THIRD DIVISION

[G.R. NO. 177056 : September 18, 2009]

THE OFFICE OF THE SOLICITOR GENERAL, Petitioner, v. AYALA LAND INCORPORATED,

ROBINSON'S LAND CORPORATION, SHANGRI-LA PLAZA CORPORATION and SM PRIME
HOLDINGS, INC., Respondents.

DECISION

CHICO-NAZARIO, J.:

Before this Court is a Petition for Review on Certiorari,1 under Rule 45 of the Revised Rules of
Court, filed by petitioner Office of the Solicitor General (OSG), seeking the reversal and setting
aside of the Decision2 dated 25 January 2007 of the Court of Appeals in CA-G.R. CV No.
76298, which affirmed in toto the Joint Decision3 dated 29 May 2002 of the Regional Trial Court
(RTC) of Makati City, Branch 138, in Civil Cases No. 00-1208 and No. 00-1210; and (2) the
Resolution4 dated 14 March 2007 of the appellate court in the same case which denied the
Motion for Reconsideration of the OSG. The RTC adjudged that respondents Ayala Land
Incorporated (Ayala Land), Robinsons Land Corporation (Robinsons), Shangri-la Plaza
Corporation (Shangri-la), and SM Prime Holdings, Inc. (SM Prime) could not be obliged to
provide free parking spaces in their malls to their patrons and the general public.

Respondents Ayala Land, Robinsons, and Shangri-la maintain and operate shopping malls in
various locations in Metro Manila. Respondent SM Prime constructs, operates, and leases out
commercial buildings and other structures, among which, are SM City, Manila; SM Centerpoint,
Sta. Mesa, Manila; SM City, North Avenue, Quezon City; and SM Southmall, Las Piñas.

The shopping malls operated or leased out by respondents have parking facilities for all kinds of
motor vehicles, either by way of parking spaces inside the mall buildings or in separate buildings
and/or adjacent lots that are solely devoted for use as parking spaces. Respondents Ayala
Land, Robinsons, and SM Prime spent for the construction of their own parking facilities.
Respondent Shangri-la is renting its parking facilities, consisting of land and building specifically
used as parking spaces, which were constructed for the lessor's account.

Respondents expend for the maintenance and administration of their respective parking
facilities. They provide security personnel to protect the vehicles parked in their parking facilities
and maintain order within the area. In turn, they collect the following parking fees from the
persons making use of their parking facilities, regardless of whether said persons are mall
patrons or not:

Respondent Parking Fees

Ayala Land
On weekdays, P25.00 for the first four hours and P10.00 for every succeeding hour; on
weekends, flat rate of P25.00 per day

Robinsons
P20.00 for the first three hours and P10.00 for every succeeding hour

Shangri-la
Flat rate of P30.00 per day

SM Prime
P10.00 to P20.00 (depending on whether the parking space is outdoors or indoors) for the first
three hours and 59 minutes, and P10.00 for every succeeding hour or fraction thereof

The parking tickets or cards issued by respondents to vehicle owners contain the stipulation that
respondents shall not be responsible for any loss or damage to the vehicles parked in
respondents' parking facilities.

In 1999, the Senate Committees on Trade and Commerce and on Justice and Human Rights
conducted a joint investigation for the following purposes: (1) to inquire into the legality of the
prevalent practice of shopping malls of charging parking fees; (2) assuming arguendo that the
collection of parking fees was legally authorized, to find out the basis and reasonableness of the
parking rates charged by shopping malls; and (3) to determine the legality of the policy of
shopping malls of denying liability in cases of theft, robbery, or carnapping, by invoking the
waiver clause at the back of the parking tickets. Said Senate Committees invited the top
executives of respondents, who operate the major malls in the country; the officials from the
Department of Trade and Industry (DTI), Department of Public Works and Highways (DPWH),
Metro Manila Development Authority (MMDA), and other local government officials; and the
Philippine Motorists Association (PMA) as representative of the consumers' group.

After three public hearings held on 30 September, 3 November, and 1 December 1999, the
afore-mentioned Senate Committees jointly issued Senate Committee Report No. 2255 on 2
May 2000, in which they concluded:

In view of the foregoing, the Committees find that the collection of parking fees by shopping
malls is contrary to the National Building Code and is therefor [sic] illegal. While it is true that the
Code merely requires malls to provide parking spaces, without specifying whether it is free or
not, both Committees believe that the reasonable and logical interpretation of the Code is that
the parking spaces are for free. This interpretation is not only reasonable and logical but finds
support in the actual practice in other countries like the United States of America where parking
spaces owned and operated by mall owners are free of charge.

Figuratively speaking, the Code has "expropriated" the land for parking - something similar to
the subdivision law which require developers to devote so much of the land area for parks.
Moreover, Article II of R.A. No. 9734 (Consumer Act of the Philippines) provides that "it is the
policy of the State to protect the interest of the consumers, promote the general welfare and
establish standards of conduct for business and industry." Obviously, a contrary interpretation
(i.e., justifying the collection of parking fees) would be going against the declared policy of R.A.
7394.

Section 201 of the National Building Code gives the responsibility for the administration and
enforcement of the provisions of the Code, including the imposition of penalties for
administrative violations thereof to the Secretary of Public Works. This set up, however, is not
being carried out in reality.

In the position paper submitted by the Metropolitan Manila Development Authority (MMDA), its
chairman, Jejomar C. Binay, accurately pointed out that the Secretary of the DPWH is
responsible for the implementation/enforcement of the National Building Code. After the
enactment of the Local Government Code of 1991, the local government units (LGU's) were
tasked to discharge the regulatory powers of the DPWH. Hence, in the local level, the Building
Officials enforce all rules/ regulations formulated by the DPWH relative to all building plans,
specifications and designs including parking space requirements. There is, however, no single
national department or agency directly tasked to supervise the enforcement of the provisions of
the Code on parking, notwithstanding the national character of the law.6

Senate Committee Report No. 225, thus, contained the following recommendations:

In light of the foregoing, the Committees on Trade and Commerce and Justice and Human
Rights hereby recommend the following:

1. The Office of the Solicitor General should institute the necessary action to enjoin the
collection of parking fees as well as to enforce the penal sanction provisions of the National
Building Code. The Office of the Solicitor General should likewise study how refund can be
exacted from mall owners who continue to collect parking fees.

2. The Department of Trade and Industry pursuant to the provisions of R.A. No. 7394, otherwise
known as the Consumer Act of the Philippines should enforce the provisions of the Code
relative to parking. Towards this end, the DTI should formulate the necessary implementing
rules and regulations on parking in shopping malls, with prior consultations with the local
government units where these are located. Furthermore, the DTI, in coordination with the
DPWH, should be empowered to regulate and supervise the construction and maintenance of
parking establishments.

3. Finally, Congress should amend and update the National Building Code to expressly prohibit
shopping malls from collecting parking fees by at the same time, prohibit them from invoking the
waiver of liability.7
Respondent SM Prime thereafter received information that, pursuant to Senate Committee
Report No. 225, the DPWH Secretary and the local building officials of Manila, Quezon City, and
Las Piñas intended to institute, through the OSG, an action to enjoin respondent SM Prime
and similar establishments from collecting parking fees, and to impose upon said
establishments penal sanctions under Presidential Decree No. 1096, otherwise known as the
National Building Code of the Philippines (National Building Code), and its Implementing Rules
and Regulations (IRR). With the threatened action against it, respondent SM Prime filed, on 3
October 2000, a Petition for Declaratory Relief8 under Rule 63 of the Revised Rules of Court,
against the DPWH Secretary and local building officials of Manila, Quezon City, and Las
Piñas. Said Petition was docketed as Civil Case No. 00-1208 and assigned to the RTC of
Makati City, Branch 138, presided over by Judge Sixto Marella, Jr. (Judge Marella). In its
Petition, respondent SM Prime prayed for judgment:

a) Declaring Rule XIX of the Implementing Rules and Regulations of the National Building Code
as ultra vires, hence, unconstitutional and void;

b) Declaring [herein respondent SM Prime]'s clear legal right to lease parking spaces
appurtenant to its department stores, malls, shopping centers and other commercial
establishments; andcralawlibrary

c) Declaring the National Building Code of the Philippines Implementing Rules and Regulations
as ineffective, not having been published once a week for three (3) consecutive weeks in a
newspaper of general circulation, as prescribed by Section 211 of Presidential Decree No.
1096.

[Respondent SM Prime] further prays for such other reliefs as may be deemed just and
equitable under the premises.9

The very next day, 4 October 2000, the OSG filed a Petition for Declaratory Relief and
Injunction (with Prayer for Temporary Restraining Order and Writ of Preliminary Injunction)10
against respondents. This Petition was docketed as Civil Case No. 00-1210 and raffled to the
RTC of Makati, Branch 135, presided over by Judge Francisco B. Ibay (Judge Ibay). Petitioner
prayed that the RTC:

1. After summary hearing, a temporary restraining order and a writ of preliminary injunction be
issued restraining respondents from collecting parking fees from their customers;
andcralawlibrary

2. After hearing, judgment be rendered declaring that the practice of respondents in charging
parking fees is violative of the National Building Code and its Implementing Rules and
Regulations and is therefore invalid, and making permanent any injunctive writ issued in this
case.

Other reliefs just and equitable under the premises are likewise prayed for.11
On 23 October 2000, Judge Ibay of the RTC of Makati City, Branch 135, issued an Order
consolidating Civil Case No. 00-1210 with Civil Case No. 00-1208 pending before Judge Marella
of RTC of Makati, Branch 138.

As a result of the pre-trial conference held on the morning of 8 August 2001, the RTC issued a
Pre-Trial Order12 of even date which limited the issues to be resolved in Civil Cases No. 00-
1208 and No. 00-1210 to the following:

1. Capacity of the plaintiff [OSG] in Civil Case No. 00-1210 to institute the present proceedings
and relative thereto whether the controversy in the collection of parking fees by mall owners is a
matter of public welfare.

2. Whether declaratory relief is proper.

3. Whether respondent Ayala Land, Robinsons, Shangri-La and SM Prime are obligated to
provide parking spaces in their malls for the use of their patrons or the public in general, free of
charge.

4. Entitlement of the parties of [sic] award of damages.13

On 29 May 2002, the RTC rendered its Joint Decision in Civil Cases No. 00-1208 and No. 00-
1210.

The RTC resolved the first two issues affirmatively. It ruled that the OSG can initiate Civil Case
No. 00-1210 under Presidential Decree No. 478 and the Administrative Code of 1987.14 It also
found that all the requisites for an action for declaratory relief were present, to wit:

The requisites for an action for declaratory relief are: (a) there is a justiciable controversy; (b)
the controversy is between persons whose interests are adverse; (c) the party seeking the relief
has a legal interest in the controversy; and (d) the issue involved is ripe for judicial
determination.

SM, the petitioner in Civil Case No. 001-1208 [sic] is a mall operator who stands to be affected
directly by the position taken by the government officials sued namely the Secretary of Public
Highways and the Building Officials of the local government units where it operates shopping
malls. The OSG on the other hand acts on a matter of public interest and has taken a position
adverse to that of the mall owners whom it sued. The construction of new and bigger malls has
been announced, a matter which the Court can take judicial notice and the unsettled issue of
whether mall operators should provide parking facilities, free of charge needs to be resolved.15

As to the third and most contentious issue, the RTC pronounced that:
The Building Code, which is the enabling law and the Implementing Rules and Regulations do
not impose that parking spaces shall be provided by the mall owners free of charge. Absent
such directive[,] Ayala Land, Robinsons, Shangri-la and SM [Prime] are under no obligation to
provide them for free. Article 1158 of the Civil Code is clear:

"Obligations derived from law are not presumed. Only those expressly determined in this Code
or in special laws are demandable and shall be regulated by the precepts of the law which
establishes them; and as to what has not been foreseen, by the provisions of this Book (1090).
["]

xxx

The provision on ratios of parking slots to several variables, like shopping floor area or customer
area found in Rule XIX of the Implementing Rules and Regulations cannot be construed as a
directive to provide free parking spaces, because the enabling law, the Building Code does not
so provide. x x x.

To compel Ayala Land, Robinsons, Shangri-La and SM [Prime] to provide parking spaces for
free can be considered as an unlawful taking of property right without just compensation.

Parking spaces in shopping malls are privately owned and for their use, the mall operators
collect fees. The legal relationship could be either lease or deposit. In either case[,] the mall
owners have the right to collect money which translates into income. Should parking spaces be
made free, this right of mall owners shall be gone. This, without just compensation. Further, loss
of effective control over their property will ensue which is frowned upon by law.

The presence of parking spaces can be viewed in another light. They can be looked at as
necessary facilities to entice the public to increase patronage of their malls because without
parking spaces, going to their malls will be inconvenient. These are[,] however[,] business
considerations which mall operators will have to decide for themselves. They are not sufficient
to justify a legal conclusion, as the OSG would like the Court to adopt that it is the obligation of
the mall owners to provide parking spaces for free.16

The RTC then held that there was no sufficient evidence to justify any award for damages.

The RTC finally decreed in its 29 May 2002 Joint Decision in Civil Cases No. 00-1208 and No.
00-1210 that:

FOR THE REASONS GIVEN, the Court declares that Ayala Land[,] Inc., Robinsons Land
Corporation, Shangri-la Plaza Corporation and SM Prime Holdings[,] Inc. are not obligated to
provide parking spaces in their malls for the use of their patrons or public in general, free of
charge.

All counterclaims in Civil Case No. 00-1210 are dismissed.

No pronouncement as to costs.17

CA-G.R. CV No. 76298 involved the separate appeals of the OSG18 and respondent SM
Prime19 filed with the Court of Appeals. The sole assignment of error of the OSG in its
Appellant's Brief was:

THE TRIAL COURT ERRED IN HOLDING THAT THE NATIONAL BUILDING CODE DID NOT
INTEND MALL PARKING SPACES TO BE FREE OF CHARGE[;]20

while the four errors assigned by respondent SM Prime in its Appellant's Brief were:

THE TRIAL COURT ERRED IN FAILING TO DECLARE RULE XIX OF THE IMPLEMENTING
RULES AS HAVING BEEN ENACTED ULTRA VIRES, HENCE, UNCONSTITUTIONAL AND
VOID.

II

THE TRIAL COURT ERRED IN FAILING TO DECLARE THE IMPLEMENTING RULES

INEFFECTIVE FOR NOT HAVING BEEN PUBLISHED AS REQUIRED BY LAW.

III

THE TRIAL COURT ERRED IN FAILING TO DISMISS THE OSG'S PETITION FOR
DECLARATORY RELIEF AND INJUNCTION FOR FAILURE TO EXHAUST ADMINISTRATIVE
REMEDIES.

IV

THE TRIAL COURT ERRED IN FAILING TO DECLARE THAT THE OSG HAS NO LEGAL
CAPACITY TO SUE AND/OR THAT IT IS NOT A REAL PARTY-IN-INTEREST IN THE
INSTANT CASE.21

Respondent Robinsons filed a Motion to Dismiss Appeal of the OSG on the ground that the lone
issue raised therein involved a pure question of law, not reviewable by the Court of Appeals.

The Court of Appeals promulgated its Decision in CA-G.R. CV No. 76298 on 25 January 2007.
The appellate court agreed with respondent Robinsons that the appeal of the OSG should suffer
the fate of dismissal, since "the issue on whether or not the National Building Code and its
implementing rules require shopping mall operators to provide parking facilities to the public for
free" was evidently a question of law. Even so, since CA-G.R. CV No. 76298 also included the
appeal of respondent SM Prime, which raised issues worthy of consideration, and in order to
satisfy the demands of substantial justice, the Court of Appeals proceeded to rule on the merits
of the case.

In its Decision, the Court of Appeals affirmed the capacity of the OSG to initiate Civil Case No.
00-1210 before the RTC as the legal representative of the government,22 and as the one
deputized by the Senate of the Republic of the Philippines through Senate Committee Report
No. 225.

The Court of Appeals rejected the contention of respondent SM Prime that the OSG failed to
exhaust administrative remedies. The appellate court explained that an administrative review is
not a condition precedent to judicial relief where the question in dispute is purely a legal one,
and nothing of an administrative nature is to be or can be done.

The Court of Appeals likewise refused to rule on the validity of the IRR of the National Building
Code, as such issue was not among those the parties had agreed to be resolved by the RTC
during the pre-trial conference for Civil Cases No. 00-1208 and No. 00-1210. Issues cannot be
raised for the first time on appeal. Furthermore, the appellate court found that the controversy
could be settled on other grounds, without touching on the issue of the validity of the IRR. It
referred to the settled rule that courts should refrain from passing upon the constitutionality of a
law or implementing rules, because of the principle that bars judicial inquiry into a constitutional
question, unless the resolution thereof is indispensable to the determination of the case.

Lastly, the Court of Appeals declared that Section 803 of the National Building Code and Rule
XIX of the IRR were clear and needed no further construction. Said provisions were only
intended to control the occupancy or congestion of areas and structures. In the absence of any
express and clear provision of law, respondents could not be obliged and expected to provide
parking slots free of charge.

The fallo of the 25 January 2007 Decision of the Court of Appeals reads:

WHEREFORE, premises considered, the instant appeals are DENIED. Accordingly, appealed
Decision is hereby AFFIRMED in toto.23

In its Resolution issued on 14 March 2007, the Court of Appeals denied the Motion for
Reconsideration of the OSG, finding that the grounds relied upon by the latter had already been
carefully considered, evaluated, and passed upon by the appellate court, and there was no
strong and cogent reason to modify much less reverse the assailed judgment.

The OSG now comes before this Court, via the instant Petition for Review, with a single
assignment of error:

THE COURT OF APPEALS SERIOUSLY ERRED IN AFFIRMING THE RULING OF THE

LOWER COURT THAT RESPONDENTS ARE NOT OBLIGED TO PROVIDE FREE PARKING
SPACES TO THEIR CUSTOMERS OR THE PUBLIC.24
The OSG argues that respondents are mandated to provide free parking by Section 803 of the
National Building Code and Rule XIX of the IRR.

According to Section 803 of the National Building Code:

SECTION 803. Percentage of Site Occupancy

(a) Maximum site occupancy shall be governed by the use, type of construction, and height of
the building and the use, area, nature, and location of the site; and subject to the provisions of
the local zoning requirements and in accordance with the rules and regulations promulgated by
the Secretary.

In connection therewith, Rule XIX of the old IRR,25 provides:

RULE XIX - PARKING AND LOADING SPACE REQUIREMENTS

Pursuant to Section 803 of the National Building Code (PD 1096) providing for maximum site
occupancy, the following provisions on parking and loading space requirements shall be
observed:

1. The parking space ratings listed below are minimum off-street requirements for specific
uses/occupancies for buildings/structures:

1.1 The size of an average automobile parking slot shall be computed as 2.4 meters by 5.00
meters for perpendicular or diagonal parking, 2.00 meters by 6.00 meters for parallel parking. A
truck or bus parking/loading slot shall be computed at a minimum of 3.60 meters by 12.00
meters. The parking slot shall be drawn to scale and the total number of which shall be
indicated on the plans and specified whether or not parking accommodations, are attendant-
managed. (See Section 2 for computation of parking requirements).

xxx

1.7 Neighborhood shopping center - 1 slot/100 sq. m. of shopping floor area

The OSG avers that the aforequoted provisions should be read together with Section 102 of the
National Building Code, which declares:

SECTION 102. Declaration of Policy

It is hereby declared to be the policy of the State to safeguard life, health, property, and public
welfare, consistent with the principles of sound environmental management and control; and to
this end, make it the purpose of this Code to provide for all buildings and structures, a
framework of minimum standards and requirements to regulate and control their location, site,
design, quality of materials, construction, use, occupancy, and maintenance.

The requirement of free-of-charge parking, the OSG argues, greatly contributes to the aim of
safeguarding "life, health, property, and public welfare, consistent with the principles of sound
environmental management and control." Adequate parking spaces would contribute greatly to
alleviating traffic congestion when complemented by quick and easy access thereto because of
free-charge parking. Moreover, the power to regulate and control the use, occupancy, and
maintenance of buildings and structures carries with it the power to impose fees and,
conversely, to control - - partially or, as in this case, absolutely - - the imposition of such fees.

The Court finds no merit in the present Petition.

The explicit directive of the afore-quoted statutory and regulatory provisions, garnered from a
plain reading thereof, is that respondents, as operators/lessors of neighborhood shopping
centers, should provide parking and loading spaces, in accordance with the minimum ratio of
one slot per 100 square meters of shopping floor area. There is nothing therein pertaining to the
collection (or non-collection) of parking fees by respondents. In fact, the term "parking fees"
cannot even be found at all in the entire National Building Code and its IRR.

Statutory construction has it that if a statute is clear and unequivocal, it must be given its literal
meaning and applied without any attempt at interpretation.26 Since Section 803 of the National
Building Code and Rule XIX of its IRR do not mention parking fees, then simply, said provisions
do not regulate the collection of the same. The RTC and the Court of Appeals correctly applied
Article 1158 of the New Civil Code, which states:

Art. 1158. Obligations derived from law are not presumed. Only those expressly determined in
this Code or in special laws are demandable, and shall be regulated by the precepts of the law
which establishes them; and as to what has not been foreseen, by the provisions of this Book.
(Emphasis ours.)

Hence, in order to bring the matter of parking fees within the ambit of the National Building Code
and its IRR, the OSG had to resort to specious and feeble argumentation, in which the Court
cannot concur.

The OSG cannot rely on Section 102 of the National Building Code to expand the coverage of
Section 803 of the same Code and Rule XIX of the IRR, so as to include the regulation of
parking fees. The OSG limits its citation to the first part of Section 102 of the National Building
Code declaring the policy of the State "to safeguard life, health, property, and public welfare,
consistent with the principles of sound environmental management and control"; but totally
ignores the second part of said provision, which reads, "and to this end, make it the purpose of
this Code to provide for all buildings and structures, a framework of minimum standards and
requirements to regulate and control their location, site, design, quality of materials,
construction, use, occupancy, and maintenance." While the first part of Section 102 of the
National Building Code lays down the State policy, it is the second part thereof that explains
how said policy shall be carried out in the Code. Section 102 of the National Building Code is
not an all-encompassing grant of regulatory power to the DPWH Secretary and local building
officials in the name of life, health, property, and public welfare. On the contrary, it limits the
regulatory power of said officials to ensuring that the minimum standards and requirements for
all buildings and structures, as set forth in the National Building Code, are complied with.

Consequently, the OSG cannot claim that in addition to fixing the minimum requirements for
parking spaces for buildings, Rule XIX of the IRR also mandates that such parking spaces be
provided by building owners free of charge. If Rule XIX is not covered by the enabling law, then
it cannot be added to or included in the implementing rules. The rule-making power of
administrative agencies must be confined to details for regulating the mode or proceedings to
carry into effect the law as it has been enacted, and it cannot be extended to amend or expand
the statutory requirements or to embrace matters not covered by the statute. Administrative
regulations must always be in harmony with the provisions of the law because any resulting
discrepancy between the two will always be resolved in favor of the basic law.27

From the RTC all the way to this Court, the OSG repeatedly referred to Republic v. Gonzales28
and City of Ozamis v. Lumapas29 to support its position that the State has the power to regulate
parking spaces to promote the health, safety, and welfare of the public; and it is by virtue of said
power that respondents may be required to provide free parking facilities. The OSG, though,
failed to consider the substantial differences in the factual and legal backgrounds of these two
cases from those of the Petition at bar.

In Republic, the Municipality of Malabon sought to eject the occupants of two parcels of land of
the public domain to give way to a road-widening project. It was in this context that the Court
pronounced:

Indiscriminate parking along F. Sevilla Boulevard and other main thoroughfares was prevalent;
this, of course, caused the build up of traffic in the surrounding area to the great discomfort and
inconvenience of the public who use the streets. Traffic congestion constitutes a threat to the
health, welfare, safety and convenience of the people and it can only be substantially relieved
by widening streets and providing adequate parking areas.

The Court, in City of Ozamis, declared that the City had been clothed with full power to control
and regulate its streets for the purpose of promoting public health, safety and welfare. The City
can regulate the time, place, and manner of parking in the streets and public places; and charge
minimal fees for the street parking to cover the expenses for supervision, inspection and control,
to ensure the smooth flow of traffic in the environs of the public market, and for the safety and
convenience of the public.

Republic and City of Ozamis involved parking in the local streets; in contrast, the present case
deals with privately owned parking facilities available for use by the general public. In Republic
and City of Ozamis, the concerned local governments regulated parking pursuant to their power
to control and regulate their streets; in the instant case, the DPWH Secretary and local building
officials regulate parking pursuant to their authority to ensure compliance with the minimum
standards and requirements under the National Building Code and its IRR. With the difference
in subject matters and the bases for the regulatory powers being invoked, Republic and City of
Ozamis do not constitute precedents for this case.

Indeed, Republic and City of Ozamis both contain pronouncements that weaken the position of
the OSG in the case at bar. In Republic, the Court, instead of placing the burden on private
persons to provide parking facilities to the general public, mentioned the trend in other
jurisdictions wherein the municipal governments themselves took the initiative to make more
parking spaces available so as to alleviate the traffic problems, thus:

Under the Land Transportation and Traffic Code, parking in designated areas along public
streets or highways is allowed which clearly indicates that provision for parking spaces serves a
useful purpose. In other jurisdictions where traffic is at least as voluminous as here, the
provision by municipal governments of parking space is not limited to parking along public
streets or highways. There has been a marked trend to build off-street parking facilities with the
view to removing parked cars from the streets. While the provision of off-street parking facilities
or carparks has been commonly undertaken by private enterprise, municipal governments have
been constrained to put up carparks in response to public necessity where private enterprise
had failed to keep up with the growing public demand. American courts have upheld the right of
municipal governments to construct off-street parking facilities as clearly redounding to the
public benefit.30

In City of Ozamis, the Court authorized the collection by the City of minimal fees for the parking
of vehicles along the streets: so why then should the Court now preclude respondents from
collecting from the public a fee for the use of the mall parking facilities? Undoubtedly,
respondents also incur expenses in the maintenance and operation of the mall parking facilities,
such as electric consumption, compensation for parking attendants and security, and upkeep of
the physical structures.

It is not sufficient for the OSG to claim that "the power to regulate and control the use,
occupancy, and maintenance of buildings and structures carries with it the power to impose fees
and, conversely, to control, partially or, as in this case, absolutely, the imposition of such fees."
Firstly, the fees within the power of regulatory agencies to impose are regulatory fees. It has
been settled law in this jurisdiction that this broad and all-compassing governmental
competence to restrict rights of liberty and property carries with it the undeniable power to
collect a regulatory fee. It looks to the enactment of specific measures that govern the relations
not only as between individuals but also as between private parties and the political society.31
True, if the regulatory agencies have the power to impose regulatory fees, then conversely, they
also have the power to remove the same. Even so, it is worthy to note that the present case
does not involve the imposition by the DPWH Secretary and local building officials of regulatory
fees upon respondents; but the collection by respondents of parking fees from persons who use
the mall parking facilities. Secondly, assuming arguendo that the DPWH Secretary and local
building officials do have regulatory powers over the collection of parking fees for the use of
privately owned parking facilities, they cannot allow or prohibit such collection arbitrarily or
whimsically. Whether allowing or prohibiting the collection of such parking fees, the action of the
DPWH Secretary and local building officials must pass the test of classic reasonableness and
propriety of the measures or means in the promotion of the ends sought to be accomplished.32

Keeping in mind the aforementioned test of reasonableness and propriety of measures or

means, the Court notes that Section 803 of the National Building Code falls under Chapter 8 on
Light and Ventilation. Evidently, the Code deems it necessary to regulate site occupancy to
ensure that there is proper lighting and ventilation in every building. Pursuant thereto, Rule XIX
of the IRR requires that a building, depending on its specific use and/or floor area, should
provide a minimum number of parking spaces. The Court, however, fails to see the connection
between regulating site occupancy to ensure proper light and ventilation in every building vis - Ã
-vis regulating the collection by building owners of fees for the use of their parking spaces.
Contrary to the averment of the OSG, the former does not necessarily include or imply the latter.
It totally escapes this Court how lighting and ventilation conditions at the malls could be affected
by the fact that parking facilities thereat are free or paid for.

The OSG attempts to provide the missing link by arguing that:

Under Section 803 of the National Building Code, complimentary parking spaces are required to
enhance light and ventilation, that is, to avoid traffic congestion in areas surrounding the
building, which certainly affects the ventilation within the building itself, which otherwise, the
annexed parking spaces would have served. Free-of-charge parking avoids traffic congestion by
ensuring quick and easy access of legitimate shoppers to off-street parking spaces annexed to
the malls, and thereby removing the vehicles of these legitimate shoppers off the busy streets
near the commercial establishments.33

The Court is unconvinced. The National Building Code regulates buildings, by setting the
minimum specifications and requirements for the same. It does not concern itself with traffic
congestion in areas surrounding the building. It is already a stretch to say that the National
Building Code and its IRR also intend to solve the problem of traffic congestion around the
buildings so as to ensure that the said buildings shall have adequate lighting and ventilation.
Moreover, the Court cannot simply assume, as the OSG has apparently done, that the traffic
congestion in areas around the malls is due to the fact that respondents charge for their parking
facilities, thus, forcing vehicle owners to just park in the streets. The Court notes that despite the
fees charged by respondents, vehicle owners still use the mall parking facilities, which are even
fully occupied on some days. Vehicle owners may be parking in the streets only because there
are not enough parking spaces in the malls, and not because they are deterred by the parking
fees charged by respondents. Free parking spaces at the malls may even have the opposite
effect from what the OSG envisioned: more people may be encouraged by the free parking to
bring their own vehicles, instead of taking public transport, to the malls; as a result, the parking
facilities would become full sooner, leaving more vehicles without parking spaces in the malls
and parked in the streets instead, causing even more traffic congestion.
Without using the term outright, the OSG is actually invoking police power to justify the
regulation by the State, through the DPWH Secretary and local building officials, of privately
owned parking facilities, including the collection by the owners/operators of such facilities of
parking fees from the public for the use thereof. The Court finds, however, that in totally
prohibiting respondents from collecting parking fees from the public for the use of the mall
parking facilities, the State would be acting beyond the bounds of police power.

Police power is the power of promoting the public welfare by restraining and regulating the use
of liberty and property. It is usually exerted in order to merely regulate the use and enjoyment of
the property of the owner. The power to regulate, however, does not include the power to
prohibit. A fortiori, the power to regulate does not include the power to confiscate. Police power
does not involve the taking or confiscation of property, with the exception of a few cases where
there is a necessity to confiscate private property in order to destroy it for the purpose of
protecting peace and order and of promoting the general welfare; for instance, the confiscation
of an illegally possessed article, such as opium and firearms.34

When there is a taking or confiscation of private property for public use, the State is no longer
exercising police power, but another of its inherent powers, namely, eminent domain. Eminent
domain enables the State to forcibly acquire private lands intended for public use upon payment
of just compensation to the owner.35

Normally, of course, the power of eminent domain results in the taking or appropriation of title
to, and possession of, the expropriated property; but no cogent reason appears why the said
power may not be availed of only to impose a burden upon the owner of condemned property,
without loss of title and possession.36 It is a settled rule that neither acquisition of title nor total
destruction of value is essential to taking. It is usually in cases where title remains with the
private owner that inquiry should be made to determine whether the impairment of a property is
merely regulated or amounts to a compensable taking. A regulation that deprives any person of
the profitable use of his property constitutes a taking and entitles him to compensation, unless
the invasion of rights is so slight as to permit the regulation to be justified under the police
power. Similarly, a police regulation that unreasonably restricts the right to use business
property for business purposes amounts to a taking of private property, and the owner may
recover therefor.37 ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

Although in the present case, title to and/or possession of the parking facilities remain/s with
respondents, the prohibition against their collection of parking fees from the public, for the use
of said facilities, is already tantamount to a taking or confiscation of their properties. The State is
not only requiring that respondents devote a portion of the latter's properties for use as parking
spaces, but is also mandating that they give the public access to said parking spaces for free.
Such is already an excessive intrusion into the property rights of respondents. Not only are they
being deprived of the right to use a portion of their properties as they wish, they are further
prohibited from profiting from its use or even just recovering therefrom the expenses for the
maintenance and operation of the required parking facilities.
The ruling of this Court in City Government of Quezon City v. Judge Ericta38 is edifying.
Therein, the City Government of Quezon City passed an ordinance obliging private cemeteries
within its jurisdiction to set aside at least six percent of their total area for charity, that is, for
burial grounds of deceased paupers. According to the Court, the ordinance in question was null
and void, for it authorized the taking of private property without just compensation:

There is no reasonable relation between the setting aside of at least six (6) percent of the total
area of all private cemeteries for charity burial grounds of deceased paupers and the promotion
of' health, morals, good order, safety, or the general welfare of the people. The ordinance is
actually a taking without compensation of a certain area from a private cemetery to benefit
paupers who are charges of the municipal corporation. Instead of' building or maintaining a
public cemetery for this purpose, the city passes the burden to private cemeteries.

'The expropriation without compensation of a portion of private cemeteries is not covered by

Section 12(t) of Republic Act 537, the Revised Charter of Quezon City which empowers the city
council to prohibit the burial of the dead within the center of population of the city and to provide
for their burial in a proper place subject to the provisions of general law regulating burial
grounds and cemeteries. When the Local Government Code, Batas Pambansa Blg. 337
provides in Section 177(q) that a sangguniang panlungsod may "provide for the burial of the
dead in such place and in such manner as prescribed by law or ordinance" it simply authorizes
the city to provide its own city owned land or to buy or expropriate private properties to construct
public cemeteries. This has been the law, and practise in the past. It continues to the present.
Expropriation, however, requires payment of just compensation. The questioned ordinance is
different from laws and regulations requiring owners of subdivisions to set aside certain areas
for streets, parks, playgrounds, and other public facilities from the land they sell to buyers of
subdivision lots. The necessities of public safety, health, and convenience are very clear from
said requirements which are intended to insure the development of communities with salubrious
and wholesome environments. The beneficiaries of the regulation, in turn, are made to pay by
the subdivision developer when individual lots are sold to homeowners.

In conclusion, the total prohibition against the collection by respondents of parking fees from
persons who use the mall parking facilities has no basis in the National Building Code or its IRR.
The State also cannot impose the same prohibition by generally invoking police power, since
said prohibition amounts to a taking of respondents' property without payment of just
compensation.

Given the foregoing, the Court finds no more need to address the issue persistently raised by
respondent SM Prime concerning the unconstitutionality of Rule XIX of the IRR. In addition, the
said issue was not among those that the parties, during the pre-trial conference for Civil Cases
No. 12-08 and No. 00-1210, agreed to submit for resolution of the RTC. It is likewise axiomatic
that the constitutionality of a law, a regulation, an ordinance or an act will not be resolved by
courts if the controversy can be, as in this case it has been, settled on other grounds.39
WHEREFORE, the instant Petition for Review on Certiorari is hereby DENIED. The Decision
dated 25 January 2007 and Resolution dated 14 March 2007 of the Court of Appeals in CA-G.R.
CV No. 76298, affirming in toto the Joint Decision dated 29 May 2002 of the Regional Trial
Court of Makati City, Branch 138, in Civil Cases No. 00-1208 and No. 00-1210 are hereby
AFFIRMED. No costs.

SO ORDERED

FIRST DIVISION

G.R. No. 146807 - May 9, 2002

PADCOM CONDOMINIUM CORPORATION, Petitioner, vs. ORTIGAS CENTER

ASSOCIATION, INC., Respondent.

DAVIDE, JR., C.J.:

Challenged in this case is the 30 June 2000 decision1 of the Court of Appeals in CA-G.R. CV
No. 60099, reversing and setting aside the 1 September 1997 decision2 of the Regional Trial
Court of Pasig City, Branch 264, in Civil Case No. 63801.3

Petitioner Padcom Condominium Corporation (hereafter PADCOM) owns and manages the
Padilla Office Condominium Building (PADCOM Building) located at Emerald Avenue, Ortigas
Center, Pasig City. The land on which the building stands was originally acquired from the
Ortigas & Company, Limited Partnership (OCLP), by Tierra Development Corporation (TDC)
under a Deed of Sale dated 4 September 1974. Among the terms and conditions in the deed of
sale was the requirement that the transferee and its successor-in-interest must become
members of an association for realty owners and long-term lessees in the area later known as
the Ortigas Center. Subsequently, the said lot, together with improvements thereon, was
conveyed by TDC in favor of PADCOM in a Deed of Transfer dated 25 February 1975.4

In 1982, respondent Ortigas Center Association, Inc. (hereafter the Association) was organized
to advance the interests and promote the general welfare of the real estate owners and long-
term lessees of lots in the Ortigas Center. It sought the collection of membership dues in the
amount of two thousand seven hundred twenty-four pesos and forty centavos (P2,724.40) per
month from PADCOM. The corporate books showed that PADCOM owed the Association
P639,961.47, representing membership dues, interests and penalty charges from April 1983 to
June 1993.5 The letters exchanged between the parties through the years showed repeated
demands for payment, requests for extensions of payment, and even a settlement scheme
proposed by PADCOM in September 1990.
In view of PADCOM's failure and refusal to pay its arrears in monthly dues, including interests
and penalties thereon, the Association filed a complaint for collection of sum of money before
the trial court below, which was docketed as Civil Case No. 63801. The Association averred that
purchasers of lands within the Ortigas Center complex from OCLP are obligated under their
contracts of sale to become members of the Association. This obligation was allegedly passed
on to PADCOM when it bought the lot from TDC, its predecessor-in-interest.6

In its answer, PADCOM contended that it is a non-stock, non-profit association, and for it to
become a special member of the Association, it should first apply for and be accepted for
membership by the latter's Board of Directors. No automatic membership was apparently
contemplated in the Association's By-laws. PADCOM added that it could not be compelled to
become a member without violating its right to freedom of association. And since it was not a
member of the Association, it was not liable for membership dues, interests and penalties.7

During the trial, the Association presented its accountant as lone witness to prove that
PADCOM was, indeed, one of its members and, as such, did not pay its membership dues.

PADCOM, on the other hand, did not present its evidence; instead it filed a motion to dismiss by
way of demurrer to evidence. It alleged that the facts established by the Association showed no
right to the relief prayed for. It claimed that the provisions of the Association's By-laws and the
Deed of Transfer did not contemplate automatic membership. Rather, the owner or long-term
lessee becomes a member of the Association only after applying with and being accepted by its
Board of Directors. Assuming further that PADCOM was a member of the Association, the latter
failed to show that the collection of monthly dues was a valid corporate act duly authorized by a
proper resolution of the Association's Board of Directors.8

After due consideration of the issues raised in the motion to dismiss, the trial court rendered a
decision dismissing the complaint.9

The Association appealed the case to the Court of Appeals, which docketed the appeal as CA-
G.R. CV No. 60099. In its decision10 of 30 June 2000, the Court of Appeals reversed and set
aside the trial court's dismissal of Civil Case No. 63801, and decreed as follows:

WHEREFORE, the appealed decision dated September 1, 1997 is REVERSED and SET
ASIDE and, in lieu thereof, a new one is entered ordering the appellee (PADCOM) to pay the
appellant (the Association) the following:

1) P639,961.47 as and for membership dues in arrears inclusive of earned interests and
penalties; and

2) P25,000.00 as and for attorney's fees.

Costs against the appellees.

SO ORDERED.

The Court of Appeals justified its ruling by declaring that PADCOM automatically became a
member of the Association when the land was sold to TDC. The intent to pass the obligation to
prospective transferees was evident from the annotation of the same clause at the back of the
Transfer Certificate of Title covering the lot. Despite disavowal of membership, PADCOM's
membership in the Association was evident from these facts: (1) PADCOM was included in the
Association's list of bona fide members as of 30 March 1995; (2) Narciso Padilla, PADCOM's
President, was one of the Association's incorporators; and (3) having received the demands for
payment, PADCOM not only acknowledged them, but asked for and was granted repeated
extensions, and even proposed a scheme for the settlement of its obligation. The Court of
Appeals also ruled that PADCOM cannot evade payment of its obligation to the Association
without violating equitable principles underlying quasi-contracts. Being covered by the
Association's avowed purpose to promote the interests and welfare of its members, PADCOM
cannot be allowed to expediently deny and avoid the obligation arising from such membership.

Dissatisfied with the adverse judgment of the Court of Appeals, PADCOM filed the petition for
review in this case. It raises the sole issue of whether it can be compelled to join the association
pursuant to the provision on automatic membership appearing as a condition in the Deed of
Sale of 04 September 1974 and the annotation thereof on Transfer Certificate of Title No.
457308.

PADCOM contends that it cannot be compelled to be a member of the Association solely by

virtue of the "automatic membership" clause that appears on the title of the property and the
Deed of Transfer. In 1975, when it bought the land, the Association was still inexistent.
Therefore, the provision on automatic membership was anticipatory in nature, subject to the
actual formation of the Association and the subsequent formulation of its implementing rules.

PADCOM likewise maintains that the Association's By-laws requires an application for
membership. Since it never sought membership, the Court of Appeals erred in concluding that it
was a member of the Association by implication. Aside from the lack of evidence proving such
membership, the Association has no basis to collect monthly dues since there is no board
resolution defining and prescribing how much should be paid.

For its part, the Association claims that the Deed of Sale between OCLP and TDC clearly
stipulates automatic membership for the owners of lots in the Ortigas Center, including their
successors-in-interest. The filing of applications and acceptance thereof by the Board of
Directors of the Association are, therefore, mere formalities that can be dispensed with or
waived. The provisions of the Association's By-laws cannot in any manner alter or modify the
automatic membership clause imposed on a property owner by virtue of an annotation of
encumbrance on his title.
The Association likewise asserts that membership therein requires the payment of certain
amounts for its operations and activities, as may be authorized by its Board of Directors. The
membership dues are for the common expenses of the homeowners for necessary services.

After a careful examination of the records of this case, the Court sees no reason to disturb the
assailed decision. The petition should be denied.

Section 44 of Presidential Decree No. 152911 mandates that:

SEC. 44. Statutory liens affecting title. - Every registered owner receiving a certificate of title in
pursuance of a decree of registration, and every subsequent purchaser of registered land taking
a certificate of title for value and in good faith, shall hold the same free from all encumbrances
except those noted on said certificate and any of the following encumbrances which may be
subsisting, namely: xxx

Under the Torrens system of registration, claims and liens of whatever character, except those
mentioned by law, existing against the land binds the holder of the title and the whole world.12

It is undisputed that when the land in question was bought by PADCOM's predecessor-in-
interest, TDC, from OCLP, the sale bound TDC to comply with paragraph (G) of the covenants,
conditions and restrictions of the Deed of Sale, which reads as follows:13

G. AUTOMATIC MEMBERSHIP WITH THE ASSOCIATION:

The owner of this lot, its successor-in-interest hereby binds himself to become a member of the
ASSOCIATION which will be formed by and among purchasers, fully paid up Lot BUYERS,
Building Owners and the COMPANY in respect to COMPANY OWNED LOTS.

The OWNER of this lot shall abide by such rules and regulations that shall be laid down by the
ASSOCIATION in the interest of security, maintenance, beautification and general welfare of the
OFFICE BUILDING zone. The ASSOCIATION when organized shall also, among others,
provide for and collect assessments which shall constitute a lien on the property, junior only to
liens of the Government for taxes.

Evidently, it was agreed by the parties that dues shall be collected from an automatic member
and such fees or assessments shall be a lien on the property.

This stipulation was likewise annotated at the back of Transfer Certificate of Title No. 457308
issued to TDC.14 And when the latter sold the lot to PADCOM on 25 February 1975, the Deed
of Transfer expressly stated:15

NOW, THEREFORE, for and in consideration of the foregoing premises, the DEVELOPER, by
these presents, cedes, transfers and conveys unto the CORPORATION the above-described
parcel of land evidenced by Transfer Certificate of Title No. 457308, as well as the Common
and Limited Common Areas of the Condominium project mentioned and described in the Master
Deed with Declaration of Restrictions (Annex "A" hereof), free from all liens and encumbrances,
except those already annotated at the back of said Transfer Certificate of Title No. 457308, xxx

This is so because any lien annotated on previous certificates of title should be incorporated in
or carried over to the new transfer certificates of title. Such lien is inseparable from the property
as it is a right in rem, a burden on the property whoever its owner may be. It subsists
notwithstanding a change in ownership; in short, the personality of the owner is disregarded.16
As emphasized earlier, the provision on automatic membership was annotated in the Certificate
of Title and made a condition in the Deed of Transfer in favor of PADCOM. Consequently, it is
bound by and must comply with the covenant.

Moreover, Article 1311 of the Civil Code provides that contracts take effect between the parties,
their assigns and heirs. Since PADCOM is the successor-in-interest of TDC, it follows that the
stipulation on automatic membership with the Association is also binding on the former.

We are not persuaded by PADCOM's contention that the By-laws of the Association requires
application for membership and acceptance thereof by the Board of Directors. Section 2 of the
By-laws17 reads:

Section 2. Regular Members. - Upon acceptance by the Board of Directors of Ortigas Center
Association, Inc., all real estate owners, or long-term lessees of lots within the boundaries of the
Association as defined in the Articles of Incorporation become regular members, provided,
however that the long-term lessees of a lot or lots in said area shall be considered as the
regular members in lieu of the owners of the same. Likewise, regular membership in the
Association automatically ceases upon the cessation of a member to be an owner or long-term
lessee of real estate in the area.

A lessee shall be considered a long-term lessee if his lease is in writing and for a period of two
(2) years or more. Membership of a long-term lessee in the Association shall be co-terminus
with his legal possession (or his lease) of the lot/s in the area. Upon the lessee's cessation of
membership in the Association, the owner shall automatically succeed the lessee as member
thereat.

As lot owner, PADCOM is a regular member of the Association. No application for membership
is necessary. If at all, acceptance by the Board of Directors is a ministerial function considering
that PADCOM is deemed to be a regular member upon the acquisition of the lot pursuant to the
automatic membership clause annotated in the Certificate of Title of the property and the Deed
of Transfer.

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.

In addition, under the principle of estoppel, PADCOM is barred from disclaiming membership in
the Association. In estoppel, a person, who by his act or conduct has induced another to act in a
particular manner, is barred from adopting an inconsistent position, attitude or course of conduct
that thereby causes loss or injury to another.18

We agree with the Court of Appeals' conclusion from the facts or circumstances it enumerated
in its decision and enumerated above that PADCOM is, indeed, a regular member of the
Association. These facts and circumstances are sufficient grounds to apply the doctrine of
estoppel against PADCOM.

Having ruled that PADCOM is a member of the Association, it is obligated to pay its dues
incidental thereto. Article 1159 of the Civil Code mandates:

Art. 1159. Obligations arising from contracts have the force of law between the contracting
parties and should be complied with in good faith.

Assuming in gratis argumenti that PADCOM is not a member of the Association, it cannot evade
payment without violating the equitable principles underlying quasi-contracts. Article 2142 of the
Civil Code provides:

Art. 2142. Certain lawful, voluntary and unilateral acts give rise to the juridical relation of quasi-
contract to the end that no one shall be unjustly enriched or benefited at the expense of another.

Generally, it may be said that a quasi-contract is based on the presumed will or intent of the
obligor dictated by equity and by the principles of absolute justice. Examples of these principles
are: (1) it is presumed that a person agrees to that which will benefit him; (2) nobody wants to
enrich himself unjustly at the expense of another; or (3) one must do unto others what he would
want others to do unto him under the same circumstances.19

As resident and lot owner in the Ortigas area, PADCOM was definitely benefited by the
Association's acts and activities to promote the interests and welfare of those who acquire
property therein or benefit from the acts or activities of the Association.

Finally, PADCOM's argument that the collection of monthly dues has no basis since there was
no board resolution defining how much fees are to be imposed deserves scant consideration.
Suffice it is to say that PADCOM never protested upon receipt of the earlier demands for
payment of membership dues. In fact, by proposing a scheme to pay its obligation, PADCOM
cannot belatedly question the Association's authority to assess and collect the fees in
accordance with the total land area owned or occupied by the members, which finds support in
a resolution dated 6 November 1982 of the Association's incorporating directors20 and Section
2 of its By-laws.21
WHEREFORE, the petition is hereby DENIED for lack of merit.

Costs against petitioner.

SO ORDERED

FIRST DIVISION

G.R. No. L-32599 June 29, 1979

EDGARDO E. MENDOZA, petitioner

vs.
HON. ABUNDIO Z. ARRIETA, Presiding Judge of Branch VIII, Court of First Instance of Manila,
FELINO TIMBOL, and RODOLFO SALAZAR, Respondents.

David G. Nitafan for petitioner.chanrobles virtual law library

Arsenio R. Reyes for respondent Timbol.chanrobles virtual law library

Armando M. Pulgado for respondent Salazar.

MELENCIO-HERRERA, J:

Petitioner, Edgardo Mendoza, seeks a review on certiorari of the Orders of respondent Judge in
Civil Case No. 80803 dismissing his Complaint for Damages based on quasi-delict against
respondents Felino Timbol and Rodolfo Salazar.chanrobles virtual law library

The facts which spawned the present controversy may be summarized as follows:

On October 22, 1969, at about 4:00 o'clock in the afternoon, a three- way vehicular accident
occurred along Mac-Arthur Highway, Marilao, Bulacan, involving a Mercedes Benz owned and
driven by petitioner; a private jeep owned and driven by respondent Rodolfo Salazar; and a
gravel and sand truck owned by respondent Felipino Timbol and driven by Freddie Montoya. As
a consequence of said mishap, two separate Informations for Reckless Imprudence Causing
Damage to Property were filed against Rodolfo Salazar and Freddie Montoya with the Court of
First Instance of Bulacan. The race against truck-driver Montoya, docketed as Criminal Case
No. SM-227, was for causing damage to the jeep owned by Salazar, in the amount of Pl,604.00,
by hitting it at the right rear portion thereby causing said jeep to hit and bump an oncoming car,
which happened to be petitioner's Mercedes Benz. The case against jeep-owner-driver Salazar,
docketed as Criminal Case No. SM 228, was for causing damage to the Mercedes Benz of
petitioner in the amount of P8,890.00
At the joint trial of the above cases, petitioner testified that jeep-owner- driver Salazar overtook
the truck driven by Montoya, swerved to the left going towards the poblacion of Marilao, and hit
his car which was bound for Manila. Petitioner further testified that before the impact, Salazar
had jumped from the jeep and that he was not aware that Salazar's jeep was bumped from
behind by the truck driven by Montoya. Petitioner's version of the accident was adopted by truck
driver Montoya. Jeep-owner-driver Salazar, on the other hand, tried to show that, after
overtaking the truck driven by Montoya, he flashed a signal indicating his intention to turn left
towards the poblacion of Marilao but was stopped at the intersection by a policeman who was
directing traffic; that while he was at a stop position, his jeep was bumped at the rear by the
truck driven by Montova causing him to be thrown out of the jeep, which then swerved to the left
and hit petitioner's car, which was coming from the opposite direction.chanrobles virtual law
library

On July 31, 1970, the Court of First Instance of Bulacan, Branch V, Sta. Maria, rendered
judgment, stating in its decretal portion:

IN VIEW OF THE FOREGOING, this Court finds the accused Freddie Montoya GUILTY beyond
reasonable doubt of the crime of damage to property thru reckless imprudence in Crime. Case
No. SM-227, and hereby sentences him to pay a fine of P972.50 and to indemnify Rodolfo
Salazar in the same amount of P972.50 as actual damages, with subsidiary imprisonment in
case of insolvency, both as to fine and indemnity, with costs.chanrobles virtual law library

Accused Rodolfo Salazar is hereby ACQUITTED from the offense charged in Crime. Case No.
SM-228, with costs de oficio, and his bond is ordered canceled

SO ORDERED. 1

Thus, the trial Court absolved jeep-owner-driver Salazar of any liability, civil and criminal, in
view of its findings that the collision between Salazar's jeep and petitioner's car was the result of
the former having been bumped from behind by the truck driven by Montoya. Neither was
petitioner awarded damages as he was not a complainant against truck-driver Montoya but only
against jeep-owner-driver Salazar.chanrobles virtual law library

On August 22, 1970, or after the termination of the criminal cases, petitioner filed Civil Case No.
80803 with the Court of First Instance of Manila against respondents jeep-owner-driver Salazar
and Felino Timbol, the latter being the owner of the gravel and sand truck driven by Montoya,
for indentification for the damages sustained by his car as a result of the collision involving their
vehicles. Jeep-owner-driver Salazar and truck-owner Timbol were joined as defendants, either
in the alternative or in solidum allegedly for the reason that petitioner was uncertain as to
whether he was entitled to relief against both on only one of them.chanrobles virtual law library
On September 9, 1970, truck-owner Timbol filed a Motion to Dismiss Civil Case No. 80803 on
the grounds that the Complaint is barred by a prior judgment in the criminal cases and that it
fails to state a cause of action. An Opposition thereto was filed by petitioner.chanrobles virtual
law library

In an Order dated September 12, 1970, respondent Judge dismissed the Complaint against
truck-owner Timbol for reasons stated in the afore- mentioned Motion to Dismiss On September
30, 1970, petitioner sought before this Court the review of that dismissal, to which petition we
gave due course.chanrobles virtual law library

On January 30, 1971, upon motion of jeep-owner-driver Salazar, respondent Judge also
dismissed the case as against the former. Respondent Judge reasoned out that "while it is true
that an independent civil action for liability under Article 2177 of the Civil Code could be
prosecuted independently of the criminal action for the offense from which it arose, the New
Rules of Court, which took effect on January 1, 1964, requires an express reservation of the civil
action to be made in the criminal action; otherwise, the same would be barred pursuant to
Section 2, Rule 111 ... 2 Petitioner's Motion for Reconsideration thereof was denied in the order
dated February 23, 1971, with respondent Judge suggesting that the issue be raised to a higher
Court "for a more decisive interpretation of the rule. 3

On March 25, 1971, petitioner then filed a Supplemental Petition before us, also to review the
last two mentioned Orders, to which we required jeep-owner-driver Salazar to file an Answer.

The Complaint against

truck-owner Timbol

We shall first discuss the validity of the Order, dated September 12, 1970, dismissing
petitioner's Complaint against truck-owner Timbol.chanrobles virtual law library

In dismissing the Complaint against the truck-owner, respondent Judge sustained Timbol's
allegations that the civil suit is barred by the prior joint judgment in Criminal Cases Nos. SM-227
and SM-228, wherein no reservation to file a separate civil case was made by petitioner and
where the latter actively participated in the trial and tried to prove damages against jeep-driver-
Salazar only; and that the Complaint does not state a cause of action against truck-owner
Timbol inasmuch as petitioner prosecuted jeep-owner-driver Salazar as the one solely
responsible for the damage suffered by his car.chanrobles virtual law library

Well-settled is the rule that for a prior judgment to constitute a bar to a subsequent case, the
following requisites must concur: (1) it must be a final judgment; (2) it must have been rendered
by a Court having jurisdiction over the subject matter and over the parties; (3) it must be a
judgment on the merits; and (4) there must be, between the first and second actions, Identity of
parties, Identity of subject matter and Identity of cause of action.chanrobles virtual law library

It is conceded that the first three requisites of res judicata are present. However, we agree with
petitioner that there is no Identity of cause of action between Criminal Case No. SM-227 and
Civil Case No. 80803. Obvious is the fact that in said criminal case truck-driver Montoya was not
prosecuted for damage to petitioner's car but for damage to the jeep. Neither was truck-owner
Timbol a party in said case. In fact as the trial Court had put it "the owner of the Mercedes Benz
cannot recover any damages from the accused Freddie Montoya, he (Mendoza) being a
complainant only against Rodolfo Salazar in Criminal Case No. SM-228. 4 And more
importantly, in the criminal cases, the cause of action was the enforcement of the civil liability
arising from criminal negligence under Article l of the Revised Penal Code, whereas Civil Case
No. 80803 is based on quasi-delict under Article 2180, in relation to Article 2176 of the Civil
Code As held in Barredo vs. Garcia, et al. 5

The foregoing authorities clearly demonstrate the separate in. individuality of cuasi-delitos or
culpa aquiliana under the Civil Code. Specifically they show that there is a distinction between
civil liability arising from criminal negligence (governed by the Penal Code) and responsibility for
fault or negligence under articles 1902 to 1910 of the Civil Code, and that the same negligent
act may produce either a civil liability arising from a crime under the Penal Code, or a separate
responsibility for fault or negligence under articles 1902 to 1910 of the Civil Code. Still more
concretely, the authorities above cited render it inescapable to conclude that the employer in
this case the defendant- petitioner is primarily and directly liable under article 1903 of the Civil
Code.

That petitioner's cause of action against Timbol in the civil case is based on quasi-delict is
evident from the recitals in the complaint to wit: that while petitioner was driving his car along
MacArthur Highway at Marilao, Bulacan, a jeep owned and driven by Salazar suddenly swerved
to his (petitioner's) lane and collided with his car That the sudden swerving of Salazar's jeep
was caused either by the negligence and lack of skill of Freddie Montoya, Timbol's employee,
who was then driving a gravel and sand truck iii the same direction as Salazar's jeep; and that
as a consequence of the collision, petitioner's car suffered extensive damage amounting to
P12,248.20 and that he likewise incurred actual and moral damages, litigation expenses and
attorney's fees. Clearly, therefore, the two factors that a cause of action must consist of,
namely: (1) plaintiff's primary right, i.e., that he is the owner of a Mercedes Benz, and (2)
defendant's delict or wrongful act or omission which violated plaintiff's primary right, i.e., the
negligence or lack of skill either of jeep-owner Salazar or of Timbol's employee, Montoya, in
driving the truck, causing Salazar's jeep to swerve and collide with petitioner's car, were alleged
in the Complaint. 6

Consequently, petitioner's cause of action being based on quasi-delict, respondent Judge

committed reversible error when he dismissed the civil suit against the truck-owner, as said
case may proceed independently of the criminal proceedings and regardless of the result of the
latter.
Art. 31. When the civil action is based on an obligation not arising from the act or omission
complained of as a felony, such civil action may proceed independently of the criminal
proceedings and regardless of the result of the latter.

But it is truck-owner Timbol's submission (as well as that of jeep-owner-driver Salazar) that
petitioner's failure to make a reservation in the criminal action of his right to file an independent
civil action bars the institution of such separate civil action, invoking section 2, Rule 111, Rules
of Court, which says:

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

Interpreting the above provision, this Court, in Garcia vs. Florida 7 said:

As we have stated at the outset, the same negligent act causing damages may produce a civil
liability arising from crime or create an action for quasi-delict or culpa extra-contractual. The
former is a violation of the criminal law, while the latter is a distinct and independent negligence,
having always had its own foundation and individuality. Some legal writers are of the view that in
accordance with Article 31, the civil action based upon quasi-delict may proceed independently
of the criminal proceeding for criminal negligence and regardless of the result of the latter.
Hence, 'the proviso in Section 2 of Rule 111 with reference to ... Articles 32, 33 and 34 of the
Civil Code is contrary to the letter and spirit of the said articles, for these articles were drafted ...
and are intended to constitute as exceptions to the general rule stated in what is now Section 1
of Rule 111. The proviso, which is procedural, may also be regarded as an unauthorized
amendment of substantive law, Articles 32, 33 and 34 of the Civil Code, which do not provide for
the reservation required in the proviso ... .

In his concurring opinion in the above case, Mr. Justice Antonio Barredo further observed that
inasmuch as Articles 2176 and 2177 of the Civil Code create a civil liability distinct and different
from the civil action arising from the offense of negligence under the Revised Penal Code, no
reservation, therefore, need be made in the criminal case; that Section 2 of Rule 111 is
inoperative, "it being substantive in character and is not within the power of the Supreme Court
to promulgate; and even if it were not substantive but adjective, it cannot stand because of its
inconsistency with Article 2177, an enactment of the legislature superseding the Rules of 1940."

We declare, therefore, that in so far as truck-owner Timbol is concerned, Civil Case No. 80803
is not barred by the fact that petitioner failed to reserve, in the criminal action, his right to file an
independent civil action based on quasi-delict.
The suit against

jeep-owner-driver Salazar

The case as against jeep-owner-driver Salazar, who was acquitted in Criminal Case No. SM-
228, presents a different picture altogether.chanrobles virtual law library

At the outset it should be clarified that inasmuch as civil liability co-exists with criminal
responsibility in negligence cases, the offended party has the option between an action for
enforcement of civil liability based on culpa criminal under Article 100 of the Revised Penal
Code, and an action for recovery of damages based on culpa aquiliana under Article 2177 of the
Civil Code. The action for enforcement of civil liability based on culpa criminal under section 1 of
Rule 111 of the Rules of Court is deemed simultaneously instituted with the criminal action,
unless expressly waived or reserved for separate application by the offended party. 8

The circumstances attendant to the criminal case yields the conclusion that petitioner had opted
to base his cause of action against jeep-owner-driver Salazar on culpa criminal and not on culpa
aquiliana as evidenced by his active participation and intervention in the prosecution of the
criminal suit against said Salazar. The latter's civil liability continued to be involved in the
criminal action until its termination. Such being the case, there was no need for petitioner to
have reserved his right to file a separate civil action as his action for civil liability was deemed
impliedly instituted in Criminal Case No. SM-228.chanrobles virtual law library

Neither would an independent civil action he. Noteworthy is the basis of the acquittal of jeep-
owner-driver Salazar in the criminal case, expounded by the trial Court in this wise:

In view of what has been proven and established during the trial, accused Freddie Montoya
would be held able for having bumped and hit the rear portion of the jeep driven by the accused
Rodolfo Salazar,

Considering that the collision between the jeep driven by Rodolfo Salazar and the car owned
and driven by Edgardo Mendoza was the result of the hitting on the rear of the jeep by the truck
driven by Freddie Montoya, this Court behaves that accused Rodolfo Salazar cannot be held
able for the damages sustained by Edgardo Mendoza's car. 9

Crystal clear is the trial Court's pronouncement that under the facts of the case, jeep-owner-
driver Salazar cannot be held liable for the damages sustained by petitioner's car. In other
words, "the fact from which the civil might arise did not exist. " Accordingly, inasmuch as
petitioner's cause of action as against jeep-owner-driver Salazar is ex- delictu, founded on
Article 100 of the Revised Penal Code, the civil action must be held to have been extinguished
in consonance with Section 3(c), Rule 111 of the Rules of Court 10which provides:

Sec. 3. Other civil actions arising from offenses. - In all cases not included in the preceding
section the following rules shall be observed:
xxx xxx xxx

c) Extinction of the penal action does not carry with it extinction of the civil, unless the
extinction proceeds from a declaration in a final judgment that the fact from which the civil night
arise did not exist. ...

