product or service is that of [Citystate] when in
fact it is different from [Citigroup's].

The likelihood of confusion between two marks should be taken from the
viewpoint of the prospective buyer. In Emerald Garment Manufacturing Corp. vs.
Court of Appeals, et al., the Supreme Court ruled that:
"Finally, in line with the foregoing discussions, more credit should be given to
the 'ordinary purchaser.' Cast in this particular controversy, the ordinary
purchaser is not the 'completely unwary consumer' but is the 'ordinarily
intelligent buyer' considering the type of product involved.
The definition laid down in Dy Buncio v. Tan Tiao Bok is better suited to the
present case. There, the 'ordinary purchaser' was defined as one 'accustomed to
buy, and therefore to some extent familiar with, the goods in question. The test
of fraudulent simulation is to be found in the likelihood of the deception of some
persons in some measure acquainted with an established design and desirous of
purchasing the commodity with which that design has been associated. The test
is not found in the deception, or the possibility of deception, of the person who
knows nothing about the design which has been counterfeited, and who must be
indifferent between that and the other. The simulation, in order to be
objectionable, must be such as appears likely to mislead the ordinary intelligent
buyer who has a need to supply and is familiar with the article that he seeks to
purchase."14
Citigroup filed a Motion for Reconsideration,15 which the Court of Appeals denied
in its January 15, 2013 Resolution.16

Thus, Citigroup filed a Petition for Review 17 against Citystate before this Court.
After respondent filed its Comment/Opposition18 and petitioner filed its
Reply,19 respondent filed its Memorandum.20

Petitioner claims that the Court of Appeals erred in finding that there was no
confusing similarity between the trademark that respondent applied for and
petitioner's own trademarks.21 It avers that Emerald Manufacturing Company v.
Court of Appeals22 is not applicable to this case.23 Contrary to the Court of
Appeals' finding, the arc design is not an integral part of petitioner's "CITI"
family of marks.24

Petitioner asserts that when the dominancy test is applied to the Court of
Appeals' findings of fact, the necessary result is a finding of confusing
similarity.25 It points out that the Court of Appeals found that "CITY CASH" is the
dominant feature of respondent's applied trademark. However, because the
word "CASH" was disclaimed in respondent's trademark application, only "CITY"
may be considered the dominant part of the mark. "'CITY' ... appears nearly
identical to 'CITI'."26

Further, petitioner argues that the Court of Appeals did not understand the
services offered in relation to respondent's mark when it said that the mark is to
be applied only in relation to respondent's ATMs and within the bank premises.
It insists that in actuality, the mark could be used outside the bank premises,
such as in radio, newspapers, and the internet, where there would not
necessarily be a "GOLDEN LION'S HEAD" symbol to disambiguate the mark from
any of petitioner's marks. It argues that the Court of Appeals should have
appreciated the difference between basic financial services on one hand, which
include ATM services, and sophisticated financial services on the other hand. It
avers that customers do not select ATM services after cautious evaluation, and
that ATM services are marketed to ordinary consumers. Thus, petitioner claims
that the Court of Appeals erred when it concluded that customers are intelligent
purchasers, and failed to consider ordinary purchasers who have not yet used
the financial services of petitioner and respondent. 27

It further holds that it is not claiming a monopoly of all marks prefixed by words
sounding like "city." It stresses that it opposes only marks which are registered
under class 36 used in products directly related and in competition with its
"CITI" family of marks, sold under the same business channels, and sold to the
same group of consumers.28

Respondent argues that its mark is not confusingly similar to petitioner's 29 and
that petitioner's fears are purely speculative.30 It claims that the phonetic
similarity between "CITY" and "CITI" is not sufficient to deny its registration,
asserting that this Court has ruled that idem sonans alone is insufficient basis for
a determination of the existence of confusing similarity. As for petitioner's
arguments on possible confusion due to advertising, respondent states that
advertisement aims to inform the public of a certain entity's product and that
not mentioning a supplier's trade name in its advertisement defeats the purpose
of advertisement. It disputes petitioner's claims on ATM services and the kind of
caution exercised prior to obtaining an ATM card, asserting that before
customers may avail of ATM services, they have to open an account with the
bank offering them.31

This Court denies the Petition.

The sole issue for this Court's resolution is whether or not the Court of Appeals
committed an error of law in finding that there exists no confusing similarity
between petitioner Citigroup, Inc.'s and respondent Citystate Savings Bank,
Inc.'s marks.

In La Chemise Lacoste, S.A. v. Fernandez,32 this Court explained why

trademarks are protected in the market:
The purpose of the law protecting a trademark cannot be overemphasized. They
are to point out distinctly the origin or ownership of the article to which it is
affixed, to secure to him, who has been instrumental in bringing into market a
superior article of merchandise, the fruit of his industry and skill, and to prevent
fraud and imposition (Etepha v. Director of Patents, 16 SCRA 495).

The legislature has enacted laws to regulate the use of trademarks and provide
for the protection thereof. Modem trade and commerce demands that
depredations on legitimate trade marks of non-nationals including those who
have not shown prior registration thereof should not be countenanced. The law
against such depredations is not only for the protection of the owner of the
trademark but also, and more importantly, for the protection of purchasers from
confusion, mistake, or deception as to the goods they are buying. (Asari Yoko
Co., Ltd. v. Kee Boc, 1 SCRA 1; General Garments Corporation v. Director of
Patents, 41 SCRA 50).

The law on trademarks and tradenames is based on the principle of business

integrity and common justice. This law, both in letter and spirit, is laid upon the
premise that, while it encourages fair trade in every way and aims to foster, and
not to hamper, competition, no one, especially a trader, is justified in damaging
or jeopardizing another's business by fraud, deceit, trickery or unfair methods of
any sort. This necessarily precludes the trading by one dealer upon the good
name and reputation built up by another (Baltimore v. Moses, 182 Md 229, 34 A
(2d) 338).33
In Mirpuri v. Court of Appeals,34 this Court traced the historical development of
trademark law:
A "trademark" is defined under R.A. 166, the Trademark Law, as including "any
word, name, symbol, emblem, sign or device or any combination thereof
adopted and used by a manufacturer or merchant to identify his goods and
distinguish them from those manufactured, sold or dealt in by others." This
definition has been simplified in R.A. No. 8293, the Intellectual Property Code of
the Philippines, which defines a "trademark" as "any visible sign capable of
distinguishing goods." In Philippine jurisprudence, the function of a trademark is
to point out distinctly the origin or ownership of the goods to which it is affixed;
to secure to him, who has been instrumental in bringing into the market a
superior article of merchandise, the fruit of his industry and skill; to assure the
public that they are procuring the genuine article; to prevent fraud and
imposition; and to protect the manufacturer against substitution and sale of an
inferior and different article as his product.

Modern authorities on trademark law view trademarks as performing three

distinct functions: ( 1) they indicate origin or ownership of the articles to which
they are attached; (2) they guarantee that those articles come up to a certain
standard of quality; and (3) they advertise the articles they symbolize.

Symbols have been used to identify the ownership or origin of articles for
several centuries. As early as 5,000 B.C., markings on pottery have been found
by archaeologists. Cave drawings in southwestern Europe show bison with
symbols on their flanks. Archaeological discoveries of ancient Greek and Roman
inscriptions on sculptural works, paintings, vases, precious stones, glassworks,
bricks, etc. reveal some features which are thought to be marks or symbols.
These marks were affixed by the creator or maker of the article, or by public
authorities as indicators for the payment of tax, for disclosing state monopoly, or
devices for the settlement of accounts between an entrepreneur and his
workmen.

In the Middle Ages, the use of many kinds of marks on a variety of goods was
commonplace. Fifteenth century England saw the compulsory use of identifying
marks in certain trades. There were the baker's mark on bread, bottlemaker's
marks, smith's marks, tanner's marks, watermarks on paper, etc. Every guild
had its own mark and every master belonging to it had a special mark of his
own. The marks were not trademarks but police marks compulsorily imposed by
the sovereign to let the public know that the goods were not "foreign" goods
smuggled into an area where the guild had a monopoly, as well as to aid in
tracing defective work or poor craftsmanship to the artisan. For a similar reason,
merchants also used merchants' marks. Merchants dealt in goods acquired from
many sources and the marks enabled them to identify and reclaim their goods
upon recovery after shipwreck or piracy.

With constant use, the mark acquired popularity and became voluntarily
adopted. It was not intended to create or continue monopoly but to give the
customer an index or guarantee of quality. It was in the late 18th century when
the industrial revolution gave rise to mass production and distribution of
consumer goods that the mark became an important instrumentality of trade
and commerce. By this time, trademarks did not merely identify the goods; they
also indicated the goods to be of satisfactory quality, and thereby stimulated
further purchases by the consuming public. Eventually, they came to symbolize
the goodwill and business reputation of the owner of the product and became a
property right protected by law. The common law developed the doctrine of
trademarks and tradenames "to prevent a person from palming off his goods as
another's, from getting another's business or injuring his reputation by unfair
means, and, from defrauding the public." Subsequently, England and the United
States enacted national legislation on trademarks as part of the law regulating
unfair trade. It became the right of the trademark owner to exclude others from
the use of his mark, or of a confusingly similar mark where confusion resulted in
diversion of trade or financial injury. At the same time, the trademark served as
a warning against the imitation or faking of products to prevent the imposition of
fraud upon the public.

Today, the trademark is not merely a symbol of origin and goodwill; it is often
the most effective agent for the actual creation and protection of goodwill. It
imprints upon the public mind an anonymous and impersonal guaranty of
satisfaction, creating a desire for further satisfaction. In other words, the mark
actually sells the goods. The mark has become the "silent salesman," the
conduit through which direct contact between the trademark owner and the
consumer is assured. It has invaded popular culture in ways never anticipated
that it has become a more convincing selling point than even the quality of the
article to which it refers. In the last half century, the unparalleled growth of
industry and the rapid development of communications technology have enabled
trademarks, tradenames and other distinctive signs of a product to penetrate
regions where the owner does not actually manufacture or sell the product itself.
Goodwill is no longer confined to the territory of actual market penetration; it
extends to zones where the marked article has been fixed in the public mind
through advertising. Whether in the print, broadcast or electronic
communications medium, particularly on the Internet, advertising has paved the
way for growth and expansion of the product by creating and earning a
reputation that crosses over borders, virtually turning the whole world into one
vast marketplace.35 (Citations omitted)
There is also an underlying economic justification for the protection of
trademarks: an effective trademark system helps bridge the information gap
between producers and consumers, and thus, lowers the costs incurred by
consumers in searching for and deciding what products to purchase. As
summarized in a report of the World Intellectual Property Organization:
Economic research has shown that brands play an important role in bridging so-
called asymmetries of information between producers and consumers. In many
modem markets, product offerings differ across a wide range of quality
characteristics. Consumers, in turn, cannot always discern these characteristics
at the moment of purchase; they spend time and money researching different
offerings before deciding which product to buy. Brand reputation helps
consumers to reduce these search costs. It enables them to draw on their past
experience and other information about products - such as advertisements and
third party consumer reviews. However, the reputation mechanism only works if
consumers are confident that they will purchase what they intend to purchase.
The trademark system provides the legal framework underpinning this
confidence. It does so by granting exclusive rights to names, signs and other
identifiers in commerce. In addition, by employing trademarks, producers and
sellers create concise identifiers for specific goods and services, thereby
improving communication about those goods and services. 36
Recognizing the significance, and to further the effectivity of our trademark
system,37 our legislators proscribed the registration of marks under certain
circumstances:
Section 123. Registrability. - 123.1. A mark cannot be registered if it:

(a) Consists of immoral, deceptive or scandalous matter, or matter which may

disparage or falsely suggest a connection with persons, living or dead,
institutions, beliefs, or national symbols, or bring them into contempt or
disrepute;

(b) Consists of the flag or coat of arms or other insignia of the Philippines or any
of its political subdivisions, or of any foreign nation, or any simulation thereof;

(c) Consists of a name, portrait or signature identifying a particular living

individual except by his written consent, or the name, signature, or portrait of a
deceased President of the Philippines, during the life of his widow, if any, except
by written consent of the widow;

(d) Is identical with a registered mark belonging to a different proprietor or a

mark with an earlier filing or priority date, in respect of:
(i) The same goods or services, or

(ii) Closely related goods or services, or

(iii) If it nearly resembles such a mark as to be likely to deceive or cause
confusion;
(e) Is identical with, or confusingly similar to, or constitutes a translation of a
mark which is considered by the competent authority of the Philippines to be
well-known internationally and in the Philippines, whether or not it is registered
here, as being already the mark of a person other than the applicant for
registration, and used for identical or similar goods or services: Provided, That in
determining whether a mark is well known, account shall be taken of the
knowledge of the relevant sector of the public, rather than of the public at large,
including knowledge in the Philippines which has been obtained as a result of the
promotion of the mark;

(f) Is identical with, or confusingly similar to, or constitutes a translation of a

mark considered well-known in accordance with the preceding paragraph, which
is registered in the Philippines with respect to goods or services which are not
similar to those with respect to which registration is applied for: Provided, That
use of the mark in relation to those goods or services would indicate a
connection between those goods or services, and the owner of the registered
mark: Provided, further, That the interests of the owner of the registered mark
are likely to be damaged by such use;

(g) Is likely to mislead the public, particularly as to the nature, quality,

characteristics or geographical origin of the goods or services;

(h) Consists exclusively of signs that are generic for the goods or services that
they seek to identify;

(i) Consists exclusively of signs or of indications that have become customary or

usual to designate the goods or services in everyday language or in bona
fide and established trade practice;

(j) Consists exclusively of signs or of indications that may serve in trade to

designate the kind, quality, quantity, intended purpose, value, geographical
origin, time or production of the goods or rendering of the services, or other
characteristics of the goods or services;

(k) Consists of shapes that may be necessitated by technical factors or by the

nature of the goods themselves or factors that affect their intrinsic value;

(l) Consists of color alone, unless defined by a given form; or

(m) Is contrary to public order or morality.

Based on this proscription, petitioner insists that respondent's mark cannot be
registered because it is confusingly similar to its own set of marks. Thus,
granting the petition rests solely on the question of likelihood of confusion
between petitioner's and respondent's respective marks.

There is no objective test for determining whether the confusion is likely.

Likelihood of confusion must be determined according to the particular
circumstances of each case.38 To aid in determining the similarity and likelihood
of confusion between marks, our jurisprudence has developed two (2) tests: the
dominancy test and the holistic test. This Court explained these tests in Coffee
Partners, Inc. v. San Francisco Coffee & Roastery, Inc.39:
The dominancy test focuses on the similarity of the prevalent features of the
competing trademarks that might cause confusion and deception, thus
constituting infringement. If the competing trademark contains the main,
essential, and dominant features of another, and confusion or deception is likely
to result, infringement occurs. Exact duplication or imitation is not required. The
question is whether the use of the marks involved is likely to cause confusion or
mistake in the mind of the public or to deceive consumers.

In contrast, the holistic test entails a consideration of the entirety of the marks
as applied to the products, including the labels and packaging, in determining
confusing similarity. The discerning eye of the observer must focus not only on
the predominant words but also on the other features appearing on both marks
in order that the observer may draw his conclusion whether one is confusingly
similar to the other.40 (Citations omitted)
With these guidelines in mind, this Court considered "the main, essential, and
dominant features" of the marks in this case, as well as the contexts in which
the marks are to be used. This Court finds that the use of the "CITY CASH WITH
GOLDEN LION'S HEAD" mark will not result in the likelihood of confusion in the
minds of customers.

A visual comparison of the marks reveals no likelihood of confusion.

Respondent's mark is:

(See image)

This Court agrees with the observation of Director General Cristobal that the
most noticeable part of this mark is the golden lion's head device, 41 and finds
that after noticing the image of the lion's head, the words "CITY" and "CASH"
are equally prominent.

