1

G.R. No. 84698 February 4, 1992

PHILIPPINE SCHOOL OF BUSINESS ADMINISTRATION vs. COURT OF APPEALS
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 Ordoez-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 ofquasi-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; 3hence, 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.
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 Franceis 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. InCangco 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

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relation between PSBA and Bautista. In other words, a contractual relation is a condition sine qua
nonto 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, abovementioned, 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.

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

JOSE S. AMADORA (et. al.) vs. HONORABLE COURT OF APPEALS, COLEGIO DE SAN JOSERECOLETOS
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 . 3On 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."

3
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 ofreddendo 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
someculpa 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 nonacademic.
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

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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 ofrespondeat superior, but then it may exculpate itself from liability by proof that it
had exercised the diligence of abonus 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

5
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.

G.R. No. 150843

March 14, 2003
CATHAY PACIFIC AIRWAYS, LTD vs. SPOUSES DANIEL VAZQUEZ and MARIA LUISA MADRIGAL
VAZQUEZ
Is an involuntary upgrading of an airline passengers accommodation from one class to a more superior
class at no extra cost a breach of contract of carriage that would entitle the passenger to an award of
damages? This is a novel question that has to be resolved in this case.
The facts in this case, as found by the Court of Appeals and adopted by petitioner Cathay Pacific
Airways, Ltd., (hereinafter Cathay) are as follows:
Cathay is a common carrier engaged in the business of transporting passengers and goods by air.
Among the many routes it services is the Manila-Hongkong-Manila course. As part of its marketing
strategy, Cathay accords its frequent flyers membership in its Marco Polo Club. The members enjoy
several privileges, such as priority forupgrading of booking without any extra charge whenever an
opportunity arises. Thus, a frequent flyer booked in the Business Class has priority for upgrading to First
Class if the Business Class Section is fully booked.

Respondents-spouses Dr. Daniel Earnshaw Vazquez and Maria Luisa Madrigal Vazquez are frequent
flyers of Cathay and are Gold Card members of its Marco Polo Club. On 24 September 1996, the
Vazquezes, together with their maid and two friends Pacita Cruz and Josefina Vergel de Dios, went to
Hongkong for pleasure and business.
For their return flight to Manila on 28 September 1996, they were booked on Cathays Flight CX-905,
with departure time at 9:20 p.m. Two hours before their time of departure, the Vazquezes and their
companions checked in their luggage at Cathays check-in counter at Kai Tak Airport and were given
their respective boarding passes, to wit, Business Class boarding passes for the Vazquezes and their
two friends, and Economy Class for their maid. They then proceeded to the Business Class passenger
lounge.
When boarding time was announced, the Vazquezes and their two friends went to Departure Gate No.
28, which was designated for Business Class passengers. Dr. Vazquez presented his boarding pass to
the ground stewardess, who in turn inserted it into an electronic machine reader or computer at the
gate. The ground stewardess was assisted by a ground attendant by the name of Clara Lai Han Chiu.
When Ms. Chiu glanced at the computer monitor, she saw a message that there was a "seat change"
from Business Class to First Class for the Vazquezes.
Ms. Chiu approached Dr. Vazquez and told him that the Vazquezes accommodations were upgraded to
First Class. Dr. Vazquez refused the upgrade, reasoning that it would not look nice for them as hosts to
travel in First Class and their guests, in the Business Class; and moreover, they were going to discuss
business matters during the flight. He also told Ms. Chiu that she could have other passengers instead
transferred to the First Class Section. Taken aback by the refusal for upgrading, Ms. Chiu consulted her
supervisor, who told her to handle the situation and convince the Vazquezes to accept the upgrading.
Ms. Chiu informed the latter that the Business Class was fully booked, and that since they were Marco
Polo Club members they had the priority to be upgraded to the First Class. Dr. Vazquez continued to
refuse, so Ms. Chiu told them that if they would not avail themselves of the privilege, they would not be
allowed to take the flight. Eventually, after talking to his two friends, Dr. Vazquez gave in. He and Mrs.
Vazquez then proceeded to the First Class Cabin.
Upon their return to Manila, the Vazquezes, in a letter of 2 October 1996 addressed to Cathays Country
Manager, demanded that they be indemnified in the amount of P1million for the "humiliation and
embarrassment" caused by its employees. They also demanded "a written apology from the
management of Cathay, preferably a responsible person with a rank of no less than the Country
Manager, as well as the apology from Ms. Chiu" within fifteen days from receipt of the letter.
In his reply of 14 October 1996, Mr. Larry Yuen, the assistant to Cathays Country Manager Argus Guy
Robson, informed the Vazquezes that Cathay would investigate the incident and get back to them within
a weeks time.
On 8 November 1996, after Cathays failure to give them any feedback within its self-imposed deadline,
the Vazquezes instituted before the Regional Trial Court of Makati City an action for damages against
Cathay, praying for the payment to each of them the amounts of P250,000 as temperate damages;
P500,000 as moral damages; P500,000 as exemplary or corrective damages; and P250,000 as
attorneys fees.
In their complaint, the Vazquezes alleged that when they informed Ms. Chiu that they preferred to stay
in Business Class, Ms. Chiu "obstinately, uncompromisingly and in a loud, discourteous and harsh voice
threatened" that they could not board and leave with the flight unless they go to First Class, since the
Business Class was overbooked. Ms. Chius loud and stringent shouting annoyed, embarrassed, and
humiliated them because the incident was witnessed by all the other passengers waiting for boarding.
They also claimed that they were unjustifiably delayed to board the plane, and when they were finally
permitted to get into the aircraft, the forward storage compartment was already full. A flight stewardess
instructed Dr. Vazquez to put his roll-on luggage in the overhead storage compartment. Because he was
not assisted by any of the crew in putting up his luggage, his bilateral carpal tunnel syndrome was
aggravated, causing him extreme pain on his arm and wrist. The Vazquezes also averred that they
"belong to the uppermost and absolutely top elite of both Philippine Society and the Philippine financial
community, [and that] they were among the wealthiest persons in the Philippine[s]."
In its answer, Cathay alleged that it is a practice among commercial airlines to upgrade passengers to
the next better class of accommodation, whenever an opportunity arises, such as when a certain section

6
is fully booked. Priority in upgrading is given to its frequent flyers, who are considered favored
passengers like the Vazquezes. Thus, when the Business Class Section of Flight CX-905 was fully
booked, Cathays computer sorted out the names of favored passengers for involuntary upgrading to
First Class. When Ms. Chiu informed the Vazquezes that they were upgraded to First Class, Dr.
Vazquez refused. He then stood at the entrance of the boarding apron, blocking the queue of
passengers from boarding the plane, which inconvenienced other passengers. He shouted that it was
impossible for him and his wife to be upgraded without his two friends who were traveling with them.
Because of Dr. Vazquezs outburst, Ms. Chiu thought of upgrading the traveling companions of the
Vazquezes. But when she checked the computer, she learned that the Vazquezes companions did not
have priority for upgrading. She then tried to book the Vazquezes again to their original seats. However,
since the Business Class Section was already fully booked, she politely informed Dr. Vazquez of such
fact and explained that the upgrading was in recognition of their status as Cathays valued passengers.
Finally, after talking to their guests, the Vazquezes eventually decided to take the First Class
accommodation.
Cathay also asserted that its employees at the Hong Kong airport acted in good faith in dealing with the
Vazquezes; none of them shouted, humiliated, embarrassed, or committed any act of disrespect against
them (the Vazquezes). Assuming that there was indeed a breach of contractual obligation, Cathay acted
in good faith, which negates any basis for their claim for temperate, moral, and exemplary damages and
attorneys fees. Hence, it prayed for the dismissal of the complaint and for payment of P100,000 for
exemplary damages and P300,000 as attorneys fees and litigation expenses.
During the trial, Dr. Vazquez testified to support the allegations in the complaint. His testimony was
corroborated by his two friends who were with him at the time of the incident, namely, Pacita G. Cruz
and Josefina Vergel de Dios.
For its part, Cathay presented documentary evidence and the testimonies of Mr. Yuen; Ms. Chiu; Norma
Barrientos, Comptroller of its retained counsel; and Mr. Robson. Yuen and Robson testified on Cathays
policy of upgrading the seat accommodation of its Marco Polo Club members when an opportunity
arises. The upgrading of the Vazquezes to First Class was done in good faith; in fact, the First Class
Section is definitely much better than the Business Class in terms of comfort, quality of food, and
service from the cabin crew. They also testified that overbooking is a widely accepted practice in the
airline industry and is in accordance with the International Air Transport Association (IATA) regulations.
Airlines overbook because a lot of passengers do not show up for their flight. With respect to Flight CX905, there was no overall overbooking to a degree that a passenger was bumped off or downgraded.
Yuen and Robson also stated that the demand letter of the Vazquezes was immediately acted upon.
Reports were gathered from their office in Hong Kong and immediately forwarded to their counsel Atty.
Remollo for legal advice. However, Atty. Remollo begged off because his services were likewise
retained by the Vazquezes; nonetheless, he undertook to solve the problem in behalf of Cathay. But
nothing happened until Cathay received a copy of the complaint in this case. For her part, Ms. Chiu
denied that she shouted or used foul or impolite language against the Vazquezes. Ms. Barrientos
testified on the amount of attorneys fees and other litigation expenses, such as those for the taking of
the depositions of Yuen and Chiu.
In its decision1 of 19 October 1998, the trial court found for the Vazquezes and decreed as follows:
WHEREFORE, finding preponderance of evidence to sustain the instant complaint, judgment
is hereby rendered in favor of plaintiffs Vazquez spouses and against defendant Cathay
Pacific Airways, Ltd., ordering the latter to pay each plaintiff the following:
a) Nominal damages in the amount of P100,000.00 for each plaintiff;
b) Moral damages in the amount of P2,000,000.00 for each plaintiff;
c) Exemplary damages in the amount of P5,000,000.00 for each plaintiff;
d) Attorneys fees and expenses of litigation in the amount of P1,000,000.00 for
each plaintiff; and
e) Costs of suit.
SO ORDERED.
According to the trial court, Cathay offers various classes of seats from which passengers are allowed to
choose regardless of their reasons or motives, whether it be due to budgetary constraints or whim. The
choice imposes a clear obligation on Cathay to transport the passengers in the class chosen by them.
The carrier cannot, without exposing itself to liability, force a passenger to involuntarily change his

choice. The upgrading of the Vazquezes accommodation over and above their vehement objections
was due to the overbooking of the Business Class. It was a pretext to pack as many passengers as
possible into the plane to maximize Cathays revenues. Cathays actuations in this case displayed
deceit, gross negligence, and bad faith, which entitled the Vazquezes to awards for damages.
On appeal by the petitioners, the Court of Appeals, in its decision of 24 July 2001,2 deleted the award for
exemplary damages; and it reduced the awards for moral and nominal damages for each of the
Vazquezes to P250,000 and P50,000, respectively, and the attorneys fees and litigation expenses to
P50,000 for both of them.
The Court of Appeals ratiocinated that by upgrading the Vazquezes to First Class, Cathay novated the
contract of carriage without the formers consent. There was a breach of contract not because Cathay
overbooked the Business Class Section of Flight CX-905 but because the latter pushed through with the
upgrading despite the objections of the Vazquezes.
However, the Court of Appeals was not convinced that Ms. Chiu shouted at, or meant to be discourteous
to, Dr. Vazquez, although it might seemed that way to the latter, who was a member of the elite in
Philippine society and was not therefore used to being harangued by anybody. Ms. Chiu was a Hong
Kong Chinese whose fractured Chinese was difficult to understand and whose manner of speaking
might sound harsh or shrill to Filipinos because of cultural differences. But the Court of Appeals did not
find her to have acted with deliberate malice, deceit, gross negligence, or bad faith. If at all, she was
negligent in not offering the First Class accommodations to other passengers. Neither can the flight
stewardess in the First Class Cabin be said to have been in bad faith when she failed to assist Dr.
Vazquez in lifting his baggage into the overhead storage bin. There is no proof that he asked for help
and was refused even after saying that he was suffering from "bilateral carpal tunnel syndrome." Anent
the delay of Yuen in responding to the demand letter of the Vazquezes, the Court of Appeals found it to
have been sufficiently explained.
The Vazquezes and Cathay separately filed motions for a reconsideration of the decision, both of which
were denied by the Court of Appeals.
Cathay seasonably filed with us this petition in this case. Cathay maintains that the award for moral
damages has no basis, since the Court of Appeals found that there was no "wanton, fraudulent, reckless
and oppressive" display of manners on the part of its personnel; and that the breach of contract was not
attended by fraud, malice, or bad faith. If any damage had been suffered by the Vazquezes, it
was damnum absque injuria, which is damage without injury, damage or injury inflicted without injustice,
loss or damage without violation of a legal right, or a wrong done to a man for which the law provides no
remedy. Cathay also invokes our decision in United Airlines, Inc. v. Court of Appeals3 where we
recognized that, in accordance with the Civil Aeronautics Boards Economic Regulation No. 7, as
amended, an overbooking that does not exceed ten percent cannot be considered deliberate and done
in bad faith. We thus deleted in that case the awards for moral and exemplary damages, as well as
attorneys fees, for lack of proof of overbooking exceeding ten percent or of bad faith on the part of the
airline carrier.
On the other hand, the Vazquezes assert that the Court of Appeals was correct in granting awards for
moral and nominal damages and attorneys fees in view of the breach of contract committed by Cathay
for transferring them from the Business Class to First Class Section without prior notice or consent and
over their vigorous objection. They likewise argue that the issuance of passenger tickets more than the
seating capacity of each section of the plane is in itself fraudulent, malicious and tainted with bad faith.
The key issues for our consideration are whether (1) by upgrading the seat accommodation of the
Vazquezes from Business Class to First Class Cathay breached its contract of carriage with the
Vazquezes; (2) the upgrading was tainted with fraud or bad faith; and (3) the Vazquezes are entitled to
damages.
We resolve the first issue in the affirmative.
A contract is a meeting of minds between two persons whereby one agrees to give something or render
some service to another for a consideration. There is no contract unless the following requisites concur:
(1) consent of the contracting parties; (2) an object certain which is the subject of the contract; and (3)
the cause of the obligation which is established.4 Undoubtedly, a contract of carriage existed between
Cathay and the Vazquezes. They voluntarily and freely gave their consent to an agreement whose
object was the transportation of the Vazquezes from Manila to Hong Kong and back to Manila, with

7
seats in the Business Class Section of the aircraft, and whose cause or consideration was the fare paid
by the Vazquezes to Cathay.
The only problem is the legal effect of the upgrading of the seat accommodation of the Vazquezes. Did it
constitute a breach of contract?
Breach of contract is defined as the "failure without legal reason to comply with the terms of a
contract."5 It is also defined as the "[f]ailure, without legal excuse, to perform any promise which forms
the whole or part of the contract."6
In previous cases, the breach of contract of carriage consisted in either the bumping off of a passenger
with confirmed reservation or the downgrading of a passengers seat accommodation from one class to
a lower class. In this case, what happened was the reverse. The contract between the parties was for
Cathay to transport the Vazquezes to Manila on a Business Class accommodation in Flight CX-905.
After checking-in their luggage at the Kai Tak Airport in Hong Kong, the Vazquezes were given boarding
cards indicating their seat assignments in the Business Class Section. However, during the boarding
time, when the Vazquezes presented their boarding passes, they were informed that they had a seat
change from Business Class to First Class. It turned out that the Business Class was overbooked in that
there were more passengers than the number of seats. Thus, the seat assignments of the Vazquezes
were given to waitlisted passengers, and the Vazquezes, being members of the Marco Polo Club, were
upgraded from Business Class to First Class.
We note that in all their pleadings, the Vazquezes never denied that they were members of Cathays
Marco Polo Club. They knew that as members of the Club, they had priority for upgrading of their seat
accommodation at no extra cost when an opportunity arises. But, just like other privileges, such priority
could be waived. The Vazquezes should have been consulted first whether they wanted to avail
themselves of the privilege or would consent to a change of seat accommodation before their seat
assignments were given to other passengers. Normally, one would appreciate and accept an upgrading,
for it would mean a better accommodation. But, whatever their reason was and however odd it might be,
the Vazquezes had every right to decline the upgrade and insist on the Business Class accommodation
they had booked for and which was designated in their boarding passes. They clearly waived their
priority or preference when they asked that other passengers be given the upgrade. It should not have
been imposed on them over their vehement objection. By insisting on the upgrade, Cathay breached its
contract of carriage with the Vazquezes.
We are not, however, convinced that the upgrading or the breach of contract was attended by fraud or
bad faith. Thus, we resolve the second issue in the negative.
Bad faith and fraud are allegations of fact that demand clear and convincing proof. They are serious
accusations that can be so conveniently and casually invoked, and that is why they are never
presumed. They amount to mere slogans or mudslinging unless convincingly substantiated by whoever
is alleging them.
Fraud has been defined to include an inducement through insidious machination. Insidious machination
refers to a deceitful scheme or plot with an evil or devious purpose. Deceit exists where the party, with
intent to deceive, conceals or omits to state material facts and, by reason of such omission or
concealment, the other party was induced to give consent that would not otherwise have been given.7
Bad faith does not simply connote bad judgment or negligence; it imports a dishonest purpose or some
moral obliquity and conscious doing of a wrong, a breach of a known duty through some motive or
interest or ill will that partakes of the nature of fraud.8
We find no persuasive proof of fraud or bad faith in this case. The Vazquezes were not induced to agree
to the upgrading through insidious words or deceitful machination or through willful concealment of
material facts. Upon boarding, Ms. Chiu told the Vazquezes that their accommodations were upgraded
to First Class in view of their being Gold Card members of Cathays Marco Polo Club. She was honest
in telling them that their seats were already given to other passengers and the Business Class Section
was fully booked. Ms. Chiu might have failed to consider the remedy of offering the First Class seats to
other passengers. But, we find no bad faith in her failure to do so, even if that amounted to an exercise
of poor judgment.
Neither was the transfer of the Vazquezes effected for some evil or devious purpose. As testified to by
Mr. Robson, the First Class Section is better than the Business Class Section in terms of comfort,
quality of food, and service from the cabin crew; thus, the difference in fare between the First Class and

Business Class at that time was $250.9 Needless to state, an upgrading is for the better condition and,
definitely, for the benefit of the passenger.
We are not persuaded by the Vazquezes argument that the overbooking of the Business Class Section
constituted bad faith on the part of Cathay. Section 3 of the Economic Regulation No. 7 of the Civil
Aeronautics Board, as amended, provides:
Sec 3. Scope. This regulation shall apply to every Philippine and foreign air carrier with
respect to its operation of flights or portions of flights originating from or terminating at, or
serving a point within the territory of the Republic of the Philippines insofar as it denies
boarding to a passenger on a flight, or portion of a flight inside or outside the Philippines, for
which he holds confirmed reserved space. Furthermore, this Regulation is designed to cover
only honest mistakes on the part of the carriers and excludes deliberate and willful acts of
non-accommodation. Provided, however, that overbooking not exceeding 10% of the seating
capacity of the aircraft shall not be considered as a deliberate and willful act of nonaccommodation.
It is clear from this section that an overbooking that does not exceed ten percent is not considered
deliberate and therefore does not amount to bad faith.10 Here, while there was admittedly an
overbooking of the Business Class, there was no evidence of overbooking of the plane beyond ten
percent, and no passenger was ever bumped off or was refused to board the aircraft.
Now we come to the third issue on damages.
The Court of Appeals awarded each of the Vazquezes moral damages in the amount of P250,000.
Article 2220 of the Civil Code provides:
Article 2220. Willful injury to property may be a legal ground for awarding moral damages if
the court should find that, under the circumstances, such damages are justly due. The same
rule applies to breaches of contract where the defendant acted fraudulently or in bad faith.
Moral damages include physical suffering, mental anguish, fright, serious anxiety, besmirched
reputation, wounded feelings, moral shock, social humiliation, and similar injury. Although incapable of
pecuniary computation, moral damages may be recovered if they are the proximate result of the
defendants wrongful act or omission.11 Thus, case law establishes the following requisites for the award
of moral damages: (1) there must be an injury clearly sustained by the claimant, whether physical,
mental or psychological; (2) there must be a culpable act or omission factually established; (3) the
wrongful act or omission of the defendant is the proximate cause of the injury sustained by the claimant;
and (4) the award for damages is predicated on any of the cases stated in Article 2219 of the Civil
Code.12
Moral damages predicated upon a breach of contract of carriage may only be recoverable in instances
where the carrier is guilty of fraud or bad faith or where the mishap resulted in the death of a
passenger.13 Where in breaching the contract of carriage the airline is not shown to have acted
fraudulently or in bad faith, liability for damages is limited to the natural and probable consequences of
the breach of the obligation which the parties had foreseen or could have reasonably foreseen. In such
a case the liability does not include moral and exemplary damages.14
In this case, we have ruled that the breach of contract of carriage, which consisted in the involuntary
upgrading of the Vazquezes seat accommodation, was not attended by fraud or bad faith. The Court of
Appeals award of moral damages has, therefore, no leg to stand on.
The deletion of the award for exemplary damages by the Court of Appeals is correct. It is a requisite in
the grant of exemplary damages that the act of the offender must be accompanied by bad faith or done
in wanton, fraudulent or malevolent manner.15 Such requisite is absent in this case. Moreover, to be
entitled thereto the claimant must first establish his right to moral, temperate, or compensatory
damages.16 Since the Vazquezes are not entitled to any of these damages, the award for exemplary
damages has no legal basis. And where the awards for moral and exemplary damages are eliminated,
so must the award for attorneys fees.17
The most that can be adjudged in favor of the Vazquezes for Cathays breach of contract is an award for
nominal damages under Article 2221 of the Civil Code, which reads as follows:
Article 2221 of the Civil Code provides:
Article 2221. Nominal damages are adjudicated in order that a right of the plaintiff, which has
been violated or invaded by the defendant, may be vindicated or recognized, and not for the
purpose of indemnifying the plaintiff for any loss suffered by him.