And even if petitioner's cause of action as against jeep-owner-driver Salazar were not ex-
delictu, the end result would be the same, it being clear from the judgment in the criminal case
that Salazar's acquittal was not based upon reasonable doubt, consequently, a civil action for
damages can no longer be instituted. This is explicitly provided for in Article 29 of the Civil Code
quoted here under:

Art. 29.When the accused in a criminal prosecution is acquitted on the ground that his guilt has
not been proved beyond reasonable doubt, a civil action for damages for the same act or
omission may be instituted. Such action requires only a preponderance of
evidence ...chanrobles virtual law library

If in a criminal case the judgment of acquittal is based upon reasonable doubt, the court shall so
declare. In the absence of any declaration to that effect, it may be inferred from the text of the
decision whether or not the acquittal is due to that ground.

In so far as the suit against jeep-owner-driver Salazar is concerned, therefore, we sustain

respondent Judge's Order dated January 30, 1971 dismissing the complaint, albeit on different
grounds.chanrobles virtual law library

WHEREFORE, 1) the Order dated September 12, 1970 dismissing Civil Case No. 80803
against private respondent Felino Timbol is set aside, and respondent Judge, or his successor,
hereby ordered to proceed with the hearing on the merits; 2) but the Orders dated January 30,
1971 and February 23, 1971 dismissing the Complaint in Civil Case No. 80803 against
respondent Rodolfo Salazar are hereby upheld.chanrobles virtual law library

No costs.chanrobles virtual law library

SO ORDERED

SECOND DIVISION

G.R. No. 84698 February 4, 1992

PHILIPPINE SCHOOL OF BUSINESS ADMINISTRATION, JUAN D. LIM, BENJAMIN P.
PAULINO, ANTONIO M. MAGTALAS, COL. PEDRO SACRO and LT. M. SORIANO,
petitioners,
vs.
COURT OF APPEALS, HON. REGINA ORDOÑEZ-BENITEZ, in her capacity as Presiding
Judge of Branch 47, Regional Trial Court, Manila, SEGUNDA R. BAUTISTA and ARSENIA D.
BAUTISTA, respondents.

Balgos and Perez for petitioners.

Collantes, Ramirez & Associates for private respondents.

PADILLA, J.:

A stabbing incident on 30 August 1985 which caused the death of Carlitos Bautista while on the
second-floor premises of the Philippine School of Business Administration (PSBA) prompted the
parents of the deceased to file suit in the Regional Trial Court of Manila (Branch 47) presided
over by Judge (now Court of Appeals justice) Regina Ordoñez-Benitez, for damages against the
said PSBA and its corporate officers. At the time of his death, Carlitos was enrolled in the third
year commerce course at the PSBA. It was established that his assailants were not members of
the school's academic community but were elements from outside the school.

Specifically, the suit impleaded the PSBA and the following school authorities: Juan D. Lim
(President), Benjamin P. Paulino (Vice-President), Antonio M. Magtalas (Treasurer/Cashier),
Col. Pedro Sacro (Chief of Security) and a Lt. M. Soriano (Assistant Chief of Security).
Substantially, the plaintiffs (now private respondents) sought to adjudge them liable for the
victim's untimely demise due to their alleged negligence, recklessness and lack of security
precautions, means and methods before, during and after the attack on the victim. During the
proceedings a quo, Lt. M. Soriano terminated his relationship with the other petitioners by
resigning from his position in the school.

Defendants a quo (now petitioners) sought to have the suit dismissed, alleging that since they
are presumably sued under Article 2180 of the Civil Code, the complaint states no cause of
action against them, as jurisprudence on the subject is to the effect that academic institutions,
such as the PSBA, are beyond the ambit of the rule in the afore-stated article.

The respondent trial court, however, overruled petitioners' contention and thru an order dated 8
December 1987, denied their motion to dismiss. A subsequent motion for reconsideration was
similarly dealt with by an order dated 25 January 1988. Petitioners then assailed the trial court's
disposition before the respondent appellate court which, in a decision * promulgated on 10 June
1988, affirmed the trial court's orders. On 22 August 1988, the respondent appellate court
resolved to deny the petitioners' motion for reconsideration. Hence, this petition.
At the outset, it is to be observed that the respondent appellate court primarily anchored its
decision on the law of quasi-delicts, as enunciated in Articles 2176 and 2180 of the Civil Code. 1
Pertinent portions of the appellate court's now assailed ruling state:

Article 2180 (formerly Article 1903) of the Civil Code is an adoption from the old Spanish Civil
Code. The comments of Manresa and learned authorities on its meaning should give way to
present day changes. The law is not fixed and flexible (sic); it must be dynamic. In fact, the
greatest value and significance of law as a rule of conduct in (sic) its flexibility to adopt to
changing social conditions and its capacity to meet the new challenges of progress.

Construed in the light of modern day educational system, Article 2180 cannot be construed in its
narrow concept as held in the old case of Exconde vs. Capuno 2 and Mercado vs. Court of
Appeals; 3 hence, the ruling in the Palisoc 4 case that it should apply to all kinds of educational
institutions, academic or vocational.

At any rate, the law holds the teachers and heads of the school staff liable unless they relieve
themselves of such liability pursuant to the last paragraph of Article 2180 by "proving that they
observed all the diligence to prevent damage." This can only be done at a trial on the merits of
the case. 5

While we agree with the respondent appellate court that the motion to dismiss the complaint
was correctly denied and the complaint should be tried on the merits, we do not however agree
with the premises of the appellate court's ruling.

Article 2180, in conjunction with Article 2176 of the Civil Code, establishes the rule of in loco
parentis. This Court discussed this doctrine in the afore-cited cases of Exconde, Mendoza,
Palisoc and, more recently, in Amadora vs. Court of Appeals. 6 In all such cases, it had been
stressed that the law (Article 2180) plainly provides that the damage should have been caused
or inflicted by pupils or students of he educational institution sought to be held liable for the acts
of its pupils or students while in its custody. However, this material situation does not exist in the
present case for, as earlier indicated, the assailants of Carlitos were not students of the PSBA,
for whose acts the school could be made liable.

However, does the appellate court's failure to consider such material facts mean the exculpation
of the petitioners from liability? It does not necessarily follow.

When an academic institution accepts students for enrollment, there is established a contract
between them, resulting in bilateral obligations which both parties are bound to comply with. 7
For its part, the school undertakes to provide the student with an education that would
presumably suffice to equip him with the necessary tools and skills to pursue higher education
or a profession. On the other hand, the student covenants to abide by the school's academic
requirements and observe its rules and regulations.
Institutions of learning must also meet the implicit or "built-in" obligation of providing their
students with an atmosphere that promotes or assists in attaining its primary undertaking of
imparting knowledge. Certainly, no student can absorb the intricacies of physics or higher
mathematics or explore the realm of the arts and other sciences when bullets are flying or
grenades exploding in the air or where there looms around the school premises a constant
threat to life and limb. Necessarily, the school must ensure that adequate steps are taken to
maintain peace and order within the campus premises and to prevent the breakdown thereof.

Because the circumstances of the present case evince a contractual relation between the PSBA
and Carlitos Bautista, the rules on quasi-delict do not really govern. 8 A perusal of Article 2176
shows that obligations arising from quasi-delicts or tort, also known as extra-contractual
obligations, arise only between parties not otherwise bound by contract, whether express or
implied. However, this impression has not prevented this Court from determining the existence
of a tort even when there obtains a contract. In Air France vs. Carrascoso (124 Phil. 722), the
private respondent was awarded damages for his unwarranted expulsion from a first-class seat
aboard the petitioner airline. It is noted, however, that the Court referred to the petitioner-
airline's liability as one arising from tort, not one arising from a contract of carriage. In effect, Air
France is authority for the view that liability from tort may exist even if there is a contract, for the
act that breaks the contract may be also a tort. (Austro-America S.S. Co. vs. Thomas, 248 Fed.
231).

This view was not all that revolutionary, for even as early as 1918, this Court was already of a
similar mind. In Cangco vs. Manila Railroad (38 Phil. 780), Mr. Justice Fisher elucidated thus:

The field of non-contractual obligation is much broader than that of contractual obligation,
comprising, as it does, the whole extent of juridical human relations. These two fields,
figuratively speaking, concentric; that is to say, the mere fact that a person is bound to another
by contract does not relieve him from extra-contractual liability to such person. When such a
contractual relation exists the obligor may break the contract under such conditions that the
same act which constitutes a breach of the contract would have constituted the source of an
extra-contractual obligation had no contract existed between the parties.

Immediately what comes to mind is the chapter of the Civil Code on Human Relations,
particularly Article 21, which provides:

Any person who wilfully causes loss or injury to another in a manner that is contrary to morals,
good custom or public policy shall compensate the latter for the damage. (emphasis supplied).

Air France penalized the racist policy of the airline which emboldened the petitioner's employee
to forcibly oust the private respondent to cater to the comfort of a white man who allegedly "had
a better right to the seat." In Austro-American, supra, the public embarrassment caused to the
passenger was the justification for the Circuit Court of Appeals, (Second Circuit), to award
damages to the latter. From the foregoing, it can be concluded that should the act which
breaches a contract be done in bad faith and be violative of Article 21, then there is a cause to
view the act as constituting a quasi-delict.

In the circumstances obtaining in the case at bar, however, there is, as yet, no finding that the
contract between the school and Bautista had been breached thru the former's negligence in
providing proper security measures. This would be for the trial court to determine. And, even if
there be a finding of negligence, the same could give rise generally to a breach of contractual
obligation only. Using the test of Cangco, supra, the negligence of the school would not be
relevant absent a contract. In fact, that negligence becomes material only because of the
contractual relation between PSBA and Bautista. In other words, a contractual relation is a
condition sine qua non to the school's liability. The negligence of the school cannot exist
independently of the contract, unless the negligence occurs under the circumstances set out in
Article 21 of the Civil Code.

This Court is not unmindful of the attendant difficulties posed by the obligation of schools,
above-mentioned, for conceptually a school, like a common carrier, cannot be an insurer of its
students against all risks. This is specially true in the populous student communities of the so-
called "university belt" in Manila where there have been reported several incidents ranging from
gang wars to other forms of hooliganism. It would not be equitable to expect of schools to
anticipate all types of violent trespass upon their premises, for notwithstanding the security
measures installed, the same may still fail against an individual or group determined to carry out
a nefarious deed inside school premises and environs. Should this be the case, the school may
still avoid liability by proving that the breach of its contractual obligation to the students was not
due to its negligence, here statutorily defined to be the omission of that degree of diligence
which is required by the nature of the obligation and corresponding to the circumstances of
persons, time and place. 9

As the proceedings a quo have yet to commence on the substance of the private respondents'
complaint, the record is bereft of all the material facts. Obviously, at this stage, only the trial
court can make such a determination from the evidence still to unfold.

WHEREFORE, the foregoing premises considered, the petition is DENIED. The court of origin
(RTC, Manila, Br. 47) is hereby ordered to continue proceedings consistent with this ruling of
the Court. Costs against the petitioners.

SO ORDERED.

SECOND DIVISION

G.R. No. 170498 January 9, 2013

METROPOLITAN BANK & TRUST COMPANY, Petitioner,

vs.
ABSOLUTE MANAGEMENT CORPORATION, Respondent.

DECISION

BRION, J.:

We resolve petitioner Metropolitan Bank & Trust Company's (Metro bank's) petition for review
on certiorari1 seeking the reversal of the decision2 dated August 25, 2005 and the resolution3
dated November 17, 2005 of the Court of Appeals (CA) in CA-G.R. SP No. 86336. The assailed
decision affirmed the order4 dated May 7, 2004 of the Regional Trial Court (RTC) of Quezon
City, Branch 80. The RTC had denied the admission of Metrobank's Fourth-Party Complaint5
against the Estate of Jose L. Chua for being a money claim that falls under Section 5, Rule 86
of the Rules of Court; the claim should have been filed in the pending judicial settlement of
Chua’s estate before the RTC of Pasay City. The CA affirmed the RTC’s order based on the
same ground.

Factual Antecedents

On October 5, 2000, Sherwood Holdings Corporation, Inc. (SHCI) filed a complaint for sum of
money against Absolute Management Corporation (AMC). The complaint was docketed as Civil
Case No. Q-00-42105 and was assigned to the RTC of Quezon City, Branch 80.6

SHCI alleged in its complaint that it made advance payments to AMC for the purchase of 27,000
pieces of plywood and 16,500 plyboards in the sum of ₱12,277,500.00, covered by Metrobank
Check Nos. 1407668502, 140768507, 140768530, 140768531, 140768532, 140768533 and
140768534. These checks were all crossed, and were all made payable to AMC. They were
given to Chua, AMC’s General Manager, in 1998.7

Chua died in 1999, 8 and a special proceeding for the settlement of his estate was commenced
before the RTC of Pasay City. This proceeding was pending at the time AMC filed its answer
with counterclaims and third-party complaint.9

SHCI made demands on AMC, after Chua’s death, for allegedly undelivered items worth
₱8,331,700.00. According to AMC, these transactions could not be found in its records. Upon
investigation, AMC discovered that in 1998, Chua received from SHCI 18 Metrobank checks
worth ₱31,807,500.00. These were all payable to AMC and were crossed or "for payee’s
account only."10

In its answer with counterclaims and third-party complaint,11 AMC averred that it had no
knowledge of Chua’s transactions with SHCI and it did not receive any money from the latter.
AMC also asked the RTC to hold Metrobank liable for the subject checks in case it is adjudged
liable to SHCI.
Metrobank filed a motion for bill of particulars,12 seeking to clarify certain ambiguous
statements in AMC’s answer. The RTC granted the motion but AMC failed to submit the
required bill of particulars. Hence, Metrobank filed a motion to strike out the third-party
complaint.13

In the meantime, Metrobank filed a motion to dismiss14 against AMC on the ground that the
latter engaged in prohibited forum shopping. According to Metrobank, AMC’s claim against it is
the same claim that it raised against Chua’s estate in Special Proceedings No. 99-0023 before
the RTC of Pasay City, Branch 112. The RTC subsequently denied this motion.15

The RTC of Quezon City opted to defer consideration16 of Metrobank’s motion to strike out
third-party complaint17 and it instead granted AMC’s motion for leave to serve written
interrogatories on the third-party defendant.18 While Metrobank filed its answer to the written
interrogatories, AMC was again directed by the RTC, in an order19 dated August 13, 2003, to
submit its bill of particulars. Instead, AMC filed a motion for reconsideration20 which was denied
in an order21 dated October 28, 2003. AMC still did not file its bill of particulars. The RTC, on
the other hand, did not act on Metrobank’s motion to strike out AMC’s third-party complaint.22

In its answer23 dated December 1, 2003, Metrobank admitted that it deposited the checks in
question to the account of Ayala Lumber and Hardware, a sole proprietorship Chua owned and
managed. The deposit was allegedly done with the knowledge and consent of AMC. According
to

Metrobank, Chua then gave the assurance that the arrangement for the handling of the checks
carried AMC’s consent. Chua also submitted documents showing his position and interest in
AMC. These documents, as well as AMC’s admission in its answer that it allowed Chua to
manage AMC with a relative free hand, show that it knew of Chua’s arrangement with
Metrobank. Further, Chua’s records show that the proceeds of the checks were remitted to AMC
which cannot therefore now claim that it did not receive these proceeds.

Metrobank also raised the defense of estoppel. According to Metrobank, AMC had knowledge of
its arrangements with Chua for several years. Despite this arrangement, AMC did not object to
nor did it call the attention of Metrobank about Chua’s alleged lack of authority to deposit the
checks in Ayala Lumber and Hardware’s account. At this point, AMC is already estopped from
questioning Chua’s authority to deposit these checks in Ayala Lumber and Hardware’s account.

Lastly, Metrobank asserted that AMC gave Chua unbridled control in managing AMC’s affairs.
This measure of control amounted to gross negligence that was the proximate cause of the loss
that AMC must now bear.

Subsequently, Metrobank filed a motion for leave to admit fourth-party complaint24 against
Chua’s estate. It alleged that Chua’s estate should reimburse Metrobank in case it would be
held liable in the third-party complaint filed against it by AMC.
The RTC’s Ruling

In an order25 dated May 7, 2004, the RTC denied Metrobank’s motion. It likewise denied
Metrobank’s motion for reconsideration in an order26 dated July 7, 2004.

The RTC categorized Metrobank’s allegation in the fourth-party complaint as a "cobro de lo

indebido"27 – a kind of quasi-contract that mandates recovery of what has been improperly
paid. Quasi-contracts fall within the concept of implied contracts that must be included in the
claims required to be filed with the judicial settlement of the deceased’s estate under Section 5,
Rule 86 of the Rules of Court. As such claim, it should have been filed in Special Proceedings
No. 99-0023, not before the RTC as a fourth-party complaint. The RTC, acting in the exercise of
its general jurisdiction, does not have the authority to adjudicate the fourth-party complaint. As a
trial court hearing an ordinary action, it cannot resolve matters pertaining to special proceedings
because the latter is subject to specific rules.

Metrobank responded to the RTC ruling by filing a petition for certiorari28 under Rule 65 before
the CA.

The CA’s Ruling

The CA affirmed the RTC’s ruling that Metrobank’s fourth-party complaint should have been
filed in Special Proceedings No. 99-0023.29 According to the CA, the relief that Metrobank
prayed for was based on a quasi-contract and was a money claim categorized as an implied
contract that should be filed under Section 5, Rule 86 of the Rules of Court.

Based on the statutory construction principle of lex specialis derogat generali, the CA held that
Section 5, Rule 86 of the Rules of Court is a special provision that should prevail over the
general provisions of Section 11, Rule 6 of the Rules of Court. The latter applies to money
claims in ordinary actions while a money claim against a person already deceased falls under
the settlement of his estate that is governed by the rules on special proceedings. If at all, rules
for ordinary actions only apply suppletorily to special proceedings.

The Present Petition

In its present petition for review on certiorari,30 Metrobank asserts that it should be allowed to
file a fourth-party complaint against Chua’s estate in the proceedings before the RTC; its fourth-
party complaint was filed merely to enforce its right to be reimbursed by Chua’s estate in case
Metrobank is held liable to AMC. Hence, Section 11, Rule 6 of the Rules of Court should apply.

AMC, in its comment,31 maintains the line that the CA and the RTC rulings should be followed,
i.e., that Metrobank’s claim is a quasi-contract that should be filed as a claim under Section 5,
Rule 86 of the Rules of Court.
AMC also challenges the form of Metrobank’s petition for failure to comply with Section 4, Rule
45 of the Rules of Court. This provision requires petitions filed before the Supreme Court to be
accompanied by "such material portions of the record as would support the petition."

According to AMC, the petition’s annexes are mostly Metrobank’s pleadings and court
issuances. It did not append all relevant AMC pleadings before the RTC and the CA. For this
reason, the petition should have been dismissed outright.

Issues

The parties’ arguments, properly joined, present to us the following issues:

1) Whether the petition for review on certiorari filed by Metrobank before the Supreme Court
complies with Section 4, Rule 45 of the Rules of Court; and

2) Whether Metrobank’s fourth-party complaint against Chua’s estate should be allowed.

The Court’s Ruling

The Present Petition Complies With Section 4, Rule 45 of the Rules of Court

AMC posits that Metrobank’s failure to append relevant AMC pleadings submitted to the RTC
and to the CA violated Section 4, Rule 45 of the Rules of Court,32 and is a sufficient ground to
dismiss the petition under Section 5, Rule 45 of the Rules of Court.33

We disagree with AMC’s position.

In F.A.T. Kee Computer Systems, Inc. v. Online Networks International, Inc.,34 Online Networks
International, Inc. similarly assailed F.A.T. Kee Computer Systems, Inc.’s failure to attach the
transcript of stenographic notes (TSN) of the RTC proceedings, and claimed this omission to be
a violation of Section 4, Rule 45 of the Rules of Court that warranted the petition’s dismissal.
The Court held that the defect was not fatal, as the TSN of the proceedings before the RTC
forms part of the records of the case. Thus, there was no incurable omission that warranted the
outright dismissal of the petition.

The Court significantly pointed out in F.A.T. Kee that the requirement in Section 4, Rule 45 of
the Rules of Court is not meant to be an absolute rule whose violation would automatically lead
to the petition’s dismissal.35 The Rules of Court has not been intended to be totally rigid. In fact,
the Rules of Court provides that 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";36 and "[i]f the petition is given due
course, the Supreme Court may require the elevation of the complete record of the case or
specified parts thereof within fifteen (15) days from notice."37 These provisions are in keeping
with the overriding standard that procedural rules should be liberally construed to promote their
objective and to assist the parties in obtaining a just, speedy and inexpensive determination of
every action or proceeding.38

Under this guiding principle, we do not see Metrobank’s omission to be a fatal one that should
warrant the petition’s outright dismissal. To be sure, the omission to submit the adverse party’s
pleadings in a petition before the Court is not a commendable practice as it may lead to an
unduly biased narration of facts and arguments that masks the real issues before the Court.
Such skewed presentation could lead to the waste of the Court’s time in sifting through the
maze of the parties’ narrations of facts and arguments and is a danger the Rules of Court seeks
to avoid.

Our examination of Metrobank’s petition shows that it contains AMC’s opposition to its motion to
admit fourth-party complaint among its annexes. The rest of the pleadings have been
subsequently submitted as attachments in Metrobank’s Reply. A reading of these pleadings
shows that their arguments are the same as those stated in the orders of the trial court and the
Court of Appeals. Thus, even if Metrobank’s petition did not contain some of AMC’s pleadings,
the Court still had the benefit of a clear narration of facts and arguments according to both
parties’ perspectives. In this broader view, the mischief that the Rules of Court seeks to avoid
has not really been present. If at all, the omission is not a grievous one that the spirit of liberality
cannot address.

The Merits of the Main Issue

The main issue poses to us two essential points that must be addressed. First, are quasi-
contracts included in claims that should be filed pursuant to Rule 86, Section 5 of the Rules of
Court? Second, if so, is Metrobank’s claim against the Estate of Jose Chua based on a quasi-
contract?

Quasi-contracts are included in

claims that should be filed under Rule
86, Section 5 of the Rules of Court

In Maclan v. Garcia,39 Gabriel Maclan filed a civil case to recover from Ruben Garcia the
necessary expenses he spent as possessor of a piece of land. Garcia acquired the land as an
heir of its previous owner. He set up the defense that this claim should have been filed in the
special proceedings to settle the estate of his predecessor. Maclan, on the other hand,
contended that his claim arises from law and not from contract, express or implied. Thus, it need
not be filed in the settlement of the estate of Garcia’s predecessor, as mandated by Section 5,
Rule 87 of the Rules of Court (now Section 5, Rule 86).

The Court held under these facts that a claim for necessary expenses spent as previous
possessor of the land is a kind of quasi-contract. Citing Leung Ben v. O’Brien,40 it explained
that the term "implied contracts," as used in our remedial law, originated from the common law
where obligations derived from quasi-contracts and from law are both considered as implied
contracts. Thus, the term quasi-contract is included in the concept "implied contracts" as used in
the Rules of Court. Accordingly, liabilities of the deceased arising from quasi-contracts should
be filed as claims in the settlement of his estate, as provided in Section 5, Rule 86 of the Rules
of Court.41

Metrobank’s fourth-party complaint is

based on quasi-contract

Both the RTC and the CA described Metrobank’s claim against Chua’s estate as one based on
quasi-contract. A quasi-contract involves a juridical relation that the law creates on the basis of
certain voluntary, unilateral and lawful acts of a person, to avoid unjust enrichment.42 The Civil
Code provides an enumeration of quasi-contracts,43 but the list is not exhaustive and merely
provides examples.44

According to the CA, Metrobank’s fourth-party complaint falls under the quasi-contracts
enunciated in Article 2154 of the Civil Code.45 Article 2154 embodies the concept "solutio
indebiti" which arises when something is delivered through mistake to a person who has no right
to demand it. It obligates the latter to return what has been received through mistake.46

Solutio indebiti, as defined in Article 2154 of the Civil Code, has two indispensable requisites:
first, that something has been unduly delivered through mistake; and second, that something
was received when there was no right to demand it.47

In its fourth-party complaint, Metrobank claims that Chua’s estate should reimburse it if it
becomes liable on the checks that it deposited to Ayala Lumber and Hardware’s account upon
Chua’s instructions.

This fulfills the requisites of solutio indebiti. First, Metrobank acted in a manner akin to a mistake
when it deposited the AMC checks to Ayala Lumber and Hardware’s account; because of
Chua’s control over AMC’s operations, Metrobank assumed that the checks payable to AMC
could be deposited to Ayala Lumber and Hardware’s account. Second, Ayala Lumber and
Hardware had no right to demand and receive the checks that were deposited to its account;
despite Chua’s control over AMC and Ayala Lumber and Hardware, the two entities are distinct,
and checks exclusively and expressly payable to one cannot be deposited in the account of the
other. This disjunct created an obligation on the part of Ayala Lumber and Hardware, through its
sole proprietor, Chua, to return the amount of these checks to Metrobank.

The Court notes, however, that its description of Metrobank’s fourth-party complaint as a
claimclosely analogous to solutio indebiti is only to determine the validity of the lower courts’
orders denying it. It is not an adjudication determining the liability of Chua’s estate against
Metrobank. The appropriate trial court should still determine whether Metrobank has a lawful
claim against Chua’s estate based on quasi-contract.1âwphi1

Metrobank’s fourth-party complaint,

as a contingent claim, falls within the
claims that should be filed under
Section 5, Rule 86 of the Rules of
Court

A distinctive character of Metrobank’s fourth-party complaint is its contingent nature – the claim
depends on the possibility that Metrobank would be adjudged liable to AMC, a future event that
may or may not happen. This characteristic unmistakably marks the complaint as a contingent
one that must be included in the claims falling under the terms of Section 5, Rule 86 of the
Rules of Court:

Sec. 5. Claims which must be filed under the notice. If not filed, barred; exceptions. – All claims
for money against the decedent, arising from contract, express or implied, whether the same be
due, not due, or contingent, all claims for funeral expenses and expenses for the last sickness
of the decedent, and judgment for money against the decedent, must be filed within the time
limited in the notice. [italics ours]

Specific provisions of Section 5, Rule

86 of the Rules of Court prevail over
general provisions of Section 11, Rule
6 of the Rules of Court

Metrobank argues that Section 11, Rule 6 of the Rules of Court should apply because it
impleaded Chua’s estate for reimbursement in the same transaction upon which it has been
sued by AMC. On this point, the Court supports the conclusion of the CA, to wit:

Notably, a comparison of the respective provisions of Section 11, Rule 6 and Section 5, Rule 86
of the Rules of Court readily shows that Section 11, Rule 6 applies to ordinary civil actions while
Section 5, Rule 86 specifically applies to money claims against the estate. The specific
provisions of Section 5, Rule 86 x x x must therefore prevail over the general provisions of
Section 11, Rule 6.48

We read with approval the CA’s use of the statutory construction principle of lex specialis
derogat generali, leading to the conclusion that the specific provisions of Section 5, Rule 86 of
the Rules of Court should prevail over the general provisions of Section 11, Rule 6 of the Rules
of Court; the settlement of the estate of deceased persons (where claims against the deceased
should be filed) is primarily governed by the rules on special proceedings, while the rules
provided for ordinary claims, including Section 11, Rule 6 ofthe Rules of Court, merely apply
suppletorily.49

In sum, on all counts in the considerations material to the issues posed, the resolution points to
the affirmation of the assailed CA decision and resolution. Metrobank's claim in its fourth-party
complaint against Chua's estate is based on quasi-contract. It is also a contingent claim that
depends on another event. Both belong to the category of claims against a deceased person
that should be filed under Section 5, Rule 86 of the Rules of Comi and, as such, should have
been so filed in Special Proceedings No. 99-0023.

WHEREFORE, premises considered, we hereby DENY the petition for lack of merit. The
decision of the Court of Appeals dated August 25, 2005, holding that the Regional Trial Court of
Quezon City, Branch 80, did not commit grave abuse of discretion in denying Metropolitan Bank
& Trust Company's motion for leave to admit fourth-party complaint Is

AFFIRMED. Costs against Metropolitan Bank & Trust Company.

SO ORDERED

EN BANC

G.R. No. L-48006 July 8, 1942

FAUSTO BARREDO, petitioner,

vs.
SEVERINO GARCIA and TIMOTEA ALMARIO, respondents.

Celedonio P. Gloria and Antonio Barredo for petitioner.

Jose G. Advincula for respondents.

BOCOBO, J.:

This case comes up from the Court of Appeals which held the petitioner herein, Fausto Barredo,
liable in damages for the death of Faustino Garcia caused by the negligence of Pedro
Fontanilla, a taxi driver employed by said Fausto Barredo.

At about half past one in the morning of May 3, 1936, on the road between Malabon and
Navotas, Province of Rizal, there was a head-on collision between a taxi of the Malate Taxicab
driven by Pedro Fontanilla and a carretela guided by Pedro Dimapalis. The carretela was
overturned, and one of its passengers, 16-year-old boy Faustino Garcia, suffered injuries from
which he died two days later. A criminal action was filed against Fontanilla in the Court of First
Instance of Rizal, and he was convicted and sentenced to an indeterminate sentence of one
year and one day to two years of prision correccional. The court in the criminal case granted the
petition that the right to bring a separate civil action be reserved. The Court of Appeals affirmed
the sentence of the lower court in the criminal case. Severino Garcia and Timotea Almario,
parents of the deceased on March 7, 1939, brought an action in the Court of First Instance of
Manila against Fausto Barredo as the sole proprietor of the Malate Taxicab and employer of
Pedro Fontanilla. On July 8, 1939, the Court of First Instance of Manila awarded damages in
favor of the plaintiffs for P2,000 plus legal interest from the date of the complaint. This decision
was modified by the Court of Appeals by reducing the damages to P1,000 with legal interest
from the time the action was instituted. It is undisputed that Fontanilla 's negligence was the
cause of the mishap, as he was driving on the wrong side of the road, and at high speed. As to
Barredo's responsibility, the Court of Appeals found:

... It is admitted that defendant is Fontanilla's employer. There is proof that he exercised the
diligence of a good father of a family to prevent damage. (See p. 22, appellant's brief.) In fact it
is shown he was careless in employing Fontanilla who had been caught several times for
violation of the Automobile Law and speeding (Exhibit A) — violation which appeared in the
records of the Bureau of Public Works available to be public and to himself. Therefore, he must
indemnify plaintiffs under the provisions of article 1903 of the Civil Code.

The main theory of the defense is that the liability of Fausto Barredo is governed by the Revised
Penal Code; hence, his liability is only subsidiary, and as there has been no civil action against
Pedro Fontanilla, the person criminally liable, Barredo cannot be held responsible in the case.
The petitioner's brief states on page 10:

... The Court of Appeals holds that the petitioner is being sued for his failure to exercise all the
diligence of a good father of a family in the selection and supervision of Pedro Fontanilla to
prevent damages suffered by the respondents. In other words, The Court of Appeals insists on
applying in the case article 1903 of the Civil Code. Article 1903 of the Civil Code is found in
Chapter II, Title 16, Book IV of the Civil Code. This fact makes said article to a civil liability
arising from a crime as in the case at bar simply because Chapter II of Title 16 of Book IV of the
Civil Code, in the precise words of article 1903 of the Civil Code itself, is applicable only to
"those (obligations) arising from wrongful or negligent acts or commission not punishable by
law.

The gist of the decision of the Court of Appeals is expressed thus:

... We cannot agree to the defendant's contention. The liability sought to be imposed upon him
in this action is not a civil obligation arising from a felony or a misdemeanor (the crime of Pedro
Fontanilla,), but an obligation imposed in article 1903 of the Civil Code by reason of his
negligence in the selection or supervision of his servant or employee.

The pivotal question in this case is whether the plaintiffs may bring this separate civil action
against Fausto Barredo, thus making him primarily and directly, responsible under article 1903
of the Civil Code as an employer of Pedro Fontanilla. The defendant maintains that Fontanilla's
negligence being punishable by the Penal Code, his (defendant's) liability as an employer is
only subsidiary, according to said Penal code, but Fontanilla has not been sued in a civil action
and his property has not been exhausted. To decide the main issue, we must cut through the
tangle that has, in the minds of many confused and jumbled together delitos and cuasi delitos,
or crimes under the Penal Code and fault or negligence under articles 1902-1910 of the Civil
Code. This should be done, because justice may be lost in a labyrinth, unless principles and
remedies are distinctly envisaged. Fortunately, we are aided in our inquiry by the luminous
presentation of the perplexing subject by renown jurists and we are likewise guided by the
decisions of this Court in previous cases as well as by the solemn clarity of the consideration in
several sentences of the Supreme Tribunal of Spain.

Authorities support the proposition that a quasi-delict or "culpa aquiliana " is a separate legal
institution under the Civil Code with a substantivity all its own, and individuality that is entirely
apart and independent from delict or crime. Upon this principle and on the wording and spirit
article 1903 of the Civil Code, the primary and direct responsibility of employers may be safely
anchored.

The pertinent provisions of the Civil Code and Revised Penal Code are as follows:

CIVIL CODE

ART. 1089 Obligations arise from law, from contracts and quasi-contracts, and from acts and
omissions which are unlawful or in which any kind of fault or negligence intervenes.

xxx xxx xxx

ART. 1092. Civil obligations arising from felonies or misdemeanors shall be governed by the
provisions of the Penal Code.

ART. 1093. Those which are derived from acts or omissions in which fault or negligence, not
punishable by law, intervenes shall be subject to the provisions of Chapter II, Title XVI of this
book.

xxx xxx xxx

ART 1902. Any person who by an act or omission causes damage to another by his fault or
negligence shall be liable for the damage so done.

ART. 1903. The obligation imposed by the next preceding article is enforcible, not only for
personal acts and omissions, but also for those of persons for whom another is responsible.

The father and in, case of his death or incapacity, the mother, are liable for any damages
caused by the minor children who live with them.

Guardians are liable for damages done by minors or incapacitated persons subject to their
authority and living with them.

Owners or directors of an establishment or business are equally liable for any damages caused
by their employees while engaged in the branch of the service in which employed, or on
occasion of the performance of their duties.
The State is subject to the same liability when it acts through a special agent, but not if the
damage shall have been caused by the official upon whom properly devolved the duty of doing
the act performed, in which case the provisions of the next preceding article shall be applicable.

Finally, teachers or directors of arts trades are liable for any damages caused by their pupils or
apprentices while they are under their custody.

The liability imposed by this article shall cease in case the persons mentioned therein prove that
they are exercised all the diligence of a good father of a family to prevent the damage.

ART. 1904. Any person who pays for damage caused by his employees may recover from the
latter what he may have paid.

REVISED PENAL CODE

ART. 100. Civil liability of a person guilty of felony. — Every person criminally liable for a felony
is also civilly liable.

ART. 101. Rules regarding civil liability in certain cases. — The exemption from criminal liability
established in subdivisions 1, 2, 3, 5, and 6 of article 12 and in subdivision 4 of article 11 of this
Code does not include exemption from civil liability, which shall be enforced to the following
rules:

First. In cases of subdivision, 1, 2 and 3 of article 12 the civil liability for acts committed by any
imbecile or insane person, and by a person under nine years of age, or by one over nine but
under fifteen years of age, who has acted without discernment shall devolve upon those having
such person under their legal authority or control, unless it appears that there was no fault or
negligence on their part.

Should there be no person having such insane, imbecile or minor under his authority, legal
guardianship, or control, or if such person be insolvent, said insane, imbecile, or minor shall
respond with their own property, excepting property exempt from execution, in accordance with
the civil law.

Second. In cases falling within subdivision 4 of article 11, the person for whose benefit the harm
has been prevented shall be civilly liable in proportion to the benefit which they may have
received.

The courts shall determine, in their sound discretion, the proportionate amount for which each
one shall be liable.

When the respective shares can not be equitably determined, even approximately, or when the
liability also attaches to the Government, or to the majority of the inhabitants of the town, and, in
all events, whenever the damage has been caused with the consent of the authorities or their
agents, indemnification shall be made in the manner prescribed by special laws or regulations.

Third. In cases falling within subdivisions 5 and 6 of article 12, the persons using violence or
causing the fear shall be primarily liable and secondarily, or, if there be no such persons, those
doing the act shall be liable, saving always to the latter that part of their property exempt from
execution.

ART. 102. Subsidiary civil liability of innkeepers, tavern keepers and proprietors of
establishment. — In default of persons criminally liable, innkeepers, tavern keepers, and any
other persons or corporation shall be civilly liable for crimes committed in their establishments,
in all cases where a violation of municipal ordinances or some general or special police
regulation shall have been committed by them or their employees.

Innkeepers are also subsidiarily liable for the restitution of goods taken by robbery or theft within
their houses lodging therein, or the person, or for the payment of the value thereof, provided
that such guests shall have notified in advance the innkeeper himself, or the person
representing him, of the deposit of such goods within the inn; and shall furthermore have
followed the directions which such innkeeper or his representative may have given them with
respect to the care of and vigilance over such goods. No liability shall attach in case of robbery
with violence against or intimidation against or intimidation of persons unless committed by the
innkeeper's employees.

ART. 103. Subsidiary civil liability of other persons. — The subsidiary liability established in the
next preceding article shall also apply to employers, teachers, persons, and corporations
engaged in any kind of industry for felonies committed by their servants, pupils, workmen,
apprentices, or employees in the discharge of their duties.

xxx xxx xxx

ART. 365. Imprudence and negligence. — Any person who, by reckless imprudence, shall
commit any act which, had it been intentional, would constitute a grave felony, shall suffer the
penalty of arresto mayor in its maximum period to prision correccional in its minimum period; if it
would have constituted a less grave felony, the penalty of arresto mayor in its minimum and
medium periods shall be imposed.

Any person who, by simple imprudence or negligence, shall commit an act which would
otherwise constitute a grave felony, shall suffer the penalty of arresto mayor in its medium and
maximum periods; if it would have constituted a less serious felony, the penalty of arresto mayor
in its minimum period shall be imposed."

It will thus be seen that while the terms of articles 1902 of the Civil Code seem to be broad
enough to cover the driver's negligence in the instant case, nevertheless article 1093 limits
cuasi-delitos to acts or omissions "not punishable by law." But inasmuch as article 365 of the
Revised Penal Code punishes not only reckless but even simple imprudence or negligence, the
fault or negligence under article 1902 of the Civil Code has apparently been crowded out. It is
this overlapping that makes the "confusion worse confounded." However, a closer study shows
that such a concurrence of scope in regard to negligent acts does not destroy the distinction
between the civil liability arising from a crime and the responsibility for cuasi-delitos or culpa
extra-contractual. The same negligent act causing damages may produce civil liability arising
from a crime under article 100 of the Revised Penal Code, or create an action for cuasi-delito or
culpa extra-contractual under articles 1902-1910 of the Civil Code.

The individuality of cuasi-delito or culpa extra-contractual looms clear and unmistakable. This
legal institution is of ancient lineage, one of its early ancestors being the Lex Aquilia in the
Roman Law. In fact, in Spanish legal terminology, this responsibility is often referred to as culpa
aquiliana. The Partidas also contributed to the genealogy of the present fault or negligence
under the Civil Code; for instance, Law 6, Title 15, of Partida 7, says: "Tenudo es de fazer
emienda, porque, como quier que el non fizo a sabiendas en daño al otro, pero acaescio por su
culpa."

The distinctive nature of cuasi-delitos survives in the Civil Code. According to article 1089, one
of the five sources of obligations is this legal institution of cuasi-delito or culpa extra-contractual:
"los actos . . . en que intervenga cualquier genero de culpa o negligencia." Then article 1093
provides that this kind of obligation shall be governed by Chapter II of Title XVI of Book IV,
meaning articles 1902-0910. This portion of the Civil Code is exclusively devoted to the legal
institution of culpa aquiliana.

Some of the differences between crimes under the Penal Code and the culpa aquiliana or cuasi-
delito under the Civil Code are:

1. That crimes affect the public interest, while cuasi-delitos are only of private concern.

2. That, consequently, the Penal Code punishes or corrects the criminal act, while the Civil
Code, by means of indemnification, merely repairs the damage.

3. That delicts are not as broad as quasi-delicts, because the former are punished only if there
is a penal law clearly covering them, while the latter, cuasi-delitos, include all acts in which "any
king of fault or negligence intervenes." However, it should be noted that not all violations of the
penal law produce civil responsibility, such as begging in contravention of ordinances, violation
of the game laws, infraction of the rules of traffic when nobody is hurt. (See Colin and Capitant,
"Curso Elemental de Derecho Civil," Vol. 3, p. 728.)

Let us now ascertain what some jurists say on the separate existence of quasi-delicts and the
employer's primary and direct liability under article 1903 of the Civil Code.

Dorado Montero in his essay on "Responsibilidad" in the "Enciclopedia Juridica Española" (Vol.
XXVII, p. 414) says:
El concepto juridico de la responsabilidad civil abarca diversos aspectos y comprende a
diferentes personas. Asi, existe una responsabilidad civil propiamente dicha, que en ningun casl
lleva aparejada responsabilidad criminal alguna, y otra que es consecuencia indeclinable de la
penal que nace de todo delito o falta."

The juridical concept of civil responsibility has various aspects and comprises different persons.
Thus, there is a civil responsibility, properly speaking, which in no case carries with it any
criminal responsibility, and another which is a necessary consequence of the penal liability as a
result of every felony or misdemeanor."

Maura, an outstanding authority, was consulted on the following case: There had been a
collision between two trains belonging respectively to the Ferrocarril Cantabrico and the
Ferrocarril del Norte. An employee of the latter had been prosecuted in a criminal case, in which
the company had been made a party as subsidiarily responsible in civil damages. The employee
had been acquitted in the criminal case, and the employer, the Ferrocarril del Norte, had also
been exonerated. The question asked was whether the Ferrocarril Cantabrico could still bring a
civil action for damages against the Ferrocarril del Norte. Maura's opinion was in the affirmative,
stating in part (Maura, Dictamenes, Vol. 6, pp. 511-513):

Quedando las cosas asi, a proposito de la realidad pura y neta de los hechos, todavia menos
parece sostenible que exista cosa juzgada acerca de la obligacion civil de indemnizar los
quebrantos y menoscabos inferidos por el choque de los trenes. El titulo en que se funda la
accion para demandar el resarcimiento, no puede confundirse con las responsabilidades civiles
nacidas de delito, siquiera exista en este, sea el cual sea, una culpa rodeada de notas
agravatorias que motivan sanciones penales, mas o menos severas. La lesion causada por
delito o falta en los derechos civiles, requiere restituciones, reparaciones o indemnizaciones,
que cual la pena misma atañen al orden publico; por tal motivo vienen encomendadas, de
ordinario, al Ministerio Fiscal; y claro es que si por esta via se enmiendan los quebrantos y
menoscabos, el agraviado excusa procurar el ya conseguido desagravio; pero esta eventual
coincidencia de los efectos, no borra la diversidad originaria de las acciones civiles para pedir
indemnizacion.

Estas, para el caso actual (prescindiendo de culpas contractuales, que no vendrian a cuento y
que tiene otro regimen), dimanan, segun el articulo 1902 del Codigo Civil, de toda accion u
omision, causante de daños o perjuicios, en que intervenga culpa o negligencia. Es trivial que
acciones semejantes son ejercitadas ante los Tribunales de lo civil cotidianamente, sin que la
Justicia punitiva tenga que mezclarse en los asuntos. Los articulos 18 al 21 y 121 al 128 del
Codigo Penal, atentos al espiritu y a los fines sociales y politicos del mismo, desenvuelven y
ordenan la materia de responsabilidades civiles nacidas de delito, en terminos separados del
regimen por ley comun de la culpa que se denomina aquiliana, por alusion a precedentes
legislativos del Corpus Juris. Seria intempestivo un paralelo entre aquellas ordenaciones, y la
de la obligacion de indemnizar a titulo de culpa civil; pero viene al caso y es necesaria una de
las diferenciaciones que en el tal paralelo se notarian.
Los articulos 20 y 21 del Codigo Penal, despues de distribuir a su modo las responsabilidades
civiles, entre los que sean por diversos conceptos culpables del delito o falta, las hacen
extensivas a las empresas y los establecimientos al servicio de los cuales estan los
delincuentes; pero con caracter subsidiario, o sea, segun el texto literal, en defecto de los que
sean responsables criminalmente. No coincide en ello el Codigo Civil, cuyo articulo 1903, dice;
La obligacion que impone el articulo anterior es exigible, no solo por los actos y omisiones
propios, sino por los de aquellas personas de quienes se debe responder; personas en la
enumeracion de las cuales figuran los dependientes y empleados de los establecimientos o
empresas, sea por actos del servicio, sea con ocasion de sus funciones. Por esto acontece, y
se observa en la jurisprudencia, que las empresas, despues de intervenir en las causas
criminales con el caracter subsidiario de su responsabilidad civil por razon del delito, son
demandadas y condenadas directa y aisladamente, cuando se trata de la obligacion, ante los
tribunales civiles.

Siendo como se ve, diverso el titulo de esta obligacion, y formando verdadero postulado de
nuestro regimen judicial la separacion entre justicia punitiva y tribunales de lo civil, de suerte
que tienen unos y otros normas de fondo en distintos cuerpos legales, y diferentes modos de
proceder, habiendose, por añadidura, abstenido de asistir al juicio criminal la Compañia del
Ferrocarril Cantabrico, que se reservo ejercitar sus acciones, parece innegable que la de
indemnizacion por los daños y perjuicios que le irrogo el choque, no estuvo sub judice ante el
Tribunal del Jurado, ni fue sentenciada, sino que permanecio intacta, al pronunciarse el fallo de
21 de marzo. Aun cuando el veredicto no hubiese sido de inculpabilidad, mostrose mas arriba,
que tal accion quedaba legitimamente reservada para despues del proceso; pero al declararse
que no existio delito, ni responsabilidad dimanada de delito, materia unica sobre que tenian
jurisdiccion aquellos juzgadores, se redobla el motivo para la obligacion civil ex lege, y se
patentiza mas y mas que la accion para pedir su cumplimiento permanece incolume, extraña a
la cosa juzgada.

As things are, apropos of the reality pure and simple of the facts, it seems less tenable that
there should be res judicata with regard to the civil obligation for damages on account of the
losses caused by the collision of the trains. The title upon which the action for reparation is
based cannot be confused with the civil responsibilities born of a crime, because there exists in
the latter, whatever each nature, a culpa surrounded with aggravating aspects which give rise to
penal measures that are more or less severe. The injury caused by a felony or misdemeanor
upon civil rights requires restitutions, reparations, or indemnifications which, like the penalty
itself, affect public order; for this reason, they are ordinarily entrusted to the office of the
prosecuting attorney; and it is clear that if by this means the losses and damages are repaired,
the injured party no longer desires to seek another relief; but this coincidence of effects does not
eliminate the peculiar nature of civil actions to ask for indemnity.

Such civil actions in the present case (without referring to contractual faults which are not
pertinent and belong to another scope) are derived, according to article 1902 of the Civil Code,
from every act or omission causing losses and damages in which culpa or negligence
intervenes. It is unimportant that such actions are every day filed before the civil courts without
the criminal courts interfering therewith. Articles 18 to 21 and 121 to 128 of the Penal Code,
bearing in mind the spirit and the social and political purposes of that Code, develop and
regulate the matter of civil responsibilities arising from a crime, separately from the regime
under common law, of culpa which is known as aquiliana, in accordance with legislative
precedent of the Corpus Juris. It would be unwarranted to make a detailed comparison between
the former provisions and that regarding the obligation to indemnify on account of civil culpa; but
it is pertinent and necessary to point out to one of such differences.

Articles 20 and 21 of the Penal Code, after distriburing in their own way the civil responsibilities
among those who, for different reasons, are guilty of felony or misdemeanor, make such civil
responsibilities applicable to enterprises and establishments for which the guilty parties render
service, but with subsidiary character, that is to say, according to the wording of the Penal
Code, in default of those who are criminally responsible. In this regard, the Civil Code does not
coincide because article 1903 says: "The obligation imposed by the next preceding article is
demandable, not only for personal acts and omissions, but also for those of persons for whom
another is responsible." Among the persons enumerated are the subordinates and employees
of establishments or enterprises, either for acts during their service or on the occasion of their
functions. It is for this reason that it happens, and it is so observed in judicial decisions, that the
companies or enterprises, after taking part in the criminal cases because of their subsidiary civil
responsibility by reason of the crime, are sued and sentenced directly and separately with
regard to the obligation, before the civil courts.

Seeing that the title of this obligation is different, and the separation between punitive justice
and the civil courts being a true postulate of our judicial system, so that they have different
fundamental norms in different codes, as well as different modes of procedure, and inasmuch
as the Compaña del Ferrocarril Cantabrico has abstained from taking part in the criminal case
and has reserved the right to exercise its actions, it seems undeniable that the action for
indemnification for the losses and damages caused to it by the collision was not sub judice
before the Tribunal del Jurado, nor was it the subject of a sentence, but it remained intact when
the decision of March 21 was rendered. Even if the verdict had not been that of acquittal, it has
already been shown that such action had been legitimately reserved till after the criminal
prosecution; but because of the declaration of the non-existence of the felony and the non-
existence of the responsibility arising from the crime, which was the sole subject matter upon
which the Tribunal del Jurado had jurisdiction, there is greater reason for the civil obligation ex
lege, and it becomes clearer that the action for its enforcement remain intact and is not res
judicata.

Laurent, a jurist who has written a monumental work on the French Civil Code, on which the
Spanish Civil Code is largely based and whose provisions on cuasi-delito or culpa extra-
contractual are similar to those of the Spanish Civil Code, says, referring to article 1384 of the
French Civil Code which corresponds to article 1903, Spanish Civil Code:
The action can be brought directly against the person responsible (for another), without
including the author of the act. The action against the principal is accessory in the sense that it
implies the existence of a prejudicial act committed by the employee, but it is not subsidiary in
the sense that it can not be instituted till after the judgment against the author of the act or at
least, that it is subsidiary to the principal action; the action for responsibility (of the employer) is
in itself a principal action. (Laurent, Principles of French Civil Law, Spanish translation, Vol. 20,
pp. 734-735.)

Amandi, in his "Cuestionario del Codigo Civil Reformado" (Vol. 4, pp. 429, 430), declares that
the responsibility of the employer is principal and not subsidiary. He writes:

Cuestion 1. La responsabilidad declarada en el articulo 1903 por las acciones u omisiones de

aquellas personas por las que se debe responder, es subsidiaria? es principal? Para contestar
a esta pregunta es necesario saber, en primer lugar, en que se funda el precepto legal. Es que
realmente se impone una responsabilidad por una falta ajena? Asi parece a primera vista; pero
semejante afirmacion seria contraria a la justicia y a la maxima universal, segun la que las
faltas son personales, y cada uno responde de aquellas que le son imputables. La
responsabilidad de que tratamos se impone con ocasion de un delito o culpa, pero no por
causa de ellos, sino por causa del causi delito, esto es, de la imprudencia o de la negligencia
del padre, del tutor, del dueño o director del establecimiento, del maestro, etc. Cuando
cualquiera de las personas que enumera el articulo citado (menores de edad, incapacitados,
dependientes, aprendices) causan un daño, la ley presume que el padre, el tutor, el maestro,
etc., han cometido una falta de negligencia para prevenir o evitar el daño. Esta falta es la que la
ley castiga. No hay, pues, responsabilidad por un hecho ajeno, sino en la apariencia; en
realidad la responsabilidad se exige por un hecho propio. La idea de que esa responsabilidad
sea subsidiaria es, por lo tanto, completamente inadmisible.

Question No. 1. Is the responsibility declared in article 1903 for the acts or omissions of those
persons for who one is responsible, subsidiary or principal? In order to answer this question it is
necessary to know, in the first place, on what the legal provision is based. Is it true that there is
a responsibility for the fault of another person? It seems so at first sight; but such assertion
would be contrary to justice and to the universal maxim that all faults are personal, and that
everyone is liable for those faults that can be imputed to him. The responsibility in question is
imposed on the occasion of a crime or fault, but not because of the same, but because of the
cuasi-delito, that is to say, the imprudence or negligence of the father, guardian, proprietor or
manager of the establishment, of the teacher, etc. Whenever anyone of the persons
enumerated in the article referred to (minors, incapacitated persons, employees, apprentices)
causes any damage, the law presumes that the father, guardian, teacher, etc. have committed
an act of negligence in not preventing or avoiding the damage. It is this fault that is condemned
by the law. It is, therefore, only apparent that there is a responsibility for the act of another; in
reality the responsibility exacted is for one's own act. The idea that such responsibility is
subsidiary is, therefore, completely inadmissible.
Oyuelos, in his "Digesto: Principios, Doctrina y Jurisprudencia, Referentes al Codigo Civil
Español," says in Vol. VII, p. 743:

Es decir, no responde de hechos ajenos, porque se responde solo de su propia culpa, doctrina
del articulo 1902; mas por excepcion, se responde de la ajena respecto de aquellas personas
con las que media algun nexo o vinculo, que motiva o razona la responsabilidad. Esta
responsabilidad, es directa o es subsidiaria? En el orden penal, el Codigo de esta clase
distingue entre menores e incapacitados y los demas, declarando directa la primera (articulo
19) y subsidiaria la segunda (articulos 20 y 21); pero en el orden civil, en el caso del articulo
1903, ha de entenderse directa, por el tenor del articulo que impone la responsabilidad
precisamente "por los actos de aquellas personas de quienes se deba responder."

That is to say, one is not responsible for the acts of others, because one is liable only for his
own faults, this being the doctrine of article 1902; but, by exception, one is liable for the acts of
those persons with whom there is a bond or tie which gives rise to the responsibility. Is this
responsibility direct or subsidiary? In the order of the penal law, the Penal Code distinguishes
between minors and incapacitated persons on the one hand, and other persons on the other,
declaring that the responsibility for the former is direct (article 19), and for the latter, subsidiary
(articles 20 and 21); but in the scheme of the civil law, in the case of article 1903, the
responsibility should be understood as direct, according to the tenor of that articles, for precisely
it imposes responsibility "for the acts of those persons for whom one should be responsible."

Coming now to the sentences of the Supreme Tribunal of Spain, that court has upheld the
principles above set forth: that a quasi-delict or culpa extra-contractual is a separate and distinct
legal institution, independent from the civil responsibility arising from criminal liability, and that
an employer is, under article 1903 of the Civil Code, primarily and directly responsible for the
negligent acts of his employee.

One of the most important of those Spanish decisions is that of October 21, 1910. In that case,
Ramon Lafuente died as the result of having been run over by a street car owned by the
"compañia Electric Madrileña de Traccion." The conductor was prosecuted in a criminal case
but he was acquitted. Thereupon, the widow filed a civil action against the street car company,
paying for damages in the amount of 15,000 pesetas. The lower court awarded damages; so
the company appealed to the Supreme Tribunal, alleging violation of articles 1902 and 1903 of
the Civil Code because by final judgment the non-existence of fault or negligence had been
declared. The Supreme Court of Spain dismissed the appeal, saying:

Considerando que el primer motivo del recurso se funda en el equivocado supuesto de que el
Tribunal a quo, al condonar a la compañia Electrica Madrileña al pago del daño causado con la
muerte de Ramon La fuente Izquierdo, desconoce el valor y efectos juridicos de la sentencia
absolutoria deictada en la causa criminal que se siguio por el mismo hecho, cuando es lo cierto
que de este han conocido las dos jurisdicciones bajo diferentes as pectos, y como la de lo
criminal declrao dentro de los limites de su competencia que el hecho de que se trata no era
constitutivo de delito por no haber mediado descuido o negligencia graves, lo que no excluye,
siendo este el unico fundamento del fallo absolutorio, el concurso de la culpa o negligencia no
califacadas, fuente de obligaciones civiles segun el articulo 1902 del Codigo, y que alcanzan,
segun el 1903, netre otras perosnas, a los Directores de establecimientos o empresas por los
daños causados por sus dependientes en determinadas condiciones, es manifesto que la de lo
civil, al conocer del mismo hehco baho este ultimo aspecto y al condenar a la compañia
recurrente a la indemnizacion del daño causado por uno de sus empleados, lejos de infringer
los mencionados textos, en relacion con el articulo 116 de la Ley de Enjuciamiento Criminal, se
ha atenido estrictamente a ellos, sin invadir atribuciones ajenas a su jurisdiccion propia, ni
contrariar en lo mas minimo el fallo recaido en la causa.

Considering that the first ground of the appeal is based on the mistaken supposition that the trial
court, in sentencing the Compañia Madrileña to the payment of the damage caused by the
death of Ramon Lafuente Izquierdo, disregards the value and juridical effects of the sentence of
acquittal rendered in the criminal case instituted on account of the same act, when it is a fact
that the two jurisdictions had taken cognizance of the same act in its different aspects, and as
the criminal jurisdiction declared within the limits of its authority that the act in question did not
constitute a felony because there was no grave carelessness or negligence, and this being the
only basis of acquittal, it does no exclude the co-existence of fault or negligence which is not
qualified, and is a source of civil obligations according to article 1902 of the Civil Code,
affecting, in accordance with article 1903, among other persons, the managers of
establishments or enterprises by reason of the damages caused by employees under certain
conditions, it is manifest that the civil jurisdiccion in taking cognizance of the same act in this
latter aspect and in ordering the company, appellant herein, to pay an indemnity for the damage
caused by one of its employees, far from violating said legal provisions, in relation with article
116 of the Law of Criminal Procedure, strictly followed the same, without invading attributes
which are beyond its own jurisdiction, and without in any way contradicting the decision in that
cause. (Emphasis supplied.)

It will be noted, as to the case just cited:

First. That the conductor was not sued in a civil case, either separately or with the street car
company. This is precisely what happens in the present case: the driver, Fontanilla, has not
been sued in a civil action, either alone or with his employer.

Second. That the conductor had been acquitted of grave criminal negligence, but the Supreme
Tribunal of Spain said that this did not exclude the co-existence of fault or negligence, which is
not qualified, on the part of the conductor, under article 1902 of the Civil Code. In the present
case, the taxi driver was found guilty of criminal negligence, so that if he had even sued for his
civil responsibility arising from the crime, he would have been held primarily liable for civil
damages, and Barredo would have been held subsidiarily liable for the same. But the plaintiffs
are directly suing Barredo, on his primary responsibility because of his own presumed
negligence — which he did not overcome — under article 1903. Thus, there were two liabilities
of Barredo: first, the subsidiary one because of the civil liability of the taxi driver arising from the
latter's criminal negligence; and, second, Barredo's primary liability as an employer under article
1903. The plaintiffs were free to choose which course to take, and they preferred the second
remedy. In so doing, they were acting within their rights. It might be observed in passing, that
the plaintiff choose the more expeditious and effective method of relief, because Fontanilla was
either in prison, or had just been released, and besides, he was probably without property which
might be seized in enforcing any judgment against him for damages.

Third. That inasmuch as in the above sentence of October 21, 1910, the employer was held
liable civilly, notwithstanding the acquittal of the employee (the conductor) in a previous criminal
case, with greater reason should Barredo, the employer in the case at bar, be held liable for
damages in a civil suit filed against him because his taxi driver had been convicted. The degree
of negligence of the conductor in the Spanish case cited was less than that of the taxi driver,
Fontanilla, because the former was acquitted in the previous criminal case while the latter was
found guilty of criminal negligence and was sentenced to an indeterminate sentence of one year
and one day to two years of prision correccional.

(See also Sentence of February 19, 1902, which is similar to the one above quoted.)

In the Sentence of the Supreme Court of Spain, dated February 14, 1919, an action was
brought against a railroad company for damages because the station agent, employed by the
company, had unjustly and fraudulently, refused to deliver certain articles consigned to the
plaintiff. The Supreme Court of Spain held that this action was properly under article 1902 of the
Civil Code, the court saying:

Considerando que la sentencia discutida reconoce, en virtud de los hechos que consigna con
relacion a las pruebas del pleito: 1.º, que las expediciones facturadas por la compañia
ferroviaria a la consignacion del actor de las vasijas vacias que en su demanda relacionan
tenian como fin el que este las devolviera a sus remitentes con vinos y alcoholes; 2.º, que
llegadas a su destino tales mercanias no se quisieron entregar a dicho consignatario por el jefe
de la estacion sin motivo justificado y con intencion dolosa, y 3.º, que la falta de entrega de
estas expediciones al tiempo de reclamarlas el demandante le originaron daños y perjuicios en
cantidad de bastante importancia como expendedor al por mayor que era de vinos y alcoholes
por las ganancias que dejo de obtener al verse privado de servir los pedidos que se le habian
hecho por los remitentes en los envases:

Considerando que sobre esta base hay necesidad de estimar los cuatro motivos que integran
este recurso, porque la demanda inicial del pleito a que se contrae no contiene accion que
nazca del incumplimiento del contrato de transporte, toda vez que no se funda en el retraso de
la llegada de las mercancias ni de ningun otro vinculo contractual entre las partes
contendientes, careciendo, por tanto, de aplicacion el articulo 371 del Codigo de Comercio, en
que principalmente descansa el fallo recurrido, sino que se limita a pedir la reparaction de los
daños y perjuicios producidos en el patrimonio del actor por la injustificada y dolosa negativa
del porteador a la entrega de las mercancias a su nombre consignadas, segun lo reconoce la
sentencia, y cuya responsabilidad esta claramente sancionada en el articulo 1902 del Codigo
Civil, que obliga por el siguiente a la Compañia demandada como ligada con el causante de
aquellos por relaciones de caracter economico y de jurarquia administrativa.