On the other hand, petitioner's marks, as noted by the Court of Appeals, often
include the red arc device:

(See image)

Petitioner's other registered marks which do not contain the red arc device
include the following:

(See image)

Examining these marks, this Court finds that petitioner's marks can best be
described as consisting of the prefix "CITI" added to other words.

Applying the dominancy test, this Court sees that the prevalent feature of
respondent's mark, the golden lion's head device, is not present at all in any of
petitioner's marks. The only similar feature between respondent's mark and
petitioner's collection of marks is the word "CITY" in the former, and the "CITI"
prefix found in the latter. This Court agrees with the findings of the Court of
Appeals that this similarity alone is not enough to create a likelihood of
confusion.
The dis[s]imilarities between the two marks are noticeable and substantial.
Respondent's mark, "CITY CASH WITH GOLDEN LION'S HEAD", has an insignia
of a golden lion's head at the left side of the words "CITY CASH", while
petitioner's "CITI" mark usually has an arc between the two I's. A further
scrutiny of the other "CITI" marks of petitioner would show that their font type,
font size, and color schemes of the said "CITI" marks vary for each product or
service. Most of the time, petitioner's "CITI" mark is joined with another term to
form a single word, with each product or service having different font types and
color schemes. On the contrary, the trademark of respondent consists of the
words "CITY CASH", with a golden lion's head emblem on the left side. It is,
therefore, improbable that the public would immediately and naturally conclude
that respondent's "CITY CASH WITH GOLDEN LION'S HEAD" is but another
variation under petitioner's "CITI" marks.

Verily, the variations in the appearance of the "CITI" marks by petitioner, when
conjoined with other words, would dissolve the alleged similarity between them
and the trademark of respondent. These dissimilarities, and the insignia of a
golden lion's head before the words "CITY CASH" in the mark of the respondent
would sufficiently acquaint and apprise the public that respondent's trademark
"CITY CASH WITH GOLDEN LION'S HEAD" is not connected with the "CITI"
marks of petitioner.42
This Court also agrees with the Court of Appeals that the context where
respondent's mark is to be used, namely, for its ATM services, which could only
be secured at respondent's premises and not in an open market of ATM services,
further diminishes the possibility of confusion on the part of prospective
customers. Thus, this Court quotes with approval the Court of Appeals, which
made reference to Emerald Manufacturing:
Moreover, more credit should be given to the "ordinary purchaser." Cast in this
particular controversy, the ordinary purchaser is not the "completely unwary
consumer" but is the "ordinarily intelligent buyer" considering the type of
product involved. It bears to emphasize that the mark "CITY CASH WITH
GOLDEN LION'S HEAD" is a mark of respondent for its ATM services which it
offers to the public. It cannot be gainsaid that an ATM service is not an ordinary
product which could be obtained at any store without the public noticing its
association with the banking institution that provides said service. Naturally, the
customer must first open an account with a bank before it could avail of its ATM
service. Moreover, the name of the banking institution is written and posted
either inside or outside the ATM booth, not to mention the fact that the name of
the bank that operates the ATM is constantly flashed at the screen of the ATM
itself. With this, the public would accordingly be apprised that respondent's
"CITY CASH" is an ATM service of the respondent bank, and not of the
petitioner's.43
Petitioner argues that Emerald Manufacturing is distinguishable from this case,
insisting that ATM services are more akin to ordinary household items than they
are akin to brand name jeans, in terms of how their customers choose their
providers:
73. The Emerald Manufacturing case involved the marks "Lee" and "Stylistic Mr.
Lee", and the Supreme Court focused on the nature of the products as "not the
ordinary household items", pointing to the fact that, "the average Filipino
consumer generally buys his jeans by brand. He does not ask the sales clerk for
his generic jeans but for, say a Levis, Guess, Wrangler or even an Armani."

74. In contrast, when an ordinary consumer of ATM services wishes to withdraw

cash, more often than not he will simply locate the nearest ATM, without
reference to brand as long as the ATM accepts his card. When dealing with
banks that belong to an ATM network such as Bancnet, which both parties do,
the cards are almost universally and interchangeably accepted. 44
This scenario is unclear, and thus, unconvincing and insufficient to support a
finding of error on the part of the Court of Appeals. Petitioner hypothesizes that
there could be some confusion because ATM users "simply locate the nearest
ATM, without reference to brand as long as the ATM accepts [their] card." 45 This
Court is at a loss to see how this supports petitioner's claims that ATM users
locate the nearest ATMs and use them without reference to brand as long as the
ATM accepts their cards. If petitioner's speculation is true, then bank branding is
wholly irrelevant after the ATM service has been secured. This Court is hard
pressed to accept this assumption. In any case, this Court simply cannot agree
that a bank or ATM service is more akin to ordinary household items than it is to
brand name Jeans.

More relevant than the scenario discussed by petitioner is the stage when a bank
is trying to attract customers to avail of its services. Petitioner points out that in
advertisements, such as in radio, newspapers, and the internet, which are
shown beyond the bank premises, there may be no golden lion's head device to
disambiguate "CITY CASH" from any of petitioner's own marks and
services.46 This Court finds this unconvincing. ATM services, like other bank
services, are generally not marketed as independent products. Indeed, as
pointed out by petitioner itself, ATM cards accompany the basic deposit product
in most banks.47 They are generally adjunct to the main deposit service provided
by a bank. Since ATM services must be secured and contracted for at the
offering bank's premises, any marketing campaign for an ATM service must
focus first and foremost on the offering bank. Hence, any effective internet and
newspaper advertisement for respondent would include and emphasize the
golden lion's head device. Indeed, a radio advertisement would not have it. It
should not be forgotten, however, that a mark is a question of visuals, by
statutory definition.48 Thus, the similarity between the sounds of "CITI" and
"CITY" in a radio advertisement alone neither is sufficient for this Court to
conclude that there is a likelihood that a customer would be confused nor can
operate to bar respondent from registering its mark. This Court notes that any
confusion that may arise from using "CITY CASH" in a radio advertisement would
be the same confusion that might arise from using respondent's own trade
name. Aurally, respondent's very trade name, which is not questioned, could be
mistaken as "CITISTATE SAVINGS BANK," and all of petitioner's fears of possible
confusion would be just as likely.

This Court agrees with Director General Cristobal's recognition of respondent's

history and of "Citystate" as part of its name. 49 Upon consideration, it notes that
it may have been more aligned with the purpose of trademark protection for
respondent to have chosen the trademark "CITYSTATE CASH" instead of "CITY
CASH" to create a stronger association between its trade name and the service
provided. Nonetheless, there is no law requiring that trademarks match the
offeror's trade name precisely to be registrable. The only relevant issue is the
likelihood of confusion.

This Court also recognizes that there could be other situations involving a
combination of the word "city" and another word that could result in confusion
among customers. However, it is not convinced that this is one of those
situations.

Thus, having examined the particularities of this case, this Court affirms the
Court of Appeals' finding that Director General Cristobal of the Intellectual
Property Office did not commit any grave abuse of discretion in allowing the
registration of respondent's trademark.

WHEREFORE, the petition is DENIED. The Court of Appeals August 29, 2012
Decision and January 15, 2013 Resolution in CA-G.R. SP No. 109679
are AFFIRMED.

SO ORDERED.

G.R. No. 199455, June 27, 2018

FEDERAL EXPRESS CORPORATION, Petitioner, v. LUWALHATI R.

ANTONINO AND ELIZA BETTINA RICASA ANTONINO, Respondents.
 DECISION

LEONEN, J.:

The duty of common carriers to observe extraordinary diligence in shipping

goods does not terminate until delivery to the consignee or to the specific person
authorized to receive the shipped goods. Failure to deliver to the person
authorized to receive the goods is tantamount to loss of the goods, thereby
engendering the common carrier's liability for loss. Ambiguities in contracts of
carriage, which are contracts of adhesion, must be interpreted against the
common carrier that prepared these contracts.

This resolves a Petition for Review on Certiorari 1 under Rule 45 of the 1997 Rules
of Civil Procedure praying that the assailed Court of Appeals August 31, 2011
Decision2 and November 21, 2011 Resolution3 in CA-G.R. CV No. 91216 be
reversed and set aside and that Luwalhati R. Antonino (Luwalhati) and Eliza
Bettina Ricasa Antonino (Eliza) be held liable on Federal Express Corporation's
(FedEx) counterclaim.

The assailed Court of Appeals August 31, 2011 Decision denied the appeal filed
by FedEx and affirmed the May 8, 2008 Decision4 of Branch 217, Regional Trial
Court, Quezon City, awarding moral and exemplary damages, and attorney's
fees to Luwalhati and Eliza.5 In its assailed November 21, 2011 Resolution, the
Court of Appeals denied FedEx's Motion for Reconsideration. 6

Eliza was the owner of Unit 22-A (the Unit) in Allegro Condominium, located at
62 West 62nd St., New York, United States.7 In November 2003, monthly
common charges on the Unit became due. These charges were for the period of
July 2003 to November 2003, and were for a total amount of US$9,742.81. 8

On December 15, 2003, Luwalhati and Eliza were in the Philippines. As the
monthly common charges on the Unit had become due, they decided to send
several Citibank checks to Veronica Z. Sison (Sison), who was based in New
York. Citibank checks allegedly amounting to US$17,726.18 for the payment of
monthly charges and US$11,619.35 for the payment of real estate taxes were
sent by Luwalhati through FedEx with Account No. x2546-4948-1 and Tracking
No. 8442 4588 4268. The package was addressed to Sison who was tasked to
deliver the checks payable to Maxwell-Kates, Inc. and to the New York County
Department of Finance. Sison allegedly did not receive the package, resulting in
the non-payment of Luwalhati and Eliza's obligations and the foreclosure of the
Unit.9

Upon learning that the checks were sent on December 15, 2003, Sison contacted
FedEx on February 9, 2004 to inquire about the non-delivery. She was informed
that the package was delivered to her neighbor but there was no signed
receipt.10
On March 14, 2004, Luwalhati and Eliza, through their counsel, sent a demand
letter to FedEx for payment of damages due to the non-delivery of the package,
but FedEx refused to heed their demand.11 Hence, on April 5, 2004, they filed
their Complaint12 for damages.

FedEx claimed that Luwalhati and Eliza "ha[d] no cause of action against it
because [they] failed to comply with a condition precedent, that of filing a
written notice of claim within the 45 calendar days from the acceptance of the
shipment."13 It added that it was absolved of liability as Luwalhati and Eliza
shipped prohibited items and misdeclared these items as "documents." 14 It
pointed to conditions under its Air Waybill prohibiting the "transportation of
money (including but not limited to coins or negotiable instruments equivalent to
cash such as endorsed stocks and bonds)."15

In its May 8, 2008 Decision,16 the Regional Trial Court ruled for Luwalhati and
Eliza, awarding them moral and exemplary damages, and attorney's fees.17

The Regional Trial Court found that Luwalhati failed to accurately declare the
contents of the package as "checks."18 However, it ruled that a check is not legal
tender or a "negotiable instrument equivalent to cash," as prohibited by the Air
Waybill.19 It explained that common carriers are presumed to be at fault
whenever goods are lost.20 Luwalhati testified on the non-delivery of the
package. FedEx, on the other hand, claimed that the shipment was released
without the signature of the actual recipient, as authorized by the shipper or
recipient. However, it failed to show that this authorization was made; thus, it
was still liable for the loss of the package.21

On non-compliance with a condition precedent, it ruled that under the Air

Waybill, the prescriptive period for filing an action was "within two (2) years
from the date of delivery of the shipment or from the date on which the
shipment should have been delivered."22 Luwalhati and Eliza's demand letter
made on March 11, 2004 was within the two (2)-year period sanctioned by the
Air Waybill.23 The trial court also noted that they were given a "run-around" by
FedEx employees, and thus, were deemed to have complied with the filing of the
formal claim.24

The dispositive portion of the Regional Trial Court May 8, 2008 Decision read:

WHEREFORE, judgment is hereby rendered in favor of plaintiffs Luwalhati R.

Antonino and Eliza Bettina Ricasa Antonino ordering the following:

1) The amount of P200,000.00 by way of moral damages;

2) The amount of P100,000.00 by way of exemplary damages; and
[3]) The amount of P150,000.00 as and for attorney's fees. Costs against
defendant.

The counterclaim is ordered dismissed.

SO ORDERED.25

In its assailed August 31, 2011 Decision,26 the Court of Appeals affirmed the
ruling of the Regional Trial Court.27 According to it, by accepting the package
despite its supposed defect, FedEx was deemed to have acquiesced to the
transaction. Thus, it must deliver the package in good condition and could not
subsequently deny liability for loss.28 The Court of Appeals sustained the
Regional Trial Court's conclusion that checks are not legal tender, and thus, not
covered by the Air Waybill's prohibition.29 It further noted that an Air Waybill is a
contract of adhesion and should be construed against the party that drafted it. 30

The dispositive portion of the Court of Appeals August 31, 2011 Decision read:

WHEREFORE, premises considered, the present appeal is hereby DENIED. The

assailed May 08, 2008 Decision of the Regional Trial Court, Branch 217, Quezon
City in Civil case No. Q-04-52325 is AFFIRMED. Costs against the herein
appellant.

SO ORDERED.31

Following the Court of Appeals' denial32 of its Motion for Reconsideration, FedEx
filed the present Petition.

For resolution of this Court is the sole issue of whether or not petitioner Federal
Express Corporation may be held liable for damages on account of its failure to
deliver the checks shipped by respondents Luwalhati R. Antonino and Eliza
Bettina Ricasa Antonino to the consignee Veronica Sison.

Petitioner disclaims liability because of respondents' failure to comply with a

condition precedent, that is, the filing of a written notice of a claim for non-
delivery or misdelivery within 45 days from acceptance of the shipment. 33 The
Regional Trial Court found the condition precedent to have been substantially
complied with and attributed respondents' noncompliance to FedEx for giving
them a run-around.34 This Court affirms this finding.

A provision in a contract of carriage requiring the filing of a formal claim within a

specified period is a valid stipulation. Jurisprudence maintains that compliance
with this provision is a legitimate condition precedent to an action for damages
arising from loss of the shipment:

More particularly, where the contract of shipment contains a reasonable

requirement of giving notice of loss of or injury to the goods, the giving of such
notice is a condition precedent to the action for loss or injury or the right to
enforce the carrier's liability. Such requirement is not an empty formalism. The
fundamental reason or purpose of such a stipulation is not to relieve the carrier
from just liability, but reasonably to inform it that the shipment has been
damaged and that it is charged with liability therefor, and to give it an
opportunity to examine the nature and extent of the injury. This protects the
carrier by affording it an opportunity to make an investigation of a claim while
the matter is fresh and easily investigated so as to safeguard itself from false
and fraudulent claims.35 (Citation omitted)

Petitioner's Air Waybill stipulates the following on filing of claims:

Claims for Loss, Damage, or Delay. All claims must be made in writing and
within strict time limits. See any applicable tariff, our service guide or our
standard conditions for carriage for details.

The right to damages against us shall be extinguished unless an action is

brought within two (2) years from the date of delivery of the shipment or from
the date on which the shipment should have been delivered.

Within forty-five (45) days after notification of the claim, it must be documented
by sending to us [all the] relevant information about it.36

For their claim to prosper, respondents must, thus, surpass two (2) hurdles:
first, the filing of their formal claim within 45 days; and second, the subsequent
filing of the action within two (2) years.

There is no dispute on respondents' compliance with the second period as their

Complaint was filed on April 5, 2004.37

In appraising respondents' compliance with the first condition, this Court is

guided by settled standards in jurisprudence.