8
Worth noting is the fact that in Cathays Memorandum filed with this Court, it prayed only for the deletion
of the award for moral damages. It deferred to the Court of Appeals discretion in awarding nominal
damages; thus:
As far as the award of nominal damages is concerned, petitioner respectfully defers to the
Honorable Court of Appeals discretion. Aware as it is that somehow, due to the resistance of
respondents-spouses to the normally-appreciated gesture of petitioner to upgrade their
accommodations, petitioner may have disturbed the respondents-spouses wish to be with
their companions (who traveled to Hong Kong with them) at the Business Class on their flight
to Manila. Petitioner regrets that in its desire to provide the respondents-spouses with
additional amenities for the one and one-half (1 1/2) hour flight to Manila, unintended tension
ensued.18
Nonetheless, considering that the breach was intended to give more benefit and advantage to the
Vazquezes by upgrading their Business Class accommodation to First Class because of their valued
status as Marco Polo members, we reduce the award for nominal damages to P5,000.
Before writing finis to this decision, we find it well-worth to quote the apt observation of the Court of
Appeals regarding the awards adjudged by the trial court:
We are not amused but alarmed at the lower courts unbelievable alacrity, bordering on the scandalous,
to award excessive amounts as damages. In their complaint, appellees asked for P1 million as moral
damages but the lower court awarded P4 million; they asked for P500,000.00 as exemplary damages
but the lower court cavalierly awarded a whooping P10 million; they asked for P250,000.00 as attorneys
fees but were awarded P2 million; they did not ask for nominal damages but were awarded
P200,000.00. It is as if the lower court went on a rampage, and why it acted that way is beyond all tests
of reason. In fact the excessiveness of the total award invites the suspicion that it was the result of
"prejudice or corruption on the part of the trial court."
The presiding judge of the lower court is enjoined to hearken to the Supreme Courts
admonition in Singson vs. CA (282 SCRA 149 [1997]), where it said:
The well-entrenched principle is that the grant of moral damages depends upon the
discretion of the court based on the circumstances of each case. This discretion is
limited by the principle that the amount awarded should not be palpably and
scandalously excessive as to indicate that it was the result of prejudice or
corruption on the part of the trial court.
and in Alitalia Airways vs. CA (187 SCRA 763 [1990], where it was held:
Nonetheless, we agree with the injunction expressed by the Court of Appeals that
passengers must not prey on international airlines for damage awards, like
"trophies in a safari." After all neither the social standing nor prestige of the
passenger should determine the extent to which he would suffer because of a
wrong done, since the dignity affronted in the individual is a quality inherent in him
and not conferred by these social indicators. 19
We adopt as our own this observation of the Court of Appeals.
WHEREFORE, the instant petition is hereby partly GRANTED. The Decision of the Court of Appeals of
24 July 2001 in CA-G.R. CV No. 63339 is hereby MODIFIED, and as modified, the awards for moral
damages and attorneys fees are set aside and deleted, and the award for nominal damages is reduced
to P5,000.
No pronouncement on costs.
SO ORDERED.
[G.R. No. 142305. December 10, 2003]
SINGAPORE AIRLINES LIMITED, petitioner, vs. ANDION FERNANDEZ, respondent.
This is a petition for review on certiorari assailing the Decision[1] of the Court of Appeals which
affirmed in toto the decision[2] of the RegionalTrial Court of Pasig City, Branch 164 in Civil Case No.
60985 filed by the respondent for damages.
The Case for the Respondent

Respondent Andion Fernandez is an acclaimed soprano here in the Philippines and abroad. At the time
of the incident, she was availing an educational grant from the Federal Republic of Germany, pursuing a
Masters Degree in Music majoring in Voice.[3]
She was invited to sing before the King and Queen of Malaysia on February 3 and 4, 1991. For
this singing engagement, an airline passage ticket was purchased from petitioner Singapore Airlines
which would transport her to Manila from Frankfurt, Germany on January 28, 1991. FromManila, she
would proceed to Malaysia on the next day.[4] It was necessary for the respondent to pass by Manila in
order to gather her wardrobe; and to rehearse and coordinate with her pianist her repertoire for the
aforesaid performance.
The petitioner issued the respondent a Singapore Airlines ticket for Flight No. SQ 27,
leaving Frankfurt, Germany on January 27, 1991bound for Singapore with onward connections
from Singapore to Manila. Flight No. SQ 27 was scheduled to leave Frankfurt at 1:45 in the afternoon
of January 27, 1991, arriving at Singapore at 8:50 in the morning of January 28, 1991. The connecting
flight from Singapore to Manila, Flight No. SQ 72, was leaving Singapore at 11:00 in the morning
of January 28, 1991, arriving in Manila at 2:20 in the afternoon of the same day.[5]
On January 27, 1991, Flight No. SQ 27 left Frankfurt but arrived in Singapore two hours late or at
about 11:00 in the morning of January 28, 1991. By then, the aircraft bound for Manila had left as
scheduled, leaving the respondent and about 25 other passengers stranded in
the ChangiAirport in Singapore.[6]
Upon disembarkation at Singapore, the respondent approached the transit counter who referred
her to the nightstop counter and told the lady employee thereat that it was important for her to
reach Manila on that day, January 28, 1991. The lady employee told her that there were no more flights
to Manila for that day and that respondent had no choice but to stay in Singapore. Upon respondents
persistence, she was told that she can actually fly to Hong Kong going to Manila but since her ticket was
non-transferable, she would have to pay for the ticket. The respondent could not accept the offer
because she had no money to pay for it.[7] Her pleas for the respondent to make arrangements to
transport her toManila were unheeded.[8]
The respondent then requested the lady employee to use their phone to make a call
to Manila. Over the employees reluctance, the respondent telephoned her mother to inform the latter
that she missed the connecting flight. The respondent was able to contact a family friend who picked her
up from the airport for her overnight stay in Singapore.[9]
The next day, after being brought back to the airport, the respondent proceeded to petitioners
counter which says: Immediate Attention To Passengers with Immediate Booking. There were four or
five passengers in line. The respondent approached petitioners male employee at the counter to make
arrangements for immediate booking only to be told: Cant you see I am doing something. She explained
her predicament but the male employee uncaringly retorted: Its your problem, not ours.[10]
The respondent never made it to Manila and was forced to take a direct flight
from Singapore to Malaysia on January 29, 1991, through the efforts of her mother and travel agency
in Manila. Her mother also had to travel to Malaysia bringing with her respondents wardrobe and
personal things needed for the performance that caused them to incur an expense of about P50,000.[11]
As a result of this incident, the respondents performance before the Royal Family of Malaysia was
below par. Because of the rude and unkind treatment she received from the petitioners personnel
in Singapore, the respondent was engulfed with fear, anxiety, humiliation and embarrassment causing
her to suffer mental fatigue and skin rashes. She was thereby compelled to seek immediate medical
attention upon her return to Manila for acute urticaria
On June 15, 1993, the RTC rendered a decision with the following dispositive portion:
ACCORDINGLY and as prayed for, defendant Singapore Airlines is ordered to pay herein plaintiff
Andion H. Fernandez the sum of:
1.
2.

FIFTY THOUSAND (P50,000.00) PESOS as compensatory or actual damages;

TWO HUNDRED and FIFTY THOUSAND (P250,000.00) PESOS as moral damages
considering plaintiffs professional standing in the field of culture at home and abroad;

9
3.
4.
5.
6.

ONE HUNDRED THOUSAND (P100,000.00) PESOS as exemplary damages;

SEVENTY-FIVE THOUSAND (P75,000.00) PESOS as attorneys fees; and
To pay the costs of suit.
SO ORDERED

The petitioner appealed the decision to the Court of Appeals.

On June 10, 1998, the CA promulgated the assailed decision finding no reversible error in the appealed
decision of the trial court.[
Forthwith, the petitioner filed the instant petition for review, raising the following errors:
I. THE HONORABLE COURT OF APPEALS ERRED IN AFFIRMING IN TOTO THE DECISION OF THE
TRIAL COURT THAT AWARDED DAMAGES TO RESPONDENT FOR THE ALLEGED FAILURE OF
THE PETITIONER TO EXERCISE EXTRAORDINARY DILIGENCE.
II. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE PETITIONER ACTED IN
BAD FAITH.
III. THE HONORABLE COURT OF APPEALS ERRED IN DISMISSING THE PETITIONERS
COUNTERCLAIMS.
The petitioner assails the award of damages contending that it exercised the extraordinary
diligence required by law under the given circumstances. The delay of Flight No. SQ 27
from Frankfurt to Singapore on January 28, 1991 for more than two hours was due to a fortuitous
event and beyond petitioners control. Inclement weather prevented the petitioners plane coming
from Copenhagen, Denmark to arrive in Frankfurt on time on January 27, 1991. The plane could not
take off from the airport as the place was shrouded with fog. This delay caused a snowball effect
whereby the other flights were consequently delayed. The plane carrying the respondent arrived
in Singapore two (2) hours behind schedule.[16] The delay was even compounded when the plane could
not travel the normal route which was through the Middle East due to the raging Gulf War at that time. It
had to pass through the restricted Russian airspace which was more congested.[17]
Under these circumstances, petitioner therefore alleged that it cannot be faulted for the delay in
arriving in Singapore on January 28, 1991and causing the respondent to miss her connecting flight
to Manila.
The petitioner further contends that it could not also be held in bad faith because its personnel did
their best to look after the needs and interests of the passengers including the respondent. Because the
respondent and the other 25 passengers missed their connecting flight to Manila, the petitioner
automatically booked them to the flight the next day and gave them free hotel accommodations for the
night. It was respondent who did not take petitioners offer and opted to stay with a family friend
in Singapore.
The petitioner also alleges that the action of the respondent was baseless and it tarnished its
good name and image earned through the years for which, it was entitled to damages in the amount
of P1,000,000; exemplary damages of P500,000; and attorneys fees also in the amount of P500,000.[18]
The petition is barren of merit.
When an airline issues a ticket to a passenger, confirmed for a particular flight on a certain date, a
contract of carriage arises. The passenger then has every right to expect that he be transported on that
flight and on that date. If he does not, then the carrier opens itself to a suit for a breach of contract of
carriage.[19]
The contract of air carriage is a peculiar one. Imbued with public interest, the law requires
common carriers to carry the passengers safely as far as human care and foresight can provide, using
the utmost diligence of very cautious persons with due regard for all the circumstances. [20]In an action for
breach of contract of carriage, the aggrieved party does not have to prove that the common carrier was
at fault or was negligent. All that is necessary to prove is the existence of the contract and the fact of its
non-performance by the carrier.[21]
In the case at bar, it is undisputed that the respondent carried a confirmed ticket for the twolegged trip from Frankfurt to Manila: 1) Frankfurt-Singapore; and 2) Singapore-Manila. In her contract of
carriage with the petitioner, the respondent certainly expected that she would fly to Manila on Flight No.

SQ 72 on January 28, 1991. Since the petitioner did not transport the respondent as covenanted by it on
said terms, the petitioner clearly breached its contract of carriage with the respondent. The respondent
had every right to sue the petitioner for this breach. The defense that the delay was due to fortuitous
events and beyond petitioners control is unavailing. In PAL vs. CA,[22] we held that:
Undisputably, PALs diversion of its flight due to inclement weather was a fortuitous event. Nonetheless,
such occurrence did not terminate PALs contract with its passengers. Being in the business of air
carriage and the sole one to operate in the country, PAL is deemed to be equipped to deal with
situations as in the case at bar. What we said in one case once again must be stressed, i.e., the relation
of carrier and passenger continues until the latter has been landed at the port of destination and has left
the carriers premises. Hence, PAL necessarily would still have to exercise extraordinary diligence in
safeguarding the comfort, convenience and safety of its stranded passengers until they have reached
their final destination...
If the cause of non-fulfillment of the contract is due to a fortuitous event, it has to be the sole and only
cause (Art. 1755 C.C., Art. 1733 C.C.). Since part of the failure to comply with the obligation of common
carrier to deliver its passengers safely to their destination lay in the defendants failure to provide comfort
and convenience to its stranded passengers using extraordinary diligence, the cause of non-fulfillment is
not solely and exclusively due to fortuitous event, but due to something which defendant airline could
have prevented, defendant becomes liable to plaintiff.
Indeed, in the instant case, petitioner was not without recourse to enable it to fulfill its obligation to
transport the respondent safely as scheduled as far as human care and foresight can provide to her
destination. Tagged as a premiere airline as it claims to be and with the complexities of air travel, it was
certainly well-equipped to be able to foresee and deal with such situation. The petitioners indifference
and negligence by its absence and insensitivity was exposed by the trial court, thus:
1.

2.

3.

Under Section 9.1 of its Traffic Manual (Exhibit 4) flights can be delayed to await
the uplift of connecting cargo and passengers arriving on a late in-bound flight As
adverted to by the trial court, Flight SQ-27/28 maybe delayed for about half an
hour to transfer plaintiff to her connecting flight. As pointed out above, delay is
normal in commercial air transportation (RTC Decision, p. 22); or
Petitioner airlines could have carried her on one of its flights bound
for Hongkong and arranged for a connecting flight from Hongkong to Manila all on
the same date. But then the airline personnel who informed her of such possibility
told her that she has to pay for that flight. Regrettably, respondent did not have
sufficient funds to pay for it. (TSN, 30 March 1992, pp.8-9; RTC Decision, pp. 2223) Knowing the predicament of the respondent, petitioner did not offer to
shoulder the cost of the ticket for that flight; or
As noted by the trial court from the account of petitioners witness, Bob
Khkimyong, that a passenger such as the plaintiff could have been
accommodated in another international airline such as Lufthansa to bring the
plaintiff to Singapore early enough from Frankfurt provided that there was prior
communication from that station to enable her to catch the connecting flight to
Manila because of the urgency of her business in Manila(RTC Decision, p. 23)

The petitioners diligence in communicating to its passengers the consequences of the delay in their
flights was wanting. As elucidated by the trial court: It maybe that delay in the take off and arrival of
commercial aircraft could not be avoided and may be caused by diverse factors such as those testified
to by defendants pilot. However, knowing fully well that even before the plaintiff boarded defendants
Jumbo aircraft in Frankfurt bound for Singapore, it has already incurred a delay of two
hours. Nevertheless, defendant did not take the trouble of informing plaintiff, among its other
passengers of such a delay and that in such a case, the usual practice of defendant airline will be that

10
they have to stay overnight at their connecting airport; and much less did it inquire from the plaintiff and
the other 25 passengers bound for Manila whether they are amenable to stay overnight in Singapore
and to take the connecting flight to Manila the next day. Such information should have been given and
inquiries made in Frankfurt because even the defendant airlines manual provides that in case of
urgency to reach his or her destination on the same date, the head office of defendant in Singapore
must be informed by telephone or telefax so as the latter may make certain arrangements with other
airlines in Frankfurt to bring such a passenger with urgent business to Singapore in such a manner that
the latter can catch up with her connecting flight such as S-27/28 without spending the night in
Singapore
The respondent was not remiss in conveying her apprehension about the delay of the flight when
she was still in Frankfurt. Upon the assurance of petitioners personnel in Frankfurt that she will be
transported to Manila on the same date, she had every right to expect that obligation fulfilled. She
testified, to wit:
Q: Now, since you were late, when the plane that arrived from Frankfurt was late, did you
not make arrangements so that your flight fromSingapore to Manila would be
adjusted?
A: I asked the lady at the ticket counter, the one who gave the boarding pass in Frankfurt
and I asked her, Since my flight going to Singapore would be late, what would happen
to my Singapore-Manila flight? and then she said, Dont worry, Singapore Airlines
would be responsible to bring you to Manila on the same date. And then they have
informed the name of the officer, or whatever, that our flight is going to be late.[24]
When a passenger contracts for a specific flight, he has a purpose in making that choice which
must be respected. This choice, once exercised, must not be impaired by a breach on the part of the
airline without the latter incurring any liability.[25] For petitioners failure to bring the respondent to her
destination, as scheduled, we find the petitioner clearly liable for the breach of its contract of carriage
with the respondent.
We are convinced that the petitioner acted in bad faith. Bad faith means a breach of known duty
through some motive of interest or ill will. Self-enrichment or fraternal interest, and not personal ill will,
may well have been the motive; but it is malice nevertheless.[26] Bad faith was imputed by the trial court
when it found that the petitioners employees at the Singapore airport did not accord the respondent the
attention and treatment allegedly warranted under the circumstances. The lady employee at the counter
was unkind and of no help to her. The respondent further alleged that without her threats of suing the
company, she was not allowed to use the companys phone to make long distance calls to her mother
in Manila. The male employee at the counter where it says: Immediate Attention to Passengers with
Immediate Booking was rude to her when he curtly retorted that he was busy attending to other
passengers in line. The trial court concluded that this inattentiveness and rudeness of petitioners
personnel to respondents plight was gross enough amounting to bad faith. This is a finding that is
generally binding upon the Court which we find no reason to disturb.
Article 2232 of the Civil Code provides that in a contractual or quasi-contractual relationship,
exemplary damages may be awarded only if the defendant had acted in a wanton, fraudulent, reckless,
oppressive or malevolent manner. In this case, petitioners employees acted in a wanton, oppressive or
malevolent manner. The award of exemplary damages is, therefore, warranted in this case.
WHEREFORE, the Petition is DENIED. The Decision of the Court of Appeals is AFFIRMED. SO
ORDERED.

G.R. No. 171545 December 19, 2007

EQUITABLE PCI BANK vs. NG SHEUNG NGOR (aka KEN MARKETING)
This petition for review on certiorari[1] seeks to set aside the decision[2] of the Court of Appeals (CA) in
CA-G.R. SP No. 83112 and its resolution[3] denying reconsideration.
On October 7, 2001, respondents Ng Sheung Ngor,[4] Ken Appliance Division, Inc. and
Benjamin E. Go filed an action for annulment and/or reformation of documents and contracts[5] against
petitioner Equitable PCI Bank (Equitable) and its employees, Aimee Yu and Bejan Lionel Apas, in the
Regional Trial Court (RTC), Branch 16 of Cebu City.[6] They claimed that Equitable induced them to avail
of its peso and dollar credit facilities by offering low interest rates[7] so they accepted Equitable's
proposal and signed the bank's pre-printed promissory notes on various dates beginning 1996. They,
however, were unaware that the documents contained identical escalation clauses granting Equitable
authority to increase interest rates without their consent.[8]
Equitable, in its answer, asserted that respondents knowingly accepted all the terms and conditions
contained in the promissory notes.[9] In fact, they continuously availed of and benefited from Equitable's
credit facilities for five years.[10]
After trial, the RTC upheld the validity of the promissory notes. It found that, in 2001 alone, Equitable
restructured respondents'loans amounting to US$228,200 and P1,000,000.[11] The trial court, however,
invalidated the escalation clause contained therein because it violated the principle of mutuality of
contracts.[12] Nevertheless, it took judicial notice of the steep depreciation of the peso during the
intervening period[13] and declared the existence of extraordinary deflation.[14] Consequently, the RTC
ordered the use of the 1996 dollar exchange rate in computing respondents' dollar-denominated loans.
[15]
Lastly, because the business reputation of respondents was (allegedly) severely damaged when
Equitable froze their accounts, the trial court awarded moral and exemplary damages to them.[17]
The dispositive portion of the February 5, 2004 RTC decision provided:
WHEREFORE, premises considered, judgment is hereby rendered:

11
A)

Ordering [Equitable] to reinstate and return the amount of [respondents'] deposit

placed on hold status;

B)

Ordering [Equitable] to pay [respondents] the sum of P12 [m]illion [p]esos as moral
damages;

C)

Ordering [Equitable] to pay [respondents] the sum of P10 [m]illion [p]esos as

exemplary damages;

D)

Ordering defendants Aimee Yu and Bejan [Lionel] Apas to pay [respondents], jointly
and severally, the sum of [t]wo [m]illion [p]esos as moral and exemplary damages;

E)

Ordering [Equitable, Aimee Yu and Bejan Lionel Apas], jointly and severally, to pay
[respondents'] attorney's fees in the sum of P300,000; litigation expenses in the sum
of P50,000 and the cost of suit;

F)

Directing plaintiffs Ng Sheung Ngor and Ken Marketing to pay [Equitable] the unpaid
principal obligation for the peso loan as well as the unpaid obligation for the dollar
denominated loan;
Directing plaintiff Ng Sheung Ngor and Ken Marketing to pay [Equitable] interest as
follows: (1) 12% per annum for the peso loans; (2) 8% per annum for the dollar loans.
The basis for the payment of the dollar obligation is the conversion rate of P26.50 per
dollar availed of at the time of incurring of the obligation in accordance with Article
1250 of the Civil Code of the Philippines;

G)

H)

Dismissing [Equitable's] counterclaim except the payment of the aforestated unpaid

principal loan obligations and interest.

SO ORDERED.
Equitable and respondents filed their respective notices of appeal.
In the March 1, 2004 order of the RTC, both notices were denied due course because Equitable and
respondents failed to submit proof that they paid their respective appeal fees.
WHEREFORE, premises considered, the appeal interposed by defendants from the Decision
in the above-entitled case is DENIED due course. As of February 27, 2004, the Decision
dated February 5, 2004, is considered final and executory in so far as [Equitable, Aimee
Yu and Bejan Lionel Apas] are concerned.[22] (emphasis supplied)
Equitable moved for the reconsideration of the March 1, 2004 order of the RTC[23] on the ground that it
did in fact pay the appeal fees. Respondents, on the other hand, prayed for the issuance of a writ of
execution.[24]
On March 24, 2004, the RTC issued an omnibus order denying Equitable's motion for reconsideration
for lack of merit[25] and ordered the issuance of a writ of execution in favor of respondents.[26] According
to the RTC, because respondents did not move for the reconsideration of the previous order (denying
due course to the parties notices of appeal),[27] the February 5, 2004 decision became final and
executory as to both parties and a writ of execution against Equitable was in order.[28]
A writ of execution was thereafter issued[29] and three real properties of Equitable were levied upon.[30]
On March 26, 2004, Equitable filed a petition for relief in the RTC from the March 1, 2004 order.[31] It,
however, withdrew that petition on March 30, 2004[32] and instead filed a petition for certiorari with an
application for an injunction in the CA to enjoin the implementation and execution of the March 24, 2004
omnibus order.[33]
On June 16, 2004, the CA granted Equitable's application for injunction. A writ of preliminary injunction
was correspondingly issued.[34]

Notwithstanding the writ of injunction, the properties of Equitable previously levied upon were sold in a
public auction on July 1, 2004. Respondents were the highest bidders and certificates of sale were
issued to them.[35]
On August 10, 2004, Equitable moved to annul the July 1, 2004 auction sale and to cite the sheriffs who
conducted the sale in contempt for proceeding with the auction despite the injunction order of the CA.
On October 28, 2005, the CA dismissed the petition for certiorari.[37] It found Equitable guilty of forum
shopping because the bank filed its petition for certiorari in the CA several hours before withdrawing its
petition for relief in the RTC.[38] Moreover, Equitable failed to disclose, both in the statement of material
dates and certificate of non-forum shopping (attached to its petition for certiorari in the CA), that it had a
pending petition for relief in the RTC.[39]
Equitable moved for reconsideration[40] but it was denied.[41] Thus, this petition. Equitable asserts that it
was not guilty of forum shopping because the petition for relief was withdrawn on the same day the
petition for certiorari was filed.[42] It likewise avers that its petition for certiorari was meritorious because
the RTC committed grave abuse of discretion in issuing the March 24, 2004 omnibus order which was
based on an erroneous assumption. The March 1, 2004 order denying its notice of appeal for non
payment of appeal fees was erroneous because it had in fact paid the required fees.[43] Thus, the RTC,
by issuing its March 24, 2004 omnibus order, effectively prevented Equitable from appealing the
patently wrong February 5, 2004 decision.[44]
This petition is meritorious.
EQUITABLE WAS NOT GUILTY OF FORUM SHOPPING
Forum shopping exists when two or more actions involving the same transactions, essential facts and
circumstances are filed and those actions raise identical issues, subject matter and causes of action.
[45]
The test is whether, in two or more pending cases, there is identity of parties, rights or causes of
actions and reliefs.[46]
Equitable's petition for relief in the RTC and its petition for certiorari in the CA did not have identical
causes of action. The petition for relief from the denial of its notice of appeal was based on the RTCs
judgment or final order preventing it from taking an appeal by fraud, accident, mistake or excusable
negligence.[47] On the other hand, its petition for certiorari in the CA, a special civil action, sought to
correct the grave abuse of discretion amounting to lack of jurisdiction committed by the RTC.[48]
In a petition for relief, the judgment or final order is rendered by a court with competent jurisdiction. In a
petition for certiorari, the order is rendered by a court without or in excess of its jurisdiction. Moreover,
Equitable substantially complied with the rule on non-forum shopping when it moved to withdraw its
petition for relief in the RTC on the same day (in fact just four hours and forty minutes after) it filed the
petition for certiorari in the CA. Even if Equitable failed to disclose that it had a pending petition for relief
in the RTC, it rectified what was doubtlessly a careless oversight by withdrawing the petition for relief
just a few hours after it filed its petition for certiorari in the CA a clear indication that it had no intention
of maintaining the two actions at the same time.
THE TRIAL COURT COMMITTED GRAVE ABUSE OF DISCRETION IN ISSUING ITS MARCH 1, 2004
AND MARCH 24, 2004 ORDERS
Section 1, Rule 65 of the Rules of Court provides:
Section 1. Petition for Certiorari. When any tribunal, board or officer exercising judicial or
quasi-judicial function has acted without or in excess of its or his jurisdiction, or with
grave abuse of discretion amounting to lack or excess of jurisdiction, and there is no
appeal, nor any plain, speedy or adequate remedy in the ordinary course of law, a
person aggrieved thereby may file a verified petition in the proper court, alleging the facts with
certainty and praying that judgment be rendered annulling or modifying the proceedings of
such tribunal, board or officer, and granting such incidental reliefs as law and justice may
require.