Considering that the sentence, in question recognizes, in virtue of the facts which it declares, in
relation to the evidence in the case: (1) that the invoice issued by the railroad company in favor
of the plaintiff contemplated that the empty receptacles referred to in the complaint should be
returned to the consignors with wines and liquors; (2) that when the said merchandise reached
their destination, their delivery to the consignee was refused by the station agent without
justification and with fraudulent intent, and (3) that the lack of delivery of these goods when they
were demanded by the plaintiff caused him losses and damages of considerable importance, as
he was a wholesale vendor of wines and liquors and he failed to realize the profits when he was
unable to fill the orders sent to him by the consignors of the receptacles:

Considering that upon this basis there is need of upholding the four assignments of error, as the
original complaint did not contain any cause of action arising from non-fulfillment of a contract of
transportation, because the action was not based on the delay of the goods nor on any
contractual relation between the parties litigant and, therefore, article 371 of the Code of
Commerce, on which the decision appealed from is based, is not applicable; but it limits to
asking for reparation for losses and damages produced on the patrimony of the plaintiff on
account of the unjustified and fraudulent refusal of the carrier to deliver the goods consigned to
the plaintiff as stated by the sentence, and the carrier's responsibility is clearly laid down in
article 1902 of the Civil Code which binds, in virtue of the next article, the defendant company,
because the latter is connected with the person who caused the damage by relations of
economic character and by administrative hierarchy. (Emphasis supplied.)

The above case is pertinent because it shows that the same act may come under both the
Penal Code and the Civil Code. In that case, the action of the agent was unjustified and
fraudulent and therefore could have been the subject of a criminal action. And yet, it was held to
be also a proper subject of a civil action under article 1902 of the Civil Code. It is also to be
noted that it was the employer and not the employee who was being sued.

Let us now examine the cases previously decided by this Court.

In the leading case of Rakes vs. Atlantic Gulf and Pacific Co. (7 Phil., 359, 362-365 [year
1907]), the trial court awarded damages to the plaintiff, a laborer of the defendant, because the
latter had negligently failed to repair a tramway in consequence of which the rails slid off while
iron was being transported, and caught the plaintiff whose leg was broken. This Court held:

It is contended by the defendant, as its first defense to the action that the necessary conclusion
from these collated laws is that the remedy for injuries through negligence lies only in a criminal
action in which the official criminally responsible must be made primarily liable and his employer
held only subsidiarily to him. According to this theory the plaintiff should have procured the
arrest of the representative of the company accountable for not repairing the track, and on his
prosecution a suitable fine should have been imposed, payable primarily by him and secondarily
by his employer.

This reasoning misconceived the plan of the Spanish codes upon this subject. Article 1093 of
the Civil Code makes obligations arising from faults or negligence not punished by the law,
subject to the provisions of Chapter II of Title XVI. Section 1902 of that chapter reads:

"A person who by an act or omission causes damage to another when there is fault or
negligence shall be obliged to repair the damage so done.

"SEC. 1903. The obligation imposed by the preceeding article is demandable, not only for
personal acts and omissions, but also for those of the persons for whom they should be
responsible.

"The father, and on his death or incapacity, the mother, is liable for the damages caused by the
minors who live with them.

xxx xxx xxx

"Owners or directors of an establishment or enterprise are equally liable for the damages
caused by their employees in the service of the branches in which the latter may be employed
or in the performance of their duties.

xxx xxx xxx

"The liability referred to in this article shall cease when the persons mentioned therein prove that
they employed all the diligence of a good father of a family to avoid the damage."

As an answer to the argument urged in this particular action it may be sufficient to point out that
nowhere in our general statutes is the employer penalized for failure to provide or maintain safe
appliances for his workmen. His obligation therefore is one 'not punished by the laws' and falls
under civil rather than criminal jurisprudence. But the answer may be a broader one. We should
be reluctant, under any conditions, to adopt a forced construction of these scientific codes, such
as is proposed by the defendant, that would rob some of these articles of effect, would shut out
litigants against their will from the civil courts, would make the assertion of their rights
dependent upon the selection for prosecution of the proper criminal offender, and render
recovery doubtful by reason of the strict rules of proof prevailing in criminal actions. Even if
these articles had always stood alone, such a construction would be unnecessary, but clear light
is thrown upon their meaning by the provisions of the Law of Criminal Procedure of Spain (Ley
de Enjuiciamiento Criminal), which, though never in actual force in these Islands, was formerly
given a suppletory or explanatory effect. Under article 111 of this law, both classes of action,
civil and criminal, might be prosecuted jointly or separately, but while the penal action was
pending the civil was suspended. According to article 112, the penal action once started, the
civil remedy should be sought therewith, unless it had been waived by the party injured or been
expressly reserved by him for civil proceedings for the future. If the civil action alone was
prosecuted, arising out of a crime that could be enforced only on private complaint, the penal
action thereunder should be extinguished. These provisions are in harmony with those of
articles 23 and 133 of our Penal Code on the same subject.

An examination of this topic might be carried much further, but the citation of these articles
suffices to show that the civil liability was not intended to be merged in the criminal nor even to
be suspended thereby, except as expressly provided in the law. Where an individual is civilly
liable for a negligent act or omission, it is not required that the injured party should seek out a
third person criminally liable whose prosecution must be a condition precedent to the
enforcement of the civil right.

Under article 20 of the Penal Code the responsibility of an employer may be regarded as
subsidiary in respect of criminal actions against his employees only while they are in process of
prosecution, or in so far as they determine the existence of the criminal act from which liability
arises, and his obligation under the civil law and its enforcement in the civil courts is not barred
thereby unless by the election of the injured person. Inasmuch as no criminal proceeding had
been instituted, growing our of the accident in question, the provisions of the Penal Code can
not affect this action. This construction renders it unnecessary to finally determine here whether
this subsidiary civil liability in penal actions has survived the laws that fully regulated it or has
been abrogated by the American civil and criminal procedure now in force in the Philippines.

The difficulty in construing the articles of the code above cited in this case appears from the
briefs before us to have arisen from the interpretation of the words of article 1093, "fault or
negligence not punished by law," as applied to the comprehensive definition of offenses in
articles 568 and 590 of the Penal Code. It has been shown that the liability of an employer
arising out of his relation to his employee who is the offender is not to be regarded as derived
from negligence punished by the law, within the meaning of articles 1902 and 1093. More than
this, however, it cannot be said to fall within the class of acts unpunished by the law, the
consequence of which are regulated by articles 1902 and 1903 of the Civil Code. The acts to
which these articles are applicable are understood to be those not growing out of pre-existing
duties of the parties to one another. But where relations already formed give rise to duties,
whether springing from contract or quasi contract, then breaches of those duties are subject to
articles 1101, 1103, and 1104 of the same code. A typical application of this distinction may be
found in the consequences of a railway accident due to defective machinery supplied by the
employer. His liability to his employee would arise out of the contract of employment, that to the
passengers out of the contract for passage, while that to the injured bystander would originate in
the negligent act itself.

In Manzanares vs. Moreta, 38 Phil., 821 (year 1918), the mother of the 8 of 9-year-old child
Salvador Bona brought a civil action against Moreta to recover damages resulting from the
death of the child, who had been run over by an automobile driven and managed by the
defendant. The trial court rendered judgment requiring the defendant to pay the plaintiff the sum
of P1,000 as indemnity: This Court in affirming the judgment, said in part:
If it were true that the defendant, in coming from the southern part of Solana Street, had to stop
his auto before crossing Real Street, because he had met vehicles which were going along the
latter street or were coming from the opposite direction along Solana Street, it is to be believed
that, when he again started to run his auto across said Real Street and to continue its way along
Solana Street northward, he should have adjusted the speed of the auto which he was
operating until he had fully crossed Real Street and had completely reached a clear way on
Solana Street. But, as the child was run over by the auto precisely at the entrance of Solana
Street, this accident could not have occurred if the auto had been running at a slow speed,
aside from the fact that the defendant, at the moment of crossing Real Street and entering
Solana Street, in a northward direction, could have seen the child in the act of crossing the latter
street from the sidewalk on the right to that on the left, and if the accident had occurred in such
a way that after the automobile had run over the body of the child, and the child's body had
already been stretched out on the ground, the automobile still moved along a distance of about
2 meters, this circumstance shows the fact that the automobile entered Solana Street from Real
Street, at a high speed without the defendant having blown the horn. If these precautions had
been taken by the defendant, the deplorable accident which caused the death of the child would
not have occurred.

It will be noticed that the defendant in the above case could have been prosecuted in a criminal
case because his negligence causing the death of the child was punishable by the Penal Code.
Here is therefore a clear instance of the same act of negligence being a proper subject-matter
either of a criminal action with its consequent civil liability arising from a crime or of an entirely
separate and independent civil action for fault or negligence under article 1902 of the Civil
Code. Thus, in this jurisdiction, the separate individually of a cuasi-delito or culpa aquiliana
under the Civil Code has been fully and clearly recognized, even with regard to a negligent act
for which the wrongdoer could have been prosecuted and convicted in a criminal case and for
which, after such a conviction, he could have been sued for this civil liability arising from his
crime.

Years later (in 1930) this Court had another occasion to apply the same doctrine. In Bernal and
Enverso vs. House and Tacloban Electric & Ice Plant, Ltd., 54 Phil., 327, the parents of the five-
year-old child, Purificacion Bernal, brought a civil action to recover damages for the child's
death as a result of burns caused by the fault and negligence of the defendants. On the evening
of April 10, 1925, the Good Friday procession was held in Tacloban, Leyte. Fortunata Enverso
with her daughter Purificacion Bernal had come from another municipality to attend the same.
After the procession the mother and the daughter with two others were passing along Gran
Capitan Street in front of the offices of the Tacloban Electric & Ice Plant, Ltd., owned by
defendants J. V. House, when an automobile appeared from the opposite direction. The little
girl, who was slightly ahead of the rest, was so frightened by the automobile that she turned to
run, but unfortunately she fell into the street gutter where hot water from the electric plant was
flowing. The child died that same night from the burns. The trial courts dismissed the action
because of the contributory negligence of the plaintiffs. But this Court held, on appeal, that there
was no contributory negligence, and allowed the parents P1,000 in damages from J. V. House
who at the time of the tragic occurrence was the holder of the franchise for the electric plant.
This Court said in part:

Although the trial judge made the findings of fact hereinbefore outlined, he nevertheless was led
to order the dismissal of the action because of the contributory negligence of the plaintiffs. It is
from this point that a majority of the court depart from the stand taken by the trial judge. The
mother and her child had a perfect right to be on the principal street of Tacloban, Leyte, on the
evening when the religious procession was held. There was nothing abnormal in allowing the
child to run along a few paces in advance of the mother. No one could foresee the coincidence
of an automobile appearing and of a frightened child running and falling into a ditch filled with
hot water. The doctrine announced in the much debated case of Rakes vs. Atlantic Gulf and
Pacific Co. ([1907]), 7 Phil., 359), still rule. Article 1902 of the Civil Code must again be
enforced. The contributory negligence of the child and her mother, if any, does not operate as a
bar to recovery, but in its strictest sense could only result in reduction of the damages.

It is most significant that in the case just cited, this Court specifically applied article 1902 of the
Civil Code. It is thus that although J. V. House could have been criminally prosecuted for
reckless or simple negligence and not only punished but also made civilly liable because of his
criminal negligence, nevertheless this Court awarded damages in an independent civil action for
fault or negligence under article 1902 of the Civil Code.

In Bahia vs. Litonjua and Leynes (30 Phil., 624 [year 1915), the action was for damages for the
death of the plaintiff's daughter alleged to have been caused by the negligence of the servant in
driving an automobile over the child. It appeared that the cause of the mishap was a defect in
the steering gear. The defendant Leynes had rented the automobile from the International
Garage of Manila, to be used by him in carrying passengers during the fiesta of Tuy, Batangas.
Leynes was ordered by the lower court to pay P1,000 as damages to the plaintiff. On appeal
this Court reversed the judgment as to Leynes on the ground that he had shown that the
exercised the care of a good father of a family, thus overcoming the presumption of negligence
under article 1903. This Court said:

As to selection, the defendant has clearly shown that he exercised the care and diligence of a
good father of a family. He obtained the machine from a reputable garage and it was, so far as
appeared, in good condition. The workmen were likewise selected from a standard garage,
were duly licensed by the Government in their particular calling, and apparently thoroughly
competent. The machine had been used but a few hours when the accident occurred and it is
clear from the evidence that the defendant had no notice, either actual or constructive, of the
defective condition of the steering gear.

The legal aspect of the case was discussed by this Court thus:

Article 1903 of the Civil Code not only establishes liability in cases of negligence, but also
provides when the liability shall cease. It says:
"The liability referred to in this article shall cease when the persons mentioned therein prove that
they employed all the diligence of a good father of a family to avoid the damage."

From this article two things are apparent: (1) That when an injury is caused by the negligence of
a servant or employee there instantly arises a presumption of law that there was negligence on
the part of the matter or employer either in the selection of the servant or employee, or in
supervision over him after the selection, or both; and (2) that presumption is juris tantum and not
juris et de jure, and consequently, may be rebutted. It follows necessarily that if the employer
shows to the satisfaction of the court that in selection and supervision he has exercised the care
and diligence of a good father of a family, the presumption is overcome and he is relieve from
liability.

This theory bases the responsibility of the master ultimately on his own negligence and not on
that of his servant.

The doctrine of the case just cited was followed by this Court in Cerf vs. Medel (33 Phil., 37
[year 1915]). In the latter case, the complaint alleged that the defendant's servant had so
negligently driven an automobile, which was operated by defendant as a public vehicle, that
said automobile struck and damaged the plaintiff's motorcycle. This Court, applying article 1903
and following the rule in Bahia vs. Litonjua and Leynes, said in part (p. 41) that:

The master is liable for the negligent acts of his servant where he is the owner or director of a
business or enterprise and the negligent acts are committed while the servant is engaged in his
master's employment as such owner.

Another case which followed the decision in Bahia vs. Litonjua and Leynes was Cuison vs.
Norton & Harrison Co., 55 Phil., 18 (year 1930). The latter case was an action for damages
brought by Cuison for the death of his seven-year-old son Moises. The little boy was on his way
to school with his sister Marciana. Some large pieces of lumber fell from a truck and pinned the
boy underneath, instantly killing him. Two youths, Telesforo Binoya and Francisco Bautista, who
were working for Ora, an employee of defendant Norton & Harrison Co., pleaded guilty to the
crime of homicide through reckless negligence and were sentenced accordingly. This Court,
applying articles 1902 and 1903, held:

The basis of civil law liability is not respondent superior but the relationship of pater familias.
This theory bases the liability of the master ultimately on his own negligence and not on that of
his servant. (Bahia vs. Litonjua and Leynes [1915], 30 Phil., 624; Cangco vs. Manila Railroad
Co. [1918], 38 Phil., 768.)

In Walter A. Smith & Co. vs. Cadwallader Gibson Lumber Co., 55 Phil., 517 (year 1930) the
plaintiff brought an action for damages for the demolition of its wharf, which had been struck by
the steamer Helen C belonging to the defendant. This Court held (p. 526):
The evidence shows that Captain Lasa at the time the plaintiff's wharf collapsed was a duly
licensed captain, authorized to navigate and direct a vessel of any tonnage, and that the
appellee contracted his services because of his reputation as a captain, according to F. C.
Cadwallader. This being so, we are of the opinion that the presumption of liability against the
defendant has been overcome by the exercise of the care and diligence of a good father of a
family in selecting Captain Lasa, in accordance with the doctrines laid down by this court in the
cases cited above, and the defendant is therefore absolved from all liability.

It is, therefore, seen that the defendant's theory about his secondary liability is negatived by the
six cases above set forth. He is, on the authority of these cases, primarily and directly
responsible in damages under article 1903, in relation to article 1902, of the Civil Code.

Let us now take up the Philippine decisions relied upon by the defendant. We study first, City of
Manila vs. Manila Electric Co., 52 Phil., 586 (year 1928). A collision between a truck of the City
of Manila and a street car of the Manila Electric Co. took place on June 8, 1925. The truck was
damaged in the amount of P1,788.27. Sixto Eustaquio, the motorman, was prosecuted for the
crime of damage to property and slight injuries through reckless imprudence. He was found
guilty and sentenced to pay a fine of P900, to indemnify the City of Manila for P1,788.27, with
subsidiary imprisonment in case of insolvency. Unable to collect the indemnity from Eustaquio,
the City of Manila filed an action against the Manila Electric Company to obtain payment,
claiming that the defendant was subsidiarily liable. The main defense was that the defendant
had exercised the diligence of a good father of a family to prevent the damage. The lower court
rendered judgment in favor of the plaintiff. This Court held, in part, that this case was governed
by the Penal Code, saying:

With this preliminary point out of the way, there is no escaping the conclusion that the provisions
of the Penal Code govern. The Penal Code in easily understandable language authorizes the
determination of subsidiary liability. The Civil Code negatives its application by providing that
civil obligations arising from crimes or misdemeanors shall be governed by the provisions of the
Penal Code. The conviction of the motorman was a misdemeanor falling under article 604 of the
Penal Code. The act of the motorman was not a wrongful or negligent act or omission not
punishable by law. Accordingly, the civil obligation connected up with the Penal Code and not
with article 1903 of the Civil Code. In other words, the Penal Code affirms its jurisdiction while
the Civil Code negatives its jurisdiction. This is a case of criminal negligence out of which civil
liability arises and not a case of civil negligence.

xxx xxx xxx

Our deduction, therefore, is that the case relates to the Penal Code and not to the Civil Code.
Indeed, as pointed out by the trial judge, any different ruling would permit the master to escape
scot-free by simply alleging and proving that the master had exercised all diligence in the
selection and training of its servants to prevent the damage. That would be a good defense to a
strictly civil action, but might or might not be to a civil action either as a part of or predicated on
conviction for a crime or misdemeanor. (By way of parenthesis, it may be said further that the
statements here made are offered to meet the argument advanced during our deliberations to
the effect that article 0902 of the Civil Code should be disregarded and codal articles 1093 and
1903 applied.)

It is not clear how the above case could support the defendant's proposition, because the Court
of Appeals based its decision in the present case on the defendant's primary responsibility
under article 1903 of the Civil Code and not on his subsidiary liability arising from Fontanilla's
criminal negligence. In other words, the case of City of Manila vs. Manila Electric Co., supra, is
predicated on an entirely different theory, which is the subsidiary liability of an employer arising
from a criminal act of his employee, whereas the foundation of the decision of the Court of
Appeals in the present case is the employer's primary liability under article 1903 of the Civil
Code. We have already seen that this is a proper and independent remedy.

Arambulo vs. Manila Electric Co. (55 Phil., 75), is another case invoked by the defendant. A
motorman in the employ of the Manila Electric Company had been convicted o homicide by
simple negligence and sentenced, among other things, to pay the heirs of the deceased the
sum of P1,000. An action was then brought to enforce the subsidiary liability of the defendant as
employer under the Penal Code. The defendant attempted to show that it had exercised the
diligence of a good father of a family in selecting the motorman, and therefore claimed
exemption from civil liability. But this Court held:

In view of the foregoing considerations, we are of opinion and so hold, (1) that the exemption
from civil liability established in article 1903 of the Civil Code for all who have acted with the
diligence of a good father of a family, is not applicable to the subsidiary civil liability provided in
article 20 of the Penal Code.

The above case is also extraneous to the theory of the defendant in the instant case, because
the action there had for its purpose the enforcement of the defendant's subsidiary liability under
the Penal Code, while in the case at bar, the plaintiff's cause of action is based on the
defendant's primary and direct responsibility under article 1903 of the Civil Code. In fact, the
above case destroys the defendant's contention because that decision illustrates the principle
that the employer's primary responsibility under article 1903 of the Civil Code is different in
character from his subsidiary liability under the Penal Code.

In trying to apply the two cases just referred to, counsel for the defendant has failed to
recognize the distinction between civil liability arising from a crime, which is governed by the
Penal Code, and the responsibility for cuasi-delito or culpa aquiliana under the Civil Code, and
has likewise failed to give the importance to the latter type of civil action.

The defendant-petitioner also cites Francisco vs. Onrubia (46 Phil., 327). That case need not be
set forth. Suffice it to say that the question involved was also civil liability arising from a crime.
Hence, it is as inapplicable as the two cases above discussed.
The foregoing authorities clearly demonstrate the separate individuality of cuasi-delitos or culpa
aquiliana under the Civil Code. Specifically they show that there is a distinction between civil
liability arising from criminal negligence (governed by the Penal Code) and responsibility for
fault or negligence under articles 1902 to 1910 of the Civil Code, and that the same negligent
act may produce either a civil liability arising from a crime under the Penal Code, or a separate
responsibility for fault or negligence under articles 1902 to 1910 of the Civil Code. Still more
concretely, the authorities above cited render it inescapable to conclude that the employer — in
this case the defendant-petitioner — is primarily and directly liable under article 1903 of the Civil
Code.

The legal provisions, authors, and cases already invoked should ordinarily be sufficient to
dispose of this case. But inasmuch as we are announcing doctrines that have been little
understood in the past, it might not be inappropriate to indicate their foundations.

Firstly, the Revised Penal Code in article 365 punishes not only reckless but also simple
negligence. If we were to hold that articles 1902 to 1910 of the Civil Code refer only to fault or
negligence not punished by law, according to the literal import of article 1093 of the Civil Code,
the legal institution of culpa aquiliana would have very little scope and application in actual life.
Death or injury to persons and damage to property through any degree of negligence — even
the slightest — would have to be indemnified only through the principle of civil liability arising
from a crime. In such a state of affairs, what sphere would remain for cuasi-delito or culpa
aquiliana? We are loath to impute to the lawmaker any intention to bring about a situation so
absurd and anomalous. Nor are we, in the interpretation of the laws, disposed to uphold the
letter that killeth rather than the spirit that giveth life. We will not use the literal meaning of the
law to smother and render almost lifeless a principle of such ancient origin and such full-grown
development as culpa aquiliana or cuasi-delito, which is conserved and made enduring in
articles 1902 to 1910 of the Spanish Civil Code.

Secondly, to find the accused guilty in a criminal case, proof of guilt beyond reasonable doubt is
required, while in a civil case, preponderance of evidence is sufficient to make the defendant
pay in damages. There are numerous cases of criminal negligence which can not be shown
beyond reasonable doubt, but can be proved by a preponderance of evidence. In such cases,
the defendant can and should be made responsible in a civil action under articles 1902 to 1910
of the Civil Code. Otherwise, there would be many instances of unvindicated civil wrongs. Ubi
jus ibi remedium.

Thirdly, to hold that there is only one way to make defendant's liability effective, and that is, to
sue the driver and exhaust his (the latter's) property first, would be tantamount to compelling the
plaintiff to follow a devious and cumbersome method of obtaining relief. True, there is such a
remedy under our laws, but there is also a more expeditious way, which is based on the primary
and direct responsibility of the defendant under article 1903 of the Civil Code. Our view of the
law is more likely to facilitate remedy for civil wrongs, because the procedure indicated by the
defendant is wasteful and productive of delay, it being a matter of common knowledge that
professional drivers of taxis and similar public conveyance usually do not have sufficient means
with which to pay damages. Why, then, should the plaintiff be required in all cases to go through
this roundabout, unnecessary, and probably useless procedure? In construing the laws, courts
have endeavored to shorten and facilitate the pathways of right and justice.

At this juncture, it should be said that the primary and direct responsibility of employers and their
presumed negligence are principles calculated to protect society. Workmen and employees
should be carefully chosen and supervised in order to avoid injury to the public. It is the masters
or employers who principally reap the profits resulting from the services of these servants and
employees. It is but right that they should guarantee the latter's careful conduct for the
personnel and patrimonial safety of others. As Theilhard has said, "they should reproach
themselves, at least, some for their weakness, others for their poor selection and all for their
negligence." And according to Manresa, "It is much more equitable and just that such
responsibility should fall upon the principal or director who could have chosen a careful and
prudent employee, and not upon the injured person who could not exercise such selection and
who used such employee because of his confidence in the principal or director." (Vol. 12, p.
622, 2nd Ed.) Many jurists also base this primary responsibility of the employer on the principle
of representation of the principal by the agent. Thus, Oyuelos says in the work already cited
(Vol. 7, p. 747) that before third persons the employer and employee "vienen a ser como una
sola personalidad, por refundicion de la del dependiente en la de quien le emplea y utiliza."
("become as one personality by the merging of the person of the employee in that of him who
employs and utilizes him.") All these observations acquire a peculiar force and significance
when it comes to motor accidents, and there is need of stressing and accentuating the
responsibility of owners of motor vehicles.

Fourthly, because of the broad sweep of the provisions of both the Penal Code and the Civil
Code on this subject, which has given rise to the overlapping or concurrence of spheres already
discussed, and for lack of understanding of the character and efficacy of the action for culpa
aquiliana, there has grown up a common practice to seek damages only by virtue of the civil
responsibility arising from a crime, forgetting that there is another remedy, which is by invoking
articles 1902-1910 of the Civil Code. Although this habitual method is allowed by our laws, it has
nevertheless rendered practically useless and nugatory the more expeditious and effective
remedy based on culpa aquiliana or culpa extra-contractual. In the present case, we are asked
to help perpetuate this usual course. But we believe it is high time we pointed out to the harm
done by such practice and to restore the principle of responsibility for fault or negligence under
articles 1902 et seq. of the Civil Code to its full rigor. It is high time we caused the stream of
quasi-delict or culpa aquiliana to flow on its own natural channel, so that its waters may no
longer be diverted into that of a crime under the Penal Code. This will, it is believed, make for
the better safeguarding of private rights because it re-establishes an ancient and additional
remedy, and for the further reason that an independent civil action, not depending on the issues,
limitations and results of a criminal prosecution, and entirely directed by the party wronged or
his counsel, is more likely to secure adequate and efficacious redress.

In view of the foregoing, the judgment of the Court of Appeals should be and is hereby affirmed,
with costs against the defendant-petitioner
EN BANC

G.R. No. L-47745 April 15, 1988

JOSE S. AMADORA, LORETA A. AMADORA, JOSE A. AMADORA JR., NORMA A. YLAYA

PANTALEON A. AMADORA, JOSE A. AMADORA III, LUCY A. AMADORA, ROSALINDA A.
AMADORA, PERFECTO A. AMADORA, SERREC A. AMADORA, VICENTE A. AMADORA and
MARIA TISCALINA A. AMADORA, petitioners
vs.
HONORABLE COURT OF APPEALS, COLEGIO DE SAN JOSE-RECOLETOS, VICTOR
LLUCH SERGIO P. DLMASO JR., CELESTINO DICON, ANIANO ABELLANA, PABLITO
DAFFON thru his parents and natural guardians, MR. and MRS. NICANOR GUMBAN, and
ROLANDO VALENCIA, thru his guardian, A. FRANCISCO ALONSO, respondents.

Jose S. Amadora & Associates for petitioners.

Padilla Law Office for respondents.

CRUZ, J.:

Like any prospective graduate, Alfredo Amadora was looking forward to the commencement
exercises where he would ascend the stage and in the presence of his relatives and friends
receive his high school diploma. These ceremonies were scheduled on April 16, 1972. As it
turned out, though, fate would intervene and deny him that awaited experience. On April 13,
1972, while they were in the auditorium of their school, the Colegio de San Jose-Recoletos, a
classmate, Pablito Damon, fired a gun that mortally hit Alfredo, ending all his expectations and
his life as well. The victim was only seventeen years old. 1

Daffon was convicted of homicide thru reckless imprudence . 2 Additionally, the herein
petitioners, as the victim's parents, filed a civil action for damages under Article 2180 of the Civil
Code against the Colegio de San Jose-Recoletos, its rector the high school principal, the dean
of boys, and the physics teacher, together with Daffon and two other students, through their
respective parents. The complaint against the students was later dropped. After trial, the Court
of First Instance of Cebu held the remaining defendants liable to the plaintiffs in the sum of
P294,984.00, representing death compensation, loss of earning capacity, costs of litigation,
funeral expenses, moral damages, exemplary damages, and attorney's fees .3 On appeal to the
respondent court, however, the decision was reversed and all the defendants were completely
absolved .4
In its decision, which is now the subject of this petition for certiorari under Rule 45 of the Rules
of Court, the respondent court found that Article 2180 was not applicable as the Colegio de San
Jose-Recoletos was not a school of arts and trades but an academic institution of learning. It
also held that the students were not in the custody of the school at the time of the incident as
the semester had already ended, that there was no clear identification of the fatal gun and that
in any event the defendant, had exercised the necessary diligence in preventing the injury. 5

The basic undisputed facts are that Alfredo Amadora went to the San Jose-Recoletos on April
13, 1972, and while in its auditorium was shot to death by Pablito Daffon, a classmate. On the
implications and consequences of these facts, the parties sharply disagree.

The petitioners contend that their son was in the school to show his physics experiment as a
prerequisite to his graduation; hence, he was then under the custody of the private respondents.
The private respondents submit that Alfredo Amadora had gone to the school only for the
purpose of submitting his physics report and that he was no longer in their custody because the
semester had already ended.

There is also the question of the identity of the gun used which the petitioners consider
important because of an earlier incident which they claim underscores the negligence of the
school and at least one of the private respondents. It is not denied by the respondents that on
April 7, 1972, Sergio Damaso, Jr., the dean of boys, confiscated from Jose Gumban an
unlicensed pistol but later returned it to him without making a report to the principal or taking any
further action .6 As Gumban was one of the companions of Daffon when the latter fired the gun
that killed Alfredo, the petitioners contend that this was the same pistol that had been
confiscated from Gumban and that their son would not have been killed if it had not been
returned by Damaso. The respondents say, however, that there is no proof that the gun was the
same firearm that killed Alfredo.

Resolution of all these disagreements will depend on the interpretation of Article 2180 which, as
it happens, is invoked by both parties in support of their conflicting positions. The pertinent part
of this article reads as follows:

Lastly, teachers or heads of establishments of arts and trades shall be liable for damages
caused by their pupils and students or apprentices so long as they remain in their custody.

Three cases have so far been decided by the Court in connection with the above-quoted
provision, to wit: Exconde v. Capuno 7 Mercado v. Court of Appeals, 8 and Palisoc v. Brillantes.
9 These will be briefly reviewed in this opinion for a better resolution of the case at bar.

In the Exconde Case, Dante Capuno, a student of the Balintawak Elementary School and a Boy
Scout, attended a Rizal Day parade on instructions of the city school supervisor. After the
parade, the boy boarded a jeep, took over its wheel and drove it so recklessly that it turned
turtle, resulting in the death of two of its passengers. Dante was found guilty of double homicide
with reckless imprudence. In the separate civil action flied against them, his father was held
solidarily liable with him in damages under Article 1903 (now Article 2180) of the Civil Code for
the tort committed by the 15-year old boy.

This decision, which was penned by Justice Bautista Angelo on June 29,1957, exculpated the
school in an obiter dictum (as it was not a party to the case) on the ground that it was riot a
school of arts and trades. Justice J.B.L. Reyes, with whom Justices Sabino Padilla and Alex
Reyes concurred, dissented, arguing that it was the school authorities who should be held liable
Liability under this rule, he said, was imposed on (1) teachers in general; and (2) heads of
schools of arts and trades in particular. The modifying clause "of establishments of arts and
trades" should apply only to "heads" and not "teachers."

Exconde was reiterated in the Mercado Case, and with an elaboration. A student cut a
classmate with a razor blade during recess time at the Lourdes Catholic School in Quezon City,
and the parents of the victim sued the culprits parents for damages. Through Justice Labrador,
the Court declared in another obiter (as the school itself had also not been sued that the school
was not liable because it was not an establishment of arts and trades. Moreover, the custody
requirement had not been proved as this "contemplates a situation where the student lives and
boards with the teacher, such that the control, direction and influences on the pupil supersede
those of the parents." Justice J.B.L. Reyes did not take part but the other members of the court
concurred in this decision promulgated on May 30, 1960.

In Palisoc vs. Brillantes, decided on October 4, 1971, a 16-year old student was killed by a
classmate with fist blows in the laboratory of the Manila Technical Institute. Although the
wrongdoer — who was already of age — was not boarding in the school, the head thereof and
the teacher in charge were held solidarily liable with him. The Court declared through Justice
Teehankee:

The phrase used in the cited article — "so long as (the students) remain in their custody" —
means the protective and supervisory custody that the school and its heads and teachers
exercise over the pupils and students for as long as they are at attendance in the school,
including recess time. There is nothing in the law that requires that for such liability to attach, the
pupil or student who commits the tortious act must live and board in the school, as erroneously
held by the lower court, and the dicta in Mercado (as well as in Exconde) on which it relied,
must now be deemed to have been set aside by the present decision.

This decision was concurred in by five other members, 10 including Justice J.B.L. Reyes, who
stressed, in answer to the dissenting opinion, that even students already of age were covered
by the provision since they were equally in the custody of the school and subject to its discipline.
Dissenting with three others,11 Justice Makalintal was for retaining the custody interpretation in
Mercado and submitted that the rule should apply only to torts committed by students not yet of
age as the school would be acting only in loco parentis.

In a footnote, Justice Teehankee said he agreed with Justice Reyes' dissent in the Exconde
Case but added that "since the school involved at bar is a non-academic school, the question as
to the applicability of the cited codal provision to academic institutions will have to await another
case wherein it may properly be raised."

This is the case.

Unlike in Exconde and Mercado, the Colegio de San Jose-Recoletos has been directly
impleaded and is sought to be held liable under Article 2180; and unlike in Palisoc, it is not a
school of arts and trades but an academic institution of learning. The parties herein have also
directly raised the question of whether or not Article 2180 covers even establishments which are
technically not schools of arts and trades, and, if so, when the offending student is supposed to
be "in its custody."

After an exhaustive examination of the problem, the Court has come to the conclusion that the
provision in question should apply to all schools, academic as well as non-academic. Where the
school is academic rather than technical or vocational in nature, responsibility for the tort
committed by the student will attach to the teacher in charge of such student, following the first
part of the provision. This is the general rule. In the case of establishments of arts and trades, it
is the head thereof, and only he, who shall be held liable as an exception to the general rule. In
other words, teachers in general shall be liable for the acts of their students except where the
school is technical in nature, in which case it is the head thereof who shall be answerable.
Following the canon of reddendo singula singulis "teachers" should apply to the words "pupils
and students" and "heads of establishments of arts and trades" to the word "apprentices."

The Court thus conforms to the dissenting opinion expressed by Justice J.B.L. Reyes in
Exconde where he said in part:

I can see no sound reason for limiting Art. 1903 of the Old Civil Code to teachers of arts and
trades and not to academic ones. What substantial difference is there between them insofar as
concerns the proper supervision and vice over their pupils? It cannot be seriously contended
that an academic teacher is exempt from the duty of watching that his pupils do not commit a
tort to the detriment of third Persons, so long as they are in a position to exercise authority and
Supervision over the pupil. In my opinion, in the phrase "teachers or heads of establishments of
arts and trades" used in Art. 1903 of the old Civil Code, the words "arts and trades" does not
qualify "teachers" but only "heads of establishments." The phrase is only an updated version of
the equivalent terms "preceptores y artesanos" used in the Italian and French Civil Codes.

If, as conceded by all commentators, the basis of the presumption of negligence of Art. 1903 in
some culpa in vigilando that the parents, teachers, etc. are supposed to have incurred in the
exercise of their authority, it would seem clear that where the parent places the child under the
effective authority of the teacher, the latter, and not the parent, should be the one answerable
for the torts committed while under his custody, for the very reason/that the parent is not
supposed to interfere with the discipline of the school nor with the authority and supervision of
the teacher while the child is under instruction. And if there is no authority, there can be no
responsibility.
There is really no substantial distinction between the academic and the non-academic schools
insofar as torts committed by their students are concerned. The same vigilance is expected from
the teacher over the students under his control and supervision, whatever the nature of the
school where he is teaching. The suggestion in the Exconde and Mercado Cases is that the
provision would make the teacher or even the head of the school of arts and trades liable for an
injury caused by any student in its custody but if that same tort were committed in an academic
school, no liability would attach to the teacher or the school head. All other circumstances being
the same, the teacher or the head of the academic school would be absolved whereas the
teacher and the head of the non-academic school would be held liable, and simply because the
latter is a school of arts and trades.

The Court cannot see why different degrees of vigilance should be exercised by the school
authorities on the basis only of the nature of their respective schools. There does not seem to
be any plausible reason for relaxing that vigilance simply because the school is academic in
nature and for increasing such vigilance where the school is non-academic. Notably, the injury
subject of liability is caused by the student and not by the school itself nor is it a result of the
operations of the school or its equipment. The injury contemplated may be caused by any
student regardless of the school where he is registered. The teacher certainly should not be
able to excuse himself by simply showing that he is teaching in an academic school where, on
the other hand, the head would be held liable if the school were non-academic.

These questions, though, may be asked: If the teacher of the academic school is to be held
answerable for the torts committed by his students, why is it the head of the school only who is
held liable where the injury is caused in a school of arts and trades? And in the case of the
academic or non- technical school, why not apply the rule also to the head thereof instead of
imposing the liability only on the teacher?

The reason for the disparity can be traced to the fact that historically the head of the school of
arts and trades exercised a closer tutelage over his pupils than the head of the academic
school. The old schools of arts and trades were engaged in the training of artisans apprenticed
to their master who personally and directly instructed them on the technique and secrets of their
craft. The head of the school of arts and trades was such a master and so was personally
involved in the task of teaching his students, who usually even boarded with him and so came
under his constant control, supervision and influence. By contrast, the head of the academic
school was not as involved with his students and exercised only administrative duties over the
teachers who were the persons directly dealing with the students. The head of the academic
school had then (as now) only a vicarious relationship with the students. Consequently, while he
could not be directly faulted for the acts of the students, the head of the school of arts and
trades, because of his closer ties with them, could be so blamed.

It is conceded that the distinction no longer obtains at present in view of the expansion of the
schools of arts and trades, the consequent increase in their enrollment, and the corresponding
diminution of the direct and personal contract of their heads with the students. Article 2180,
however, remains unchanged. In its present state, the provision must be interpreted by the
Court according to its clear and original mandate until the legislature, taking into account the
charges in the situation subject to be regulated, sees fit to enact the necessary amendment.

The other matter to be resolved is the duration of the responsibility of the teacher or the head of
the school of arts and trades over the students. Is such responsibility co-extensive with the
period when the student is actually undergoing studies during the school term, as contended by
the respondents and impliedly admitted by the petitioners themselves?

From a reading of the provision under examination, it is clear that while the custody
requirement, to repeat Palisoc v. Brillantes, does not mean that the student must be boarding
with the school authorities, it does signify that the student should be within the control and under
the influence of the school authorities at the time of the occurrence of the injury. This does not
necessarily mean that such, custody be co-terminous with the semester, beginning with the start
of classes and ending upon the close thereof, and excluding the time before or after such
period, such as the period of registration, and in the case of graduating students, the period
before the commencement exercises. In the view of the Court, the student is in the custody of
the school authorities as long as he is under the control and influence of the school and within
its premises, whether the semester has not yet begun or has already ended.

It is too tenuous to argue that the student comes under the discipline of the school only upon the
start of classes notwithstanding that before that day he has already registered and thus placed
himself under its rules. Neither should such discipline be deemed ended upon the last day of
classes notwithstanding that there may still be certain requisites to be satisfied for completion of
the course, such as submission of reports, term papers, clearances and the like. During such
periods, the student is still subject to the disciplinary authority of the school and cannot consider
himself released altogether from observance of its rules.

As long as it can be shown that the student is in the school premises in pursuance of a
legitimate student objective, in the exercise of a legitimate student right, and even in the
enjoyment of a legitimate student right, and even in the enjoyment of a legitimate student
privilege, the responsibility of the school authorities over the student continues. Indeed, even if
the student should be doing nothing more than relaxing in the campus in the company of his
classmates and friends and enjoying the ambience and atmosphere of the school, he is still
within the custody and subject to the discipline of the school authorities under the provisions of
Article 2180.

During all these occasions, it is obviously the teacher-in-charge who must answer for his
students' torts, in practically the same way that the parents are responsible for the child when
he is in their custody. The teacher-in-charge is the one designated by the dean, principal, or
other administrative superior to exercise supervision over the pupils in the specific classes or
sections to which they are assigned. It is not necessary that at the time of the injury, the teacher
be physically present and in a position to prevent it. Custody does not connote immediate and
actual physical control but refers more to the influence exerted on the child and the discipline
instilled in him as a result of such influence. Thus, for the injuries caused by the student, the
teacher and not the parent shag be held responsible if the tort was committed within the
premises of the school at any time when its authority could be validly exercised over him.

In any event, it should be noted that the liability imposed by this article is supposed to fall
directly on the teacher or the head of the school of arts and trades and not on the school itself. If
at all, the school, whatever its nature, may be held to answer for the acts of its teachers or even
of the head thereof under the general principle of respondeat superior, but then it may exculpate
itself from liability by proof that it had exercised the diligence of a bonus paterfamilias.

Such defense is, of course, also available to the teacher or the head of the school of arts and
trades directly held to answer for the tort committed by the student. As long as the defendant
can show that he had taken the necessary precautions to prevent the injury complained of, he
can exonerate himself from the liability imposed by Article 2180, which also states that:

The responsibility treated of in this article shall cease when the Persons herein mentioned prove
that they observed all the diligence of a good father of a family to prevent damages.

In this connection, it should be observed that the teacher will be held liable not only when he is
acting in loco parentis for the law does not require that the offending student be of minority age.
Unlike the parent, who wig be liable only if his child is still a minor, the teacher is held
answerable by the law for the act of the student under him regardless of the student's age.
Thus, in the Palisoc Case, liability attached to the teacher and the head of the technical school
although the wrongdoer was already of age. In this sense, Article 2180 treats the parent more
favorably than the teacher.

The Court is not unmindful of the apprehensions expressed by Justice Makalintal in his
dissenting opinion in Palisoc that the school may be unduly exposed to liability under this article
in view of the increasing activism among the students that is likely to cause violence and
resulting injuries in the school premises. That is a valid fear, to be sure. Nevertheless, it should
be repeated that, under the present ruling, it is not the school that will be held directly liable.
Moreover, the defense of due diligence is available to it in case it is sought to be held
answerable as principal for the acts or omission of its head or the teacher in its employ.

The school can show that it exercised proper measures in selecting the head or its teachers and
the appropriate supervision over them in the custody and instruction of the pupils pursuant to its
rules and regulations for the maintenance of discipline among them. In almost all cases now, in
fact, these measures are effected through the assistance of an adequate security force to help
the teacher physically enforce those rules upon the students. Ms should bolster the claim of the
school that it has taken adequate steps to prevent any injury that may be committed by its
students.

A fortiori, the teacher himself may invoke this defense as it would otherwise be unfair to hold
him directly answerable for the damage caused by his students as long as they are in the school
premises and presumably under his influence. In this respect, the Court is disposed not to
expect from the teacher the same measure of responsibility imposed on the parent for their
influence over the child is not equal in degree. Obviously, the parent can expect more
obedience from the child because the latter's dependence on him is greater than on the teacher.
It need not be stressed that such dependence includes the child's support and sustenance
whereas submission to the teacher's influence, besides being coterminous with the period of
custody is usually enforced only because of the students' desire to pass the course. The parent
can instill more las discipline on the child than the teacher and so should be held to a greater
accountability than the teacher for the tort committed by the child.

And if it is also considered that under the article in question, the teacher or the head of the
school of arts and trades is responsible for the damage caused by the student or apprentice
even if he is already of age — and therefore less tractable than the minor — then there should
all the more be justification to require from the school authorities less accountability as long as
they can prove reasonable diligence in preventing the injury. After all, if the parent himself is no
longer liable for the student's acts because he has reached majority age and so is no longer
under the former's control, there is then all the more reason for leniency in assessing the
teacher's responsibility for the acts of the student.

Applying the foregoing considerations, the Court has arrived at the following conclusions:

1. At the time Alfredo Amadora was fatally shot, he was still in the custody of the authorities
of Colegio de San Jose-Recoletos notwithstanding that the fourth year classes had formally
ended. It was immaterial if he was in the school auditorium to finish his physics experiment or
merely to submit his physics report for what is important is that he was there for a legitimate
purpose. As previously observed, even the mere savoring of the company of his friends in the
premises of the school is a legitimate purpose that would have also brought him in the custody
of the school authorities.

2. The rector, the high school principal and the dean of boys cannot be held liable because
none of them was the teacher-in-charge as previously defined. Each of them was exercising
only a general authority over the student body and not the direct control and influence exerted
by the teacher placed in charge of particular classes or sections and thus immediately involved
in its discipline. The evidence of the parties does not disclose who the teacher-in-charge of the
offending student was. The mere fact that Alfredo Amadora had gone to school that day in
connection with his physics report did not necessarily make the physics teacher, respondent
Celestino Dicon, the teacher-in-charge of Alfredo's killer.

3. At any rate, assuming that he was the teacher-in-charge, there is no showing that Dicon
was negligent in enforcing discipline upon Daffon or that he had waived observance of the rules
and regulations of the school or condoned their non-observance. His absence when the tragedy
happened cannot be considered against him because he was not supposed or required to
report to school on that day. And while it is true that the offending student was still in the
custody of the teacher-in-charge even if the latter was physically absent when the tort was
committed, it has not been established that it was caused by his laxness in enforcing discipline
upon the student. On the contrary, the private respondents have proved that they had exercised
due diligence, through the enforcement of the school regulations, in maintaining that discipline.

4. In the absence of a teacher-in-charge, it is probably the dean of boys who should be

held liable especially in view of the unrefuted evidence that he had earlier confiscated an
unlicensed gun from one of the students and returned the same later to him without taking
disciplinary action or reporting the matter to higher authorities. While this was clearly negligence
on his part, for which he deserves sanctions from the school, it does not necessarily link him to
the shooting of Amador as it has not been shown that he confiscated and returned pistol was
the gun that killed the petitioners' son.

5. Finally, as previously observed, the Colegio de San Jose-Recoletos cannot be held

directly liable under the article because only the teacher or the head of the school of arts and
trades is made responsible for the damage caused by the student or apprentice. Neither can it
be held to answer for the tort committed by any of the other private respondents for none of
them has been found to have been charged with the custody of the offending student or has
been remiss in the discharge of his duties in connection with such custody.

In sum, the Court finds under the facts as disclosed by the record and in the light of the
principles herein announced that none of the respondents is liable for the injury inflicted by
Pablito Damon on Alfredo Amadora that resulted in the latter's death at the auditorium of the
Colegio de San Jose-Recoletos on April 13, 1972. While we deeply sympathize with the
petitioners over the loss of their son under the tragic circumstances here related, we
nevertheless are unable to extend them the material relief they seek, as a balm to their grief,
under the law they have invoked.

WHEREFORE, the petition is DENIED, without any pronouncement as to costs. It is so ordered.

JUAN F. VILLARROEL, vs. BERNARDINO ESTRADA

G.R. No. L-47362 December 19, 1940

FACTS: On May 9 1912, Alejandra F. Callao mother of herein petitioner obtained from the Sps
Mariano Estrada and Severina a loan of 1000 pesos payable in 6 years. Alejandra died leaving
petitioner as the sole heir. The Sps Mariano Estrada and Severina died as well leaving the
respondent as the sole heir. On Aug 9 1930, petitioner signed a document assuming the
obligation to pay the respondent 1000 plus 12% per annum interest. Hence the action filed to
recover said amount.

The CFI ruled in favor of the respondent ordering the petitioner to pay 1000 plus interest of 12%
per annum to be counted from Aug 9 1930.
ISSUE: Whether or not the present action may prosper notwithstanding the prescription of the
action to recover the original debt?

HELD: Yes. The present action is not based on the original debt contracted by petitioner’s
mother – which has already prescribed – but on petitioner’s undertaking on Aug 9 1930 to
assume the original obligation. For the petitioner who is the sole heir of the original debtor with
rights to the latter’s inheritance, the debt legally contracted by his mother even if it has already
lost enforceability due to prescription, has become a moral obligation which is a sufficient
consideration to make the obligation he voluntarily assumed on Aug 9 1930 enforceable and
legally demandable.

EN BANC

G.R. No. 46274 November 2, 1939

A.O. FISHER, plaintiff-appellee,

vs.
JOHN C. ROBB, defendant-appellant.

Marcial P. Lichauco and Manuel M. Mejia for appellant.

Wolfson, Barrion and Baradi and Ignacio Ycaza for appellee.

VILLA-REAL, J.:

The defendant John C. Robb appeals to this Court from the judgment of the Court of First
Instance of Manila, the dispositive part of which reads:

Judgment is hereby rendered in favor of the plaintiff and against the defendant, who is ordered
to pay to the former the sum of P2,000, with interest at the legal rate from March 11, 1938, until
paid, plus costs.

The facts established at the trial without discussion are the following:

In September, 1935, the board of directors of the Philippine Greyhound Club, Inc., told the
herein defendant-appellant John C. Robb, to make a business trip to Shanghai to study the
operation of a dog racing course. In Shanghai, the defendant-appellant stayed at the American
Club where be became acquainted with the plaintiff-appellee, A. O. Fisher, through their mutual
friends. In the course of a conversation, the defendant-appellant came to know that the plaintiff-
appellee was the manager of a dog racing course. Upon knowing the purpose of the defendant-
appellant's trip, the plaintiff-appellee showed great interest and invited him to his establishment
and for several days gave him information about the business. It seems that the plaintiff became
interested in the Philippine Greyhound Club, Inc., and asked the defendant if he could have a
part therein as a stockholder. As the defendant-appellant answered in the affirmative, the
plaintiff-appellee thereupon filled a subscription blank and, through his bank in Shanghai, sent to
the Philippine Greyhound Club, Inc., in Manila telegraphic transfer for P3,000 in payment of the
first installment of his subscription. Later on the defendant-appellant returned to Manila from
Shanghai.

Some months thereafter, when the board of directors of the Philippine Greyhound Club, Inc.,
issued a call for the payment of the second installment of the subscriptions, the defendant-
appellant sent a radiogram to the plaintiff-appellee did so and sent P2,000 directly to the
Philippine Greyhound Club, Inc., in payment of the said installment. Due to the manipulations of
those who controlled the Philippine Greyhound Club, Inc., during the absence of the defendant-
appellant undertook the organization of a company called The Philippine Racing Club, which
now manages the race track of the Santa Ana park. The defendant immediately endeavored to
save the investment of those who had subscribed to the Philippine Greyhound Club, Inc., by
having the Philippine Racing Club acquire the remaining assets of the Philippine Greyhound
Club, Inc. The defendant-appellant wrote a letter to the plaintiff-appellee in Shanghai explaining
in detail the critical condition of the Philippine Greyhound Club, Inc., and outlining his plans to
save the properties and assets of the plaintiff-appellee that he felt morally responsible to the
stockholders who had paid their second installment (Exh. C). In answer to said letter, the
plaintiff-appellee wrote the defendant-appellant requiring him to return the entire amount paid by
him to the Philippine Greyhound Club, Inc., (exhibit E). Upon receiving this letter, the defendant-
appellant answered the plaintiff-appellee for any loss which he might have suffered in
connection with the Philippine Greyhound Club, Inc., in the same way that he could not expect
anyone to reimburse him for his own losses which were much more than those of the plaintiff-
appellee (Exh. B).

The principal question to be decided in this appeal is whether or not the trial court erred in
holding that there was sufficient consideration to justify the promise made by the defendant-
appellant in his letters Exhibits B and C.

In the fifth paragraph of the letter Exhibit B, dated March 16, 1936, addressed by the defendant-
appellant to the plaintiff-appellee, the former said: "I feel a moral responsibility for these second
payments, which were made in order to carry out my plan (not the first payments, as you have it
in your letter), and Mr. Hilscher and I will see to it that stockholders who made second payments
receive these amounts back as soon as possible, out of our own personal funds. "As it is, I have
had to take my loss along with everyone else here, and so far as I can see that is what all of us
must do. The corporation is finally flat, so it is out of the question to receive back any of your
investment from that source; the only salvage will be the second payment that you made, and
that will come from Hilscher and me personally, as I say, not because of any obligation, but
simply because we have taken it on ourselves to do that. (And I wish I could find someone who
would undertake to repay a part of my own losses in the enterprise!)" And in the seventh
paragraph of the letter Exhibit C, dated February 21, 1936, addressed by the same defendant-
appellant to the same plaintiff-appellee the former said the following:
However, Mr. Fischer and I feel a personal responsibility to those few stockholders who made
their second payments, including yourself, and it is our intention to personally repay the
amounts of the second payments made by those few.

. . . And, finally, paragraph 8 of the same letter Exhibit C states: "We are to receive a certain
share of the new Philippine Racing Club for our services as promoters of that organization, and
as soon as this is received by us, we will be in a position to compensate you and the few others
who made the second payments. That, as T have said, will come from us personally, in an effort
to make things easier for those who were sportsmen enough to try to save the Greyhound
organization by making second payments.

Article 1254 of the Civil Code provides as follows:

A contract exists from the moment one or more persons consent to be bound with respect to
another or others to deliver something or to render some services.

And article 1261 of the same Civil Code provides the following:

ART. 1261. There is no contract unless the following requisites exists:

1. The consent of the contracting parties;

2. A definite object which is the subject-matter of the contract;

3. A consideration for the obligation established.

In the present case, while the defendant-appellant told the plaintiff-appellee that he felt morally
responsible for the second payments which had been made to carry out his plan, and that Mr.
Hilscher and he would do everything possible so that the stockholders who had made second
payments may receive the amount paid by them from their personal funds because they
voluntarily assumed the responsibility to make such payment as soon as they receive from the
Philippine racing Club certain shares for their services as promoters of said organization, it does
not appear that the plaintiff-appellee had consented to said form of reimbursement of the
P2,000 which he had directly paid to the Philippine Greyhound Club, Inc., in satisfaction of the
second installment.

The first essential requisite, therefore, required by the cited article 1261 of the Civil Code for the
existence of a contract, does not exists.

As to the third essential requisite, namely, "A consideration for the obligation established,"
article 1274 of the same Code provides:lawphi1.net
In onerous contracts the consideration as to each of the parties is the delivery or performance or
the promise of delivery or performance of a thing or service by the other party; in remuneratory
contracts the consideration is the service or benefit for which the remuneration is given, and in
contracts of pure beneficence the consideration is the liberality of the benefactors.

And article 1275 of the same Code provides:

ART. 1275. Contracts without consideration or with an illicit consideration produce no effect
whatsoever. A consideration is illicit when it is contrary to law or morality.

Manresa, in volume 8, 4rth edition, pages 618-619 of his Commentaries on the Civil Code, has
this to say:

Considering the concept of the consideration as the explanation and motive of the contract, it is
related to the latter's object and even more to its motives with which it is often confused. It is
differentiated from them, however, in that the former is the essential reason for the contract,
while the latter are the particular reasons of a contracting party which do not affect the other
party and which do not preclude the existence of a different consideration. To clarify by an
example: A thing purchased constitutes the consideration for the purchaser and not the motives
which have influenced his mind, like its usefulness, its perfection, its relation to another, the use
thereof which he may have in mind, etc., a very important distinction, which precludes the
annulment of the contract by the sole influence of the motives, unless the efficacy of the former
had been subordinated to compliance with the latter as conditions.

The jurisprudence shows some cases wherein this important distinction is established. The
consideration of contracts, states the decision of February 24, 1904, is distinct from the motive
which may prompt the parties in executing them. The inaccuracies committed in expressing its
accidental or secondary details do not imply lack of consideration or false consideration,
wherefore, they do not affect the essence and validity of the contract. In a loan the consideration
in its essence is, for the borrower the acquisition of the amount, and for the lender the power to
demand its return, whether the money be for the former or for another person and whether it be
invested as stated or otherwise.

The same distinction between the consideration and the motive is found in the decisions of
November 23, 1920 and March 5, 1924.

The contract sought to be judicially enforced by the plaintiff-appellee against the defendant-
appellant is onerous in character, because it supposes the deprivation of the latter of an amount
of money which impairs his property, which is a burden, and for it to be legally valid it is
necessary that it should have a consideration consisting in the lending or or promise of a thing
or service by such party. The defendant-appellant is required to give a thing, namely, the
payment of the sum of P2,000, but the plaintiff-appellee has not given or promised anything or
service to the former which may compel him to make such payment. The promise which said
defendant-appellant has made to the plaintiff-appellee to return to him P2,000 which he had
paid to the Philippine Greyhound Club, Inc., as second installment of the payment of the amount
of the shares for which he has subscribed, was prompted by a feeling of pity which said
defendant-appellant had for the plaintiff-appellee as a result of the loss which the latter had
suffered because of the failure of the enterprise. The obligation which the said defendant-
appellant had contracted with the plaintiff-appellee is, therefore, purely moral and, as such, is
not demandable in law but only in conscience, over which human judges have no
jurisdiction.1awphi1.net

As to whether a moral obligation is a sufficient consideration, read in volume 12 of the American

Jurisprudence, pages 589-590, paragraphs 96, 67, the following:

SEC. 96. Moral obligation. — Although there is authority in support of the board proposition that
a moral obligation is sufficient consideration, such proposition is usually denied. . . . .

The case presenting the question whether a moral obligation will sustain an express executory
promise may be divided into five classes: (1) Cases in which the moral obligation arose wholly
from ethical considerations, unconnected with any legal obligations, perfect or imperfect, and
without the receipt of actual pecuniary or material benefit by the promisor prior to the
subsequent promise; (2) cases in which the moral obligation arose from a legal liability already
performed or still enforceable; (3) cases in which the moral obligation arose out of, or was
connected with, a previous request or promise creating originally an enforceable legal liability,
which, however, at the time of the subsequent express promise had become discharged or
barred by operation of a positive rule of law, so that at that time there was no enforceable legal
liability; (4) cases in which the moral obligation arose from, or was connected with, a previous
request or promise which, however, never created any enforceable legal liability, because of a
rule of law which rendered the original agreement void, or at least unenforceable; and (5) cases
in which the moral obligation arose out of, or was connected with, the receipt of actual material
or pecuniary benefit by the promisor, without, however, any previous request or promise on his
part, express or implied, and therefore, of course, without any original legal liability, perfect or
imperfect.

SEC. 97. Moral obligation unconnected with legal liability or legal benefit. — Although, as
subsequently shown was formerly some doubt as to the point, it is now well established that a
mere moral obligation or conscience duty arising wholly from ethical motives or a mere
conscientious duty unconnected with any legal obligation, perfect or imperfect, or with the
receipt of benefit by the promisor of a material or pecuniary nature will not furnish a
consideration for an executory promise. . . . .

In view of the foregoing considerations, we are of the opinion and so hold, that the promise
made by an organizer of a dog racing course to a stockholder to return to him certain amounts
paid by the latter in satisfaction of his subscription upon the belief of said organizer that he was
morally responsible because of the failure of the enterprise, is not the consideration rquired by
article 1261 of the Civil Code as an essential element for the legal existence of an onerous
contract which would bind the promisor to comply with his promise.
Wherefore, the appealed judgment is reversed and the costs to the plaintiff

EN BANC

G.R. No. L-14335 January 28, 1920

MANUEL DE GUIA, plaintiff-appellant,

vs.
THE MANILA ELECTRIC RAILROAD & LIGHT COMPANY, defendant-appellant.

Sumulong and Estrada, Crossfield and O'Brien and Francisco A. Delgado for
plaintiff-appellant.
Lawrence and Ross for defendant-appellant.

STREET, J.:

This is an appeal prosecuted both by the plaintiff and the defendant from a judgment of the
Court of First Instance of the City of Manila, whereby the plaintiff was awarded the sum of
P6,100, with interest and costs, as damages incurred by him in consequence of physical injuries
sustained while riding on one of the defendant's car.

The accident which gave rise to the litigation occurred on September 4, 1915, near the end of
the street-car line in Caloocan, Rizal, a northern suburb of the city of Manila. It appears that, at
about 8 o'clock p.m., of the date mentioned, the plaintiff Manuel de Guia, a physician residing in
Caloocan, boarded a car at the end of the line with the intention of coming to the city. At about
30 meters from the starting point the car entered a switch, the plaintiff remaining on the back
platform holding the handle of the right-hand door. Upon coming out of the switch, the small
wheels of the rear truck left the track, ran for a short distance along the macadam filling, which
was flush with the rails, and struck a concrete post at the left of the tract. The post was
shattered; and as the car stopped the plaintiff was thrown against the door with some violence,
receiving bruises and possibly certain internal injuries, the extent of which is a subject of
dispute.

The trial court found that the motorman of the derailed car was negligent in having maintained
too rapid a speed. This inference appears to be based chiefly upon the results of the shock,
involving the shattering of the post and the bending of the kingpost of the car. It is insisted for
the defendant company that the derailment was due to the presence of a stone, somewhat
larger than a goose egg, which had become accidentally lodged between the rails at the
juncture of the switch and which was unobserved by the motorman. In this view the derailment
of the car is supposed to be due to casus fortuitos and not chargeable to the negligence of the
motorman.
Even supposing that the derailment of the car was due to the accidental presence of such a
stone as suggested, we do not think that the existence of negligence is disproved. The
motorman says that upon approaching the switch he reduced the electrical energy to the point
that the car barely entered the switch under its own momentum, and this operation was
repeated as he passed out. Upon getting again on the straight tract he put the control
successively at points one, two, three and lastly at point four. At the moment when the control
was placed at point four he perceived that the rear wheels were derailed and applied the brake;
but at the same instant the car struck the post, some 40 meters distant from the exit of the
switch. One of the defendant's witnesses stated in court that the rate of a car propelled by
electricity with the control at point "four" should be about five or 6 miles per hour. There was
some other evidence to the effect that the car was behind schedule time and that it was being
driven after leaving the switch, at a higher rate than would ordinarily be indicated by the control
at point four. This inference is rendered more tenable by the circumstance that the car was
practically empty. On the whole, we are of the opinion that the finding of negligence in the
operation of the car must be sustained, as not being clearly contrary to the evidence; not so
much because of excessive speed as because of the distance which the car was allowed to run
with the front wheels of the rear truck derailed. It seems to us than an experienced and attentive
motorman should have discovered that something was wrong and would have stopped before
he had driven the car over the entire distance from the point where the wheels left the track to
the place where the post was struck.

The conclusion being accepted that there was negligence on the part of the motorman in driving
the car, it results that the company is liable for the damage resulting to the plaintiff as a
consequence of that negligence. The plaintiff had boarded the car as a passenger for the city of
Manila and the company undertook to convey him for hire. The relation between the parties
was, therefore, of a contractual nature, and the duty of the carrier is to be determined with
reference to the principles of contract law, that is, the company was bound to convey and
deliver the plaintiff safely and securely with reference to the degree of care which, under the
circumstances, is required by law and custom applicable to the case (art. 1258, Civil Code).
Upon failure to comply with that obligation the company incurred the liability defined in articles
1103-1107 of the Civil Code. (Cangco vs. Manila Railroad Company, 38 Phil. Rep., 768; Manila
Railroad Company vs. Compañia Transatlantica, and Atlantic, Gulf & Pacific Co., 38 Phil. Rep.,
875.)