In Philippine Airlines, Inc. v. Court of Appeals,38 Philippine Airlines alleged that

shipper Gilda Mejia (Mejia) failed to file a formal claim within the period stated in
the Air Waybill.39 This Court ruled that there was substantial compliance with the
period because of the zealous efforts demonstrated by Mejia in following up her
claim.40 These efforts coupled with Philippine Airlines' "tossing around the claim
and leaving it unresolved for an indefinite period of time" led this Court to deem
the requisite period satisfied.41 This is pursuant to Article 1186 of the New Civil
Code which provides that "[t]he condition shall be deemed fulfilled when the
obligor voluntarily prevents its fulfillment": 42

Considering the abovementioned incident and private respondent Mejia's own

zealous efforts in following up the claim, it was clearly not her fault that the
letter of demand for damages could only be filed, after months of exasperating
follow-up of the claim, on August 13, 1990. If there was any failure at all to file
the formal claim within the prescriptive period contemplated in the air waybill,
this was largely because of PAL's own doing, the consequences of which cannot,
in all fairness, be attributed to private respondent.
Even if the claim for damages was conditioned on the timely filing of a formal
claim, 'under Article 1186 of the Civil Code that condition was deemed fulfilled,
considering that the collective action of PAL's personnel in tossing around the
claim and leaving it unresolved for an indefinite period of time was tantamount
to "voluntarily preventing its fulfillment." On grounds of equity, the filing of the
baggage freight claim, which sufficiently informed PAL of the damage sustained
by private respondent's cargo, constituted substantial compliance with the
requirement in the contract for the filing of a formal claim.43 (Citations omitted)

Here, the Court of Appeals detailed the efforts made by respondent Luwalhati
and consignee Sison. It also noted petitioner's ambiguous and evasive
responses, nonchalant handling of respondents' concerns, and how these bogged
down respondents' actions and impaired their compliance with the required 45-
day period:

Anent the issues concerning lack of cause of action and their so-called "run-
around" matter, We uphold the lower court's finding that the herein appellees
complied with the requirement for the immediate filing of a formal claim for
damages as required in the Air Waybill or, at least, We find that there was
substantial compliance therewith. Luwalhati testified that the addressee,
Veronica Z. Sison promptly traced the whereabouts of the said package, but to
no avail. Her testimony narrated what happened thereafter, thus:

". . .
"COURT: All right. She was informed that it was lost. What steps did you take to find out or to recover
back this package?
 
"ATTY. ALENTAJAN:
"Q What did you do to Fedex?
". . .
   
WITNESS: First, I asked the secretary here to call Fedex Manila and they said, the record show that it was
sent to New York, Your Honor.
 
". . .
ATTY. ALENTAJAN:
"Q After calling Fedex, what did Fedex do?
   
"A None, sir. They washed their hands because according to them it is New York because they
have sent it. Their records show that New York received it, Sir.
   
"Q New York Fedex?
   
"A Yes, Sir.
   
"Q Now what else did you do after that?
   
"A And then I asked my friend Mrs. Veronica Sison to trace it, Sir.
   
". . .  
   
"Q What did she report to you?
   
"A She reported to me that first, she checked with the Fedex and the first answer was they were
going to trace it. The second answer was that, it was delivered to the lady, her neighbor and the
neighbor completely denied it and as they show a signature that is not my signature, so the next
time she called again, another person answered. She called to say that the neighbor did not
receive and the person on the other line I think she got his name, said that, it is because it is
December and we usually do that just leave it and then they cut the line and so I asked my
friend to issue a sworn statement in the form of affidavit and have it notarized in the Philippine
Embassy or Consulate, Sir. That is what she did.
   
"Q On your part here in the Philippines after doing that, after instructing Veronica Sison, what else
did you do because of this violation?
   
"A I think the next step was to issue a demand letter because any way I do not want to go to Court,
it is so hard, Sir."

The foregoing event show Luwalhati's own ardent campaign in following up the
claim. To the Court's mind, it is beyond her control why the demand letter for
damages was only sent subsequent to her infuriating follow-ups regarding the
whereabouts of the said package. We can surmise that if there was any omission
at all to file the said claim within the prescriptive period provided for under the
Air Waybill it was mostly due to herein appellant's own behavior, the outcome
thereof cannot, by any chance, be imputed to the herein
appellees.44 (Grammatical errors in the original)

Petitioner has been unable to persuasively refute Luwalhati's recollection of the

efforts that she and Sison exerted, and of the responses it gave them. It instead
insists that the 45-day period stated in its Air Waybill is sacrosanct. This Court is
unable to bring itself to sustaining petitioner's appeal to a convenient reprieve.
It is one with the Regional Trial Court and the Court of Appeals in stressing that
respondents' inability to expediently file a formal claim can only be attributed to
petitioner hampering its fulfillment. Thus, respondents must be deemed to have
substantially complied with the requisite 45-day period for filing a formal claim.
 II

The Civil Code mandates common carriers to observe extraordinary diligence in

caring for the goods they are transporting:

Article 1733. Common carriers, from the nature of their business and for reasons
of public policy, are bound to observe extraordinary diligence in the vigilance
over the goods and for the safety of the passengers transported by them,
according to all the circumstances of each case.

"Extraordinary diligence is that extreme measure of care and caution which

persons of unusual prudence and circumspection use for securing and preserving
their own property or rights."45 Consistent with the mandate of extraordinary
diligence, the Civil Code stipulates that in case of loss or damage to goods,
common carriers are presumed to be negligent or at fault,46 except in the
following instances:

(1) Flood, storm, earthquake, lightning, or other natural disaster or calamity;

(2) Act of the public enemy in war, whether international or civil;
(3) Act or omission of the shipper or owner of the goods;
(4) The character of the goods or defects in the packing or in the containers;
(5) Order or act or competent public authority.47

In all other cases, common carriers must prove that they exercised
extraordinary diligence in the performance of their duties, if they are to be
absolved of liability.48

The responsibility of common carriers to exercise extraordinary diligence lasts

from the time the goods are unconditionally placed in their possession until they
are delivered "to the consignee, or to the person who has a right to receive
them."49 Thus, part of the extraordinary responsibility of common carriers is the
duty to ensure that shipments are received by none but "the person who has a
right to receive them."50 Common carriers must ascertain the identity of the
recipient. Failing to deliver shipment to the designated recipient amounts to a
failure to deliver. The shipment shall then be considered lost, and liability for this
loss ensues.

Petitioner is unable to prove that it exercised extraordinary diligence in ensuring

delivery of the package to its designated consignee. It claims to have made a
delivery but it even admits that it was not to the designated consignee. It
asserts instead that it was authorized to release the package without the
signature of the designated recipient and that the neighbor of the consignee,
one identified only as "LGAA 385507," received it.51 This fails to impress.

The assertion that receipt was made by "LGAA 385507" amounts to little, if any,
value in proving petitioner's successful discharge of its duty. "LGAA 385507" is
nothing but an alphanumeric code that outside of petitioner's personnel and
internal systems signifies nothing. This code does not represent a definite,
readily identifiable person, contrary to how commonly accepted identifiers, such
as numbers attached to official, public, or professional identifications like social
security numbers and professional license numbers, function. Reliance on this
code is tantamount to reliance on nothing more than petitioner's bare, self-
serving allegations. Certainly, this cannot satisfy the requisite of extraordinary
diligence consummated through delivery to none but "the person who has a
right to receive"52 the package.

Given the circumstances in this case, the more reasonable conclusion is that the
package was not delivered. The package shipped by respondents should then be
considered lost, thereby engendering the liability of a common carrier for this
loss.

Petitioner cannot but be liable for this loss. It failed to ensure that the package
was delivered to the named consignee. It admitted to delivering to a mere
neighbor. Even as it claimed this, it failed to identify that neighbor.

III

Petitioner further asserts that respondents violated the terms of the Air Waybill
by shipping checks. It adds that this violation exempts it from liability. 53

This is untenable.

Petitioner's International Air Waybill states:

Items Not Acceptable for Transportation. We do not accept transportation

of money (including but not limited to coins or negotiable instruments equivalent
to cash such as endorsed stocks and bonds). We exclude all liability for
shipments of such items accepted by mistake. Other items may be accepted for
carriage only to limited destinations or under restricted conditions. We reserve
the right to reject packages based upon these limitations or for reasons of safety
or security. You may consult our Service Guide, Standard Conditions of Carriage,
or any applicable tariff for specific details.54 (Emphasis in the original)

The prohibition has a singular object: money. What follows the phrase
"transportation of money" is a phrase enclosed in parentheses, and commencing
with the words "including but not limited to." The additional phrase, enclosed as
it is in parentheses, is not the object of the prohibition, but merely a postscript
to the word "money." Moreover, its introductory words "including but not limited
to" signify that the items that follow are illustrative examples; they are not
qualifiers that are integral to or inseverable from "money." Despite the utterance
of the enclosed phrase, the singular prohibition remains: money.
Money is "what is generally acceptable in exchange for goods." 55 It can take
many forms, most commonly as coins and banknotes. Despite its myriad forms,
its key element is its general acceptability.56 Laws usually define what can be
considered as a generally acceptable medium of exchange. 57 In the Philippines,
Republic Act No. 7653, otherwise known as The New Central Bank Act, defines
"legal tender" as follows:

All notes and coins issued by the Bangko Sentral shall be fully guaranteed by the
Government of the Republic of the Philippines and shall be legal tender in the
Philippines for all debts, both public and private: Provided, however, That,
unless otherwise fixed by the Monetary Board, coins shall be legal tender in
amounts not exceeding Fifty pesos (P50.00) for denomination of Twenty-five
centavos and above, and in amounts not exceeding Twenty pesos (P20.00) for
denominations of Ten centavos or less.58

It is settled in jurisprudence that checks, being only negotiable instruments, are

only substitutes for money and are not legal tender; more so when the check
has a named payee and is not payable to bearer. In Philippine Airlines, Inc. v.
Court of Appeals,59 this Court ruled that the payment of a check to the sheriff did
not satisfy the judgment debt as checks are not considered legal tender. This
has been maintained in other cases decided by this Court. In Cebu International
Finance Corporation v. Court of Appeals,60 this Court held that the debts paid in
a money market transaction through the use of a check is not a valid tender of
payment as a check is not legal tender in the Philippines. Further, in Bank of the
Philippine Islands v. Court of Appeals,61 this Court held that "a check, whether a
manager's check or ordinary check, is not legal tender." 62

The Air Waybill's prohibition mentions "negotiable instruments" only in the

course of making an example. Thus, they are not prohibited items themselves.
Moreover, the illustrative example does not even pertain to negotiable
instruments per se but to "negotiable instruments equivalent to cash."63

The checks involved here are payable to specific payees, Maxwell-Kates, Inc.
and the New York County Department of Finance.64 Thus, they are order
instruments. They are not payable to their bearer, i.e., bearer instruments.
Order instruments differ from bearer instruments in their manner of negotiation:

Under Section 30 of the [Negotiable Instruments Law], an order instrument

requires an indorsement from the payee or holder before it may be validly
negotiated. A bearer instrument, on the other hand, does not require an
indorsement to be validly negotiated. 65

There is no question that checks, whether payable to order or to bearer, so long

as they comply with the requirements under Section 1 of the Negotiable
Instruments Law, are negotiable instruments. 66 The more relevant consideration
is whether checks with a specified payee are negotiable instruments equivalent
to cash, as contemplated in the example added to the Air Waybill's prohibition.
This Court thinks not. An order instrument, which has to be endorsed by the
payee before it may be negotiated,67 cannot be a negotiable instrument
equivalent to cash. It is worth emphasizing that the instruments given as further
examples under the Air Waybill must be endorsed to be considered equivalent to
cash:68

Items Not Acceptable for Transportation. We do not accept transportation

of money (including but not limited to coins or negotiable instruments equivalent
to cash such as endorsed stocks and bonds). ... (Emphasis in the original)69

What this Court's protracted discussion reveals is that petitioner's Air Waybill
lends itself to a great deal of confusion. The clarity of its terms leaves much to
be desired. This lack of clarity can only militate against petitioner's cause.

The contract between petitioner and respondents is a contract of adhesion; it

was prepared solely by petitioner for respondents to conform to. 70 Although not
automatically void, any ambiguity in a contract of adhesion is construed strictly
against the party that prepared it.71 Accordingly, the prohibition against
transporting money must be restrictively construed against petitioner and
liberally for respondents. Viewed through this lens, with greater reason should
respondents be exculpated from liability for shipping documents or instruments,
which are reasonably understood as not being money, and for being unable to
declare them as such.

Ultimately, in shipping checks, respondents were not violating petitioner's Air

Waybill. From this, it follows that they committed no breach of warranty that
would absolve petitioner of liability.

WHEREFORE, the Petition for Review on Certiorari is DENIED. The assailed

August 31, 2011 Decision and November 21, 2011 Resolution of the Court of
Appeals in CA-G.R. CV No. 91216 are AFFIRMED.

SO ORDERED.

G.R. No. 199455, June 27, 2018

FEDERAL EXPRESS CORPORATION, Petitioner, v. LUWALHATI R.

ANTONINO AND ELIZA BETTINA RICASA ANTONINO, Respondents.

DECISION

LEONEN, J.:

The duty of common carriers to observe extraordinary diligence in shipping

goods does not terminate until delivery to the consignee or to the specific person
authorized to receive the shipped goods. Failure to deliver to the person
authorized to receive the goods is tantamount to loss of the goods, thereby
engendering the common carrier's liability for loss. Ambiguities in contracts of
carriage, which are contracts of adhesion, must be interpreted against the
common carrier that prepared these contracts.

This resolves a Petition for Review on Certiorari 1 under Rule 45 of the 1997 Rules
of Civil Procedure praying that the assailed Court of Appeals August 31, 2011
Decision2 and November 21, 2011 Resolution3 in CA-G.R. CV No. 91216 be
reversed and set aside and that Luwalhati R. Antonino (Luwalhati) and Eliza
Bettina Ricasa Antonino (Eliza) be held liable on Federal Express Corporation's
(FedEx) counterclaim.

The assailed Court of Appeals August 31, 2011 Decision denied the appeal filed
by FedEx and affirmed the May 8, 2008 Decision4 of Branch 217, Regional Trial
Court, Quezon City, awarding moral and exemplary damages, and attorney's
fees to Luwalhati and Eliza.5 In its assailed November 21, 2011 Resolution, the
Court of Appeals denied FedEx's Motion for Reconsideration. 6

Eliza was the owner of Unit 22-A (the Unit) in Allegro Condominium, located at
62 West 62nd St., New York, United States.7 In November 2003, monthly
common charges on the Unit became due. These charges were for the period of
July 2003 to November 2003, and were for a total amount of US$9,742.81. 8

On December 15, 2003, Luwalhati and Eliza were in the Philippines. As the
monthly common charges on the Unit had become due, they decided to send
several Citibank checks to Veronica Z. Sison (Sison), who was based in New
York. Citibank checks allegedly amounting to US$17,726.18 for the payment of
monthly charges and US$11,619.35 for the payment of real estate taxes were
sent by Luwalhati through FedEx with Account No. x2546-4948-1 and Tracking
No. 8442 4588 4268. The package was addressed to Sison who was tasked to
deliver the checks payable to Maxwell-Kates, Inc. and to the New York County
Department of Finance. Sison allegedly did not receive the package, resulting in
the non-payment of Luwalhati and Eliza's obligations and the foreclosure of the
Unit.9

Upon learning that the checks were sent on December 15, 2003, Sison contacted
FedEx on February 9, 2004 to inquire about the non-delivery. She was informed
that the package was delivered to her neighbor but there was no signed
receipt.10

On March 14, 2004, Luwalhati and Eliza, through their counsel, sent a demand
letter to FedEx for payment of damages due to the non-delivery of the package,
but FedEx refused to heed their demand.11 Hence, on April 5, 2004, they filed
their Complaint12 for damages.