12
The petition shall be accompanied by a certified true copy of the judgment, order or resolution
subject thereof, copies of all pleadings and documents relevant and pertinent thereto, and a
sworn certificate of non-forum shopping as provided in the third paragraph of Section 3, Rule
46.
There are two substantial requirements in a petition for certiorari. These are: (1) that the tribunal, board
or officer exercising judicial or quasi-judicial functions acted without or in excess of his or its jurisdiction
or with grave abuse of discretion amounting to lack or excess of jurisdiction; and (2) That there is no
appeal or any plain, speedy and adequate remedy in the ordinary course of law.
For a petition for certiorari premised on grave abuse of discretion to prosper, petitioner must show that
the public respondent patently and grossly abused his discretion and that abuse amounted to an
evasion of positive duty or a virtual refusal to perform a duty enjoined by law or to act at all in
contemplation of law, as where the power was exercised in an arbitrary and despotic manner by reason
of passion or hostility.[49]
The March 1, 2004 order denied due course to the notices of appeal of both Equitable and respondents.
However, it declared that the February 5, 2004 decision was final and executory only with respect to
Equitable.[50] As expected, the March 24, 2004 omnibus order denied Equitable's motion for
reconsideration and granted respondents' motion for the issuance of a writ of execution. The March 1,
2004 and March 24, 2004 orders of the RTC were obviously intended to prevent Equitable, et al. from
appealing the February 5, 2004 decision. Not only that. The execution of the decision was undertaken
with indecent haste, effectively obviating or defeating Equitable's right to avail of possible legal
remedies. No matter how we look at it, the RTC committed grave abuse of discretion in rendering those
orders.
With regard to whether Equitable had a plain, speedy and adequate remedy in the ordinary course of
law, we hold that there was none. The RTC denied due course to its notice of appeal in the March 1,
2004 order. It affirmed that denial in the March 24, 2004 omnibus order. Hence, there was no way
Equitable could have possibly appealed the February 5, 2004 decision.[52]
Although Equitable filed a petition for relief from the March 24, 2004 order, that petition was not a plain,
speedy and adequate remedy in the ordinary course of law.[53] A petition for relief under Rule 38 is an
equitable remedy allowed only in exceptional circumstances or where there is no other available or
adequate remedy. Thus, we grant Equitable's petition for certiorari and consequently give due course to
its appeal.
EQUITABLE RAISED PURE QUESTIONS OF LAW IN ITS PETITION FOR REVIEW
The jurisdiction of this Court in Rule 45 petitions is limited to questions of law.[55] There is a question of
law when the doubt or controversy concerns the correct application of law or jurisprudence to a certain
set of facts; or when the issue does not call for the probative value of the evidence presented, the truth
or falsehood of facts being admitted.[56]
Equitable does not assail the factual findings of the trial court. Its arguments essentially focus on the
nullity of the RTCs February 5, 2004 decision. Equitable points out that that decision was patently
erroneous, specially the exorbitant award of damages, as it was inconsistent with existing law and
jurisprudence.[57]

It is erroneous, however, to conclude that contracts of adhesion are invalid per se. They are, on the
contrary, as binding as ordinary contracts. A party is in reality free to accept or reject it. A contract of
adhesion becomes void only when the dominant party takes advantage of the weakness of the other
party, completely depriving the latter of the opportunity to bargain on equal footing. [61]
That was not the case here. As the trial court noted, if the terms and conditions offered by Equitable had
been truly prejudicial to respondents, they would have walked out and negotiated with another bank at
the first available instance. But they did not. Instead, they continuously availed of Equitable's credit
facilities for five long years.
While the RTC categorically found that respondents had outstanding dollar- and peso-denominated
loans with Equitable, it, however, failed to ascertain the total amount due (principal, interest and
penalties, if any) as of July 9, 2001. The trial court did not explain how it arrived at the amounts of
US$228,200 and P1,000,000.[62] In Metro Manila Transit Corporation v. D.M. Consunji, [63] we reiterated
that this Court is not a trier of facts and it shall pass upon them only for compelling reasons which
unfortunately are not present in this case.[64] Hence, we ordered the partial remand of the case for the
sole purpose of determining the amount of actual damages.[65]
ESCALATION CLAUSE VIOLATED THE
PRINCIPLE OF MUTUALITY OF CONTRACTS
Escalation clauses are not void per se. However, one which grants the creditor an unbridled right to
adjust the interest independently and upwardly, completely depriving the debtor of the right to assent to
an important modification in the agreement is void. Clauses of that nature violate the principle of
mutuality of contracts.[66] Article 1308[67] of the Civil Code holds that a contract must bind both contracting
parties; its validity or compliance cannot be left to the will of one of them.[68]
For this reason, we have consistently held that a valid escalation clause provides: (1) that the rate of
interest will only be increased if the applicable maximum rate of interest is increased by law or by the
Monetary Board; and (2) that the stipulated rate of interest will be reduced if the applicable maximum
rate of interest is reduced by law or by the Monetary Board (de-escalation clause).[69]
The RTC found that Equitable's promissory notes uniformly stated: If subject promissory note is
extended, the interest for subsequent extensions shall be at such rate as shall be determined by the
bank.[70]
Equitable dictated the interest rates if the term (or period for repayment) of the loan was extended.
Respondents had no choice but to accept them. This was a violation of Article 1308 of the Civil Code.
Furthermore, the assailed escalation clause did not contain the necessary provisions for validity, that is,
it neither provided that the rate of interest would be increased only if allowed by law or the Monetary
Board, nor allowed de-escalation. For these reasons, the escalation clause was void.
With regard to the proper rate of interest, in New Sampaguita Builders v. Philippine National Bank[71] we
held that, because the escalation clause was annulled, the principal amount of the loan was subject to
the original or stipulated rate of interest. Upon maturity, the amount due was subject to legal interest at
the rate of 12% per annum.[72]
Consequently, respondents should pay Equitable the interest rates of 12.66% p.a. for their dollardenominated loans and 20% p.a. for their peso-denominated loans from January 10, 2001 to July 9,
2001. Thereafter, Equitable was entitled to legal interest of 12% p.a. on all amounts due.

THE PROMISSORY NOTES WERE VALID

The RTC upheld the validity of the promissory notes despite respondents assertion that those
documents were contracts of adhesion.
A contract of adhesion is a contract whereby almost all of its provisions are drafted by one party.[58] The
participation of the other party is limited to affixing his signature or his adhesion to the contract. [59] For
this reason, contracts of adhesion are strictly construed against the party who drafted it.[60]

THERE WAS NO EXTRAORDINARY DEFLATION

Extraordinary inflation exists when there is an unusual decrease in the purchasing power of currency
(that is, beyond the common fluctuation in the value of currency) and such decrease could not be
reasonably foreseen or was manifestly beyond the contemplation of the parties at the time of the
obligation. Extraordinary deflation, on the other hand, involves an inverse situation.[73]

13
Article 1250 of the Civil Code provides: In case an extraordinary inflation or deflation of the currency
stipulated should intervene, the value of the currency at the time of the establishment of the obligation
shall be the basis of payment, unless there is an agreement to the contrary.
For extraordinary inflation (or deflation) to affect an obligation, the following requisites must
be proven:
(1) that there was an official declaration of extraordinary inflation or deflation from the
Bangko Sentral ng Pilipinas (BSP
(2) that the obligation was contractual in nature;[75] and
(3) that the parties expressly agreed to consider the effects of the extraordinary
inflation or deflation.
Despite the devaluation of the peso, the BSP never declared a situation of extraordinary
inflation. Moreover, although the obligation in this instance arose out of a contract, the
parties did not agree to recognize the effects of extraordinary inflation (or deflation).[77]The
RTC never mentioned that there was a such stipulation either in the promissory note or loan
agreement. Therefore, respondents should pay their dollar-denominated loans at the
exchange rate fixed by the BSP on the date of maturity.[78]
THE AWARD OF MORAL AND EXEMPLARY DAMAGES LACKED BASIS
Moral damages are in the category of an award designed to compensate the claimant for actual injury
suffered, not to impose a penalty to the wrongdoer.[79] To be entitled to moral damages, a claimant must
prove:
(1) That he or she suffered besmirched reputation, or physical, mental or psychological suffering
sustained by the claimant;
(2) That the defendant committed a wrongful act or omission;
(3) That the wrongful act or omission was the proximate cause of the damages the claimant
sustained;
(4) The case is predicated on any of the instances expressed or envisioned by Article 2219[80] and
2220[81]. [82]
In culpa contractual or breach of contract, moral damages are recoverable only if the defendant acted
fraudulently or in bad faith or in wanton disregard of his contractual obligations.[83] The breach must be
wanton, reckless, malicious or in bad faith, and oppressive or abusive.[84]
The RTC found that respondents did not pay Equitable the interest due on February 9, 2001 (or any
month thereafter prior to the maturity of the loan)[85] or the amount due (principal plus interest) due on
July 9, 2001.[86] Consequently, Equitable applied respondents' deposits to their loans upon maturity.
The relationship between a bank and its depositor is that of creditor and debtor.[87] For this reason, a
bank has the right to set-off the deposits in its hands for the payment of a depositor's indebtedness.
Respondents indeed defaulted on their obligation. For this reason, Equitable had the option to exercise
its legal right to set-off or compensation. However, the RTC mistakenly (or, as it now appears,
deliberately) concluded that Equitable acted fraudulently or in bad faith or in wanton disregard of its
contractual obligations despite the absence of proof. The undeniable fact was that, whatever damage
respondents sustained was purely the consequence of their failure to pay their loans. There was
therefore absolutely no basis for the award of moral damages to them. Neither was there reason to
award exemplary damages. Since respondents were not entitled to moral damages, neither should they
be awarded exemplary damages.[89] And if respondents were not entitled to moral and exemplary
damages, neither could they be awarded attorney's fees and litigation expenses. [90]
ACCORDINGLY, the petition is hereby GRANTED. The October 28, 2005 decision and February 3,
2006 resolution of the Court of Appeals in CA-G.R. SP No. 83112 are herebyREVERSED and SET
ASIDE.
The March 24, 2004 omnibus order of the Regional Trial Court, Branch 16, Cebu City in Civil Case No.
CEB-26983 is herebyANNULLED for being rendered with grave abuse of discretion amounting to lack
or excess of jurisdiction. All proceedings undertaken pursuant thereto are likewise declared null and
void.

The March 1, 2004 order of the Regional Trial Court, Branch 16 of Cebu City in Civil Case No. CEB26983 is hereby SET ASIDE. The appeal of petitioners Equitable PCI Bank, Aimee Yu and Bejan Lionel
Apas is therefore given due course.
The February 5, 2004 decision of the Regional Trial Court, Branch 16 of Cebu City in Civil Case No.
CEB-26983 is accordinglySET ASIDE. New judgment is hereby entered:
(1)

ordering respondents Ng Sheung Ngor, doing business under the name and style of Ken
Marketing, Ken Appliance Division, Inc. and Benjamin E. Go to pay petitioner Equitable PCI
Bank the principal amount of their dollar- and peso-denominated loans;
(2) ordering respondents Ng Sheung Ngor, doing business under the name and style of Ken
Marketing, Ken Appliance Division, Inc. and Benjamin E. Go to pay petitioner Equitable PCI
Bank interest at: (a) 12.66% p.a. with respect to their dollar-denominated loans from January
10, 2001 to July 9, 2001; (b) 20% p.a. with respect to their peso-denominated loans from
January 10, 2001 to July 9, 2001; (c) pursuant to our ruling in Eastern Shipping Lines v. Court
of Appeals,[92] the total amount due on July 9, 2001 shall earn legal interest at 12% p.a. from
the time petitioner Equitable PCI Bank demanded payment, whether judicially or extrajudicially; and (d) after this Decision becomes final and executory, the applicable rate shall be
12% p.a. until full satisfaction;
(3) all other claims and counterclaims are dismissed.
As a starting point, the Regional Trial Court, Branch 16 of Cebu City shall compute the exact amounts
due on the respective dollar-denominated and peso-denominated loans, as of July 9, 2001, of
respondents Ng Sheung Ngor, doing business under the name and style of Ken Marketing, Ken
Appliance Division and Benjamin E. Go. SO ORDERED.
GR. NO. 159709 JUNE 27, 2012
HIERS OF SERVANDO FRANCO vs. SPOUSES GONZALES
There is novation when there is an irreconcilable incompatibility between the old and the new
obligations. There is no novation in case of only slight modifications; hence, the old obligation prevails.
The petitioners challenge the decision promulgated on March 19, 2003,[1] whereby the Court of Appeals
(CA) upheld the issuance of a writ of execution by the Regional Trial Court (RTC), Branch 16, in
Malolos, Bulacan.
Antecedents
The Court adopts the following summary of the antecedents rendered by the Court in Medel v. Court of
Appeals,[2] the case from which this case originated, to wit:
On November 7, 1985, Servando Franco and Leticia Medel (hereafter Servando and Leticia)
obtained a loan from Veronica R. Gonzales (hereafter Veronica), who was engaged in the
money lending business under the name Gonzales Credit Enterprises, in the amount
of P50,000.00, payable in two months. Veronica gave only the amount of P47,000.00, to the
borrowers, as she retained P3,000.00, as advance interest for one month at 6% per month.
Servado and Leticia executed a promissory note for P50,000.00, to evidence the loan,
payable on January 7, 1986.
On November 19, 1985, Servando and Leticia obtained from Veronica another loan in the
amount of P90,000.00, payable in two months, at 6% interest per month. They executed a
promissory note to evidence the loan, maturing on January 19, 1986. They received
only P84,000.00, out of the proceeds of the loan.
On maturity of the two promissory notes, the borrowers failed to pay the indebtedness. On
June 11, 1986, Servando and Leticia secured from Veronica still another loan in the amount
of P300,000.00, maturing in one month, secured by a real estate mortgage over a property
belonging to Leticia Makalintal Yaptinchay, who issued a special power of attorney in favor of
Leticia Medel, authorizing her to execute the mortgage. Servando and Leticia executed a
promissory note in favor of Veronica to pay the sum ofP300,000.00, after a month, or on July
11, 1986. However, only the sum of P275,000.00, was given to them out of the proceeds of
the loan. Like the previous loans, Servando and Medel failed to pay the third loan on maturity.

14
On July 23, 1986, Servando and Leticia with the latter's husband, Dr. Rafael Medel,
consolidated all their previous unpaid loans totalingP440,000.00, and sought from Veronica
another loan in the amount of P60,000.00, bringing their indebtedness to a total
of P500,000.00, payable on August 23, 1986. They executed a promissory note, reading as
follows: Maturity Date August 23, 1986 of P500,000.00
FOR VALUE RECEIVED, I/WE jointly and severally promise to pay to the order of
VERONICA R. GONZALES doing business in the business style of GONZALES CREDIT
ENTERPRISES, Filipino, of legal age, married to Danilo G. Gonzales, Jr., of Baliwag
Bulacan, the sum of PESOS ........ FIVE HUNDRED THOUSAND ..... (P500,000.00)
Philippine
Currency with interest thereon at therate of 5.5 PER CENT per month plus 2% service c
harge per annum from date hereof until fully paid according to the amortization schedule
contained herein. (Underscoring supplied)
Payment will be made in full at the maturity date.
Should I/WE fail to pay any amortization or portion hereof when due, all the other
installments together with all interest accrued shall immediately be due and payable and
I/WE
hereby
agree
to
pay
an additional amount equivalent to one per cent (1%) per month of theamount due and d
emandable as penalty charges in the form of liquidated damages until fully paid; and the
further sum of TWENTY FIVEPER CENT (25%) thereof in full,
without
deductions as Attorney's Fee whether actually incurred or not, of the total amount due
and demandable, exclusive of costs and judicial or extra judicial expenses.
(Underscoring supplied)
I, WE further agree that in the event the present rate of interest on loan is increased by
law or the Central Bank of the Philippines, the holder shall have the option to apply and
collect the increased interest charges without notice although the original interest have
already been collected wholly or partially unless the contrary is required by law.
It is also a special condition of this contract that the parties herein agree that the amount
of peso-obligation under this agreement is based on the present value of peso, and if
there be any change in the value thereof, due to extraordinary inflation or deflation, or
any other cause or reason, then the peso-obligation herein contracted shall be adjusted
in accordance with the value of the peso then prevailing at the time of the complete
fulfillment of obligation.
Demand and notice of dishonor waived. Holder may accept partial payments and grant
renewals of this note or extension of payments, reserving rights against each and all
indorsers and all parties to this note.
IN CASE OF JUDICIAL Execution of this obligation, or any partof it, the debtors waive all
his/their rights under the provisions of Section 12, Rule 39, of the Revised Rules of
Court.On maturity of the loan, the borrowers failed to pay the indebedness
of P500,000.00, plus interests and penalties, evidenced by the above-quoted promissory
note. On February 20, 1990, Veronica R. Gonzales, joined by her husband Danilo G.
Gonzales, filed with the Regional Trial Court of Bulacan, Branch 16, at Malolos, Bulacan,
a complaint for collection of the full amount of the loan including interests and other
charges.
In his answer to the complaint filed with the trial court on April 5, 1990, defendant Servando
alleged that he did not obtain any loan from the plaintiffs; that it was defendants Leticia and
Dr. Rafael Medel who borrowed from the plaintiffs the sum of P500,000.00, and actually
received the amount and benefited therefrom; that the loan was secured by a real estate
mortgage executed in favor of the plaintiffs, and that he (Servando Franco) signed the
promissory note only as a witness. In their separate answer filed on April 10,1990, defendants
Leticia and Rfael Medel alleged that the loan was the transaction of Leticia Yaptinchay, who
executed a mortgage in favor of the plaintiffs over a parcel of real estate situated in San Juan,
Batangas; that the interest rate is excessive at 5.5% per month with additional service charge
of 2% per annum, and penalty charge of 1% per month; that the stipulation for attorney's fees

of 25% of the amount due is unconscionable, illegal and excessive, and that substantial
payments made were applied to interest, penalties and other charges.
After due trial, the lower court declared that the due execution and genuineness of the four
promissory notes had been duly proved, and ruled that although the Usury Law had been
repealed, the interest charged by the plaintiffs on the loans was unconscionable and "revolting
to the conscience". Hence, the trial court applied "the provision of the New [Civil] Code" that
the "legal rate of interest for loan or forbearance of money, goods or credit is 12% per
annum."
Accordingly, on December 9, 1991, the trial court rendered judgment, the dispositive portion
of which reads as follows:
WHEREFORE, premises considered, judgment is hereby rendered, as follows:
1.

Ordering the defendants Servando Franco and Leticia

Medel, jointly and severally, to pay plaintiffs the amount
of P47,000.00 plus 12% interest per annum from
November 7, 1985 and 1% per month as penalty, until
the entire amount is paid in full.

2.

Ordering the defendants Servando Franco and Leticia

Y. Medel to plaintiffs, jointly and severally the amount
of P84,000.00 with 12% interest per annum and 1% per
cent per month as penalty from November 19,1985 until
the whole amount is fully paid;

3.

Ordering the defendants to pay the plaintiffs, jointly and

severally, the amount of P285,000.00 plus 12% interest
per annum and 1% per month as penalty from July 11,
1986, until the whole amount is fully paid;

4.

Ordering the defendants to pay plaintiffs, jointly and

severally, the amount of P50,000.00 as attorney's fees;

5.

All counterclaims are hereby dismissed.

With costs against the defendants. In due time, both plaintiffs and defendants appealed
to the Court of Appeals.
In their appeal, plaintiffs-appellants argued that the promissory note, which consolidated all
the unpaid loans of the defendants, is the law that governs the parties. They further argued
that Circular No. 416 of the Central Bank prescribing the rate of interest for loans or
forbearance of money, goods or credit at 12% per annum, applies only in the absence of a
stipulation on interest rate, but not when the parties agreed thereon. The Court of Appeals
sustained the plaintiffs-appellants' contention. It ruled that the Usury Law having become
legally inexistent with the promulgation by the Central Bank in 1982 of Circular No. 905, the
lender and borrower could agree on any interest that may be charged on the loan. The Court
of Appeals further held that "the imposition of an additional amount equivalent to 1% per
month of the amount due and demandable as penalty charges in the form of liquidated
damages until fully paid was allowed by law.
Accordingly, on March 21, 1997, the Court of Appeals promulgated it decision reversing that of
the Regional Trial Court, disposing as follows:
WHEREFORE, the appealed judgment is hereby MODIFIED such that defendants are
hereby ordered to pay the plaintiffs the sum ofP500,000.00, plus 5.5% per month interest
and 2% service charge per annum effective July 23, 1986, plus 1% per month of the total
amount due and demandable as penalty charges effective August 24, 1986, until the
entire amount is fully paid. The award to the plaintiffs of P50,000.00 as attorney's fees is
affirmed. And so is the imposition of costs against the defendants. SO ORDERED

15
On April 15, 1997, defendants-appellants filed a motion for reconsideration of the said
decision. By resolution dated November 25, 1997, the Court of Appeals denied the motion.[3]
On review, the Court in Medel v. Court of Appeals struck down as void the stipulation on the interest for
being iniquitous or unconscionable, and revived the judgment of the RTC rendered on December 9,
1991, viz:
WHEREFORE, the Court hereby REVERSES and SETS ASIDE the decision of the Court of
Appeals promulgated on March 21, 1997, and its resolution dated November 25, 1997.
Instead, we render judgment REVIVING and AFFIRMING the decision dated December 9,
1991, of the Regional Trial Court of Bulacan, Branch 16, Malolos, Bulacan, in Civil Case No.
134-M-90, involving the same parties.
No pronouncement as to costs in this instance. SO ORDERED.[4]
Upon the finality of the decision in Medel v. Court of Appeals, the respondents moved for execution.
[5]
Servando Franco opposed,[6] claiming that he and the respondents had agreed to fix the entire
obligation at P775,000.00.[7] According to Servando, their agreement, which was allegedly embodied in
a receipt dated February 5, 1992, [8] whereby he made an initial payment ofP400,000.00 and promised to
pay the balance of P375,000.00 on February 29, 1992, superseded the July 23, 1986 promissory note.

When the terms of the compromise judgment is violated, the aggrieved party must move
for its execution, not its invalidation.
It is clear from the aforementioned jurisprudence that even if there is a compromise
agreement and the terms have been violated, the aggrieved party, such as the private
respondents, has the right to move for the issuance of a writ of execution of the final judgment
subject of the compromise agreement.
Moreover, under the circumstances of this case, petitioner does not stand to suffer any harm
or prejudice for the simple reason that what has been asked by private respondents to be the
subject of a writ of execution is only the balance of petitioners obligation after deducting the
payments made on the basis of the compromise agreement.
WHEREFORE, premises considered, the instant petition is hereby DENIED DUE COURSE
and consequently DISMISSED for lack of merit. SO ORDERED.
His motion for reconsideration having been denied, [14] Servando appealed. He was eventually
substituted by his heirs, now the petitioners herein, on account of his intervening death. The substitution
was pursuant to the resolution dated June 15, 2005.[15]
Issue: The petitioners submit that the CA erred in ruling that:
I.

THE 9 DECEMBER 1991 DECISION OF BRANCH 16 OF THE REGIONAL TRIAL

COURT OF MALOLOS, BULACAN WAS NOT NOVATED BY THE COMPROMISE
AGREEMENT BETWEEN THE PARTIES ON 5 FEBRUARY 1992.

II.

THE LIABILITY OF THE PETITIONER RESPONDENTS SHOULD BE BASED ON THE

DECEMBER 1991 DECISION OF BRANCH 16 OF THE REGIONAL TRIAL COURT OF
MALOLOS, BULACAN AND NOT ON THE COMPROMISE AGREEMENT EXECUTED
IN 1992.