From the nature of the liability thus incurred, it is clear that the defendant company can not avail
itself of the last paragraph of article 1903 of the Civil Code, since that provision has reference to
liability incurred by negligence in the absence of contractual relation, that is, to the culpa
aquiliana of the civil law. It was therefore irrelevant for the defendant company to prove, as it
did, that the company had exercised due care in the selection and instruction of the motorman
who was in charge of its car and that he was in fact an experienced and reliable servant.

At this point, however, it should be observed that although in case like this the defendant must
answer for the consequences of the negligence of its employee, the court has the power to
moderate liability according to the circumstances of the case (art. 1103, Civ. Code):
Furthermore, we think it obvious that an employer who has in fact displayed due diligence in
choosing and instructing his servants is entitled to be considered a debtor in good faith, within
the meaning of article 1107 of the same Code. Construing these two provisions together,
applying them to the facts of this case, it results that the defendant's liability is limited to such
damages as might, at the time of the accident, have been reasonably foreseen as a probable
consequence of the physical injuries inflicted upon the plaintiff and which were in fact a
necessary result of those injuries. There is nothing novel in this proposition, since both the civil
and the common law are agreed upon the point that the damages ordinarily recoverable for the
breach of a contractual obligation, against a person who has acted in good faith, are such as
can reasonably be foreseen at the time the obligation is contracted. In Daywalt vs. Corporacion
de PP. Agustinos Recoletos (39 Phil., 587), we said: "The extent of the liability for the breach of
a contract must be determined in the light of the situation in existence at the time the contract is
made; and the damages ordinarily recoverable are in all events limited to such as might be
reasonably foreseen in the light of the facts then known to the contracting parties."

This brings us to consider the amount which may be awarded to the plaintiff as damages. Upon
this point the trial judge found that, as a result of the physical and nervous derangement
resulting from the accident, Dr. De Guia was unable properly to attend to his professional labors
for three months and suspended his practice for that period. It was also proved by the testimony
of the plaintiff that his customary income, as a physician, was about P300 per month. The trial
judge accordingly allowed P900, as damages for loss of professional earnings. This allowance
is attacked upon appeal by the defendant as excessive both as to the period and rate of
allowance. Upon examining the evidence we fell disinclined to disturb this part of the judgment,
though it must be conceded that the estimate of the trial judge on this point was liberal enough
to the plaintiff.

Another item allowed by the trial judge consists of P3,900, which the plaintiff is supposed to
have lost by reason of his inability to accept a position as district health officer in Occidental
Negros. It appears in this connection that Mr. Alunan, representative from Occidental Negros,
had asked Dr. Montinola, who supposedly had the authority to make the appointment, to
nominate the plaintiff to such position. The job was supposed to be good for two years, with a
salary of P1,600 per annum, and possibility of outside practice worth P350. Accepting these
suggestions as true, it is evident that the damages thus incurred are too speculative to be the
basis of recovery in a civil action. This element of damages must therefore be eliminated. It
goes without saying that damage of this character could not, at the time of the accident, have
been foreseen by the delinquent party as a probable consequence of the injury inflicted — a
circumstance which makes applicable article 1107 of the Civil Code, as already expounded.

The last element of damages to be considered is the item of the plaintiff's doctor's bills, a
subject which we momentarily pass for discussion further on, since the controversy on this point
can be more readily understood in connection with the question raised by the plaintiff's appeal.
The plaintiff alleges in the complaint that the damages incurred by him as a result of the injuries
in question ascend to the amount of P40,000. Of this amount the sum of P10,000 is supposed
to represent the cost of medical treatment and other expenses incident to the plaintiff's cure,
while the remainder (P30,000) represents the damage resulting from the character of his
injuries, which are supposedly such as to incapacitate him for the exercise of the medical
profession in the future. In support of these claims the plaintiff introduced evidence, consisting
of his own testimony and that of numerous medical experts, tending to show that as a result of
the injuries in question he had developed infarct of the liver and traumatic neurosis,
accompanied by nervousness, vertigo, and other disturbing symptoms of a serious and
permanent character, it being claimed that these manifestations of disorder rendered him liable
to a host of other dangerous diseases, such as pleuresy, tuberculosis, pneumonia, and
pulmonary gangrene, and that restoration to health could only be accomplished, if at all, after
long years of complete repose. The trial judge did not take these pretensions very seriously,
and, as already stated, limited the damages to the three items of professional earnings,
expenses of medical treatment, and the loss of the appointment as medical treatment, and the
loss of the appointment as medical inspector in Occidental Negros. As the appeal of the plaintiff
opens the whole case upon the question of damages, it is desirable to present a somewhat
fuller statement than that already given with respect to extent and character of the injuries in
question.

The plaintiff testified that, at the time the car struck against the concrete post, he was standing
on the rear platform, grasping the handle of the right-hand door. The shock of the impact threw
him forward, and the left part of his chest struck against the door causing him to fall. In falling,
the plaintiff says, his head struck one of the seats and he became unconscious. He was
presently taken to his home which was only a short distance away, where he was seen at about
10 o'clock p. m., by a physician in the employment of the defendant company. This physician
says that the plaintiff was then walking about and apparently suffering somewhat from bruises
on his chest. He said nothing about his head being injured and refused to go to a hospital. Later,
during the same night Dr. Carmelo Basa was called in to see the plaintiff. This physician says
that he found Doctor De Guia lying in bed and complaining of a severe pain in the side. During
the visit of Doctor Basa the plaintiff several times spit up blood, a manifestation no doubt due to
the effects of the bruises received in his side. The next day Doctor De Guia went into Manila to
consult another physician, Doctor Miciano, and during the course of a few weeks he called into
consultation other doctors who were introduced as witnesses in his behalf at the trial of this
case. According to the testimony of these witnesses, as well as that of the plaintiff himself, the
symptoms of physical and nervous derangement in the plaintiff speedily developed in
portentous degree.

Other experts were introduced by the defendant whose testimony tended to show that the
plaintiff's injuries, considered in their physical effects, were trivial and that the attendant nervous
derangement, with its complicated train of ailments, was merely simulated.

Upon this question the opposing medical experts ventilated a considerable mass of professional
learning with reference to the nature and effects of the baffling disease known as traumatic
neurosis, or traumatic hysteria — a topic which has been the occasion of much controversy in
actions of this character in the tribunals of Europe and America. The subject is one of
considerable interest from a medico-legal point of view, but we deem it unnecessary in this
opinion to enter upon a discussion of its voluminous literature. It is enough to say that in our
opinion the plaintiff's case for large damages in respect to his supposed incapacitation for future
professional practice is not made out. Of course in this jurisdiction damages can not be
assessed in favor of the plaintiff as compensation for the physical or mental pain which he may
have endured (Marcelo vs. Velasco, 11 Phil. Rep. 287); and the evidence relating to the injuries,
both external and internal, received by him must be examined chiefly in its bearing upon his
material welfare, that is, in its results upon his earning capacity and the expenses incurred in
restoration to the usual condition of health.

The evidence before us shows that immediately after the accident in question Doctor De Guia,
sensing in the situation a possibility of profit, devoted himself with great assiduity to the
promotion of this litigation; and with the aid of his own professional knowledge, supplemented
by suggestions obtained from his professional friends and associates, he enveloped himself
more or less unconsciously in an atmosphere of delusion which rendered him incapable of
appreciating at their true value the symptoms of disorder which he developed. The trial court
was in our opinion fully justified in rejecting the exaggerated estimate of damages thus created.

We now pass to the consideration of the amount allowed to the plaintiff by the trial judge as the
expense incurred for medical service. In this connection Doctor Montes testified that he was first
called to see the plaintiff upon September 14, 1915, when he found him suffering from traumatic
neurosis. Three months later he was called upon to treat the same patient for an acute catarrhal
condition, involving disturbance in the pulmonary region. The treatment for this malady was
successful after two months, but at the end of six months the same trouble recurred and
required further treatment. In October of the year 1916, or more than a year after the accident in
question occurred, Doctor Montes was called in consultation with Doctor Guerrero to make an
examination of the plaintiff. Doctor Montes says that his charges altogether for services
rendered to the plaintiff amount to P350, of which the sum of P200 had been paid by the plaintiff
upon bills rendered from time to time. This physician speaks in the most general terms with
respect to the times and extent of the services rendered; and it is by no means clear that those
services which were rendered many months, or year, after the accident had in fact any
necessary or legitimate relation to the injuries received by the plaintiff. In view of the vagueness
and uncertainty of the testimony relating to Doctor Montes' services, we are of the opinion that
the sum of P200, or the amount actually paid to him by the plaintiff, represents the extent of the
plaintiff's obligation with respect to treatment for said injuries.

With regard to the obligation supposedly incurred by the plaintiff to three other physicians, we
are of the opinion that they are not a proper subject of recovery in this action; and this for more
than one reason. In the first place, it does not appear that said physicians have in fact made
charges for those services with the intention of imposing obligations on the plaintiff to pay for
them. On the contrary it would seem that said services were gratuitously rendered out of
courtesy to the plaintiff as a member of the medical profession. The suggestions made on the
stand by these physicians to the effect that their services were worth the amounts stated by
them are not sufficient to proved that the plaintiff had incurred the obligation to pay those
amounts. In the second place, we are convinced that in employing so many physicians the
plaintiff must have had in view of the successful promotion of the issue of this lawsuit rather
than the bona fide purpose of effecting the cure of his injuries. In order to constitute a proper
element of recovery in an action of this character, the medical service for which reimbursement
is claimed should not only be such as to have created a legal obligation upon the plaintiff but
such as was reasonably necessary in view of his actual condition. It can not be permitted that a
litigant should retain an unusual and unnecessary number of professional experts with a view to
the successful promotion of a lawsuit and expect to recover against his adversary the entire
expense thus incurred. His claim for medical services must be limited to such expenditures as
were reasonably suited to the case.

The second error assigned in the brief of the defendant company presents a question of
practice which, though not vital to the solution of this case, is of sufficient general importance to
merit notice. It appears that four of the physicians examined as witnesses for the plaintiff had
made written statements at various dates certifying the results of their respective examinations
into the condition of the plaintiff. When these witnesses were examined in court the identified
their respective signatures to these certificates and the trial judge, over the defendant's
objection, admitted the documents as primary evidence in the case. This was undoubtedly
erroneous. A document of this character is not primary evidence in any sense, since it is
fundamentally of a hearsay nature; and the only legitimate use to which one of these certificates
could be put, as evidence for the plaintiff, was to allow the physician who issued it to refer
thereto to refresh his memory upon details which he might have forgotten. In Zwangizer vs.
Newman (83 N. Y. Supp., 1071) which was also an action to recover damages for personal
injury, it appeared that a physician, who had been sent by one of the parties to examine the
plaintiff, had made at the time a written memorandum of the results of the examination; and it
was proposed to introduce this document in evidence at the trial. It was excluded by the trial
judge, and it was held upon appeal that this was proper. Said the court: "There was no failure or
exhaustion of the memory, and no impeachment of the memorandum on cross-examination;
and the document was clearly incompetent as evidence in chief."

It results from the foregoing that the judgment appealed from must be modified by reducing the
amount of the recovery to eleven hundred pesos (1,100), with legal interest from November 8,
1916. As thus modified the judgment is affirmed, without any special pronouncement as to costs
of this instance. So ordered.

EN BANC

G.R. No. L-7567 November 12, 1912

THE UNITED STATES, Plaintiff-Appellee, vs. SEGUNDO BARIAS, Defendant-Appellant.

Bruce, Lawrence, Ross and Block for appellant.
Office of the Solicitor-General Harvey, for appellee.

CARSON, J.:

This is an appeal from a sentence imposed by the Honorable A. S. Crossfield, judge of the
Court of First Instance of Manila, for homicide resulting from reckless negligence. The
information charges:

That on or about November 2, 1911, in the city of Manila, Philippine Islands, the said Segundo
Barias was a motorman on street car No. 9, run 7 of the Pasay-Cervantes lines of the Manila
Electric Railroad and Light Company, a corporation duly organized and doing business in the
city of Manila, Philippine Islands; as a such motorman he was controlling and operating said
street car along Rizal Avenue, formerly Calle Cervantes, of this city, and as such motorman of
the said street car he was under obligation to run the same with due care and diligence to avoid
any accident that might occur to vehicles and pedestrians who were travelling on said Rizal
Avenue; said accused, at said time and place, did willfully, with reckless imprudence and
inexcusable negligence and in violation of the regulations promulgated to that effect, control and
operate said street car, without heeding the pedestrians crossing Rizal Avenue from one side to
the other, thus knocking down and causing by his carelessness and imprudent negligence that
said street car No. 9, operated and controlled by said accused, as hereinbefore stated, should
knock down and pass over the body and head of one Fermina Jose, a girl 2 years old, who at
said time and place was crossing the said Rizal Avenue, the body of said girl being dragged
along street-car on said Rizal Avenue for a long distance, thus crushing and destroying her
head and causing her sudden death as a result of the injury received; that if the acts executed
by the accused had been done with malice, he would be guilty of the serious crime of homicide.

The defendant was a motorman for the Manila Electric Railroad and Light Company. At about 6
o'clock on the morning of November 2, 1911, he was driving his car along Rizal avenue and
stopped it near the intersection of that street with Calle Requesen to take on some passengers.
When the car stopped, the defendant looked backward, presumably to note whether all the
passengers were aboard, and then started his car. At that moment Fermina Jose, a child about
3 years old, walked or ran in front of he car. She was knocked down and dragged some little
distance underneath the car, and was left dead upon the track. The motorman proceeded with
his car to the end of the track, some distance from the place of the accident, and apparently
knew nothing of it until his return, when he was informed of what
happened.chanroblesvirtualawlibrary chanrobles virtual law library

There is no substantial dispute as to the facts. It is true that one witness testified that the
defendant started the car without turning his head, and while he was still looking backwards and
that this testimony was directly contradicted by that of another witness. But we do not deem it
necessary to make an express finding as to the precise direction in which the defendant's head
was turned at the moment when he started his car. It is sufficient for the purpose of our decision
to hold, as we do, that the evidence clearly discloses that he started his car from a standstill
without looking over the track immediately in front of the car to satisfy himself that it was clear.
he did not see the child until after he had run his car over it, and after he had return to the place
where it was found dead, and we think we are justified in saying that whenever he was looking
at the moment when he started his car, he was not looking at the track immediately in front of
the car, and that he had not satisfied himself that this portion of the tract was clear immediately
before putting the car in the motion.chanroblesvirtualawlibrary chanrobles virtual law library

The trial court found the defendant guilty of imprudencia temeraria (reckless negligence) as
charged in the information, and sentenced him to over one year and one month of imprisonment
in the Bilibid Prison, and to pay the cause of the action.chanroblesvirtualawlibrary chanrobles
virtual law library

The sole question raised by this appeal is whether the evidence shows such carelessness or
want of ordinary care on the part of the defendant as to amount to reckless negligence
( imprudencia temeraria).chanroblesvirtualawlibrary chanrobles virtual law library

Judge Cooley in his work on Torts (3d ed., 1324) defines negligence to be: "The failure to
observe, for the protection of the interests of another person, that degree of care, precaution
and vigilance which the circumstances justly demand, whereby such other persons suffers
injury."chanrobles virtual law library

In the case of U. S. vs. Nava, (1 Phil. Rep., 580), we held that: "Reckless negligence consists of
the failure to take such precautions or advance measures in the performance of an act as the
most prudence would suggest whereby injury is caused to persons or to property."chanrobles
virtual law library

Silvela says in his " Derecho Penal," in speaking of reckless imprudence ( imprudencia
temeraria):

The word " negligencia" used in the code, and the term "imprudencia" with which this
punishable act is defined, express this idea in such a clear manner that it is not necessary to
enlarge upon it. He who has done everything on his part to prevent his actions from causing
damage to another, although he has not succeeded in doing so, notwithstanding his efforts, is
the victim of an accident and can not be considered responsible for the same. (Vol. 2, p. 127
[153].)chanrobles virtual law library

Temerario is, in our opinion, one who omits, with regard to this actions, which are liable to cause
injury to another, that care and diligence, that attention, which can be required of the least
careful, attentive, or diligent. If a moment's attention and reflection would have shown a person
that the act which he was about to perform was liable to have the harmful consequence which it
had, such person acted with temerity and may be guilty of " imprudencia temeraria." It may be
that in practice this idea has been given a greater scope and the acts of imprudence which did
not show carelessness as carried to such high degree, might have been punished as
"imprudencia temeraria;" but in our opinion, the proper meaning of the word does not authorize
another interpretation. ( Id., p. 133 [161].)

Groizard, commenting upon " imprudencia temeraria," on page 389, volume 8, of his work on
the Penal Code, says:

Prudence is that cardinal virtue which teaches us to discern and distinguish the good from bad,
in order to adopt or flee from it. It also means good judgment, temperance, and moderation in
one's actions. `Temerario is one who exposes himself to danger or rushes into it without
reflection and without examining the same. Consequently, he who from lack of good judgment,
temperance, or moderation in his actions, exposes himself without reflection and examination to
the danger of committing a crime, must be held responsible under the provision of law
aforementioned.

Negligence is want of the care required by the circumstances. It is a relative or comparative, not
an absolute, term and its application depends upon the situation of the parties and the degree of
care and vigilance which the circumstances reasonably require. Where the danger is great, a
high degree of care is necessary, and the failure to observe it is a want of ordinary care under
the circumstances. (Ahern vs. Oregon Telephone Co., 24 Oreg., 276, 294; 35 Pac.,
549.)chanrobles virtual law library

Ordinary care, if the danger is great, may arise to the grade of a very exact and unchangeable
attention. (Parry Mfg. Co. vs. Eaton, 41 Ind. App., 81, 1908; 83 N. E., 510.)chanrobles virtual
law library

In the case of U. S. vs. Reyes (1 Phil. Rep., 375-377), we held that: "The diligence with which
the law requires the individual at all the time to govern his conduct varies with the nature of the
situation in which he is placed and with the importance of the act which he is to
perform.chanroblesvirtualawlibrary chanrobles virtual law library

The question to be determined then, is whether, under all the circumstances, and having in
mind the situation of the defendant when he put his car in motion and ran it over the child, he
was guilty of a failure to take such precautions or advance measures as common prudence
would suggest.chanroblesvirtualawlibrary chanrobles virtual law library

The evidence shows that the thoroughfare on which the incident occurred was a public street in
a densely populated section of the city. The hour was six in the morning, or about the time when
the residents of such streets begin to move about. Under such conditions a motorman of an
electric street car was clearly charged with a high degree of diligence in the performance of his
duties. He was bound to know and to recognize that any negligence on his part in observing the
track over which he was running his car might result in fatal accidents. He had no right to
assume that the track before his car was clear. It was his duty to satisfy himself of that fact by
keeping a sharp lookout, and to do everything in his power to avoid the danger which is
necessarily incident to the operation of heavy street cars on public thoroughfares in populous
sections of the city.chanroblesvirtualawlibrary chanrobles virtual law library

Did he exercise the degree of diligence required of him? We think this question must be
answered in the negative. We do not go so far as to say that having brought his car to a
standstill it was his bounden duty to keep his eyes directed to the front. Indeed, in the absence
of some regulation of his employers, we can well understand that, at times, it might be highly
proper and prudent for him to glance back before again setting his car in motion, to satisfy
himself that he understood correctly a signal to go forward or that all the passengers had safely
alighted or gotten on board. But we do insist that before setting his car again in motion, it was
his duty to satisfy himself that the track was clear, and, for that purpose, to look and to see the
track just in front of his car. This the defendant did not do, and the result of his negligence was
the death of the child.chanroblesvirtualawlibrary chanrobles virtual law library

In the case of Smith vs. St. Paul City Ry. Co., (32 Minn., p. 1), the supreme court of Minnesota,
in discussing the diligence required of street railway companies in the conduct of their business
observed that: "The defendant was a carrier of passengers for hire, owing and controlling the
tracks and cars operated thereon. It is therefore subject to the rules applicable to passenger
carriers. (Thompson's Carriers, 442; Barrett vs. Third Ave. R. Co., 1 Sweeny, 568; 8 Abb. Pr.
(N.S.), 205.) As respects hazards and dangers incident to the business or employment, the law
enjoins upon such carrier the highest degree of care consistent with its undertaking, and it is
responsible for the slightest negligence. (Wilson vs. Northern Pacific R. Co., 26 Minn., 278;
Warren vs. Fitchburg R. Co., 8 Allen, 233; 43 Am. Dec. 354, 356, notes and cases.) . . . The
severe ruled which enjoins upon the carrier such extraordinary care and diligence, is intended,
for reasons of public policy, to secure the safe carriage of passengers, in so far as human skill
and foresight can affect such result." The case just cited was a civil case, and the doctrine
therein announced had special reference to the care which should be exercised in securing the
safety of passengers. But we hold that the reasons of public policy which impose upon street
car companies and their employees the duty of exercising the utmost degree of diligence in
securing the safety of passengers, apply with equal force to the duty of avoiding the infliction of
injuries upon pedestrians and others on the public streets and thoroughfares over which these
companies are authorized to run their cars. And while, in a criminal case, the courts will require
proof of the guilt of the company or its employees beyond a reasonable doubt, nevertheless the
care or diligence required of the company and its employees is the same in both cases, and the
only question to be determined is whether the proofs shows beyond a reasonable doubt that the
failure to exercise such care or diligence was the cause of the accident, and that the defendant
was guilty thereof.chanroblesvirtualawlibrary chanrobles virtual law library

Counsel for the defendant insist that the accident might have happened despite the exercise of
the utmost care by the defendant, and they have introduced photographs into the record for the
purpose of proving that while the motorman was standing in his proper place on the front
platform of the car, a child might have walked up immediately in front of he car without coming
within the line of his vision. Examining the photographs, we think that this contention may have
some foundation in fact; but only to this extent, that standing erect, at the position he would
ordinarily assume while the car is in motion, the eye of the average motorman might just miss
seeing the top of the head of a child, about three years old, standing or walking close up to the
front of the car. But it is also very evident that by inclining the head and shoulders forward very
slightly, and glancing in front of the car, a person in the position of a motorman could not fail to
see a child on the track immediately in front of his car; and we hold that it is the manifest duty of
a motorman, who is about to start his car on a public thoroughfare in a thickly-settled district, to
satisfy himself that the track is clear immediately in front of his car, and to incline his body
slightly forward, if that be necessary, in order to bring the whole track within his line of vision. Of
course, this may not be, and usually is not necessary when the car is in motion, but we think
that it is required by the dictates of the most ordinary prudence in starting from a
standstill.chanroblesvirtualawlibrary chanrobles virtual law library

We are not unmindful of our remarks in the case of U. S. vs. Bacho (10 Phil. Rep., 577), to
which our attention is directed by counsel for appellant. In that case we said that:

. . . In the general experience of mankind, accidents apparently avoidable and often inexplicable
are unfortunately too frequent to permit us to conclude that some one must be criminally liable
for negligence in every case where an accident occurs. It is the duty of the prosecution in each
case to prove by competent evidence not only the existence of criminal negligence, but that the
accused was guilty thereof.

Nor do we overlook the ruling in the case of U. S. vs. Barnes (12 Phil. Rep., 93), to which our
attention is also invited, wherein we held that the defendant was not guilty of reckless
negligence, where it appeared that he killed another by the discharge of his gun under such
circumstances that he might have been held guilty of criminally reckless negligence had he had
knowledge at that moment that another person was in such position as to be in danger if the
gun should be discharged. In this latter case the defendant had no reason to anticipate that the
person who was injured was in the line of fire, or that there was any probability that he or
anyone else would place himself in the line of fire. In the case at bar, however, it was, as we
have seen, the manifest duty of the motorman to take reasonable precautions in starting his car
to see that in doing so he was not endangering the life of any pedestrian, old or young; and to
this end it was further his duty to guard against the reasonable possibility that some one might
be on the track immediately in front of the car. We think that the evidence showing, as it does,
that the child was killed at the moment when the car was set in motion, we are justified in
holding that, had the motorman seen the child, he could have avoided the accident; the accident
was not, therefore, "unavailable or inexplicable," and it appearing that the motorman, by the
exercise of ordinary diligence, might have seen the child before he set the car in motion, his
failure to satisfy himself that the track was clear before doing so was reckless negligence, of
which he was properly convicted in the court below.chanroblesvirtualawlibrary chanrobles virtual
law library
We think, however, that the penalty should be reduced to that of six months and one day of
prision correccional. Modified by substituting for so much thereof as imposes the penalty of one
year and one month of imprisonment, the penalty of six months and one day of prision
correccional, the judgment of the lower court convicting and sentencing the appellant is
affirmed, with costs of both instances against him. So ordered

THIRD DIVISION

G.R. No. 141258 April 9, 2003

TOMASA SARMIENTO, petitioner,

vs.
SPS. LUIS & ROSE SUN-CABRIDO and MARIA LOURDES SUN, respondents.

CORONA, J.:

This appeal by certiorari stems from the Decision1 of respondent Court of Appeals promulgated
on November 26, 1999 in CA-G.R. SP No. 47431 declaring the private respondents not liable
for damages.

Petitioner, Tomasa Sarmiento, states that sometime in April 1994, a friend, Dra. Virginia Lao,
requested her to find somebody to reset a pair of diamond earrings into two gold rings.2
Accordingly, petitioner sent a certain Tita Payag with the pair of earrings to Dingding’s Jewelry
Shop, owned and managed by respondent spouses Luis and Rose Cabrido,3 which accepted
the job order for P400.4

Petitioner provided 12 grams of gold to be used in crafting the pair of ring settings.5 After 3
days, Tita Payag delivered to the jewelry shop one of Dra. Lao’s diamond earrings which was
earlier appraised as worth .33 carat and almost perfect in cut and clarity.6 Respondent Ma.
Lourdes (Marilou) Sun went on to dismount the diamond from its original setting. Unsuccessful,
she asked their goldsmith, Zenon Santos, to do it. Santos removed the diamond by twisting the
setting with a pair of pliers, breaking the gem in the process.7

Petitioner required the respondents to replace the diamond with the same size and quality.
When they refused, the petitioner was forced to buy a replacement in the amount of P30,000.8

Respondent Rose Cabrido, manager of Dingding’s Jewelry Shop, denied having entered into
any transaction with Tita Payag whom she met only after the latter came to the jewelry shop to
seek compensation from Santos for the broken piece of jewelry.9 However, it was possible that
Payag may have availed of their services as she could not have known every customer who
came to their shop. Rose disclosed that she usually arrived at 11:00 a.m. When she was not
around, her mother and sister tended the shop.10
Marilou admitted knowing Payag who came to Dingding’s Jewelry Shop to avail of their services
regarding a certain piece of jewelry. After a short conversation, Payag went inside the shop to
see Santos. When the precious stone was broken by Santos, Payag demanded P15,000 from
him. As the latter had no money, she turned to Marilou for reimbursement apparently thinking
that Marilou was the owner of the shop.11

For his part, Santos recalled that Payag requested him to dismount what appeared to him was a
sapphire. While clipping the setting with the use of a small pair of pliers, the stone accidentally
broke. Santos denied being an employee of Dingding’s Jewelry Shop.12

Attempts to settle the controversy before the barangay lupon proved futile.13 Consequently,
petitioner filed a complaint for damages on June 28, 1994 with the Municipal Trial Court in Cities
(MTCC) of Tagbilaran City docketed as Civil Case No. 2339 which rendered a decision14 in
favor of the petitioner, the dispositive portion of which reads:

WHEREFORE, Decision is hereby rendered in favor of plaintiff Tomasa Sarmiento and against
defendants Spouses Luis and Rose Sun-Cabrido, ordering defendants to pay jointly and
severally the amount of Thirty Thousand Pesos (P30,000.00) as actual or compensatory
damages; Three Thousand Pesos (P3,000.00) as moral damages; Five Thousand Pesos
(P5,000.00) as attorney’s fees; Two Thousand Pesos (P2,000.00) as litigation expenses, with
legal interest of 6% per annum from the date of this decision and 12% per annum from the date
when this decision becomes final until the amounts shall have been fully paid and to pay the
costs.

This case as against defendant Maria Lourdes Sun as well as defendants’ counterclaim are
dismissed for lack of merit.

SO ORDERED.

On appeal, the Regional Trial Court (RTC) of Tagbilaran City, Branch 3, reversed the decision
of the MTCC, thus absolving the respondents of any responsibility arising from breach of
contract.15 Finding no reversible error, the Court of Appeals (CA) affirmed the judgment of the
RTC in its Decision promulgated on November 26, 1999.16

Unable to accept the decision, the petitioner filed the instant petition for review with the following
assigned errors:

THE COURT OF APPEALS ERRED IN MAINTAINING AND SO HOLDING THAT ZENON

SANTOS IS NOT AN EMPLOYEE OF DEFENDANT (herein respondent) ROSE SUN-
CABRIDO, AND IS THEREFORE ANSWERABLE FOR HIS OWN ACTS OR OMISSIONS
II

THE HONORABLE COURT OF APPEALS ERRED IN SUSTAINING THE REGIONAL TRIAL

COURT’S PRONOUNCEMENTS THAT THERE EXISTS NO AGREEMENT BETWEEN THE
PETITIONER AND RESPONDENTS THAT THE LATTER WOULD ANSWER FOR ANY
LIABILITY SHOULD THE DIAMOND BE DAMAGED IN THE PROCESS OF DISMOUNTING
THEM FROM THE EARRINGS.

Essentially, petitioner claims that the dismounting of the diamond from its original setting was
part of the obligation assumed by the private respondents under the contract of service. Thus,
they should be held liable for damages arising from its breakage. On the other hand, the version
of the private respondents, upheld by the RTC and the CA, is that their agreement with the
petitioner was for crafting two gold rings mounted with diamonds only and did not include the
dismounting of the said diamonds from their original setting.17 Consequently, the crux of the
instant controversy is the scope of the obligation assumed by the private respondents under the
verbal contract of service with the petitioner.

The Court notes that, during the trial, private respondents vigorously denied any transaction
between Dingdings’ Jewelry Shop and the petitioner, through Tita Payag. Rose Cabrido, for
instance, denied having ever met Payag before the latter came to seek reimbursement for the
value of the broken diamond. Likewise, while Marilou acknowledged acquaintance with Payag,
she nevertheless denied accepting any job order from her. Debunking their protestations,
however, the MTCC of Tagbilaran City rendered its decision on November 26, 1999 in favor of
herein petitioner.

Apparently realizing the weakness and futility of their position, private respondents conceded,
on appeal, the existence of an agreement with the petitioner for crafting a pair of gold rings
mounted with diamonds. This apparent concession by the private respondents, however, was
really nothing but an ingenious maneuver, designed to preclude, just the same, any recovery for
damages by the petitioner. Thus, while ostensibly admitting the existence of the said
agreement, private respondents, nonetheless denied assuming any obligation to dismount the
diamonds from their original settings.18

The inconsistent position of the private respondents impugns their credibility. They cannot be
permitted to adopt a certain stance, only to vacillate later to suit their interest. We are therefore
inclined to agree with the MTCC in giving credence to the version of the petitioner. The MTCC
had the unique opportunity to actually observe the behavior and demeanor of the witnesses as
they testified during the trial.19

At any rate, the contemporaneous and subsequent acts of the parties20 support the version of
the petitioner. Thus, when Tita Payag asked Marilou of Dingding’s Jewelry Shop to reset a pair
of diamond earrings, she brought with her the said pieces of jewelry so that the diamonds which
were still mounted could be measured and the new ring settings crafted accordingly. On the
said occasion, Marilou expressed no reservation regarding the dismounting of the diamonds
which, after all, was an integral part of petitioner’s job order. She should have instructed Payag
to have them dismounted first if Marilou had actually intended to spare the jewelry shop of the
task but she did not. Instead, petitioner was charged P400 for the job order which was readily
accepted. Thus, a perfected contract to reset the pair of diamond earrings arose between the
petitioner, through Payag, and Dingding’s Jewelry Shop, through Marilou.

Marilou’s subsequent actuations were even more revealing as regards the scope of obligation
assumed by the jewelry shop. After the new settings were completed in 3 days, she called up
the petitioner to bring the diamond earrings to be reset.21 Having initially examined one of
them, Marilou went on to dismount the diamond from its original setting. Unsuccessful, she then
delegated the task to their goldsmith, Zenon Santos. Having acted the way she did, Marilou
cannot now deny the shop’s obligation to reset the pair of earrings.

Obligations arising from contracts have the force of law between the contracting parties.22
Corollarily, those who in the performance of their obligations are guilty of fraud, negligence or
delay and those who in any manner contravene the tenor thereof, are liable for damages.23 The
fault or negligence of the obligor consists in the omission of that diligence which is required by
the nature of the obligation and corresponds with the circumstances of the persons, of the time
and of the place.24

In the case at bar, it is beyond doubt that Santos acted negligently in dismounting the diamond
from its original setting. It appears to be the practice of the trade to use a miniature wire saw in
dismounting precious gems, such as diamonds, from their original settings.25 However, Santos
employed a pair of pliers in clipping the original setting, thus resulting in breakage of the
diamond. The jewelry shop failed to perform its obligation with the ordinary diligence required by
the circumstances. It should be pointed out that Marilou examined the diamond before
dismounting it from the original setting and found the same to be in order. Its subsequent
breakage in the hands of Santos could only have been caused by his negligence in using the
wrong equipment. Res ipsa loquitur.

Private respondents seek to avoid liability by passing the buck to Santos who claimed to be an
independent worker. They also claim, rather lamely, that Marilou simply happened to drop by at
Dingding’s Jewelry Shop when Payag arrived to place her job order.26

We do not think so.

The facts show that Santos had been working at Dingding’s Jewelry Shop as goldsmith for
about 6 months accepting job orders through referrals from private respondents.27 On the other
hand, Payag stated that she had transacted with Dingding’s Jewelry Shop on at least 10
previews occasions, always through Marilou.28 The preponderance of evidence supports the
view that Marilou and Zenon Santos were employed at Dingding’s Jewelry Shop in order to
perform activities which were usually necessary or desirable in its business.29
We therefore hold that an obligation to pay actual damages arose in favor of the petitioner
against the respondents spouses who admittedly owned and managed Dingding’s Jewelry
Shop. It was proven that petitioner replaced the damaged jewelry in the amount of P30,000.30

The facts of the case also justify the award of moral damages. As a general rule, moral
damages are not recoverable in actions for damages predicated on a breach of contract for it is
not one of the items enumerated under Article 2219 of the Civil Code.31 Moral damages may be
awarded in a breach of contract only when there is proof that defendant acted in bad faith, or
was guilty of gross negligence amounting to bad faith, or in wanton disregard of his contractual
obligation.32 Santos was a goldsmith for more than 40 years.33 Given his long experience in
the trade, he should have known that using a pair of pliers instead of a miniature wire saw in
dismounting a precious stone like a diamond would have entailed an unnecessary risk of
breakage. He went on with it anyway. Hence, respondent spouses are liable for P10,000 as
moral damages due to the gross negligence of their employee.

However, private respondent’s refusal to pay the value of the damaged jewelry emanated from
an honest belief that they were not responsible therefor, hence, negating any basis for the
award of attorney’s fees.34

WHEREFORE, the instant petition is GRANTED and the assailed decision of the Court of
Appeals dated November 26, 1999 is hereby reversed and set aside. Private respondents Luis
Cabrido and Rose Sun-Cabrido are hereby ordered to pay, jointly and severally, the amount of
P30,000 as actual damages and P10,000 as moral damages in favor of the petitioner.

No costs.

SO ORDERED

FIRST DIVISION

G.R. No. 138334. August 25, 2003

ESTELA L. CRISOSTOMO, petitioner, vs. the Court of Appeals and CARAVAN TRAVEL &
TOURS INTERNATIONAL, INC., respondents.

DECISION

YNARES-SANTIAGO, J.:

In May 1991, petitioner Estela L. Crisostomo contracted the services of respondent Caravan
Travel and Tours International, Inc. to arrange and facilitate her booking, ticketing and
accommodation in a tour dubbed Jewels of Europe. The package tour included the countries of
England, Holland, Germany, Austria, Liechstenstein, Switzerland and France at a total cost of
P74,322.70. Petitioner was given a 5% discount on the amount, which included airfare, and the
booking fee was also waived because petitioners niece, Meriam Menor, was respondent
companys ticketing manager.

Pursuant to said contract, Menor went to her aunts residence on June 12, 1991 a Wednesday to
deliver petitioners travel documents and plane tickets. Petitioner, in turn, gave Menor the full
payment for the package tour. Menor then told her to be at the Ninoy Aquino International
Airport (NAIA) on Saturday,two hours before her flight on board British Airways.

Without checking her travel documents, petitioner went to NAIA on Saturday, June 15, 1991, to
take the flight for the first leg of her journey from Manila to Hongkong. To petitioners dismay,
she discovered that the flight she was supposed to take had already departed the previous day.
She learned that her plane ticket was for the flight scheduled on June 14, 1991. She thus called
up Menor to complain.

Subsequently, Menor prevailed upon petitioner to take another tour the British Pageant which
included England, Scotland and Wales in its itinerary. For this tour package, petitioner was
asked anew to pay US$785.00 or P20,881.00 (at the then prevailing exchange rate of P26.60).
She gave respondent US$300 or P7,980.00 as partial payment and commenced the trip in July
1991.

Upon petitioners return from Europe, she demanded from respondent the reimbursement of
P61,421.70, representing the difference between the sum she paid for Jewels of Europe and the
amount she owed respondent for the British Pageant tour. Despite several demands,
respondent company refused to reimburse the amount, contending that the same was non-
refundable.1 Petitioner was thus constrained to file a complaint against respondent for breach of
contract of carriage and damages, which was docketed as Civil Case No. 92-133 and raffled to
Branch 59 of the Regional Trial Court of Makati City.

In her complaint,2 petitioner alleged that her failure to join Jewels of Europe was due to
respondents fault since it did not clearly indicate the departure date on the plane ticket.
Respondent was also negligent in informing her of the wrong flight schedule through its
employee Menor. She insisted that the British Pageant was merely a substitute for the Jewels of
Europe tour, such that the cost of the former should be properly set-off against the sum paid for
the latter.

For its part, respondent company, through its Operations Manager, Concepcion Chipeco,
denied responsibility for petitioners failure to join the first tour. Chipeco insisted that petitioner
was informed of the correct departure date, which was clearly and legibly printed on the plane
ticket. The travel documents were given to petitioner two days ahead of the scheduled trip.
Petitioner had only herself to blame for missing the flight, as she did not bother to read or
confirm her flight schedule as printed on the ticket.

Respondent explained that it can no longer reimburse the amount paid for Jewels of Europe,
considering that the same had already been remitted to its principal in Singapore, Lotus Travel
Ltd., which had already billed the same even if petitioner did not join the tour. Lotus European
tour organizer, Insight International Tours Ltd., determines the cost of a package tour based on
a minimum number of projected participants. For this reason, it is accepted industry practice to
disallow refund for individuals who failed to take a booked tour.3cräläwvirtualibräry

Lastly, respondent maintained that the British Pageant was not a substitute for the package tour
that petitioner missed. This tour was independently procured by petitioner after realizing that
she made a mistake in missing her flight for Jewels of Europe. Petitioner was allowed to make a
partial payment of only US$300.00 for the second tour because her niece was then an
employee of the travel agency. Consequently, respondent prayed that petitioner be ordered to
pay the balance of P12,901.00 for the British Pageant package tour.

After due proceedings, the trial court rendered a decision,4 the dispositive part of which reads:

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

1. Ordering the defendant to return and/or refund to the plaintiff the amount of Fifty Three
Thousand Nine Hundred Eighty Nine Pesos and Forty Three Centavos (P53,989.43) with legal
interest thereon at the rate of twelve percent (12%) per annum starting January 16, 1992, the
date when the complaint was filed;

2. Ordering the defendant to pay the plaintiff the amount of Five Thousand (P5,000.00) Pesos
as and for reasonable attorneys fees;

3. Dismissing the defendants counterclaim, for lack of merit; and

4. With costs against the defendant.

SO ORDERED.5cräläwvirtualibräry

The trial court held that respondent was negligent in erroneously advising petitioner of her
departure date through its employee, Menor, who was not presented as witness to rebut
petitioners testimony. However, petitioner should have verified the exact date and time of
departure by looking at her ticket and should have simply not relied on Menors verbal
representation. The trial court thus declared that petitioner was guilty of contributory negligence
and accordingly, deducted 10% from the amount being claimed as refund.

Respondent appealed to the Court of Appeals, which likewise found both parties to be at fault.
However, the appellate court held that petitioner is more negligent than respondent because as
a lawyer and well-traveled person, she should have known better than to simply rely on what
was told to her. This being so, she is not entitled to any form of damages. Petitioner also
forfeited her right to the Jewels of Europe tour and must therefore pay respondent the balance
of the price for the British Pageant tour. The dispositive portion of the judgment appealed from
reads as follows:

WHEREFORE, premises considered, the decision of the Regional Trial Court dated October 26,
1995 is hereby REVERSED and SET ASIDE. A new judgment is hereby ENTERED requiring
the plaintiff-appellee to pay to the defendant-appellant the amount of P12,901.00, representing
the balance of the price of the British Pageant Package Tour, the same to earn legal interest at
the rate of SIX PERCENT (6%) per annum, to be computed from the time the counterclaim was
filed until the finality of this decision. After this decision becomes final and executory, the rate of
TWELVE PERCENT (12%) interest per annum shall be additionally imposed on the total
obligation until payment thereof is satisfied. The award of attorneys fees is DELETED. Costs
against the plaintiff-appellee.

SO ORDERED.6cräläwvirtualibräry

Upon denial of her motion for reconsideration,7 petitioner filed the instant petition under Rule 45
on the following grounds:

It is respectfully submitted that the Honorable Court of Appeals committed a reversible error in
reversing and setting aside the decision of the trial court by ruling that the petitioner is not
entitled to a refund of the cost of unavailed Jewels of Europe tour she being equally, if not more,
negligent than the private respondent, for in the contract of carriage the common carrier is
obliged to observe utmost care and extra-ordinary diligence which is higher in degree than the
ordinary diligence required of the passenger. Thus, even if the petitioner and private respondent
were both negligent, the petitioner cannot be considered to be equally, or worse, more guilty
than the private respondent. At best, petitioners negligence is only contributory while the private
respondent [is guilty] of gross negligence making the principle of pari delicto inapplicable in the
case;

II

The Honorable Court of Appeals also erred in not ruling that the Jewels of Europe tour was not
indivisible and the amount paid therefor refundable;

III
The Honorable Court erred in not granting to the petitioner the consequential damages due her
as a result of breach of contract of carriage.8cräläwvirtualibräry

Petitioner contends that respondent did not observe the standard of care required of a common
carrier when it informed her wrongly of the flight schedule. She could not be deemed more
negligent than respondent since the latter is required by law to exercise extraordinary diligence
in the fulfillment of its obligation. If she were negligent at all, the same is merely contributory and
not the proximate cause of the damage she suffered. Her loss could only be attributed to
respondent as it was the direct consequence of its employees gross negligence.

Petitioners contention has no merit.

By definition, a contract of carriage or transportation is one whereby a certain person or

association of persons obligate themselves to transport persons, things, or news from one place
to another for a fixed price.9 Such person or association of persons are regarded as carriers
and are classified as private or special carriers and common or public carriers.10 A common
carrier is defined under Article 1732 of the Civil Code 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.

It is obvious from the above definition that respondent is not an entity engaged in the business
of transporting either passengers or goods and is therefore, neither a private nor a common
carrier. Respondent did not undertake to transport petitioner from one place to another since its
covenant with its customers is simply to make travel arrangements in their behalf. Respondents
services as a travel agency include procuring tickets and facilitating travel permits or visas as
well as booking customers for tours.

While petitioner concededly bought her plane ticket through the efforts of respondent company,
this does not mean that the latter ipso facto is a common carrier. At most, respondent acted
merely as an agent of the airline, with whom petitioner ultimately contracted for her carriage to
Europe. Respondents obligation to petitioner in this regard was simply to see to it that petitioner
was properly booked with the airline for the appointed date and time. Her transport to the place
of destination, meanwhile, pertained directly to the airline.

The object of petitioners contractual relation with respondent is the latters service of arranging
and facilitating petitioners booking, ticketing and accommodation in the package tour. In
contrast, the object of a contract of carriage is the transportation of passengers or goods. It is in
this sense that the contract between the parties in this case was an ordinary one for services
and not one of carriage. Petitioners submission is premised on a wrong assumption.

The nature of the contractual relation between petitioner and respondent is determinative of the
degree of care required in the performance of the latters obligation under the contract. For
reasons of public policy, a common carrier in a contract of carriage is bound by law to carry
passengers as far as human care and foresight can provide using the utmost diligence of very
cautious persons and with due regard for all the circumstances.11 As earlier stated, however,
respondent is not a common carrier but a travel agency. It is thus not bound under the law to
observe extraordinary diligence in the performance of its obligation, as petitioner claims.

Since the contract between the parties is an ordinary one for services, the standard of care
required of respondent is that of a good father of a family under Article 1173 of the Civil Code.12
This connotes reasonable care consistent with that which an ordinarily prudent person would
have observed when confronted with a similar situation. The test to determine whether
negligence attended the performance of an obligation is: did the defendant in doing the alleged
negligent act use that reasonable care and caution which an ordinarily prudent person would
have used in the same situation? If not, then he is guilty of negligence.13cräläwvirtualibräry

In the case at bar, the lower court found Menor negligent when she allegedly informed petitioner
of the wrong day of departure. Petitioners testimony was accepted as indubitable evidence of
Menors alleged negligent act since respondent did not call Menor to the witness stand to refute
the allegation. The lower court applied the presumption under Rule 131, Section 3 (e)14 of the
Rules of Court that evidence willfully suppressed would be adverse if produced and thus
considered petitioners uncontradicted testimony to be sufficient proof of her claim.

On the other hand, respondent has consistently denied that Menor was negligent and maintains
that petitioners assertion is belied by the evidence on record. The date and time of departure
was legibly written on the plane ticket and the travel papers were delivered two days in advance
precisely so that petitioner could prepare for the trip. It performed all its obligations to enable
petitioner to join the tour and exercised due diligence in its dealings with the latter.

We agree with respondent.

Respondents failure to present Menor as witness to rebut petitioners testimony could not give
rise to an inference unfavorable to the former. Menor was already working in France at the time
of the filing of the complaint,15 thereby making it physically impossible for respondent to present
her as a witness. Then too, even if it were possible for respondent to secure Menors testimony,
the presumption under Rule 131, Section 3(e) would still not apply. The opportunity and
possibility for obtaining Menors testimony belonged to both parties, considering that Menor was
not just respondents employee, but also petitioners niece. It was thus error for the lower court to
invoke the presumption that respondent willfully suppressed evidence under Rule 131, Section
3(e). Said presumption would logically be inoperative if the evidence is not intentionally omitted
but is simply unavailable, or when the same could have been obtained by both
parties.16cräläwvirtualibräry

In sum, we do not agree with the finding of the lower court that Menors negligence concurred
with the negligence of petitioner and resultantly caused damage to the latter. Menors negligence
was not sufficiently proved, considering that the only evidence presented on this score was
petitioners uncorroborated narration of the events. It is well-settled that the party alleging a fact
has the burden of proving it and a mere allegation cannot take the place of evidence.17 If the
plaintiff, upon whom rests the burden of proving his cause of action, fails to show in a
satisfactory manner facts upon which he bases his claim, the defendant is under no obligation to
prove his exception or defense.18cräläwvirtualibräry

Contrary to petitioners claim, the evidence on record shows that respondent exercised due
diligence in performing its obligations under the contract and followed standard procedure in
rendering its services to petitioner. As correctly observed by the lower court, the plane ticket19
issued to petitioner clearly reflected the departure date and time, contrary to petitioners
contention. The travel documents, consisting of the tour itinerary, vouchers and instructions,
were likewise delivered to petitioner two days prior to the trip. Respondent also properly booked
petitioner for the tour, prepared the necessary documents and procured the plane tickets. It
arranged petitioners hotel accommodation as well as food, land transfers and sightseeing
excursions, in accordance with its avowed undertaking.

Therefore, it is clear that respondent performed its prestation under the contract as well as
everything else that was essential to book petitioner for the tour. Had petitioner exercised due
diligence in the conduct of her affairs, there would have been no reason for her to miss the
flight. Needless to say, after the travel papers were delivered to petitioner, it became incumbent
upon her to take ordinary care of her concerns. This undoubtedly would require that she at least
read the documents in order to assure herself of the important details regarding the trip.

The negligence of the obligor in the performance of the obligation renders him liable for
damages for the resulting loss suffered by the obligee. Fault or negligence of the obligor
consists in his failure to exercise due care and prudence in the performance of the obligation as
the nature of the obligation so demands.20 There is no fixed standard of diligence applicable to
each and every contractual obligation and each case must be determined upon its particular
facts. The degree of diligence required depends on the circumstances of the specific obligation
and whether one has been negligent is a question of fact that is to be determined after taking
into account the particulars of each case.21cräläwvirtualibräry

The lower court declared that respondents employee was negligent. This factual finding,
however, is not supported by the evidence on record. While factual findings below are generally
conclusive upon this court, the rule is subject to certain exceptions, as when the trial court
overlooked, misunderstood, or misapplied some facts or circumstances of weight and substance
which will affect the result of the case.22cräläwvirtualibräry

In the case at bar, the evidence on record shows that respondent company performed its duty
diligently and did not commit any contractual breach. Hence, petitioner cannot recover and must
bear her own damage.

WHEREFORE, the instant petition is DENIED for lack of merit. The decision of the Court of
Appeals in CA-G.R. CV No. 51932 is AFFIRMED. Accordingly, petitioner is ordered to pay
respondent the amount of P12,901.00 representing the balance of the price of the British
Pageant Package Tour, with legal interest thereon at the rate of 6% per annum, to be computed
from the time the counterclaim was filed until the finality of this Decision. After this Decision
becomes final and executory, the rate of 12% per annum shall be imposed until the obligation is
fully settled, this interim period being deemed to be by then an equivalent to a forbearance of
credit.23cräläwvirtualibräry

SO ORDERED.

FIRST DIVISION

[G.R. No. 23769. September 16, 1925. ]

SONG FO & COMPANY, Plaintiff-Appellee, v. HAWAIIAN PHILIPPINE CO., Defendant-

Appellant.

Hilado & Hilado, Ross, Lawrence & Selph and Antonio T. Carrascoso, Jr., for Appellant.

Arroyo, Gurrea & Muller for Appellee.

SYLLABUS

1. CONTRACTS; SALES; INSTANT CASE. — The written contract examined and found to
provide for the delivery by the Hawaiian-Philippine Co. to Song Fo & Company of 300,000
gallons of molasses.

2. ID.; ID,.; ID.; PAYMENT. — The terms of payment fixed by the parties are controlling. The
time of payment stipulated for in the contract should be treated as of the essence of the
contract.

3. ID.; ID.; ID.; ID.; RESCISSION. — The general rule is that rescission will not be permitted for
a slight or casual breach of the contract, but only for such breaches as are so substantial and
fundamental as to defeat the object of the parties in making the agreement.

4. ID.; ID.; ID.; ID.; ID. — A delay in payment for a small quantity of molasses for some twenty
days is not such a violation of an essential condition of the contract as warrants rescission for
non-performance.

5. ID.; ID.; ID.; MEASURE OF DAMAGES FOR BREACH OF CONTRACT. — The facts
examined and Song Fo & Company allowed P3,000 on account of the greater expense to which
it was put in being compelled to secure molasses in the open market.

6. ID.; ID.; ID. — The facts examined and Song Fo & Company allowed nothing for lost profits
on account of the breach of the contract, because of failure of proof.
DECISION

MALCOLM, J. :

In the Court of First Instance of Iloilo, Song Fo & Company, plaintiff, presented a complaint with
two causes of action for breach of contract against the Hawaiian-Philippine Co., defendant, in
which judgment was asked for P70,369.50, with legal interest, and costs. In an amended
answer and cross-complaint, the defendant set up the special defense that since the plaintiff
had defaulted in the payment for the molasses delivered to it by the defendant under the
contract between the parties, the latter was compelled to cancel and rescind the said contract.
The case was submitted for decision on a stipulation of facts and the exhibits therein mentioned.
The judgment of the trial court condemned the defendant to pay for the plaintiff a total of
P35,317.93, with legal interest from the date of the presentation of the complaint, and with
costs.

From the judgment of the Court of First Instance the defendant only has appealed. In this court
it has made the following assignment of errors: "I. The lower court erred in finding that the
appellant had agreed to sell to the appellee 400,000, and not only 300,000, gallons of molasses.
II. The lower court erred in finding that the appellant rescinded without sufficient cause the
contract for the sale of molasses executed by it and the appellee. III. The lower court erred in
rendering judgment in favor of the appellee and not in favor of the appellant in accordance with
the prayer of its answer and cross-complaint. IV. The lower court erred in denying appellant’s
motion for a new trial." The specified errors raise three questions which we will consider in the
order suggested by the Appellant.

1. Did the defendant agree to sell to the plaintiff 400,000 gallons of molasses or 300,000 gallons
of molasses? The trial court found the former amount to be correct. The appellant contends that
the smaller amount was the basis of the agreement.

The contract of the parties is in writing. It is found principally in the documents, Exhibits F and
G. The first mentioned exhibit is a letter addressed by the administrator of the Hawaiian-
Philippine Co. to Song Fo & Company on December 13, 1922. It reads:jgc:chanrobles.com.ph

"SILAY, OCC. NEGROS, P. I.

"December 13, 1922.

"MESSRS. SONG FO AND CO.

"Iloilo, Iloilo.

"DEAR SIRS: Confirming our conversation we had today with your Mr. Song Fo, who visited this
Central, we wish to state as follows:jgc:chanrobles.com.ph

"He agreed to the delivery of 300,000 gallons of molasses at the same price as last year under
the same condition, and the same to start after the completion of our grinding season. He
requested if possible to let you have molasses during January, February and March or in other
words, while we are grinding, and we agreed with him that we would to the best of our ability,
altho we are somewhat handicapped. But we believe we can let you have 25,000 gallons during
each of the milling months, altho it interfere with the shipping of our own and planters sugars to
Iloilo. Mr. Song Fo also asked if we could supply him with another 100,000 gallons of molasses,
and we stated we believe that this is possible and will do our best to let you have these extra
100,000 gallons during the next year the same to be taken by you before November 1st, 1923,
along with the 300,000, making 400,000 gallons in all.

"Regarding the payment for our molasses, Mr. Song Fo gave us to understand that you would
pay us at the end of each month for molasses delivered to you.

"Hoping that this is satisfactorily and awaiting your answer regarding this matter, we remain.

"Yours very truly,

"HAWAIIAN-PHILIPPINE COMPANY

"By: R.C. PITCAIRN

"Administrator."cralaw virtua1aw library

Exhibit G is the answer of the manager of Song Fo & Company to the Hawaiian-Philippine Co.
on December 16, 1922. This letter reads:jgc:chanrobles.com.ph

"December 16th, 1922.

"MESSRS. HAWAIIAN-PHILIPPINE CO.,

"Silay, Neg. Occ., P. I.

"DEAR SIRS: We are in receipt of your favors dated the 9th and the 13th inst. and understood
all their contents.
"In connection to yours of the 13th inst, we regret to hear that you mentioned Mr. Song Fo the
one who visited your Central, but it was not for he was Mr. Song Heng, the representative and
the manager of Messrs. Song Fo & Co.

"With reference to the contents of your letter dated the 13th inst. we confirm all the
arrangements you have stated and in order to make the contract clear, we hereby quote below
our old contract as amended, as per our new arrangements.

"(a) Price, at 2 cents per gallon delivered at the central.

"(b) All handling charges and expenses at the central and at the dock at Mambaguid for our
account.

"(c) For services of one locomotive and flat cars necessary for our six tanks at the rate of P48
for the round trip dock to central and central to dock. This service to be restricted to one trip for
the six tanks.

"Yours very truly,

"SONG FO & COMPANY

"By__________________

"Manager."cralaw virtua1aw library

We agree with appellant that the above quoted correspondence is susceptible of but one
interpretation. The Hawaiian-Philippine Co. agreed to deliver to Song Fo & Company 300,000
gallons of molasses. The Hawaiian-Philippine Co. also believed it possible to accommodate
Song Fo & Company by supplying the latter company with an extra 100,000 gallons. But the
language used with reference to the additional 100,000 gallons was not a definite promise. Still
less did it constitute an obligation.

If Exhibit T relied upon by the trial court shows anything, it is simply that the defendant did not
consider itself obliged to deliver to the plaintiff molasses in any amount. On the other hand,
Exhibit A, a letter written by the manager of Song Fo & Company on October 17, 1922,
expressly mentions an understanding between the parties of a contract for 300,000 gallons of
molasses.

We sustain appellant’s point of view on the first question and rule that the contract between the
parties provided for the delivery by the Hawaiian-Philippine Co. to Song Fo & Company of
300,000 gallons of molasses.

2. Had the Hawaiian-Philippine Co. the right to rescind the contract of sale made with Song Fo
& Company? The trial judge answers No, the appellant Yes.
Turning to Exhibit F, we note this sentence: "Regarding the payment for our molasses, Mr. Song
Fo (Mr. Song Heng) gave us to understand that you would pay us at the end of each month for
molasses delivered to you." In Exhibit G, we find Song Fo & Company stating that they
understand the contents of Exhibit F, and that they "confirm all the arrangements you have
stated, and in order to make the contract clear, we hereby quote below our old contract as
amended, as per our new arrangements. (a) Price, at 2 cents per gallon delivered at the
central." In connection with the portion of the contract having reference to the payment for the
molasses, the parties have agreed on a table showing the date of delivery of the molasses, the
account and date thereof, the date of receipt of account by plaintiff, and date of payment. The
table mentioned is as follows:chanrob1es virtual 1aw library

Date of receipt

Date of delivery Account and date of account by Date of payment

thereof plaintiff

1922 1923 1923

Dec. 18 P206.16 Dec. 26/22 Jan. 5 Feb. 20

Dec. 29 206.16 Jan. 3/23 do Do.

1923

Jan. 5 206.16 Jan. 9/23 Mar. 7 or 8 Mar. 31

Feb. 12 206.16 Mar. 12/23 do Do.

Feb. 27 206.16 do do Do.

Mar. 5 206.16 do do Do.

Mar. 16 206.16 Mar. 20/23 Apr. 2/23 Apr. 19

Mar. 24 206.16 Mar. 31/23 do Do.

Mar. 29 206.16 do do Do.

Some doubt has risen as to when Song Fo & Company was expected to make payments for the
molasses delivered. Exhibit F speaks of payments "at the end of each month." Exhibit G is silent
on the point. Exhibit M, a letter of March 28, 1923, from Warner, Barnes & Co., Ltd., the agent of
the Hawaiian-Philippine Co. to Song Fo & Company, mentions "payment on presentation of bills
for each delivery." Exhibit O, another letter from Warner, Barnes & Co., Ltd. to Song Fo &
Company dated April 2, 1923, is of a similar tenor. Exhibit P, a communication sent direct by the
Hawaiian-Philippine Co. to Song Fo & Company on April 2, 1923, by which the Hawaiian-
Philippine Co. gave notice of the termination of the contract, gave as the reason for the
rescission, the breach of Song Fo & Company of this condition: "You will recall that under the
arrangements made for taking our molasses, you were to meet our accounts upon presentation
and at each delivery." Not far removed from this statement, is the allegation of plaintiff in its
complaint that "plaintiff agreed to pay defendant, at the end of each month upon presentation of
accounts."cralaw virtua1aw library

Resolving such ambiguity as exists and having in mind ordinary business practice, a reasonable
deduction is that Song Fo & Company was to pay the Hawaiian-Philippine Co. upon
presentation of accounts at the end of each month. Under this hypothesis, Song Fo & Company
should have paid for the molasses delivered in December, 1922, and for which accounts were
received by it on January 5, 1923, not later than January 31 of that year. Instead, payment was
not made until February 20, 1923. All the rest of the molasses was paid for either on time or
ahead of time.

The terms of payment fixed by the parties are controlling. The time of payment stipulated for in
the contract should be treated as of the essence of the contract. Theoretically, agreeable to
certain conditions which could easily be imagined, the Hawaiian-Philippine Co. would have had
the right to rescind the contract because of the breach of Song Fo & Company. But actually,
there is her present no outstanding fact which would legally sanction the rescission of the
contract by the Hawaiian-Philippine Co.

The general rule is that rescission will not be permitted for a slight or casual breach of the
contract, but only for such breaches as are so substantial and fundamental as to defeat the
object of the parties in making the agreement. A delay in payment for a small quantity of
molasses for some twenty days is not such a violation of an essential condition of the contract
as warrants rescission for non-performance. Not only this, but the Hawaiian-Philippine Co.
waived this condition when it arose by accepting payment of the overdue accounts and
continuing with the contract. Thereafter, Song Fo & Company was not in default in payment so
that the Hawaiian-Philippine Co. had in reality no excuse for writing its letter of April 2, 1923,
cancelling the contract. (Warner, Barnes & Co. v. Inza [1922], 43 Phil., 505.)

We rule that the appellant had no legal right to rescind the contract of sale because of the failure
of Song Fo & Company to pay for the molasses within the time agreed upon by the parties. We
sustain the finding of the trial judge in this respect.

3. On the basis first, of a contract for 300,000 gallons of molasses, and second, of a contract
imprudently breached by the Hawaiian-Philippine Co., what is the measure of damages? We
again turn to the facts as agreed upon by the parties.
The first cause of action of the plaintiff is based on the greater expense to which it was put in
being compelled to secure molasses from other sources. Three hundred thousand gallons of
molasses was the total of the agreement, as we have seen. As conceded by the plaintiff 55,006
gallons of molasses were delivered by the defendant to the plaintiff before the breach. This
leaves 244,994 gallons of molasses undelivered which the plaintiff had to purchase in the open
market. As expressly conceded by the plaintiff at page 25 of its brief 100,000 gallons of
molasses were secured from the Central North Negros Sugar Co., Inc., at two centavos a
gallon. As this is the same price specified in the contract between the plaintiff and the
defendant, the plaintiff accordingly suffered no material loss in having to make this purchase. So
244,994 gallons minus the 100,000 gallons just mentioned leaves as a result 144,994 gallons.
As to this amount, the plaintiff admits that it could have secured it and more than the Central
Victorias Milling Company one and one-half centavos per gallon. In other words, the plaintiff had
to pay the Central Victorias Milling Company one and one-half centavos a gallon more for the
molasses than it would have had to pay the Hawaiian-Philippine Co. Translated into pesos and
centavos, this meant a loss to the plaintiff of approximately P2,174.91. As the conditions
existing at the central of the Hawaiian-Philippine Co. may have been different than those found
at the Central North Negros Sugar Co., Inc., and the Central Victorias Milling Company, and as
not alone through the delay but through expenses of transportation and incidental expenses, the
plaintiff may have been put to greater cost in making the purchase of the molasses in the open
market, we would concede under the first cause of action in round figures P3,000.