FedEx claimed that Luwalhati and Eliza "ha[d] no cause of action against it
because [they] failed to comply with a condition precedent, that of filing a
written notice of claim within the 45 calendar days from the acceptance of the
shipment."13 It added that it was absolved of liability as Luwalhati and Eliza
shipped prohibited items and misdeclared these items as "documents." 14 It
pointed to conditions under its Air Waybill prohibiting the "transportation of
money (including but not limited to coins or negotiable instruments equivalent to
cash such as endorsed stocks and bonds)."15

In its May 8, 2008 Decision,16 the Regional Trial Court ruled for Luwalhati and
Eliza, awarding them moral and exemplary damages, and attorney's fees.17

The Regional Trial Court found that Luwalhati failed to accurately declare the
contents of the package as "checks."18 However, it ruled that a check is not legal
tender or a "negotiable instrument equivalent to cash," as prohibited by the Air
Waybill.19 It explained that common carriers are presumed to be at fault
whenever goods are lost.20 Luwalhati testified on the non-delivery of the
package. FedEx, on the other hand, claimed that the shipment was released
without the signature of the actual recipient, as authorized by the shipper or
recipient. However, it failed to show that this authorization was made; thus, it
was still liable for the loss of the package.21

On non-compliance with a condition precedent, it ruled that under the Air

Waybill, the prescriptive period for filing an action was "within two (2) years
from the date of delivery of the shipment or from the date on which the
shipment should have been delivered."22 Luwalhati and Eliza's demand letter
made on March 11, 2004 was within the two (2)-year period sanctioned by the
Air Waybill.23 The trial court also noted that they were given a "run-around" by
FedEx employees, and thus, were deemed to have complied with the filing of the
formal claim.24

The dispositive portion of the Regional Trial Court May 8, 2008 Decision read:

WHEREFORE, judgment is hereby rendered in favor of plaintiffs Luwalhati R.

Antonino and Eliza Bettina Ricasa Antonino ordering the following:

1) The amount of P200,000.00 by way of moral damages;

2) The amount of P100,000.00 by way of exemplary damages; and
[3]) The amount of P150,000.00 as and for attorney's fees. Costs against
defendant.

The counterclaim is ordered dismissed.

SO ORDERED.25

In its assailed August 31, 2011 Decision,26 the Court of Appeals affirmed the
ruling of the Regional Trial Court.27 According to it, by accepting the package
despite its supposed defect, FedEx was deemed to have acquiesced to the
transaction. Thus, it must deliver the package in good condition and could not
subsequently deny liability for loss.28 The Court of Appeals sustained the
Regional Trial Court's conclusion that checks are not legal tender, and thus, not
covered by the Air Waybill's prohibition.29 It further noted that an Air Waybill is a
contract of adhesion and should be construed against the party that drafted it. 30

The dispositive portion of the Court of Appeals August 31, 2011 Decision read:

WHEREFORE, premises considered, the present appeal is hereby DENIED. The

assailed May 08, 2008 Decision of the Regional Trial Court, Branch 217, Quezon
City in Civil case No. Q-04-52325 is AFFIRMED. Costs against the herein
appellant.

SO ORDERED.31

Following the Court of Appeals' denial32 of its Motion for Reconsideration, FedEx
filed the present Petition.

For resolution of this Court is the sole issue of whether or not petitioner Federal
Express Corporation may be held liable for damages on account of its failure to
deliver the checks shipped by respondents Luwalhati R. Antonino and Eliza
Bettina Ricasa Antonino to the consignee Veronica Sison.

Petitioner disclaims liability because of respondents' failure to comply with a

condition precedent, that is, the filing of a written notice of a claim for non-
delivery or misdelivery within 45 days from acceptance of the shipment. 33 The
Regional Trial Court found the condition precedent to have been substantially
complied with and attributed respondents' noncompliance to FedEx for giving
them a run-around.34 This Court affirms this finding.

A provision in a contract of carriage requiring the filing of a formal claim within a

specified period is a valid stipulation. Jurisprudence maintains that compliance
with this provision is a legitimate condition precedent to an action for damages
arising from loss of the shipment:

More particularly, where the contract of shipment contains a reasonable

requirement of giving notice of loss of or injury to the goods, the giving of such
notice is a condition precedent to the action for loss or injury or the right to
enforce the carrier's liability. Such requirement is not an empty formalism. The
fundamental reason or purpose of such a stipulation is not to relieve the carrier
from just liability, but reasonably to inform it that the shipment has been
damaged and that it is charged with liability therefor, and to give it an
opportunity to examine the nature and extent of the injury. This protects the
carrier by affording it an opportunity to make an investigation of a claim while
the matter is fresh and easily investigated so as to safeguard itself from false
and fraudulent claims.35 (Citation omitted)
Petitioner's Air Waybill stipulates the following on filing of claims:

Claims for Loss, Damage, or Delay. All claims must be made in writing and
within strict time limits. See any applicable tariff, our service guide or our
standard conditions for carriage for details.

The right to damages against us shall be extinguished unless an action is

brought within two (2) years from the date of delivery of the shipment or from
the date on which the shipment should have been delivered.

Within forty-five (45) days after notification of the claim, it must be documented
by sending to us [all the] relevant information about it.36

For their claim to prosper, respondents must, thus, surpass two (2) hurdles:
first, the filing of their formal claim within 45 days; and second, the subsequent
filing of the action within two (2) years.

There is no dispute on respondents' compliance with the second period as their

Complaint was filed on April 5, 2004.37

In appraising respondents' compliance with the first condition, this Court is

guided by settled standards in jurisprudence.

In Philippine Airlines, Inc. v. Court of Appeals,38 Philippine Airlines alleged that

shipper Gilda Mejia (Mejia) failed to file a formal claim within the period stated in
the Air Waybill.39 This Court ruled that there was substantial compliance with the
period because of the zealous efforts demonstrated by Mejia in following up her
claim.40 These efforts coupled with Philippine Airlines' "tossing around the claim
and leaving it unresolved for an indefinite period of time" led this Court to deem
the requisite period satisfied.41 This is pursuant to Article 1186 of the New Civil
Code which provides that "[t]he condition shall be deemed fulfilled when the
obligor voluntarily prevents its fulfillment": 42

Considering the abovementioned incident and private respondent Mejia's own

zealous efforts in following up the claim, it was clearly not her fault that the
letter of demand for damages could only be filed, after months of exasperating
follow-up of the claim, on August 13, 1990. If there was any failure at all to file
the formal claim within the prescriptive period contemplated in the air waybill,
this was largely because of PAL's own doing, the consequences of which cannot,
in all fairness, be attributed to private respondent.

Even if the claim for damages was conditioned on the timely filing of a formal
claim, 'under Article 1186 of the Civil Code that condition was deemed fulfilled,
considering that the collective action of PAL's personnel in tossing around the
claim and leaving it unresolved for an indefinite period of time was tantamount
to "voluntarily preventing its fulfillment." On grounds of equity, the filing of the
baggage freight claim, which sufficiently informed PAL of the damage sustained
by private respondent's cargo, constituted substantial compliance with the
requirement in the contract for the filing of a formal claim.43 (Citations omitted)

Here, the Court of Appeals detailed the efforts made by respondent Luwalhati
and consignee Sison. It also noted petitioner's ambiguous and evasive
responses, nonchalant handling of respondents' concerns, and how these bogged
down respondents' actions and impaired their compliance with the required 45-
day period:

Anent the issues concerning lack of cause of action and their so-called "run-
around" matter, We uphold the lower court's finding that the herein appellees
complied with the requirement for the immediate filing of a formal claim for
damages as required in the Air Waybill or, at least, We find that there was
substantial compliance therewith. Luwalhati testified that the addressee,
Veronica Z. Sison promptly traced the whereabouts of the said package, but to
no avail. Her testimony narrated what happened thereafter, thus:

". . .
"COURT: All right. She was informed that it was lost. What steps did you take to find out or to recover
back this package?
 
"ATTY. ALENTAJAN:
"Q What did you do to Fedex?
". . .
   
WITNESS: First, I asked the secretary here to call Fedex Manila and they said, the record show that it was
sent to New York, Your Honor.
 
". . .
ATTY. ALENTAJAN:
"Q After calling Fedex, what did Fedex do?
   
"A None, sir. They washed their hands because according to them it is New York because they
have sent it. Their records show that New York received it, Sir.
   
"Q New York Fedex?
   
"A Yes, Sir.
   
"Q Now what else did you do after that?
   
"A And then I asked my friend Mrs. Veronica Sison to trace it, Sir.
   
". . .  
   
"Q What did she report to you?
   
"A She reported to me that first, she checked with the Fedex and the first answer was they were
going to trace it. The second answer was that, it was delivered to the lady, her neighbor and the
neighbor completely denied it and as they show a signature that is not my signature, so the next
time she called again, another person answered. She called to say that the neighbor did not
receive and the person on the other line I think she got his name, said that, it is because it is
December and we usually do that just leave it and then they cut the line and so I asked my
friend to issue a sworn statement in the form of affidavit and have it notarized in the Philippine
Embassy or Consulate, Sir. That is what she did.
   
"Q On your part here in the Philippines after doing that, after instructing Veronica Sison, what else
did you do because of this violation?
   
"A I think the next step was to issue a demand letter because any way I do not want to go to Court,
it is so hard, Sir."

The foregoing event show Luwalhati's own ardent campaign in following up the
claim. To the Court's mind, it is beyond her control why the demand letter for
damages was only sent subsequent to her infuriating follow-ups regarding the
whereabouts of the said package. We can surmise that if there was any omission
at all to file the said claim within the prescriptive period provided for under the
Air Waybill it was mostly due to herein appellant's own behavior, the outcome
thereof cannot, by any chance, be imputed to the herein
appellees.44 (Grammatical errors in the original)

Petitioner has been unable to persuasively refute Luwalhati's recollection of the

efforts that she and Sison exerted, and of the responses it gave them. It instead
insists that the 45-day period stated in its Air Waybill is sacrosanct. This Court is
unable to bring itself to sustaining petitioner's appeal to a convenient reprieve.
It is one with the Regional Trial Court and the Court of Appeals in stressing that
respondents' inability to expediently file a formal claim can only be attributed to
petitioner hampering its fulfillment. Thus, respondents must be deemed to have
substantially complied with the requisite 45-day period for filing a formal claim.

II

The Civil Code mandates common carriers to observe extraordinary diligence in

caring for the goods they are transporting:
Article 1733. Common carriers, from the nature of their business and for reasons
of public policy, are bound to observe extraordinary diligence in the vigilance
over the goods and for the safety of the passengers transported by them,
according to all the circumstances of each case.

"Extraordinary diligence is that extreme measure of care and caution which

persons of unusual prudence and circumspection use for securing and preserving
their own property or rights."45 Consistent with the mandate of extraordinary
diligence, the Civil Code stipulates that in case of loss or damage to goods,
common carriers are presumed to be negligent or at fault,46 except in the
following instances:

(1) Flood, storm, earthquake, lightning, or other natural disaster or calamity;

(2) Act of the public enemy in war, whether international or civil;
(3) Act or omission of the shipper or owner of the goods;
(4) The character of the goods or defects in the packing or in the containers;
(5) Order or act or competent public authority.47

In all other cases, common carriers must prove that they exercised
extraordinary diligence in the performance of their duties, if they are to be
absolved of liability.48

The responsibility of common carriers to exercise extraordinary diligence lasts

from the time the goods are unconditionally placed in their possession until they
are delivered "to the consignee, or to the person who has a right to receive
them."49 Thus, part of the extraordinary responsibility of common carriers is the
duty to ensure that shipments are received by none but "the person who has a
right to receive them."50 Common carriers must ascertain the identity of the
recipient. Failing to deliver shipment to the designated recipient amounts to a
failure to deliver. The shipment shall then be considered lost, and liability for this
loss ensues.

Petitioner is unable to prove that it exercised extraordinary diligence in ensuring

delivery of the package to its designated consignee. It claims to have made a
delivery but it even admits that it was not to the designated consignee. It
asserts instead that it was authorized to release the package without the
signature of the designated recipient and that the neighbor of the consignee,
one identified only as "LGAA 385507," received it.51 This fails to impress.

The assertion that receipt was made by "LGAA 385507" amounts to little, if any,
value in proving petitioner's successful discharge of its duty. "LGAA 385507" is
nothing but an alphanumeric code that outside of petitioner's personnel and
internal systems signifies nothing. This code does not represent a definite,
readily identifiable person, contrary to how commonly accepted identifiers, such
as numbers attached to official, public, or professional identifications like social
security numbers and professional license numbers, function. Reliance on this
code is tantamount to reliance on nothing more than petitioner's bare, self-
serving allegations. Certainly, this cannot satisfy the requisite of extraordinary
diligence consummated through delivery to none but "the person who has a
right to receive"52 the package.

Given the circumstances in this case, the more reasonable conclusion is that the
package was not delivered. The package shipped by respondents should then be
considered lost, thereby engendering the liability of a common carrier for this
loss.

Petitioner cannot but be liable for this loss. It failed to ensure that the package
was delivered to the named consignee. It admitted to delivering to a mere
neighbor. Even as it claimed this, it failed to identify that neighbor.

III

Petitioner further asserts that respondents violated the terms of the Air Waybill
by shipping checks. It adds that this violation exempts it from liability. 53

This is untenable.

Petitioner's International Air Waybill states:

Items Not Acceptable for Transportation. We do not accept transportation

of money (including but not limited to coins or negotiable instruments equivalent
to cash such as endorsed stocks and bonds). We exclude all liability for
shipments of such items accepted by mistake. Other items may be accepted for
carriage only to limited destinations or under restricted conditions. We reserve
the right to reject packages based upon these limitations or for reasons of safety
or security. You may consult our Service Guide, Standard Conditions of Carriage,
or any applicable tariff for specific details.54 (Emphasis in the original)

The prohibition has a singular object: money. What follows the phrase
"transportation of money" is a phrase enclosed in parentheses, and commencing
with the words "including but not limited to." The additional phrase, enclosed as
it is in parentheses, is not the object of the prohibition, but merely a postscript
to the word "money." Moreover, its introductory words "including but not limited
to" signify that the items that follow are illustrative examples; they are not
qualifiers that are integral to or inseverable from "money." Despite the utterance
of the enclosed phrase, the singular prohibition remains: money.

Money is "what is generally acceptable in exchange for goods." 55 It can take
many forms, most commonly as coins and banknotes. Despite its myriad forms,
its key element is its general acceptability.56 Laws usually define what can be
considered as a generally acceptable medium of exchange. 57 In the Philippines,
Republic Act No. 7653, otherwise known as The New Central Bank Act, defines
"legal tender" as follows:

All notes and coins issued by the Bangko Sentral shall be fully guaranteed by the
Government of the Republic of the Philippines and shall be legal tender in the
Philippines for all debts, both public and private: Provided, however, That,
unless otherwise fixed by the Monetary Board, coins shall be legal tender in
amounts not exceeding Fifty pesos (P50.00) for denomination of Twenty-five
centavos and above, and in amounts not exceeding Twenty pesos (P20.00) for
denominations of Ten centavos or less.58

It is settled in jurisprudence that checks, being only negotiable instruments, are

only substitutes for money and are not legal tender; more so when the check
has a named payee and is not payable to bearer. In Philippine Airlines, Inc. v.
Court of Appeals,59 this Court ruled that the payment of a check to the sheriff did
not satisfy the judgment debt as checks are not considered legal tender. This
has been maintained in other cases decided by this Court. In Cebu International
Finance Corporation v. Court of Appeals,60 this Court held that the debts paid in
a money market transaction through the use of a check is not a valid tender of
payment as a check is not legal tender in the Philippines. Further, in Bank of the
Philippine Islands v. Court of Appeals,61 this Court held that "a check, whether a
manager's check or ordinary check, is not legal tender." 62

The Air Waybill's prohibition mentions "negotiable instruments" only in the

course of making an example. Thus, they are not prohibited items themselves.
Moreover, the illustrative example does not even pertain to negotiable
instruments per se but to "negotiable instruments equivalent to cash."63

The checks involved here are payable to specific payees, Maxwell-Kates, Inc.
and the New York County Department of Finance.64 Thus, they are order
instruments. They are not payable to their bearer, i.e., bearer instruments.
Order instruments differ from bearer instruments in their manner of negotiation:

Under Section 30 of the [Negotiable Instruments Law], an order instrument

requires an indorsement from the payee or holder before it may be validly
negotiated. A bearer instrument, on the other hand, does not require an
indorsement to be validly negotiated. 65

There is no question that checks, whether payable to order or to bearer, so long

as they comply with the requirements under Section 1 of the Negotiable
Instruments Law, are negotiable instruments. 66 The more relevant consideration
is whether checks with a specified payee are negotiable instruments equivalent
to cash, as contemplated in the example added to the Air Waybill's prohibition.