The RTC granted the motion for execution over Servandos opposition, thus:
There is no doubt that the decision dated December 9, 1991 had already been affirmed and
had already become final and executory. Thus, in accordance with Sec. 1 of Rule 39 of the
1997 Rules of Civil Procedure, execution shall issue as a matter of right. It has likewise been
ruled that a judgment which has acquired finality becomes immutable and unalterable and
hence may no longer be modified at any respect except only to correct clerical errors or
mistakes (Korean Airlines Co. Ltd. vs. C.A., 247 SCRA 599). In this respect, the decision
deserves to be respected.
The argument about the modification of the contract or non-participation of defendant
Servando Franco in the proceedings on appeal on the alleged belief that the payment he
made had already absolved him from liability is of no moment. Primarily, the decision was for
him and Leticia Medel to pay the plaintiffs jointly and severally the amounts stated in the
Decision. In other words, the liability of the defendants thereunder is solidary. Based on this
aspect alone, the new defense raised by defendant Franco is unavailing.

The petitioners insist that the RTC could not validly enforce a judgment based on a promissory note that
had been already novated; that the promissory note had been impliedly novated when the principal
obligation of P500,000.00 had been fixed at P750,000.00, and the maturity date had been extended
from August 23, 1986 to February 29, 1992.
In contrast, the respondents aver that the petitioners seek to alter, modify or revoke the final and
executory decision of the Court; that novation did not take place because there was no complete
incompatibility between the promissory note and the memorandum receipt; that Servandos previous
payment would be deducted from the total liability of the debtors based on the RTCs decision.

WHEREFORE, in the light of all the foregoing, the Court hereby grants the Motion for
Execution of Judgment. Accordingly, let a writ of execution be issued for implementation by
the Deputy Sheriff of this Court. SO ORDERED.[9]

Issue: Was there a novation of the August 23, 1986 promissory note when respondent Veronica
Gonzales issued the February 5, 1992 receipt?

On March 8, 2001, the RTC issued the writ of execution.[10]

Ruling: The petition lacks merits.

Servando moved for reconsideration,[11] but the RTC denied his motion.[12] On March 19, 2003, the CAI.
affirmed the RTC through its assailed decision, ruling that the execution was proper because of
Servandos failure to comply with the terms of the compromise agreement, stating:[13]

Novation did not transpire because no irreconcilable incompatibility existed between the
promissory note and the receipt

Petitioner cannot deny the fact that there was no full compliance with the tenor of the
compromise agreement. Private respondents on their part did not disregard the payments
made by the petitioner. They even offered that whatever payments made by petitioner, it can
be deducted from the principal obligation including interest. However, private respondents
posit that the payments made cannot alter, modify or revoke the decision of the Supreme
Court in the instant case.
In the case of Prudence Realty and Development Corporation vs. Court of Appeals, the
Supreme Court ruled that:

To buttress their claim of novation, the petitioners rely on the receipt issued on February 5, 1992 by
respondent Veronica whereby Servandos obligation was fixed at P750,000.00. They insist that even the
maturity date was extended until February 29, 1992. Such changes, they assert, were incompatible with
those of the original agreement under the promissory note.
The petitioners assertion is wrong.
A novation arises when there is a substitution of an obligation by a subsequent one that
extinguishes the first, either by changing the object or the principal conditions, or by
substituting the person of the debtor, or by subrogating a third person in the rights of the
creditor.[16] For a valid novation to take place, there must be, therefore: (a) a previous valid
obligation; (b) an agreement of the parties to make a new contract; (c) an extinguishment of the
old contract; and (d) a valid new contract.[17] In short, the new obligation extinguishes the prior
agreement only when the substitution is unequivocally declared, or the old and the new

16
obligations are incompatible on every point. A compromise of a final judgment operates as a
novation of the judgment obligation upon compliance with either of these two conditions.[18]
The receipt dated February 5, 1992, excerpted below, did not create a new obligation incompatible with
the old one under the promissory note, viz: February 5, 1992 - Received from SERVANDO FRANCO
BPI Managers Check No. 001700 in the amount of P400,00.00 as partial payment of loan. Balance
of P375,000.00 to be paid on or before FEBRUARY 29, 1992. In case of default an interest will be
charged as stipulated in the promissory note subject of this case.
To be clear, novation is not presumed. This means that the parties to a contract should expressly agree
to abrogate the old contract in favor of a new one. In the absence of the express agreement, the old and
the new obligations must be incompatible on every point. [20] According to California Bus Lines, Inc. v.
State Investment House, Inc.:[21]
The extinguishment of the old obligation by the new one is a necessary element of novation which may
be effected either expressly or impliedly. The term expressly means that the contracting parties
incontrovertibly disclose that their object in executing the new contract is to extinguish the old one. Upon
the other hand, no specific form is required for an implied novation, and all that is prescribed by law
would be an incompatibility between the two contracts. While there is really no hard and fast rule to
determine what might constitute to be a sufficient change that can bring about novation, the touchstone
for contrariety, however, would be an irreconcilable incompatibility between the old and the new
obligations.
There is incompatibility when the two obligations cannot stand together, each one having its
independent existence. If the two obligations cannot stand together, the latter obligation novates the
first.[22] Changes that breed incompatibility must be essential in nature and not merely accidental. The
incompatibility must affect any of the essential elements of the obligation, such as its object, cause or
principal conditions thereof; otherwise, the change is merely modificatory in nature and insufficient to
extinguish the original obligation.[23]
In light of the foregoing, the issuance of the receipt created no new obligation. Instead, the respondents
only thereby recognized the original obligation by stating in the receipt that the P400,000.00 was partial
payment of loan and by referring to the promissory note subject of the case in imposing the interest.
The loan mentioned in the receipt was still the same loan involving the P500,000.00 extended to
Servando. Advertence to the interest stipulated in the promissory note indicated that the contract still
subsisted, not replaced and extinguished, as the petitioners claim. The receipt dated February 5, 1992
was only the proof of Servandos payment of his obligation as confirmed by the decision of the RTC. It
did not establish the novation of his agreement with the respondents. Indeed, the Court has ruled that
an obligation to pay a sum of money is not novated by an instrument that expressly recognizes the old,
or changes only the terms of payment, or adds other obligations not incompatible with the old ones, or
the new contract merely supplements the old one.[24] A new contract that is a mere reiteration,
acknowledgment or ratification of the old contract with slight modifications or alterations as to the cause
or object or principal conditions can stand together with the former one, and there can be no
incompatibility between them.[25] Moreover, a creditors acceptance of payment after demand does not
operate as a modification of the original contract. [26] Worth noting is that Servandos liability was joint and
solidary with his co-debtors. In a solidary obligation, the creditor may proceed against any one of the
solidary debtors or some or all of them simultaneously.[27] The choice to determine against whom the
collection is enforced belongs to the creditor until the obligation is fully satisfied.[28] Thus, the obligation
was being enforced against Servando, who, in order to escape liability, should have presented evidence
to prove that his obligation had already been cancelled by the new obligation or that another debtor had
assumed his place. In case of change in the person of the debtor, the substitution must be clear and
express,[29] and made with the consent of the creditor.[30] Yet, these circumstances did not obtain herein,
proving precisely that Servando remained a solidary debtor against whom the entire or part of the
obligation might be enforced. Lastly, the extension of the maturity date did not constitute a novation of
the previous agreement. It is settled that an extension of the term or period of the maturity date does not
result in novation.[31]
II.

Total liability to be reduced by P400,000.00

The petitioners argue that Servandos remaining liability amounted to only P375,000.00, the balance
indicated in the February 5, 1992 receipt. Accordingly, the balance was not yet due because the
respondents did not yet make a demand for payment.
The petitioners cannot be upheld. The balance of P375,000.00 was premised on the taking place of a
novation. However, as found now, novation did not take place. Accordingly, Servandos obligation, being
solidary, remained to be that decreed in the December 9, 1991 decision of the RTC, inclusive of
interests, less the amount of P400,000.00 that was meanwhile paid by him.
WHEREFORE, the Court AFFIRMS the decision of the Court of Appeals promulgated on
March 19, 2003; ORDERS the Regional Trial Court, Branch 16, in Malolos, Bulacan to proceed with the
execution based on its decision rendered on December 9, 1991, deducting the amount of P400,000.00
already paid by the late Servando Franco; and DIRECTS the petitioners to pay the costs of suit.
G.R. No. 128690 January 21, 1999
ABS-CBN BROADCASTING CORPORATION vs. HONORABLE COURT OF APPEALS
In this petition for review on certiorari, petitioner ABS-CBN Broadcasting Corp. (hereafter ABS-CBN)
seeks to reverse and set aside the decision 1 of 31 October 1996 and the resolution 2 of 10 March 1997
of the Court of Appeals in CA-G.R. CV No. 44125. The former affirmed with modification the
decision 3 of 28 April 1993 of the Regional Trial Court (RTC) of Quezon City, Branch 80, in Civil Case
No. Q-92-12309. The latter denied the motion to reconsider the decision of 31 October 1996.
The antecedents, as found by the RTC and adopted by the Court of Appeals, are as follows:
In 1990, ABS-CBN and Viva executed a Film Exhibition Agreement (Exh. "A") whereby Viva gave
ABS-CBN an exclusive right to exhibit some Viva films. Sometime in December 1991, in accordance
with paragraph 2.4 [sic] of said agreement stating that . 1.4 ABS-CBN shall have the right of first
refusal to the next twenty-four (24) Viva films for TV telecast under such terms as may be agreed
upon by the parties hereto, provided, however, that such right shall be exercised by ABS-CBN from
the actual offer in writing.
Viva, through defendant Del Rosario, offered ABS-CBN, through its vice-president Charo SantosConcio, a list of three(3) film packages (36 title) from which ABS-CBN may exercise its right of first
refusal under the afore-said agreement (Exhs. "1" par, 2, "2," "2-A'' and "2-B"-Viva). ABS-CBN, however
through Mrs. Concio, "can tick off only ten (10) titles" (from the list) "we can purchase" (Exh. "3" - Viva)
and therefore did not accept said list (TSN, June 8, 1992, pp. 9-10). The titles ticked off by Mrs. Concio
are not the subject of the case at bar except the film ''Maging Sino Ka Man." For further enlightenment,
this rejection letter dated January 06, 1992 (Exh "3" - Viva) is hereby quoted: 6 January 1992
Dear Vic, This is not a very formal business letter I am writing to you as I would like to express my
difficulty in recommending the purchase of the three film packages you are offering ABS-CBN.
From among the three packages I can only tick off 10 titles we can purchase. Please see attached. I
hope you will understand my position. Most of the action pictures in the list do not have big action stars
in the cast. They are not for primetime. In line with this I wish to mention that I have not scheduled for
telecast several action pictures in out very first contract because of the cheap production value of these
movies as well as the lack of big action stars. As a film producer, I am sure you understand what I am
trying to say as Viva produces only big action pictures.
In fact, I would like to request two (2) additional runs for these movies as I can only schedule them in
our non-primetime slots. We have to cover the amount that was paid for these movies because as you
very well know that non-primetime advertising rates are very low. These are the unaired titles in the first
contract.
1. Kontra Persa [sic].
2. Raider Platoon.
3. Underground guerillas
4. Tiger Command
5. Boy de Sabog
6. Lady Commando
7. Batang Matadero
8. Rebelyon

17
I hope you will consider this request of mine. The other dramatic films have been offered to us before
and have been rejected because of the ruling of MTRCB to have them aired at 9:00 p.m. due to their
very adult themes. As for the 10 titles I have choosen [sic] from the 3 packages please consider
including all the other Viva movies produced last year. I have quite an attractive offer to make. Thanking
you and with my warmest regards.
On February 27, 1992, defendant Del Rosario approached ABS-CBN's Ms. Concio, with a list consisting
of 52 original movie titles (i.e. not yet aired on television) including the 14 titles subject of the present
case, as well as 104 re-runs (previously aired on television) from which ABS-CBN may choose another
52 titles, as a total of 156 titles, proposing to sell to ABS-CBN airing rights over this package of 52
originals and 52 re-runs for P60,000,000.00 of which P30,000,000.00 will be in cash and
P30,000,000.00 worth of television spots. On April 2, 1992, defendant Del Rosario and ABS-CBN
general manager, Eugenio Lopez III, met at the Tamarind Grill Restaurant in Quezon City to discuss the
package proposal of Viva. What transpired in that lunch meeting is the subject of conflicting versions.
Mr. Lopez testified that he and Mr. Del Rosario allegedly agreed that ABS-CRN was granted exclusive
film rights to fourteen (14) films for a total consideration of P36 million; that he allegedly put this
agreement as to the price and number of films in a "napkin'' and signed it and gave it to Mr. Del Rosario
(Exh. D; TSN, pp. 24-26, 77-78, June 8, 1992). On the other hand, Del Rosario denied having made any
agreement with Lopez regarding the 14 Viva films; denied the existence of a napkin in which Lopez
wrote something; and insisted that what he and Lopez discussed at the lunch meeting was Viva's film
package offer of 104 films (52 originals and 52 re-runs) for a total price of P60 million. Mr. Lopez
promising [sic]to make a counter proposal which came in the form of a proposal contract Annex "C" of
the complaint (Exh. "1"- Viva; Exh. "C" - ABS-CBN). On April 06, 1992, Del Rosario and Mr. Graciano
Gozon of RBS Senior vice-president for Finance discussed the terms and conditions of Viva's offer to
sell the 104 films, after the rejection of the same package by ABS-CBN. On April 07, 1992, defendant
Del Rosario received through his secretary, a handwritten note from Ms. Concio, (Exh. "5" - Viva), which
reads: "Here's the draft of the contract. I hope you find everything in order," to which was attached a
draft exhibition agreementa counter-proposal covering 53 films, 52 of which came from the list sent by
defendant Del Rosario and one film was added by Ms. Concio, for a consideration of P35 million. Exhibit
"C" provides that ABS-CBN is granted films right to 53 films and contains a right of first refusal to "1992
Viva Films." The said counter proposal was however rejected by Viva's Board of Directors [in the]
evening of the same day, April 7, 1992, as Viva would not sell anything less than the package of 104
films for P60 million pesos (Exh. "9" - Viva), and such rejection was relayed to Ms. Concio. On April 29,
1992, after the rejection of ABS-CBN and following several negotiations and meetings defendant Del
Rosario and Viva's President Teresita Cruz, in consideration of P60 million, signed a letter of agreement
dated April 24, 1992. granting RBS the exclusive right to air 104 Viva-produced and/or acquired films
(Exh. "7-A" - RBS; Exh. "4" - RBS) including the fourteen (14) films subject of the present case. 4
On 27 May 1992, ABS-CBN filed before the RTC a complaint for specific performance with a prayer for
a writ of preliminary injunction and/or temporary restraining order against private respondents Republic
Broadcasting Corporation 5 (hereafter RBS ), Viva Production (hereafter VIVA), and Vicente Del Rosario.
The complaint was docketed as Civil Case No. Q-92-12309. On 27 May 1992, RTC issued a temporary
restraining order 6 enjoining private respondents from proceeding with the airing, broadcasting, and
televising of the fourteen VIVA films subject of the controversy, starting with the film Maging Sino Ka
Man, which was scheduled to be shown on private respondents RBS' channel 7 at seven o'clock in the
evening of said date. On 17 June 1992, after appropriate proceedings, the RTC issued an
order 7 directing the issuance of a writ of preliminary injunction upon ABS-CBN's posting of P35 million
bond. ABS-CBN moved for the reduction of the bond, 8 while private respondents moved for
reconsideration of the order and offered to put up a counterbound. 9
In the meantime, private respondents filed separate answers with counterclaim. 10 RBS also set up a
cross-claim against VIVA.. On 3 August 1992, the RTC issued an order 11 dissolving the writ of
preliminary injunction upon the posting by RBS of a P30 million counterbond to answer for whatever
damages ABS-CBN might suffer by virtue of such dissolution. However, it reduced petitioner's injunction

bond to P15 million as a condition precedent for the reinstatement of the writ of preliminary injunction
should private respondents be unable to post a counterbond.
At the pre-trial 12 on 6 August 1992, the parties, upon suggestion of the court, agreed to explore the
possibility of an amicable settlement. In the meantime, RBS prayed for and was granted reasonable
time within which to put up a P30 million counterbond in the event that no settlement would be reached.
As the parties failed to enter into an amicable settlement RBS posted on 1 October 1992 a counterbond,
which the RTC approved in its Order of 15 October 1992. 13
On 19 October 1992, ABS-CBN filed a motion for reconsideration 14 of the 3 August and 15 October
1992 Orders, which RBS opposed. On 29 October 1992, the RTC conducted a pre-trial. 16
Pending resolution of its motion for reconsideration, ABS-CBN filed with the Court of Appeals a
petition 17challenging the RTC's Orders of 3 August and 15 October 1992 and praying for the issuance of
a writ of preliminary injunction to enjoin the RTC from enforcing said orders. The case was docketed as
CA-G.R. SP No. 29300.
On 3 November 1992, the Court of Appeals issued a temporary restraining order 18 to enjoin the airing,
broadcasting, and televising of any or all of the films involved in the controversy.
On 18 December 1992, the Court of Appeals promulgated a decision 19 dismissing the petition in CA
-G.R. No. 29300 for being premature. ABS-CBN challenged the dismissal in a petition for review filed
with this Court on 19 January 1993, which was docketed as G.R. No. 108363.
In the meantime the RTC received the evidence for the parties in Civil Case No. Q-192-1209.
Thereafter, on 28 April 1993, it rendered a decision 20 in favor of RBS and VIVA and against ABS-CBN
disposing as follows:
WHEREFORE, under cool reflection and prescinding from the foregoing, judgments is rendered in favor
of defendants and against the plaintiff.
(1) The complaint is hereby dismissed; (2) Plaintiff ABS-CBN is ordered to pay defendant RBS the
following:
a) P107,727.00, the amount of premium paid by RBS to the surety which issued defendant
RBS's bond to lift the injunction;
b) P191,843.00 for the amount of print advertisement for "Maging Sino Ka Man" in various
newspapers;
c) Attorney's fees in the amount of P1 million;
d) P5 million as and by way of moral damages;
e) P5 million as and by way of exemplary damages;
f)
For defendant VIVA, plaintiff ABS-CBN is ordered to pay P212,000.00 by way of reasonable
attorney's fees.
g) The cross-claim of defendant RBS against defendant VIVA is dismissed.
h) Plaintiff to pay the costs.
According to the RTC, there was no meeting of minds on the price and terms of the offer. The alleged
agreement between Lopez III and Del Rosario was subject to the approval of the VIVA Board of
Directors, and said agreement was disapproved during the meeting of the Board on 7 April 1992.
Hence, there was no basis for ABS-CBN's demand that VIVA signed the 1992 Film Exhibition
Agreement. Furthermore, the right of first refusal under the 1990 Film Exhibition Agreement had
previously been exercised per Ms. Concio's letter to Del Rosario ticking off ten titles acceptable to them,
which would have made the 1992 agreement an entirely new contract.
On 21 June 1993, this Court denied 21 ABS-CBN's petition for review in G.R. No. 108363, as no
reversible error was committed by the Court of Appeals in its challenged decision and the case had
"become moot and academic in view of the dismissal of the main action by the court a quo in its
decision" of 28 April 1993.
Aggrieved by the RTC's decision, ABS-CBN appealed to the Court of Appeals claiming that there was a
perfected contract between ABS-CBN and VIVA granting ABS-CBN the exclusive right to exhibit the
subject films. Private respondents VIVA and Del Rosario also appealed seeking moral and exemplary
damages and additional attorney's fees.
In its decision of 31 October 1996, the Court of Appeals agreed with the RTC that the contract between
ABS-CBN and VIVA had not been perfected, absent the approval by the VIVA Board of Directors of
whatever Del Rosario, it's agent, might have agreed with Lopez III. The appellate court did not even

18
believe ABS-CBN's evidence that Lopez III actually wrote down such an agreement on a "napkin," as
the same was never produced in court. It likewise rejected ABS-CBN's insistence on its right of first
refusal and ratiocinated as follows:
As regards the matter of right of first refusal, it may be true that a Film Exhibition Agreement was
entered into between Appellant ABS-CBN and appellant VIVA under Exhibit "A" in 1990, and that parag.
1.4 thereof provides: 1.4 ABS-CBN shall have the right of first refusal to the next twenty-four (24) VIVA
films for TV telecast under such terms as may be agreed upon by the parties hereto, provided, however,
that such right shall be exercised by ABS-CBN within a period of fifteen (15) days from the actual offer in
writing (Records, p. 14).
[H]owever, it is very clear that said right of first refusal in favor of ABS-CBN shall still be subject to such
terms as may be agreed upon by the parties thereto, and that the said right shall be exercised by ABSCBN within fifteen (15) days from the actual offer in writing. Said parag. 1.4 of the agreement Exhibit "A"
on the right of first refusal did not fix the price of the film right to the twenty-four (24) films, nor did it
specify the terms thereof. The same are still left to be agreed upon by the parties. In the instant case,
ABS-CBN's letter of rejection Exhibit 3 (Records, p. 89) stated that it can only tick off ten (10) films, and
the draft contract Exhibit "C" accepted only fourteen (14) films, while parag. 1.4 of Exhibit "A'' speaks of
the next twenty-four (24) films. The offer of V1VA was sometime in December 1991 (Exhibits 2, 2-A. 2-B;
Records, pp. 86-88; Decision, p. 11, Records, p. 1150), when the first list of VIVA films was sent by Mr.
Del Rosario to ABS-CBN. The Vice President of ABS-CBN, Ms. Charo Santos-Concio, sent a letter
dated January 6, 1992 (Exhibit 3, Records, p. 89) where ABS-CBN exercised its right of refusal by
rejecting the offer of VIVA.. As aptly observed by the trial court, with the said letter of Mrs. Concio of
January 6, 1992, ABS-CBN had lost its right of first refusal. And even if We reckon the fifteen (15) day
period from February 27, 1992 (Exhibit 4 to 4-C) when another list was sent to ABS-CBN after the letter
of Mrs. Concio, still the fifteen (15) day period within which ABS-CBN shall exercise its right of first
refusal has already expired. 22 Accordingly, respondent court sustained the award of actual damages
consisting in the cost of print advertisements and the premium payments for the counterbond, there
being adequate proof of the pecuniary loss which RBS had suffered as a result of the filing of the
complaint by ABS-CBN. As to the award of moral damages, the Court of Appeals found reasonable
basis therefor, holding that RBS's reputation was debased by the filing of the complaint in Civil Case No.
Q-92-12309 and by the non-showing of the film "Maging Sino Ka Man." Respondent court also held that
exemplary damages were correctly imposed by way of example or correction for the public good in view
of the filing of the complaint despite petitioner's knowledge that the contract with VIVA had not been
perfected, It also upheld the award of attorney's fees, reasoning that with ABS-CBN's act of instituting
Civil Case No, Q-92-1209, RBS was "unnecessarily forced to litigate." The appellate court, however,
reduced the awards of moral damages to P2 million, exemplary damages to P2 million, and attorney's
fees to P500, 000.00.
On the other hand, respondent Court of Appeals denied VIVA and Del Rosario's appeal because it was
"RBS and not VIVA which was actually prejudiced when the complaint was filed by ABS-CBN."
Its motion for reconsideration having been denied, ABS-CBN filed the petition in this case, contending
that the Court of Appeals gravely erred in
I.
RULING THAT THERE WAS NO PERFECTED CONTRACT BETWEEN PETITIONER AND
PRIVATE RESPONDENT VIVA NOTWITHSTANDING PREPONDERANCE OF EVIDENCE
ADDUCED BY PETITIONER TO THE CONTRARY.
II.
AWARDING ACTUAL AND COMPENSATORY DAMAGES IN FAVOR OF PRIVATE
RESPONDENT RBS.
III.
IN AWARDING MORAL AND EXEMPLARY DAMAGES IN FAVOR OF PRIVATE
RESPONDENT RBS.
IV.
IN AWARDING ATTORNEY'S FEES IN FAVOR OF RBS.
ABS-CBN claims that it had yet to fully exercise its right of first refusal over twenty-four titles under the
1990 Film Exhibition Agreement, as it had chosen only ten titles from the first list. It insists that we give
credence to Lopez's testimony that he and Del Rosario met at the Tamarind Grill Restaurant, discussed
the terms and conditions of the second list (the 1992 Film Exhibition Agreement) and upon agreement
thereon, wrote the same on a paper napkin. It also asserts that the contract has already been effective,