The second cause of action relates to lost profits on account of the breach of the contract. The
only evidence in the record on this question is the stipulation of counsel to the effect that had
Mr. Song Heng, the manager of Song Fo & Company, been called as a witness, he would have
testified that the plaintiff would have realized a profit of P14,948.43, if the contract of December
13, 1922, had been fulfilled by the defendant. Indisputably, this statement falls far short of
presenting proof on which to make a finding as to damages.

In the first place, the testimony which Mr. Song Heng would have given undoubtedly would
follow the same line of thought as found in the decision of the trial court, which we have found to
be unsustainable. In the second place, had Mr. Song Heng taken the witness-stand and made
the statement attributed to him, it would have been insufficient proof of the allegations of the
complaint, and the fact that it is a part of the stipulation by counsel does not change this result.
And lastly, the testimony of the witness Song Heng, if we may dignify it as such, is a mere
conclusion, not a proven fact. As to what items make up the more than P14,000 of alleged lost
profits, whether loss of sales or loss of customers, or what not, we have no means of knowing.

We rule that the plaintiff is entitled to recover damages from the defendant for breach of contract
on the first cause of action in the amount of P3,000 and on the second cause of action in no
amount. Appellant’s assignments of error are accordingly found to be well in taken in part and
not well taken in part.
Agreeable to the foregoing, the judgment appealed from shall be modified and the plaintiff shall
have and recover from the defendant the sum of P3,000, with legal interest from October 2,
1923, until payment. Without special finding as to costs in either instance, it is ordered

THIRD DIVISION

G.R. No. 108346 July 11, 2001

Spouses MARIANO Z. VELARDE and AVELINA D. VELARDE, petitioners,

vs.
COURT OF APPEALS, DAVID A. RAYMUNDO and GEORGE RAYMUNDO, respondents.

PANGANIBAN, J.:

A substantial breach of a reciprocal obligation, like failure to pay the price in the manner
prescribed by the contract, entitled the injured party to rescind the obligation. Rescission
abrogates the contract from its inception and requires a mutual restitution of benefits received.

The Case

Before us is a Petition for Review on Certiorari1 questioning the Decision2 of the Court of
Appeals (CA) in CA-GR CV No. 32991 dated October 9, 1992, as well as its Resolution3 dated
December 29, 1992 denying petitioner's motion for reconsideration.4

The dispositive portion of the assailed Decision reads:

"WHEREFORES the Order dated May 15, 1991 is hereby ANNULLED and SET ASIDE and the
Decision dated November 14, 1990 dismissing the [C]omplaint is RESINSTATED. The bonds
posted by plaintiffs-appellees and defendants-appellants are hereby RELEASED."5

The Facts

The factual antecedents of the case, as found by the CA, are as follows:

"x x x. David Raymundo [herein private respondent] is the absolute and registered owner of a
parcel of land, together with the house and other improvements thereon, located at 1918
Kamias St., Dasmariñas Village, Makati and covered by TCT No. 142177. Defendant George
Raymundo [herein private petitioners] is David's father who negotiated with plaintiffs Avelina
and Mariano Velarde [herein petitioners] for the sale of said property, which was, however,
under lease (Exh. '6', p. 232, Record of Civil Case No. 15952).
"On August 8, 1986, a Deed of Sale with Assumption of Mortgage (Exh. 'A'; Exh. '1', pp. 11-12,
Record) was executed by defendant David Raymundo, as vendor, in favor of plaintiff Avelina
Velarde, as vendee, with the following terms and conditions:

'x x x xxx xxx

'That for and in consideration of the amount of EIGHT HUNDRED THOUSAND PESOS
(P800,000.00), Philippine currency, receipt of which in full is hereby acknowledged by the
VENDOR from the VENDEE, to his entire and complete satisfaction, by these presents the
VENDOR hereby SELLS, CEDES, TRANSFERS, CONVEYS AND DELIVERS, freely and
voluntarily, with full warranty of a legal and valid title as provided by law, unto the VENDEE, her
heirs, successors and assigns, the parcel of land mentioned and described above, together with
the house and other improvements thereon.

'That the aforesaid parcel of land, together with the house and other improvements thereon,
were mortgaged by the VENDOR to the BANK OF THE PHILIPPINE ISLANDS, Makati, Metro
Manila to secure the payment of a loan of ONE MILLION EIGHT HUNDRED THOUSAND
PESOS (P1,800,000.00), Philippine currency, as evidenced by a Real Estate Mortgage signed
and executed by the VENDOR in favor of the said Bank of the Philippine Islands, on _____ and
which Real Estate Mortgage was ratified before Notary Public for Makati, _____, as Doc. No.
______, Page No. _____, Book No. ___, Series of 1986 of his Notarial Register.

'That as part of the consideration of this sale, the VENDEE hereby assumes to pay the
mortgage obligations on the property herein sold in the amount of ONE MILLION EIGHT
HUNDRED THOUSAND PESOS (P1,800,000.00), Philippine currency, in favor of Bank of
Philippine Islands, in the name of the VENDOR, and further agrees to strictly and faithfully
comply with all the terms and conditions appearing in the Real Estate Mortgage signed and
executed by the VENDOR in favor of BPI, including interests and other charges for late payment
levied by the Bank, as if the same were originally signed and executed by the VENDEE.

'It is further agreed and understood by the parties herein that the capital gains tax and
documentary stamps on the sale shall be for the account of the VENDOR; whereas, the
registration fees and transfer tax thereon shall be the account of the VENDEE.' (Exh. 'A', pp. 11-
12, Record).'

"On the same date, and as part of the above-document, plaintiff Avelina Velarde, with the
consent of her husband, Mariano, executed an Undertaking (Exh. 'C', pp. 13-14, Record).'

'x x x xxx xxx

'Whereas, as per deed of Sale with Assumption of Mortgage, I paid Mr. David A. Raymundo the
sum of EIGHT HUNDRED THOUSAND PESOS (P800,000.00), Philippine currency, and
assume the mortgage obligations on the property with the Bank of the Philippine Islands in the
amount of ONE MILLION EIGHT HUNDRED THOUSAND PESOS (P1,800,000.00), Philippine
currency, in accordance with the terms and conditions of the Deed of Real Estate Mortgage
dated _____, signed and executed by Mr. David A. Raymundo with the said Bank,
acknowledged before Notary Public for Makati, _____, as Doc. No. _____, Page No. _____,
Book No. _____, Series of 1986 of his Notarial Register.

'WHEREAS, while my application for the assumption of the mortgage obligations on the
property is not yet approved by the mortgagee Bank, I have agreed to pay the mortgage
obligations on the property with the Bank in the name of Mr. David A. Raymundo, in accordance
with the terms and conditions of the said Deed of Real Estate Mortgage, including all interests
and other charges for late payment.

'WHEREAS, this undertaking is being executed in favor of Mr. David A. Raymundo, for
purposes of attesting and confirming our private understanding concerning the said mortgage
obligations to be assumed.

'NOW, THEREFORE, for and in consideration of the foregoing premises, and the assumption of
the mortgage obligations of ONE MILLION EIGHT HUNDRED THOUSAND PESOS
(P1,800,000.00), Philippine currency, with the bank of the Philippine Islands, I, Mrs, Avelina D,
Velarde with the consent of my husband, Mariano Z. Velardo, do hereby bind and obligate
myself, my heirs, successors and assigns, to strictly and faithfully comply with the following
terms and conditions:

'1. That until such time as my assumption of the mortgage obligations on the property
purchased is approved by the mortgagee bank, the Bank of the Philippine Islands, I shall
continue to pay the said loan in accordance with the terms and conditions of the Deed of Real
Estate Mortgage in the name of Mr. David A. Raymundo, the original Mortgagor.

'2. That, in the event I violate any of the terms and conditions of the said Deed of Real Estate
Mortgage, I hereby agree that my downpayment of P800,000.00, plus all payments made with
the Bank of the Philippine Islands on the mortgage loan, shall be forfeited in favor of Mr. David
A. Raymundo, as and by way of liquidated damages, without necessity of notice or any judicial
declaration to that effect, and Mr. David A. Raymundo shall resume total and complete
ownership and possession of the property sold by way of Deed of Sale with Assumption of
Mortgage, and the same shall be deemed automatically cancelled and be of no further force or
effect, in the same manner as it (the) same had never been executed or entered into.

'3. That I am executing the Undertaking for purposes of binding myself, my heirs, successors
and assigns, to strictly and faithfully comply with the terms and conditions of the mortgage
obligations with the Bank of the Philippine Islands, and the covenants, stipulations and
provisions of this Undertaking.

'That, David A. Raymundo, the vendor of the property mentioned and identified above, [does]
hereby confirm and agree to the undertakings of the Vendee pertinent to the assumption of the
mortgage obligations by the Vendee with the Bank of the Philippine Islands. (Exh. 'C', pp. 13-14,
Record).'

"This undertaking was signed by Avelina and Mariano Velarde and David Raymundo.

"It appears that the negotiated terms for the payment of the balance of P1.8 million was from the
proceeds of a loan that plaintiffs were to secure from a bank with defendant's help. Defendants
had a standing approved credit line with the Bank of the Philippine Islands (BPI). The parties
agreed to avail of this, subject to BPI's approval of an application for assumption of mortgage by
plaintiffs. Pending BPI's approval o[f] the application, plaintiffs were to continue paying the
monthly interests of the loan secured by a real estate mortgage.

"Pursuant to said agreements, plaintiffs paid BPI the monthly interest on the loan secured by the
aforementioned mortgage for three (3) months as follows: September 19, 1986 at P27,225.00;
October 20, 1986 at P23,000.00; and November 19, 1986 at P23,925.00 (Exh. 'E', 'H' & 'J', pp.
15, 17and 18, Record).

"On December 15, 1986, plaintiffs were advised that the Application for Assumption of Mortgage
with BPI, was not approved (Exh. 'J', p. 133, Record). This prompted plaintiffs not to make any
further payment.

"On January 5, 1987, defendants, thru counsel, wrote plaintiffs informing the latter that their
non-payment to the mortgage bank constitute[d] non-performance of their obligation (Exh. '3', p.
220, Record).

"In a Letter dated January 7, 1987, plaintiffs, thru counsel, responded, as follows:

'This is to advise you, therefore, that our client is willing to pay the balance in cash not later than
January 21, 1987 provided: (a) you deliver actual possession of the property to her not later
than January 15, 1987 for her immediate occupancy; (b) you cause the re- lease of title and
mortgage from the Bank of P.I. and make the title available and free from any liens and
encumbrances; and (c) you execute an absolute deed of sale in her favor free from any liens or
encumbrances not later than January 21, 1987.' (Exhs. 'k', '4', p. 223, Record).

"On January 8, 1987 defendants sent plaintiffs a notarial notice of cancellation/rescission of the
intended sale of the subject property allegedly due to the latter's failure to comply with the terms
and conditions of the Deed of Sale with Assumption of Mortgage and the Undertaking (Exh. '5',
pp. 225-226, Record)."6

Consequently, petitioners filed on February 9, 1987 a Complaint against private respondents for
specific performance, nullity of cancellation, writ of possession and damages. This was
docketed as Civil Case No. 15952 at the Regional Trial Court of Makati, Branch 149. The case
was tried and heard by then Judge Consuelo Ynares-Santiago (now an associate justice of this
Court), who dismissed the Complaint in a Decision dated November 14, 1990.7 Thereafter,
petitioners filed a Motion for Reconsideration.8

Meanwhile, then Judge Ynares-Santiago was promoted to the Court of Appeals and Judge
Salvador S. A. Abad Santos was assigned to the sala she vacated. In an Order dated May 15,
1991,9 Judge Abad Santos granted petitioner's Motion for Reconsideration and directed the
parties to proceed with the sale. He instructed petitioners to pay the balance of P1.8 million to
private respondents who, in turn, were ordered to execute a deed of absolute sale and to
surrender possession of the disputed property to petitioners.

Private respondents appealed to the CA.

Ruling of the Court of Appeal

The CA set aside the Order of Judge Abad Santos and reinstated then Judge Ynares-
Santiago's earlier Decision dismissing petitioners' Complaint. Upholding the validity of the
rescission made by private respondents, the CA explained its ruling in this wise:

"In the Deed of Sale with Assumption of Mortgage, it was stipulated that 'as part of the
consideration of this sale, the VENDEE (Velarde)' would assume to pay the mortgage obligation
on the subject property in the amount of P 1.8 million in favor of BPI in the name of the Vendor
(Raymundo). Since the price to be paid by the Vendee Velarde includes the downpayment of
P800,000.00 and the balance of Pl.8 million, and the balance of Pl.8 million cannot be paid in
cash, Vendee Velarde, as part of the consideration of the sale, had to assume the mortgage
obligation on the subject property. In other words, the assumption of the mortgage obligation is
part of the obligation of Velarde, as vendee, under the contract. Velarde further agreed 'to
strictly and faithfully comply with all the terms and conditions appearing in the Real Estate
Mortgage signed and executed by the VENDOR in favor of BPI x x x as if the same were
originally signed and executed by the Vendee. (p. 2, thereof, p. 12, Record). This was reiterated
by Velarde in the document entitled 'Undertaking' wherein the latter agreed to continue paying
said loan in accordance with the terms and conditions of the Deed of Real Estate Mortgage in
the name of Raymundo. Moreover, it was stipulated that in the event of violation by Velarde of
any terms and conditions of said deed of real estate mortgage, the downpayment of
P800,000.00 plus all payments made with BPI or the mortgage loan would be forfeited and the
[D]eed of [S]ale with [A]ssumption of [M]ortgage would thereby be Cancelled automatically and
of no force and effect (pars. 2 & 3, thereof, pp 13-14, Record).

"From these 2 documents, it is therefore clear that part of the consideration of the sale was the
assumption by Velarde of the mortgage obligation of Raymundo in the amount of Pl.8 million.
This would mean that Velarde had to make payments to BPI under the [D]eed of [R]eal [E]state
[M]ortgage the name of Raymundo. The application with BPI for the approval of the assumption
of mortgage would mean that, in case of approval, payment of the mortgage obligation will now
be in the name of Velarde. And in the event said application is disapproved, Velarde had to pay
in full. This is alleged and admitted in Paragraph 5 of the Complaint. Mariano Velarde likewise
admitted this fact during the hearing on September 15, 1997 (p. 47, t.s.n., September 15, 1987;
see also pp. 16-26, t.s.n., October 8, 1989). This being the case, the non-payment of the
mortgage obligation would result in a violation of the contract. And, upon Velarde's failure to pay
the agreed price, the[n] Raymundo may choose either of two (2) actions - (1) demand fulfillment
of the contract, or (2) demand its rescission (Article 1191, Civil Code).

"The disapproval by BPI of the application for assumption of mortgage cannot be used as an
excuse for Velarde's non-payment of the balance of the purchase price. As borne out by the
evidence, Velarde had to pay in full in case of BPI's disapproval of the application for
assumption of mortgage. What Velarde should have done was to pay the balance of P1.8
million. Instead, Velarde sent Raymundo a letter dated January 7, 1987 (Exh. 'K', '4') which was
strongly given weight by the lower court in reversing the decision rendered by then Judge
Ynares-Santiago. In said letter, Velarde registered their willingness to pay the balance in cash
but enumerated 3 new conditions which, to the mind of this Court, would constitute a new
undertaking or new agreement which is subject to the consent or approval of Raymundo. These
3 conditions were not among those previously agreed upon by Velarde and Raymundo. These
are mere offers or, at most, an attempt to novate. But then again, there can be no novation
because there was no agreement of all the parties to the new contract (Garcia, Jr. vs. Court of
Appeals, 191 SCRA 493).

"It was likewise agreed that in case of violation of the mortgage obligation, the Deed of Sale with
Assumption of Mortgage would be deemed 'automatically cancelled and of no further force and
effect, as if the same had never been executed or entered into.' While it is true that even if the
contract expressly provided for automatic rescission upon failure to pay the price, the vendee
may still pay, he may do so only for as long as no demand for rescission of the contract has
been made upon him either judicially or by a notarial act (Article 1592, Civil Code). In the case
at bar, Raymundo sent Velarde notarial notice dated January 8, 1987 of cancellation/rescission
of the contract due to the latter's failure to comply with their obligation. The rescission was
justified in view of Velarde's failure to pay the price (balance) which is substantial and
fundamental as to defeat the object of the parties in making the agreement. As adverted to
above, the agreement of the parties involved a reciprocal obligation wherein the obligation of
one is a resolutory condition of the obligation of the other, the non-fulfillment of which entitles
the other party to rescind the contract (Songcuan vs. IAC, 191 SCRA 28). Thus, the non-
payment of the mortgage obligation by appellees Velarde would create a right to demand
payment or to rescind the contract, or to criminal prosecution (Edca Publishing & Distribution
Corporation vs. Santos, 184 SCRA 614). Upon appellee's failure, therefore, to pay the balance,
the contract was properly rescinded (Ruiz vs. IAC, 184 SCRA 720). Consequently, appellees
Velarde having violated the contract, they have lost their right to its enforcement and hence,
cannot avail of the action for specific performance (Voysaw vs. Interphil Promotions, Inc., 148
SCRA 635)."10

Hence, this appeal. 11

The Issues
Petitioners, in their Memorandum,12 interpose the following assignment of errors:

"I.

The Court of Appeals erred in holding that the non-payment of the mortgage obligation resulted
in a breach of the contract.

"II

The Court of Appeals erred in holding that the rescission (resolution) of the contract by private
respondents was justified.

"III

The Court of Appeals erred in holding that petitioners' January 7, 1987 letter gave three 'new
conditions' constituting mere offers or an attempt to novate necessitating a new agreement
between the parties."

The Court's Ruling

The Petition is partially meritorious.

First Issue:

Breach of Contract

Petitioner aver that their nonpayment of private respondents' mortgage obligation did not
constitute a breach of contract, considering that their request to assume the obligation had been
disapproved by the mortgagee bank. Accordingly, payment of the monthly amortizations ceased
to be their obligation and, instead, it devolved upon private respondents again.

However, petitioners did not merely stop paying the mortgage obligations; they also failed to pay
the balance of the purchase price. As admitted by both parties, their agreement mandated that
petitioners should pay the purchase price balance of P1.8 million to private respondents in case
the request to assume the mortgage would be disapproved. Thus, on December 15, 1986, when
petitioners received notice of the bank's disapproval of their application to assume respondents'
mortgage, they should have paid the balance of the P1.8 million loan.

Instead of doing so, petitioners sent a letter to private respondents offering to make such
payment only upon the fulfillment of certain conditions not originally agreed upon in the contract
of sale. Such conditional offer to pay cannot take the place of actual payment as would
discharge the obligation of a buyer under a contract of sale.
In a contract of sale, the seller obligates itself to transfer the ownership of and deliver a
determinate things, and the buyer to pay therefor a price certain in money or its equivalent.13

Private respondents had already performed their obligation through the execution of the Deed of
Sale, which effectively transferred ownership of the property to petitioner through constructive
delivery. Prior physical delivery or possession is not legally required, and the execution of the
Deed of Sale is deemed equivalent to delivery.14

Petitioners, on the other hand, did not perform their correlative obligation of paying the contract
price in the manner agreed upon. Worse, they wanted private respondents to perform
obligations beyond those stipulated in the contract before fulfilling their own obligation to pay the
full purchase price.

Second Issue

Validity of the Rescission

Petitioners likewise claim that the rescission of the contract by private respondents was not
justified, inasmuch as the former had signified their willingness to pay the balance of the
purchase price only a little over a month from the time they were notified of the disapproval of
their application for assumption of mortgage. Petitioners also aver that the breach of the
contract was not substantial as would warrant a rescission. They cite several cases15 in which
this Court declared that rescission of a contract would not be permitted for a slight or casual
breach. Finally, they argue that they have substantially performed their obligation in good faith,
considering that they have already made the initial payment of P800,000 and three (3) monthly
mortgage payments.

As pointed out earlier, the breach committed by petitioners was not so much their nonpayment
of the mortgage obligations, as their nonperformance of their reciprocal obligation to pay the
purchase price under the contract of sale. Private respondents' right to rescind the contract finds
basis in Article 1191 of the Civil Code, which explicitly provides as follows:

"Art. 1191. -- The power to rescind obligations is implied in reciprocal ones, in case one of the
obligors should not comply with what is incumbent upon him.

The injured party may choose between fulfillment and the rescission of the obligation, with the
payment of damages in either case. He may also seek rescission even after he has chosen
fulfillment, if the latter should become impossible."

The right of rescission of a party to an obligation under Article 1191 of the Civil Code is
predicated on a breach of faith by the other party who violates the reciprocity between them.16
The breach contemplated in the said provision is the obligor's failure to comply with an existing
obligation.17 When the obligor cannot comply with what is incumbent upon it, the obligee may
seek rescission and, in the absence of any just cause for the court to determine the period of
compliance, the court shall decree the rescission.18

In the present case, private respondents validly exercised their right to rescind the contract,
because of the failure of petitioners to comply with their obligation to pay the balance of the
purchase price. Indubitably, the latter violated the very essence of reciprocity in the contract of
sale, a violation that consequently gave rise to private respondent's right to rescind the same in
accordance with law.

True, petitioners expressed their willingness to pay the balance of the purchase price one month
after it became due; however, this was not equivalent to actual payment as would constitute a
faithful compliance of their reciprocal obligation. Moreover, the offer to pay was conditioned on
the performance by private respondents of additional burdens that had not been agreed upon in
the original contract. Thus, it cannot be said that the breach committed by petitioners was
merely slight or casual as would preclude the exercise of the right to rescind.

Misplaced is petitioners' reliance on the cases19 they cited, because the factual circumstances
in those cases are not analogous to those in the present one. In Song Fo there was, on the part
of the buyer, only a delay of twenty (20) days to pay for the goods delivered. Moreover, the
buyer's offer to pay was unconditional and was accepted by the seller.

In Zepeda, the breach involved a mere one-week delay in paying the balance of 1,000 which
was actually paid.

In Tan, the alleged breach was private respondent's delay of only a few days, which was for the
purpose of clearing the title to the property; there was no reference whatsoever to the
nonpayment of the contract price.

In the instant case, the breach committed did not merely consist of a slight delay in payment or
an irregularity; such breach would not normally defeat the intention of the parties to the contract.
Here, petitioners not only failed to pay the P1.8 million balance, but they also imposed upon
private respondents new obligations as preconditions to the performance of their own obligation.
In effect, the qualified offer to pay was a repudiation of an existing obligation, which was legally
due and demandable under the contract of sale. Hence, private respondents were left with the
legal option of seeking rescission to protect their own interest.

Mutual Restitution

Required in Rescission

As discussed earlier, the breach committed by petitioners was the nonperformance of a

reciprocal obligation, not a violation of the terms and conditions of the mortgage contract.
Therefore, the automatic rescission and forfeiture of payment clauses stipulated in the contract
does not apply. Instead, Civil Code provisions shall govern and regulate the resolution of this
controversy.

Considering that the rescission of the contract is based on Article 1191 of the Civil Code, mutual
restitution is required to bring back the parties to their original situation prior to the inception of
the contract. Accordingly, the initial payment of P800,000 and the corresponding mortgage
payments in the amounts of P27,225, P23,000 and P23,925 (totaling P874,150.00) advanced
by petitioners should be returned by private respondents, lest the latter unjustly enrich
themselves at the expense of the former.

Rescission creates the obligation to return the object of the contract. It can be carried out only
when the one who demands rescission can return whatever he may be obliged to restore.20 To
rescind is to declare a contract void at its inception and to put an end to it as though it never
was. It is not merely to terminate it and release the parties from further obligations to each other,
but to abrogate it from the beginning and restore the parties to their relative positions as if no
contract has been made.21

Third Issue

Attempt to Novate

In view of the foregoing discussion, the Court finds it no longer necessary to discuss the third
issue raised by petitioners. Suffice it to say that the three conditions appearing on the January
7, 1987 letter of petitioners to private respondents were not part of the original contract. By that
time, it was already incumbent upon the former to pay the balance of the sale price. They had
no right to demand preconditions to the fulfillment of their obligation, which had become due.

WHEREFORE, the assailed Decision is hereby AFFIRMED with the MODIFICATION that
private respondents are ordered to return to petitioners the amount of P874,150, which the latter
paid as a consequence of the rescinded contract, with legal interest thereon from January 8,
1987, the date of rescission. No pronouncement as to costs.

SO ORDERED

EN BANC

G.R. No. L-4811 July 31, 1953

CHARLES F. WOODHOUSE, plaintiff-appellant,

vs.
FORTUNATO F. HALILI, defendant-appellant.
Tañada, Pelaez & Teehankee for defendant and appellant.
Gibbs, Gibbs, Chuidian & Quasha for plaintiff and appellant.

LABRADOR, J.:

On November 29, 1947, the plaintiff entered on a written agreement, Exhibit A, with the
defendant, the most important provisions of which are (1) that they shall organize a partnership
for the bottling and distribution of Mision soft drinks, plaintiff to act as industrial partner or
manager, and the defendant as a capitalist, furnishing the capital necessary therefor; (2) that
the defendant was to decide matters of general policy regarding the business, while the plaintiff
was to attend to the operation and development of the bottling plant; (3) that the plaintiff was to
secure the Mission Soft Drinks franchise for and in behalf of the proposed partnership; and (4)
that the plaintiff was to receive 30 per cent of the net profits of the business. The above
agreement was arrived at after various conferences and consultations by and between them,
with the assistance of their respective attorneys. Prior to entering into this agreement, plaintiff
had informed the Mission Dry Corporation of Los Angeles, California, U.S.A., manufacturers of
the bases and ingridients of the beverages bearing its name, that he had interested a prominent
financier (defendant herein) in the business, who was willing to invest half a million dollars in the
bottling and distribution of the said beverages, and requested, in order that he may close the
deal with him, that the right to bottle and distribute be granted him for a limited time under the
condition that it will finally be transferred to the corporation (Exhibit H). Pursuant for this request,
plaintiff was given "a thirty-days" option on exclusive bottling and distribution rights for the
Philippines" (Exhibit J). Formal negotiations between plaintiff and defendant began at a meeting
on November 27, 1947, at the Manila Hotel, with their lawyers attending. Before this meeting
plaintiff's lawyer had prepared the draft of the agreement, Exhibit II or OO, but this was not
satisfactory because a partnership, instead of a corporation, was desired. Defendant's lawyer
prepared after the meeting his own draft, Exhibit HH. This last draft appears to be the main
basis of the agreement, Exhibit A.

The contract was finally signed by plaintiff on December 3, 1947. Plaintiff did not like to go to the
United States without the agreement being not first signed. On that day plaintiff and defendant
went to the United States, and on December 10, 1947, a franchise agreement (Exhibit V) was
entered into the Mission Dry Corporation and Fortunato F. Halili and/or Charles F. Woodhouse,
granted defendant the exclusive right, license, and authority to produce, bottle, distribute, and
sell Mision beverages in the Philippines. The plaintiff and the defendant thereafter returned to
the Philippines. Plaintiff reported for duty in January, 1948, but operations were not begun until
the first week of February, 1948. In January plaintiff was given as advance, on account of
profits, the sum of P2,000, besides the use of a car; in February, 1948, also P2,000, and in
March only P1,000. The car was withdrawn from plaintiff on March 9, 1948.

When the bottling plant was already on operation, plaintiff demanded of defendant that the
partnership papers be executed. At first defendant executed himself, saying there was no hurry.
Then he promised to do so after the sales of the product had been increased to P50,000. As
nothing definite was forthcoming, after this condition was attained, and as defendant refused to
give further allowances to plaintiff, the latter caused his attorneys to take up the matter with the
defendant with a view to a possible settlement. as none could be arrived at, the present action
was instituted.

In his complaint plaintiff asks for the execution of the contract of partnership, an accounting of
the profits, and a share thereof of 30 per cent, as well as damages in the amount of P200,000.
In his answer defendant alleges by way of defense (1) that defendant's consent to the
agreement, Exhibit A, was secured by the representation of plaintiff that he was the owner, or
was about to become owner of an exclusive bottling franchise, which representation was false,
and plaintiff did not secure the franchise, but was given to defendant himself; (2) that defendant
did not fail to carry out his undertakings, but that it was plaintiff who failed; (3) that plaintiff
agreed to contribute the exclusive franchise to the partnership, but plaintiff failed to do so. He
also presented a counter-claim for P200,000 as damages. On these issues the parties went to
trial, and thereafter the Court of First Instance rendered judgment ordering defendant to render
an accounting of the profits of the bottling and distribution business, subject of the action, and to
pay plaintiff 15 percent thereof. it held that the execution of the contract of partnership could not
be enforced upon the parties, but it also held that the defense of fraud was not proved. Against
this judgment both parties have appealed.

The most important question of fact to be determined is whether defendant had falsely
represented that he had an exclusive franchise to bottle Mission beverages, and whether this
false representation or fraud, if it existed, annuls the agreement to form the partnership. The trial
court found that it is improbable that defendant was never shown the letter, Exhibit J, granting
plaintiff had; that the drafts of the contract prior to the final one can not be considered for the
purpose of determining the issue, as they are presumed to have been already integrated into
the final agreement; that fraud is never presumed and must be proved; that the parties were
represented by attorneys, and that if any party thereto got the worse part of the bargain, this fact
alone would not invalidate the agreement. On this appeal the defendant, as appellant, insists
that plaintiff did represent to the defendant that he had an exclusive franchise, when as a matter
of fact, at the time of its execution, he no longer had it as the same had expired, and that,
therefore, the consent of the defendant to the contract was vitiated by fraud and it is,
consequently, null and void.

Our study of the record and a consideration of all the surrounding circumstances lead us to
believe that defendant's contention is not without merit. Plaintiff's attorney, Mr. Laurea, testified
that Woodhouse presented himself as being the exclusive grantee of a franchise, thus:

A. I don't recall any discussion about that matter. I took along with me the file of the office with
regards to this matter. I notice from the first draft of the document which I prepared which calls
for the organization of a corporation, that the manager, that is, Mr. Woodhouse, is represented
as being the exclusive grantee of a franchise from the Mission Dry Corporation. . . . (t.s.n.,
p.518)
As a matter of fact, the first draft that Mr. Laurea prepared, which was made before the Manila
Hotel conference on November 27th, expressly states that plaintiff had the exclusive franchise.
Thus, the first paragraph states:

Whereas, the manager is the exclusive grantee of a franchise from the Mission Dry Corporation
San Francisco, California, for the bottling of Mission products and their sale to the public
throughout the Philippines; . . . .

3. The manager, upon the organization of the said corporation, shall forthwith transfer to the
said corporation his exclusive right to bottle Mission products and to sell them throughout the
Philippines. . . . .

(Exhibit II; emphasis ours)

The trial court did not consider this draft on the principle of integration of jural acts. We find that
the principle invoked is inapplicable, since the purpose of considering the prior draft is not to
vary, alter, or modify the agreement, but to discover the intent of the parties thereto and the
circumstances surrounding the execution of the contract. The issue of fact is: Did plaintiff
represent to defendant that he had an exclusive franchise? Certainly, his acts or statements
prior to the agreement are essential and relevant to the determination of said issue. The act or
statement of the plaintiff was not sought to be introduced to change or alter the terms of the
agreement, but to prove how he induced the defendant to enter into it — to prove the
representations or inducements, or fraud, with which or by which he secured the other party's
consent thereto. These are expressly excluded from the parol evidence rule. (Bough and Bough
vs. Cantiveros and Hanopol, 40 Phil., 209; port Banga Lumber Co. vs. Export & Import Lumber
Co., 26 Phil., 602; III Moran 221,1952 rev. ed.) Fraud and false representation are an incident to
the creation of a jural act, not to its integration, and are not governed by the rules on integration.
Were parties prohibited from proving said representations or inducements, on the ground that
the agreement had already been entered into, it would be impossible to prove misrepresentation
or fraud. Furthermore, the parol evidence rule expressly allows the evidence to be introduced
when the validity of an instrument is put in issue by the pleadings (section 22, par. (a), Rule 123,
Rules of Court),as in this case.

That plaintiff did make the representation can also be easily gleaned from his own letters and
his own testimony. In his letter to Mission Dry Corporation, Exhibit H, he said:.

. . . He told me to come back to him when I was able to speak with authority so that we could
come to terms as far as he and I were concerned. That is the reason why the cable was sent.
Without this authority, I am in a poor bargaining position. . .

I would propose that you grant me the exclusive bottling and distributing rights for a limited
period of time, during which I may consummate my plants. . . .
By virtue of this letter the option on exclusive bottling was given to the plaintiff on October 14,
1947. (See Exhibit J.) If this option for an exclusive franchise was intended by plaintiff as an
instrument with which to bargain with defendant and close the deal with him, he must have used
his said option for the above-indicated purpose, especially as it appears that he was able to
secure, through its use, what he wanted.

Plaintiff's own version of the preliminary conversation he had with defendant is to the effect that
when plaintiff called on the latter, the latter answered, "Well, come back to me when you have
the authority to operate. I am definitely interested in the bottling business." (t. s. n., pp. 60-61.)
When after the elections of 1949 plaintiff went to see the defendant (and at that time he had
already the option), he must have exultantly told defendant that he had the authority already. It
is improbable and incredible for him to have disclosed the fact that he had only an option to the
exclusive franchise, which was to last thirty days only, and still more improbable for him to have
disclosed that, at the time of the signing of the formal agreement, his option had already
expired. Had he done so, he would have destroyed all his bargaining power and authority, and
in all probability lost the deal itself.

The trial court reasoned, and the plaintiff on this appeal argues, that plaintiff only undertook in
the agreement "to secure the Mission Dry franchise for and in behalf of the proposed
partnership." The existence of this provision in the final agreement does not militate against
plaintiff having represented that he had the exclusive franchise; it rather strengthens belief that
he did actually make the representation. How could plaintiff assure defendant that he would get
the franchise for the latter if he had not actually obtained it for himself? Defendant would not
have gone into the business unless the franchise was raised in his name, or at least in the name
of the partnership. Plaintiff assured defendant he could get the franchise. Thus, in the draft
prepared by defendant's attorney, Exhibit HH, the above provision is inserted, with the
difference that instead of securing the franchise for the defendant, plaintiff was to secure it for
the partnership. To show that the insertion of the above provision does not eliminate the
probability of plaintiff representing himself as the exclusive grantee of the franchise, the final
agreement contains in its third paragraph the following:

. . . and the manager is ready and willing to allow the capitalists to use the exclusive franchise . .
.

and in paragraph 11 it also expressly states:

1. In the event of the dissolution or termination of the partnership, . . . the franchise from Mission
Dry Corporation shall be reassigned to the manager.

These statements confirm the conclusion that defendant believed, or was made to believe, that
plaintiff was the grantee of an exclusive franchise. Thus it is that it was also agreed upon that
the franchise was to be transferred to the name of the partnership, and that, upon its dissolution
or termination, the same shall be reassigned to the plaintiff.
Again, the immediate reaction of defendant, when in California he learned that plaintiff did not
have the exclusive franchise, was to reduce, as he himself testified, plaintiff's participation in the
net profits to one half of that agreed upon. He could not have had such a feeling had not plaintiff
actually made him believe that he (plaintiff) was the exclusive grantee of the franchise.

The learned trial judge reasons in his decision that the assistance of counsel in the making of
the contract made fraud improbable. Not necessarily, because the alleged representation took
place before the conferences were had, in other words, plaintiff had already represented to
defendant, and the latter had already believed in, the existence of plaintiff's exclusive franchise
before the formal negotiations, and they were assisted by their lawyers only when said formal
negotiations actually took place. Furthermore, plaintiff's attorney testified that plaintiff had said
that he had the exclusive franchise; and defendant's lawyer testified that plaintiff explained to
him, upon being asked for the franchise, that he had left the papers evidencing it.(t.s.n., p. 266.)

We conclude from all the foregoing that plaintiff did actually represent to defendant that he was
the holder of the exclusive franchise. The defendant was made to believe, and he actually
believed, that plaintiff had the exclusive franchise. Defendant would not perhaps have gone to
California and incurred expenses for the trip, unless he believed that plaintiff did have that
exclusive privilege, and that the latter would be able to get the same from the Mission Dry
Corporation itself. Plaintiff knew what defendant believed about his (plaintiff's) exclusive
franchise, as he induced him to that belief, and he may not be allowed to deny that defendant
was induced by that belief. (IX Wigmore, sec. 2423; Sec. 65, Rule 123, Rules of Court.)

We now come to the legal aspect of the false representation. Does it amount to a fraud that
would vitiate the contract? It must be noted that fraud is manifested in illimitable number of
degrees or gradations, from the innocent praises of a salesman about the excellence of his
wares to those malicious machinations and representations that the law punishes as a crime. In
consequence, article 1270 of the Spanish Civil Code distinguishes two kinds of (civil) fraud, the
causal fraud, which may be a ground for the annulment of a contract, and the incidental deceit,
which only renders the party who employs it liable for damages. This Court had held that in
order that fraud may vitiate consent, it must be the causal (dolo causante), not merely the
incidental (dolo causante), inducement to the making of the contract. (Article 1270, Spanish Civil
Code; Hill vs. Veloso, 31 Phil. 160.) The record abounds with circumstances indicative that the
fact that the principal consideration, the main cause that induced defendant to enter into the
partnership agreement with plaintiff, was the ability of plaintiff to get the exclusive franchise to
bottle and distribute for the defendant or for the partnership. The original draft prepared by
defendant's counsel was to the effect that plaintiff obligated himself to secure a franchise for the
defendant. Correction appears in this same original draft, but the change is made not as to the
said obligation but as to the grantee. In the corrected draft the word "capitalist"(grantee) is
changed to "partnership." The contract in its final form retains the substituted term "partnership."
The defendant was, therefore, led to the belief that plaintiff had the exclusive franchise, but that
the same was to be secured for or transferred to the partnership. The plaintiff no longer had the
exclusive franchise, or the option thereto, at the time the contract was perfected. But while he
had already lost his option thereto (when the contract was entered into), the principal obligation
that he assumed or undertook was to secure said franchise for the partnership, as the bottler
and distributor for the Mission Dry Corporation. We declare, therefore, that if he was guilty of a
false representation, this was not the causal consideration, or the principal inducement, that led
plaintiff to enter into the partnership agreement.

But, on the other hand, this supposed ownership of an exclusive franchise was actually the
consideration or price plaintiff gave in exchange for the share of 30 percent granted him in the
net profits of the partnership business. Defendant agreed to give plaintiff 30 per cent share in
the net profits because he was transferring his exclusive franchise to the partnership. Thus, in
the draft prepared by plaintiff's lawyer, Exhibit II, the following provision exists:

3. That the MANAGER, upon the organization of the said corporation, shall forthwith transfer to
the said corporation his exclusive right to bottle Mission products and to sell them throughout
the Philippines. As a consideration for such transfer, the CAPITALIST shall transfer to the
Manager fully paid non assessable shares of the said corporation . . . twenty-five per centum of
the capital stock of the said corporation. (Par. 3, Exhibit II; emphasis ours.)

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

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

El dolo incidental no es el que puede producirse en el cumplimiento del contrato sino que
significa aqui, el que concurriendoen el consentimiento, o precediendolo, no influyo para
arrancar porsi solo el consentimiento ni en la totalidad de la obligacion, sinoen algun extremo o
accidente de esta, dando lugar tan solo a una accion para reclamar indemnizacion de
perjuicios. (8 Manresa 602.)

Having arrived at the conclusion that the agreement may not be declared null and void, the
question that next comes before us is, May the agreement be carried out or executed? We find
no merit in the claim of plaintiff that the partnership was already a fait accompli from the time of
the operation of the plant, as it is evident from the very language of the agreement that the
parties intended that the execution of the agreement to form a partnership was to be carried out
at a later date. They expressly agreed that they shall form a partnership. (Par. No. 1, Exhibit A.)
As a matter of fact, from the time that the franchise from the Mission Dry Corporation was
obtained in California, plaintiff himself had been demanding that defendant comply with the
agreement. And plaintiff's present action seeks the enforcement of this agreement. Plaintiff's
claim, therefore, is both inconsistent with their intention and incompatible with his own conduct
and suit.

As the trial court correctly concluded, the defendant may not be compelled against his will to
carry out the agreement nor execute the partnership papers. Under the Spanish Civil Code, the
defendant has an obligation to do, not to give. The law recognizes the individual's freedom or
liberty to do an act he has promised to do, or not to do it, as he pleases. It falls within what
Spanish commentators call a very personal act (acto personalismo), of which courts may not
compel compliance, as it is considered an act of violence to do so.

Efectos de las obligaciones consistentes en hechos personalismo.—Tratamos de la ejecucion

de las obligaciones de hacer en el solocaso de su incumplimiento por parte del deudor, ya sean
los hechos personalisimos, ya se hallen en la facultad de un tercero; porque el complimiento
espontaneo de las mismas esta regido por los preceptos relativos al pago, y en nada les
afectan las disposiciones del art. 1.098.

Esto supuesto, la primera dificultad del asunto consiste en resolver si el deudor puede ser
precisado a realizar el hecho y porque medios.

Se tiene por corriente entre los autores, y se traslada generalmente sin observacion el principio
romano nemo potest precise cogi ad factum. Nadie puede ser obligado violentamente a
haceruna cosa. Los que perciben la posibilidad de la destruccion deeste principio, añaden que,
aun cuando se pudiera obligar al deudor, no deberia hacerse, porque esto constituiria una
violencia, y noes la violenciamodo propio de cumplir las obligaciones (Bigot, Rolland, etc.). El
maestro Antonio Gomez opinaba lo mismo cuandodecia que obligar por la violencia seria infrigir
la libertad eimponer una especie de esclavitud.

xxx xxx xxx

En efecto; las obligaciones contractuales no se acomodan biencon el empleo de la fuerza fisica,

no ya precisamente porque seconstituya de este modo una especie de esclavitud, segun el
dichode Antonio Gomez, sino porque se supone que el acreedor tuvo encuenta el caracter
personalisimo del hecho ofrecido, y calculo sobre laposibilidad de que por alguna razon no se
realizase. Repugna,ademas, a la conciencia social el empleo de la fuerza publica, mediante
coaccion sobre las personas, en las relaciones puramente particulares; porque la evolucion de
las ideas ha ido poniendo masde relieve cada dia el respeto a la personalidad humana, y nose
admite bien la violencia sobre el individuo la cual tiene caracter visiblemente penal, sino por
motivos que interesen a la colectividad de ciudadanos. Es, pues, posible y licita esta violencia
cuando setrata de las obligaciones que hemos llamado ex lege, que afectanal orden social y a
la entidad de Estado, y aparecen impuestas sinconsideracion a las conveniencias particulares,
y sin que por estemotivo puedan tampoco ser modificadas; pero no debe serlo cuandola
obligacion reviste un interes puramente particular, como sucedeen las contractuales, y cuando,
por consecuencia, paraceria salirseel Estado de su esfera propia, entrado a dirimir, con apoyo
dela fuerza colectiva, las diferencias producidas entre los ciudadanos. (19 Scaevola 428, 431-
432.)

The last question for us to decide is that of damages,damages that plaintiff is entitled to receive
because of defendant's refusal to form the partnership, and damages that defendant is also
entitled to collect because of the falsity of plaintiff's representation. (Article 1101, Spanish Civil
Code.) Under article 1106 of the Spanish Civil Code the measure of damages is the actual loss
suffered and the profits reasonably expected to be received, embraced in the terms daño
emergente and lucro cesante. Plaintiff is entitled under the terms of the agreement to 30 per
cent of the net profits of the business. Against this amount of damages, we must set off the
damage defendant suffered by plaintiff's misrepresentation that he had obtained a very high
percentage of share in the profits. We can do no better than follow the appraisal that the parties
themselves had adopted.

When defendant learned in Los Angeles that plaintiff did not have the exclusive franchise which
he pretended he had and which he had agreed to transfer to the partnership, his spontaneous
reaction was to reduce plaintiff's share form 30 per cent to 15 per cent only, to which reduction
defendant appears to have readily given his assent. It was under this understanding, which
amounts to a virtual modification of the contract, that the bottling plant was established and
plaintiff worked as Manager for the first three months. If the contract may not be considered
modified as to plaintiff's share in the profits, by the decision of defendant to reduce the same to
one-half and the assent thereto of plaintiff, then we may consider the said amount as a fair
estimate of the damages plaintiff is entitled to under the principle enunciated in the case of
Varadero de Manila vs. Insular Lumber Co., 46 Phil. 176. Defendant's decision to reduce
plaintiff's share and plaintiff's consent thereto amount to an admission on the part of each of the
reasonableness of this amount as plaintiff's share. This same amount was fixed by the trial
court. The agreement contains the stipulation that upon the termination of the partnership,
defendant was to convey the franchise back to plaintiff (Par. 11, Exhibit A). The judgment of the
trial court does not fix the period within which these damages shall be paid to plaintiff. In view of
paragraph 11 of Exhibit A, we declare that plaintiff's share of 15 per cent of the net profits shall
continue to be paid while defendant uses the franchise from the Mission Dry Corporation.

With the modification above indicated, the judgment appealed from is hereby affirmed. Without
costs.

SECOND DIVISION

G.R. No. 108253 February 23, 1994

LYDIA L. GERALDEZ, petitioner,

vs.
HON. COURT OF APPEALS and KENSTAR TRAVEL CORPORATION, respondents.

Natividad T. Perez for petitioner.

Bito, Lozada, Ortega & Castillo for private respondent.

REGALADO, J.:

Our tourism industry is not only big business; it is a revenue support of the nation's economy. It
has become a matter of public interest as to call for its promotion and regulation on a cabinet
level. We have special laws and policies for visiting tourists, but such protective concern has not
been equally extended to Filipino tourists going abroad. Thus, with the limited judicial relief
available within the ambit of present laws, our tourists often prefer who fail to deliver on their
undertakings. This case illustrates the recourse of one such tourist who refused to forget.

An action for damages by reason of contractual breach was filed by petitioner Lydia L. Geraldez
against private respondent Kenstar Travel Corporation, docketed as Civil Case No. Q-90-4649
of the Regional Trial Court of Quezon City, Branch 80.1 After the parties failed to arrive at an
amicable settlement, trial on the merits ensued.

Culling from the records thereof, we find that sometime in October, 1989, Petitioner came to
know about private respondent from numerous advertisements in newspapers of general
circulation regarding tours in Europe. She then contacted private respondent by phone and the
latter sent its representative, Alberto Vito Cruz, who gave her the brochure for the tour and later
discussed its highlights. The European tours offered were classified into four, and petitioner
chose the classification denominated as "VOLARE 3" covering a 22-day tour of Europe for
$2,990.00. She paid the total equivalent amount of P190,000.00 charged by private respondent
for her and her sister, Dolores.

Petitioner claimed that, during the tour, she was very uneasy and disappointed when it turned
out that, contrary to what was stated in the brochure, there was no European tour manager for
their group of tourists, the hotels in which she and the group were bullited were not first-class,
the UGC Leather Factory which was specifically added as a highlight of the tour was not visited,
and the Filipino lady tour guide by private respondent was a first timer, that is, she was
performing her duties and responsibilities as such for the first time.2

In said action before the Regional Trial Court of Quezon City, petitioner likewise moved for the
issuance of a writ of preliminary attachment against private respondent on the ground that it
committed fraud in contracting an obligation, as contemplated in Section 1(d), Rule 57 of the
Rules of Court, to which no opposition by the latter appears on the record. This was granted by
the court a quo3 but the preliminary attachment was subsequently lifted upon the filing by
private respondent of a counterbond amounting to P990,000.00.4
During the pendency of said civil case for damages, petitioner also filed other complaints before
the Department of Tourism in DOT Case No. 90-121 and the Securities and Exchange
Commission in PED Case No. 90-3738,5 wherein, according to petitioner, herein private
respondent was meted out a fine of P10,000.00 by the Commission and P5,000.00 by the
Department,6 which facts are not disputed by private respondent in its comment on the present
petition.

On July 9, 1991, the court a quo rendered its decision7 ordering private respondent to pay
petitioner P500.000.00 as moral damages, P200,000.00 as nominal damages, P300,000.00 as
exemplary damages, P50,000.00 as and for attorney's fees, and the costs of the suit.8 On
appeal, respondent court9 deleted the award for moral and exemplary damages, and reduced
the awards for nominal damages and attorney's fees to P30,000.00 and P10,000.00,
respectively. 10

Hence, the instant petition from which, after sifting through the blades of contentions alternately
thrust and parried in the exchanges of the parties, the pivotal issue that emerges is whether or
not private respondent acted in bad faith or with gross negligence in discharging its obligations
under the contract.

Both the respondent court and the court a quo agree that private respondent failed to comply
faithfully with its commitments under the Volare 3 tour program, more particularly in not
providing the members of the tour group with a European tour manger whose duty, inter alia,
was to explain the points of interest of and familiarize the tour group with the places they would
visit in Europe, and in assigning instead a first timer Filipino tour guide, in the person of Rowena
Zapanta, 11 to perform that role which definitely requires experience and knowledge of such
places. It is likewise undisputed that while the group was able to pay a visit to the site of the
UGC Leather Factory, they were brought there at a very late hour such that the factory was
already closed and they were unable to make purchases at supposedly discounted prices. 12
As to the first-class hotels, however, while the court a quo found that the hotels were not fist-
class, respondent court believed otherwise, or that, at least, there was substantial compliance
with such a representation.

While clearly there was therefore a violation of the rights of petitioner under the aforementioned
circumstances, respondent court, contrary to the findings of the trial court, ruled that no malice
or bad faith could be imputed to private respondent, hence there is no justification for the award
of moral and exemplary damages. Furthermore, it held that while petitioner is entitled to nominal
damages, the amount awarded by the trial court was unconscionable since petitioner did not
suffer actual or substantial damage from the breach of contract, 13 hence its reduction of such
award as hereinbefore stated.

After thorough and painstaking scrutiny of the case records of both the trial and appellate
courts, we are satisfactorily convinced, and so hold, that private respondent did commit
fraudulent misrepresentations amounting to bad faith, to the prejudice of petitioner and the
members of the tour group.
By providing the Volare 3 tourist group, of which petitioner was a member, with an
inexperienced and a first timer tour escort, private respondent manifested its indifference to the
convenience, satisfaction and peace of mind of its clients during the trip, despite its express
commitment to provide such facilities under the Volare 3 Tour Program which had the grandiose
slogan "Let your heart sing. 14

Evidently, an inexperienced tour escort, who admittedly had not even theretofore been to
Europe, 15 cannot effectively acquaint the tourists with the interesting areas in the cities and
places included in the program, or to promptly render necessary assistance, especially where
the latter are complete strangers thereto, like witnesses Luz Sui Haw and her husband who
went to Europe for their honeymoon. 16

We agree with petitioner that the selection of Zapanta as the group's tour guide was deliberate
and conscious choice on the part of private respondent in order to afford her an on-the-job
training and equip her with the proper opportunities so as to later qualify her as an
"experienced" tour guide and eventually be an asset of respondent corporation. 17
Unfortunately, this resulted in a virtual project experimentation with petitioner and the members
of the tour as the unwitting participants.

We are, therefore, one with respondent court in faulting private respondent's choice of Zapanta
as a qualified tour guide for the Volare 3 tour package. It brooks no argument that to be true to
its undertakings, private respondent should have selected an experienced European tour guide,
or it could have allowed Zapanta to go merely as an understudy under the guidance, control and
supervision of an experienced and competent European or Filipino tour guide, 18 who could
give her the desired training.

Moreover, a tour guide is supposed to attend to the routinary needs of the tourists, not only
when the latter ask for assistance but at the moment such need becomes apparent. In other
words, the tour guide, especially by reason of her experience in previous tours, must be able to
anticipate the possible needs and problems of the tourists instead of waiting for them to bring it
to her attention. While this is stating the obvious, it is her duty to see to it that basic personal
necessities such as soap, towels and other daily amenities are provided by the hotels. It is also
expected of her to see to it that the tourists are provided with sanitary surroundings and to
actively arrange for medical attention in case of accidents, as what befell petitioner's sister and
wherein the siblings had to practically fend for themselves since, after merely calling for an
ambulance, Zapanta left with the other tour participants. 19

Zapanta fell far short of the performance expected by the tour group, her testimony in open
court being revelatory of her inexperience even on the basic function of a tour guide, to wit:

Q Now, are you aware that there were times that the tourists under the "Volare 3" were not
provided with soap and towels?
A They did not tell me that but I was able to ask them later on but then nobody is
complaining. 20 . . . .

The inability of the group to visit the leather factory is likewise reflective of the neglect and
ineptness of Zapanta in attentively following the itinerary of the day. This incompetence must
necessarily be traced to the lack of due diligence on the part of private respondent in the
selection of its employees. It is true that among the thirty-two destinations, which included
twenty-three cities and special visits to nine tourist spots, this was the only place that was not
visited. 21 It must be noted, however, that the visit to the UGC Leather Factory was one of the
highlights 22 of the Volare 3 program which even had to be specifically inserted in the itinerary,
hence it was incumbent upon the organizers of the tour to take special efforts to ensure the
same. Besides, petitioner did expect much from the visit to that factory since it was represented
by private respondent that quality leather goods could be bought there at lower prices. 23

Private respondent represents Zapanta's act of making daily overseas calls to Manila as an
exercise of prudence and diligence on the latter's part as a tour guide. 24 It further claims that
these calls were needed so that it could monitor the progress of the tour and respond to any
problem immediately. 25 We are not persuaded. The truth of the matter is that Zapanta, as an
inexperienced trainee-on-the-job, was required to make these calls to private respondent for the
latter to gauge her ability in coping with her first assignment and to provide instructions to her.
26

Clearly, therefore, private respondent's choice of Zapanta as the tour guide is a manifest
disregard of its specific assurances to the tour group, resulting in agitation and anxiety on their
part, and which deliberate omission is contrary to the elementary rules of good faith and fair
play. It is extremely doubtful if any group of Filipino tourists would knowingly agree to be used in
effect as guinea pigs in an employees' training program of a travel agency, to be conducted in
unfamiliar European countries with their diverse cultures, lifestyles and languages.

On the matter of the European tour manager, private respondent's advertisement in its tour
contract declares and represents as follows:

FILIPINO TOUR ESCORT!

He will accompany you throughout Europe. He speaks your language, shares your culture and
feels your excitement.

He won't be alone because you will also be accompanied by a . . .

EUROPEAN TOUR MANAGER!

You get the best of both worlds. Having done so may tours in the past with people like you, he
knows your sentiments, too. So knowledgeable about Europe, there is hardly a question he
can't answer. 27
Private respondent contends that the term "European Tour Manager" does not refer to an
individual but to an organization, allegedly the Kuoni Travel of Switzerland which supposedly
prepared the itinerary for its "Volare Europe Tour," negotiated with all the hotels in Europe,
selected tourist spots and historical places to visit, and appointed experienced local tour guides
for the tour group. 28

We regret this unseemly quibbling which perforce cannot be allowed to pass judicial muster.

A cursory reading of said advertisement will readily reveal the express representation that the
contemplated European tour manager is a natural person, and not a juridical one as private
respondent asserts. A corporate entity could not possibly accompany the members of the tour
group to places in Europe; neither can it answer questions from the tourists during the tour. Of
course, it is absurd that if a tourist would want to know how he could possibly go to the nearest
store or supermarket, he would still have to call Kuoni Travel of Switzerland.

Furthermore, both lower courts observed, and we uphold their observations, that indeed private
respondent had the obligation to provide the tour group not only with a European tour manger,
but also with local European tour guides. The latter, parenthetically, were likewise never made
available. 29 Zapanta claims that she was accompanied by a European local tour guide in most
of the major cities in Europe. We entertain serious doubts on, and accordingly reject, this
pretension for she could not even remember the name of said European tour guide. 30 If such a
guide really existed, it is incredible why she could not even identify the former when she testified
a year later, despite the length of their sojourn and the duration of their association.

As to why the word "he" was used in the aforequoted advertisement, private respondent
maintains that the pronoun "he" also includes the word "it," as where it is used as a "nominative
case form in general statements (as in statutes) to include females, fictitious persons (as
corporations)." 31 We are constrained to reject this submission as patently strained and
untenable. As already demonstrated, it is incredible that the word "he" was used by private
respondent to denote an artificial or corporate being. From its advertisement, it is beyond cavil
that the import of the word "he" is a natural and not a juridical person. There is no need for
further interpretation when the wordings are clear. The meaning that will determine the legal
effect of a contract is that which is arrived at by objective standards; one is bound, not by what
he subjectively intends, but by what he leads others reasonably to think he intends. 32

In an obvious but hopeless attempt to arrive at a possible justification, private respondent further
contends that it explained the concept of a European tour manager to its clients at the pre-
departure briefing, which petitioner did not attend. 33 Significantly, however, private respondent
failed to present even one member of the tour group to substantiate its claim. It is a basic rule of
evidence that a party must prove his own affirmative allegations. 34 Besides, if it was really its
intention to provide a juridical European tour manager, it could not have kept on promising its
tourists during the tour that a European tour manager would come, 35 supposedly to join and
assist them.
Veering to another line of defense, private respondent seeks sanctuary in the delimitation of its
responsibility as printed on the face of its brochure on the Volare 3 program, to wit:

RESPONSIBILITIES: KENSTAR TRAVEL CORPORATION, YOUR TRAVEL AGENT, THEIR

EMPLOYEES OR SUB-AGENTS SHALL BE RESPONSIBLE ONLY FOR BOOKING AND
MAKING ARRANGEMENTS AS YOUR AGENTS. Kenstar Travel Corporation, your travel
Agent, their employees or sub-agents assume no responsibility or liability arising out of or in
connection with the services or lack of services, of any train, vessel, other conveyance or station
whatsoever in the performance of their duty to the passengers or guests, neither will they be
responsible for any act, error or omission, or of any damages, injury, loss, accident, delay or
irregularity which may be occasioned by reason (of) or any defect in . . . lodging place or any
facilities . . . . (Emphasis by private respondent.) 36

While, generally, the terms of a contract result from the mutual formulation thereof by the parties
thereto, it is of common knowledge that there are certain contracts almost all the provisions of
which have been drafted by only one party, usually a corporation. Such contracts are called
contracts of adhesion, because the only participation of the party is the affixing of his signature
or his "adhesion" thereto. 37 In situations like these, when a party imposes upon another a
ready-made form of contract, 38 and the other is reduced to the alternative of taking it or leaving
it, giving no room for negotiation and depriving the latter of the opportunity to bargain on equal
footing, a contract of adhesion results. While it is true that an adhesion contract is not
necessarily void, it must nevertheless be construed strictly against the one who drafted the
same. 39 This is especially true where the stipulations are printed in fine letters and are hardly
legible as is the case of the tour contract 40 involved in the present controversy.

Yet, even assuming arguendo that the contractual limitation aforequoted is enforceable, private
respondent still cannot be exculpated for the reason that responsibility arising from fraudulent
acts, as in the instant case, cannot be stipulated against by reason of public policy.
Consequently, for the foregoing reasons, private respondent cannot rely on its defense of
"substantial compliance" with the contract.

Private respondent submits likewise that the tour was satisfactory, considering that only
petitioner, out of eighteen participants in the Volare 3 Tour Program, actually complained. 41
We cannot accept this argument. Section 28, Rule 130 of the Rules of Court declares that the
rights of a party cannot be prejudiced by an act, declaration, or omission of another, a statutory
adaptation of the first branch of the hornbook rule of res inter alios acta 42 which we do not
have to belabor here.

Besides, it is a commonly known fact that there are tourists who, although the tour was far from
what the tour operator undertook under the contract, choose to remain silent and forego
recourse to a suit just to avoid the expenses, hassle and rancor of litigation, and not because
the tour was in accord with was promised. One does not relish adding to the bitter memory of a
misadventure the unpleasantness of another extended confrontation. Furthermore, contrary to
private respondent's assertion, not only petitioner but two other members of the tour group, Luz
Sui Haw and Ercilla Ampil, confirmed petitioner's complaints when they testified as witnesses for
her as plaintiff in the court below. 43

Private respondent likewise committed a grave misrepresentation when it assured in its Volare 3
tour package that the hotels it had chosen would provide the tourists complete amenities and
were conveniently located along the way for the daily itineraries. 44 It turned out that some of
the hotels were not sufficiently equipped with even the basic facilities and were at a distance
from the cities covered by the projected tour. Petitioner testified on her disgust with the
conditions and locations of the hotels, thus:

Q And that these bathrooms ha(ve) bath tub(s) and hot and cold shower(s)?

A Not all, sir.

Q Did they also provide soap and towels?

A Not all, sir, some (had) no toilet paper. 45

Q Which one?

A The 2 stars, the 3 stars and some 4 stars (sic) hotels.

Q What I am saying . . .

A You are asking a question? I am answering you. 2 stars, 3 stars and some 4 stars (sic)
hotels, no soap, toilet paper and (the) bowl
stinks. . . .

xxx xxx xxx

Q And that except for the fact that some of these four star hotels were outside the city they
provided you with the comfort?

A Not all, sir.

Q Can you mention some which did not provide you that comfort?

A For example, if Ramada Hotel Venezia is in Quezon City, our hotel is in Meycauayan.
And if Florence or Ferenze is in manila, our hotel is in Muntinlupa. 46

xxx xxx xxx

A One more hotel, sir, in Barcelona, Hotel Saint Jacques is also outside the city. Suppose
Barcelona is in Quezon City, our hotel is in Marilao. We looked for this hotel inside the city of
Barcelona for three (3) hours. We wasted our time looking for almost all the hotels and places
where to eat. That is the kind of tour that you have. 47

Luz Sui Haw, who availed of the Volare 3 tour package with her husband for their honeymoon,
shared the sentiments of petitioner and testified as follows:

Q . . . Will you kindly tell us why the hotels where you stayed are not considered first class
hotels?