This Court thinks not. An order instrument, which has to be endorsed by the
payee before it may be negotiated,67 cannot be a negotiable instrument
equivalent to cash. It is worth emphasizing that the instruments given as further
examples under the Air Waybill must be endorsed to be considered equivalent to
cash:68

Items Not Acceptable for Transportation. We do not accept transportation

of money (including but not limited to coins or negotiable instruments equivalent
to cash such as endorsed stocks and bonds). ... (Emphasis in the original)69

What this Court's protracted discussion reveals is that petitioner's Air Waybill
lends itself to a great deal of confusion. The clarity of its terms leaves much to
be desired. This lack of clarity can only militate against petitioner's cause.

The contract between petitioner and respondents is a contract of adhesion; it

was prepared solely by petitioner for respondents to conform to. 70 Although not
automatically void, any ambiguity in a contract of adhesion is construed strictly
against the party that prepared it.71 Accordingly, the prohibition against
transporting money must be restrictively construed against petitioner and
liberally for respondents. Viewed through this lens, with greater reason should
respondents be exculpated from liability for shipping documents or instruments,
which are reasonably understood as not being money, and for being unable to
declare them as such.

Ultimately, in shipping checks, respondents were not violating petitioner's Air

Waybill. From this, it follows that they committed no breach of warranty that
would absolve petitioner of liability.

WHEREFORE, the Petition for Review on Certiorari is DENIED. The assailed

August 31, 2011 Decision and November 21, 2011 Resolution of the Court of
Appeals in CA-G.R. CV No. 91216 are AFFIRMED.

SO ORDERED.

G.R. No. 189524, October 11, 2017

ORIENTAL ASSURANCE CORPORATION, Petitioner, v. MANUEL ONG,

DOING BUSINESS UNDER THE BUSINESS NAME OF WESTERN PACIFIC
TRANSPORT SERVICES AND/OR ASIAN TERMINALS, INC., Respondents.

DECISION

LEONEN, J.:

The consignee's claim letter that was received by the arrastre operator two (2)
days after complete delivery of the cargo constitutes substantial compliance with
the time limitation for filing claims under the Gate Pass and the Management
Contract. However, the arrastre operator's liability for damage to the cargo is
limited to P5,000.00 per package in accordance with the Management Contract.
This Rule 45 Petition for Review on Certiorari 1 seeks a review of the February 19,
2009 Decision2 and August 25, 2009 Resolution3 of the Court of Appeals in CA-
GR. CV No. 89311. The Court of Appeals affirmed the Regional Trial Court's
dismissal of the complaint on the ground that the claim of petitioner Oriental
Assurance Corporation (Oriental) had already prescribed.

JEA Steel Industries, Inc. (JEA Steel) imported from South Korea 72 aluminum-
zinc-alloy-coated steel sheets in coils. These steel sheets were transported to
Manila on board the vessel M/V Dooyang Glory as evidenced by Bill of Lading No.
HDMUBSOML-214s011.4

Upon arrival of the vessel at the Manila South Harbor on June 10, 2002, the 72
coils were discharged and stored in Pier 9 under the custody of the arrastre
contractor, Asian Terminals, Inc. (Asian Terminals). 5

From the storage compound of Asian Terminals, the coils were loaded on the
trucks of Manuel Ong (Ong) and delivered to JEA Steel's plant in Barangay
Lapidario, Trece Martirez, Cavite on June 14, 20026 and June 17, 2002.7 Eleven
of these coils ''were found to be in damaged condition, dented or their normal
round shape deformed."8

JEA Steel filed a claim with Oriental for the value of the 11 damaged coils,
pursuant to Marine Insurance Policy No. OAC/M-12292.9

Oriental paid JEA Steel the sum of P521,530.16 and subsequently demanded
indemnity from Ong and Asian Terminals (respondents), but they refused to
pay.10

On May 19, 2003, Oriental filed a Complaint11 before the Regional Trial Court of
Manila for sum of money against respondents.12

Ong countered that the 11 coils were already damaged when they were loaded
on board his trucks and transported to the consignee.13

For its part, Asian Terminals claimed that it exercised due diligence in handling
the cargo, that the cargo was released to the consignee's representative in the
same condition as when received from the vessel, and that the damages were
sustained while in the custody of the vessel or the customs broker. 14

Asian Terminals further argued that Oriental's claim was barred for the latter's
failure to file a notice of claim within the 15-day period provided in the Gate
Pass and in Article VII, Section 7.01 of the Contract for Cargo Handling Services
(Management Contract) between the Philippine Ports Authority and Asian
Terminals.15 The Gate Pass was signed by the consignee's representative to
acknowledge the delivery and receipt of the shipment. 16 The dorsal side of this
Gate Pass stated:
 PROVISIONS

Issuance of this Gate Pass constitutes delivery to and receipt by the consignee of
the goods as described above in good order and condition unless an
accompanying B.O. certificate duly signed and noted on the fact (sic) of this
Gate Pass appears.

This Gate Pass is subject to all terms and conditions defined in the Management
Contract between the Philippine Ports Authority and Asian Terminals, Inc. and
amendment and alterations thereof particularly but not limited to the Article VI
thereof, limiting the contractor's liability to P5,000 per package unless the
transportation is otherwise specified or manifested or communicated in writing
together with the invoice value and supported by a certified packing list to the
contractor by the interested party or parties before the discharge of the goods
and corresponding arrastre charges have been paid providing exception or
restriction from liability among others, unless a formal claim with the required
annexes shall have been filed with the contractor within fifteen (15) days from
date of issuance by the contractor's certificate of loss, damage, injury or
certificate of non-delivery.17

Asan Terminals added that its liability, if any, should not exceed P5,000.00,
pursuant to said Section 7.01.18

After trial, Branch 39, Regional Trial Court, Manila rendered its Decision 19 on
August 9, 2006 dismissing the complaint. It found no preponderance of evidence
to establish that respondents were the ones responsible for the damage to the
11 coils.20 Oriental's Motion for Reconsideration was likewise denied by the
Regional Trial Court in its Resolution21 dated June 6, 2007.

The Court of Appeals dismissed Oriental’s appeal on the ground that its claim
had already prescribed.22 The Court of Appeals found that 11 of the coi1s were
already damaged before they were loaded in Ong's trucks.23 Hence, the legal
presumption of negligence applies against Asian Terminals unless it is able to
prove that it exercised extraordinary diligence in the handling of the cargo. 24 The
Court of Appeals held that as an arrastre operator, Asian Terminals was bound
to observe the same degree of care required of common carriers. 25 The Court of
Appeals further ruled that while Asian Terminals failed to rebut the presumption
of negligence against it, it cannot be held liable to pay the value of the damaged
coils because Oriental's claim was filed beyond the 15-day prescriptive period
stated in the Gate Pass. According to the Court of Appeals, it can resolve the
issue of prescription despite not being assigned as an error on appeal as it was
already raised, although not tackled, in the lower court. The Court of Appeals
also denied petitioner's subsequent motion for reconsideration. 26

Hence, this petition was filed before this Court. Respondents filed their
respective Comments,27 and Oriental filed its Motion to Admit Consolidated
Reply28 together with its Consolidated Reply.29
In compliance with this Court's January 18, 2012 Resolution30 Asian
Terminals31 and Oriental32 filed their respective memoranda. Ong filed a
Manifestation33 adopting the arguments contained in the Memorandum of Asian
Terminals.

The issues for this Court's resolution are:

First, whether or not the Court of Appeals gravely erred in passing upon the
issue of prescription even though it was not an assigned error in the appeal;

Second, whether or not the claim against Asian Terminals, Inc. is barred by
prescription; and

Finally, whether or not the Court of Appeals gravely erred in ruling that Manuel
Ong is not liable for the damage of the cargo.34

Oriental submits that the court of Appeals cannot rule on the issue of
prescription as this was not included in the assignment of errors ... nor was this
properly argued by any of the parties in their respective briefs filed before the
Court of Appeals."35

On the other hand, Asian Terminals counters that the Court of Appeals properly
reviewed the issue of prescription even though it was not raised in Oriental's
appeal brief. This issue is closely related to the liability of Asian Terminals for the
damaged shipment, the first error in Oriental's appeal. Moreover, Asian
Terminals asserts that it raised the issue of prescription before the trial court,
although it was not resolved.36

This Court agrees with Asian Terminals. The Court of Appeals properly passed
upon the issue of prescription.

Rule 51, Section 8 of the Rules of Court provides:

Section 8. Questions that may be decided. No error which does not affect the
jurisdiction over the subject matter or the validity of the judgment appealed
from or the proceedings therein will be considered unless stated in the
assignment of errors, or closely related to or dependent on an assigned error
and properly argued in the brief, save as the court may pass upon plain errors
and clerical errors.

An assignment of error is generally required for appellate review. 37 Section 8

provides that only errors which have been stated in the assignment of errors and
properly argued in the brief will be considered by the appellate court. The
exceptions to this rule are errors affecting jurisdiction over the subject matter as
well as plain and clerical errors. 38
However, in a number of cases,39 this Court recognized the appellate courts'
ample authority to consider errors that were not assigned. This is in accord with
the liberal spirit of the Rules of Court with a view to securing a ''just, speedy and
inexpensive disposition" of every case.40 In Mendoza v. Bautista:41

[A]n appellate court is clothed with ample authority to review rulings even if
they are not assigned as errors in the appeal in these instances: (a) grounds not
assigned as errors but affecting jurisdiction over the subject matter; (b) matters
not assigned as errors on appeal but are evidently plain or clerical errors within
contemplation of law; (c) matters not assigned as errors on appeal but
consideration of which is necessary in arriving at a just decision and complete
resolution of the case or to serve the interests of justice or to avoid dispensing
piecemeal justice; (d) matters not specifically assigned as errors on appeal but
raised in the trial court and are matters of record having some bearing on the
issue submitted which the parties failed to raise or which the lower court
ignored; (e) matters not assigned as errors on appeal but closely related to an
error assigned; and (f) matters not assigned as errors on appeal but upon which
the determination of a question properly assigned, is dependent. 42

Exceptions (d) and (e) apply in this case.

The issue of whether or not Oriental's claim has prescribed was raised in the
Regional Trial Court and evidence was presented by Asian Terminals. 43 However,
this matter was no longer discussed by the Regional Trial Court in its decision in
view of its finding that Oriental failed to clearly establish that respondents were
responsible for the damaged coils.44

Moreover, it was Oriental that appealed to the Court of Appeals. It is

comprehensible that respondents failed to discuss the issue since the arguments
in their briefs were limited to refuting the matters raised by petitioner.

Oriental assigned the following as errors in its appeal to the Court of Appeals:

The trial court erred when it declared that [respondents] are not liable for the
loss and damage of the goods.

....

The trial court erred in dismissing [Oriental's] complaint and in refusing to grant
the reliefs prayed for[.]45

The issue of prescription is closely related to, and determinant of, the propriety
of the lower court's ruling, absolving respondents from liability for the damaged
goods and dismissing Oriental's complaint. Thus, this Court finds no error on the
part of the Court of Appeals in passing upon this issue.

II.A
Going to the substantive issue, Oriental contends that it was not aware of the
provisions46 of the Gate Pass or the Management Contract, neither of which it
was a party to.47 Consequently, it cannot be bound by the stipulation limiting the
liability of Asian Terminals.48

Asian Terminals counters that "[t]he provisions of the Management Contract and
the Gate Pass are binding on Oriental as insurer-subrogee and successor-in-
interest of the consignee."49

This Court finds for Asian Terminals. This issue on whether or not petitioner, who
was not a party to the Gate Pass or Management Contract, is bound by the 15-
day prescriptive period fixed in them to file a claim against the arrastre operator
is not new. This has long been settled by this Court.

In Government Service Insurance System v. Manila Railroad Company,50 this

Court held that the provisions of a gate pass or of an arrastre management
contract are binding on an insurer-subrogee even if the latter is not a party to
it, viz:

The question whether plaintiff is bound by the stipulation in the Management

Contract, Exhibit 1, requiring the filing of a claim within 15 days from discharge
of the goods, as a condition precedent to the accrual of a cause of action against
the defendants, has already been settled in Northern Motors, Inc. vs. Prince Line
et al, 107 Phil., 253, Mendoza vs. Phil. Air Lines, Inc., (9 Phil., 836), and Freixas
& Co. vs. Pacific Mail Steamship Co. (42 Phil., 199), adversely to plaintiff's
pretense. We have repeatedly held that, by availing himself of the services of
the arrastre operator and taking delivery therefrom in pursuance of a permit and
a pass issued by the latter, which were "subject to all the terms and conditions"
of said management contract, including, inter alia, the requirement thereof
that .a claim is filed with the Company within 15 days from the date of arrival of
the goods", the consignee — and, hence, the insurer, or plaintiff herein, as
successor to the rights of the consignee — became bound by the provisions of
said contract. The second assignment of error is, therefore, untenable. 51

This doctrine was reiterated in the later case of Summa Insurance Corporation
v. Court of Appeals:52

In the performance of its job, an arrastre operator is bound by the management

contract it had executed with the Bureau of Customs. However, a management
contract, which is a sort of a stipulation pour autrui within the meaning of Article
1311 of the Civil Code, is also binding on a consignee because it is incorporated
in the gate pass and delivery receipt which must be presented by the consignee
before delivery can be effected to it. The insurer, as successor-in-interest of the
consignee, is likewise bound by the management contract. Indeed, upon taking
delivery of the cargo, a consignee (and necessarily its successor-in interest)
tacitly accepts the provisions of the management contract, including those which
are intended to limit the liability of one of the contracting parties, the arrastre
operator.53 (Citations omitted)

The fact that Oriental is not a party to the Gate Pass and the Management
Contract does not mean that it cannot be bound by their provisions. Oriental is
subrogated to the rights of the consignee simply upon its payment of the
insurance claim.

Article 2207 of the Civil Code provides:

Article 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. If the amount paid by the insurance company does not
fully cover the injury or loss, the aggrieved party shall be entitled to recover the
deficiency from the person causing the loss or injury. (Emphasis added)

This Court explained the principle of subrogation m insurance contracts:

Article 2207 of the Civil Code is founded on the well-settled principle of

subrogation. If the insured property is destroyed or damaged through the fault
or negligence of a party other than the assured, then the insurer, upon payment
to the assured, will be subrogated to the rights of the assured to recover from
the wrongdoer to the extent that the insurer has been obligated to pay. Payment
by the insurer to the assured operates as an equitable assignment to the former
of all remedies which the latter may have against the third party whose
negligence or wrongful act caused the loss. The right of subrogation is not
dependent upon, nor does it grow out of, any privity of contract or upon written
assignment of claim. It accrues simply upon payment of the insurance claim by
the insurer[.]54

As subrogee, petitioner merely stepped into the shoes of the consignee and may
only exercise those rights that the consignee may have against the wrongdoer
who caused the damage.55 "It can recover only the amount that is recoverable
by the assured."56 And since the right of action of the consignee is subject to a
precedent condition stipulated in the Gate Pass, which includes by reference the
terms of the Management Contract, necessarily a suit by the insurer is subject to
the same precedent condition.57

Petitioner's assertion that the 15-day prescriptive period could not be enforced
upon it to defeat its claim since the Gate Pass was pro forma and it was not
given notice of the Management Contract58 is untenable.