as the elements thereof, namely, consent, object, and consideration were established. It then concludes
that the Court of Appeals' pronouncements were not supported by law and jurisprudence, as per our
decision of 1 December 1995 in Limketkai Sons Milling, Inc. v. Court of Appeals, 23 which cited Toyota
Shaw, Inc. v. Court of Appeals, 24 Ang Yu Asuncion v. Court of Appeals, 25 and Villonco Realty Company
v. Bormaheco. Inc. 26
Anent the actual damages awarded to RBS, ABS-CBN disavows liability therefor. RBS spent for the
premium on the counterbond of its own volition in order to negate the injunction issued by the trial court
after the parties had ventilated their respective positions during the hearings for the purpose. The filing
of the counterbond was an option available to RBS, but it can hardly be argued that ABS-CBN
compelled RBS to incur such expense. Besides, RBS had another available option, i.e., move for the
dissolution or the injunction; or if it was determined to put up a counterbond, it could have presented a
cash bond. Furthermore under Article 2203 of the Civil Code, the party suffering loss or injury is also
required to exercise the diligence of a good father of a family to minimize the damages resulting from
the act or omission. As regards the cost of print advertisements, RBS had not convincingly established
that this was a loss attributable to the non showing "Maging Sino Ka Man"; on the contrary, it was
brought out during trial that with or without the case or the injunction, RBS would have spent such an
amount to generate interest in the film.
ABS-CBN further contends that there was no clear basis for the awards of moral and exemplary
damages. The controversy involving ABS-CBN and RBS did not in any way originate from business
transaction between them. The claims for such damages did not arise from any contractual dealings or
from specific acts committed by ABS-CBN against RBS that may be characterized as wanton,
fraudulent, or reckless; they arose by virtue only of the filing of the complaint, An award of moral and
exemplary damages is not warranted where the record is bereft of any proof that a party acted
maliciously or in bad faith in filing an action. 27 In any case, free resort to courts for redress of wrongs is
a matter of public policy. The law recognizes the right of every one to sue for that which he honestly
believes to be his right without fear of standing trial for damages where by lack of sufficient evidence,
legal technicalities, or a different interpretation of the laws on the matter, the case would lose
ground. 28 One who makes use of his own legal right does no injury. 29 If damage results front the filing of
the complaint, it is damnum absque injuria. 30 Besides, moral damages are generally not awarded in
favor of a juridical person, unless it enjoys a good reputation that was debased by the offending party
resulting in social humiliation. 31
As regards the award of attorney's fees, ABS-CBN maintains that the same had no factual, legal, or
equitable justification. In sustaining the trial court's award, the Court of Appeals acted in clear disregard
of the doctrines laid down in Buan v. Camaganacan 32 that the text of the decision should state the
reason why attorney's fees are being awarded; otherwise, the award should be disallowed. Besides, no
bad faith has been imputed on, much less proved as having been committed by, ABS-CBN. It has been
held that "where no sufficient showing of bad faith would be reflected in a party' s persistence in a case
other than an erroneous conviction of the righteousness of his cause, attorney's fees shall not be
recovered as cost." 33 On the other hand, RBS asserts that there was no perfected contract between
ABS-CBN and VIVA absent any meeting of minds between them regarding the object and consideration
of the alleged contract. It affirms that the ABS-CBN's claim of a right of first refusal was correctly
rejected by the trial court. RBS insist the premium it had paid for the counterbond constituted a
pecuniary loss upon which it may recover. It was obliged to put up the counterbound due to the
injunction procured by ABS-CBN. Since the trial court found that ABS-CBN had no cause of action or
valid claim against RBS and, therefore not entitled to the writ of injunction, RBS could recover from
ABS-CBN the premium paid on the counterbond. Contrary to the claim of ABS-CBN, the cash bond
would prove to be more expensive, as the loss would be equivalent to the cost of money RBS would
forego in case the P30 million came from its funds or was borrowed from banks.
RBS likewise asserts that it was entitled to the cost of advertisements for the cancelled showing of the
film "Maging Sino Ka Man" because the print advertisements were put out to announce the showing on
a particular day and hour on Channel 7, i.e., in its entirety at one time, not a series to be shown on a
periodic basis. Hence, the print advertisement were good and relevant for the particular date showing,
and since the film could not be shown on that particular date and hour because of the injunction, the
expenses for the advertisements had gone to waste.

19
As regards moral and exemplary damages, RBS asserts that ABS-CBN filed the case and secured
injunctions purely for the purpose of harassing and prejudicing RBS. Pursuant then to Article 19 and 21
of the Civil Code, ABS-CBN must be held liable for such damages. Citing Tolentino, 34 damages may be
awarded in cases of abuse of rights even if the act done is not illicit and there is abuse of rights were
plaintiff institutes and action purely for the purpose of harassing or prejudicing the defendant. In support
of its stand that a juridical entity can recover moral and exemplary damages, private respondents
RBScited People v. Manero, 35 where it was stated that such entity may recover moral and exemplary
damages if it has a good reputation that is debased resulting in social humiliation. it then ratiocinates;
thus:
There can be no doubt that RBS' reputation has been debased by ABS-CBN's acts in this case. When
RBS was not able to fulfill its commitment to the viewing public to show the film "Maging Sino Ka Man"
on the scheduled dates and times (and on two occasions that RBS advertised), it suffered serious
embarrassment and social humiliation. When the showing was canceled, late viewers called up RBS'
offices and subjected RBS to verbal abuse ("Announce kayo nang announce, hindi ninyo naman
ilalabas," "nanloloko yata kayo") (Exh. 3-RBS, par. 3). This alone was not something RBS brought upon
itself. it was exactly what ABS-CBN had planned to happen.
The amount of moral and exemplary damages cannot be said to be excessive. Two reasons justify the
amount of the award. The first is that the humiliation suffered by RBS is national extent. RBS operations
as a broadcasting company is [sic] nationwide. Its clientele, like that of ABS-CBN, consists of those who
own and watch television. It is not an exaggeration to state, and it is a matter of judicial notice that
almost every other person in the country watches television. The humiliation suffered by RBS is
multiplied by the number of televiewers who had anticipated the showing of the film "Maging Sino Ka
Man" on May 28 and November 3, 1992 but did not see it owing to the cancellation. Added to this are
the advertisers who had placed commercial spots for the telecast and to whom RBS had a commitment
in consideration of the placement to show the film in the dates and times specified. The second is that it
is a competitor that caused RBS to suffer the humiliation. The humiliation and injury are far greater in
degree when caused by an entity whose ultimate business objective is to lure customers (viewers in this
case) away from the competition. 36
For their part, VIVA and Vicente del Rosario contend that the findings of fact of the trial court and the
Court of Appeals do not support ABS-CBN's claim that there was a perfected contract. Such factual
findings can no longer be disturbed in this petition for review under Rule 45, as only questions of law
can be raised, not questions of fact. On the issue of damages and attorneys fees, they adopted the
arguments of RBS. The key issues for our consideration are (1) whether there was a perfected
contract between VIVA and ABS-CBN, and (2) whether RBS is entitled to damages and attorney's
fees. It may be noted that the award of attorney's fees of P212,000 in favor of VIVA is not
assigned as another error.
The first issue should be resolved against ABS-CBN. A contract is a meeting of minds between two
persons whereby one binds himself to give something or to render some service to another 37 for a
consideration. There is no contract unless the following requisites concur: (1) consent of the contracting
parties; (2) object certain which is the subject of the contract; and (3) cause of the obligation, which is
established. 38 A contract undergoes three stages:
a)
b)
c)

preparation, conception, or generation, which is the period of negotiation and bargaining,

ending at the moment of agreement of the parties;
perfection or birth of the contract, which is the moment when the parties come to agree on the
terms of the contract; and
consummation or death, which is the fulfillment or performance of the terms agreed upon in
the contract.

Contracts that are consensual in nature are perfected upon mere meeting of the minds, Once there is
concurrence between the offer and the acceptance upon the subject matter, consideration, and terms of
payment a contract is produced. The offer must be certain. To convert the offer into a contract, the
acceptance must be absolute and must not qualify the terms of the offer; it must be plain, unequivocal,
unconditional, and without variance of any sort from the proposal. A qualified acceptance, or one that

involves a new proposal, constitutes a counter-offer and is a rejection of the original offer. Consequently,
when something is desired which is not exactly what is proposed in the offer, such acceptance is not
sufficient to generate consent because any modification or variation from the terms of the offer annuls
the offer. 40 When Mr. Del Rosario of VIVA met with Mr. Lopez of ABS-CBN at the Tamarind Grill on 2
April 1992 to discuss the package of films, said package of 104 VIVA films was VIVA's offer to ABS-CBN
to enter into a new Film Exhibition Agreement. But ABS-CBN, sent, through Ms. Concio, a counterproposal in the form of a draft contract proposing exhibition of 53 films for a consideration of P35 million.
This counter-proposal could be nothing less than the counter-offer of Mr. Lopez during his conference
with Del Rosario at Tamarind Grill Restaurant. Clearly, there was no acceptance of VIVA's offer, for it
was met by a counter-offer which substantially varied the terms of the offer.
ABS-CBN's reliance in Limketkai Sons Milling, Inc. v. Court of
Appeals 41 and Villonco Realty Company v. Bormaheco, Inc., 42 is misplaced. In these cases, it was held
that an acceptance may contain a request for certain changes in the terms of the offer and yet be a
binding acceptance as long as "it is clear that the meaning of the acceptance is positively and
unequivocally to accept the offer, whether such request is granted or not." This ruling was, however,
reversed in the resolution of 29 March 1996, 43 which ruled that the acceptance of all offer must be
unqualified and absolute, i.e., it "must be identical in all respects with that of the offer so as to produce
consent or meeting of the minds."
On the other hand, in Villonco, cited in Limketkai, the alleged changes in the revised counter-offer were
not material but merely clarificatory of what had previously been agreed upon. It cited the statement
in Stuart v.Franklin Life Insurance Co. 44 that "a vendor's change in a phrase of the offer to purchase,
which change does not essentially change the terms of the offer, does not amount to a rejection of the
offer and the tender of a counter-offer." 45However, when any of the elements of the contract is modified
upon acceptance, such alteration amounts to a counter-offer.
In the case at bar, ABS-CBN made no unqualified acceptance of VIVA's offer. Hence, they underwent a
period of bargaining. ABS-CBN then formalized its counter-proposals or counter-offer in a draft contract,
VIVA through its Board of Directors, rejected such counter-offer, Even if it be conceded arguendo that
Del Rosario had accepted the counter-offer, the acceptance did not bind VIVA, as there was no proof
whatsoever that Del Rosario had the specific authority to do so. Under Corporation Code, 46 unless
otherwise provided by said Code, corporate powers, such as the power; to enter into contracts; are
exercised by the Board of Directors. However, the Board may delegate such powers to either an
executive committee or officials or contracted managers. The delegation, except for the executive
committee, must be for specific purposes, 47 Delegation to officers makes the latter agents of the
corporation; accordingly, the general rules of agency as to the bindings effects of their acts would
apply. 48 For such officers to be deemed fully clothed by the corporation to exercise a power of the
Board, the latter must specially authorize them to do so. That Del Rosario did not have the authority to
accept ABS-CBN's counter-offer was best evidenced by his submission of the draft contract to VIVA's
Board of Directors for the latter's approval. In any event, there was between Del Rosario and Lopez III
no meeting of minds. The following findings of the trial court are instructive: A number of considerations
militate against ABS-CBN's claim that a contract was perfected at that lunch meeting on April 02, 1992
at the Tamarind Grill. FIRST, Mr. Lopez claimed that what was agreed upon at the Tamarind Grill
referred to the price and the number of films, which he wrote on a napkin. However, Exhibit "C"
contains numerous provisions which, were not discussed at the Tamarind Grill, if Lopez testimony was
to be believed nor could they have been physically written on a napkin. There was even doubt as to
whether it was a paper napkin or a cloth napkin. In short what were written in Exhibit "C'' were not
discussed, and therefore could not have been agreed upon, by the parties. How then could this court
compel the parties to sign Exhibit "C" when the provisions thereof were not previously agreed upon?
SECOND, Mr. Lopez claimed that what was agreed upon as the subject matter of the contract was 14
films. The complaint in fact prays for delivery of 14 films. But Exhibit "C" mentions 53 films as its subject
matter. Which is which If Exhibits "C" reflected the true intent of the parties, then ABS-CBN's claim for
14 films in its complaint is false or if what it alleged in the complaint is true, then Exhibit "C" did not
reflect what was agreed upon by the parties. This underscores the fact that there was no meeting of the
minds as to the subject matter of the contracts, so as to preclude perfection thereof. For settled is the
rule that there can be no contract where there is no object which is its subject matter (Art. 1318, NCC).

20
THIRD, Mr. Lopez [sic] answer to question 29 of his affidavit testimony (Exh. "D") states: We were able
to reach an agreement. VIVA gave us the exclusive license to show these fourteen (14) films, and we
agreed to pay Viva the amount of P16,050,000.00 as well as grant Viva commercial slots worth
P19,950,000.00. We had already earmarked this P16, 050,000.00. which gives a total consideration of
P36 million (P19,950,000.00 plus P16,050,000.00. equals P36,000,000.00).
On cross-examination Mr. Lopez testified:
Q. What was written in this napkin?
A. The total price, the breakdown the known Viva movies, the 7 blockbuster movies and the other 7 Viva
movies because the price was broken down accordingly. The none [sic] Viva and the seven other Viva
movies and the sharing between the cash portion and the concerned spot portion in the total amount of
P35 million pesos.
Now, which is which? P36 million or P35 million? This weakens ABS-CBN's claim. FOURTH. Mrs.
Concio, testifying for ABS-CBN stated that she transmitted Exhibit "C" to Mr. Del Rosario with a
handwritten note, describing said Exhibit "C" as a "draft." (Exh. "5" - Viva; tsn pp. 23-24 June 08, 1992).
The said draft has a well defined meaning. Since Exhibit "C" is only a draft, or a tentative, provisional or
preparatory writing prepared for discussion, the terms and conditions thereof could not have been
previously agreed upon by ABS-CBN and Viva Exhibit "C'' could not therefore legally bind Viva, not
having agreed thereto. In fact, Ms. Concio admitted that the terms and conditions embodied in Exhibit
"C" were prepared by ABS-CBN's lawyers and there was no discussion on said terms and
conditions. . . . As the parties had not yet discussed the proposed terms and conditions in Exhibit "C,"
and there was no evidence whatsoever that Viva agreed to the terms and conditions thereof, said
document cannot be a binding contract. The fact that Viva refused to sign Exhibit "C" reveals only two
[sic] well that it did not agree on its terms and conditions, and this court has no authority to compel Viva
to agree thereto. FIFTH. Mr. Lopez understand [sic] that what he and Mr. Del Rosario agreed upon at
the Tamarind Grill was only provisional, in the sense that it was subject to approval by the Board of
Directors of Viva. He testified:
Q. Now, Mr. Witness, and after that Tamarind meeting ... the second meeting wherein you claimed that
you have the meeting of the minds between you and Mr. Vic del Rosario, what happened?
A. Vic Del Rosario was supposed to call us up and tell us specifically the result of the discussion with
the Board of Directors.
Q. And you are referring to the so-called agreement which you wrote in [sic] a piece of paper?
A. Yes, sir.
Q. So, he was going to forward that to the board of Directors for approval?
A. Yes, sir. (Tsn, pp. 42-43, June 8, 1992)
Q. Did Mr. Del Rosario tell you that he will submit it to his Board for approval?
A. Yes, sir. (Tsn, p. 69, June 8, 1992).
The above testimony of Mr. Lopez shows beyond doubt that he knew Mr. Del Rosario had no authority
to bind Viva to a contract with ABS-CBN until and unless its Board of Directors approved it. The
complaint, in fact, alleges that Mr. Del Rosario "is the Executive Producer of defendant Viva" which "is a
corporation." (par. 2, complaint). As a mere agent of Viva, Del Rosario could not bind Viva unless what
he did is ratified by its Board of Directors. (Vicente vs. Geraldez, 52 SCRA 210; Arnold vs. Willets and
Paterson, 44 Phil. 634). As a mere agent, recognized as such by plaintiff, Del Rosario could not be held
liable jointly and severally with Viva and his inclusion as party defendant has no legal basis. (Salonga
vs. Warner Barner [sic] , COLTA , 88 Phil. 125; Salmon vs. Tan, 36 Phil. 556). The testimony of Mr.
Lopez and the allegations in the complaint are clear admissions that what was supposed to have been
agreed upon at the Tamarind Grill between Mr. Lopez and Del Rosario was not a binding agreement. It
is as it should be because corporate power to enter into a contract is lodged in the Board of Directors.
(Sec. 23, Corporation Code). Without such board approval by the Viva board, whatever agreement
Lopez and Del Rosario arrived at could not ripen into a valid contract binding upon Viva (Yao Ka Sin
Trading vs. Court of Appeals, 209 SCRA 763). The evidence adduced shows that the Board of Directors
of Viva rejected Exhibit "C" and insisted that the film package for 140 films be maintained (Exh. "7-1" Viva ). 49 The contention that ABS-CBN had yet to fully exercise its right of first refusal over twenty-four

films under the 1990 Film Exhibition Agreement and that the meeting between Lopez and Del Rosario
was a continuation of said previous contract is untenable. As observed by the trial court, ABS-CBN right
of first refusal had already been exercised when Ms. Concio wrote to VIVA ticking off ten films, Thus:
[T]he subsequent negotiation with ABS-CBN two (2) months after this letter was sent, was for an entirely
different package. Ms. Concio herself admitted on cross-examination to having used or exercised the
right of first refusal. She stated that the list was not acceptable and was indeed not accepted by ABSCBN, (TSN, June 8, 1992, pp. 8-10). Even Mr. Lopez himself admitted that the right of the first refusal
may have been already exercised by Ms. Concio (as she had). (TSN, June 8, 1992, pp. 71-75). Del
Rosario himself knew and understand [sic] that ABS-CBN has lost its rights of the first refusal when his
list of 36 titles were rejected.
II However, we find for ABS-CBN on the issue of damages. We shall first take up actual damages.
Chapter 2, Title XVIII, Book IV of the Civil Code is the specific law on actual or compensatory damages.
Except as provided by law or by stipulation, one is entitled to compensation for actual damages only for
such pecuniary loss suffered by him as he has duly proved. 51 The indemnification shall comprehend not
only the value of the loss suffered, but also that of the profits that the obligee failed to obtain. 52 In
contracts and quasi-contracts the damages which may be awarded are dependent on whether the
obligor acted with good faith or otherwise, It case of good faith, the damages recoverable are those
which 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 of the constitution of the obligation. If the
obligor acted with fraud, bad faith, malice, or wanton attitude, he shall be responsible for all damages
which may be reasonably attributed to the non-performance of the obligation. 53 In crimes and quasidelicts, the defendant shall be liable for all damages which are the natural and probable consequences
of the act or omission complained of, whether or not such damages has been foreseen or could have
reasonably been foreseen by the defendant. 54
Actual damages may likewise be recovered for loss or impairment of earning capacity in cases of
temporary or permanent personal injury, or for injury to the plaintiff's business standing or commercial
credit. 55
The claim of RBS for actual damages did not arise from contract, quasi-contract, delict, or quasi-delict. It
arose from the fact of filing of the complaint despite ABS-CBN's alleged knowledge of lack of cause of
action. Thus paragraph 12 of RBS's Answer with Counterclaim and Cross-claim under the heading
COUNTERCLAIM specifically alleges:
12. ABS-CBN filed the complaint knowing fully well that it has no cause of action RBS. As a result
thereof, RBS suffered actual damages in the amount of P6,621,195.32. 56
Needless to state the award of actual damages cannot be comprehended under the above law on actual
damages. RBS could only probably take refuge under Articles 19, 20, and 21 of the Civil Code, which
read as follows:
Art. 19. Every person must, in the exercise of his rights and in the performance of his duties, act with
justice, give everyone his due, and observe honesty and good faith.
Art. 20. Every person who, contrary to law, wilfully or negligently causes damage to another, shall
indemnify the latter for tile same.
Art. 21. Any person who wilfully causes loss or injury to another in a manner that is contrary to
morals, good customs or public policy shall compensate the latter for the damage.
It may further be observed that in cases where a writ of preliminary injunction is issued, the damages
which the defendant may suffer by reason of the writ are recoverable from the injunctive bond. 57 In this
case, ABS-CBN had not yet filed the required bond; as a matter of fact, it asked for reduction of the
bond and even went to the Court of Appeals to challenge the order on the matter, Clearly then, it was
not necessary for RBS to file a counterbond. Hence, ABS-CBN cannot be held responsible for the
premium RBS paid for the counterbond.
Neither could ABS-CBN be liable for the print advertisements for "Maging Sino Ka Man" for lack of
sufficient legal basis. The RTC issued a temporary restraining order and later, a writ of preliminary
injunction on the basis of its determination that there existed sufficient ground for the issuance thereof.