A Because the hotels where we went, sir, (are) far from the City and the materials used are
not first class and at times there were no towels and soap. And the two (2) hotels in Nevers and
Florence the conditions (are) very worse (sic). 48

Q Considering that you are honeymooners together with your husband, what (were) your
feelings when you found out that the condition were not fulfilled by the defendant?

A I would like to be very honest. I got sick when I reached Florence and half of my body
got itch (sic). I think for a honeymooner I would like to emphasize that we should enjoy that day
of our life and it seems my feet kept on itching because of the condition of the hotel. And I was
so dissatisfied because the European Tour Manager was not around there (were) beautiful
promises. They kept on telling us that a European Tour Manager will come over; until our Paris
tour was ended there was no European tour manager. 49

xxx xxx xxx

Q You will file an action against the defendant because there was a disruption of your
happiness, in your honeymoon, is that correct?

A That is one of my causes of (sic) coming up here. Secondly, i was very dissatisfied (with)
the condition. Thirdly, that Volare 89 it says it will let your heart sing. That is not true. There was
no European tour (manager) and the highlights of the tour (were) very poor. The hotels were
worse (sic) hotels. 50

Q All the conditions of the hotels as you . . .

A Not all but as stated in the brochure that it is first class hotel. The first class hotels state
that all things are beautiful and it is neat and clean with complete amenities and I encountered
the Luxembourg hotel which is quite very dilapidated because of the flooring when you step on
the side "kumikiring" and the cabinets (are) antiques and as honeymooners we don't want to be
disturbed or seen. 51

xxx xxx xxx

Q None of these are first class hotels?

A Yes, sir.

Q So, for example Ramada Hotel Venezia which according to Miss Geraldez is first class hotel
is not first class hotel?

A Yes, sir.

Q You share the opinion of Miss Geraldez?

A Yes, sir.

Q The same is true with Grand Hotel Palatino which is not a first class hotel?

A Yes, sir.

Q And Hotel Delta Florence is not first class hotel?

A That is how I got my itch, sir. Seven (7) days of itch.

Q How about Hotel Saint-Jacquez, Paris?

A It is far from the city. It is not first class hotel.

Q So with Hotel Le Prieure Du Coeur de Jesus neither a first class hotel?

A Yes, sir.

Q Hotel De Nevers is not a first class hotel?

A Yes, sir.

Q Hotel Roc Blanc Andorra is not a first class hotel?

A Yes, sir.

Q Saint Just Hotel, Barcelona is not a first class hotel?

A Yes, sir.

Q Hotel Pullman Nice neither is not a first class hotel?

A Yes, sir.

Q Hotel Prinz Eugen and Austrotel are not first class hotels?

A Yes, sir. 52

Private respondent cannot escape responsibility by seeking refuge under the listing of first-class
hotels in publications like the "Official Hotel and Resort Guide" and Worldwide Hotel Guide." 53
Kuoni Travel, its tour operator, 54 which prepared the hotel listings, is a European-based travel
agency 55 and, as such, could have easily verified the matter of first-class accommodations.
Nor can it logically claim that the first-class hotels in Europe may not necessarily be the first-
class hotels here in the Philippines. 56 It is reasonable for petitioner to assume that the
promised first-class hotels are equivalent to what are considered first-class hotels in Manila.
Even assuming arguendo that there is indeed a difference in classifications, it cannot be
gainsaid that a first-class hotel could at the very least provide basic necessities and sanitary
accommodations. We are accordingly not at all impressed by private respondent's attempts to
trivialize the complaints thereon by petitioner and her companions.

In a last ditch effort to justify its choice of the hotels, private respondent contends that it merely
provided such "first class" hotels which are commensurate to the tourists budget, or which were,
under the given circumstances, the "best for their money." It postulated that it could not have
offered better hostelry when the consideration paid for hotel accommodations by the tour
participants was only so much,57 and the tour price of $2,990.00 covers a European tour for 22
days inclusive of lower room rates and meals. 58 this is implausible, self-serving and borders on
sophistry.

The fact that the tourists were to pay a supposedly lower amount, such that private respondent
allegedly retained hardly enough as reasonable profit, 59 does not justify a substandard form of
service in return. It was private respondent, in the first place, which fixed the charges for the
package tour and determined the services that could be availed of corresponding to such price.
Hence, it cannot now be heard to complain that it only made a putative marginal profit out of the
transaction. if it could not provide the tour participants with first-class lodgings on the basis of
the amount that they paid, it could and should have instead increased the price to enable it to
arrange for the promised first-class accommodations.

On the foregoing considerations, respondent court erred in deleting the award for moral and
exemplary damages. Moral damages may be awarded in breaches of contract where the obligor
acted fraudulently or in bad faith. 60 From the facts earlier narrated, private respondent can be
faulted with fraud in the inducement, which is employed by a party to a contract in securing the
consent of the other.

This fraud or dolo which is present or employed at the time of birth or perfection of a contract
may either be dolo causante or dolo incidente. The first, or causal fraud referred to in Article
1338, are those deceptions or misrepresentations of a serious character employed by one party
and without which the other party would not have entered into the contract. Dolo incidente, or
incidental fraud which is referred to in Article 1344, are those which are not serious in character
and without which the other party would still have entered into the contract. 61 Dolo causante
determines or is the essential cause of the consent, while dolo incidente refers only to some
particular or accident of the
obligations. 62 The effects of dolo causante are the nullity of the contract and the
indemnification of damages, 63 and dolo incidente also obliges the person employing it to pay
damages. 64

In either case, whether private respondent has committed dolo causante or dolo incidente by
making misrepresentations in its contracts with petitioner and other members of the tour group,
which deceptions became patent in the light of after-events when, contrary to its
representations, it employed an inexperienced tour guide, housed the tourist group in
substandard hotels, and reneged on its promise of a European tour manager and the visit to the
leather factory, it is indubitably liable for damages to petitioner.

In the belief that an experienced tour escort and a European tour manager would accompany
them, with the concomitant reassuring and comforting thought of having security and assistance
readily at hand, petitioner was induced to join the Volare 3 tourists, instead of travelling alone 65
She likewise suffered serious anxiety and distress when the group was unable to visit the
leather factory and when she did not receive first-class accommodations in their lodgings which
were misrepresented as first-class hotels. These, to our mind, justify the award for moral
damages, which are in the category of an award designed to compensate the claimant for that
injury which she had suffered, and not as a penalty on the wrongdoer, 66 we believe that an
award of P100,000.00 is sufficient and reasonable.

When moral damages are awarded, especially for fraudulent conduct, exemplary damages may
also be decreed. Exemplary damages are imposed by way of example or correction for the
public good, in addition to moral, temperate, liquidated or compensatory damages. According to
the code Commission, exemplary damages are required by public policy, for wanton acts must
be suppressed. 67 An award, therefore, of P50,000.00 is called for to deter travel agencies from
resorting to advertisements and enticements with the intention of realizing considerable profit at
the expense of the public, without ensuring compliance with their express commitments. While,
under the present state of the law, extraordinary diligence is not required in travel or tour
contracts, such as that in the case at bar, the travel agency acting as tour operator must
nevertheless be held to strict accounting for contracted services, considering the public interest
in tourism, whether in the local or in the international scene. Consequently, we have to likewise
reject the theory of private respondent that the promise it made in the tour brochure may be
regarded only as "commendatory trade talk." 68

With regard to the honorarium for counsel as an item of damages, since we are awarding moral
and exemplary damages, 69 and considering the legal importance of the instant litigation and
the efforts of counsel evident from the records of three levels of the judicial hierarchy, we
favorably consider the amount of P20,000.00 therefor.
WHEREFORE, premises considered, the decision of respondent Court of Appeals is hereby
SET ASIDE, and another one rendered, ordering private respondent Kenstar Travel Corporation
to pay petitioner Lydia L. Geraldez the sums of P100,000.00 by way of moral damages,
P50,000.00 as exemplary damages, and P20,000.00 as and for attorney's fees, with costs
against private respondent. The award for nominal damages is hereby deleted.

EN BANC

G.R. No. 34840 September 23, 1931

NARCISO GUTIERREZ, plaintiff-appellee,

vs.
BONIFACIO GUTIERREZ, MARIA V. DE GUTIERREZ, MANUEL GUTIERREZ, ABELARDO
VELASCO, and SATURNINO CORTEZ, defendants-appellants.

L.D. Lockwood for appellants Velasco and Cortez.

San Agustin and Roxas for other appellants.
Ramon Diokno for appellee.

MALCOLM, J.:

This is an action brought by the plaintiff in the Court of First Instance of Manila against the five
defendants, to recover damages in the amount of P10,000, for physical injuries suffered as a
result of an automobile accident. On judgment being rendered as prayed for by the plaintiff, both
sets of defendants appealed.

On February 2, 1930, a passenger truck and an automobile of private ownership collided while
attempting to pass each other on the Talon bridge on the Manila South Road in the municipality
of Las Piñas, Province of Rizal. The truck was driven by the chauffeur Abelardo Velasco, and
was owned by Saturnino Cortez. The automobile was being operated by Bonifacio Gutierrez, a
lad 18 years of age, and was owned by Bonifacio's father and mother, Mr. and Mrs. Manuel
Gutierrez. At the time of the collision, the father was not in the car, but the mother, together will
several other members of the Gutierrez family, seven in all, were accommodated therein. A
passenger in the autobus, by the name of Narciso Gutierrez, was en route from San Pablo,
Laguna, to Manila. The collision between the bus and the automobile resulted in Narciso
Gutierrez suffering a fracture right leg which required medical attendance for a considerable
period of time, and which even at the date of the trial appears not to have healed properly.

It is conceded that the collision was caused by negligence pure and simple. The difference
between the parties is that, while the plaintiff blames both sets of defendants, the owner of the
passenger truck blames the automobile, and the owner of the automobile, in turn, blames the
truck. We have given close attention to these highly debatable points, and having done so, a
majority of the court are of the opinion that the findings of the trial judge on all controversial
questions of fact find sufficient support in the record, and so should be maintained. With this
general statement set down, we turn to consider the respective legal obligations of the
defendants.

In amplification of so much of the above pronouncement as concerns the Gutierrez family, it

may be explained that the youth Bonifacio was in incompetent chauffeur, that he was driving at
an excessive rate of speed, and that, on approaching the bridge and the truck, he lost his head
and so contributed by his negligence to the accident. The guaranty given by the father at the
time the son was granted a license to operate motor vehicles made the father responsible for
the acts of his son. Based on these facts, pursuant to the provisions of article 1903 of the Civil
Code, the father alone and not the minor or the mother, would be liable for the damages caused
by the minor.

We are dealing with the civil law liability of parties for obligations which arise from fault or
negligence. At the same time, we believe that, as has been done in other cases, we can take
cognizance of the common law rule on the same subject. In the United States, it is uniformly
held that the head of a house, the owner of an automobile, who maintains it for the general use
of his family is liable for its negligent operation by one of his children, whom he designates or
permits to run it, where the car is occupied and being used at the time of the injury for the
pleasure of other members of the owner's family than the child driving it. The theory of the law is
that the running of the machine by a child to carry other members of the family is within the
scope of the owner's business, so that he is liable for the negligence of the child because of the
relationship of master and servant. (Huddy On Automobiles, 6th ed., sec. 660; Missell vs. Hayes
[1914], 91 Atl., 322.) The liability of Saturnino Cortez, the owner of the truck, and of his
chauffeur Abelardo Velasco rests on a different basis, namely, that of contract which, we think,
has been sufficiently demonstrated by the allegations of the complaint, not controverted, and the
evidence. The reason for this conclusion reaches to the findings of the trial court concerning the
position of the truck on the bridge, the speed in operating the machine, and the lack of care
employed by the chauffeur. While these facts are not as clearly evidenced as are those which
convict the other defendant, we nevertheless hesitate to disregard the points emphasized by the
trial judge. In its broader aspects, the case is one of two drivers approaching a narrow bridge
from opposite directions, with neither being willing to slow up and give the right of way to the
other, with the inevitable result of a collision and an accident.

The defendants Velasco and Cortez further contend that there existed contributory negligence
on the part of the plaintiff, consisting principally of his keeping his foot outside the truck, which
occasioned his injury. In this connection, it is sufficient to state that, aside from the fact that the
defense of contributory negligence was not pleaded, the evidence bearing out this theory of the
case is contradictory in the extreme and leads us far afield into speculative matters.

The last subject for consideration relates to the amount of the award. The appellee suggests
that the amount could justly be raised to P16,517, but naturally is not serious in asking for this
sum, since no appeal was taken by him from the judgment. The other parties unite in
challenging the award of P10,000, as excessive. All facts considered, including actual
expenditures and damages for the injury to the leg of the plaintiff, which may cause him
permanent lameness, in connection with other adjudications of this court, lead us to conclude
that a total sum for the plaintiff of P5,000 would be fair and reasonable. The difficulty in
approximating the damages by monetary compensation is well elucidated by the divergence of
opinion among the members of the court, three of whom have inclined to the view that P3,000
would be amply sufficient, while a fourth member has argued that P7,500 would be none too
much.

In consonance with the foregoing rulings, the judgment appealed from will be modified, and the
plaintiff will have judgment in his favor against the defendants Manuel Gutierrez, Abelardo
Velasco, and Saturnino Cortez, jointly and severally, for the sum of P5,000, and the costs of
both instances.

EN BANC

G.R. No. L-48930 February 23, 1944

ANTONIO VAZQUEZ, petitioner,

vs.
FRANCISCO DE BORJA, respondent.

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

G.R. No. L-48931 February 23, 1944

FRANCISCO DE BORJA, petitioner,

vs.
ANTONIO VAZQUEZ, respondent.

OZAETA, J.:

This action was commenced in the Court of First Instance of Manila by Francisco de Borja
against Antonio Vazquez and Fernando Busuego to recover from them jointly and severally the
total sum of P4,702.70 upon three alleged causes of action, to wit: First, that in or about the
month of January, 1932, the defendants jointly and severally obligated themselves to sell to the
plaintiff 4,000 cavans of palay at P2.10 per cavan, to be delivered during the month of February,
1932, the said defendants having subsequently received from the plaintiff in virtue of said
agreement the sum of P8,400; that the defendants delivered to the plaintiff during the months of
February, March, and April, 1932, only 2,488 cavans of palay of the value of P5,224.80 and
refused to deliver the balance of 1,512 cavans of the value of P3,175.20 notwithstanding
repeated demands. Second, that because of defendants' refusal to deliver to the plaintiff the
said 1,512 cavans of palay within the period above mentioned, the plaintiff suffered damages in
the sum of P1,000. And, third, that on account of the agreement above mentioned the plaintiff
delivered to the defendants 4,000 empty sacks, of which they returned to the plaintiff only 2,490
and refused to deliver to the plaintiff the balance of 1,510 sacks or to pay their value amounting
to P377.50; and that on account of such refusal the plaintiff suffered damages in the sum of
P150.

The defendant Antonio Vazquez answered the complaint, denying having entered into the
contract mentioned in the first cause of action in his own individual and personal capacity, either
solely or together with his codefendant Fernando Busuego, and alleging that the agreement for
the purchase of 4,000 cavans of palay and the payment of the price of P8,400 were made by
the plaintiff with and to the Natividad-Vasquez Sabani Development Co., Inc., a corporation
organized and existing under the laws of the Philippines, of which the defendant Antonio
Vazquez was the acting manager at the time the transaction took place. By way of counterclaim,
the said defendant alleged that he suffered damages in the sum of P1,000 on account of the
filing of this action against him by the plaintiff with full knowledge that the said defendant had
nothing to do whatever with any and all of the transactions mentioned in the complaint in his
own individual and personal capacity.

The trial court rendered judgment ordering the defendant Antonio Vazquez to pay to the plaintiff
the sum of P3,175.20 plus the sum of P377.50, with legal interest on both sums, and absolving
the defendant Fernando Busuego (treasurer of the corporation) from the complaint and the
plaintiff from the defendant Antonio Vazquez' counterclaim. Upon appeal to the Court of
Appeals, the latter modified that judgment by reducing it to the total sum of P3,314.78, with legal
interest thereon and the costs. But by a subsequent resolution upon the defendant's motion for
reconsideration, the Court of Appeals set aside its judgment and ordered that the case be
remanded to the court of origin for further proceedings. The defendant Vazquez, not being
agreeable to that result, filed the present petition for certiorari (G.R. No. 48930) to review and
reverse the judgment of the Court of Appeals; and the plaintiff Francisco de Borja, excepting to
the resolution of the Court of Appeals whereby its original judgment was set aside and the case
was ordered remanded to the court of origin for further proceedings, filed a cross-petition for
certiorari (G.R. No. 48931) to maintain the original judgment of the Court of Appeals.

The original decision of the Court of Appeals and its subsequent resolutions on reconsideration
read as follows:

Es hecho no controvertido que el 25 de Febrero de 1932, el demandado-apelante vendio al

demandante 4,000 cavanes de palay al precio de P2.10 el cavan, de los cuales, dicho
demandante solamente recibio 2,583 cavanes; y que asimismo recibio para su envase 4,000
sacos vacios. Esta provbado que de dichos 4,000 sacos vacios solamente se entregaron, 2,583
quedando en poder del demandado el resto, y cuyo valor es el de P0.24 cada uno. Presentada
la demanda contra los demandados Antonio Vazquez y Fernando Busuego para el pago de la
cantidad de P4,702.70, con sus intereses legales desde el 1.o de marzo de 1932 hasta su
completo pago y las costas, el Juzgado de Primera Instancia de Manila el asunto condenando a
Antonio Vazquez a pagar al demandante la cantidad de P3,175.20, mas la cantidad de
P377.50, con sus intereses legales, absolviendo al demandado Fernando Busuego de la
demanda y al demandante de la reconvencion de los demandados, sin especial
pronunciamiento en cuanto a las costas. De dicha decision apelo el demandado Antonio
Vazquez, apuntado como principal error el de que el habia sido condenado personalmente, y
no la corporacion por el representada.

Segun la preponderancia de las pruebas, la venta hecha por Antonio Vazquez a favor de
Francisco de Borja de los 4,000 cavanes de palay fue en su capacidad de Presidente interino y
Manager de la corporacion Natividad-Vazquez Sabani Development Co., Inc. Asi resulta del
Exh. 1, que es la copia al carbon del recibo otorgado por el demandado Vazquez, y cuyo
original lo habia perdido el demandante, segun el. Asi tambien consta en los libros de la
corporacion arriba mencionada, puesto que en los mismos se ha asentado tanto la entrada de
los P8,400, precio del palay, como su envio al gobierno en pago de los alquileres de la
Hacienda Sabani. Asi mismo lo admitio Francisco de Borja al abogado Sr. Jacinto Tomacruz,
posterior presidente de la corporacion sucesora en el arrendamiento de la Sabani Estate,
cuando el solicito sus buenos oficios para el cobro del precio del palay no entregado. Asi
igualmente lo declaro el que hizo entrega de parte del palay a Borja, Felipe Veneracion, cuyo
testimonio no ha sido refutado. Y asi se deduce de la misma demanda, cuando se incluyo en
ella a Fernando Busuego, tesorero de la Natividad-Vazquez Sabani Development Co., Inc.

Siendo esto asi, la principal responsable debe ser la Natividad-Vazquez Sabani Development
Co., Inc., que quedo insolvente y dejo de existir. El Juez sentenciador declaro, sin embargo, al
demandado Vazquez responsable del pago de la cantidad reclamada por su negligencia al
vender los referidos 4,000 cavanes de palay sin averiguar antes si o no dicha cantidad existia
en las bodegas de la corporacion.

Resulta del Exh. 8 que despues de la venta de los 4,000 cavanes de palay a Francisco de
Borja, el mismo demandado vendio a Kwong Ah Phoy 1,500 cavanes al precio de P2.00 el
cavan, y decimos 'despues' porque esta ultima venta aparece asentada despues de la primera.
Segun esto, el apelante no solamente obro con negligencia, sino interviniendo culpa de su
parte, por lo que de acuerdo con los arts. 1102, 1103 y 1902 del Codigo Civil, el debe ser
responsable subsidiariamente del pago de la cantidad objecto de la demanda.

En meritos de todo lo expuesto, se confirma la decision apelada con la modificacion de que el

apelante debe pagar al apelado la suma de P2,295.70 como valor de los 1,417 cavanes de
palay que dejo de entregar al demandante, mas la suma de P339.08 como importe de los 1,417
sacos vacios, que dejo de devolver, a razon de P0.24 el saco, total P3,314.78, con sus
intereses legales desde la interposicion de la demanda y las costas de ambas instancias.

Vista la mocion de reconsideracion de nuestra decision de fecha 13 de Octubre de 1942, y

alegandose en la misma que cuando el apelante vendio los 1,500 cavanes de palay a Ah Phoy,
la corporacion todavia tenia bastante existencia de dicho grano, y no estando dicho extremo
suficientemente discutido y probado, y pudiendo variar el resultado del asunto, dejamos sin
efecto nuestra citada decision, y ordenamos la devolucion de la causa al Juzgado de origen
para que reciba pruebas al efecto y dicte despues la decision correspondiente.

Upon consideration of the motion of the attorney for the plaintiff-appellee in case CA-G.R. No.
8676, Francisco de Borja vs. Antonio Vasquez et al., praying, for the reasons therein given, that
the resolution of December 22, 1942, be reconsidered: Considering that said resolution
remanding the case to the lower court is for the benefit of the plaintiff-appellee to afford him
opportunity to refute the contention of the defendant-appellant Antonio Vazquez, motion denied.

The action is on a contract, and the only issue pleaded and tried is whether the plaintiff entered
into the contract with the defendant Antonio Vazquez in his personal capacity or as manager of
the Natividad-Vazquez Sabani Development Co., Inc. The Court of Appeals found that
according to the preponderance of the evidence "the sale made by Antonio Vazquez in favor of
Francisco de Borja of 4,000 cavans of palay was in his capacity as acting president and
manager of the corporation Natividad-Vazquez Sabani Development Co., Inc." That finding of
fact is final and, it resolving the only issue involved, should be determinative of the result.

The Court of Appeals doubly erred in ordering that the cause be remanded to the court of origin
for further trial to determine whether the corporation had sufficient stock of palay at the time
appellant sold, 1500 cavans of palay to Kwong Ah Phoy. First, if that point was material to the
issue, it should have been proven during the trial; and the statement of the court that it had not
been sufficiently discussed and proven was no justification for ordering a new trial, which, by the
way, neither party had solicited but against which, on the contrary, both parties now vehemently
protest. Second, the point is, in any event, beside the issue, and this we shall now discuss in
connection with the original judgment of the Court of Appeals which the plaintiff cross-petitioner
seeks to maintain.

The action being on a contract, and it appearing from the preponderance of the evidence that
the party liable on the contract is the Natividad-Vazquez Sabani Development Co., Inc. which is
not a party herein, the complaint should have been dismissed. Counsel for the plaintiff, in his
brief as respondent, argues that altho by the preponderance of the evidence the trial court and
the Court of Appeals found that Vazquez celebrated the contract in his capacity as acting
president of the corporation and altho it was the latter, thru Vazquez, with which the plaintiff had
contracted and which, thru Vazquez, had received the sum of P8,400 from Borja, and altho that
was true from the point of view of a legal fiction, "ello no impede que tambien sea verdad lo
alegado en la demanda de que la misma persona de Vasquez fue la que contrato con Borja y
que la misma persona de Vasquez fue quien recibio la suma de P8,400." But such argument is
invalid and insufficient to show that the president of the corporation is personally liable on the
contract duly and lawfully entered into by him in its behalf.

It is well known that a corporation is an artificial being invested by law with a personality of its
own, separate and distinct from that of its stockholders and from that of its officers who manage
and run its affairs. The mere fact that its personality is owing to a legal fiction and that it
necessarily has to act thru its agents, does not make the latter personally liable on a contract
duly entered into, or for an act lawfully performed, by them for an in its behalf. The legal fiction
by which the personality of a corporation is created is a practical reality and necessity. Without it
no corporate entities may exists and no corporate business may be transacted. Such legal
fiction may be disregarded only when an attempt is made to use it as a cloak to hide an unlawful
or fraudulent purpose. No such thing has been alleged or proven in this case. It has not been
alleged nor even intimated that Vazquez personally benefited by the contract of sale in question
and that he is merely invoking the legal fiction to avoid personal liability. Neither is it contended
that he entered into said contract for the corporation in bad faith and with intent to defraud the
plaintiff. We find no legal and factual basis upon which to hold him liable on the contract either
principally or subsidiarily.

The trial court found him guilty of negligence in the performance of the contract and held him
personally liable on that account. On the other hand, the Court of Appeals found that he "no
solamente obro con negligencia, sino interveniendo culpa de su parte, por lo que de acuerdo
con los arts. 1102, 1103 y 1902 del Codigo Civil, el debe ser responsable subsidiariamente del
pago de la cantidad objeto de la demanda." We think both the trial court and the Court of
Appeals erred in law in so holding. They have manifestly failed to distinguish a contractual from
an extracontractual obligation, or an obligation arising from contract from an obligation arising
from culpa aquiliana. The fault and negligence referred to in articles 1101-1104 of the Civil Code
are those incidental to the fulfillment or nonfullfillment of a contractual obligation; while the fault
or negligence referred to in article 1902 is the culpa aquiliana of the civil law, homologous but
not identical to tort of the common law, which gives rise to an obligation independently of any
contract. (Cf. Manila R.R. Co. vs. Cia. Trasatlantica, 38 Phil., 875, 887-890; Cangco vs. Manila
R.R. Co., 38 Phil. 768.) The fact that the corporation, acting thru Vazquez as its manager, was
guilty of negligence in the fulfillment of the contract, did not make Vazquez principally or even
subsidiarily liable for such negligence. Since it was the corporation's contract, its nonfulfillment,
whether due to negligence or fault or to any other cause, made the corporation and not its agent
liable.

On the other hand if independently of the contract Vazquez by his fault or negligence cause
damaged to the plaintiff, he would be liable to the latter under article 1902 of the Civil Code. But
then the plaintiff's cause of action should be based on culpa aquiliana and not on the contract
alleged in his complaint herein; and Vazquez' liability would be principal and not merely
subsidiary, as the Court of Appeals has erroneously held. No such cause of action was alleged
in the complaint or tried by express or implied consent of the parties by virtue of section 4 of
Rule 17. Hence the trial court had no jurisdiction over the issue and could not adjudicate upon it
(Reyes vs. Diaz, G.R. No. 48754.) Consequently it was error for the Court of Appeals to remand
the case to the trial court to try and decide such issue.

It only remains for us to consider petitioner's second assignment of error referring to the lower
courts' refusal to entertain his counterclaim for damages against the respondent Borja arising
from the bringing of this action. The lower courts having sustained plaintiff's action. The finding
of the Court of Appeals that according to the preponderance of the evidence the defendant
Vazquez celebrated the contract not in his personal capacity but as acting president and
manager of the corporation, does not warrant his contention that the suit against him is
malicious and tortious; and since we have to decide defendant's counterclaim upon the facts
found by the Court of Appeals, we find no sufficient basis upon which to sustain said
counterclaim. Indeed, we feel that a a matter of moral justice we ought to state here that the
indignant attitude adopted by the defendant towards the plaintiff for having brought this action
against him is in our estimation not wholly right. Altho from the legal point of view he was not
personally liable for the fulfillment of the contract entered into by him on behalf of the
corporation of which he was the acting president and manager, we think it was his moral duty
towards the party with whom he contracted in said capacity to see to it that the corporation
represented by him fulfilled the contract by delivering the palay it had sold, the price of which it
had already received. Recreant to such duty as a moral person, he has no legitimate cause for
indignation. We feel that under the circumstances he not only has no cause of action against the
plaintiff for damages but is not even entitled to costs.

The judgment of the Court of Appeals is reversed, and the complaint is hereby dismissed,
without any finding as to costs

FIRST DIVISION

G.R. No. 77648 August 7, 1989

CETUS DEVELOPMENT, INC., petitioner,

vs.
COURT OF APPEALS and ONG TENG, respondents.

G.R. No. 77647 August 7, 1989

CETUS DEVELOPMENT, INC., petitioner,

vs.
COURT OF APPEALS and EDERLINA NAVALTA, respondents.

G.R. No. 77649 August 7, 1989

CETUS DEVELOPMENT, INC., petitioner,

vs.
COURT OF APPEALS and JOSE LIWANAG, respondents.

G.R. No. 77650 August 7, 1989

CETUS DEVELOPMENT, INC., petitioner,

vs.
COURT OF APPEALS and LEANDRO CANLAS, respondents.
G.R. No. 77651 August 7, 1989

CETUS DEVELOPMENT, INC., petitioner,

vs.
COURT OF APPEALS and VICTORIA SUDARIO respondents.

G.R. No.77652 August 7, 1989

CETUS DEVELOPMENT, INC., petitioner,

vs.
COURT OF APPEALS and FLORA NAGBUYA respondents.

MEDIALDEA, J.:

This is a petition for review on certiorari of the decision dated January 30, 1987 of the Court of
Appeals in CA-GR Nos. SP-07945-50 entitled, "Cetus Development, Inc., Petitioner vs. Hon.
Conrado T. Limcaoco, Presiding Judge, Regional Trial Court of Manila, Branch Ederlina
Navalta, et. al., respondents.

The following facts appear in the records:

The private respondents, Ederlina Navalta, Ong Teng, Jose Liwanag, Leandro Canlas, Victoria
Sudario, and Flora Nagbuya were the lessees of the premises located at No. 512 Quezon
Boulevard, Quiapo, Manila, originally owned by the Susana Realty. These individual verbal
leases were on a month-to month basis at the following rates: Ederlina Navalta at the rate of
P80.50; Ong Teng at the rate of P96.10; Jose Liwanag at the rate of P40.35; Leandro Canlas at
the rate of P80.55; Victoria Sudario at the rate of P50.45 and Flora Nagbuya at the rate of
P80.55. The payments of the rentals were paid by the lessees to a collector of the Susana
Realty who went to the premises monthly.

Sometime in March, 1984, the Susana Realty sold the leased premises to the petitioner, Cetus
Development, Inc., a corporation duly organized and existing under the laws of the Philippines.
From April to June, 1984, the private respondents continued to pay their monthly rentals to a
collector sent by the petitioner. In the succeeding months of July, August and September 1984,
the respondents failed to pay their monthly individual rentals as no collector came.

On October 9, 1984, the petitioner sent a letter to each of the private respondents demanding
that they vacate the subject premises and to pay the back rentals for the months of July, August
and September, 1984, within fifteen (15) days from the receipt thereof. Immediately upon the
receipt of the said demand letters on October 10, 1984, the private respondents paid their
respective arrearages in rent which were accepted by the petitioner subject to the unilateral
condition that the acceptance was without prejudice to the filing of an ejectment suit.
Subsequent monthly rental payments were likewise accepted by the petitioner under the same
condition.

For failure of the private respondents to vacate the premises as demanded in the letter dated
October 9, 1984, the petitioner filed with the Metropolitan Trial Court of Manila complaints for
ejectment against the manner, as follows: (1) 105972-CV, against Ederlina Navalta (2) 105973-
CV, against Jose Liwanag; (3) 105974-CV, against Flora Nagbuya; (4) 105975-CV, against
Leandro Canlas; (5) 105976-CV, against Victoria Sudario and (6) 105977-CV, against Ong
Teng.

In their respective answers, the six (6) private respondents interposed a common defense. They
claimed that since the occupancy of the premises they paid their monthly rental regularly
through a collector of the lessor; that their non-payment of the rentals for the months of July,
August and September, 1984, was due to the failure of the petitioner (as the new owner) to
send its collector; that they were at a loss as to where they should pay their rentals; that
sometime later, one of the respondents called the office of the petitioner to inquire as to where
they would make such payments and he was told that a collector would be sent to receive the
same; that no collector was ever sent by the petitioner; and that instead they received a uniform
demand letter dated October 9, 1984.

The private respondents, thru counsel, later filed a motion for consolidation of the six cases and
as a result thereof, the said cases were consolidated in the Metropolitan Trial Court of Manila,
Branch XII, presided over by Judge Eduardo S. Quintos, Jr. On June 4, 1985, the trial court
rendered its decision dismissing the six cases, a pertinent portion of which reads, as follows:

The records of this case show that at the time of the filing of this complaint, the rentals had all
been paid. Hence, the plaintiff cannot eject the defendants from the leased premises, because
at the time these cases were instituted, there are no rentals in arrears.

The acceptance of the back rental by the plaintiff before the filing of the complaint, as in these
case, the alleged rental arrearages were paid immediately after receipt of the demand letter,
removes its cause of action in an unlawful detainer case, even if the acceptance was without
prejudice.

x x x.

Furthermore, the court has observed that the account involved which constitutes the rentals of
the tenants are relatively small to which the ejectment may not lie on grounds of equity and for
humanitarian reasons.

Defendants' counterclaim for litigation expenses has no legal and factual basis for assessing the
same against plaintiff.
WHEREFORE, judgment is hereby rendered dismissing these cases, without pronouncement
as to costs.

Defendants' counterclaim is likewise dismissed.

SO ORDERED. (pp. 32-33, Rollo, G.R. No. 77647)

Not satisfied with the decision of the Metropolitan Trial Court, the petitioner appealed to the
Regional Trial Court of Manila and the same was assigned to Branch IX thereof presided over
by Judge Conrado T. Limcaoco (now Associate Justice of the Court of Appeals).lâwphî1.ñèt In
its decision dated November 19, 1985, the Regional Trial Court dismissed the appeal for lack of
merit.

In due time, a petition for review of the decision of the Regional Trial Court was filed by the
petitioner with the Court of Appeals. Said petition was dismissed on January 30, 1987, for lack
of merit.

Aggrieved by the decision of the Court of Appeals, petitioner now comes to Us in this petition,
assigning the following errors:

ASSIGNMENT OF ERRORS

RESPONDENT COURT OF APPEALS COMMITTED A GRAVE ABUSE OF DISCRETION,

AMOUNTING TO LACK OF JURISDICTION, WHEN IT ERRED IN HOLDING THAT THE
CAUSE OF ACTION FOR UNLAWFUL DETAINER IN THESE CASES DID NOT EXIST WHEN
THE COMPLAINTS WERE FILED BECAUSE PRIVATE RESPONDENTS TENDERED, AND
PETITIONER ACCEPTED, THE PAYMENT OF THE THREE (3) MONTHS RENTAL IN
ARREARS WITHIN THE FIFTEEN (15) DAY PERIOD FROM PRIVATE RESPONDENTS'
RECEIPT OF PETITIONER'S DEMAND LETTERS TO VACATE THE SUBJECT PREMISES
AND TO PAY THE RENTALS IN ARREARS.

II

RESPONDENT COURT OF APPEALS COMMITTED A GRAVEABUSE OF DISCRETION,

AMOUNTING TO LACK OF JURISDICTION COMMITTED A GRAVE WHEN IT ERRED IN
AFFIRMING THE DISMISSAL OF THE COMPLAINTS IN THESE CASES
NOTWITHSTANDING THE EXISTENCE OF VALID GROUNDS FOR THE JUDICIAL
EJECTMENT OF PRIVATE RESPONDENT.

III
RESPONDENT COURT OF APPEALS COMMITTED A GRAVE ABUSE OF DISCRETION,
AMOUNTING TO LACK OF JURISDICTION, WHEN IT ERRED IN HOLDING THAT THESE
CASES ARE CLASSIC EXAMPLES TO CIRCUMVENT THE RENT CONTROL LAW. (pp. 164-
165, Rollo, G.R. No. 77647)

The Court of Appeals defined the basic issue in this case as follows: whether or not there exists
a cause of action when the complaints for unlawful detainer were filed considering the fact that
upon demand by petitioner from private respondents for payment of their back rentals, the latter
immediately tendered payment which was accepted by petitioner.

In holding that there was no cause of action, the respondent Court relied on Section 2, Rule 70
of the Rules of Court, which provides:

Sec. 2. Landlord to proceed against tenant only after demand. — No landlord or his legal
representative or assign, shall be such action against a tenant for failure to pay rent due or to
comply with the conditions of his lease, unless the tenant shall have failed to pay such rent or
comply with such conditions for a period of fifteen (15) days or five (5) days in case of building,
after demand therefor, made upon qqqm personally, or by serving written notice of such
demand upon the person found on the premises, or by posting such notice on the premises if no
persons be found thereon.

It interpreted the said provision as follows:

.....the right to bring an action of ejectment or unlawful detainer must be counted from the time
the defendants failed to pay rent after the demand therefor. It is not the failure per se to pay rent
as agreed in the contract, but the failure to pay the rent after a demand therefor is made, that
entitles the lessor to bring an action for unlawful detainer. In other words, the demand
contemplated by the above-quoted provision is not a demand to vacate, but a demand made by
the landlord upon his tenant for the latter to pay the rent due if the tenant fails to comply with the
said demand with the period provided, his possession becomes unlawful and the landlord may
then bring the action for ejectment. (p. 28, , G.R. No. 77647)

We hold that the demand required and contemplated in Section 2, aforequoted, is a

jurisdictional requirement for the purpose of bringing an unlawful detainer suit for failure to pay
rent or comply with the conditions of lease. It partakes of an extrajudicial remedy that must be
pursued before resorting for judicial action so much so that when there is full compliance with
the demand, there arises no necessity for court action.

As to whether this demand is merely a demand to pay rent or comply with the conditions of the
lease or also a demand to vacate, the answer can be gleaned from said Section 2. This section
presupposes the existence of a cause of action for unlawful detainer as it speaks of "failure to
pay rent due or comply with the conditions of the lease." The existence of said cause of action
gives the lessor the right under Article 1659 of the New Civil Code to ask for the rescission of
the contract of lease and indemnification for damages, or only the latter, allowing the contract to
remain in force. Accordingly, if the option chosen is for specific performance, then the demand
referred to is obviously to pay rent or to comply with the conditions of the lease violated.
However, if rescission is the option chosen, the demand must be for the lessee to pay rents or
to comply with the conditions of the lease and to vacate. Accordingly, the rule that has been
followed in our jurisprudence where rescission is clearly the option taken, is that both demands
to pay rent and to vacate are necessary to make a lessee a deforciant in order that an ejectment
suit may be filed (Casilan et al. vs. Tomassi, L-16574, February 28,1964, 10 SCRA 261;
Rickards vs. Gonzales, 109 Phil. 423, Dikit vs. Icasiano, 89 Phil. 44).lâwphî1.ñèt

Thus, for the purpose of bringing an ejectment suit, two requisites must concur, namely: (1)
there must be failure to pay rent or comply with the conditions of the lease and (2) there must be
demand both to pay or to comply and vacate within the periods specified in Section 2, Rule 70,
namely 15 days in case of lands and 5 days in case of buildings. The first requisite refers to the
existence of the cause of action for unlawful detainer while the second refers to the jurisdictional
requirement of demand in order that said cause of action may be pursued.

It is very clear that in the case at bar, no cause of action for ejectment has accrued. There was
no failure yet on the part of private respondents to pay rents for three consecutive months. As
the terms of the individual verbal leases which were on a month-to-month basis were not
alleged and proved, the general rule on necessity of demand applies, to wit: there is default in
the fulfillment of an obligation when the creditor demands payment at the maturity of the
obligation or at anytime thereafter. This is explicit in Article 1169, New Civil Code which
provides that "(t)hose obliged to deliver or to do something incur in delay from the time the
obligee judicially or extrajudicially demands from them the fulfillment of their obligation."
Petitioner has not shown that its case falls on any of the following exceptions where demand is
not required: (a) when the obligation or the law so declares; (b) when from the nature and
circumstances of the obligation it can be inferred that time is of the essence of the contract; and
(c) when demand would be useless, as when the obligor has rendered it beyond his power to
perform.

The demand required in Article 1169 of the Civil Code may be in any form, provided that it can
be proved. The proof of this demand lies upon the creditor. Without such demand, oral or
written, the effects of default do not arise. This demand is different from the demand required
under Section 2, Rule 70, which is merely a jurisdictional requirement before an existing cause
of action may be pursued.

The facts on record fail to show proof that petitioner demanded the payment of the rentals when
the obligation matured. Coupled with the fact that no collector was sent as previously done in
the past, the private respondents cannot be held guilty of mora solvendi or delay in the payment
of rentals. Thus, when petitioner first demanded the payment of the 3-month arrearages and
private respondents lost no time in making tender and payment, which petitioner accepted, no
cause of action for ejectment accrued. Hence, its demand to vacate was premature as it was an
exercise of a non-existing right to rescind.
In contradistinction, where the right of rescission exists, payment of the arrearages in rental
after the demand to pay and to vacate under Section 2, Rule 70 does not extinguish the cause
of action for ejectment as the lessor is not only entitled to recover the unpaid rents but also to
eject the lessee.

Petitioner correctly argues that acceptance of tendered payment does not constitute a waiver of
the cause of action for ejectment especially when accepted with the written condition that it was
"without prejudice to the filing of an ejectment suit". Indeed, it is illogical or ridiculous not to
accept the tender of payment of rentals merely to preserve the right to file an action for unlawful
detainer. However, this line of argument presupposes that a cause of action for ejectment has
already accrued, which is not true in the instant case.

Petitioner likewise claims that its failure to send a collector to collect the rentals cannot be
considered a valid defense for the reason that sending a collector is not one of the obligations of
the lessor under Article 1654. While it is true that a lessor is not obligated to send a collector, it
has been duly established that it has been customary for private respondents to pay the rentals
through a collector. Besides Article 1257, New Civil Code provides that where no agreement
has been designated for the payment of the rentals, the place of payment is at the domicile of
the defendants. Hence, it could not be said that they were in default in the payment of their
rentals as the delay in paying the same was not imputable to them. Rather, it was attributable to
petitioner's omission or neglect to collect.

Petitioner also argues that neither is its refused to accept the rentals a defense for non-payment
as Article 1256 provides that "[i]f the creditor to whom the tender of payment has been made
refuses without just cause to accept it, the debtor shall be released from responsibility by the
consignation of the thing due." It bears emphasis that in this case there was no unjustified
refusal on the part of petitioner or non-acceptance without reason that would constitute mora
accipiendi and warrant consignation. There was simply lack of demand for payment of the
rentals.

In sum, We hold that respondent Court of Appeals did not commit grave abuse of discretion
amounting to lack of jurisdiction in its conclusion affirming the trial court's decision dismissing
petitioner's complaint for lack of cause of action. We do not agree, however, with the reasons
relied upon.

ACCORDINGLY, the petition for review on certiorari is hereby DENIED for lack of merit and the
decision dated January 30, 1987 of respondent Court of Appeals is hereby AFFIRMED.

FIRST DIVISION

[G.R. NO. 153004 : November 5, 2004]

SANTOS VENTURA HOCORMA FOUNDATION, INC., Petitioner, v. ERNESTO V. SANTOS
and RIVERLAND, INC., Respondents.

DECISION

QUISUMBING, J.:

Subject of the present Petition for Review on Certiorari is the Decision,1 dated January 30,
2002, as well as the April 12, 2002, Resolution2 of the Court of Appeals in CA-G.R. CV No.
55122. The appellate court reversed the Decision,3 dated October 4, 1996, of the Regional Trial
Court of Makati City, Branch 148, in Civil Case No. 95-811, and likewise denied petitioner's
Motion for Reconsideration.

The facts of this case are undisputed.

Ernesto V. Santos and Santos Ventura Hocorma Foundation, Inc. (SVHFI) were the plaintiff and
defendant, respectively, in several civil cases filed in different courts in the Philippines. On
October 26, 1990, the parties executed a Compromise Agreement4 which amicably ended all
their pending litigations. The pertinent portions of the Agreement read as follows:

1. Defendant Foundation shall pay Plaintiff Santos P14.5 Million in the following manner:
A. P1.5 Million immediately upon the execution of this agreement;
b. The balance of P13 Million shall be paid, whether in one lump sum or in installments, at the
discretion of the Foundation, within a period of not more than two (2) years from the execution
of this agreement; provided, however, that in the event that the Foundation does not pay the
whole or any part of such balance, the same shall be paid with the corresponding portion of the
land or real properties subject of the aforesaid cases and previously covered by the notices of
lis pendens, under such terms and conditions as to area, valuation, and location mutually
acceptable to both parties; but in no case shall the payment of such balance be later than two
(2) years from the date of this agreement; otherwise, payment of any unpaid portion shall only
be in the form of land aforesaid;
2. Immediately upon the execution of this agreement (and [the] receipt of the P1.5 Million),
plaintiff Santos shall cause the dismissal with prejudice of Civil Cases Nos. 88-743, 1413OR,
TC-1024, 45366 and 18166 and voluntarily withdraw the appeals in Civil Cases Nos. 4968
(C.A.-G.R. No. 26598) and 88-45366 (C.A.-G.R. No. 24304) respectively and for the immediate
lifting of the aforesaid various notices of lis pendens on the real properties aforementioned (by
signing herein attached corresponding documents, for such lifting); provided, however, that in
the event that defendant Foundation shall sell or dispose of any of the lands previously subject
of lis pendens, the proceeds of any such sale, or any part thereof as may be required, shall be
partially devoted to the payment of the Foundation's obligations under this agreement as may
still be subsisting and payable at the time of any such sale or sales;
...
5. Failure of compliance of any of the foregoing terms and conditions by either or both parties to
this agreement shall ipso facto and ipso jure automatically entitle the aggrieved party to a writ of
execution for the enforcement of this agreement. [Emphasis supplied]5
In compliance with the Compromise Agreement, respondent Santos moved for the dismissal of
the aforesaid civil cases. He also caused the lifting of the notices of lis pendens on the real
properties involved. For its part, petitioner SVHFI, paid P1.5 million to respondent Santos,
leaving a balance of P13 million.

Subsequently, petitioner SVHFI sold to Development Exchange Livelihood Corporation two real
properties, which were previously subjects of lis pendens. Discovering the disposition made by
the petitioner, respondent Santos sent a letter to the petitioner demanding the payment of the
remaining P13 million, which was ignored by the latter. Meanwhile, on September 30, 1991, the
Regional Trial Court of Makati City, Branch 62, issued a Decision6 approving the compromise
agreement.

On October 28, 1992, respondent Santos sent another letter to petitioner inquiring when it would
pay the balance of P13 million. There was no response from petitioner. Consequently,
respondent Santos applied with the Regional Trial Court of Makati City, Branch 62, for the
issuance of a writ of execution of its compromise judgment dated September 30, 1991. The
RTC granted the writ. Thus, on March 10, 1993, the Sheriff levied on the real properties of
petitioner, which were formerly subjects of the lis pendens. Petitioner, however, filed numerous
motions to block the enforcement of the said writ. The challenge of the execution of the
aforesaid compromise judgment even reached the Supreme Court. All these efforts, however,
were futile.

On November 22, 1994, petitioner's real properties located in Mabalacat, Pampanga were
auctioned. In the said auction, Riverland, Inc. was the highest bidder for P12 million and it was
issued a Certificate of Sale covering the real properties subject of the auction sale.
Subsequently, another auction sale was held on February 8, 1995, for the sale of real properties
of petitioner in Bacolod City. Again, Riverland, Inc. was the highest bidder. The Certificates of
Sale issued for both properties provided for the right of redemption within one year from the
date of registration of the said properties.

On June 2, 1995, Santos and Riverland Inc. filed a Complaint for Declaratory Relief and
Damages7 alleging that there was delay on the part of petitioner in paying the balance of P13
million. They further alleged that under the Compromise Agreement, the obligation became due
on October 26, 1992, but payment of the remaining P12 million was effected only on November
22, 1994. Thus, respondents prayed that petitioner be ordered to pay legal interest on the
obligation, penalty, attorney's fees and costs of litigation. Furthermore, they prayed that the
aforesaid sales be declared final and not subject to legal redemption.

In its Answer,8 petitioner countered that respondents have no cause of action against it since it
had fully paid its obligation to the latter. It further claimed that the alleged delay in the payment
of the balance was due to its valid exercise of its rights to protect its interests as provided under
the Rules. Petitioner counterclaimed for attorney's fees and exemplary damages.

On October 4, 1996, the trial court rendered a Decision9 dismissing herein respondents'
complaint and ordering them to pay attorney's fees and exemplary damages to petitioner.
Respondents then appealed to the Court of Appeals. The appellate court reversed the ruling of
the trial court:

WHEREFORE, finding merit in the appeal, the appealed Decision is hereby REVERSED and
judgment is hereby rendered ordering appellee SVHFI to pay appellants Santos and Riverland,
Inc.: (1) legal interest on the principal amount of P13 million at the rate of 12% per annum from
the date of demand on October 28, 1992 up to the date of actual payment of the whole
obligation; and (2) P20,000 as attorney's fees and costs of suit.
SO ORDERED.
Hence this Petition for Review on Certiorari where petitioner assigns the following issues:

WHETHER OR NOT THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR WHEN

IT AWARDED LEGAL INTEREST IN FAVOR OF THE RESPONDENTS, MR. SANTOS AND
RIVERLAND, INC., NOTWITHSTANDING THE FACT THAT NEITHER IN THE COMPROMISE
AGREEMENT NOR IN THE COMPROMISE JUDGEMENT OF HON. JUDGE DIOKNO
PROVIDES FOR PAYMENT OF INTEREST TO THE RESPONDENT
II

WHETHER OF NOT THE COURT OF APPEALS ERRED IN AWARDING LEGAL IN[T]EREST

IN FAVOR OF THE RESPONDENTS, MR. SANTOS AND RIVERLAND, INC.,
NOTWITHSTANDING THE FACT THAT THE OBLIGATION OF THE PETITIONER TO
RESPONDENT SANTOS TO PAY A SUM OF MONEY HAD BEEN CONVERTED TO AN
OBLIGATION TO PAY IN KIND - DELIVERY OF REAL PROPERTIES OWNED BY THE
PETITIONER - WHICH HAD BEEN FULLY PERFORMED
III

WHETHER OR NOT RESPONDENTS ARE BARRED FROM DEMANDING PAYMENT OF

INTEREST BY REASON OF THE WAIVER PROVISION IN THE COMPROMISE
AGREEMENT, WHICH BECAME THE LAW AMONG THE PARTIES10
The only issue to be resolved is whether the respondents are entitled to legal interest.

Petitioner SVHFI alleges that where a compromise agreement or compromise judgment does
not provide for the payment of interest, the legal interest by way of penalty on account of fault or
delay shall not be due and payable, considering that the obligation or loan, on which the
payment of legal interest could be based, has been superseded by the compromise
agreement.11 Furthermore, the petitioner argues that the respondents are barred by res
judicata from seeking legal interest on account of the waiver clause in the duly approved
compromise agreement.12 Article 4 of the compromise agreement provides:

Plaintiff Santos waives and renounces any and all other claims that he and his family may have
on the defendant Foundation arising from and in connection with the aforesaid civil cases, and
defendant Foundation, on the other hand, also waives and renounces any and all claims that it
may have against plaintiff Santos in connection with such cases.13 [Emphasis supplied.]
Lastly, petitioner alleges that since the compromise agreement did not provide for a period
within which the obligation will become due and demandable, it is incumbent upon respondent
Santos to ask for judicial intervention for purposes of fixing the period. It is only when a fixed
period exists that the legal interests can be computed.

Respondents profer that their right to damages is based on delay in the payment of the
obligation provided in the Compromise Agreement. The Compromise Agreement provides that
payment must be made within the two-year period from its execution. This was approved by the
trial court and became the law governing their contract. Respondents posit that petitioner's
failure to comply entitles them to damages, by way of interest.14

The petition lacks merit.

A compromise is a contract whereby the parties, by making reciprocal concessions, avoid a

litigation or put an end to one already commenced.15 It is an agreement between two or more
persons, who, for preventing or putting an end to a lawsuit, adjust their difficulties by mutual
consent in the manner which they agree on, and which everyone of them prefers in the hope of
gaining, balanced by the danger of losing.16

The general rule is that a compromise has upon the parties the effect and authority of res
judicata, with respect to the matter definitely stated therein, or which by implication from its
terms should be deemed to have been included therein.17 This holds true even if the
agreement has not been judicially approved.18

In the case at bar, the Compromise Agreement was entered into by the parties on October 26,
1990.19 It was judicially approved on September 30, 1991.20 Applying existing jurisprudence,
the compromise agreement as a consensual contract became binding between the parties upon
its execution and not upon its court approval. From the time a compromise is validly entered
into, it becomes the source of the rights and obligations of the parties thereto. The purpose of
the compromise is precisely to replace and terminate controverted claims.21

In accordance with the compromise agreement, the respondents asked for the dismissal of the
pending civil cases. The petitioner, on the other hand, paid the initial P1.5 million upon the
execution of the agreement. This act of the petitioner showed that it acknowledges that the
agreement was immediately executory and enforceable upon its execution.
As to the remaining P13 million, the terms and conditions of the compromise agreement are
clear and unambiguous. It provides:

...
b. The balance of P13 Million shall be paid, whether in one lump sum or in installments, at the
discretion of the Foundation, within a period of not more than two (2) years from the execution
of this agreement'22 [Emphasis supplied.]
...
The two-year period must be counted from October 26, 1990, the date of execution of the
compromise agreement, and not on the judicial approval of the compromise agreement on
September 30, 1991. When respondents wrote a demand letter to petitioner on October 28,
1992, the obligation was already due and demandable. When the petitioner failed to pay its due
obligation after the demand was made, it incurred delay.

Article 1169 of the New Civil Code provides:

Those obliged to deliver or to do something incur in delay from the time the obligee judicially or
extrajudicially demands from them the fulfillment of their obligation. [Emphasis supplied]
Delay as used in this article is synonymous to default or mora which means delay in the
fulfillment of obligations. It is the non-fulfillment of the obligation with respect to time.23

In order for the debtor to be in default, it is necessary that the following requisites be present: (1)
that the obligation be demandable and already liquidated; (2) that the debtor delays
performance; and (3) that the creditor requires the performance judicially or extrajudicially.24

In the case at bar, the obligation was already due and demandable after the lapse of the two-
year period from the execution of the contract. The two-year period ended on October 26, 1992.
When the respondents gave a demand letter on October 28, 1992, to the petitioner, the
obligation was already due and demandable. Furthermore, the obligation is liquidated because
the debtor knows precisely how much he is to pay and when he is to pay it.

The second requisite is also present. Petitioner delayed in the performance. It was able to fully
settle its outstanding balance only on February 8, 1995, which is more than two years after the
extra-judicial demand. Moreover, it filed several motions and elevated adverse resolutions to the
appellate court to hinder the execution of a final and executory judgment, and further delay the
fulfillment of its obligation.

Third, the demand letter sent to the petitioner on October 28, 1992, was in accordance with an
extra-judicial demand contemplated by law.

Verily, the petitioner is liable for damages for the delay in the performance of its obligation. This
is provided for in Article 117025 of the New Civil Code.
When the debtor knows the amount and period when he is to pay, interest as damages is
generally allowed as a matter of right.26 The complaining party has been deprived of funds to
which he is entitled by virtue of their compromise agreement. The goal of compensation
requires that the complainant be compensated for the loss of use of those funds. This
compensation is in the form of interest.27 In the absence of agreement, the legal rate of interest
shall prevail.28 The legal interest for loan as forbearance of money is 12% per annum29 to be
computed from default, i.e., from judicial or extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.30

WHEREFORE, the petition is DENIED for lack of merit. The Decision dated January 30, 2002 of
the Court of Appeals and its April 12, 2002 Resolution in CA-G.R. CV No. 55122 are
AFFIRMED. Costs against petitioner.

SO ORDERED

SECOND DIVISION

[G.R. NO. 149734 : November 19, 2004]

DR. DANIEL VAZQUEZ and MA. LUIZA M. VAZQUEZ, Petitioners, v. AYALA CORPORATION,
Respondent.

DECISION

TINGA, J.:

The rise in value of four lots in one of the country's prime residential developments, Ayala
Alabang Village in Muntinlupa City, over a period of six (6) years only, represents big money.
The huge price difference lies at the heart of the present controversy. Petitioners insist that the
lots should be sold to them at 1984 prices while respondent maintains that the prevailing market
price in 1990 should be the selling price.

Dr. Daniel Vazquez and Ma. Luisa Vazquez1 filed this Petition for Review on Certiorari2 dated
October 11, 2001 assailing the Decision3 of the Court of Appeals dated September 6, 2001
which reversed the Decision4 of the Regional Trial Court (RTC) and dismissed their complaint
for specific performance and damages against Ayala Corporation.

Despite their disparate rulings, the RTC and the appellate court agree on the following
antecedents:5

On April 23, 1981, spouses Daniel Vasquez and Ma. Luisa M. Vasquez (hereafter, Vasquez
spouses) entered into a Memorandum of Agreement (MOA) with Ayala Corporation (hereafter,
AYALA) with AYALA buying from the Vazquez spouses, all of the latter's shares of stock in
Conduit Development, Inc. (hereafter, Conduit). The main asset of Conduit was a 49.9 hectare
property in Ayala Alabang, Muntinlupa, which was then being developed by Conduit under a
development plan where the land was divided into Villages 1, 2 and 3 of the "Don Vicente
Village." The development was then being undertaken for Conduit by G.P. Construction and
Development Corp. (hereafter, GP Construction).

Under the MOA, Ayala was to develop the entire property, less what was defined as the
"Retained Area" consisting of 18,736 square meters. This "Retained Area" was to be retained
by the Vazquez spouses. The area to be developed by Ayala was called the "Remaining Area".
In this "Remaining Area" were 4 lots adjacent to the "Retained Area" and Ayala agreed to offer
these lots for sale to the Vazquez spouses at the prevailing price at the time of purchase. The
relevant provisions of the MOA on this point are:

"5.7. The BUYER hereby commits that it will develop the 'Remaining Property' into a first class
residential subdivision of the same class as its New Alabang Subdivision, and that it intends to
complete the first phase under its amended development plan within three (3) years from the
date of this Agreement. x x x"

5.15. The BUYER agrees to give the SELLERS a first option to purchase four developed lots
next to the "Retained Area" at the prevailing market price at the time of the purchase."

The parties are agreed that the development plan referred to in paragraph 5.7 is not Conduit's
development plan, but Ayala's amended development plan which was still to be formulated as of
the time of the MOA. While in the Conduit plan, the 4 lots to be offered for sale to the Vasquez
Spouses were in the first phase thereof or Village 1, in the Ayala plan which was formulated a
year later, it was in the third phase, or Phase II-c.

Under the MOA, the Vasquez spouses made several express warranties, as follows:

"3.1. The SELLERS shall deliver to the BUYER:

xxx

3.1.2. The true and complete list, certified by the Secretary and Treasurer of the Company
showing:

xxx

D. A list of all persons and/or entities with whom the Company has pending contracts, if any.

xxx

3.1.5. Audited financial statements of the Company as at Closing date.

4. Conditions Precedent

All obligations of the BUYER under this Agreement are subject to fulfillment prior to or at the
Closing, of the following conditions:

4.1. The representations and warranties by the SELLERS contained in this Agreement shall be
true and correct at the time of Closing as though such representations and warranties were
made at such time; and

xxx

6. Representation and Warranties by the SELLERS

The SELLERS jointly and severally represent and warrant to the BUYER that at the time of the
execution of this Agreement and at the Closing:

xxx

6.2.3. There are no actions, suits or proceedings pending, or to the knowledge of the SELLERS,
threatened against or affecting the SELLERS with respect to the Shares or the Property;
andcralawlibrary

7. Additional Warranties by the SELLERS

7.1. With respect to the Audited Financial Statements required to be submitted at Closing in
accordance with Par. 3.1.5 above, the SELLER jointly and severally warrant to the BUYER that:

7.1.1 The said Audited Financial Statements shall show that on the day of Closing, the
Company shall own the "Remaining Property", free from all liens and encumbrances and that
the Company shall have no obligation to any party except for billings payable to GP
Construction & Development Corporation and advances made by Daniel Vazquez for which
BUYER shall be responsible in accordance with Par. 2 of this Agreement.

7.1.2 Except to the extent reflected or reserved in the Audited Financial Statements of the
Company as of Closing, and those disclosed to BUYER, the Company as of the date thereof,
has no liabilities of any nature whether accrued, absolute, contingent or otherwise, including,
without limitation, tax liabilities due or to become due and whether incurred in respect of or
measured in respect of the Company's income prior to Closing or arising out of transactions or
state of facts existing prior thereto.

7.2 SELLERS do not know or have no reasonable ground to know of any basis for any assertion
against the Company as at closing or any liability of any nature and in any amount not fully
reflected or reserved against such Audited Financial Statements referred to above, and those
disclosed to BUYER.
xxx

7.6.3 Except as otherwise disclosed to the BUYER in writing on or before the Closing, the
Company is not engaged in or a party to, or to the best of the knowledge of the SELLERS,
threatened with, any legal action or other proceedings before any court or administrative body,
nor do the SELLERS know or have reasonable grounds to know of any basis for any such
action or proceeding or of any governmental investigation relative to the Company.

7.6.4 To the knowledge of the SELLERS, no default or breach exists in the due performance
and observance by the Company of any term, covenant or condition of any instrument or
agreement to which the company is a party or by which it is bound, and no condition exists
which, with notice or lapse of time or both, will constitute such default or breach."

After the execution of the MOA, Ayala caused the suspension of work on Village 1 of the Don
Vicente Project. Ayala then received a letter from one Maximo Del Rosario of Lancer General
Builder Corporation informing Ayala that he was claiming the amount of P1,509,558.80 as the
subcontractor of G.P. Construction...

G.P. Construction not being able to reach an amicable settlement with Lancer, on March 22,
1982, Lancer sued G.P. Construction, Conduit and Ayala in the then Court of First Instance of
Manila in Civil Case No. 82-8598. G.P. Construction in turn filed a cross-claim against Ayala.
G.P. Construction and Lancer both tried to enjoin Ayala from undertaking the development of
the property. The suit was terminated only on February 19, 1987, when it was dismissed with
prejudice after Ayala paid both Lancer and GP Construction the total of P4,686,113.39.

Taking the position that Ayala was obligated to sell the 4 lots adjacent to the "Retained Area"
within 3 years from the date of the MOA, the Vasquez spouses sent several "reminder" letters of
the approaching so-called deadline. However, no demand after April 23, 1984, was ever made
by the Vasquez spouses for Ayala to sell the 4 lots. On the contrary, one of the letters signed by
their authorized agent, Engr. Eduardo Turla, categorically stated that they expected
"development of Phase 1 to be completed by February 19, 1990, three years from the
settlement of the legal problems with the previous contractor."