As stated earlier, the dorsal side of the Gate Pass signed by the consignee's
representative upon receipt of the cargo expressly refers to the Management
Contract between the Philippine Ports Authority and Asian Terminals. Hence, the
consignee and its subrogee, petitioner insurance company, are deemed to have
notice of this Management Contract.59

II.B

Petitioner asserts that under the Gate Pass, the 15-day period was to be
reckoned from the "date of issuance by the contractor's certificate of loss,
damage, injury or certificate of non-delivery." Since Asian Terminals did not
issue any certificate of damage, then the 15-day period did not begin to run. 60

In both its Comment on the Petition and Memorandum, respondent Asian

Terminals no longer raised as an issue the matter regarding its  responsibility for
the 11 damaged coils. However, respondent Asian Terminals maintains its
refusal of liability for such loss, solely on the basis of petitioner's alleged failure
to file a formal claim within 15 days from the date of last delivery of the steel
sheet coils to the consignee's warehouse, in accordance with the Management
Contract.

With regard to the reckoning of the 15-day prescriptive period, Asian Terminals
posits that "the fifteen day limit should be counted from the date consignee
obtains knowledge of the loss, damage or misdelivery of the shipment." 61 The
contractor's issuance of a certificate of loss, damage, or non-delivery is not an
indispensable condition for the period to run.62 Asian Terminals adds that the
consignee is presumed to have learned of the damage on June 17, 2002, the
date of complete delivery of the shipment to the consignee's plant, since there
was no showing that the consignee learned of the damage later than this
date.63 Thus, counting 15 days, Oriental had until July 2, 2002 to file its
claim.64 Asian Terminals received Oriental's claim only on July 4, 2002; hence,
the claim was barred by prescription.65

II.C

Again, the dorsal side of the Gate Pass states:

PROVISIONS

Issuance of this Gate Pass constitutes delivery to and receipt by the consignee of
the goods as described above in good order and condition unless an
accompanying B.O. certificate duly issued and noted on the fact (sic) of this
Gate Pass appears.

This Gate Pass is subject to all terms and conditions defined in the Management
Contract between the Philippine Ports Authority and Asian Terminals, Inc. and
amendment and alterations thereof particularly but not limited to the Article VI
thereof, limiting the contractor's liability to P5,000 per package unless the
transportation is otherwise specified or manifested or communicated in writing
together with the invoice value and supported by a certified packing list to the
contractor by the interested party or parties before the discharge of the goods
and corresponding arrastre charges have been paid providing exception or
restriction from liability among others, unless a formal claim with the required
annexes shall have been filed with the contractor within fifteen (15) days from
date of issuance by the contractors certificate of loss, damage, injury or liability
or certificate of non-delivery.66 (Emphasis supplied)

Section 7.01 of the Contract for Cargo Handling Services67 dated March 17, 1992
between Philippine Ports Authority and then Marina Port Services, Inc., now
Asian Terminals, provides:

Section 7.01 Responsibility and Liability for Losses and Damages; Exceptions.—

The CONTRACTOR shall, at its own expense, handle all merchandise in all work
undertaken by it hereunder, diligently and in a skillful, workman-like and
efficient manner. The CONTRACTOR shall be solely responsible as an
independent contractor, and hereby agrees to accept liability and to pay to the
shipping company, consignees, consignors or other interested party or parties
for the loss, damage or non-delivery of cargoes in its custody and control to the
extent of the actual invoice value of each package which in no case shall be
more than FIVE THOUSAND PESOS (P5,000.00) each, unless the value of the
cargo shipment is otherwise specified or manifested or communicated in writing
together with the declared Bill of Lading value and supported by a certified
packing list to the CONTRACTOR by the interested party or parties before the
discharge or loading unto vessel of the goods. This amount of Five Thousand
Pesos (P5,000.00) per package may be reviewed and adjusted by the
AUTHORITY from time to time. THE CONTRACTOR shall not be responsible for
the condition or the contents of any package received nor for the weight nor for
any loss, injury or damage to the said cargo before or while the goods are being
received or remains in the piers, sheds, warehouses or facility, if the loss, injury
or damage is caused by force majeure or ,other causes beyond the
CONTRACTOR's control or capacity to prevent or remedy; PROVIDED, that
a  formal claim together with the necessary copies of Bill of Lading,
Invoice, Certified Packing List and Computation arrived at covering the
loss, injury or damage or non-delivery of such goods shall have been
filed with the CONTRACTOR within fifteen (15) days from day of
issuance by the CONTRACTOR of a certificate of non-delivery;
PROVIDED, however, that if said CONTRACTOR fails to issue such
certification within fifteen (15) days from receipt of a written request by
the shipper/consignee or his duly authorized representative or any
interested party, said certification shall be deemed to have been issued,
and thereafter, the fifteen (15) day period within which to file the claim
commences; PROVIDED, finally, that the request for certification of loss
shall be made within thirty (30) days from the date of delivery of the
package to the consignee.68 (Emphasis supplied)
The issuance of a certificate is not an indispensable condition for the 15-day limit
to run. The Management Contract expressly states that upon the contractor's
failure to issue a certification within 15 days from receipt of a consignee or his
duly authorized representative or any interested party's written request, this
certification "shall be deemed to have been issued, and thereafter, the fifteen
(15) day period within which to file the claim commences." Further, neither
petitioner alleges nor the facts of this case show that a request for a certificate
of loss or damage was made by the consignee. Hence, the arrastre operator
could not be expected to issue one.

Based on the Management Contract, the consignee has a period of 30 days from
the date of delivery of the package to the consignee within which to request a
certificate of loss from the arrastre operator. From the date of the request for a
certificate of loss, the arrastre operator has a period of 15 days within which to
issue a certificate of non-delivery or loss, either actually or constructively.
Moreover, from the date of issuance of a certificate of non-delivery or loss, the
consignee has 15 days within which to file a formal claim covering the loss,
injury, damage, or non-delivery of such goods with an accompanying
documentation against the arrastre operator.

This Court has ruled that the purpose of the time limitation for filing claims is "to
apprise the arrastre operator of the existence of a claim and enable it to check
on the validity of the claimant's demand while the facts are still fresh for
recollection of the persons who took part in the undertaking and the pertinent
papers are still available."69 Despite the changes introduced in the Management
Contract on filing claims, the purpose is still the same.

This Court, in a number of cases,70 has liberally construed the requirement for

filing a formal claim and allowed claims filed even beyond the 15-day
prescriptive period after finding that the request for bad order survey or the
provisional claim filed by the consignee had sufficiently served the purpose of a
formal claim.

In New Zealand Insurance Co., Ltd. v. Navarro,71 5,974 bags of soybean meal

were discharged from the carrying vessel and received by the arrastre operator
on June 28, 1974. The arrastre operator completed its delivery of the shipment
to the consignee on July 9, 1974. On that same day, a bad order examination of
the goods delivered was requested by the consignee and was conducted by the
arrastre operator's own inspector, in the presence of representatives of both the
Bureau of Customs and the consignee. The inspector's ensuing bad order
examination dated July 9, 1974 certified that 173 out of the 5,974 bags of
soybean meal shipped to Manila were damaged in transitu and an additional 111
bags were damaged after discharge from the vessel and receipt of the arrastre
operator. On August 9, 1974, the consignee filed a formal claim with the arrastre
operator. New Zealand Insurance Co., Ltd., the insurer of the goods, indemnified
the consignee and subsequently filed a complaint against the arrastre operator.
The trial court dismissed the complaint on the ground that the claim was filed
with the arrastre operator beyond 15 days from the issuance of the bad order
examination report, which the trial court considered as the certificate of loss,
damage, and injury referred to in the management contract.

This Court ruled that the request for, and the result of, the bad order
examination, filed and done on the last day of delivery of the cargo to the
consignee served the purpose of a formal claim. The arrastre operator had
become aware of and had verified the facts giving rise to its liability. Thus, the
arrastre operator suffered no prejudice by the lack of literal compliance with the
15-day limitation.

New Zealand held:

We took special note of the above pronouncement six (6) years later
in Fireman's Fund Insurance Co. v. Manila Port Service Co., et al.  ...

However, the trial court has overlooked the significance of the request for, and
the result of, the bad order examination, which were filed and done within
fifteen days from the haulage of the goods from the vessel. Said request and
result, in effect, served the purpose of a claim, which is —

'to afford the carrier or depositary reasonable opportunity and facilities to check
the validity of the claims while facts are still fresh in the minds of the persons
who took part in the transaction and documents are still available.’ (Consunji vs.
Manila Port Service, L-15551, 29 November 1960)

Indeed, the examination undertake[n] by the defendant's own inspector not only
gave the defendant an opportunity to check the goods but is itself a verification
of its own liability ...

In other words, what the Court considered as the crucial factor in declaring the
defendant arrastre operator liable for the loss occasioned, in the Fireman's
Fund case) was the fact that defendant, by virtue of the consignee's request for
a bad order examination, had been able formally to verify the existence and
extent of its liability within fifteen (15) days from the date of discharge of the
shipment from the carrying vessel — i.e., within the same period stipulated
under the Management Contract for the consignee to file a formal claim. That a
formal claim had been filed by the consignee beyond the stipulated period of
fifteen (15) days neither relieved defendant of liability nor excused payment
thereof, the purpose of a formal claim, as contemplated in Consunji, having
already been fully served and satisfied by the consignee's timely request for,
and the eventual result of, the bad order examination of the nylon merchandise
shipped.

Relating the doctrine of Fireman's Fund to the case at bar, ... as early as 9
July 1974 (the date of last delivery to the consignee's warehouse),
respondent Razon had been able to verify and ascertain for itself not
only the existence of its liability to the consignee but, more
significantly, the exact amount thereof — i.e., P5,746.61, representing the
value of 111 bags of soybean meal. We note further that such verification and
ascertainment of liability on the part of respondent Razon, had been
accomplished "within thirty (30) days from the date of delivery of last package
to the consignee, broker or importer" as well as "within fifteen (15) days from
the date of issuance by the Contractor [respondent Razon] of a certificate of
loss, damage or injury or certificate of non-delivery" — the periods prescribed
under Article VI, Section 1 of the Management Contract here involved, within
which a request for certificate of loss and a formal claim, respectively, must be
filed by the consignee or his agent.72 (Emphasis supplied, citations omitted)

The same doctrine was adopted in Insurance Co. of North America v. Asian
Terminals, Inc.73 This Court ruled that the Request for Bad Order Survey and the
ensuing examination report satisfied the purpose of a formal claim, as
respondent was made aware of and was able to verify that five (5) skids were
damaged or in bad order while in its custody before the last withdrawal of the
shipment. Hence, even if the formal claim was filed beyond the 15-day period
stipulated in the Contract, respondent was not prejudiced by it, since it already
knew of the number of skids damaged in its possession per the examination
report on the request for bad order survey.

Thus, in the foregoing cases, "substantial compliance with the 15-day time
limitation is allowed provided that the consignee has made a provisional claim
thru a request for bad order survey or examination report." 74

II.D

However, this case presents a new situation in that unlike the previous cases,
the facts do not show that a provisional claim or a request for bad order survey
was made by the consignee. Instead, what was only established is that the
consignee's claim letter dated July 2, 2002 was received by respondent on July
4, 2002, or 17 days from last delivery of the coils to the consignee.

Even so, this Court adopts a reasonable interpretation of the stipulations in the
Management Contract and hold that petitioner's complaint is not time-barred.

First, under the express terms of the Management Contract, the consignee
had thirty (30) days from receipt of the cargo to request for a certificate of
loss from the arrastre operator. Upon receipt of such request, the arrastre
operator would have 15 days to issue a certificate of loss, either actually or
constructively. From the date of issuance of the certificate of loss or where no
certificate was issued, from the expiration of the 15-day period, the consignee
has 15 days within which to file a formal claim with the arrastre operator.
In other words, the consignee had 45 to 60 days from the date of last delivery
of the goods within which to submit a formal claim to the arrastre operator.

The consignee's claim letter was received by respondent on July 4, 2002, 75 or 17
days from the last delivery of the goods, still within the prescribed 30-day period
to request a certificate of loss, damage, or injury from the arrastre operator.

This Court finds that whether the consignee files a claim letter or requests for a
certificate of loss or bad order examination, the effect would be the same, in
that either would afford the arrastre contractor knowledge that the shipment has
been damaged and an opportunity to examine the nature and extent of the
injury. Under the Management Contract, the 30-day period is considered
reasonable for the contractor to make an investigation of a claim.

Hence, the consignee's claim letter is regarded as substantial compliance with

the condition precedent set forth in the Management Contract to hold the
arrastre operator liable.

In New Zealand Insurance Co., Ltd. v. Navarro,76 this Court stressed that an

arrastre operator, like respondent, is a public utility, discharging functions which
are heavily invested with public interest.

Provisions limiting the liability of a public utility operator through the imposition
of multiple prescriptive periods for the filing of claims by members of the general
public who must deal with the public utility operator, must be carefully
scrutinized and reasonably construed so as to protect the legitimate interest of
the public which the utility must serve.77

Second, evidence shows that upon Asian Terminals' request, Ultraphil Marine
and Cargo Survey Corporation78 conducted two (2) surveys.79 These were:

1. On June 17, 2002 at Pier 9, South Harbor,80 where it was observed that 11

of the coils were damaged before the shipment was loaded on Ong's
truck;81 and

2. On June 27, 2002, at the warehouse of the consignee in Trece Martires,

Cavite, where the same quantity of damaged coils was observed. 82

The surveyor prepared and submitted to Asian Terminals a Final Report dated
June 29, 2002.83

Although its representative was not present during the inspections,84 the fact
that Asian Terminals requested for the cargo survey shows that it had
knowledge of the damage of the shipment while in its possession and that the
survey was sought specifically to ascertain the nature and extent of the damage.
Thus, respondent cannot escape liability for the damaged coils, simply by its
own act of not sending a representative, after it had contracted for the survey of
the shipment.

II.E

As to the extent of Asian Terminals' liability, Section 7.01 of the Management

Contract provides that its liability is limited to the actual invoice value of each
package which should not be more than P5,000.00 each. The exception to this
limitation on liability is:

[U]nless the value of the cargo shipment is otherwise specified or manifested or

communicated in writing together with the declared Bill of Lading value and
supported by a certified packing list to the CONTRACTOR by the interested party
or parties before the discharge or loading unto vessel of the goods. 85

In this case, the records do not show that the value of the shipment was
specified or manifested to Asian Terminals before discharge from the vessel.
There was no evidence proving the amount of arrastre fees paid by the
consignee to Asian Terminals so as to put the latter on notice of the value of the
cargo or that the invoice, packing list, and other shipping documents were
presented to the Bureau of Customs and to Asian Terminals for the proper
assessment of the arrastre charges and other fees. The Cargo Gate
Passes86 issued by Asian Terminals do not indicate the value of the cargo.

Accordingly, Asian Terminals' liability should be limited to the maximum

recoverable value ofP5,000.00 per package or coil, the customary freight unit.
Hence, the total recoverable amount is P55,000.00 for the 11 damaged coils.
This amount shall earn a legal interest at the rate of 6% per annum from the
date of finality of this judgment until its full satisfaction pursuant to Nacar v.
Gallery Frames.87

III

Both the Court of Appeals and the Regional Trial Court found that the 11 coils
were already damaged before the coils were loaded on Ong's truck. Hence, Ong
could not be responsible for the damaged shipment.

However, petitioner asserts that Ong should be held solidarily liable with Asian
Terminals for acting in bad faith when it did not apprise the consignee or Asian
Terminals about the damaged coils. This Court finds this contention untenable.

This issue was never raised by petitioner in the lower courts. In fact, Ong and
Asian Terminals "[Were] sued in the alternative because [petitioner was]
uncertain against whom it [was] entitled for relief."88 The rule is well-settled that
no question will be considered by the appellate court which has not been raised
in the lower court.89
[A] party cannot change his theory of the case or his cause of action on appeal.
Points of law, theories, issues and arguments not brought to the attention of the
lower court will not be considered by the reviewing court. The defenses not
pleaded in the answer cannot, on appeal, change fundamentally the nature of
the issue in the case. To do so would be unfair to the adverse party, who had no
opportunity to present evidence in connection with the new theory; this would
offend the basic rules of due process and fair play.90

Furthermore, there was no proof of Ong's bad faith. Mere allegation cannot take
the place of evidence. Besides, Ong's assertion that the loading of the cargo on
the trucks was undertaken by Asian Terminals and the unloading of the same
cargo was undertaken by the consignee at its warehouse 91 remains unrebutted.
In fact, Asian Terminals caused the inspection of the shipment before they were
loaded on Ong's trucks on June 17, 2002.92 Moreover, at the consignee's
warehouse, the inspection was done in the presence of the consignee's
authorized representative.93 Thus, Ong is not obliged to inform the consignee or
Asian Terminals about the damaged coils as they would have presumably known
about them.