21
Notably, the RTC did not dissolve the injunction on the ground of lack of legal and factual basis, but
because of the plea of RBS that it be allowed to put up a counterbond.
As regards attorney's fees, the law is clear that in the absence of stipulation, attorney's fees may be
recovered as actual or compensatory damages under any of the circumstances provided for in Article
2208 of the Civil Code. 58
The general rule is that attorney's fees cannot be recovered as part of damages because of the policy
that no premium should be placed on the right to litigate. 59 They are not to be awarded every time a
party wins a suit. The power of the court to award attorney's fees under Article 2208 demands factual,
legal, and equitable justification. 60 Even when claimant is compelled to litigate with third persons or to
incur expenses to protect his rights, still attorney's fees may not be awarded where no sufficient showing
of bad faith could be reflected in a party's persistence in a case other than erroneous conviction of the
righteousness of his cause. 61
As to moral damages the law is Section 1, Chapter 3, Title XVIII, Book IV of the Civil Code. Article 2217
thereof defines what are included in moral damages, while Article 2219 enumerates the cases where
they may be recovered, Article 2220 provides that moral damages may be recovered in breaches of
contract where the defendant acted fraudulently or in bad faith. RBS's claim for moral damages could
possibly fall only under item (10) of Article 2219, thereof which reads:
(10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34, and 35.
Moral damages are in the category of an award designed to compensate the claimant for actual injury
suffered. and not to impose a penalty on the wrongdoer. 62 The award is not meant to enrich the
complainant at the expense of the defendant, but to enable the injured party to obtain means, diversion,
or amusements that will serve to obviate then moral suffering he has undergone. It is aimed at the
restoration, within the limits of the possible, of the spiritual status quo ante, and should be proportionate
to the suffering inflicted. 63 Trial courts must then guard against the award of exorbitant damages; they
should exercise balanced restrained and measured objectivity to avoid suspicion that it was due to
passion, prejudice, or corruption on the part of the trial court. 64
The award of moral damages cannot be granted in favor of a corporation because, being an artificial
person and having existence only in legal contemplation, it has no feelings, no emotions, no senses, It
cannot, therefore, experience physical suffering and mental anguish, which call be experienced only by
one having a nervous system. 65 The statement in People v. Manero 66 and Mambulao Lumber
Co. v. PNB 67 that a corporation may recover moral damages if it "has a good reputation that is debased,
resulting in social humiliation" is an obiter dictum. On this score alone the award for damages must be
set aside, since RBS is a corporation.
The basic law on exemplary damages is Section 5, Chapter 3, Title XVIII, Book IV of the Civil Code.
These are imposed by way of example or correction for the public good, in addition to moral, temperate,
liquidated or compensatory damages. 68 They are recoverable in criminal cases as part of the civil
liability when the crime was committed with one or more aggravating circumstances; 69 in quasicontracts, if the defendant acted with gross negligence;70 and in contracts and quasi-contracts, if the
defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner. 71
It may be reiterated that the claim of RBS against ABS-CBN is not based on contract, quasi-contract,
delict, or quasi-delict, Hence, the claims for moral and exemplary damages can only be based on
Articles 19, 20, and 21 of the Civil Code.
The elements of abuse of right under Article 19 are the following: (1) the existence of a legal right or
duty, (2) which is exercised in bad faith, and (3) for the sole intent of prejudicing or injuring another.
Article 20 speaks of the general sanction for all other provisions of law which do not especially provide
for their own sanction; while Article 21 deals with acts contra bonus mores, and has the following
elements; (1) there is an act which is legal, (2) but which is contrary to morals, good custom, public
order, or public policy, and (3) and it is done with intent to injure.72
Verily then, malice or bad faith is at the core of Articles 19, 20, and 21. Malice or bad faith implies a
conscious and intentional design to do a wrongful act for a dishonest purpose or moral obliquity. 73 Such
must be substantiated by evidence. 74
There is no adequate proof that ABS-CBN was inspired by malice or bad faith. It was honestly
convinced of the merits of its cause after it had undergone serious negotiations culminating in its formal

submission of a draft contract. Settled is the rule that the adverse result of an action does not per
se make the action wrongful and subject the actor to damages, for the law could not have meant to
impose a penalty on the right to litigate. If damages result from a person's exercise of a right, it
is damnum absque injuria. 75
WHEREFORE, the instant petition is GRANTED. The challenged decision of the Court of Appeals in
CA-G.R. CV No, 44125 is hereby REVERSED except as to unappealed award of attorney's fees in favor
of VIVA Productions, Inc.1wphi1.nt
No pronouncement as to costs.

G.R. No. 194366

October 10, 2012
NAPOLEON D. NERI et. al. vs. HEIRS OF HADJI YUSOP UY AND JULPHA IBRAHIM UY
In this Petition for Review on Certiorari1 under Rule 45 of the Rules of Court, petitioners Napoleon D.
Neri (Napoleon), Alicia D. Neri-Mondejar (Alicia), Visminda D. Neri-Chambers (Visminda), Rosa D. NeriMillan (Rosa), Douglas D. Neri (Douglas), Eutropia D. Illut-Cockinos (Eutropia), and Victoria D. Illut-Piala
(Victoria) seek to reverse and set aside the April 27, 2010 Decision2 and October 18, 2010
Resolution3 of the Court of Appeals (CA) in CA-G.R. CV No. 01031-MIN which annulled the October 25,
2004 Decision4 of the Regional Trial Court (RTC) of Panabo City, Davao del Norte and instead, entered
a new one dismissing petitioners complaint for annulment of sale, damages and attorneys feesagainst
herein respondents heirs of spouses Hadji Yusop Uy and Julpha Ibrahim Uy (heirs of Uy).
The Facts
During her lifetime, Anunciacion Neri (Anunciacion) had seven children, two (2) from her first marriage
with Gonzalo Illut (Gonzalo), namely: Eutropia and Victoria, and five (5) from her second marriage with
Enrique Neri (Enrique), namely: Napoleon, Alicia, Visminda, Douglas and Rosa. Throughout the
marriage of spouses Enrique and Anunciacion, they acquired several homestead properties with a total
area of 296,555 square meters located in Samal, Davao del Norte, embraced by Original Certificate of
Title (OCT) Nos. (P-7998) P-21285, (P-14608) P-51536 and P-20551 (P-8348)7issued on February 15,
1957, August 27, 1962 and July 7, 1967, respectively.

22
On September 21, 1977, Anunciacion died intestate. Her husband, Enrique, in his personal capacity and
as natural guardian of his minor children Rosa and Douglas, together with Napoleon, Alicia, and
Vismindaexecuted an Extra-Judicial Settlement of the Estate with Absolute Deed of Sale 8 on July 7,
1979, adjudicating among themselves the said homestead properties, and thereafter, conveying themto
the late spouses Hadji Yusop Uy and Julpha Ibrahim Uy (spouses Uy)for a consideration
of P 80,000.00.
On June 11, 1996, the children of Enrique filed a complaint for annulment of saleof the said homestead
properties against spouses Uy (later substituted by their heirs)before the RTC, docketed as Civil Case
No.96-28, assailing the validity of the sale for having been sold within the prohibited period.
Thecomplaint was later amended to include Eutropia and Victoriaas additional plaintiffs for having been
excluded and deprived of their legitimes as childrenof Anunciacion from her first marriage.
In their amended answer with counterclaim, the heirs of Uy countered that the sale took place beyond
the 5-year prohibitory period from the issuance of the homestead patents. They also denied knowledge
of Eutropia and Victorias exclusionfrom the extrajudicial settlement and sale of the subject properties,
and interposed further the defenses of prescription and laches.
The RTC Ruling
On October 25, 2004, the RTC rendered a decision ordering, among others, the annulment of the ExtraJudicial Settlement of the Estate with Absolute Deed of Sale. It ruled that while the sale occurred
beyond the 5-year prohibitory period, the sale is still void because Eutropia and Victoria were deprived
of their hereditary rights and that Enrique had no judicial authority to sell the shares of his minor
children, Rosa and Douglas.
Consequently, it rejected the defenses of laches and prescription raised by spouses Uy, who claimed
possession of the subject properties for 17 years, holding that co-ownership rights are imprescriptible.
The CA Ruling
On appeal, the CAreversed and set aside the ruling of the RTC in its April 27, 2010 Decision and
dismissed the complaint of the petitioners. It held that, while Eutropia and Victoria had no knowledge of
the extrajudicial settlement and sale of the subject properties and as such, were not bound by it, the CA
found it unconscionable to permit the annulment of the sale considering spouses Uys possession
thereof for 17 years, and thatEutropia and Victoriabelatedlyfiled their actionin 1997, ormore than two
years fromknowledge of their exclusion as heirs in 1994 when their stepfather died. It, however, did not
preclude the excluded heirs from recovering their legitimes from their co-heirs.
Similarly, the CA declared the extrajudicial settlement and the subsequent saleas valid and binding with
respect to Enrique and hischildren, holding that as co-owners, they have the right to dispose of their
respective shares as they consider necessary or fit.While recognizing Rosa and Douglas to be minors at
that time, they were deemed to have ratified the sale whenthey failed to question it upon reaching the
age of majority.Italso found laches to have set in because of their inaction for a long period of time.
The Issues In this petition, petitioners imputeto the CA the following errors:
1.

2.

3.

WHEN IT UPHELDTHE VALIDITY OF THE "EXTRA JUDICIAL SETTLEMENT OF THE

ESTATE WITH ABSOLUTE DEED OF SALE" AS FAR AS THE SHARES OF EUTROPIA AND
VICTORIA WERE CONCERNED, THEREBY DEPRIVING THEM OF THEIR INHERITANCE;
WHEN IT DID NOT NULLIFY OR ANNUL THE "EXTRA JUDICIAL SETTLEMENT OF THE
ESTATE WITH ABSOLUTE DEED OF SALE" WITH RESPECT TO THE SHARESOF ROSA
AND DOUGLAS, THEREBY DEPRIVING THEM OF THEIR INHERITANCE; and
WHEN IT FOUND THAT LACHES OR PRESCRIPTION HAS SET IN.

The Ruling of the Court: The petitionis meritorious.

It bears to stress that all the petitioners herein are indisputably legitimate children of Anunciacion from
her first and second marriages with Gonzalo and Enrique, respectively, and consequently, are entitled to
inherit from her in equal shares, pursuant to Articles 979 and 980 of the Civil Code which read:
ART. 979. Legitimate children and their descendants succeed the parents and other ascendants, without
distinction as to sex or age, and even if they should come from different marriages.
xxx

ART. 980. The children of the deceased shall always inherit from him in their own right, dividing the
inheritance in equal shares.
As such, upon the death of Anunciacion on September 21, 1977, her children and Enrique acquired their
respective inheritances,9 entitling them to their pro indiviso shares in her whole estate.
Hence, in the execution of the Extra-Judicial Settlement of the Estate with Absolute Deed of Sale in
favor of spouses Uy, all the heirs of Anunciacionshould have participated. Considering that Eutropia and
Victoria were admittedly excluded and that then minors Rosa and Douglas were not properly
represented therein, the settlement was not valid and binding uponthem and consequently, a total nullity.
Section 1, Rule 74 of the Rules of Court provides:
SECTION 1. Extrajudicial settlement by agreement between heirs.
The fact of the extrajudicial settlement or administration shall be published in a newspaper of general
circulation in the manner provided in the next succeeding section; but no extrajudicial settlement shall
be binding upon any person who has not participated therein or had no notice thereof. (Underscoring
added) The effect of excluding the heirs in the settlement of estate was further elucidated in Segura v.
Segura,10 thus: It is clear that Section 1 of Rule 74 does not apply to the partition in question which was
null and void as far as the plaintiffs were concerned. The rule covers only valid partitions. The partition in
the present case was invalid because it excluded six of the nine heirs who were entitled to equal shares
in the partitioned property. Under the rule "no extrajudicial settlement shall be binding upon any person
who has not participated therein or had no notice thereof." As the partition was a total nullity and did not
affect the excluded heirs, it was not correct for the trial court to hold that their right to challenge the
partition had prescribed after two years from its execution
However, while the settlement of the estate is null and void, the subsequent sale of the subject
propertiesmade by Enrique and his children, Napoleon, Alicia and Visminda, in favor of the respondents
isvalid but only with respect to their proportionate shares therein.It cannot be denied that these heirs
have acquired their respective shares in the properties of Anunciacion from the moment of her
death11and that, as owners thereof, they can very well sell their undivided share in the estate.12
With respect to Rosa and Douglas who were minors at the time of the execution of the settlement and
sale, their natural guardian and father, Enrique, represented them in the transaction. However, on the
basis of the laws prevailing at that time, Enrique was merely clothed with powers of administration and
bereft of any authority to dispose of their 2/16 shares in the estate of their mother, Anunciacion.
Articles 320 and 326 of the Civil Code, the laws in force at the time of the execution of the settlement
and sale, provide:
ART. 320. The father, or in his absence the mother, is the legal administrator of the property pertaining
to the child under parental authority. If the property is worth more than two thousand pesos, the father or
mother shall give a bond subject to the approval of the Court of First Instance.
ART. 326. When the property of the child is worth more than two thousand pesos, the father or mother
shall be considered a guardian of the childs property, subject to the duties and obligations of guardians
under the Rules of Court.
Corollarily, Section 7, Rule 93 of the Rules of Court also provides:
SEC. 7. Parents as Guardians. When the property of the child under parental authority is worth two
thousand pesos or less, the father or the mother, without the necessity of court appointment, shall be his
legal guardian. When the property of the child is worth more than two thousand pesos, the father or the
mother shall be considered guardian of the childs property, with the duties and obligations of guardians
under these Rules, and shall file the petition required by Section 2 hereof. For good reasons, the court
may, however, appoint another suitable persons.
Administration includes all acts for the preservation of the property and the receipt of fruits according to
the natural purpose of the thing. Any act of disposition or alienation, or any reduction in the substance of
the patrimony of child, exceeds the limits of administration.13 Thus, a father or mother, as the natural
guardian of the minor under parental authority, does not have the power to dispose or encumber the
property of the latter. Such power is granted by law only to a judicial guardian of the wards property and
even then only with courts prior approval secured in accordance with the proceedings set forth by the
Rules of Court.14
Consequently, the disputed sale entered into by Enrique in behalf of his minor children without the
proper judicial authority, unless ratified by them upon reaching the age of majority,15 is unenforceable in
accordance with Articles 1317 and 1403(1) of the Civil Code which provide:

23
ART. 1317. No one may contract in the name of another without being authorized by the latter or unless
he has by law a right to represent him.
A contract entered into in the name of another by one who has no authority or legal representation, or
who has acted beyond his powers, shall be unenforceable, unless it is ratified, expressly or impliedly, by
the person on whose behalf it has been executed, before it is revoked by the other contracting party.
ART. 1403. The following contracts are unenforceable, unless they are ratified:
(1) Those entered into the name of another person by one who has been given no authority or legal
representation, or who has acted beyond his powers;
Ratification means that one under no disability voluntarily adopts and gives sanction to some
unauthorized act or defective proceeding, which without his sanction would not be binding on him. It is
this voluntary choice, knowingly made, which amounts to a ratification of what was theretofore
unauthorized, and becomes the authorized act of the party so making the ratification. 16 Once ratified,
expressly or impliedly such as when the person knowingly received benefits from it, the contract is
cleansed from all its defects from the moment it was constituted,17 as it has a retroactive effect.
Records, however, show that Rosa had ratified the extrajudicial settlement of the estate with absolute
deed of sale. In Napoleon and Rosas Manifestation18 before the RTC dated July 11, 1997,they stated:
"Concerning the sale of our parcel of land executed by our father, Enrique Neri concurred in and
conformed to by us and our other two sisters and brother (the other plaintiffs), in favor of Hadji Yusop Uy
and his spouse Hadja Julpa Uy on July 7, 1979, we both confirmed that the same was voluntary and
freely made by all of us and therefore the sale was absolutely valid and enforceable as far as we all
plaintiffs in this case are concerned;" (Underscoring supplied)
In their June 30, 1997 Joint-Affidavit,19 Napoleon and Rosa also alleged:
"That we are surprised that our names are included in this case since we do not have any intention to
file a case against Hadji Yusop Uy and Julpha Ibrahim Uy and their family and we respect and
acknowledge the validity of the Extra-Judicial Settlement of the Estate with Absolute Deed of Sale dated
July 7, 1979;" (Underscoring supplied)
Clearly, the foregoing statements constitutedratification of the settlement of the estate and the
subsequent sale, thus, purging all the defects existing at the time of its execution and legitimizing the
conveyance of Rosas 1/16 share in the estate of Anunciacion to spouses Uy. The same, however, is not
true with respect to Douglas for lack of evidence showing ratification.
Considering, thus, that the extrajudicial settlement with sale is invalid and therefore, not binding on
Eutropia, Victoria and Douglas, only the shares ofEnrique, Napoleon, Alicia, Visminda and Rosa in the
homestead properties have effectivelybeen disposed in favor of spouses Uy. "A person can only sell
what he owns, or is authorized to sell and the buyer can as a consequence acquire no more than what
the sellercan legally transfer."20 On this score, Article 493 of the Civil Codeis relevant, which provides:
Each co-owner shall have the full ownership of his part and of the fruits and benefits pertaining thereto,
and he may therefore alienate, assign or mortgage it, and even substitute another person in its
enjoyment, except when personal rights are involved. But the effect of the alienation or the mortgage,
with respect to the co-owners, shall be limited to the portion which may be allotted to him in the division
upon the termination of the co-ownership.
Consequently, spouses Uy or their substituted heirs became pro indiviso co-owners of the homestead
properties with Eutropia, Victoria and Douglas, who retained title to their respective 1/16 shares. They
were deemed to be holding the 3/16 shares of Eutropia, Victoria and Douglas under an implied
constructive trust for the latters benefit, conformably with Article 1456 of the Civil Code which states:"if
property is acquired through mistake or fraud, the person obtaining it is, by force of law, considered a
trustee of an implied trust for the benefit of the person from whom the property comes." As such, it is
only fair, just and equitable that the amount paid for their shares equivalent to P 5,000.0021 each or a
total of P 15,000.00 be returned to spouses Uy with legal interest.
On the issue of prescription, the Court agrees with petitioners that the present action has not prescribed
in so far as it seeks to annul the extrajudicial settlement of the estate. Contrary to the ruling of the CA,
the prescriptive period of 2 years provided in Section 1 Rule 74 of the Rules of
Court reckoned from the execution of the extrajudicial settlement finds no application to petitioners
Eutropia, Victoria and Douglas, who were deprived of their lawful participation in the subject estate.

Besides, an "action or defense for the declaration of the inexistence of a contract does not prescribe" in
accordance with Article 1410 of the Civil Code.
However, the action to recover property held in trust prescribes after 10 years from the time the cause of
action accrues,22 which is from the time of actual notice in case of unregistered deed.23 In this case,
Eutropia, Victoria and Douglas claimed to have knowledge of the extrajudicial settlement with sale after
the death of their father, Enrique, in 1994 which spouses Uy failed to refute. Hence, the complaint filed
in 1997 was well within the prescriptive period of 10 years.
WHEREFORE, the instant petition is GRANTED. The April 27, 2010 Decision and October 18, 2010
Resolution of the Court of Appeals are REVERSED and SET ASIDE and a new judgment is entered:
1.
2.

3.

4.

Declaring the Extra-Judicial Settlement of the Estate of Anunciacion Neri NULL and VOID;
Declaring the Absolute Deed of Sale in favor of the late spouses Hadji Yusop Uy and Julpha
Ibrahim Uy as regards the 13/16 total shares of the late Enrique Neri, Napoleon Neri, Alicia D.
Neri-Mondejar, Visminda D. Neri-Chambers and Rosa D. Neri-Millan VALID;
Declaring Eutropia D. Illut-Cockinos, Victoria D. Illut-Piala and Douglas D. Neri as
the LAWFUL OWNERSof the 3/16 portions of the subject homestead properties, covered by
Original Certificate of Title Nos. (P-7998) P-2128, (P-14608) P-5153 and P-20551 (P-8348);
and
Ordering the estate of the late Enrique Neri, as well as Napoleon Neri, Alicia D. NeriMondejar, Visminda D. Neri-Chambers and Rosa D. Neri-Millan to return to the respondents
jointly and solidarily the amount paid corresponding to the 3/16 shares of Eutropia, Victoria
and Douglas in the total amount of P 15,000.00, with legal interest at 6% per annum
computed from the time of payment until finality of this decision and 12% per annum
thereafter until fully paid. SO ORDERED.

[G.R. No. 155001. May 5, 2003]

DEMOSTHENES P. AGAN vs. PHILIPPINE INTERNATIONAL AIR TERMINALS CO., INC., MANILA
INTERNATIONAL AIRPORT AUTHORITY (PIATCO)
Petitioners and petitioners-in-intervention filed the instant petitions for prohibition under Rule 65 of the
Revised Rules of Court seeking to prohibit the Manila International Airport Authority (MIAA) and the
Department of Transportation and Communications (DOTC) and its Secretary from implementing the
following agreements executed by the Philippine Government through the DOTC and the MIAA and the
Philippine International Air Terminals Co., Inc. (PIATCO): (1) the Concession Agreement signed on July
12, 1997, (2) the Amended and Restated Concession Agreement dated November 26, 1999, (3) the
First Supplement to the Amended and Restated Concession Agreement dated August 27, 1999, (4) the
Second Supplement to the Amended and Restated Concession Agreement dated September 4, 2000,
and (5) the Third Supplement to the Amended and Restated Concession Agreement dated June 22,
2001 (collectively, the PIATCO Contracts).
The facts are as follows: In August 1989, the DOTC engaged the services of Aeroport de Paris (ADP)
to conduct a comprehensive study of the Ninoy Aquino International Airport (NAIA) and determine
whether the present airport can cope with the traffic development up to the year 2010. The study
consisted of two parts: first, traffic forecasts, capacity of existing facilities, NAIA future requirements,
proposed master plans and development plans; and second, presentation of the preliminary design of
the passenger terminal building. The ADP submitted a Draft Final Report to the DOTC in December
1989.
Some time in 1993, six business leaders consisting of John Gokongwei, Andrew Gotianun, Henry Sy,
Sr., Lucio Tan, George Ty and Alfonso Yuchengco met with then President Fidel V. Ramos to explore the
possibility of investing in the construction and operation of a new international airport terminal. To signify
their commitment to pursue the project, they formed the Asias Emerging Dragon Corp. (AEDC) which
was registered with the Securities and Exchange Commission (SEC) on September 15, 1993.