By early 1990 Ayala finished the development of the vicinity of the 4 lots to be offered for sale.
The four lots were then offered to be sold to the Vasquez spouses at the prevailing price in
1990. This was rejected by the Vasquez spouses who wanted to pay at 1984 prices, thereby
leading to the suit below.

After trial, the court a quo rendered its decision, the dispositive portion of which states:

"THEREFORE, judgment is hereby rendered in favor of plaintiffs and against defendant,

ordering defendant to sell to plaintiffs the relevant lots described in the Complaint in the Ayala
Alabang Village at the price of P460.00 per square meter amounting to P1,349,540.00; ordering
defendant to reimburse to plaintiffs attorney's fees in the sum of P200,000.00 and to pay the
cost of the suit."

In its decision, the court a quo concluded that the Vasquez spouses were not obligated to
disclose the potential claims of GP Construction, Lancer and Del Rosario; Ayala's accountants
should have opened the records of Conduit to find out all claims; the warranty against suit is
with respect to "the shares of the Property" and the Lancer suit does not affect the shares of
stock sold to Ayala; Ayala was obligated to develop within 3 years; to say that Ayala was under
no obligation to follow a time frame was to put the Vasquezes at Ayala's mercy; Ayala did not
develop because of a slump in the real estate market; the MOA was drafted and prepared by
the AYALA who should suffer its ambiguities; the option to purchase the 4 lots is valid because
it was supported by consideration as the option is incorporated in the MOA where the parties
had prestations to each other. [Emphasis supplied]

Ayala Corporation filed an appeal, alleging that the trial court erred in holding that petitioners did
not breach their warranties under the MOA6 dated April 23, 1981; that it was obliged to develop
the land where the four (4) lots subject of the option to purchase are located within three (3)
years from the date of the MOA; that it was in delay; and that the option to purchase was valid
because it was incorporated in the MOA and the consideration therefor was the commitment by
Ayala Corporation to petitioners embodied in the MOA.

As previously mentioned, the Court of Appeals reversed the RTC Decision. According to the
appellate court, Ayala Corporation was never informed beforehand of the existence of the
Lancer claim. In fact, Ayala Corporation got a copy of the Lancer subcontract only on May 29,
1981 from G.P. Construction's lawyers. The Court of Appeals thus held that petitioners violated
their warranties under the MOA when they failed to disclose Lancer's claims. Hence, even
conceding that Ayala Corporation was obliged to develop and sell the four (4) lots in question
within three (3) years from the date of the MOA, the obligation was suspended during the
pendency of the case filed by Lancer.

Interpreting the MOA's paragraph 5.7 above-quoted, the appellate court held that Ayala
Corporation committed to develop the first phase of its own amended development plan and not
Conduit's development plan. Nowhere does the MOA provide that Ayala Corporation shall follow
Conduit's development plan nor is Ayala Corporation prohibited from changing the sequence of
the phases of the property it will develop.

Anent the question of delay, the Court of Appeals ruled that there was no delay as petitioners
never made a demand for Ayala Corporation to sell the subject lots to them. According to the
appellate court, what petitioners sent were mere reminder letters the last of which was dated
prior to April 23, 1984 when the obligation was not yet demandable. At any rate, the Court of
Appeals found that petitioners in fact waived the three (3)-year period when they sent a letter
through their agent, Engr. Eduardo Turla, stating that they "expect that the development of
Phase I will be completed by 19 February 1990, three years from the settlement of the legal
problems with the previous contractor."7
The appellate court likewise ruled that paragraph 5.15 above-quoted is not an option contract
but a right of first refusal there being no separate consideration therefor. Since petitioners
refused Ayala Corporation's offer to sell the subject lots at the reduced 1990 price of P5,000.00
per square meter, they have effectively waived their right to buy the same.

In the instant Petition, petitioners allege that the appellate court erred in ruling that they violated
their warranties under the MOA; that Ayala Corporation was not obliged to develop the
"Remaining Property" within three (3) years from the execution of the MOA; that Ayala was not
in delay; and that paragraph 5.15 of the MOA is a mere right of first refusal. Additionally,
petitioners insist that the Court should review the factual findings of the Court of Appeals as they
are in conflict with those of the trial court.

Ayala Corporation filed a Comment on the Petition8 dated March 26, 2002, contending that the
petition raises questions of fact and seeks a review of evidence which is within the domain of
the Court of Appeals. Ayala Corporation maintains that the subcontract between GP
Construction, with whom Conduit contracted for the development of the property under a
Construction Contract dated October 10, 1980, and Lancer was not disclosed by petitioners
during the negotiations. Neither was the liability for Lancer's claim included in the Audited
Financial Statements submitted by petitioners after the signing of the MOA. These justify the
conclusion that petitioners breached their warranties under the afore-quoted paragraphs of the
MOA. Since the Lancer suit ended only in February 1989, the three (3)-year period within which
Ayala Corporation committed to develop the property should only be counted thence. Thus,
when it offered the subject lots to petitioners in 1990, Ayala Corporation was not yet in delay.

In response to petitioners' contention that there was no action or proceeding against them at the
time of the execution of the MOA on April 23, 1981, Ayala Corporation avers that the facts and
circumstances which gave rise to the Lancer claim were already extant then. Petitioners
warranted that their representations under the MOA shall be true and correct at the time of
"Closing" which shall take place within four (4) weeks from the signing of the MOA.9 Since the
MOA was signed on April 23, 1981, "Closing" was approximately the third week of May 1981.
Hence, Lancer's claims, articulated in a letter which Ayala Corporation received on May 4, 1981,
are among the liabilities warranted against under paragraph 7.1.2 of the MOA.

Moreover, Ayala Corporation asserts that the warranties under the MOA are not just against
suits but against all kinds of liabilities not reflected in the Audited Financial Statements. It cannot
be faulted for relying on the express warranty that except for billings payable to GP Construction
and advances made by petitioner Daniel Vazquez in the amount of P38,766.04, Conduit has no
other liabilities. Hence, petitioners cannot claim that Ayala Corporation should have examined
and investigated the Audited Financial Statements of Conduit and should now assume all its
obligations and liabilities including the Lancer suit and the cross-claim of GP Construction.

Furthermore, Ayala Corporation did not make a commitment to complete the development of the
first phase of the property within three (3) years from the execution of the MOA. The provision
refers to a mere declaration of intent to develop the first phase of its (Ayala Corporation's) own
development plan and not Conduit's. True to its intention, Ayala Corporation did complete the
development of the first phase (Phase II-A) of its amended development plan within three (3)
years from the execution of the MOA. However, it is not obliged to develop the third phase
(Phase II-C) where the subject lots are located within the same time frame because there is no
contractual stipulation in the MOA therefor. It is free to decide on its own the period for the
development of Phase II-C. If petitioners wanted to impose the same three (3)-year timetable
upon the third phase of the amended development plan, they should have filed a suit to fix the
time table in accordance with Article 119710 of the Civil Code. Having failed to do so, Ayala
Corporation cannot be declared to have been in delay.

Ayala Corporation further contends that no demand was made on it for the performance of its
alleged obligation. The letter dated October 4, 1983 sent when petitioners were already aware
of the Lancer suit did not demand the delivery of the subject lots by April 23, 1984. Instead, it
requested Ayala Corporation to keep petitioners posted on the status of the case. Likewise, the
letter dated March 4, 1984 was merely an inquiry as to the date when the development of Phase
1 will be completed. More importantly, their letter dated June 27, 1988 through Engr. Eduardo
Turla expressed petitioners' expectation that Phase 1 will be completed by February 19, 1990.

Lastly, Ayala Corporation maintains that paragraph 5.15 of the MOA is a right of first refusal and
not an option contract.

Petitioners filed their Reply11 dated August 15, 2002 reiterating the arguments in their Petition
and contending further that they did not violate their warranties under the MOA because the
case was filed by Lancer only on April 1, 1982, eleven (11) months and eight (8) days after the
signing of the MOA on April 23, 1981. Ayala Corporation admitted that it received Lancer's claim
before the "Closing" date. It therefore had all the time to rescind the MOA. Not having done so,
it can be concluded that Ayala Corporation itself did not consider the matter a violation of
petitioners' warranty.

Moreover, petitioners submitted the Audited Financial Statements of Conduit and allowed an
acquisition audit to be conducted by Ayala Corporation. Thus, the latter bought Conduit with
"open eyes."

Petitioners also maintain that they had no knowledge of the impending case against Conduit at
the time of the execution of the MOA. Further, the MOA makes Ayala Corporation liable for the
payment of all billings of GP Construction. Since Lancer's claim was actually a claim against GP
Construction being its sub-contractor, it is Ayala Corporation and not petitioners which is liable.

Likewise, petitioners aver that although Ayala Corporation may change the sequence of its
development plan, it is obliged under the MOA to develop the entire area where the subject lots
are located in three (3) years.
They also assert that demand was made on Ayala Corporation to comply with their obligation
under the MOA. Apart from their reminder letters dated January 24, February 18 and March 5,
1984, they also sent a letter dated March 4, 1984 which they claim is a categorical demand for
Ayala Corporation to comply with the provisions of the MOA.

The parties were required to submit their respective memoranda in the Resolution12 dated
November 18, 2002. In compliance with this directive, petitioners submitted their
Memorandum13 dated February 14, 2003 on even date, while Ayala Corporation filed its
Memorandum14 dated February 14, 2003 on February 17, 2003.

We shall first dispose of the procedural question raised by the instant petition.

It is well-settled that the jurisdiction of this Court in cases brought to it from the Court of Appeals
by way of Petition for Review under Rule 45 is limited to reviewing or revising errors of law
imputed to it, its findings of fact being conclusive on this Court as a matter of general principle.
However, since in the instant case there is a conflict between the factual findings of the trial
court and the appellate court, particularly as regards the issues of breach of warranty, obligation
to develop and incurrence of delay, we have to consider the evidence on record and resolve
such factual issues as an exception to the general rule.15 In any event, the submitted issue
relating to the categorization of the right to purchase granted to petitioners under the MOA is
legal in character.

The next issue that presents itself is whether petitioners breached their warranties under the
MOA when they failed to disclose the Lancer claim. The trial court declared they did not; the
appellate court found otherwise.

Ayala Corporation summarizes the clauses of the MOA which petitioners allegedly breached
when they failed to disclose the Lancer claim:

a) Clause 7.1.1. - that Conduit shall not be obligated to anyone except to GP Construction for
P38,766.04, and for advances made by Daniel Vazquez;

b) Clause 7.1.2. - that except as reflected in the audited financial statements Conduit had no
other liabilities whether accrued, absolute, contingent or otherwise;

c) Clause 7.2. - that there is no basis for any assertion against Conduit of any liability of any
value not reflected or reserved in the financial statements, and those disclosed to Ayala;

d) Clause 7.6.3. - that Conduit is not threatened with any legal action or other proceedings;
andcralawlibrary

e) Clause 7.6.4. - that Conduit had not breached any term, condition, or covenant of any
instrument or agreement to which it is a party or by which it is bound.16
The Court is convinced that petitioners did not violate the foregoing warranties.

The exchanges of communication between the parties indicate that petitioners substantially
apprised Ayala Corporation of the Lancer claim or the possibility thereof during the period of
negotiations for the sale of Conduit.

In a letter17 dated March 5, 1984, petitioner Daniel Vazquez reminded Ayala Corporation's Mr.
Adolfo Duarte (Mr. Duarte) that prior to the completion of the sale of Conduit, Ayala Corporation
asked for and was given information that GP Construction sub-contracted, presumably to
Lancer, a greater percentage of the project than it was allowed. Petitioners gave this information
to Ayala Corporation because the latter intimated a desire to "break the contract of Conduit with
GP." Ayala Corporation did not deny this. In fact, Mr. Duarte's letter18 dated March 6, 1984
indicates that Ayala Corporation had knowledge of the Lancer subcontract prior to its acquisition
of Conduit. Ayala Corporation even admitted that it "tried to explore legal basis to discontinue
the contract of Conduit with GP" but found this "not feasible when information surfaced about
the tacit consent of Conduit to the sub-contracts of GP with Lancer."

At the latest, Ayala Corporation came to know of the Lancer claim before the date of Closing of
the MOA. Lancer's letter19 dated April 30, 1981 informing Ayala Corporation of its unsettled
claim with GP Construction was received by Ayala Corporation on May 4, 1981, well before the
"Closing"20 which occurred four (4) weeks after the date of signing of the MOA on April 23,
1981, or on May 23, 1981.

The full text of the pertinent clauses of the MOA quoted hereunder likewise indicate that certain
matters pertaining to the liabilities of Conduit were disclosed by petitioners to Ayala Corporation
although the specifics thereof were no longer included in the MOA:

7.1.1 The said Audited Financial Statements shall show that on the day of Closing, the
Company shall own the "Remaining Property", free from all liens and encumbrances and that
the Company shall have no obligation to any party except for billings payable to GP
Construction & Development Corporation and advances made by Daniel Vazquez for which
BUYER shall be responsible in accordance with Paragraph 2 of this Agreement.

7.1.2 Except to the extent reflected or reserved in the Audited Financial Statements of the
Company as of Closing, and those disclosed to BUYER, the Company as of the date hereof,
has no liabilities of any nature whether accrued, absolute, contingent or otherwise, including,
without limitation, tax liabilities due or to become due and whether incurred in respect of or
measured in respect of the Company's income prior to Closing or arising out of transactions or
state of facts existing prior thereto.

7.2 SELLERS do not know or have no reasonable ground to know of any basis for any assertion
against the Company as at Closing of any liability of any nature and in any amount not fully
reflected or reserved against such Audited Financial Statements referred to above, and those
disclosed to BUYER.
xxx

7.6.3 Except as otherwise disclosed to the BUYER in writing on or before the Closing, the
Company is not engaged in or a party to, or to the best of the knowledge of the SELLERS,
threatened with, any legal action or other proceedings before any court or administrative body,
nor do the SELLERS know or have reasonable grounds to know of any basis for any such
action or proceeding or of any governmental investigation relative to the Company.

7.6.4 To the knowledge of the SELLERS, no default or breach exists in the due performance
and observance by the Company of any term, covenant or condition of any instrument or
agreement to which the Company is a party or by which it is bound, and no condition exists
which, with notice or lapse of time or both, will constitute such default or breach."21 [Emphasis
supplied]

Hence, petitioners' warranty that Conduit is not engaged in, a party to, or threatened with any
legal action or proceeding is qualified by Ayala Corporation's actual knowledge of the Lancer
claim which was disclosed to Ayala Corporation before the "Closing."

At any rate, Ayala Corporation bound itself to pay all billings payable to GP Construction and the
advances made by petitioner Daniel Vazquez. Specifically, under paragraph 2 of the MOA
referred to in paragraph 7.1.1, Ayala Corporation undertook responsibility "for the payment of all
billings of the contractor GP Construction & Development Corporation after the first billing and
any payments made by the company and/or SELLERS shall be reimbursed by BUYER on
closing which advances to date is P1,159,012.87."22

The billings knowingly assumed by Ayala Corporation necessarily include the Lancer claim for
which GP Construction is liable. Proof of this is Ayala Corporation's letter23 to GP Construction
dated before "Closing" on May 4, 1981, informing the latter of Ayala Corporation's receipt of the
Lancer claim embodied in the letter dated April 30, 1981, acknowledging that it is taking over the
contractual responsibilities of Conduit, and requesting copies of all sub-contracts affecting the
Conduit property. The pertinent excerpts of the letter read:

In this connection, we wish to inform you that this morning we received a letter from Mr. Maximo
D. Del Rosario, President of Lancer General Builders Corporation apprising us of the existence
of subcontracts that they have with your corporation. They have also furnished us with a copy of
their letter to you dated 30 April 1981.

Since we are taking over the contractual responsibilities of Conduit Development, Inc., we
believe that it is necessary, at this point in time, that you furnish us with copies of all your
subcontracts affecting the property of Conduit, not only with Lancer General Builders
Corporation, but all subcontracts with other parties as well'24
Quite tellingly, Ayala Corporation even attached to its Pre-Trial Brief25 dated July 9, 1992 a
copy of the letter26 dated May 28, 1981 of GP Construction's counsel addressed to Conduit
furnishing the latter with copies of all sub-contract agreements entered into by GP Construction.
Since it was addressed to Conduit, it can be presumed that it was the latter which gave Ayala
Corporation a copy of the letter thereby disclosing to the latter the existence of the Lancer sub-
contract.

The ineluctable conclusion is that petitioners did not violate their warranties under the MOA. The
Lancer sub-contract and claim were substantially disclosed to Ayala Corporation before the
"Closing" date of the MOA. Ayala Corporation cannot disavow knowledge of the claim.

Moreover, while in its correspondence with petitioners, Ayala Corporation did mention the filing
of the Lancer suit as an obstacle to its development of the property, it never actually brought up
nor sought redress for petitioners' alleged breach of warranty for failure to disclose the Lancer
claim until it filed its Answer27 dated February 17, 1992.

We now come to the correct interpretation of paragraph 5.7 of the MOA. Does this paragraph
express a commitment or a mere intent on the part of Ayala Corporation to develop the property
within three (3) years from date thereof? Paragraph 5.7 provides:

5.7. The BUYER hereby commits that it will develop the 'Remaining Property' into a first class
residential subdivision of the same class as its New Alabang Subdivision, and that it intends to
complete the first phase under its amended development plan within three (3) years from the
date of this Agreement'.28

Notably, while the first phrase of the paragraph uses the word "commits" in reference to the
development of the "Remaining Property" into a first class residential subdivision, the second
phrase uses the word "intends" in relation to the development of the first phase of the property
within three (3) years from the date of the MOA. The variance in wording is significant. While
"commit"29 connotes a pledge to do something, "intend"30 merely signifies a design or
proposition.

Atty. Leopoldo Francisco, former Vice President of Ayala Corporation's legal division who
assisted in drafting the MOA, testified:

COURT

You only ask what do you mean by that intent. Just answer on that point.

ATTY. BLANCO

Don't talk about standard.

WITNESS
A Well, the word intent here, your Honor, was used to emphasize the tentative character of the
period of development because it will be noted that the sentence refers to and I quote "to
complete the first phase under its amended development plan within three (3) years from the
date of this agreement, at the time of the execution of this agreement, your Honor." That
amended development plan was not yet in existence because the buyer had manifested to the
seller that the buyer could amend the subdivision plan originally belonging to the seller to
conform with its own standard of development and second, your Honor, (interrupted)31

It is thus unmistakable that this paragraph merely expresses an intention on Ayala Corporation's
part to complete the first phase under its amended development plan within three (3) years from
the execution of the MOA. Indeed, this paragraph is so plainly worded that to misunderstand its
import is deplorable.

More focal to the resolution of the instant case is paragraph 5.7's clear reference to the first
phase of Ayala Corporation's amended development plan as the subject of the three (3)-year
intended timeframe for development. Even petitioner Daniel Vazquez admitted on cross-
examination that the paragraph refers not to Conduit's but to Ayala Corporation's development
plan which was yet to be formulated when the MOA was executed:

Q: Now, turning to Section 5.7 of this Memorandum of Agreement, it is stated as follows: "The
Buyer hereby commits that to develop the remaining property into a first class residential
subdivision of the same class as New Alabang Subdivision, and that they intend to complete the
first phase under its amended development plan within three years from the date of this
agreement."

Now, my question to you, Dr. Vasquez is that there is no dispute that the amended development
plan here is the amended development plan of Ayala?

A: Yes, sir.

Q: In other words, it is not Exhibit "D-5" which is the original plan of Conduit?
chanroblesvirtualawlibrary

A: No, it is not.

Q: This Exhibit "D-5" was the plan that was being followed by GP Construction in 1981?
chanroblesvirtualawlibrary

A: Yes, sir.

Q: And point of fact during your direct examination as of the date of the agreement, this
amended development plan was still to be formulated by Ayala?chanroblesvirtualawlibrary
A: Yes, sir.32

As correctly held by the appellate court, this admission is crucial because while the subject lots
to be sold to petitioners were in the first phase of the Conduit development plan, they were in
the third or last phase of the Ayala Corporation development plan. Hence, even assuming that
paragraph 5.7 expresses a commitment on the part of Ayala Corporation to develop the first
phase of its amended development plan within three (3) years from the execution of the MOA,
there was no parallel commitment made as to the timeframe for the development of the third
phase where the subject lots are located.

Lest it be forgotten, the point of this petition is the alleged failure of Ayala Corporation to offer
the subject lots for sale to petitioners within three (3) years from the execution of the MOA. It is
not that Ayala Corporation committed or intended to develop the first phase of its amended
development plan within three (3) years. Whether it did or did not is actually beside the point
since the subject lots are not located in the first phase anyway.

We now come to the issue of default or delay in the fulfillment of the obligation.

Article 1169 of the Civil Code provides:

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

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

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

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

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

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

In order that the debtor may be in default it is necessary that the following requisites be present:
(1) that the obligation be demandable and already liquidated; (2) that the debtor delays
performance; and (3) that the creditor requires the performance judicially or extrajudicially.33

Under Article 1193 of the Civil Code, obligations for whose fulfillment a day certain has been
fixed shall be demandable only when that day comes. However, no such day certain was fixed
in the MOA. Petitioners, therefore, cannot demand performance after the three (3) year period
fixed by the MOA for the development of the first phase of the property since this is not the
same period contemplated for the development of the subject lots. Since the MOA does not
specify a period for the development of the subject lots, petitioners should have petitioned the
court to fix the period in accordance with Article 119734 of the Civil Code. As no such action
was filed by petitioners, their complaint for specific performance was premature, the obligation
not being demandable at that point. Accordingly, Ayala Corporation cannot likewise be said to
have delayed performance of the obligation.

Even assuming that the MOA imposes an obligation on Ayala Corporation to develop the
subject lots within three (3) years from date thereof, Ayala Corporation could still not be held to
have been in delay since no demand was made by petitioners for the performance of its
obligation.

As found by the appellate court, petitioners' letters which dealt with the three (3)-year timetable
were all dated prior to April 23, 1984, the date when the period was supposed to expire. In other
words, the letters were sent before the obligation could become legally demandable. Moreover,
the letters were mere reminders and not categorical demands to perform. More importantly,
petitioners waived the three (3)-year period as evidenced by their agent, Engr. Eduardo Turla's
letter to the effect that petitioners agreed that the three (3)-year period should be counted from
the termination of the case filed by Lancer. The letter reads in part:

I. Completion of Phase I

As per the memorandum of Agreement also dated April 23, 1981, it was undertaken by your
goodselves to complete the development of Phase I within three (3) years. Dr. & Mrs. Vazquez
were made to understand that you were unable to accomplish this because of legal problems
with the previous contractor. These legal problems were resolved as of February 19, 1987, and
Dr. & Mrs. Vazquez therefore expect that the development of Phase I will be completed by
February 19, 1990, three years from the settlement of the legal problems with the previous
contractor. The reason for this is, as you know, that security-wise, Dr. & Mrs. Vazquez have
been advised not to construct their residence till the surrounding area (which is Phase I) is
developed and occupied. They have been anxious to build their residence for quite some time
now, and would like to receive assurance from your goodselves regarding this, in compliance
with the agreement.

II. Option on the adjoining lots

We have already written your goodselves regarding the intention of Dr. & Mrs. Vazquez to
exercise their option to purchase the two lots on each side (a total of 4 lots) adjacent to their
"Retained Area". They are concerned that although over a year has elapsed since the
settlement of the legal problems, you have not presented them with the size, configuration, etc.
of these lots. They would appreciate being provided with these at your earliest convenience.35
Manifestly, this letter expresses not only petitioners' acknowledgement that the delay in the
development of Phase I was due to the legal problems with GP Construction, but also their
acquiescence to the completion of the development of Phase I at the much later date of
February 19, 1990. More importantly, by no stretch of semantic interpretation can it be
construed as a categorical demand on Ayala Corporation to offer the subject lots for sale to
petitioners as the letter merely articulates petitioners' desire to exercise their option to purchase
the subject lots and concern over the fact that they have not been provided with the
specifications of these lots.

The letters of petitioners' children, Juan Miguel and Victoria Vazquez, dated January 23,
198436 and February 18, 198437 can also not be considered categorical demands on Ayala
Corporation to develop the first phase of the property within the three (3)-year period much less
to offer the subject lots for sale to petitioners. The letter dated January 23, 1984 reads in part:

You will understand our interest in the completion of the roads to our property, since we cannot
develop it till you have constructed the same. Allow us to remind you of our Memorandum of
Agreement, as per which you committed to develop the roads to our property "as per the
original plans of the company", and that

1. The back portion should have been developed before the front portion - which has not been
the case.

2. The whole project - front and back portions be completed by 1984.38

The letter dated February 18, 1984 is similarly worded. It states:

In this regard, we would like to remind you of Articles 5.7 and 5.9 of our Memorandum of
Agreement which states respectively:'39

Even petitioner Daniel Vazquez' letter40 dated March 5, 1984 does not make out a categorical
demand for Ayala Corporation to offer the subject lots for sale on or before April 23, 1984. The
letter reads in part:

'and that we expect from your goodselves compliance with our Memorandum of Agreement, and
a definite date as to when the road to our property and the development of Phase I will be
completed.41

At best, petitioners' letters can only be construed as mere reminders which cannot be
considered demands for performance because it must appear that the tolerance or benevolence
of the creditor must have ended.42

The petition finally asks us to determine whether paragraph 5.15 of the MOA can properly be
construed as an option contract or a right of first refusal. Paragraph 5.15 states:
5.15 The BUYER agrees to give the SELLERS first option to purchase four developed lots next
to the "Retained Area" at the prevailing market price at the time of the purchase.43

The Court has clearly distinguished between an option contract and a right of first refusal. An
option is a preparatory contract in which one party grants to another, for a fixed period and at a
determined price, the privilege to buy or sell, or to decide whether or not to enter into a principal
contract. It binds the party who has given the option not to enter into the principal contract with
any other person during the period designated, and within that period, to enter into such
contract with the one to whom the option was granted, if the latter should decide to use the
option. It is a separate and distinct contract from that which the parties may enter into upon the
consummation of the option. It must be supported by consideration.44

In a right of first refusal, on the other hand, while the object might be made determinate, the
exercise of the right would be dependent not only on the grantor's eventual intention to enter
into a binding juridical relation with another but also on terms, including the price, that are yet to
be firmed up.45

Applied to the instant case, paragraph 5.15 is obviously a mere right of first refusal and not an
option contract. Although the paragraph has a definite object, i.e., the sale of subject lots, the
period within which they will be offered for sale to petitioners and, necessarily, the price for
which the subject lots will be sold are not specified. The phrase "at the prevailing market price at
the time of the purchase" connotes that there is no definite period within which Ayala
Corporation is bound to reserve the subject lots for petitioners to exercise their privilege to
purchase. Neither is there a fixed or determinable price at which the subject lots will be offered
for sale. The price is considered certain if it may be determined with reference to another thing
certain or if the determination thereof is left to the judgment of a specified person or persons.46

Further, paragraph 5.15 was inserted into the MOA to give petitioners the first crack to buy the
subject lots at the price which Ayala Corporation would be willing to accept when it offers the
subject lots for sale. It is not supported by an independent consideration. As such it is not
governed by Articles 1324 and 1479 of the Civil Code, viz:

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

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

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

Consequently, the "offer" may be withdrawn anytime by communicating the withdrawal to the
other party.47
In this case, Ayala Corporation offered the subject lots for sale to petitioners at the price of
P6,500.00/square meter, the prevailing market price for the property when the offer was made
on June 18, 1990.48 Insisting on paying for the lots at the prevailing market price in 1984 of
P460.00/square meter, petitioners rejected the offer. Ayala Corporation reduced the price to
P5,000.00/square meter but again, petitioners rejected the offer and instead made a counter-
offer in the amount of P2,000.00/square meter.49 Ayala Corporation rejected petitioners'
counter-offer. With this rejection, petitioners lost their right to purchase the subject lots.

It cannot, therefore, be said that Ayala Corporation breached petitioners' right of first refusal and
should be compelled by an action for specific performance to sell the subject lots to petitioners
at the prevailing market price in 1984.

WHEREFORE, the instant petition is DENIED. No pronouncement as to costs.

SO ORDERED.

SECOND DIVISION

[G.R. No. 32336. December 20, 1930.]

JULIO C. ABELLA, Plaintiff-Appellant, v. GUILLERMO B. FRANCISCO, Defendant-Appellee.

Antonio T. Carrascoso jr., for Appellant.

Camus & Delgado for Mooney.

SYLLABUS

1. CONTRACT OF SALE; PERIOD FOR PAYMENT OF SELLING PRICE; RESOLUTION OF

CONTRACT. — Having agreed that the selling price (even supposing it was a contract of sale)
would be paid not later than December, 1928, and in view of the fact that the vendor executed
said contract in order to pay off with the proceeds thereof certain obligations which fell due in
the same month of December, it is held that the time fixed for the payment of the selling price
was essential in the transaction, and, therefore, the vendor, under article 1124 of the Civil Code,
is entitled to resolve the contract for failure to pay the price within the time specified.

DECISION
AVANCEÑA, C.J. :

Defendant Guillermo B. Francisco purchased from the Government on installments, lots 937 to
945 of the Tala Estate in Novaliches, Caloocan, Rizal. He was in arrears for some of these
installments. On the 31st of October, 1928, he signed the following
document:jgc:chanrobles.com.ph

"MANILA, October 31, 1928

"Received from Mr. Julio C. Abella the amount of five hundred pesos (500), payment on account
of lots Nos. 937, 938, 939, 940, 941, 942, 943, 944, and 945 of the Tala Estate, barrio of
Novaliches, Caloocan, Rizal, containing an area of about 221 hectares, at the rate of one
hundred pesos (P100) per hectare, the balance being due on or before the fifteenth day of
December, 1928, extendible fifteen days thereafter. (Sgd.) G. B. FRANCISCO — P500 —
Phone 67125."cralaw virtua1aw library

After having made this agreement, the plaintiff proposed the sale of these lots at a higher price
to George C. Sellner, collecting P10,000 on account thereof on December 29, 1928.

Besides the P500 which, according to the instrument quoted above, the plaintiff paid, he made
another payment of P415.31 on November 13, 1928, upon demand made by the defendant. On
December 27th of the same year, the defendant, being in the Province of Cebu, wrote to Roman
Mabanta of this City of Manila, attaching a power of attorney authorizing him to sign in behalf of
the defendant all the documents required by the Bureau of Lands for the transfer of the lots to
the plaintiff. In that letter the defendant instructed Roman Mabanta, in the event that the plaintiff
failed to pay the remainder of the selling price, to inform him that the option would be
considered cancelled, and to return to him the amount of P915.31 already delivered. On
January 3, 1929, Mabanta notified the plaintiff that he had received the power of attorney to sign
the deed of conveyance of the lots to him, and that he was willing go execute the proper deed of
sale upon payment of the balance due. The plaintiff asked for a few days’ time, but Mabanta,
following the instructions he had received from the defendant, only gave him until the 5th of that
month. The plaintiff did not pay the rest of the price on the 5th of January, but on the 9th of the
month attempted to do so; Mabanta, however, refused to accept it, and gave him to understand
that he regarded the contract as rescinded. On the same day, Mabanta returned by check the
sum of P915.31 which the plaintiff had paid.

The plaintiff brought this action to compel the defendant to execute the deed of sale of the lots
in question, upon receipt of the balance of the price, and asks that he be judicially declared the
owner of said lots and that the defendant be ordered to deliver them to him.

The court below absolved the defendant from the complaint, and the plaintiff appealed.
In rendering that judgment, the court relied on the fact that the plaintiff had failed to pay the
price of the lots within the stipulated time; and that since the contract between plaintiff and
defendant was an option for the purchase of the lots, time was an essential element in it.

It is to be noted that in the document signed by the defendant, the 15th of December was fixed
as the date, extendible for fifteen days, for the payment by the plaintiff of the balance of the
selling price. It has been admitted that the plaintiff did not offer to complete the payment until
January 9, 1929. He contends that Mabanta, as attorney-in-fact for the defendant in this
transaction, granted him an extension of time until the 9th of January. But Mabanta has stated
that he only extended the time until the 5th of that month. Mabanta’s testimony on this point is
corroborated by that of Paz Vicente and by the plaintiff’s own admission to Narciso Javier that
his option to purchase those lots expired on January 5, 1929.

In holding that the period was an essential element of the transaction between plaintiff and
defendant, the trial court considered that the contract in question was an option for the purchase
that the contract in question was an option for the purchase of the lots, and that in an agreement
of this nature the period is deemed essential. The opinion of the court is divided upon the
question of whether the agreement was an option or a sale, but even supposing it was a sale,
the court holds that time was an essential element in the transaction. The defendant wanted to
sell those lots to the plaintiff in order to pay off certain obligation which fell due in the month of
December, 1928. The time fixed for the payment of the price was therefore essential for the
defendant, and this view in borne out by his letter to his representative Mabanta instructing him
to consider the contract rescinded if the price was not completed in time. In accordance with
article 1124 of the Civil Code, the defendant is entitled to resolve the contract for failure to pay
the price within the time specified.

The judgment appealed from is affirmed, with costs against the appellant. So ordered

EN BANC

G.R. No. L-10394 December 13, 1958

CLAUDINA VDA. DE VILLARUEL, ET AL., plaintiffs-appellees,

vs.
MANILA MOTOR CO., INC. and ARTURO COLMENARES, defendants-appellants.

Hilado and Hilado for appellees.

Ozaeta, Gibbs and Ozaeta for appellant company.
Jose L. Gamboa and Napoleon Garcia for appellant Arturo Colmenares.
REYES, J. B. L., J.:

Manila Motor Co., Inc., and Arturo Colmenares interpose this appeal against the decision of the
Court of First Instance of Negros Occidental, in its Civil Case No. 648, ordering the defendant
Manila Motor Co., Inc. to pay to the plaintiffs Villaruel the sum of (a) P11,900 with legal rest from
May 18, 1953, on which date, the court below declared invalid the continued operation of the
Debt Moratorium, under the first cause of action; (b) P38,395 with legal interest from the date of
filing of the original complaint on April 26, 1947, on the second cause of action; and against both
the Manila Motor Co., Inc. and its co-defendant, Arturo Colmenares, the sum of P30,000 to be
paid, jointly and severally, with respect to the third cause of action.

On May 31, 1940, the plaintiffs Villaruel and the defendant Manila Motor Co., Inc. entered into a
contract (Exhibit "A") whereby, the former agreed to convey by way of lease to the latter the
following described premises;

(a) Five hundred (500) square meters of floor space of a building of strong materials for
automobile showroom, offices, and store room for automobile spare parts;

(b) Another building of strong materials for automobile repair shop; and

(c) A 5-bedroom house of strong materials for residence of the Bacolod Branch Manager of the
defendant company.

The term of the lease was five (5) years, to commence from the time that the building were
delivered and placed at the disposal of the lessee company, ready for immediate occupancy.
The contract was renewable for an additional period of five (5) years. The Manila Motor
Company, in consideration of the above covenants, agreed to pay to the lessors, or their duly
authorized representative, a monthly rental of Three Hundred (P300) pesos payable in advance
before the fifth day of each month, and for the residential house of its branch manager, a
monthly rental not to exceed Fifty (P50) pesos "payable separately by the Manager".

The leased premises were placed in the possession of the lessee on the 31st day of October,
1940, from which date, the period of the lease started to run under their agreement.

This situation, the Manila Motor Co., Inc. and its branch manager enjoying the premises, and
the lessors receiving the corresponding rentals as stipulated, continued until the invasion of
1941; and shortly after the Japanese military occupation of the Provincial Capital of Bacolod the
enemy forces held and used the properties leased as part of their quarters from June 1, 1942 to
March 29, 1945, ousting the lessee therefrom. No payment of rentals were made at any time
during the said period.

Immediately upon the liberation of the said city in 1945, the American Forces occupied the
same buildings that were vacated by the Japanese, including those leased by the plaintiffs, until
October 31, 1945. Monthly rentals were paid by the said occupants to the owners during the
time that they were in possession, as the same rate that the defendant company used to pay.

Thereafter, when the United States Army finally gave up the occupancy the premises, the
Manila Motor Co., Inc., through their branch manager, Rafael B. Grey, decided to exercise their
option to renew the contract for the additional period of five (5) years, and the parties, agreed
that the seven months occupancy by the U. S. Army would not be counted as part of the new 5-
year term. Simultaneously with such renewal, the company sublet the same buildings, except
that used for the residence of the branch manager, to the other defendant, Arturo Colmenares.

However, before resuming the collection of rentals, Dr. Alfredo Villaruel, who was entrusted with
the same, consulted Atty. Luis Hilado on whether they (the lessors) had the right to collect, from
the defendant company, rentals corresponding to the time during which the Japanese military
forces had control over the leased premises. Upon being advised that they had such a right, Dr.
Villaruel demanded payment thereof, but the defendant company refused to pay. As a result, Dr.
Villaruel gave notice seeking the rescission of the contract of lease and the payment of rentals
from June 1, 1942 to March 31, 1945 totalling P11,900. This was also rejected by the defendant
company in its letter to Villaruel, dated July 27, 1946.

Sometime on that same month of July, Rafael B. Grey offered to pay to Dr. Villaruel the sum of
P350, for which, tenderer requested a receipt that would state that it was in full payment for the
said month. The latter expressed willingness to accept the tendered amount provided, however,
that his acceptance should be understood to be without prejudice to their demand for the
rescission of the contract, and for increased rentals until their buildings were returned to them.
Later, Dr. Villaruel indicated his willingness to limit the condition of his acceptance to be that
"neither the lessee nor the lessors admit the contention of the other by the mere fact of
payment". As no accord could still be reached between the parties as to the context of the
receipt, no payment was thereafter tendered until the end of November, 1946. On December 4,
1946 (the day after the defendant company notified Dr. Villaruel by telegram, that it cancelled
the power of attorney given to Grey, and that it now authorized Arturo Colmenares, instead, to
pay the rent of P350 each month), the Manila Motor Co., Inc. remitted to Dr. Villaruel by letter,
the sum of P350.00. For this payment, the latter issued a receipt stating that it was "without
prejudice" to their demand for rents in arrears and for the rescission of the contract of lease.

After it had become evident that the parties could not settle their case amicably, the lessors
commenced this action on April 26, 1947 with the Court of First Instance of Negros Occidental
against the appellants herein. During the pendency of the case, a fire originating from the
projection room of the City Theatre, into which Arturo Colmenares, (the sublessee) had
converted the former repair shop of the Manila Motor Co. Inc., completely razed the building,
engulfing also the main building where Colmenares had opened a soda fountain and
refreshment parlor, and made partitions for store spaces which he rented to other persons.
Because of the aforesaid occurrence, plaintiffs demanded reimbursement from the defendants,
but having been refused, they filed a supplemental complaint to include as their third cause of
action, the recovery of the value of the burned buildings.

Defendants filed their amended answer and also moved for the dismissal of the plaintiffs' first
and second causes of action invoking the Debt Moratorium that was then in force. The dismissal
was granted by the trial court on February 5, 1951, but hearing was set as regards the third
cause of action.

On August 11, 1952, the defendant company filed a motion for summary judgment dismissing
the plaintiffs, third cause of action, to which plaintiffs registered objection coupled with a petition
for reconsideration of the order of the court dismissing the first and second causes of action.
Pending the resolution of this incident, plaintiffs, on October 2, 1953, called the court's attention
to the decision in the case of Rutter vs. Esteban (93 Phil., 68; 49 Off. Gaz. [5] 1807) invalidating
the continued effectivity of the Moratorium Law (R. A. 342). On November 25, 1953, the trial
court denied the defendant company's motion for summary judgment and set aside its previous
order dismissing the first and second causes of action. The case was accordingly heard and
thereafter, judgment was rendered in plaintiffs' favor in the terms set in the opening paragraph
of this decision. Thereafter, the defendants regularly appealed to this Court.

The defendants-appellants raise a number of procedural points. The first of these relates to their
contention that the supplemental complaint which included a third cause of action, should not
have been admitted, as it brought about a change in the original theory of the case and that it
raised new issues not theretofore considered. This argument cannot be sustained under the
circumstances. This action was inceptionally instituted for the rescission of the contract of lease
and for the recovery of unpaid rentals before and after liberation. When the leased buildings
were destroyed, the plaintiffs-lessors demanded from the defendants-lessees, instead, the value
of the burned premises, basing their right to do so on defendants' alleged default in the payment
of post-liberation rentals (which was also their basis in formerly seeking for rescission). This
cannot be considered as already altering the theory of the case which is merely a change in the
relief prayed for, brought about by circumstances occurring during the pendency of the action,
and is not improper. (Southern Pacific Co. vs. Conway, 115 F. 2d 746; Suburban Improvement
Company vs. Scott Lumber Co., 87 A.L.R. 555, 59 F. 2d 711). The filing of the supplements
complaint can well be justified also under section 2, Rule 17 of the Rules of Court (on
amendments) "to the end that the real matter in dispute and all matters in the action in dispute
between the parties may, as far as possible be completely determined in a single proceedings".
It is to be noted furthermore, that the admission or rejection of this kind of pleadings is within the
sound discretion of the court that will not be disturbed on appeal in the absence of abuse
thereof (see Sec. 5, Rule 17, Rules of Court), especially so, as in this case, where no
substantial procedural prejudice is caused to the adverse party.

It is urged that the dismissal of the first and second causes of action on February 5, 1951 had
the effect of a dismissal "with prejudice" as the court did not make any qualification in its
dismissal order. Appellants, apparently, lost sight of the fact that the dismissal was premised on
the existence of the "Debt Moratorium" which suspended the enforcement of the obligation up to
a certain time. The reference thereto by the lower court amounted to a dismissal "without
prejudice", since in effect it ruled that the plaintiffs could not, at the time they sought it, enforce
their right of action against the defendants, but plaintiffs must wait until the moratorium was
lifted. In this way, the court qualified its dismissal.

Taking up the case on its merits, it is readily seen that the key to the entire dispute is the
question whether the defendant-appellant Manila Motor Co., Inc. should be held liable for the
rentals of the premises leased corresponding to the lapse of time that they were occupied as
quarters or barracks by the invading Japanese army, and whether said appellant was placed in
default by its refusal to comply with the demand to pay such rents. For if the Motor Company
was not so liable, then it never was in default nor was it chargeable for the accidental lose of the
buildings, nor for any damages except the rental at the contract rate from its reoccupation of the
premises leased until the same were accidentally destroyed by fire on March 2, 1948.

The appellees contended, and the court below has held, that the ouster of the least company by
the Japanese occupation forces from 1942 until liberation, while operating to deprive the lessee
of the enjoyment of the thing leased, was, nevertheless, a mere act of trespass ("perturbacion
de mero hecho") that, under the Spanish Civil Code of 1889 (in force here until 1950), did not
exempt the lessee from the duty to pay rent. We find that contention and ruling erroneous and
untenable.

The pertinent articles of the Civil Code of Spain of 1889 provide:

ART. 1554. It shall be the duty of the lessor;

1. To deliver to the lessee the thing which is the subject matter of the contract;

2. To make thereon, during the lease, all repairs necessary in order to keep it in serviceable
condition for the purpose for which it was intended;

3. To maintain the lessee in the peaceful enjoyment of the lease during the entire term of
the contract.

ART. 1560. The lessor shall not be liable for any act of mere disturbance of a third person of the
use of the leased property; but the lessee shall have a direct action against the trespasser.

It the third person, be it the Government or a private individual, has acted in reliance upon a
right, such action shall not be deemed a mere act of disturbance. (Emphasis supplied)

Under the first paragraph of article 1560 the lessor does not answer for a mere act of trespass
( perturbacion de mero hecho) as distinguished from trespass under color of title ( perturbacion
de derecho). As to what would constitute a mere act of trespass, this Court in the case of
Goldstein vs. Roces (34 Phil. 562), made this pronouncement:
Si el hecho perturbador no va acompañado ni precedido de nada que revele una intencion
propiamente juridica en el que lo realiza, de tal suerte que el arrendatario solo pueda apreciar el
hecho material desnudo de toda forma o motivacion de derecho, entendemos que se trata de
una perturbacion de mero hecho.

Upon the basis of the distinction thus established between the perturbacion de hecho and the
perturbacion de derecho, it is demonstrable that the ouster of the appellant by the Japanese
occupying forces belongs to the second class of disturbances, de derecho. For under the
generally accepted principles of international law (and it must be remembered that those
principles are made by our Constitution a part of the law of our nation 1) a belligerent occupant
(like the Japanese in 1942-1945) may legitimately billet or quarter its troops in privately owned
land and buildings for the duration of its military operations, or as military necessity should
demand. The well known writer Oppenheim, discoursing on the laws of war on land, says upon
this topic;

Immovable private enemy property may under no circumstances or conditions be appropriated

by an invading belligerent. Should he confiscate and sell private land or buildings, the buyer
would acquire no right whatever to the property. Article 46 of the Hague Regulations expressly
enacts that "private property may not be confiscated." But confiscation differs from the
temporary use of private land and building for all kinds of purposes demanded by the
necessities of war. What has been said above with regard to utilization of public buildings
applied equally to private buildings. If necessary, they maybe converted into hospital barracks,
and stables without compensation for the proprietors, and they may also be converted into
fortifications. A humane belligerent will not drive the wretched inhabitants into the street if he
can help it. But under the pressure of necessity he may be obliged to do this, and he is certainly
not prohibited from doing it. (Emphasis supplied) (Oppenheim & Lauterpach, International Law,
Vol. II, p. 312, 1944 Ed.)

The view thus expressed is concurred in by other writers. Hyde (International Law, Vol. 3, p.
1893, 2nd Rev. Ed.) quotes the U. S. War Department 1940 Rules of Land Warfare (Rule No.
324) to the effect that —

The measure of permissible devastation is found in the strict necessities of war. As an end in
itself, as a separate measure of war, devastation is not sanctioned by the law of war. There
must be some reasonably close connection between the destruction of property and the
overcoming of the enemy's army. Thus the rule requiring respect for private property is not
violated through damage resulting from operations, movements, or combats of the army; that is,
real estate may be utilized for marches, camp sites, construction of trenches, etc. Buildings may
be used for shelter for troops, the sick and wounded, for animals, for reconnaissance, cover
defense, etc. Fence, woods, crops, buildings, etc., may be demolished, cut down, and removed
to clear a field of fire, to construct bridges, to furnish fuel if imperatively needed for the army.
(Emphasis supplied)
Reference may also be made to Rule 336:

What may be requisitioned. — Practically everything may be requisitioned under this article (art.
LII of the regulations above quoted) that is necessary for the maintenance of the army and not
of direct military use, such as fuel, food, forage, clothing, tobacco, printing presses, type,
leather, cloth, etc. Billeting of troops for quarters and subsistence is also authorized. (Emphasis
supplied)

And Forest and Tucker state:

The billegerent occupant may destroy or appropriate public property which may have a hostile
purpose, as forts, arms, armories, etc. The occupying force may enjoy the income from the
public sources. Strictly private property should be inviolable, except so far as the necessity of
war requires contrary action. (Forest and Tucker, International Law, 9th Ed., p. 277) (Emphasis
supplied)

The distinction between confiscation and temporary sequestration of private property by a

belligerent occupant was also passed upon by this Court in Haw Pia vs. China Banking
Corporation, 80 Phil. 604, wherein the right of Japan to sequester or take temporary control over
enemy private property in the interest of its military effort was expressly recognized.

We are thus forced to conclude that in evicting the lessee, Manila Motor Co., Inc. from the
leased buildings and occupying the same as quarters for troops, the Japanese authorities acted
pursuant to a right recognized by international and domestic law. Its act of dispossession,
therefore, did not constitute perturbacion de hecho but a perturbacion de derecho for which the
lessors Villaruel (and not the appellants lessees) were liable (Art. 1560, supra) and for the
consequences of which said lessors must respond, since the result of the disturbance was the
deprivation of the lessee of the peaceful use and enjoyment of the property leased. Wherefore,
the latter's corresponding obligation to pay rentals ceased during such deprivation.

The Supreme Court of Spain, in its Sentencia of 6 December 1944, squarely declared the
resolutory effect of the military sequestration of properties under lease upon the lessee's
obligation to pay rent (Jurisprudencia Civil, Segunda Serie, Tomo 8, pp. 583, 608):.

Considerando que para resolver acerca de la procedencia del presente recurso es preciso partir
de las bases de hecho sentadas en la sentencia recurrida, y no impugnadas al amparo del
numero 7. del articulo 1.692 de la Ley de Enjuiciamiento civil, es decir, de que hallandose
vigente el contrato de arrendamiento celebrado entre actor y demandada, en fecha que no se
precisa, entre los dias del 18 al 31 de julio de 1936, los locales objeto de dicho contrato de
arrendamiento, y en los que no funcionaba de tiempo anterior la industria para cuyo ejercicio se
arrendaron, fueron requisados por el Ejercito Nacional, con motivo de la guerra civil, para que
se instalara en los mismos la Junta de Donativos al Ejercito del Sur, aun cundo en dicha
incautacion, que se hizo a la propiedad de la finca, no se observaron las formalidades legales,
a causa de las circunstancias extraordinarias por que a la sazon atravesaba Sevilla, hecho que
no consta se hiciera saber por los arrendatarios demandados al actor, pero que fue notorio en
aquella capital, donde residia el actor, que de el debio tener conocimiento. Se estima
igualmente por la Sala que el hecho de que la industria no funcionara en el local no tuvo
influencia alguna sobre su incautacion por el Ejercito.

Considerando que sobre tales bases de hecho es de desestimar el primer motivo del recurso:
violacion de los articulos 1.254, 1.278 y 1.091 del Codigo civil, que sancionan, en terminos
generales, la eficacia de los contratos, puesto que en el presente caso de los que se trata en
definitiva es de determinar si por virtud de fuerza mayor, la requisa a que se hace referencia,
ajena, por lo tanto, a culpa, asi del arrendatario como del arrendador, se vio aquel privado del
posible disfrute de la finca arrendada, y de si por virtud de esta circunstancia esta o no exento
de la obligacion de abonar la renta pactada durante el tiempo que subsistio la incautacion; y es
indudable la afirmativa en cuanto al primer extremo, puesto que la sentencia recurrida
establece que el hecho de que no funcionase la industria y estuvieran los locales cerrados no
actuo como causa de la requisa de estos por el Ejercito.

Considerando que la sentencia recurrida, en cuanto no da lugar al pago de las rentas

correspondientes al tiempo que duro la incautacion, lejos de infringir, por aplicacion indebida, el
art. 1.568 del Codigo civil, se ajusta la orientacion marcada en el mismo, puesto que este
precepto legal dispone que el arrendatario tiene accion contra el tercero perturbador de mero
hecho en la posesion de la finca arrendada, pero no contra la Administracion o contra los que
obran en virtud de un derecho que les corresponde; y aqui la perturbacion que experimento el
arrendador en su posesion, como consecuencia de la requisa, no puede calificarse como de
mero hecho, conforme al citado articulo, puesto que la finca fue requisada por la autoridad
militar para fines de guerra, de donde se sigue que el arrendatario tenia que soportar la
privacion de su tenencia material a traves del arrendador, con quien ha de entenderse la
requisa de la cosa arrendada.

In addition, the text of Art. 1560, in its first paragraph ( jam quot.) assumes that in case of mere
disturbance ( perturbacion de mero hecho) "the lessee shall have a direct action against the
trespasser." This assumption evidently does not contemplate the case of dispossession of the
lessee by a military occupant, as pointed out by Mr. Chief Justice Paras in his dissenting opinion
in Reyes vs. Caltex (Phil.) Inc., 84 Phil. 669; for the reason that the lessee could not have a
direct action against the military occupant. It would be most unrealistic to expect that the
occupation courts, place under the authority of the occupying belligerent, should entertain at the
time a suit for forcible entry against the Japanese army. The plaintiffs, their lawyers, and in all
probability, the Judge and court personnel, would face "severest penalties" for such defiance of
the invader.

The present case is distinguishable from Lo Ching vs. Archbishop of Manila (81 Phil., 601) in
that the act of the Japanese military involved in the latter case clearly went beyond the limits set
by the Hague Conventions, in seizing the property and delivering it to another private party; and
from Reyes vs. Caltex (Phil.) Inc., 84 Phil. 654, in that the rights of the military occupant under
international law were not raised or put in issue in said case; and moreover, the lessee there, by
failing to rescind the lease upon seizure of the premises by the Japanese military, despite the
stipulated power to do so, resumed business and decided to hold unto the long term lease for
the balance of its 20-year period, starting from December 23, 1940. In the case before us, the
occupation of the leased property by the Japanese army covered the major portion of the five-
year contractual period, without any option to rescind by the lessee.

The lessor's position is not improved by regarding the military seizure of the property under
lease as a case of force majeure or fortuitous event. Ordinarily, a party may not be held
responsible therefor, despite the fact that it prevented compliance of its obligations. But lease
being a contract that calls for prestations that are both reciprocal and repetitive (tractum
successivum), the obligations of either party are not discharged at any given moment, but must
be fulfilled all throughout the term of the contract. As a result, any substantial failure by one
party to fulfill its commitments at any time during the contract period gives rise to a failure of
consideration (causa) for the obligations of the other party and excuses the latter from the
correlative performance, because the causa in lease must exist not only at the perfection but
throughout the term of the contract. No lessee would agree to pay rent for premises he could
not enjoy. As expressed by Marcel Planiol (quoted in 4 Castan, Derecho Civil, 7th Edition, p.
264) —

Como la obligacion del arrendador es sucesiva y se renueva todos los dias, la subsistencia del
arrendamiento se hace imposible cuando, por cualquier razon, el arrendador no puede ya
procurar al arrendatario el disfrute de la cosa.

This effect of the failure of reciprocity appears whether the failure is due to fault or to fortuitous
event; the only difference being that in case of fault, the other party is entitled to rescind the
contract in toto, and collect damages, while in casual non-performance it becomes entitled only
to a suspension pro tanto of its own commitments. This rule is recognized in par. 2 of Art. 1558,
authorizing the lessee to demand reduction of the rent in case of repairs depriving him of the
possession of part of the property; and in Art. 1575, enabling the lessee of rural property to
demand reduction of the rent if more than one-half of the fruits are lost by extraordinary
fortuitous event. Of course, where it becomes immediately apparent that the loss of possession
or enjoyment will be permanent, as in the case of accidental destruction of a leased building, the
lease contract terminates.

Applying these principles, the Sentencia of December 1944, already adverted to, ruled as
follows:

Considerando que privado el arrendador, por tal hecho, del disfrute de esta, es manifiesta la
imposibilidad en que se vio de cumplir la tercera de las obligaciones que el impone el articulo
1.554 del Codigo Civil, obligacion (la de mantener al arrendatario en el disfrute de la cosa
arrendada) que ha de entenderse reciproca de la de pago de renta pactada, que impone al
arrendatario el numero primero del art. 1.555 de dicho Cuerpo legal, y por ello no puede ser
exigida.
Considerando que, aunque no sean estrictamente aplicables al caso los articulos 1.124, 1.556 y
1.568, que se citan como infringidos por el recurrente, suponiendo que a ellos ha entendido
referirse la Audiencia (lo que impediria, en todo caso, la estimacion del recurso por este motivo,
ya que dichos articulos no se citan en la sentencia de instancia), es evidente que ellos
proclaman la reciprocidad de las obligaciones entre arrendatario y arrendador, y en este
sentido, tratandose de un incumplimiento inculpable decontrato, pueden servir, como tambien el
1.558, en cuanto preven la reduccion de rentas o posible restriccion del contrato cuando el
arrendatario se ve privado, por obras realizadas en la finca arrendada, del disfrute de este, de
fundamento, con los demas preceptos invocados, a una extencion de renta mientras subsiste la
imposibilidad de utilizar la cosa arrendada, sobre todo cuando los articulos 157 y 158 del
Reglamento de Requisas de 13 de enero de 1921 estatuyen claramente que las requisas de
edificio se hacen a la propiedad, y es el propietario el que puede pedir indemnization, uno de
cuyos elementos es el precio del alquiler que le sea satisfecho por el inmueble incautado.

We are aware that the rule in the common law is otherwise, due to its regarding a lease as a
conveyance to the lessee of a temporary estate or title to the leased property so that loss of
possession due to war or other fortuitous event leaves the tenant liable for the rent in the
absence of stipulation. The fundamental difference between the common law and the civil law
concepts has been outlined by the United States in Viterbo vs. Friedlander, 30 L. Ed. (U.S.) pp.
776, 778, in this wise:

But as to the nature and effect of a lease for years, at a certain rent which the lessee agrees to
pay, and containing no express covenant on the part of the lessor, the two systems differ
materially. The common law regards such a lease as the grant of an estate for years, which the
lessee takes a title in, and is bound to pay the stipulated rent for, notwithstanding any injury by
flood, fire or external violence, at least unless the injury is such a destruction of the land as to
amount to an eviction; and by that law the lessor is under no implied covenant to repair, or even
that the premises shall be fit for the purpose for which they are leased. Fowler vs. Bott, 6 Mass.
63; 3 Kent, Com. 465, 466; Broom, Legal Maxims, 3d ed. 213, 214; Doupe vs. Genin, 45 N. Y.
119; Kingbury vs. Westfall, 61 N. Y. 356. Naumberg vs. Young, 15 Vroom, 331; Bowe vs.
Hunking, 135 Mass. 380; Manchester Warehouse Co. vs. Carr, L.R. 5 C.P.D. 507.

The civil law, on the other hand, regards a lease for years as a mere transfer of the use and
enjoyment of the property; and holds the landlord bound, without any express covenant, to keep
it in repair and otherwise fit for use and enjoyment for the purpose for which it is leased, even
when the need of repair or the unfitness is caused by an inevitable accident, and if he does not
do so, the tenant may have the lease annulled, or the rent abated. Dig. 19, 2, 9, 2; 19, 2, 15, 1,
2; 19, 2, 25, 2; 19, 2, 39; 2 Gomez, Variae Resolutiones c. 3, secs. 1-3, 18, 19: Gregorio Lopez
in 5 Partidas, tit. 8, 11. 8, 22; Domat, Droit Civil, pt. 1, lib. 1, tit. 4, sec. 1, no. 1; sec. 3 nos. 1, 3,
6, Pothier, Contract de Louage, nos. 3, 6, 11, 22, 53, 103, 106, 139-155.

It is accordingly laid down in the Pandects, on the authority of Julian, "If anyone has let an
estate, that, even if anything happens by vis major, he must make it good, he must stand by his
contract," si quis fundum locaverit, ut, etiamsi quid vi majore accidisset, hoc ei praestaretur,
pacto standum esse; Dig. 19, 2, 9, 2; and on the authority of Ulpian, that "A lease does not
change the ownership," non solet locatio dominiun mutare; Dig. 19, 2, 39; and that the lessee
has a right of action, if he cannot enjoy the thing which he has hired, si re quam conduxit frui
non liceat, whether because his possession, either of the whole or of part of the field, is not
made good, or a house, or stable or sheepfold, is not repaired; and the landlord ought to
warrant the tenant, dominum colono praestare debere, against every irresistible force, omnim
vim cui resisti non potest, such as floods, flocks of birds, or any like cause, or invasion of
enemies; and if the whole crop should be destroyed by a heavy rainfall, or the olives should be
spoiled by blight, or by extraordinary heat of the sun, solis fervore non assueto, it would be the
loss of the landlord, damnum domini futurum; and so if the field falls in by an earthquake, for
there must be made good to the tenant a field that he can enjoy, oportere enim agrum praestari
conductori, ut frui possit; but if any loss arises from defects in the thing itself, si qua tamen vitia
ex ipsa re oriantur, as if wine turns sour, or standing corn is spoiled by worms or weeds, or if
nothing extraordinary happens, si vero nihil extra consuetudinem acciderit, it is the loss of the
tenant, damnum coloni esse. Dig. 19, 2; 15, 1, 2. (Emphasis supplied)

In short, the law applies to leases the rule enunciated by the Canonists and the Bartolist School
of Post glossatorse, that "contractus qui tractum successivum habent et dependentiam de
futuro, sub conditione rebus sic stantibus intelliguntur," they are understood entered subject to
the condition that things will remain as they are, without material change.

It is also worthy of note that the lessors, through Dr. Javier Villaruel, agreed after liberation to a
renewal of the contract of lease for another five years (from June 1, 1946 to May 31 of 1951)
without making any reservation regarding the alleged liability of the lessee company for the
rentals corresponding to the period of occupancy of the premises by the Japanese army, and
without insisting that the non-payment of such rental was a breach of the contract of lease. This
passivity of the lessors strongly supports the claim of the lessees that the rentals in question
were verbally waived. The proffered explanation is that the lessors could not refuse to renew the
lease, because the privilege of renewal had been granted to the lessees in the original contract.
Such excuse is untenable: if the lessors deemed that the contract had been breached by the
lessee's non-payment of the occupation rents how could they admit the lessee's right to renew a
contract that the lessee itself had violated?

But this is not all. The lessors accepted payment of current rentals from October 1945 to June
1946. It was only in July 1946 that they insisted upon collecting also the 1942-1945 rents, and
refused to accept further payments tendered by the lessee unless their right to collect the
occupation rental was recognized or reserved. After refusing the rents from July to November
1946, unless the lessee recognized their right to occupation rentals, the appellees (lessors)
demanded rescission of the contract and a rental of P1,740 monthly in lieu of the stipulated
P350 per month. (Exhibit "C").

This attitude of the lessors was doubly wrongful: first, because as already shown, the
dispossession by the Japanese army exempted the lessee from his obligation to pay rent for the
period of its ouster; and second, because even if the lessee had been liable for that rent, its
collection in 1946 was barred by the moratorium order, Executive Order No. 32, that remained
in force until replaced by Rep. Act 342 in 1948. To apply the current rentals to the occupation
obligations would amount to enforcing them contrary to the moratorium decreed by the
government.

Clearly, then, the lessor' insistence upon collecting the occupation rentals for 1942-1945 was
unwarranted in law. Hence, their refusal to accept the current rentals without qualification placed
them in default (mora creditoris or accipiendi) with the result that thereafter, they had to bear all
supervening risks of accidental injury or destruction of the leased premises. While not expressly
declared by the Code of 1889, this result is clearly inferable from the nature and effects of mora,
and from Articles 1185, 1452 [par. 3] and 1589).