WHEREFORE, the Petition for Review is GRANTED. The February 19, 2009
Decision and August 25, 2009 Resolution of the Court of Appeals in CA-G.R. CV
No. 89311 are SET ASIDE. Respondent Asian Terminals, Inc. is ORDERED to
pay petitioner Oriental Assurance Corporation the amount of P55,000.00, with
interest at the legal rate of six percent (6%) per annum from the date of finality
of this judgment until fully paid.

SO ORDERED.

G.R. No. 189524, October 11, 2017

ORIENTAL ASSURANCE CORPORATION, Petitioner, v. MANUEL ONG, DOING BUSINESS UNDER THE BUSINESS NAME
OF WESTERN PACIFIC TRANSPORT SERVICES AND/OR ASIAN TERMINALS, INC., Respondents.
D E C I S I O N -LEONEN, J.:

The consignee's claim letter that was received by the arrastre operator two (2) days after complete delivery of the
cargo constitutes substantial compliance with the time limitation for filing claims under the Gate Pass and the
Management Contract. However, the arrastre operator's liability for damage to the cargo is limited to P5,000.00 per
package in accordance with the Management Contract.

This Rule 45 Petition for Review on Certiorari 1 seeks a review of the February 19, 2009 Decision 2 and August 25, 2009
Resolution3 of the Court of Appeals in CA-GR. CV No. 89311. The Court of Appeals affirmed the Regional Trial Court's
dismissal of the complaint on the ground that the claim of petitioner Oriental Assurance Corporation (Oriental) had
already prescribed.

JEA Steel Industries, Inc. (JEA Steel) imported from South Korea 72 aluminum-zinc-alloy-coated steel sheets in coils.
These steel sheets were transported to Manila on board the vessel M/V Dooyang Glory as evidenced by Bill of Lading
No. HDMUBSOML-214s011.4

Upon arrival of the vessel at the Manila South Harbor on June 10, 2002, the 72 coils were discharged and stored in Pier
9 under the custody of the arrastre contractor, Asian Terminals, Inc. (Asian Terminals). 5
From the storage compound of Asian Terminals, the coils were loaded on the trucks of Manuel Ong (Ong) and
delivered to JEA Steel's plant in Barangay Lapidario, Trece Martirez, Cavite on June 14, 2002 6 and June 17,
2002.7 Eleven of these coils ''were found to be in damaged condition, dented or their normal round shape deformed." 8

JEA Steel filed a claim with Oriental for the value of the 11 damaged coils, pursuant to Marine Insurance Policy No.
OAC/M-12292.9

Oriental paid JEA Steel the sum of P521,530.16 and subsequently demanded indemnity from Ong and Asian Terminals
(respondents), but they refused to pay. 10

On May 19, 2003, Oriental filed a Complaint 11 before the Regional Trial Court of Manila for sum of money against
respondents.12

Ong countered that the 11 coils were already damaged when they were loaded on board his trucks and transported to
the consignee.13

For its part, Asian Terminals claimed that it exercised due diligence in handling the cargo, that the cargo was released
to the consignee's representative in the same condition as when received from the vessel, and that the damages were
sustained while in the custody of the vessel or the customs broker. 14

Asian Terminals further argued that Oriental's claim was barred for the latter's failure to file a notice of claim within
the 15-day period provided in the Gate Pass and in Article VII, Section 7.01 of the Contract for Cargo Handling Services
(Management Contract) between the Philippine Ports Authority and Asian Terminals. 15 The Gate Pass was signed by
the consignee's representative to acknowledge the delivery and receipt of the shipment. 16 The dorsal side of this Gate
Pass stated:

PROVISIONS

Issuance of this Gate Pass constitutes delivery to and receipt by the consignee of the goods as described above in good
order and condition unless an accompanying B.O. certificate duly signed and noted on the fact (sic) of this Gate Pass
appears.

This Gate Pass is subject to all terms and conditions defined in the Management Contract between the Philippine Ports
Authority and Asian Terminals, Inc. and amendment and alterations thereof particularly but not limited to the Article
VI thereof, limiting the contractor's liability to P5,000 per package unless the transportation is otherwise specified or
manifested or communicated in writing together with the invoice value and supported by a certified packing list to the
contractor by the interested party or parties before the discharge of the goods and corresponding arrastre charges
have been paid providing exception or restriction from liability among others, unless a formal claim with the required
annexes shall have been filed with the contractor within fifteen (15) days from date of issuance by the contractor's
certificate of loss, damage, injury or certificate of non-delivery. 17

Asan Terminals added that its liability, if any, should not exceed P5,000.00, pursuant to said Section 7.01. 18

After trial, Branch 39, Regional Trial Court, Manila rendered its Decision 19 on August 9, 2006 dismissing the complaint.
It found no preponderance of evidence to establish that respondents were the ones responsible for the damage to the
11 coils.20 Oriental's Motion for Reconsideration was likewise denied by the Regional Trial Court in its
Resolution21 dated June 6, 2007.

The Court of Appeals dismissed Oriental’s appeal on the ground that its claim had already prescribed. 22 The Court of
Appeals found that 11 of the coi1s were already damaged before they were loaded in Ong's trucks. 23 Hence, the legal
presumption of negligence applies against Asian Terminals unless it is able to prove that it exercised extraordinary
diligence in the handling of the cargo. 24 The Court of Appeals held that as an arrastre operator, Asian Terminals was
bound to observe the same degree of care required of common carriers. 25 The Court of Appeals further ruled that
while Asian Terminals failed to rebut the presumption of negligence against it, it cannot be held liable to pay the value
of the damaged coils because Oriental's claim was filed beyond the 15-day prescriptive period stated in the Gate Pass.
According to the Court of Appeals, it can resolve the issue of prescription despite not being assigned as an error on
appeal as it was already raised, although not tackled, in the lower court. The Court of Appeals also denied petitioner's
subsequent motion for reconsideration.26

Hence, this petition was filed before this Court. Respondents filed their respective Comments, 27 and Oriental filed its
Motion to Admit Consolidated Reply28 together with its Consolidated Reply. 29

In compliance with this Court's January 18, 2012 Resolution 30 Asian Terminals31 and Oriental32 filed their respective
memoranda. Ong filed a Manifestation33 adopting the arguments contained in the Memorandum of Asian Terminals.

The issues for this Court's resolution are:

First, whether or not the Court of Appeals gravely erred in passing upon the issue of prescription even though it was
not an assigned error in the appeal;

Second, whether or not the claim against Asian Terminals, Inc. is barred by prescription; and

Finally, whether or not the Court of Appeals gravely erred in ruling that Manuel Ong is not liable for the damage of the
cargo.34

Oriental submits that the court of Appeals cannot rule on the issue of prescription as this was not included in the
assignment of errors ... nor was this properly argued by any of the parties in their respective briefs filed before the
Court of Appeals."35

On the other hand, Asian Terminals counters that the Court of Appeals properly reviewed the issue of prescription
even though it was not raised in Oriental's appeal brief. This issue is closely related to the liability of Asian Terminals
for the damaged shipment, the first error in Oriental's appeal. Moreover, Asian Terminals asserts that it raised the
issue of prescription before the trial court, although it was not resolved. 36

This Court agrees with Asian Terminals. The Court of Appeals properly passed upon the issue of prescription.

Rule 51, Section 8 of the Rules of Court provides:

Section 8.  Questions that may be decided. No error which does not affect the jurisdiction over the subject matter or
the validity of the judgment appealed from or the proceedings therein will be considered unless stated in the
assignment of errors, or closely related to or dependent on an assigned error and properly argued in the brief, save as
the court may pass upon plain errors and clerical errors.

An assignment of error is generally required for appellate review. 37 Section 8 provides that only errors which have been
stated in the assignment of errors and properly argued in the brief will be considered by the appellate court. The
exceptions to this rule are errors affecting jurisdiction over the subject matter as well as plain and clerical errors. 38

However, in a number of cases,39 this Court recognized the appellate courts' ample authority to consider errors that
were not assigned. This is in accord with the liberal spirit of the Rules of Court with a view to securing a ''just, speedy
and inexpensive disposition" of every case.40 In Mendoza v. Bautista:41

[A]n appellate court is clothed with ample authority to review rulings even if they are not assigned as errors in the
appeal in these instances: (a) grounds not assigned as errors but affecting jurisdiction over the subject matter; (b)
matters not assigned as errors on appeal but are evidently plain or clerical errors within contemplation of law; (c)
matters not assigned as errors on appeal but consideration of which is necessary in arriving at a just decision and
complete resolution of the case or to serve the interests of justice or to avoid dispensing piecemeal justice; (d) matters
not specifically assigned as errors on appeal but raised in the trial court and are matters of record having some bearing
on the issue submitted which the parties failed to raise or which the lower court ignored; (e) matters not assigned as
errors on appeal but closely related to an error assigned; and (f) matters not assigned as errors on appeal but upon
which the determination of a question properly assigned, is dependent. 42

Exceptions (d) and (e) apply in this case.

The issue of whether or not Oriental's claim has prescribed was raised in the Regional Trial Court and evidence was
presented by Asian Terminals.43 However, this matter was no longer discussed by the Regional Trial Court in its
decision in view of its finding that Oriental failed to clearly establish that respondents were responsible for the
damaged coils.44

Moreover, it was Oriental that appealed to the Court of Appeals. It is comprehensible that respondents failed to
discuss the issue since the arguments in their briefs were limited to refuting the matters raised by petitioner.

Oriental assigned the following as errors in its appeal to the Court of Appeals:

The trial court erred when it declared that [respondents] are not liable for the loss and damage of the goods.

....

The trial court erred in dismissing [Oriental's] complaint and in refusing to grant the reliefs prayed for[.] 45

The issue of prescription is closely related to, and determinant of, the propriety of the lower court's ruling, absolving
respondents from liability for the damaged goods and dismissing Oriental's complaint. Thus, this Court finds no error
on the part of the Court of Appeals in passing upon this issue.

II.A

Going to the substantive issue, Oriental contends that it was not aware of the provisions 46 of the Gate Pass or the
Management Contract, neither of which it was a party to. 47 Consequently, it cannot be bound by the stipulation
limiting the liability of Asian Terminals.48

Asian Terminals counters that "[t]he provisions of the Management Contract and the Gate Pass are binding on Oriental
as insurer-subrogee and successor-in-interest of the consignee." 49

This Court finds for Asian Terminals. This issue on whether or not petitioner, who was not a party to the Gate Pass or
Management Contract, is bound by the 15-day prescriptive period fixed in them to file a claim against the arrastre
operator is not new. This has long been settled by this Court.

In Government Service Insurance System v. Manila Railroad Company,50 this Court held that the provisions of a gate
pass or of an arrastre management contract are binding on an insurer-subrogee even if the latter is not a party to
it, viz:

The question whether plaintiff is bound by the stipulation in the Management Contract, Exhibit 1, requiring the filing of
a claim within 15 days from discharge of the goods, as a condition precedent to the accrual of a cause of action against
the defendants, has already been settled in Northern Motors, Inc. vs. Prince Line et al, 107 Phil., 253, Mendoza vs. Phil.
Air Lines, Inc., (9 Phil., 836), and Freixas & Co. vs. Pacific Mail Steamship Co. (42 Phil., 199), adversely to plaintiff's
pretense. We have repeatedly held that, by availing himself of the services of the arrastre operator and taking delivery
therefrom in pursuance of a permit and a pass issued by the latter, which were "subject to all the terms and
conditions" of said management contract, including, inter alia, the requirement thereof that .a claim is filed with the
Company within 15 days from the date of arrival of the goods", the consignee — and, hence, the insurer, or plaintiff
herein, as successor to the rights of the consignee — became bound by the provisions of said contract. The second
assignment of error is, therefore, untenable. 51

This doctrine was reiterated in the later case of Summa Insurance Corporation v. Court of Appeals:52

In the performance of its job, an arrastre operator is bound by the management contract it had executed with the
Bureau of Customs. However, a management contract, which is a sort of a stipulation pour autrui within the meaning
of Article 1311 of the Civil Code, is also binding on a consignee because it is incorporated in the gate pass and delivery
receipt which must be presented by the consignee before delivery can be effected to it. The insurer, as successor-in-
interest of the consignee, is likewise bound by the management contract. Indeed, upon taking delivery of the cargo, a
consignee (and necessarily its successor-in interest) tacitly accepts the provisions of the management contract,
including those which are intended to limit the liability of one of the contracting parties, the arrastre
operator.53 (Citations omitted)

The fact that Oriental is not a party to the Gate Pass and the Management Contract does not mean that it cannot be
bound by their provisions. Oriental is subrogated to the rights of the consignee simply upon its payment of the
insurance claim.

Article 2207 of the Civil Code provides:

Article 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. If the
amount paid by the insurance company does not fully cover the injury or loss, the aggrieved party shall be entitled to
recover the deficiency from the person causing the loss or injury. (Emphasis added)

This Court explained the principle of subrogation m insurance contracts:

Article 2207 of the Civil Code is founded on the well-settled principle of subrogation. If the insured property is
destroyed or damaged through the fault or negligence of a party other than the assured, then the insurer, upon
payment to the assured, will be subrogated to the rights of the assured to recover from the wrongdoer to the extent
that the insurer has been obligated to pay. Payment by the insurer to the assured operates as an equitable assignment
to the former of all remedies which the latter may have against the third party whose negligence or wrongful act
caused the loss. The right of subrogation is not dependent upon, nor does it grow out of, any privity of contract or
upon written assignment of claim. It accrues simply upon payment of the insurance claim by the insurer[.] 54

As subrogee, petitioner merely stepped into the shoes of the consignee and may only exercise those rights that the
consignee may have against the wrongdoer who caused the damage. 55 "It can recover only the amount that is
recoverable by the assured."56 And since the right of action of the consignee is subject to a precedent condition
stipulated in the Gate Pass, which includes by reference the terms of the Management Contract, necessarily a suit by
the insurer is subject to the same precedent condition. 57

Petitioner's assertion that the 15-day prescriptive period could not be enforced upon it to defeat its claim since the
Gate Pass was pro forma and it was not given notice of the Management Contract 58 is untenable.

As stated earlier, the dorsal side of the Gate Pass signed by the consignee's representative upon receipt of the cargo
expressly refers to the Management Contract between the Philippine Ports Authority and Asian Terminals. Hence, the
consignee and its subrogee, petitioner insurance company, are deemed to have notice of this Management Contract. 59

II.B

Petitioner asserts that under the Gate Pass, the 15-day period was to be reckoned from the "date of issuance by the
contractor's certificate of loss, damage, injury or certificate of non-delivery." Since Asian Terminals did not issue any
certificate of damage, then the 15-day period did not begin to run. 60
In both its Comment on the Petition and Memorandum, respondent Asian Terminals no longer raised as an issue the
matter regarding its  responsibility for the 11 damaged coils. However, respondent Asian Terminals maintains its refusal
of liability for such loss, solely on the basis of petitioner's alleged failure to file a formal claim within 15 days from the
date of last delivery of the steel sheet coils to the consignee's warehouse, in accordance with the Management
Contract.