24
On October 5, 1994, AEDC submitted an unsolicited proposal to the Government through the
DOTC/MIAA for the development of NAIA International Passenger Terminal III (NAIA IPT III) under a
build-operate-and-transfer arrangement pursuant to RA 6957 as amended by RA 7718 (BOT Law. On
December 2, 1994, the DOTC issued Dept. Order No. 94-832 constituting the Prequalification Bids and
Awards Committee (PBAC) for the implementation of the NAIA IPT III project.
On March 27, 1995, then DOTC Secretary Jose Garcia endorsed the proposal of AEDC to the National
Economic and Development Authority (NEDA). A revised proposal, however, was forwarded by the
DOTC to NEDA on December 13, 1995. On January 5, 1996, the NEDA Investment Coordinating
Council (NEDA ICC) Technical Board favorably endorsed the project to the ICC Cabinet Committee
which approved the same, subject to certain conditions, on January 19, 1996. On February 13, 1996,
the NEDA passed Board Resolution No. 2 which approved the NAIA IPT III project.
On June 7, 14, and 21, 1996, DOTC/MIAA caused the publication in two daily newspapers of an
invitation for competitive or comparative proposals on AEDCs unsolicited proposal, in accordance with
Sec. 4-A of RA 6957, as amended. The alternative bidders were required to submit three (3) sealed
envelopes on or before 5:00 p.m. of September 20, 1996. The first envelope should contain the
Prequalification Documents, the second envelope the Technical Proposal, and the third envelope the
Financial Proposal of the proponent.
On June 20, 1996, PBAC Bulletin No. 1 was issued, postponing the availment of the Bid Documents
and the submission of the comparative bid proposals. Interested firms were permitted to obtain the
Request for Proposal Documents beginning June 28, 1996, upon submission of a written application
and payment of a non-refundable fee of P50,000.00 (US$2,000).
The Bid Documents issued by the PBAC provided among others that the proponent must have
adequate capability to sustain the financing requirement for the detailed engineering, design,
construction, operation, and maintenance phases of the project. The proponent would be evaluated
based on its ability to provide a minimum amount of equity to the project, and its capacity to secure
external financing for the project.
On July 23, 1996, the PBAC issued PBAC Bulletin No. 2 inviting all bidders to a pre-bid conference on
July 29, 1996. On August 16, 1996, the PBAC issued PBAC Bulletin No. 3 amending the Bid
Documents. The following amendments were made on the Bid Documents:
a. Aside from the fixed Annual Guaranteed Payment, the proponent shall include in its financial proposal
an additional percentage of gross revenue share of the Government, as follows:
i. First 5 years 5.0%
ii. Next 10 years 7.5%
iii. Next 10 years 10.0%
b. The amount of the fixed Annual Guaranteed Payment shall be subject of the price
challenge. Proponent may offer an Annual Guaranteed Payment which need not be of equal amount,
but payment of which shall start upon site possession.
c. The project proponent must have adequate capability to sustain the financing requirement for the
detailed engineering, design, construction, and/or operation and maintenance phases of the project as
the case may be. For purposes of pre-qualification, this capability shall be measured in terms of:
i. Proof of the availability of the project proponent and/or the consortium to provide the minimum amount
of equity for the project; and
ii. a letter testimonial from reputable banks attesting that the project proponent and/or the members of
the consortium are banking with them, that the project proponent and/or the members are of good
financial standing, and have adequate resources.
d. The basis for the prequalification shall be the proponents compliance with the minimum technical and
financial requirements provided in the Bid Documents and the IRR of the BOT Law. The minimum
amount of equity shall be 30% of the Project Cost.
e. Amendments to the draft Concession Agreement shall be issued from time to time. Said amendments
shall only cover items that would not materially affect the preparation of the proponents proposal.
On August 29, 1996, the Second Pre-Bid Conference was held where certain clarifications were
made. Upon the request of prospective bidder Peoples Air Cargo & Warehousing Co., Inc (Paircargo),
the PBAC warranted that based on Sec. 11.6, Rule 11 of the Implementing Rules and Regulations of the
BOT Law, only the proposed Annual Guaranteed Payment submitted by the challengers would be

revealed to AEDC, and that the challengers technical and financial proposals would remain
confidential. The PBAC also clarified that the list of revenue sources contained in Annex 4.2a of the Bid
Documents was merely indicative and that other revenue sources may be included by the proponent,
subject to approval by DOTC/MIAA. Furthermore, the PBAC clarified that only those fees and charges
denominated as Public Utility Fees would be subject to regulation, and those charges which would be
actually deemed Public Utility Fees could still be revised, depending on the outcome of PBACs query on
the matter with the Department of Justice.
In September 1996, the PBAC issued Bid Bulletin No. 5, entitled Answers to the Queries of
PAIRCARGO as Per Letter Dated September 3 and 10, 1996. Paircargos queries and the PBACs
responses were as follows:
1. It is difficult for Paircargo and Associates to meet the required minimum equity requirement as
prescribed in Section 8.3.4 of the Bid Documents considering that the capitalization of each member
company is so structured to meet the requirements and needs of their current respective business
undertaking/activities. In order to comply with this equity requirement, Paircargo is requesting PBAC to
just allow each member of (sic) corporation of the Joint Venture to just execute an agreement that
embodies a commitment to infuse the required capital in case the project is awarded to the Joint
Venture instead of increasing each corporations current authorized capital stock just for prequalification
purposes.
In prequalification, the agency is interested in ones financial capability at the time of prequalification, not
future or potential capability.
A commitment to put up equity once awarded the project is not enough to establish that present
financial capability. However, total financial capability of all member companies of the Consortium, to be
established by submitting the respective companies audited financial statements, shall be acceptable.
2. At present, Paircargo is negotiating with banks and other institutions for the extension of a
Performance Security to the joint venture in the event that the Concessions Agreement (sic) is awarded
to them. However, Paircargo is being required to submit a copy of the draft concession as one of the
documentary requirements. Therefore, Paircargo is requesting that theyd (sic) be furnished copy of the
approved negotiated agreement between the PBAC and the AEDC at the soonest possible time.
A copy of the draft Concession Agreement is included in the Bid Documents. Any material changes
would be made known to prospective challengers through bid bulletins. However, a final version will be
issued before the award of contract.
The PBAC also stated that it would require AEDC to sign Supplement C of the Bid Documents
(Acceptance of Criteria and Waiver of Rights to Enjoin Project) and to submit the same with the required
Bid Security.
On September 20, 1996, the consortium composed of Peoples Air Cargo and Warehousing Co.,
Inc. (Paircargo), Phil. Air and Grounds Services, Inc. (PAGS) and Security Bank Corp. (Security Bank)
(collectively, Paircargo Consortium) submitted their competitive proposal to the PBAC. On September
23, 1996, the PBAC opened the first envelope containing the prequalification documents of the
Paircargo Consortium.On the following day, September 24, 1996, the PBAC prequalified the Paircargo
Consortium.
On September 26, 1996, AEDC informed the PBAC in writing of its reservations as regards the
Paircargo Consortium, which include:
a. The lack of corporate approvals and financial capability of PAIRCARGO;
b. The lack of corporate approvals and financial capability of PAGS;
c. The prohibition imposed by RA 337, as amended (the General Banking Act) on the amount that
Security Bank could legally invest in the project;
d. The inclusion of Siemens as a contractor of the PAIRCARGO Joint Venture, for prequalification
purposes; and
e. The appointment of Lufthansa as the facility operator, in view of the Philippine requirement in the
operation of a public utility.
The PBAC gave its reply on October 2, 1996, informing AEDC that it had considered the issues
raised by the latter, and that based on the documents submitted by Paircargo and the established
prequalification criteria, the PBAC had found that the challenger, Paircargo, had prequalified to
undertake the project. The Secretary of the DOTC approved the finding of the PBAC.

25
The PBAC then proceeded with the opening of the second envelope of the Paircargo Consortium
which contained its Technical Proposal.
On October 3, 1996, AEDC reiterated its objections, particularly with respect to Paircargos
financial capability, in view of the restrictions imposed by Section 21-B of the General Banking Act and
Sections 1380 and 1381 of the Manual Regulations for Banks and Other Financial Intermediaries. On
October 7, 1996, AEDC again manifested its objections and requested that it be furnished with excerpts
of the PBAC meeting and the accompanying technical evaluation report where each of the issues they
raised were addressed.
On October 16, 1996, the PBAC opened the third envelope submitted by AEDC and the Paircargo
Consortium containing their respective financial proposals. Both proponents offered to build the NAIA
Passenger Terminal III for at least $350 million at no cost to the government and to pay the
government: 5% share in gross revenues for the first five years of operation, 7.5% share in gross
revenues for the next ten years of operation, and 10% share in gross revenues for the last ten years of
operation, in accordance with the Bid Documents. However, in addition to the foregoing, AEDC offered
to pay the government a total of P135 million as guaranteed payment for 27 years while Paircargo
Consortium offered to pay the government a total of P17.75 billion for the same period.
Thus, the PBAC formally informed AEDC that it had accepted the price proposal submitted by the
Paircargo Consortium, and gave AEDC 30 working days or until November 28, 1996 within which to
match the said bid, otherwise, the project would be awarded to Paircargo. As AEDC failed to match the
proposal within the 30-day period, then DOTC Secretary Amado Lagdameo, on December 11, 1996,
issued a notice to Paircargo Consortium regarding AEDCs failure to match the proposal. On February
27, 1997, Paircargo Consortium incorporated into Philippine International Airport Terminals Co., Inc.
(PIATCO). AEDC subsequently protested the alleged undue preference given to PIATCO and reiterated
its objections as regards the prequalification of PIATCO. On April 11, 1997, the DOTC submitted the
concession agreement for the second-pass approval of the NEDA-ICC.
On April 16, 1997, AEDC filed with the Regional Trial Court of Pasig a Petition for Declaration of Nullity
of the Proceedings, Mandamus and Injunction against the Secretary of the DOTC, the Chairman of the
PBAC, the voting members of the PBAC and Pantaleon D. Alvarez, in his capacity as Chairman of the
PBAC Technical Committee.
On April 17, 1997, the NEDA-ICC conducted an ad referendum to facilitate the approval, on a noobjection basis, of the BOT agreement between the DOTC and PIATCO. As the ad
referendum gathered only four (4) of the required six (6) signatures, the NEDA merely noted the
agreement. On July 9, 1997, the DOTC issued the notice of award for the project to PIATCO. On July
12, 1997, the Government, through then DOTC Secretary Arturo T. Enrile, and PIATCO, through its
President, Henry T. Go, signed the Concession Agreement for the Build-Operate-and-Transfer
Arrangement of the Ninoy Aquino International Airport Passenger Terminal III (1997 Concession
Agreement). The Government granted PIATCO the franchise to operate and maintain the said terminal
during the concession period and to collect the fees, rentals and other charges in accordance with the
rates or schedules stipulated in the 1997 Concession Agreement. The Agreement provided that the
concession period shall be for twenty-five (25) years commencing from the in-service date, and may be
renewed at the option of the Government for a period not exceeding twenty-five (25) years. At the end of
the concession period, PIATCO shall transfer the development facility to MIAA. On November 26, 1998,
the Government and PIATCO signed an Amended and Restated Concession Agreement
(ARCA). Among the provisions of the 1997 Concession Agreement that were amended by the ARCA
were: Sec. 1.11 pertaining to the definition of certificate of completion; Sec. 2.05 pertaining to the
Special Obligations of GRP; Sec. 3.02 (a) dealing with the exclusivity of the franchise given to the
Concessionaire; Sec. 4.04 concerning the assignment by Concessionaire of its interest in the
Development Facility; Sec. 5.08 (c) dealing with the proceeds of Concessionaires insurance; Sec. 5.10
with respect to the temporary take-over of operations by GRP; Sec. 5.16 pertaining to the taxes, duties
and other imposts that may be levied on the Concessionaire; Sec. 6.03 as regards the periodic
adjustment of public utility fees and charges; the entire Article VIII concerning the provisions on the
termination of the contract; and Sec. 10.02 providing for the venue of the arbitration proceedings in case
a dispute or controversy arises between the parties to the agreement.

Subsequently, the Government and PIATCO signed three Supplements to the ARCA. The First
Supplement was signed on August 27, 1999; the Second Supplement on September 4, 2000; and the
Third Supplement on June 22, 2001 (collectively, Supplements).
The First Supplement to the ARCA amended Sec. 1.36 of the ARCA defining Revenues or Gross
Revenues; Sec. 2.05 (d) of the ARCA referring to the obligation of MIAA to provide sufficient funds for
the upkeep, maintenance, repair and/or replacement of all airport facilities and equipment which are
owned or operated by MIAA; and further providing additional special obligations on the part of GRP
aside from those already enumerated in Sec. 2.05 of the ARCA. The First Supplement also provided a
stipulation as regards the construction of a surface road to connect NAIA Terminal II and Terminal III in
lieu of the proposed access tunnel crossing Runway 13/31; the swapping of obligations between GRP
and PIATCO regarding the improvement of Sales Road; and the changes in the timetable. It also
amended Sec. 6.01 (c) of the ARCA pertaining to the Disposition of Terminal Fees; Sec. 6.02 of the
ARCA by inserting an introductory paragraph; and Sec. 6.02 (a) (iii) of the ARCA referring to the
Payments of Percentage Share in Gross Revenues. The Second Supplement to the ARCA contained
provisions concerning the clearing, removal, demolition or disposal of subterranean structures
uncovered or discovered at the site of the construction of the terminal by the Concessionaire. It defined
the scope of works; it provided for the procedure for the demolition of the said structures and the
consideration for the same which the GRP shall pay PIATCO; it provided for time extensions,
incremental and consequential costs and losses consequent to the existence of such structures; and it
provided for some additional obligations on the part of PIATCO as regards the said structures. Finally,
the Third Supplement provided for the obligations of the Concessionaire as regards the construction of
the surface road connecting Terminals II and III.
Meanwhile, the MIAA which is charged with the maintenance and operation of the NAIA Terminals I and
II, had existing concession contracts with various service providers to offer international airline airport
services, such as in-flight catering, passenger handling, ramp and ground support, aircraft maintenance
and provisions, cargo handling and warehousing, and other services, to several international airlines at
the NAIA.Some of these service providers are the Miascor Group, DNATA-Wings Aviation Systems
Corp., and the MacroAsia Group. Miascor, DNATA and MacroAsia, together with Philippine Airlines
(PAL), are the dominant players in the industry with an aggregate market share of 70%.
On September 17, 2002, the workers of the international airline service providers, claiming that they
stand to lose their employment upon the implementation of the questioned agreements, filed before this
Court a petition for prohibition to enjoin the enforcement of said agreements. [2] On October 15, 2002, the
service providers, joining the cause of the petitioning workers, filed a motion for intervention and a
petition-in-intervention.
On October 24, 2002, Congressmen Salacnib Baterina, Clavel Martinez and Constantino Jaraula filed a
similar petition with this Court.[3]
On November 6, 2002, several employees of the MIAA likewise filed a petition assailing the legality of
the various agreements.[4] On December 11, 2002. another group of Congressmen, Hon. Jacinto V.
Paras, Rafael P. Nantes, Eduardo C. Zialcita, Willie B. Villarama, Prospero C. Nograles, Prospero A.
Pichay, Jr., Harlin Cast Abayon and Benasing O. Macaranbon, moved to intervene in the case as
Respondents-Intervenors. They filed their Comment-In-Intervention defending the validity of the assailed
agreements and praying for the dismissal of the petitions. During the pendency of the case before this
Court, President Gloria Macapagal Arroyo, on November 29, 2002, in her speech at the 2002 Golden
Shell Export Awards at Malacaang Palace, stated that she will not honor (PIATCO) contracts which the
Executive Branchs legal offices have concluded (as) null and void.[5]
Respondent PIATCO filed its Comments to the present petitions on November 7 and 27, 2002.
The Office of the Solicitor General and the Office of the Government Corporate Counsel filed their
respective Comments in behalf of the public respondents.
On December 10, 2002, the Court heard the case on oral argument. After the oral argument, the
Court then resolved in open court to require the parties to file simultaneously their respective
Memoranda in amplification of the issues heard in the oral arguments within 30 days and to explore the
possibility of arbitration or mediation as provided in the challenged contracts. In their consolidated
Memorandum, the Office of the Solicitor General and the Office of the Government Corporate Counsel
prayed that the present petitions be given due course and that judgment be rendered declaring the 1997

26
Concession Agreement, the ARCA and the Supplements thereto void for being contrary to the
Constitution, the BOT Law and its Implementing Rules and Regulations.
On March 6, 2003, respondent PIATCO informed the Court that on March 4, 2003 PIATCO
commenced arbitration proceedings before the International Chamber of Commerce, International Court
of Arbitration (ICC) by filing a Request for Arbitration with the Secretariat of the ICC against the
Government of the Republic of the Philippines acting through the DOTC and MIAA. In the present
cases, the Court is again faced with the task of resolving complicated issues made difficult by their
intersecting legal and economic implications. The Court is aware of the far reaching fall out effects of the
ruling which it makes today. For more than a century and whenever the exigencies of the times demand
it, this Court has never shirked from its solemn duty to dispense justice and resolve actual controversies
involving rights which are legally demandable and enforceable, and to determine whether or not there
has been grave abuse of discretion amounting to lack or excess of jurisdiction.[6] To be sure, this Court
will not begin to do otherwise today.
We shall first dispose of the procedural issues raised by respondent PIATCO which they allege will bar
the resolution of the instant controversy.
Petitioners Legal Standing to File
the present Petitions
a.

G.R. Nos. 155001 and 155661

In G.R. No. 155001 individual petitioners are employees of various service providers[7] having separate
concession contracts with MIAA and continuing service agreements with various international airlines to
provide in-flight catering, passenger handling, ramp and ground support, aircraft maintenance and
provisions, cargo handling and warehousing and other services. Also included as petitioners are labor
unions MIASCOR Workers Union-National Labor Union and Philippine Airlines Employees
Association. These petitioners filed the instant action for prohibition as taxpayers and as parties whose
rights and interests stand to be violated by the implementation of the PIATCO Contracts.
Petitioners-Intervenors in the same case are all corporations organized and existing under
Philippine laws engaged in the business of providing in-flight catering, passenger handling, ramp and
ground support, aircraft maintenance and provisions, cargo handling and warehousing and other
services to several international airlines at the Ninoy Aquino International Airport. Petitioners-Intervenors
allege that as tax-paying international airline and airport-related service operators, each one of them
stands to be irreparably injured by the implementation of the PIATCO Contracts. Each of the petitionersintervenors have separate and subsisting concession agreements with MIAA and with various
international airlines which they allege are being interfered with and violated by respondent PIATCO.
In G.R. No. 155661, petitioners constitute employees of MIAA and Samahang Manggagawa sa
Paliparan ng Pilipinas - a legitimate labor union and accredited as the sole and exclusive bargaining
agent of all the employees in MIAA. Petitioners anchor their petition for prohibition on the nullity of the
contracts entered into by the Government and PIATCO regarding the build-operate-and-transfer of the
NAIA IPT III. They filed the petition as taxpayers and persons who have a legitimate interest to protect in
the implementation of the PIATCO Contracts.
Petitioners in both cases raise the argument that the PIATCO Contracts contain stipulations which
directly contravene numerous provisions of the Constitution, specific provisions of the BOT Law and its
Implementing Rules and Regulations, and public policy. Petitioners contend that the DOTC and the
MIAA, by entering into said contracts, have committed grave abuse of discretion amounting to lack or
excess of jurisdiction which can be remedied only by a writ of prohibition, there being no plain, speedy
or adequate remedy in the ordinary course of law.
In particular, petitioners assail the provisions in the 1997 Concession Agreement and the ARCA
which grant PIATCO the exclusive right to operate a commercial international passenger terminal within
the Island of Luzon, except those international airports already existing at the time of the execution of
the agreement. The contracts further provide that upon the commencement of operations at the NAIA
IPT III, the Government shall cause the closure of Ninoy Aquino International Airport Passenger
Terminals I and II as international passenger terminals. With respect to existing concession agreements
between MIAA and international airport service providers regarding certain services or operations, the

1997 Concession Agreement and the ARCA uniformly provide that such services or operations will not
be carried over to the NAIA IPT III and PIATCO is under no obligation to permit such carry over except
through a separate agreement duly entered into with PIATCO.[8]
With respect to the petitioning service providers and their employees, upon the commencement of
operations of the NAIA IPT III, they allege that they will be effectively barred from providing international
airline airport services at the NAIA Terminals I and II as all international airlines and passengers will be
diverted to the NAIA IPT III. The petitioning service providers will thus be compelled to contract with
PIATCO alone for such services, with no assurance that subsisting contracts with MIAA and other
international airlines will be respected. Petitioning service providers stress that despite the very
competitive market, the substantial capital investments required and the high rate of fees, they entered
into their respective contracts with the MIAA with the understanding that the said contracts will be in
force for the stipulated period, and thereafter, renewed so as to allow each of the petitioning service
providers to recoup their investments and obtain a reasonable return thereon.
Petitioning employees of various service providers at the NAIA Terminals I and II and of MIAA on
the other hand allege that with the closure of the NAIA Terminals I and II as international passenger
terminals under the PIATCO Contracts, they stand to lose employment.
The question on legal standing is whether such parties have alleged such a personal stake in the
outcome of the controversy as to assure that concrete adverseness which sharpens the presentation of
issues upon which the court so largely depends for illumination of difficult constitutional questions.
[9]
Accordingly, it has been held that the interest of a person assailing the constitutionality of a statute
must be direct and personal. He must be able to show, not only that the law or any government act is
invalid, but also that he sustained or is in imminent danger of sustaining some direct injury as a result of
its enforcement, and not merely that he suffers thereby in some indefinite way. It must appear that the
person complaining has been or is about to be denied some right or privilege to which he is lawfully
entitled or that he is about to be subjected to some burdens or penalties by reason of the statute or act
complained of.[10]
We hold that petitioners have the requisite standing. In the above-mentioned cases, petitioners
have a direct and substantial interest to protect by reason of the implementation of the PIATCO
Contracts. They stand to lose their source of livelihood, a property right which is zealously protected by
the Constitution. Moreover, subsisting concession agreements between MIAA and petitionersintervenors and service contracts between international airlines and petitioners-intervenors stand to be
nullified or terminated by the operation of the NAIA IPT III under the PIATCO Contracts. The financial
prejudice brought about by the PIATCO Contracts on petitioners and petitioners-intervenors in these
cases are legitimate interests sufficient to confer on them the requisite standing to file the instant
petitions.
b. G.R. No. 155547
In G.R. No. 155547, petitioners filed the petition for prohibition as members of the House of
Representatives, citizens and taxpayers. They allege that as members of the House of Representatives,
they are especially interested in the PIATCO Contracts, because the contracts compel the Government
and/or the House of Representatives to appropriate funds necessary to comply with the provisions
therein.[11] They cite provisions of the PIATCO Contracts which require disbursement of unappropriated
amounts in compliance with the contractual obligations of the Government. They allege that the
Government obligations in the PIATCO Contracts which compel government expenditure without
appropriation is a curtailment of their prerogatives as legislators, contrary to the mandate of the
Constitution that [n]o money shall be paid out of the treasury except in pursuance of an appropriation
made by law.[12]
Standing is a peculiar concept in constitutional law because in some cases, suits are not brought
by parties who have been personally injured by the operation of a law or any other government act but
by concerned citizens, taxpayers or voters who actually sue in the public interest.Although we are not
unmindful of the cases of Imus Electric Co. v. Municipality of Imus[13] and Gonzales v.
Raquiza[14] wherein this Court held that appropriation must be made only on amounts immediately
demandable, public interest demands that we take a more liberal view in determining whether the
petitioners suing as legislators, taxpayers and citizens have locus standi to file the instant