ART. 1185. When the obligation to deliver a certain and determinate thing arises from the
commission of a crime or misdemeanor the obligor shall not be exempted from the payment of
its value, whatever the cause of its loss may have been, unless, having offered the thing to the
person entitled to receive it, the latter should have refused without reason to accept it.

Art. 1452. ....

If fungible things should be sold for a price fixed with relation to weight, number, or measure,
they shall not be at the purchaser's risk until they have been weighed, counted, or measured,
unless the purchaser should be in default.

ART. 1589. If the person who contracted to do the work bound himself to furnish the
materials, he shall bear the loss in case of the destruction of the work before it is delivered,
unless its acceptance has been delayed by the default of the other party.

While there is a presumption that the loss of the thing leased is due to the fault of the lessee
(Civil Code of 1889, Art. 1563), it is noteworthy that the lessor have not invoked that
presumption either here or in the court below. On the contrary, the parties and the trial court
have all proceeded and discussed the issues taking for granted that the destruction of the
leased buildings was purely fortuitous. We see no reason for departing from that assumption
and further prolonging this litigation..

That the lessee and sublessee did not consign or deposit in court the rentals tendered to and
improperly rejected by the lessors, did not render the debtor liable for default (mora solvendi)
nor answerable for fortuitous events because, as explained by the Supreme Court of Spain in its
Sentencia of 5 June 1944 —

Al exigir el art. 1176 del Codigo Civil la consignacion para liberar al deudor no quiere decir que
necesariamente haya de practicarse, y no baste el ofrecimiento de pago que de aquella no
fuere seguido, a efectos de exclusion de las consecuencias de la mora solvendi. (8 Manresa,
Comentarios, 5th Ed., Vol. 1, p. 136).
In other words, the only effect of the failure to consign the rentals in court was that the obligation
to pay them subsisted (P.N.B. vs. Relativo, 92 Phil., 203) and the lessee remained liable for the
amount of the unpaid contract rent, corresponding to the period from July to November, 1946; it
being undisputed that, from December 1946 up to March 2, 1948, when the commercial
buildings were burned, the defendants-appellants have paid the contract rentals at the rate of
P350 per month. But the failure to consign did not eradicate the default (mora) of the lessors nor
the risk of loss that lay upon them. (3 Castan, Der. Civ., 8th Ed., p. 145; 4 Puig Peña, Der. Civ.,
part. 1, p. 234; Diaz Pairo, Teoria Gen. de las Obligaciones [3rd Ed.], Vol. 1, pp. 192-193).

In view of the foregoing, we hold:lawphil.net

(a) That the dispossession of the lessee from the premises by the Japanese army of
occupation was not an act of mere trespass ( perturbacion de mero hecho) but one de derecho
chargeable to the lessors;

(b) That such dispossession, though not due to fault of lessors or lessee, nevertheless
resulted in the exemption of the lessee from its obligation to pay rent during the period that it
was deprived of the possession and enjoyment of the premises leased;

(c) That the insistence of the lessors to collect such rentals was unwarranted;

(d) That the lessors were not justified in refusing to accept the tender of current rentals
unless the lessee should recognize their right to the rents corresponding to the period that the
lessee was not in possession;

(e) That by their improper refusal to accept the current rents tendered by the lessee, the
lessors incurred in default (mora) and they must shoulder the subsequent accidental loss of the
premises leased;

(f) That the mora of the lessors was not cured by the failure of the lessee to make the
consignation of the rejected payments, but the lessee remained obligated to pay the amounts
tendered and not consigned by it in court.

Consequently, it was reversible error to sentence the appellants to pay P2,165 a month as
reasonable value of the occupation of the premises from July 1946, and the value of the
destroyed buildings amounting to P30,000.

Wherefore, the decision appealed from is modified in the sense that the appellant Manila Motor
Company should pay to the appellees Villaruel only the rents for the leased premises
corresponding to the period from July up to November 1946, at the rate of P350 a month, or a
total of P1,750. Costs against appellees in both instances. So ordered.
SECOND DIVISION

G.R. No. L-49852 October 19, 1989

EMILIA TENGCO, petitioner,

vs.
COURT OF APPEALS and BENJAMIN CIFRA JR., respondents.

De Santos, Balgos & Perez for petitioner.

Teofilo F. Manalo for respondents.

PADILLA, J.:

Review on certiorari of the decision* rendered by the Court of Appeals in CA-G.R. NO. SP-
08182, entitled: "Emilia Tengco, petitioner, versus Court of First Instance of Rizal, etc., et al,
respondents," which dismissed herein petitioner's "Appeal by Way of Certiorari" from the
judgment of the Court of First Instance of Rizal in Civil Case No. C-6625 which affirmed the
decision of the Municipal Court of Navotas, Metro Manila, in Civil Case No. 2092, entitled:
"Benjamin Cifra, plaintiff, versus Emilia Tengco defendant," ordering the herein petitioner (as
defendant) to vacate the premises at No. 164 Int Gov. Pascual St., Navotas, Metro Manila, and
to pay the herein private respondent (as plaintiff) the arrears in rentals and attorney's fees; and
the Resolution denying the herein petitioner's motion for reconsideration of the said Court of
Appeals decision.

The record of the case shows that on 16 September 1976, the herein private respondent,
Benjamin Cifra, Jr., claiming to be the owner of the premises at No. 164 Int Gov. Pascual St.,
Navotas, Metro Manila, which he had leased to the herein petitioner, Emilia Tengco, filed an
action for unlawful detainer with the Municipal Court of Navotas, Metro Manila, docketed therein
as Civil Case No. 2092, to evict the petitioner, Emilia Tengco, from the said premises for her
alleged failure to comply with the terms and conditions of the lease contract by failing and
refusing to pay the stipulated rentals despite repeated demands. After trial judgment was
rendered against the petitioner. The decretal portion of the decision reads, as follows:

WHEREFORE, Judgment is hereby rendered in favor of the plaintiff and against the defendant,
ordering the defendant and any and all persons claiming rights under her to vacate the premises
occupied by her at No. 164 Int Gov. Pascual Street, this town and to surrender possession
thereof to the plaintiff, condemning the defendant to pay the plaintiff the amount of THREE
HUNDRED SEVENTY SIX (P376.00) PESOS, as rentals in arrears and the sum of TWELVE
PESOS (P12.00), a month from October, 1976 until the premises is fully vacated. To pay the
plaintiff the sum of TWO HUNDRED (P200.00) PESOS as and for attorney's fees and costs of
suit.
From this judgment, the herein petitioner appealed to the Court of First Instance of Rizal where
the appeal was docketed as Civil Case No. C-6625. On 18 May 1978, the Court of First
Instance of Rizal rendered judgment affirming the decision of the municipal court, the dispositive
part of which reads as follows:

WHEREFORE, premises considered, judgment is hereby rendered affirming in toto the

judgment of the lower court dated September 20, 1 977 without pronouncement as to costs.

Not satisfied, the herein petitioner filed with the respondent Court of Appeals an "Appeal by Way
of Certiorari" which was docketed as CA-G.R. NO. SP-08182. On 29 August 1978, the
respondent Court of Appeals promulgated a decision, with the following disposition:

WHEREFORE, finding that the Decision of the lower Court is supported by substantial evidence
and that its conclusions are not clearly against the law and jurisprudence, the instant petition is
hereby denied due course and is dismissed outright.

The petitioner filed a motion for reconsideration of the decision but her motion was denied on 16
January 1979.

Hence, the present recourse.

The petitioner contends that the respondent Court of Appeals erred in sustaining the decisions
of the appellate and trial courts which are allegedly contrary to the evidence and applicable
jurisprudence. The petitioner more particularly claims that (1) the private respondent Benjamin
Cifra, Jr. is not the owner of the leased premises; (2) the lessor was guilty of mora accipiendi;
(3) the petitioner's version of the facts is more credible than private respondent's; (4) laches had
deprived the lessor of the right to eject her; and (5) the private respondent failed to establish a
cause of action against the petitioner.

We find no merit in the petition. The reasons advanced by the petitioner to support her petition
are the same reasons given by her to the Court of Appeals in support of her "Appeal by Way of
Certiorari" and we find no ground to adopt a different course from that of the respondent
appellate court. In disposing of the petitioner's contentions, the Court of Appeals said:

Petitioner claims that private respondent had failed to establish his ownership of the lot in
question for while the Certificate of Title presented by him refers to a parcel of land situated at
Bo. Almacen, Navotas, the premises in question, on the other hand, is situated in Bo. Sipak
Navotas; that it was not with private respondent that she entered into the lease agreement but
with his mother; that her failure to pay the rentals on the premises was due to the refusal of the
collector to accept her tender of payment; and that laches had deprived private respondent of
whatever right he had against her considering that the Complaint was filed only in September,
1976 whereas his cause of action arose sometime in February, 1974 when she defaulted in the
payment of rentals.
We find this appeal which We consider as a Petition for Review, to be without merit.

It should be noted that petitioner admits that she is a lessee on the premises in question and
that she had been in default in the payment of the rentals thereon since February, 1974
allegedly because of the refusal of the collector to accept her tender of payment. However, she
claims that the lease agreement was not with private respondent, but with his mother. The
question as to who is the real lessor of the premises is one of fact and the findings of the lower
court that it was private respondent is entitled to the highest respect by appellate Courts barring
any material evidence to the contrary. Neither can petitioner question private respondent's claim
of ownership of the leased premises. The tenant is not permitted to deny the title of his landlord
at the time of the commencement of the relation of landlord and tenant between them.

Petitioner's excuse for her non-payment of the rentals on the premises deserves scant
consideration. If, indeed, her offer to settle her obligation was refused by private respondent,
she should have resorted to the judicial deposit of the amount due in order to release her from
responsibility.

Petitioner's claim that private respondent's cause of' action is barred by laches is untenable.
While it is true that petitioner's arrearages date back to February, 1974, however, a tenant's
mere failure to pay rent does not ipso facto make unlawful his possession of the leased
premises. As held by respondent Court of First Instance, it is the failure to pay rents after a
demand therefor is made that entitles the lessor to bring an action of Unlawful Detainer.
Moreover, the lessor has the privilege to waive his right to bring an action against his tenant and
give the latter credit for the payment of the rents and allow him to continue indefinitely in the
possession of the premises. During such period, the tenant would not be in illegal possession of
the premises and the landlord can not maintain an action until after he has taken steps to
convert the legal possession into an illegal possession. Thus, in the case at bar, the demand on
petitioner to vacate the premises for failure to pay the rentals thereon was made by private
respondent only on August 23, 1976 and the Complaint against petitioner was filed on
September 16,1976.

Consequently, petitioner's non-payment of the rentals on the premises, notwithstanding demand

made by private respondent, and her failure to avail of the remedy provided for in Article 1256 of
the Civil Code, entitles private respondent to eject her from the premises.

Indeed, the question of whether or not private respondent is the owner of the leased premises is
one of fact which is within the cognizance of the trial court whose findings thereon will not be
disturbed on appeal unless there is a showing that the trial court had overlooked,
misunderstood, or misapplied some fact or circumstance of weight and substance that would
have affected the result of the case. And since the petitioner has not presented sufficient proof
that the leased premises is not the same lot registered in the name of the private respondent,
the findings of the lower courts on the fact of ownership of the leased premises will not be
disturbed.
The maps attached by the petitioner to her Reply to the Comment of the private respondent
which would tend to show that Almacen and Sipac are two (2) different barangays or sitios,
cannot offset the findings of the trial court for lack of proper Identifications; in fact, these maps
do not even indicate where the property at No. 164 Int Gov. Pascual Street is located.

The petitioner's contention that the provisions of Section 1, Commonwealth Act No. 53, should
be applied in this case in determining the credibility of witnesses, is untenable. The said law
provides:

Sec. 1. Where a covenant or contract made between the owner of land and a lessee or tenant
on share thereof has not been reduced to writing or has not been set forth in a document written
in a language known to the lessee or tenant, the testimony of such lessee or tenant shall be
accepted as prima facie evidence on the terms of a covenant or contract.

As can be seen, the cited law can be invoked only when there is a dispute between the owner of
the land and the lessee or tenant on share tenancy as to the terms of an unwritten contract or
where the contract is written in a language not known to the lessee or tenant. In the instant
case, there is no dispute as to the terms of the contract of lease. Hence, the cited law cannot be
invoked to support the petitioner's claim that the private respondent is not the owner of the
leased premises or that the petitioner's version of the facts of the case is more credible than that
of the private respondent.

Besides, the petitioner's contention that the private respondent is not the owner of the leased
premises is inconsistent with her claim that she had tendered payment of the rentals for the
month of January 1976 to the private respondent. 1

There is also no merit in the petitioner's contention that the lessor is guilty of mora accipiendi.
The circumstances surrounding the alleged refusal of the lessor (private respondent) to accept
the proffered rentals, according to petitioner, are as follows:

Sometime in 1942, petitioner entered into a verbal lease agreement with Lutgarda Cifra over the
premises in question which belonged to the latter. Aside from the amount of rentals, no other
condition or term was agreed upon. The rentals were collected from her residence by the
lessor's collector who went to her house to demand and collect payment from time to time, with
no fixed frequency (Cf., t.s.n. July 28, 1977, pp. 2-6).

Sometime in 1974, the lessor's collector stopped going to the petitioner's residence to collect
her rentals, as she had done in the past. The defendant-appellant waited for the collector to
come but the latter never showed up again in his neighborhood. Since no demand for payment
was made upon her, the petitioner decided to keep the money until the collector comes again to
demand and collect payment.
Sometime in May, 1976, petitioner received a letter (Exh. 1) from Aurora C. Recto, sister of
private respondent, informing the former that the latter, was the owner of the property in
question, was offering the same for sale.

Sometime later, or in August 1977, petitioner received another letter, this time from the private
respondent, demanding the surrender of the possession of the premises in question, also
claiming to be the owner of the property.

Upon receipt of this letter, petitioner forthwith went to the residence of the collector, another
sister of the private respondent to whom she had been paying her rentals, and there tendered
payment but this was refused without any justification (t.s.n. July 26, 1 977, p. 7). 2

Under the circumstances, the refusal to accept the proffered rentals is not without justification.
The ownership of the property had been transferred to the private respondent and the person to
whom payment was offered had no authority to accept payment. It should be noted that the
contract of lease between the petitioner and Lutgarda Cifra, the former owner of the land, was
not in writing and, hence, unrecorded. The Court has held that a contract of lease executed by
the vendor, unless recorded, ceases to have effect when the property is sold, in the absence of
a contrary agreement. 3 The petitioner cannot claim ignorance of the transfer of ownerhip of the
property because, by her own account, Aurora Recto and the private respondent, at various
times, had informed her of their respective claims to ownership of the property occupied by the
petitioner. The petitioner should have tendered payment of the rentals to the private respondent
and if that was not possible, she should have consigned such rentals in court.

Finally, we find no merit in the petitioner's contention that the private respondent is guilty of
laches. As the Court of Appeals had stated, the demand for the petitioner to vacate the
premises and to pay arrears in rentals was made on 23 August 1976 and the complaint seeking
her ejectment was filed a few days thereafter, or on 16 September 1976.

For reasons aforestated, the judgment of the Court of Appeals appears to be in accord with the
evidence and the law.

WHEREFORE, the petition is hereby DENIED. Without pronouncement as to costs. This

decision is immediately executory.

SO ORDERED

SECOND DIVISION

G.R. No. L-45710 October 3, 1985

CENTRAL BANK OF THE PHILIPPINES and ACTING DIRECTOR ANTONIO T. CASTRO, JR.
OF THE DEPARTMENT OF COMMERCIAL AND SAVINGS BANK, in his capacity as statutory
receiver of Island Savings Bank, petitioners,
vs.
THE HONORABLE COURT OF APPEALS and SULPICIO M. TOLENTINO, respondents.

I.B. Regalado, Jr., Fabian S. Lombos and Marino E. Eslao for petitioners.

Antonio R. Tupaz for private respondent.

MAKASIAR, CJ.:

This is a petition for review on certiorari to set aside as null and void the decision of the Court of
Appeals, in C.A.-G.R. No. 52253-R dated February 11, 1977, modifying the decision dated
February 15, 1972 of the Court of First Instance of Agusan, which dismissed the petition of
respondent Sulpicio M. Tolentino for injunction, specific performance or rescission, and
damages with preliminary injunction.

On April 28, 1965, Island Savings Bank, upon favorable recommendation of its legal
department, approved the loan application for P80,000.00 of Sulpicio M. Tolentino, who, as a
security for the loan, executed on the same day a real estate mortgage over his 100-hectare
land located in Cubo, Las Nieves, Agusan, and covered by TCT No. T-305, and which mortgage
was annotated on the said title the next day. The approved loan application called for a lump
sum P80,000.00 loan, repayable in semi-annual installments for a period of 3 years, with 12%
annual interest. It was required that Sulpicio M. Tolentino shall use the loan proceeds solely as
an additional capital to develop his other property into a subdivision.

On May 22, 1965, a mere P17,000.00 partial release of the P80,000.00 loan was made by the
Bank; and Sulpicio M. Tolentino and his wife Edita Tolentino signed a promissory note for
P17,000.00 at 12% annual interest, payable within 3 years from the date of execution of the
contract at semi-annual installments of P3,459.00 (p. 64, rec.). An advance interest for the
P80,000.00 loan covering a 6-month period amounting to P4,800.00 was deducted from the
partial release of P17,000.00. But this pre-deducted interest was refunded to Sulpicio M.
Tolentino on July 23, 1965, after being informed by the Bank that there was no fund yet
available for the release of the P63,000.00 balance (p. 47, rec.). The Bank, thru its vice-
president and treasurer, promised repeatedly the release of the P63,000.00 balance (p. 113,
rec.).

On August 13, 1965, the Monetary Board of the Central Bank, after finding Island Savings Bank
was suffering liquidity problems, issued Resolution No. 1049, which provides:

In view of the chronic reserve deficiencies of the Island Savings Bank against its deposit
liabilities, the Board, by unanimous vote, decided as follows:
1) To prohibit the bank from making new loans and investments [except investments in
government securities] excluding extensions or renewals of already approved loans, provided
that such extensions or renewals shall be subject to review by the Superintendent of Banks,
who may impose such limitations as may be necessary to insure correction of the bank's
deficiency as soon as possible;

xxx xxx xxx

(p. 46, rec.).

On June 14, 1968, the Monetary Board, after finding thatIsland Savings Bank failed to put up
the required capital to restore its solvency, issued Resolution No. 967 which prohibited Island
Savings Bank from doing business in the Philippines and instructed the Acting Superintendent
of Banks to take charge of the assets of Island Savings Bank (pp. 48-49, rec).

On August 1, 1968, Island Savings Bank, in view of non-payment of the P17,000.00 covered by
the promissory note, filed an application for the extra-judicial foreclosure of the real estate
mortgage covering the 100-hectare land of Sulpicio M. Tolentino; and the sheriff scheduled the
auction for January 22, 1969.

On January 20, 1969, Sulpicio M. Tolentino filed a petition with the Court of First Instance of
Agusan for injunction, specific performance or rescission and damages with preliminary
injunction, alleging that since Island Savings Bank failed to deliver the P63,000.00 balance of
the P80,000.00 loan, he is entitled to specific performance by ordering Island Savings Bank to
deliver the P63,000.00 with interest of 12% per annum from April 28, 1965, and if said balance
cannot be delivered, to rescind the real estate mortgage (pp. 32-43, rec.).

On January 21, 1969, the trial court, upon the filing of a P5,000.00 surety bond, issued a
temporary restraining order enjoining the Island Savings Bank from continuing with the
foreclosure of the mortgage (pp. 86-87, rec.).

On January 29, 1969, the trial court admitted the answer in intervention praying for the dismissal
of the petition of Sulpicio M. Tolentino and the setting aside of the restraining order, filed by the
Central Bank and by the Acting Superintendent of Banks (pp. 65-76, rec.).

On February 15, 1972, the trial court, after trial on the merits rendered its decision, finding
unmeritorious the petition of Sulpicio M. Tolentino, ordering him to pay Island Savings Bank the
amount of PI 7 000.00 plus legal interest and legal charges due thereon, and lifting the
restraining order so that the sheriff may proceed with the foreclosure (pp. 135-136. rec.

On February 11, 1977, the Court of Appeals, on appeal by Sulpicio M. Tolentino, modified the
Court of First Instance decision by affirming the dismissal of Sulpicio M. Tolentino's petition for
specific performance, but it ruled that Island Savings Bank can neither foreclose the real estate
mortgage nor collect the P17,000.00 loan pp. 30-:31. rec.).
Hence, this instant petition by the central Bank.

The issues are:

1. Can the action of Sulpicio M. Tolentino for specific performance prosper?

2. Is Sulpicio M. Tolentino liable to pay the P17,000.00 debt covered by the promissory note?

3. If Sulpicio M. Tolentino's liability to pay the P17,000.00 subsists, can his real estate mortgage
be foreclosed to satisfy said amount?

When Island Savings Bank and Sulpicio M. Tolentino entered into an P80,000.00 loan
agreement on April 28, 1965, they undertook reciprocal obligations. In reciprocal obligations, the
obligation or promise of each party is the consideration for that of the other (Penaco vs. Ruaya,
110 SCRA 46 [1981]; Vda. de Quirino vs, Pelarca 29 SCRA 1 [1969]); and when one party has
performed or is ready and willing to perform his part of the contract, the other party who has not
performed or is not ready and willing to perform incurs in delay (Art. 1169 of the Civil Code). The
promise of Sulpicio M. Tolentino to pay was the consideration for the obligation of Island
Savings Bank to furnish the P80,000.00 loan. When Sulpicio M. Tolentino executed a real
estate mortgage on April 28, 1965, he signified his willingness to pay the P80,000.00 loan. From
such date, the obligation of Island Savings Bank to furnish the P80,000.00 loan accrued. Thus,
the Bank's delay in furnishing the entire loan started on April 28, 1965, and lasted for a period of
3 years or when the Monetary Board of the Central Bank issued Resolution No. 967 on June 14,
1968, which prohibited Island Savings Bank from doing further business. Such prohibition made
it legally impossible for Island Savings Bank to furnish the P63,000.00 balance of the
P80,000.00 loan. The power of the Monetary Board to take over insolvent banks for the
protection of the public is recognized by Section 29 of R.A. No. 265, which took effect on June
15, 1948, the validity of which is not in question.

The Board Resolution No. 1049 issued on August 13,1965 cannot interrupt the default of Island
Savings Bank in complying with its obligation of releasing the P63,000.00 balance because said
resolution merely prohibited the Bank from making new loans and investments, and nowhere
did it prohibit island Savings Bank from releasing the balance of loan agreements previously
contracted. Besides, the mere pecuniary inability to fulfill an engagement does not discharge the
obligation of the contract, nor does it constitute any defense to a decree of specific performance
(Gutierrez Repide vs. Afzelius and Afzelius, 39 Phil. 190 [1918]). And, the mere fact of
insolvency of a debtor is never an excuse for the non-fulfillment of an obligation but 'instead it is
taken as a breach of the contract by him (vol. 17A, 1974 ed., CJS p. 650)

The fact that Sulpicio M. Tolentino demanded and accepted the refund of the pre-deducted
interest amounting to P4,800.00 for the supposed P80,000.00 loan covering a 6-month period
cannot be taken as a waiver of his right to collect the P63,000.00 balance. The act of Island
Savings Bank, in asking the advance interest for 6 months on the supposed P80,000.00 loan,
was improper considering that only P17,000.00 out of the P80,000.00 loan was released. A
person cannot be legally charged interest for a non-existing debt. Thus, the receipt by Sulpicio
M. 'Tolentino of the pre-deducted interest was an exercise of his right to it, which right exist
independently of his right to demand the completion of the P80,000.00 loan. The exercise of
one right does not affect, much less neutralize, the exercise of the other.

The alleged discovery by Island Savings Bank of the over-valuation of the loan collateral cannot
exempt it from complying with its reciprocal obligation to furnish the entire P80,000.00 loan.
'This Court previously ruled that bank officials and employees are expected to exercise caution
and prudence in the discharge of their functions (Rural Bank of Caloocan, Inc. vs. C.A., 104
SCRA 151 [1981]). It is the obligation of the bank's officials and employees that before they
approve the loan application of their customers, they must investigate the existence and
evaluation of the properties being offered as a loan security. The recent rush of events where
collaterals for bank loans turn out to be non-existent or grossly over-valued underscore the
importance of this responsibility. The mere reliance by bank officials and employees on their
customer's representation regarding the loan collateral being offered as loan security is a patent
non-performance of this responsibility. If ever bank officials and employees totally reIy on the
representation of their customers as to the valuation of the loan collateral, the bank shall bear
the risk in case the collateral turn out to be over-valued. The representation made by the
customer is immaterial to the bank's responsibility to conduct its own investigation. Furthermore,
the lower court, on objections of' Sulpicio M. Tolentino, had enjoined petitioners from presenting
proof on the alleged over-valuation because of their failure to raise the same in their pleadings
(pp. 198-199, t.s.n. Sept. 15. 1971). The lower court's action is sanctioned by the Rules of
Court, Section 2, Rule 9, which states that "defenses and objections not pleaded either in a
motion to dismiss or in the answer are deemed waived." Petitioners, thus, cannot raise the
same issue before the Supreme Court.

Since Island Savings Bank was in default in fulfilling its reciprocal obligation under their loan
agreement, Sulpicio M. Tolentino, under Article 1191 of the Civil Code, may choose between
specific performance or rescission with damages in either case. But since Island Savings Bank
is now prohibited from doing further business by Monetary Board Resolution No. 967, WE
cannot grant specific performance in favor of Sulpicio M, Tolentino.

Rescission is the only alternative remedy left. WE rule, however, that rescission is only for the
P63,000.00 balance of the P80,000.00 loan, because the bank is in default only insofar as such
amount is concerned, as there is no doubt that the bank failed to give the P63,000.00. As far as
the partial release of P17,000.00, which Sulpicio M. Tolentino accepted and executed a
promissory note to cover it, the bank was deemed to have complied with its reciprocal obligation
to furnish a P17,000.00 loan. The promissory note gave rise to Sulpicio M. Tolentino's reciprocal
obligation to pay the P17,000.00 loan when it falls due. His failure to pay the overdue
amortizations under the promissory note made him a party in default, hence not entitled to
rescission (Article 1191 of the Civil Code). If there is a right to rescind the promissory note, it
shall belong to the aggrieved party, that is, Island Savings Bank. If Tolentino had not signed a
promissory note setting the date for payment of P17,000.00 within 3 years, he would be entitled
to ask for rescission of the entire loan because he cannot possibly be in default as there was no
date for him to perform his reciprocal obligation to pay.

Since both parties were in default in the performance of their respective reciprocal obligations,
that is, Island Savings Bank failed to comply with its obligation to furnish the entire loan and
Sulpicio M. Tolentino failed to comply with his obligation to pay his P17,000.00 debt within 3
years as stipulated, they are both liable for damages.

Article 1192 of the Civil Code provides that in case both parties have committed a breach of
their reciprocal obligations, the liability of the first infractor shall be equitably tempered by the
courts. WE rule that the liability of Island Savings Bank for damages in not furnishing the entire
loan is offset by the liability of Sulpicio M. Tolentino for damages, in the form of penalties and
surcharges, for not paying his overdue P17,000.00 debt. The liability of Sulpicio M. Tolentino for
interest on his PI 7,000.00 debt shall not be included in offsetting the liabilities of both parties.
Since Sulpicio M. Tolentino derived some benefit for his use of the P17,000.00, it is just that he
should account for the interest thereon.

WE hold, however, that the real estate mortgage of Sulpicio M. Tolentino cannot be entirely
foreclosed to satisfy his P 17,000.00 debt.

The consideration of the accessory contract of real estate mortgage is the same as that of the
principal contract (Banco de Oro vs. Bayuga, 93 SCRA 443 [1979]). For the debtor, the
consideration of his obligation to pay is the existence of a debt. Thus, in the accessory contract
of real estate mortgage, the consideration of the debtor in furnishing the mortgage is the
existence of a valid, voidable, or unenforceable debt (Art. 2086, in relation to Art, 2052, of the
Civil Code).

The fact that when Sulpicio M. 'Tolentino executed his real estate mortgage, no consideration
was then in existence, as there was no debt yet because Island Savings Bank had not made
any release on the loan, does not make the real estate mortgage void for lack of consideration.
It is not necessary that any consideration should pass at the time of the execution of the
contract of real mortgage (Bonnevie vs. C.A., 125 SCRA 122 [1983]). lt may either be a prior or
subsequent matter. But when the consideration is subsequent to the mortgage, the mortgage
can take effect only when the debt secured by it is created as a binding contract to pay (Parks
vs, Sherman, Vol. 176 N.W. p. 583, cited in the 8th ed., Jones on Mortgage, Vol. 2, pp. 5-6).
And, when there is partial failure of consideration, the mortgage becomes unenforceable to the
extent of such failure (Dow. et al. vs. Poore, Vol. 172 N.E. p. 82, cited in Vol. 59, 1974 ed. CJS,
p. 138). Where the indebtedness actually owing to the holder of the mortgage is less than the
sum named in the mortgage, the mortgage cannot be enforced for more than the actual sum
due (Metropolitan Life Ins. Co. vs. Peterson, Vol. 19, F(2d) p. 88, cited in 5th ed., Wiltsie on
Mortgage, Vol. 1, P. 180).

Since Island Savings Bank failed to furnish the P63,000.00 balance of the P8O,000.00 loan, the
real estate mortgage of Sulpicio M. Tolentino became unenforceable to such extent. P63,000.00
is 78.75% of P80,000.00, hence the real estate mortgage covering 100 hectares is
unenforceable to the extent of 78.75 hectares. The mortgage covering the remainder of 21.25
hectares subsists as a security for the P17,000.00 debt. 21.25 hectares is more than sufficient
to secure a P17,000.00 debt.

The rule of indivisibility of a real estate mortgage provided for by Article 2089 of the Civil Code is
inapplicable to the facts of this case.

Article 2089 provides:

A pledge or mortgage is indivisible even though the debt may be divided among the successors
in interest of the debtor or creditor.

Therefore, the debtor's heirs who has paid a part of the debt can not ask for the proportionate
extinguishment of the pledge or mortgage as long as the debt is not completely satisfied.

Neither can the creditor's heir who have received his share of the debt return the pledge or
cancel the mortgage, to the prejudice of other heirs who have not been paid.

The rule of indivisibility of the mortgage as outlined by Article 2089 above-quoted presupposes
several heirs of the debtor or creditor which does not obtain in this case. Hence, the rule of
indivisibility of a mortgage cannot apply

WHEREFORE, THE DECISION OF THE COURT OF APPEALS DATED FEBRUARY 11, 1977
IS HEREBY MODIFIED, AND

1. SULPICIO M. TOLENTINO IS HEREBY ORDERED TO PAY IN FAVOR OF HEREIN

PETITIONERS THE SUM OF P17.000.00, PLUS P41,210.00 REPRESENTING 12%
INTEREST PER ANNUM COVERING THE PERIOD FROM MAY 22, 1965 TO AUGUST 22,
1985, AND 12% INTEREST ON THE TOTAL AMOUNT COUNTED FROM AUGUST 22, 1985
UNTIL PAID;

2. IN CASE SULPICIO M. TOLENTINO FAILS TO PAY, HIS REAL ESTATE MORTGAGE

COVERING 21.25 HECTARES SHALL BE FORECLOSED TO SATISFY HIS TOTAL
INDEBTEDNESS; AND

3. THE REAL ESTATE MORTGAGE COVERING 78.75 HECTARES IS HEREBY

DECLARED UNEN FORCEABLE AND IS HEREBY ORDERED RELEASED IN FAVOR OF
SULPICIO M. TOLENTINO.

NO COSTS. SO ORDERED
EN BANC

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

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

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

Sulpicio E. Platon, for Defendant-Appellee.

SYLLABUS

1. CIVIL LAW; CONTRACTS; BREACH OF CONTRACT FOR NON-PERFORMANCE; FIXING

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

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

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

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

5. REMEDIAL LAW; APPEALS; APPEAL FROM COURT OF FIRST INSTANCE TO SUPREME

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

DECISION

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

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

The appealed judgment, which is brief, is hereunder quoted in full:jgc:chanrobles.com.ph

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

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

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

"In his answer as well as in his testimony given before this court, the defendant made no denials
of the facts narrated above, except the claim of the plaintiff that the typewriter was delivered to
the defendant through a certain Julio Bocalin, which the defendant denied allegedly because the
typewriter was delivered to him personally by the plaintiff.
"The repair done on the typewriter by Freixas Business Machines with the total cost of P89.85
should not, however, be fully chargeable against the defendant. The repair invoice, Exhibit C,
shows that the missing parts had a total value of only P31.10.

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

"SO ORDERED."cralaw virtua1aw library

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

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

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

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

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

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

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

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

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

IN VIEW OF THE FOREGOING REASONS, the appealed judgment is hereby modified, by

ordering the defendant-appellee to pay, as he is hereby ordered to pay, the plaintiff-appellant
the sum of P89.85, with interest at the legal rate from the filing of the complaint. Costs in all
instances against appellee Fructuoso Gonzales.

SECOND DIVISION

G.R. No. 73867 February 29, 1988

TELEFAST COMMUNICATIONS/PHILIPPINE WIRELESS, INC., petitioner,

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

PADILLA, J.:

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

The facts of the case are as follows:

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

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

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

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

1. Sofia C. Crouch, P31.92 and P16,000.00 as compensatory damages and P20,000.00 as

moral damages.

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

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

4. Aurora Castro, P10,000.00 moral damages.

5. Salvador Castro, P10,000.00 moral damages.

6. Mario Castro, P10,000.00 moral damages.

7. Conrado Castro, P10,000 moral damages.

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

9. Agerico Castro, P10,000.00 moral damages.

10. Rolando Castro, P10,000.00 moral damages.

11. Virgilio Castro, P10,000.00 moral damages.

12. Gloria Castro, P10,000.00 moral damages.

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

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

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

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

Petitioner's contention is without merit.

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

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

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

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

As the appellate court properly observed:

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

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

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

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

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

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

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

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

(5) Costs of suit.

SO ORDERED

EN BANC

G.R. No. L-15645 January 31, 1964

PAZ P. ARRIETA and VITALIADO ARRIETA, plaintiffs-appellees,

vs.
NATIONAL RICE AND CORN CORPORATION, defendant-appellant,
MANILA UNDERWRITERS INSURANCE CO., INC., defendant-appellee.

Teehankee and Carreon for plaintiffs-appellees.

The Government Corporate Counsel for defendant-appellant.
Isidro A. Vera for defendant-appellee.

REGALA, J.:

This is an appeal of the defendant-appellant NARIC from the decision of the trial court dated
February 20, 1958, awarding to the plaintiffs-appellees the amount of $286,000.00 as damages
for breach of contract and dismissing the counterclaim and third party complaint of the
defendant-appellant NARIC.

In accordance with Section 13 of Republic Act No. 3452, "the National Rice and Corn
Administration (NARIC) is hereby abolished and all its assets, liabilities, functions, powers which
are not inconsistent with the provisions of this Act, and all personnel are transferred "to the Rice
and Corn Administration (RCA).

All references, therefore, to the NARIC in this decision must accordingly be adjusted and read
as RCA pursuant to the aforementioned law.

On May 19, 1952, plaintiff-appellee participated in the public bidding called by the NARIC for the
supply of 20,000 metric tons of Burmese rice. As her bid of $203.00 per metric ton was the
lowest, she was awarded the contract for the same. Accordingly, on July 1, 1952, plaintiff-
appellee Paz P. Arrieta and the appellant corporation entered into a Contract of Sale of Rice,
under the terms of which the former obligated herself to deliver to the latter 20,000 metric tons
of Burmess Rice at $203.00 per metric ton, CIF Manila. In turn, the defendant corporation
committed itself to pay for the imported rice "by means of an irrevocable, confirmed and
assignable letter of credit in U.S. currency in favor of the plaintiff-appellee and/or supplier in
Burma, immediately." Despite the commitment to pay immediately "by means of an irrevocable,
confirmed and assignable Letter of Credit," however, it was only on July 30, 1952, or a full
month from the execution of the contract, that the defendant corporation, thru its general
manager, took the first to open a letter of credit by forwarding to the Philippine National Bank its
Application for Commercial Letter Credit. The application was accompanied by a transmittal
letter, the relevant paragraphs of which read:

In view of the fact that we do not have sufficient deposit with your institution with which to cover
the amount required to be deposited as a condition for the opening of letters of credit, we will
appreciate it if this application could be considered special case.

We understand that our supplier, Mrs. Paz P. Arrieta, has a deadline to meet which is August 4,
1952, and in order to comply therewith, it is imperative that the L/C be opened prior to that date.
We would therefore request your full cooperation on this matter.

On the same day, July 30, 1952, Mrs. Paz P. Arrieta thru counsel, advised the appellant
corporation of the extreme necessity for the immediate opening of the letter credit since she had
by then made a tender to her supplier in Rangoon, Burma, "equivalent to 5% of the F.O.B. price
of 20,000 tons at $180.70 and in compliance with the regulations in Rangoon this 5% will be
confiscated if the required letter of credit is not received by them before August 4, 1952."

On August 4, 1952, the Philippine National Bank informed the appellant corporation that its
application, "for a letter of credit for $3,614,000.00 in favor of Thiri Setkya has been approved
by the Board of Directors with the condition that marginal cash deposit be paid and that drafts
are to be paid upon presentment." (Exh. J-pl.; Exh. 10-def., p. 19, Folder of Exhibits).
Furthermore, the Bank represented that it "will hold your application in abeyance pending
compliance with the above stated requirement."

As it turned out, however, the appellant corporation not in any financial position to meet the
condition. As matter of fact, in a letter dated August 2, 1952, the NARIC bluntly confessed to the
appellee its dilemma: "In this connection, please be advised that our application for opening of
the letter of credit has been presented to the bank since July 30th but the latter requires that we
first deposit 50% of the value of the letter amounting to aproximately $3,614,000.00 which we
are not in a position to meet." (Emphasis supplied. Exh. 9-Def.; Exh. 1-Pe., p. 18, Folder of
Exhibits)

Consequently, the credit instrument applied for was opened only on September 8, 1952 "in
favor of Thiri Setkya, Rangoon, Burma, and/or assignee for $3,614,000.00," (which is more than
two months from the execution of the contract) the party named by the appellee as beneficiary
of the letter of credit.1äwphï1.ñët

As a result of the delay, the allocation of appellee's supplier in Rangoon was cancelled and the
5% deposit, amounting to 524,000 kyats or approximately P200,000.00 was forfeited. In this
connection, it must be made of record that although the Burmese authorities had set August 4,
1952, as the deadline for the remittance of the required letter of credit, the cancellation of the
allocation and the confiscation of the 5% deposit were not effected until August 20, 1952, or, a
full half month after the expiration of the deadline. And yet, even with the 15-day grace,
appellant corporation was unable to make good its commitment to open the disputed letter of
credit.

The appellee endeavored, but failed, to restore the cancelled Burmese rice allocation. When the
futility of reinstating the same became apparent, she offered to substitute Thailand rice instead
to the defendant NARIC, communicating at the same time that the offer was "a solution which
should be beneficial to the NARIC and to us at the same time." (Exh. X-Pe., Exh. 25—Def., p.
38, Folder of Exhibits). This offer for substitution, however, was rejected by the appellant in a
resolution dated November 15, 1952.

On the foregoing, the appellee sent a letter to the appellant, demanding compensation for the
damages caused her in the sum of $286,000.00, U.S. currency, representing unrealized profit.
The demand having been rejected she instituted this case now on appeal.

At the instance of the NARIC, a counterclaim was filed and the Manila Underwriters Insurance
Company was brought to the suit as a third party defendant to hold it liable on the performance
bond it executed in favor of the plaintiff-appellee.

We find for the appellee.

It is clear upon the records that the sole and principal reason for the cancellation of the
allocation contracted by the appellee herein in Rangoon, Burma, was the failure of the letter of
credit to be opened with the contemplated period. This failure must, therefore, be taken as the
immediate cause for the consequent damage which resulted. As it is then, the disposition of this
case depends on a determination of who was responsible for such failure. Stated differently, the
issue is whether appellant's failure to open immediately the letter of credit in dispute amounted
to a breach of the contract of July 1, 1952 for which it may be held liable in damages.

Appellant corporation disclaims responsibility for the delay in the opening of the letter of credit.
On the contrary, it insists that the fault lies with the appellee. Appellant contends that the
disputed negotiable instrument was not promptly secured because the appellee , failed to
seasonably furnish data necessary and required for opening the same, namely, "(1) the amount
of the letter of credit, (2) the person, company or corporation in whose favor it is to be opened,
and (3) the place and bank where it may be negotiated." Appellant would have this Court
believe, therefore, that had these informations been forthwith furnished it, there would have
been no delay in securing the instrument.

Appellant's explanation has neither force nor merit. In the first place, the explanation reaches
into an area of the proceedings into which We are not at liberty to encroach. The explanation
refers to a question of fact. Nothing in the record suggests any arbitrary or abusive conduct on
the part of the trial judge in the formulation of the ruling. His conclusion on the matter is
sufficiently borne out by the evidence presented. We are denied, therefore, the prerogative to
disturb that finding, consonant to the time-honored tradition of this Tribunal to hold trial judges
better situated to make conclusions on questions of fact. For the record, We quote hereunder
the lower court's ruling on the point:

The defense that the delay, if any in opening the letter of credit was due to the failure of plaintiff
to name the supplier, the amount and the bank is not tenable. Plaintiff stated in Court that these
facts were known to defendant even before the contract was executed because these facts
were necessarily revealed to the defendant before she could qualify as a bidder. She stated too
that she had given the necessary data immediately after the execution of Exh. "A" (the contract
of July 1, 1952) to Mr. GABRIEL BELMONTE, General Manager of the NARIC, both orally and
in writing and that she also pressed for the opening of the letter of credit on these occasions.
These statements have not been controverted and defendant NARIC, notwithstanding its
previous intention to do so, failed to present Mr. Belmonte to testify or refute this. ...

Secondly, from the correspondence and communications which form part of the record of this
case, it is clear that what singularly delayed the opening of the stipulated letter of credit and
which, in turn, caused the cancellation of the allocation in Burma, was the inability of the
appellant corporation to meet the condition importation by the Bank for granting the same. We
do not think the appellant corporation can refute the fact that had it been able to put up the 50%
marginal cash deposit demanded by the bank, then the letter of credit would have been
approved, opened and released as early as August 4, 1952. The letter of the Philippine National
Bank to the NARIC was plain and explicit that as of the said date, appellant's "application for a
letter of credit ... has been approved by the Board of Directors with the condition that 50%
marginal cash deposit be paid and that drafts are to be paid upon presentment." (Emphasis
supplied)

The liability of the appellant, however, stems not alone from this failure or inability to satisfy the
requirements of the bank. Its culpability arises from its willful and deliberate assumption of
contractual obligations even as it was well aware of its financial incapacity to undertake the
prestation. We base this judgment upon the letter which accompanied the application filed by
the appellant with the bank, a part of which letter was quoted earlier in this decision. In the said
accompanying correspondence, appellant admitted and owned that it did "not have sufficient
deposit with your institution (the PNB) with which to cover the amount required to be deposited
as a condition for the opening of letters of credit. ... .

A number of logical inferences may be drawn from the aforementioned admission. First, that the
appellant knew the bank requirements for opening letters of credit; second, that appellant also
knew it could not meet those requirement. When, therefore, despite this awareness that was
financially incompetent to open a letter of credit immediately, appellant agreed in paragraph 8 of
the contract to pay immediately "by means of an irrevocable, confirm and assignable letter of
credit," it must be similarly held to have bound itself to answer for all and every consequences
that would result from the representation. aptly observed by the trial court:

... Having called for bids for the importation of rice involving millions, $4,260,000.00 to be exact,
it should have a certained its ability and capacity to comply with the inevitably requirements in
cash to pay for such importation. Having announced the bid, it must be deemed to have
impliedly assured suppliers of its capacity and facility to finance the importation within the
required period, especially since it had imposed the supplier the 90-day period within which the
shipment of the rice must be brought into the Philippines. Having entered in the contract, it
should have taken steps immediately to arrange for the letter of credit for the large amount
involved and inquired into the possibility of its issuance.

In relation to the aforequoted observation of the trial court, We would like to make reference
also to Article 11 of the Civil Code which provides:

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

Under this provision, not only debtors guilty of fraud, negligence or default in the performance of
obligations a decreed liable; in general, every debtor who fails in performance of his obligations
is bound to indemnify for the losses and damages caused thereby (De la Cruz Seminary of
Manila, 18 Phil. 330; Municipality of Moncada v. Cajuigan, 21 Phil. 184; De la Cavada v. Diaz,
37 Phil. 982; Maluenda & Co. v. Enriquez, 46 Phil. 916; Pasumil v. Chong, 49 Phil. 1003; Pando
v. Gimenez, 54 Phil. 459; Acme Films v. Theaters Supply, 63 Phil. 657). The phrase "any
manner contravene the tenor" of the obligation includes any illicit act which impairs the strict and
faithful fulfillment of the obligation or every kind or defective performance. (IV Tolentino, Civil
Code of the Philippines, citing authorities, p. 103.)

The NARIC would also have this Court hold that the subsequent offer to substitute Thailand rice
for the originally contracted Burmese rice amounted to a waiver by the appellee of whatever
rights she might have derived from the breach of the contract. We disagree. Waivers are not
presumed, but must be clearly and convincingly shown, either by express stipulation or acts
admitting no other reasonable explanation. (Ramirez v. Court of Appeals, 52 O.G. 779.) In the
case at bar, no such intent to waive has been established.

We have carefully examined and studied the oral and documentary evidence presented in this
case and upon which the lower court based its award. Under the contract, the NARIC bound
itself to buy 20,000 metric tons of Burmese rice at "$203.00 U.S. Dollars per metric ton, all net
shipped weight, and all in U.S. currency, C.I.F. Manila ..." On the other hand, documentary and
other evidence establish with equal certainty that the plaintiff-appellee was able to secure the
contracted commodity at the cost price of $180.70 per metric ton from her supplier in Burma.
Considering freights, insurance and charges incident to its shipment here and the forfeiture of
the 5% deposit, the award granted by the lower court is fair and equitable. For a clearer view of
the equity of the damages awarded, We reproduce below the testimony of the appellee,
adequately supported by the evidence and record:

Q. Will you please tell the court, how much is the damage you suffered?
A. Because the selling price of my rice is $203.00 per metric ton, and the cost price of my rice is
$180.00 We had to pay also $6.25 for shipping and about $164 for insurance. So adding the
cost of the rice, the freight, the insurance, the total would be about $187.99 that would be
$15.01 gross profit per metric ton, multiply by 20,000 equals $300,200, that is my supposed
profit if I went through the contract.

The above testimony of the plaintiff was a general approximation of the actual figures involved
in the transaction. A precise and more exact demonstration of the equity of the award herein is
provided by Exhibit HH of the plaintiff and Exhibit 34 of the defendant, hereunder quoted so far
as germane.

It is equally of record now that as shown in her request dated July 29, 1959, and other
communications subsequent thereto for the opening by your corporation of the required letter of
credit, Mrs. Arrieta was supposed to pay her supplier in Burma at the rate of One Hundred
Eighty Dollars and Seventy Cents ($180.70) in U.S. Currency, per ton plus Eight Dollars ($8.00)
in the same currency per ton for shipping and other handling expenses, so that she is already
assured of a net profit of Fourteen Dollars and Thirty Cents ($14.30), U.S., Currency, per ton or
a total of Two Hundred and Eighty Six Thousand Dollars ($286,000.00), U.S. Currency, in the
aforesaid transaction. ...

Lastly, herein appellant filed a counterclaim asserting that it has suffered, likewise by way of
unrealized profit damages in the total sum of $406,000.00 from the failure of the projected
contract to materialize. This counterclaim was supported by a cost study made and submitted
by the appellant itself and wherein it was illustrated how indeed had the importation pushed
thru, NARIC would have realized in profit the amount asserted in the counterclaim. And yet, the
said amount of P406,000.00 was realizable by appellant despite a number of expenses which
the appellee under the contract, did not have to incur. Thus, under the cost study submitted by
the appellant, banking and unloading charges were to be shouldered by it, including an Import
License Fee of 2% and superintendence fee of $0.25 per metric ton. If the NARIC stood to profit
over P400 000.00 from the disputed transaction inspite of the extra expenditures from which the
herein appellee was exempt, we are convicted of the fairness of the judgment presently under
appeal.

In the premises, however, a minor modification must be effected in the dispositive portion of the
decision appeal from insofar as it expresses the amount of damages in U.S. currency and not in
Philippine Peso. Republic Act 529 specifically requires the discharge of obligations only "in any
coin or currency which at the time of payment is legal tender for public and private debts." In
view of that law, therefore, the award should be converted into and expressed in Philippine
Peso.

This brings us to a consideration of what rate of exchange should apply in the conversion here
decreed. Should it be at the time of the breach, at the time the obligation was incurred or at the
rate of exchange prevailing on the promulgation of this decision.
In the case of Engel v. Velasco & Co., 47 Phil. 115, We ruled that in an action for recovery of
damages for breach of contract, even if the obligation assumed by the defendant was to pay the
plaintiff a sum of money expressed in American currency, the indemnity to be allowed should be
expressed in Philippine currency at the rate of exchange at the time of the judgment rather than
at the rate of exchange prevailing on the date of defendant's breach. This ruling, however, can
neither be applied nor extended to the case at bar for the same was laid down when there was
no law against stipulating foreign currencies in Philippine contracts. But now we have Republic
Act No. 529 which expressly declares such stipulations as contrary to public policy, void and of
no effect. And, as We already pronounced in the case of Eastboard Navigation, Ltd. v. Juan
Ysmael & Co., Inc., G.R. No. L-9090, September 10, 1957, if there is any agreement to pay an
obligation in a currency other than Philippine legal tender, the same is null and void as contrary
to public policy (Republic Act 529), and the most that could be demanded is to pay said
obligation in Philippine currency "to be measured in the prevailing rate of exchange at the time
the obligation was incurred (Sec. 1, idem)."

UPON ALL THE FOREGOING, the decision appealed from is hereby affirmed, with the sole
modification that the award should be converted into the Philippine peso at the rate of exchange
prevailing at the time the obligation was incurred or on July 1, 1952 when the contract was
executed. The appellee insurance company, in the light of this judgment, is relieved of any
liability under this suit. No pronouncement as to costs.

SECOND DIVISION

G.R. No. L-37120 April 20, 1983

VICTORINO D. MAGAT, petitioner,

vs.
HON. LEO D. MEDIALDEA and SANTIAGO A. GUERRERO, respondents.

Sinesio S. Vergara for petitioner.

Eladio B. Samson for respondents.

ESCOLIN, J.:

Put to test in this petition for review on certiorari is the sufficiency of the averments contained in
the complaint for alleged breach of contract filed by petitioner Victorino D. Magat against
respondent Santiago A. Guerrero in Civil Case No. 17827 of the Court of First Instance of Rizal,
presided by respondent Judge Leo D. Medialdea, now Deputy Judicial Administrator, which
complaint was dismissed for failure to state a cause of action.
The pertinent allegations in the complaint, subject of inquiry, are as follows: 1

3. That sometime in September 1972, the defendant entered into a contract with the U.S. Navy
Exchange, Subic Bay, Philippines, for the operation of a fleet of taxicabs, each taxicab to be
provided with the necessary taximeter and a radio transceiver for receiving and sending of
messages from mobile taxicab to fixed base stations within the Naval Base at Subic Bay,
Philippines;

4. That Isidro Q. Aligada, acting as agent of the defendant herein conducted the necessary
project studies on how best the defendant may meet the requirements of his contract with the
U.S. Navy Exchange, Subic Bay, Philippines, and because of the experience of the plaintiff in
connection with his various, contracts with the U.S. Navy, Subic Bay, Philippines, and his
goodwill already established with the Naval personnel of Subic Bay, Philippines, especially in
providing the U.S. Navy with needed materials or goods on time as specified by the U.S. Navy,
be they of local origin or imported either from the United States or from Japan, the said Isidro Q.
Aligada approached the plaintiff herein in behalf of the defendant and proposed to import from
Japan thru the plaintiff herein or thru plaintiff's Japanese business associates, all taximeters and
radio transceivers needed by the defendant in connection with his contract with the U.S. Navy
Exchange, Subic Bay, Philippines;

5. That the defendant herein and his aforesaid agent Isidro Q. Aligada were able to import from
Japan with the assistance of the plaintiff and his Japanese business associates the necessary
taximeters for defendant's taxicabs in partial fulfillment of defendant's commitments with the
U.S. Navy Exchange, Subic Bay, Philippines, the plaintiff's assistance in this matter having been
given to the defendant gratis et amore;

6. That Isidro Q. Aligada, also acting as agent of the defendant, made representations with the
plaintiff herein to the effect that defendant desired to procure from Japan thru the plaintiff herein
the needed radio transceivers and to this end, Isidro Q. Aligada secured a firm offer in writing
dated September 25, 1972, a copy of which is hereto attached marked as Annex 'A' and made
an integral part of this complaint, wherein the plaintiff quoted in his offer a total price of
$77,620.59 [U.S. dollars] FOB Yokohama, the goods or articles therein offered for sale by the
plaintiff to the defendant to be delivered sixty to ninety [60-90] days after receipt of advice from
the defendant of the radio frequency assigned to the defendant by the proper authorities;

7. That the plaintiff received notice of the fact that the defendant accepted plaintiff's offer to sell
to the defendant the items specified in Annex 'A', as well as the terms and conditions of said
offer, as shown by the signed conformity of the defendant appearing on Annex 'A' which was
duly delivered by the defendant's agent to the plaintiff herein, whereupon all that the plaintiff had
to do in the meantime was to await advice from the defendant as to the radio frequency to be
assigned by the proper authorities to the defendant;
8. That believing that the defendant would faithfully fulfill his contract with the plaintiff herein,
considering his signed conformity appearing in Annex 'A' hereof as well as the letter dated
October 4, 1972, of his agent aforementioned which is attached hereto and marked as Annex 'B'
and made an integral part of this complaint, and in order that plaintiff's promised delivery would
not be delayed, the plaintiff herein took steps to advise the Japanese entity entrusted with the
manufacture of the items listed in Annex 'A' to the effect that the contract between the defendant
herein and the plaintiff has been perfected and that advice with regards to radio frequency
would follow as soon as same is received by the plaintiff from the defendant;

9. That in his letter dated October 6, 1972, a copy of which is hereto attached marked as Annex
'C', the defendant advised his aforementioned agent to the effect that the U.S. Navy provided
him with the radio frequency of 34.2 MHZ [Megahertz] and defendant requested his said agent
to proceed with his order placed with the plaintiff herein, which fact was duly communicated to
the plaintiff by the defendant's aforementioned agent;

10. That by his letter dated October 7, 1972, addressed to the plaintiff by the defendant's agent,
a copy of which is hereto attached and marked as Annex 'D', defendant's agent qualified
defendant's instructions contained in his letter of October 6, 1972 [Annex 'C'] in the sense that
plaintiff herein should proceed to fulfill defendant's order only upon receipt by the plaintiff of the
defendant's letter of credit;

11. That it being normal business practice in case of foreign importation that the buyer opens a
letter of credit in favor of the foreign supplier before delivery of the goods sold, the plaintiff
herein awaited the opening of such a letter of credit by the defendant;

12. That the defendant and his agent have repeatedly assured plaintiff herein of the defendant's
financial capabilities to pay for the goods ordered by him and in fact he accomplished the
necessary application for a letter of credit with his banker, but he subsequently instructed his
banker not to give due course to his application for a letter of credit and that for reasons only
known to the defendant, he fails and refuses to open the necessary letter of credit to cover
payment of the goods ordered by him;

13. That it has come to the knowledge of the plaintiff herein that the defendant has been
operating his taxicabs without the required radio transceivers and when the U.S. Navy
Authorities of Subic Bay, Philippines, were pressing defendant for compliance with his
commitments with respect to the installations of radio transceivers on his taxicabs, he impliedly
laid the blame for the delay upon the plaintiff herein, thus destroying the reputation of the
plaintiff herein with the said Naval Authorities of Subic Bay, Philippines, with whom plaintiff
herein transacts business;

14. That on March 27, 1973, plaintiff wrote a letter thru his counsel, copy attached marked as
Annex 'E', to ascertain from the defendant as to whether it is his intention to fulfill his part of the
agreement with the plaintiff herein or whether he desired to have the contract between them
definitely cancelled, but defendant did not even have the courtesy to answer plaintiff's demand;
15. That the defendant herein entered into a contract with the plaintiff herein as set forth in
Annex 'A' without the least intention of faithfully complying with his obligation is thereunder, but
he did so only in order to obtain the concession from the U.S. Navy Exchange, Subic Bay,
Philippines, of operating a fleet of taxicabs inside the U.S. Naval Base to his financial benefit
and at the expense and prejudice of third parties such as the plaintiff herein;

16. That in view of the defendant's failure to fulfill his contractual obligations with the plaintiff
herein, the plaintiff will suffer the following damages:

[a] As the radio transceivers ordered by the defendant are now in the hands of the plaintiff's
Japanese representative, the plaintiff will have to pay for them, thus he will have to suffer as
total loss to him the amount of P523,938.98 (converting the amount of $77,620.59 to pesos at
the rate of P6.75 to the dollar) as said radio transceivers were purposely made or manufactured
solely for the use of the defendant herein and cannot possibly be marketed by the plaintiff
herein to the general public;

[b] The amount of P 52,393.89 or 10% of the purchase price by way of loss of expected profits
from the transaction or contract between plaintiff and the defendant;

[c] Loss of confidence in him and goodwill of the plaintiff which will result in the impairment of his
business dealings with Japanese firms, thereby resulting also in loss of possible profits in the
future which plaintiff assess at no less than P200,000.00;

[d] That in view of the defendant's bad faith in inducing plaintiff to enter into the contract with
him as set forth hereinabove, defendant should be assessed by his Honorable Court in favor of
the plaintiff the sum of P200,000.00 as moral and exemplary damages;

[e] That in view of the defendant's fault and to protect his interests, plaintiff herein is constrained
to retain the services of counsel with whom he agreed to pay by way of attorney's fees the sum
of P50,000.00".

Respondent Guerrero filed a motion to dismiss said complaint for lack of cause of action, which
ground is propounded by respondent's counsel thus: 2

... it is clear that plaintiff was merely anticipating his loss or damage which might result from the
alleged failure of defendant to comply with the terms of the alleged contract. Hence, plaintiff's
right of recovery under his cause of action is premised not on any loss or damage actually
suffered by him but on a non-existing loss or damage which he is expecting to incur in the near
future. Plaintiff's right therefore under his cause of action is not yet fixed or vested.

Inasmuch as there is no other allegation in the present Complaint wherein the same could be
maintained against defendant, the present Complaint should be dismissed for its failure to state
a cause of action against defendant.
The respondent judge, over petitioner's opposition, issued a minute order dismissing the
complaint as follows:3

Acting upon the 'Motion to Dismiss' filed by the defendant, through counsel, dated June 7, 1973,
as well as the opposition thereto filed by the plaintiff, through counsel, dated June 14, 1973, for
the reasons therein alleged, this Court hereby grants said motion and, as prayed for, the
complaint in the above-entitled case is dismissed.

SO ORDERED.

Both parties are in accord with the view that when a motion to dismiss is based on the ground of
lack of cause of action, the sufficiency of the case of action can only be determined on the basis
of the facts alleged in the complaint 4 ; that the facts alleged are deemed hypothetically
admitted, including those which are fairly deducible therefrom 5 ; and that, admitting the facts as
alleged, whether or not the Court can render a valid judgment against the defendant upon said
facts in accordance with the prayer in the complaint 6.

After a thorough examination of the complaint at bar, We find the test of legal sufficiency of the
cause of action adequately satisfied. In a methodical and logical sequence, the complaints
recites the circumstances that led to the perfection of the contract entered into by the parties. It
further avers that while petitioner had fulfilled his part of the bargain [paragraph 8 of the
Complaint], private respondent failed to comply with his correlative obligation by refusing to
open a letter of credit to cover payment of the goods ordered by him [paragraphs 11 & 12 of the
Complaint], and that consequently, petitioner suffered not only loss of his expected profits, but
moral and exemplary damages as well. From these allegations, the essential elements of a
cause of action are present, to wit: [1] the existence of a legal right to the plaintiff; [2] a
correlative duty of the defendant and [3] an act or omission of the defendant in violation of the
plaintiff's right, with consequent injury or damage to the latter for which he may maintain an
action for recovery of damages or other appropriate relief. 7

Indisputably, the parties, both businessmen, entered into the aforesaid contract with the evident
intention of deriving some profits therefrom. Upon breach of the contract by either of them, the
other would necessarily suffer loss of his expected profits. Since the loss comes into being at
the very moment of breach, such loss is real, "fixed and vested" and, therefore, recoverable
under the law.

Article 1170 of the Civil Code provides:

Those who in the performance of their obligation are guilty of fraud, negligence, or delay, and
those who in any manner contravene the tenor thereof are liable for damages.
The phrase "in any manner contravene the tenor" of the obligation includes any ilicit act or
omission which impairs the strict and faithful fulfillment of the obligation and every kind of
defective performance. 8

The damages which the obligor is liable for includes not only the value of the loss suffered by
the obligee [daño emergente] but also the profits which the latter failed to obtain [lucro cesante]
9. If the obligor acted in good faith, he shall be liable for those damages that are the natural and
probable consequences of the breach of the obligation and which the parties have foreseen or
could have reasonably foreseen at the time the obligation was constituted; and in case of fraud,
bad faith, malice or wanton attitude, he shall be liable for all damages which may be reasonably
attributed to the non-performance of the obligation 10.

The same is true with respect to moral and exemplary damages. The applicable legal provisions
on the matter, Articles 2220 and 2232 of the Civil Code, allow the award of such damages in
breaches of contract where the defendant acted in bad faith. To Our mind, the complaint
sufficiently alleges bad faith on the part of the defendant.

In fine, We hold that on the basis of the facts alleged in the complaint, the court could render a
valid judgment in accordance with the prayer thereof.

ACCORDINGLY, the questioned order of dismissal is hereby set aside and the case ordered
remanded to the court of origin for further proceedings. No costs.

SO ORDERED.