With regard to the reckoning of the 15-day prescriptive period, Asian Terminals posits that "the fifteen day limit should
be counted from the date consignee obtains knowledge of the loss, damage or misdelivery of the shipment." 61 The
contractor's issuance of a certificate of loss, damage, or non-delivery is not an indispensable condition for the period to
run.62 Asian Terminals adds that the consignee is presumed to have learned of the damage on June 17, 2002, the date
of complete delivery of the shipment to the consignee's plant, since there was no showing that the consignee learned
of the damage later than this date. 63 Thus, counting 15 days, Oriental had until July 2, 2002 to file its claim. 64 Asian
Terminals received Oriental's claim only on July 4, 2002; hence, the claim was barred by prescription. 65

II.C
Again, the dorsal side of the Gate Pass states:
PROVISIONS

Issuance of this Gate Pass constitutes delivery to and receipt by the consignee of the goods as described above in good
order and condition unless an accompanying B.O. certificate duly issued and noted on the fact (sic) of this Gate Pass
appears.

This Gate Pass is subject to all terms and conditions defined in the Management Contract between the Philippine Ports
Authority and Asian Terminals, Inc.  and amendment and alterations thereof particularly but not limited to the Article
VI thereof, limiting the contractor's liability to P5,000 per package unless the transportation is otherwise specified or
manifested or communicated in writing together with the invoice value and supported by a certified packing list to the
contractor by the interested party or parties before the discharge of the goods and corresponding arrastre charges
have been paid providing exception or restriction from liability among others, unless a formal claim with the required
annexes shall have been filed with the contractor within fifteen (15) days from date of issuance by the contractors
certificate of loss, damage, injury or liability or certificate of non-delivery.66 (Emphasis supplied)

Section 7.01 of the Contract for Cargo Handling Services 67 dated March 17, 1992 between Philippine Ports Authority
and then Marina Port Services, Inc., now Asian Terminals, provides:

Section 7.01 Responsibility and Liability for Losses and Damages; Exceptions.—The CONTRACTOR shall, at its own
expense, handle all merchandise in all work undertaken by it hereunder, diligently and in a skillful, workman-like and
efficient manner. The CONTRACTOR shall be solely responsible as an independent contractor, and hereby agrees to
accept liability and to pay to the shipping company, consignees, consignors or other interested party or parties for the
loss, damage or non-delivery of cargoes in its custody and control to the extent of the actual invoice value of each
package which in no case shall be more than FIVE THOUSAND PESOS (P5,000.00) each, unless the value of the cargo
shipment is otherwise specified or manifested or communicated in writing together with the declared Bill of Lading
value and supported by a certified packing list to the CONTRACTOR by the interested party or parties before the
discharge or loading unto vessel of the goods. This amount of Five Thousand Pesos (P5,000.00) per package may be
reviewed and adjusted by the AUTHORITY from time to time. THE CONTRACTOR shall not be responsible for the
condition or the contents of any package received nor for the weight nor for any loss, injury or damage to the said
cargo before or while the goods are being received or remains in the piers, sheds, warehouses or facility, if the loss,
injury or damage is caused by force majeure or ,other causes beyond the CONTRACTOR's control or capacity to prevent
or remedy; PROVIDED, that a  formal claim together with the necessary copies of Bill of Lading, Invoice, Certified
Packing List and Computation arrived at covering the loss, injury or damage or non-delivery of such goods shall have
been filed with the CONTRACTOR within fifteen (15) days from day of issuance by the CONTRACTOR of a certificate
of non-delivery; PROVIDED, however, that if said CONTRACTOR fails to issue such certification within fifteen (15)
days from receipt of a written request by the shipper/consignee or his duly authorized representative or any
interested party, said certification shall be deemed to have been issued, and thereafter, the fifteen (15) day period
within which to file the claim commences; PROVIDED, finally, that the request for certification of loss shall be made
within thirty (30) days from the date of delivery of the package to the consignee.68 (Emphasis supplied)

The issuance of a certificate is not an indispensable condition for the 15-day limit to run. The Management Contract
expressly states that upon the contractor's failure to issue a certification within 15 days from receipt of a consignee or
his duly authorized representative or any interested party's written request, this certification "shall be deemed to have
been issued, and thereafter, the fifteen (15) day period within which to file the claim commences." Further, neither
petitioner alleges nor the facts of this case show that a request for a certificate of loss or damage was made by the
consignee. Hence, the arrastre operator could not be expected to issue one.

Based on the Management Contract, the consignee has a period of 30 days from the date of delivery of the package to
the consignee within which to request a certificate of loss from the arrastre operator. From the date of the request for
a certificate of loss, the arrastre operator has a period of 15 days within which to issue a certificate of non-delivery or
loss, either actually or constructively. Moreover, from the date of issuance of a certificate of non-delivery or loss, the
consignee has 15 days within which to file a formal claim covering the loss, injury, damage, or non-delivery of such
goods with an accompanying documentation against the arrastre operator.

This Court has ruled that the purpose of the time limitation for filing claims is "to apprise the arrastre operator of the
existence of a claim and enable it to check on the validity of the claimant's demand while the facts are still fresh for
recollection of the persons who took part in the undertaking and the pertinent papers are still available." 69 Despite the
changes introduced in the Management Contract on filing claims, the purpose is still the same.

This Court, in a number of cases,70 has liberally construed the requirement for filing a formal claim and allowed claims
filed even beyond the 15-day prescriptive period after finding that the request for bad order survey or the provisional
claim filed by the consignee had sufficiently served the purpose of a formal claim.

In New Zealand Insurance Co., Ltd. v. Navarro,71 5,974 bags of soybean meal were discharged from the carrying vessel
and received by the arrastre operator on June 28, 1974. The arrastre operator completed its delivery of the shipment
to the consignee on July 9, 1974. On that same day, a bad order examination of the goods delivered was requested by
the consignee and was conducted by the arrastre operator's own inspector, in the presence of representatives of both
the Bureau of Customs and the consignee. The inspector's ensuing bad order examination dated July 9, 1974 certified
that 173 out of the 5,974 bags of soybean meal shipped to Manila were damaged  in transitu and an additional 111
bags were damaged after discharge from the vessel and receipt of the arrastre operator. On August 9, 1974, the
consignee filed a formal claim with the arrastre operator. New Zealand Insurance Co., Ltd., the insurer of the goods,
indemnified the consignee and subsequently filed a complaint against the arrastre operator.

The trial court dismissed the complaint on the ground that the claim was filed with the arrastre operator beyond 15
days from the issuance of the bad order examination report, which the trial court considered as the certificate of loss,
damage, and injury referred to in the management contract.

This Court ruled that the request for, and the result of, the bad order examination, filed and done on the last day of
delivery of the cargo to the consignee served the purpose of a formal claim. The arrastre operator had become aware
of and had verified the facts giving rise to its liability. Thus, the arrastre operator suffered no prejudice by the lack of
literal compliance with the 15-day limitation.

New Zealand held:

We took special note of the above pronouncement six (6) years later in Fireman's Fund Insurance Co. v. Manila Port
Service Co., et al.  ...

However,  the trial court has overlooked the significance of the request for, and the result of, the bad order
examination, which were filed and done within fifteen days from the haulage of the goods from the vessel. Said
request and result, in effect, served the purpose of a claim, which is —
'to afford the carrier or depositary reasonable opportunity and facilities to check the validity of the claims while facts
are still fresh in the minds of the persons who took part in the transaction and documents are still available.’ (Consunji
vs. Manila Port Service, L-15551, 29 November 1960)

Indeed, the examination undertake[n] by the defendant's own inspector not only gave the defendant an opportunity
to check the goods but is itself a verification of its own liability ...

In other words, what the Court considered as the crucial factor in declaring the defendant arrastre operator liable for
the loss occasioned, in the Fireman's Fund case) was the fact that defendant, by virtue of the consignee's request for a
bad order examination, had been able formally to verify the existence and extent of its liability within fifteen (15) days
from the date of discharge of the shipment from the carrying vessel —  i.e., within the same period stipulated under the
Management Contract for the consignee to file a formal claim. That a formal claim had been filed by the consignee
beyond the stipulated period of fifteen (15) days neither relieved defendant of liability nor excused payment thereof,
the purpose of a formal claim, as contemplated in Consunji, having already been fully served and satisfied by the
consignee's timely request for, and the eventual result of, the bad order examination of the nylon merchandise
shipped.

Relating the doctrine of Fireman's Fund to the case at bar, ... as early as 9 July 1974 (the date of last delivery to the
consignee's warehouse), respondent Razon had been able to verify and ascertain for itself not only the existence of
its liability to the consignee but, more significantly, the exact amount thereof — i.e., P5,746.61, representing the
value of 111 bags of soybean meal. We note further that such verification and ascertainment of liability on the part of
respondent Razon, had been accomplished "within thirty (30) days from the date of delivery of last package to the
consignee, broker or importer" as well as "within fifteen (15) days from the date of issuance by the Contractor
[respondent Razon] of a certificate of loss, damage or injury or certificate of non-delivery" — the periods prescribed
under Article VI, Section 1 of the Management Contract here involved, within which a request for certificate of loss and
a formal claim, respectively, must be filed by the consignee or his agent. 72 (Emphasis supplied, citations omitted)

The same doctrine was adopted in Insurance Co. of North America v. Asian Terminals, Inc.73 This Court ruled that the
Request for Bad Order Survey and the ensuing examination report satisfied the purpose of a formal claim, as
respondent was made aware of and was able to verify that five (5) skids were damaged or in bad order while in its
custody before the last withdrawal of the shipment. Hence, even if the formal claim was filed beyond the 15-day
period stipulated in the Contract, respondent was not prejudiced by it, since it already knew of the number of skids
damaged in its possession per the examination report on the request for bad order survey.

Thus, in the foregoing cases, "substantial compliance with the 15-day time limitation is allowed provided that the
consignee has made a provisional claim thru a request for bad order survey or examination report." 74

II.D

However, this case presents a new situation in that unlike the previous cases, the facts do not show that a provisional
claim or a request for bad order survey was made by the consignee. Instead, what was only established is that the
consignee's claim letter dated July 2, 2002 was received by respondent on July 4, 2002, or 17 days from last delivery of
the coils to the consignee.

Even so, this Court adopts a reasonable interpretation of the stipulations in the Management Contract and hold that
petitioner's complaint is not time-barred.

First, under the express terms of the Management Contract, the consignee had thirty (30) days from receipt of the
cargo to request for a certificate of loss from the arrastre operator. Upon receipt of such request, the arrastre operator
would have 15 days to issue a certificate of loss, either actually or constructively. From the date of issuance of the
certificate of loss or where no certificate was issued, from the expiration of the 15-day period, the consignee has 15
days within which to file a formal claim with the arrastre operator.
In other words, the consignee had 45 to 60 days from the date of last delivery of the goods within which to submit a
formal claim to the arrastre operator.

The consignee's claim letter was received by respondent on July 4, 2002, 75 or 17 days from the last delivery of the
goods, still within the prescribed 30-day period to request a certificate of loss, damage, or injury from the arrastre
operator.

This Court finds that whether the consignee files a claim letter or requests for a certificate of loss or bad order
examination, the effect would be the same, in that either would afford the arrastre contractor knowledge that the
shipment has been damaged and an opportunity to examine the nature and extent of the injury. Under the
Management Contract, the 30-day period is considered reasonable for the contractor to make an investigation of a
claim.

Hence, the consignee's claim letter is regarded as substantial compliance with the condition precedent set forth in the
Management Contract to hold the arrastre operator liable.

In New Zealand Insurance Co., Ltd. v. Navarro,76 this Court stressed that an arrastre operator, like respondent, is a
public utility, discharging functions which are heavily invested with public interest.

Provisions limiting the liability of a public utility operator through the imposition of multiple prescriptive periods for
the filing of claims by members of the general public who must deal with the public utility operator, must be carefully
scrutinized and reasonably construed so as to protect the legitimate interest of the public which the utility must
serve.77

Second, evidence shows that upon Asian Terminals' request, Ultraphil Marine and Cargo Survey
Corporation78 conducted two (2) surveys.79 These were:

1. On June 17, 2002 at Pier 9, South Harbor, 80 where it was observed that 11 of the coils were damaged before
the shipment was loaded on Ong's truck;81 and

2. On June 27, 2002, at the warehouse of the consignee in Trece Martires, Cavite, where the same quantity of
damaged coils was observed.82

The surveyor prepared and submitted to Asian Terminals a Final Report dated June 29, 2002. 83

Although its representative was not present during the inspections, 84 the fact that Asian Terminals requested for the
cargo survey shows that it had knowledge of the damage of the shipment while in its possession and that the survey
was sought specifically to ascertain the nature and extent of the damage. Thus, respondent cannot escape liability for
the damaged coils, simply by its own act of not sending a representative, after it had contracted for the survey of the
shipment.

II.E

As to the extent of Asian Terminals' liability, Section 7.01 of the Management Contract provides that its liability is
limited to the actual invoice value of each package which should not be more than P5,000.00 each. The exception to
this limitation on liability is:

[U]nless the value of the cargo shipment is otherwise specified or manifested or communicated in writing together
with the declared Bill of Lading value and supported by a certified packing list to the CONTRACTOR by the interested
party or parties before the discharge or loading unto vessel of the goods. 85

In this case, the records do not show that the value of the shipment was specified or manifested to Asian Terminals
before discharge from the vessel. There was no evidence proving the amount of arrastre fees paid by the consignee to
Asian Terminals so as to put the latter on notice of the value of the cargo or that the invoice, packing list, and other
shipping documents were presented to the Bureau of Customs and to Asian Terminals for the proper assessment of
the arrastre charges and other fees. The Cargo Gate Passes 86 issued by Asian Terminals do not indicate the value of the
cargo.

Accordingly, Asian Terminals' liability should be limited to the maximum recoverable value ofP5,000.00 per package or
coil, the customary freight unit. Hence, the total recoverable amount is P55,000.00 for the 11 damaged coils. This
amount shall earn a legal interest at the rate of 6% per annum from the date of finality of this judgment until its full
satisfaction pursuant to Nacar v. Gallery Frames.87

III

Both the Court of Appeals and the Regional Trial Court found that the 11 coils were already damaged before the coils
were loaded on Ong's truck. Hence, Ong could not be responsible for the damaged shipment.

However, petitioner asserts that Ong should be held solidarily liable with Asian Terminals for acting in bad faith when it
did not apprise the consignee or Asian Terminals about the damaged coils. This Court finds this contention untenable.

This issue was never raised by petitioner in the lower courts. In fact, Ong and Asian Terminals "[Were] sued in the
alternative because [petitioner was] uncertain against whom it [was] entitled for relief." 88 The rule is well-settled that
no question will be considered by the appellate court which has not been raised in the lower court. 89

[A] party cannot change his theory of the case or his cause of action on appeal. Points of law, theories, issues and
arguments not brought to the attention of the lower court will not be considered by the reviewing court. The defenses
not pleaded in the answer cannot, on appeal, change fundamentally the nature of the issue in the case. To do so would
be unfair to the adverse party, who had no opportunity to present evidence in connection with the new theory; this
would offend the basic rules of due process and fair play. 90

Furthermore, there was no proof of Ong's bad faith. Mere allegation cannot take the place of evidence. Besides, Ong's
assertion that the loading of the cargo on the trucks was undertaken by Asian Terminals and the unloading of the same
cargo was undertaken by the consignee at its warehouse 91 remains unrebutted. In fact, Asian Terminals caused the
inspection of the shipment before they were loaded on Ong's trucks on June 17, 2002. 92 Moreover, at the consignee's
warehouse, the inspection was done in the presence of the consignee's authorized representative. 93 Thus, Ong is not
obliged to inform the consignee or Asian Terminals about the damaged coils as they would have presumably known
about them.

WHEREFORE, the Petition for Review is GRANTED. The February 19, 2009 Decision and August 25, 2009 Resolution of
the Court of Appeals in CA-G.R. CV No. 89311 are SET ASIDE. Respondent Asian Terminals, Inc. is ORDERED to pay
petitioner Oriental Assurance Corporation the amount of P55,000.00, with interest at the legal rate of six percent (6%)
per annum from the date of finality of this judgment until fully paid.

SO ORDERED.