27
petition. InKilosbayan, Inc. v. Guingona,[15] this Court held [i]n line with the liberal policy of this Court
on locus standi, ordinary taxpayers, members of Congress, and even association of planters, and nonprofit civic organizations were allowed to initiate and prosecute actions before this Court to question the
constitutionality or validity of laws, acts, decisions, rulings, or orders of various government agencies or
instrumentalities.[16] Further, insofar as taxpayers' suits are concerned . . . (this Court) is not devoid of
discretion as to whether or not it should be entertained.[17] As such . . . even if, strictly speaking, they
[the petitioners] are not covered by the definition, it is still within the wide discretion of the Court to waive
the requirement and so remove the impediment to its addressing and resolving the serious constitutional
questions raised.[18] In view of the serious legal questions involved and their impact on public interest,
we resolve to grant standing to the petitioners.
Other Procedural Matters
Respondent PIATCO further alleges that this Court is without jurisdiction to review the instant
cases as factual issues are involved which this Court is ill-equipped to resolve. Moreover, PIATCO
alleges that submission of this controversy to this Court at the first instance is a violation of the rule on
hierarchy of courts. They contend that trial courts have concurrent jurisdiction with this Court with
respect to a special civil action for prohibition and hence, following the rule on hierarchy of courts, resort
must first be had before the trial courts.
After a thorough study and careful evaluation of the issues involved, this Court is of the view that
the crux of the instant controversy involves significant legal questions. The facts necessary to resolve
these legal questions are well established and, hence, need not be determined by a trial court.
The rule on hierarchy of courts will not also prevent this Court from assuming jurisdiction over the
cases at bar. The said rule may be relaxedwhen the redress desired cannot be obtained in the
appropriate courts or where exceptional and compelling circumstances justify availment of a
remedy within and calling for the exercise of this Courts primary jurisdiction.[19]
It is easy to discern that exceptional circumstances exist in the cases at bar that call for the
relaxation of the rule. Both petitioners and respondents agree that these cases are of transcendental
importance as they involve the construction and operation of the countrys premier international airport.
Moreover, the crucial issues submitted for resolution are of first impression and they entail the proper
legal interpretation of key provisions of the Constitution, the BOT Law and its Implementing Rules and
Regulations. Thus, considering the nature of the controversy before the Court, procedural bars may be
lowered to give way for the speedy disposition of the instant cases.
Legal Effect of the Commencement
of Arbitration Proceedings by
PIATCO
There is one more procedural obstacle which must be overcome. The Court is aware that
arbitration proceedings pursuant to Section 10.02 of the ARCA have been filed at the instance of
respondent PIATCO. Again, we hold that the arbitration step taken by PIATCO will not oust this Court of
its jurisdiction over the cases at bar.
In Del Monte Corporation-USA v. Court of Appeals,[20] even after finding that the arbitration
clause in the Distributorship Agreement in question is valid and the dispute between the parties is
arbitrable, this Court affirmed the trial courts decision denying petitioners Motion to Suspend
Proceedings pursuant to the arbitration clause under the contract. In so ruling, this Court held that as
contracts produce legal effect between the parties, their assigns and heirs, only the parties to the
Distributorship Agreement are bound by its terms, including the arbitration clause stipulated therein. This
Court ruled that arbitration proceedings could be called for but only with respect to the parties to the
contract in question. Considering that there are parties to the case who are neither parties to the
Distributorship Agreement nor heirs or assigns of the parties thereto, this Court, citing its previous ruling
in Salas, Jr. v. Laperal Realty Corporation,[21] held that to tolerate the splitting of proceedings by
allowing arbitration as to some of the parties on the one hand and trial for the others on the other hand
would, in effect, result inmultiplicity of suits, duplicitous procedure and unnecessary delay.
[22]
Thus, we ruled that the interest of justice would best be served if the trial court hears and
adjudicates the case in a single and complete proceeding.
It is established that petitioners in the present cases who have presented legitimate interests in
the resolution of the controversy are not parties to the PIATCO Contracts. Accordingly, they cannot be
bound by the arbitration clause provided for in the ARCA and hence, cannot be compelled to submit to

arbitration proceedings. A speedy and decisive resolution of all the critical issues in the present
controversy, including those raised by petitioners, cannot be made before an arbitral
tribunal. The object of arbitration is precisely to allow an expeditious determination of a dispute. This
objective would not be met if this Court were to allow the parties to settle the cases by arbitration as
there are certain issues involving non-parties to the PIATCO Contracts which the arbitral tribunal will not
be equipped to resolve.
Now, to the merits of the instant controversy.
I
Is PIATCO a qualified bidder?
Public respondents argue that the Paircargo Consortium, PIATCOs predecessor, was not a duly
pre-qualified bidder on the unsolicited proposal submitted by AEDC as the Paircargo Consortium failed
to meet the financial capability required under the BOT Law and the Bid Documents. They allege that in
computing the ability of the Paircargo Consortium to meet the minimum equity requirements for the
project, theentire net worth of Security Bank, a member of the consortium, should not be
considered.
PIATCO relies, on the other hand, on the strength of the Memorandum dated October 14, 1996
issued by the DOTC Undersecretary Primitivo C. Cal stating that the Paircargo Consortium is found to
have a combined net worth of P3,900,000,000.00, sufficient to meet the equity requirements of the
project. The said Memorandum was in response to a letter from Mr. Antonio Henson of AEDC to
President Fidel V. Ramos questioning the financial capability of the Paircargo Consortium on the ground
that it does not have the financial resources to put up the required minimum equity
of P2,700,000,000.00. This contention is based on the restriction under R.A. No. 337, as amended or
the General Banking Act that a commercial bank cannot invest in any single enterprise in an amount
more than 15% of its net worth. In the said Memorandum, Undersecretary Cal opined:
The Bid Documents, as clarified through Bid Bulletin Nos. 3 and 5, require that financial capability will be
evaluated based on total financial capability of all the member companies of the [Paircargo] Consortium.
In this connection, the Challenger was found to have a combined net worth of P3,926,421,242.00 that
could support a project costing approximately P13 Billion.
It is not a requirement that the net worth must be unrestricted. To impose that as a requirement now will
be nothing less than unfair.
The financial statement or the net worth is not the sole basis in establishing financial capability. As
stated in Bid Bulletin No. 3, financial capability may also be established by testimonial letters issued by
reputable banks. The Challenger has complied with this requirement.
To recap, net worth reflected in the Financial Statement should not be taken as the amount of the
money to be used to answer the required thirty percent (30%) equity of the challenger but rather to be
used in establishing if there is enough basis to believe that the challenger can comply with the required
30% equity. In fact, proof of sufficient equity is required as one of the conditions for award of contract
(Section 12.1 IRR of the BOT Law) but not for pre-qualification (Section 5.4 of the same document).[23]
Under the BOT Law, in case of a build-operate-and-transfer arrangement, the contract shall be
awarded to the bidder who, having satisfied the minimum financial, technical, organizational and
legal standards required by the law, has submitted the lowest bid and most favorable terms of the
project.[24] Further, the 1994 Implementing Rules and Regulations of the BOT Law provide:
Section 5.4 Pre-qualification Requirements.
c. Financial Capability: The project proponent must have adequate capability to sustain the financing
requirements for the detailed engineering design, construction and/or operation and maintenance
phases of the project, as the case may be. For purposes of pre-qualification, this capability shall be
measured in terms of (i) proof of the ability of the project proponent and/or the consortium to
provide a minimum amount of equity to the project, and (ii) a letter testimonial from reputable
banks attesting that the project proponent and/or members of the consortium are banking with
them, that they are in good financial standing, and that they have adequate resources. The
government agency/LGU concerned shall determine on a project-to-project basis and before prequalification, the minimum amount of equity needed. (emphasis supplied)
Pursuant to this provision, the PBAC issued PBAC Bulletin No. 3 dated August 16, 1996
amending the financial capability requirements for pre-qualification of the project proponent as follows:
6. Basis of Pre-qualification

28
The basis for the pre-qualification shall be on the compliance of the proponent to the minimum technical
and financial requirements provided in the Bid Documents and in the IRR of the BOT Law, R.A. No.
6957, as amended by R.A. 7718.
The minimum amount of equity to which the proponents financial capability will be based shall be thirty
percent (30%) of the project cost instead of the twenty percent (20%) specified in Section 3.6.4 of
the Bid Documents. This is to correlate with the required debt-to-equity ratio of 70:30 in Section 2.01a
of the draft concession agreement. The debt portion of the project financing should not exceed 70% of
the actual project cost.
Accordingly, based on the above provisions of law, the Paircargo Consortium or any challenger to
the unsolicited proposal of AEDC has to show that it possesses the requisite financial capability to
undertake the project in the minimum amount of 30% of the project costthrough (i) proof of the
ability to provide a minimum amount of equity to the project, and (ii) a letter testimonial from reputable
banks attesting that the project proponent or members of the consortium are banking with them, that
they are in good financial standing, and that they have adequate resources.
As the minimum project cost was estimated to be US$350,000,000.00 or
roughly P9,183,650,000.00,[25] the Paircargo Consortium had to show to the satisfaction of the PBAC
that it had the ability to provide the minimum equity for the project in the amount of at
leastP2,755,095,000.00.
Paircargos Audited Financial Statements as of 1993 and 1994 indicated that it had a net worth
of P2,783,592.00 and P3,123,515.00 respectively.[26] PAGS Audited Financial Statements as of 1995
indicate that it has approximately P26,735,700.00 to invest as its equity for the project.[27] Security Banks
Audited Financial Statements as of 1995 show that it has a net worth equivalent to its capital funds in
the amount ofP3,523,504,377.00.[28]
We agree with public respondents that with respect to Security Bank, the entire amount of its net
worth could not be invested in a single undertaking or enterprise, whether allied or non-allied in
accordance with the provisions of R.A. No. 337, as amended or the General Banking Act:
Sec. 21-B. The provisions in this or in any other Act to the contrary notwithstanding, the Monetary
Board, whenever it shall deem appropriate and necessary to further national development objectives or
support national priority projects, may authorize a commercial bank, a bank authorized to provide
commercial banking services, as well as a government-owned and controlled bank, to operate
under an expanded commercial banking authority and by virtue thereof exercise, in addition
to powers authorized for commercial banks, the powers of an Investment House as provided in
Presidential Decree No. 129, invest in the equity of a non-allied undertaking, or own a majority or
all of the equity in a financial intermediary other than a commercial bank or a bank authorized to
provide commercial banking services: Provided, That (a) the total investment in equities shall not
exceed fifty percent (50%) of the net worth of the bank; (b) the equity investment in any one
enterprise whether allied or non-allied shall not exceed fifteen percent (15%) of the net worth of
the bank;(c) the equity investment of the bank, or of its wholly or majority-owned subsidiary, in a single
non-allied undertaking shall not exceed thirty-five percent (35%) of the total equity in the enterprise nor
shall it exceed thirty-five percent (35%) of the voting stock in that enterprise; and (d) the equity
investment in other banks shall be deducted from the investing bank's net worth for purposes of
computing the prescribed ratio of net worth to risk assets.
.
Further, the 1993 Manual of Regulations for Banks provides:
SECTION X383. Other Limitations and Restrictions. The following limitations and restrictions shall also
apply regarding equity investments of banks.
a. In any single enterprise. The equity investments of banks in any single enterprise shall not exceed at
any time fifteen percent (15%) of the net worth of the investing bank as defined in Sec. X106 and
Subsec. X121.5.
Thus, the maximum amount that Security Bank could validly invest in the Paircargo Consortium is
only P528,525,656.55, representing 15% of its entire net worth. The total net worth therefore of the
Paircargo Consortium, after considering the maximum amounts that may be validly invested by each
of its members is P558,384,871.55 or only 6.08% of the project cost,[29] an amount substantially less
than the prescribed minimum equity investment required for the project in the amount
of P2,755,095,000.00 or 30% of the project cost.

The purpose of pre-qualification in any public bidding is to determine, at the earliest opportunity,
the ability of the bidder to undertake the project. Thus, with respect to the bidders financial capacity at
the pre-qualification stage, the law requires the government agency to examine and determine the
ability of the bidder to fund the entire cost of the project by considering the maximum amounts that
each bidder may invest in the project at the time of pre-qualification.
The PBAC has determined that any prospective bidder for the construction, operation and
maintenance of the NAIA IPT III project should prove that it has the ability to provide equity in the
minimum amount of 30% of the project cost, in accordance with the 70:30 debt-to-equity ratio prescribed
in the Bid Documents. Thus, in the case of Paircargo Consortium, the PBAC should determine
the maximum amounts that each member of the consortium may commit for the construction,
operation and maintenance of the NAIA IPT III project at the time of pre-qualification. With respect to
Security Bank, the maximum amount which may be invested by it would only be 15% of its net worth in
view of the restrictions imposed by the General Banking Act. Disregarding the investment ceilings
provided by applicable law would not result in a proper evaluation of whether or not a bidder is prequalified to undertake the project as for all intents and purposes, such ceiling or legal restriction
determines the true maximum amount which a bidder may invest in the project.
Further, the determination of whether or not a bidder is pre-qualified to undertake the project
requires an evaluation of the financial capacity of the said bidder at the time the bid is
submitted based on the required documents presented by the bidder. The PBAC should not be allowed
to speculate on the future financial ability of the bidder to undertake the project on the basis of
documents submitted. This would open doors to abuse and defeat the very purpose of a public bidding.
This is especially true in the case at bar which involves the investment of billions of pesos by the project
proponent. The relevant government authority is duty-bound to ensure that the awardee of the contract
possesses the minimum required financial capability to complete the project. To allow the PBAC to
estimate the bidders future financial capability would not secure the viability and integrity of the
project. A restrictive and conservative application of the rules and procedures of public bidding is
necessary not only to protect the impartiality and regularity of the proceedings but also to ensure the
financial and technical reliability of the project. It has been held that:
The basic rule in public bidding is that bids should be evaluated based on the required documents
submitted before and not after the opening of bids. Otherwise, the foundation of a fair and competitive
public bidding would be defeated. Strict observance of the rules, regulations, and guidelines of the
bidding process is the only safeguard to a fair, honest and competitive public bidding.[30]
Thus, if the maximum amount of equity that a bidder may invest in the project at the time the
bids are submitted falls short of the minimum amounts required to be put up by the bidder, said bidder
should be properly disqualified. Considering that at the pre-qualification stage, the maximum amounts
which the Paircargo Consortium may invest in the project fell short of the minimum amounts prescribed
by the PBAC, we hold that Paircargo Consortium was not a qualified bidder. Thus the award of the
contract by the PBAC to the Paircargo Consortium, a disqualified bidder, is null and void.
While it would be proper at this juncture to end the resolution of the instant controversy, as the
legal effects of the disqualification of respondent PIATCOs predecessor would come into play and
necessarily result in the nullity of all the subsequent contracts entered by it in pursuance of the project,
the Court feels that it is necessary to discuss in full the pressing issues of the present controversy for a
complete resolution thereof.
II
Is the 1997 Concession Agreement valid?
Petitioners and public respondents contend that the 1997 Concession Agreement is invalid as it
contains provisions that substantially depart from the draft Concession Agreement included in the Bid
Documents. They maintain that a substantial departure from the draft Concession Agreement is a
violation of public policy and renders the 1997 Concession Agreement null and void.
PIATCO maintains, however, that the Concession Agreement attached to the Bid Documents is
intended to be a draft, i.e., subject to change, alteration or modification, and that this intention was clear
to all participants, including AEDC, and DOTC/MIAA. It argued further that said intention is expressed in
Part C (6) of Bid Bulletin No. 3 issued by the PBAC which states:
6. Amendments to the Draft Concessions Agreement

29
Amendments to the Draft Concessions Agreement shall be issued from time to time. Said amendments
shall only cover items that would not materially affect the preparation of the proponents proposal.
By its very nature, public bidding aims to protect the public interest by giving the public the best
possible advantages through open competition. Thus:
Competition must be legitimate, fair and honest. In the field of government contract law, competition
requires, not only `bidding upon a common standard, a common basis, upon the same thing, the same
subject matter, the same undertaking,' but also that it be legitimate, fair and honest; and not designed to
injure or defraud the government.[31]
An essential element of a publicly bidded contract is that all bidders must be on equal footing. Not
simply in terms of application of the procedural rules and regulations imposed by the relevant
government agency, but more importantly, on the contract bidded upon. Each bidder must be able
to bid on the same thing. The rationale is obvious. If the winning bidder is allowed to later include or
modify certain provisions in the contract awarded such that the contract is altered in any material
respect, then the essence of fair competition in the public bidding is destroyed. A public bidding would
indeed be a farce if after the contract is awarded, the winning bidder may modify the contract and
include provisions which are favorable to it that were not previously made available to the other
bidders. Thus:
It is inherent in public biddings that there shall be a fair competition among the bidders. The
specifications in such biddings provide the common ground or basis for the bidders. The specifications
should, accordingly, operate equally or indiscriminately upon all bidders.[32]
The same rule was restated by Chief Justice Stuart of the Supreme Court of Minnesota:
The law is well settled that where, as in this case, municipal authorities can only let a contract for public
work to the lowest responsible bidder, the proposals and specifications therefore must be so framed as
to permit free and full competition. Nor can they enter into a contract with the best bidder
containing substantial provisions beneficial to him, not included or contemplated in the terms
and specifications upon which the bids were invited.[33]
In fact, in the PBAC Bid Bulletin No. 3 cited by PIATCO to support its argument that the draft
concession agreement is subject to amendment, the pertinent portion of which was quoted above, the
PBAC also clarified that [s]aid amendments shall only cover items that would not materially affect
the preparation of the proponents proposal.
While we concede that a winning bidder is not precluded from modifying or amending certain
provisions of the contract bidded upon, such changes must not constitute substantial or material
amendments that would alter the basic parameters of the contract and would constitute a denial
to the other bidders of the opportunity to bid on the same terms. Hence, the determination of
whether or not a modification or amendment of a contract bidded out constitutes a substantial
amendment rests on whether the contract, when taken as a whole, would contain substantially different
terms and conditions that would have the effect of altering the technical and/or financial proposals
previously submitted by other bidders. The alterations and modifications in the contract executed
between the government and the winning bidder must be such as to render such executed contract to
be an entirely different contract from the one that was bidded upon.
In the case of Caltex (Philippines), Inc. v. Delgado Brothers, Inc.,[34] this Court quoted with
approval the ruling of the trial court that an amendment to a contract awarded through public bidding,
when such subsequent amendment was made without a new public bidding, is null and void:
The Court agrees with the contention of counsel for the plaintiffs that the due execution of a contract
after public bidding is a limitation upon the right of the contracting parties to alter or amend it without
another public bidding, for otherwise what would a public bidding be good for if after the execution
of a contract after public bidding, the contracting parties may alter or amend the contract, or
even cancel it, at their will? Public biddings are held for the protection of the public, and to give the
public the best possible advantages by means of open competition between the bidders. He who bids
or offers the best terms is awarded the contract subject of the bid, and it is obvious that such
protection and best possible advantages to the public will disappear if the parties to a contract
executed after public bidding may alter or amend it without another previous public bidding.[35]
Hence, the question that comes to fore is this: is the 1997 Concession Agreement the same
agreement that was offered for public bidding, i.e., the draft Concession Agreement attached to the

Bid Documents? A close comparison of the draft Concession Agreement attached to the Bid Documents
and the 1997 Concession Agreement reveals that the documents differ in at least two material respects:
a. Modification on the Public
Utility Revenues and Non-Public
Utility Revenues that may be
collected by PIATCO
The fees that may be imposed and collected by PIATCO under the draft Concession Agreement
and the 1997 Concession Agreement may be classified into three distinct categories: (1) fees which are
subject to periodic adjustment of once every two years in accordance with a prescribed parametric
formula and adjustments are made effective only upon written approval by MIAA; (2) fees other than
those included in the first category which maybe adjusted by PIATCO whenever it deems necessary
without need for consent of DOTC/MIAA; and (3) new fees and charges that may be imposed by
PIATCO which have not been previously imposed or collected at the Ninoy Aquino International Airport
Passenger Terminal I, pursuant to Administrative Order No. 1, Series of 1993, as amended. The glaring
distinctions between the draft Concession Agreement and the 1997 Concession Agreement lie in the
types of fees included in each category and the extent of the supervision and regulation which MIAA is
allowed to exercise in relation thereto.
For fees under the first category, i.e., those which are subject to periodic adjustment in
accordance with a prescribed parametric formula and effective only upon written approval by MIAA, the
draft Concession Agreement includes the following:[36]
(1) aircraft parking fees;
(2) aircraft tacking fees;
(3) groundhandling fees;
(4) rentals and airline offices;
(5) check-in counter rentals; and
(6) porterage fees.
Under the 1997 Concession Agreement, fees which are subject to adjustment and effective
upon MIAA approval are classified as Public Utility Revenues and include: [37]
(1) aircraft parking fees;
(2) aircraft tacking fees;
(3) check-in counter fees; and
(4) Terminal Fees.
The implication of the reduced number of fees that are subject to MIAA approval is best
appreciated in relation to fees included in thesecond category identified above. Under the 1997
Concession Agreement, fees which PIATCO may adjust whenever it deems necessary without need
for consent of DOTC/MIAA are Non-Public Utility Revenues and is defined as all other income not
classified as Public Utility Revenues derived from operations of the Terminal and the Terminal Complex.
[38]
Thus, under the 1997 Concession Agreement, groundhandling fees, rentals from airline offices and
porterage fees are no longer subject to MIAA regulation.
Further, under Section 6.03 of the draft Concession Agreement, MIAA reserves the right to
regulate (1) lobby and vehicular parking fees and (2) other new fees and charges that may be imposed
by PIATCO. Such regulation may be made by periodic adjustment and is effective only upon written
approval of MIAA. The full text of said provision is quoted below:
Section 6.03. Periodic Adjustment in Fees and Charges. Adjustments in the aircraft parking fees, aircraft
tacking fees, groundhandling fees, rentals and airline offices, check-in-counter rentals and porterage
fees shall be allowed only once every two years and in accordance with the Parametric Formula
attached hereto as Annex F. Provided that adjustments shall be made effective only after the written
express approval of the MIAA. Provided, further, that such approval of the MIAA, shall be contingent
only on the conformity of the adjustments with the above said parametric formula. The first adjustment
shall be made prior to the In-Service Date of the Terminal.
The MIAA reserves the right to regulate under the foregoing terms and conditions the lobby and
vehicular parking fees and other new fees and charges as contemplated in paragraph 2 of
Section 6.01 if in its judgment the users of the airport shall be deprived of a free option for the
services they cover.[39]
On the other hand, the equivalent provision under the 1997 Concession Agreement reads:
Section 6.03 Periodic Adjustment in Fees and Charges.

30
.
(c) Concessionaire shall at all times be judicious in fixing fees and charges constituting Non-Public
Utility Revenues in order to ensure that End Users are not unreasonably deprived of services. While the
vehicular parking fee, porterage fee and greeter/well wisher fee constitute Non-Public Utility
Revenues of Concessionaire, GRP may intervene and require Concessionaire to explain and
justify the fee it may set from time to time, if in the reasonable opinion of GRP the said fees have
become exorbitant resulting in the unreasonable deprivation of End Users of such services.[40]
Thus, under the 1997 Concession Agreement, with respect to (1) vehicular parking fee, (2)
porterage fee and (3) greeter/well wisher fee, all that MIAA can do is to require PIATCO to explain and
justify the fees set by PIATCO. In the draft Concession Agreement, vehicular parking fee is subject to
MIAA regulation and approval under the second paragraph of Section 6.03 thereof while porterage fee is
covered by the first paragraph of the same provision. There is an obvious relaxation of the extent of
control and regulation by MIAA with respect to the particular fees that may be charged by PIATCO.
Moreover, with respect to the third category of fees that may be imposed and collected by
PIATCO, i.e., new fees and charges that may be imposed by PIATCO which have not been previously
imposed or collected at the Ninoy Aquino International Airport Passenger Terminal I, under Section 6.03
of the draft Concession Agreement MIAA has reserved the right to regulate the same under the same
conditions that MIAA may regulate fees under the first category, i.e., periodic adjustment of once every
two years in accordance with a prescribed parametric formula and effective only upon written approval
by MIAA. However, under the 1997 Concession Agreement, adjustment of fees under the third
category is not subject to MIAA regulation.
With respect to terminal fees that may be charged by PIATCO,[41] as shown earlier, this was
included within the category of Public Utility Revenues under the 1997 Concession Agreement. This
classification is significant because under the 1997 Concession Agreement, Public Utility Revenues are
subject to an Interim Adjustment of fees upon the occurrence of certain extraordinary events specified in
the agreement.[42]However, under the draft Concession Agreement, terminal fees are not included in
the types of fees that may be subject to Interim Adjustment.[43]
Finally, under the 1997 Concession Agreement, Public Utility Revenues, except terminal fees,
are denominated in US Dollars[44] while payments to the Government are in Philippine Pesos. In
the draft Concession Agreement, no such stipulation was included. By stipulating that Public Utility
Revenues will be paid to PIATCO in US Dollars while payments by PIATCO to the Government are in
Philippine currency under the 1997 Concession Agreement, PIATCO is able to enjoy the benefits of
depreciations of the Philippine Peso, while being effectively insulated from the detrimental effects of
exchange rate fluctuations.
When taken as a whole, the changes under the 1997 Concession Agreement with respect to
reduction in the types of fees that are subject to MIAA regulation and the relaxation of such regulation
with respect to other fees are significant amendments that substantially distinguish the draft Concession
Agreement from the 1997 Concession Agreement. The 1997 Concession Agreement, in this respect,
clearly gives PIATCO more favorable terms than what was available to other bidders at the time
the contract was bidded out. It is not very difficult to see that the changes in the 1997 Concession
Agreement translate to direct and concrete financial advantages for PIATCO which were not
available at the time the contract was offered for bidding. It cannot be denied that under the 1997
Concession Agreement only Public Utility Revenues are subject to MIAA regulation. Adjustments
of all other fees imposed and collected by PIATCO are entirely within its control. Moreover, with
respect to terminal fees, under the 1997 Concession Agreement, the same is further subject to Interim
Adjustments not previously stipulated in the draft Concession Agreement. Finally, the change in the
currency stipulated for Public Utility Revenues under the 1997 Concession Agreement, except terminal
fees, gives PIATCO an added benefit which was not available at the time of bidding.
b. Assumption by the
Government of the liabilities of
PIATCO in the event of the latters
default thereof
Under the draft Concession Agreement, default by PIATCO of any of its obligations to creditors
who have provided, loaned or advanced funds for the NAIA IPT III project does not result in the
assumption by the Government of these liabilities. In fact, nowhere in the said contract does default of

PIATCOs loans figure in the agreement. Such default does not directly result in any concomitant right or
obligation in favor of the Government.
However, the 1997 Concession Agreement provides:
Section 4.04 Assignment.
.
(b) In the event Concessionaire should default in the payment of an Attendant Liability, and the default
has resulted in the acceleration of the payment due date of the Attendant Liability prior to its stated date
of maturity, the Unpaid Creditors and Concessionaire shall immediately inform GRP in writing of such
default. GRP shall, within one hundred eighty (180) Days from receipt of the joint written notice of the
Unpaid Creditors and Concessionaire, either (i) take over the Development Facility and assume the
Attendant Liabilities, or (ii) allow the Unpaid Creditors, if qualified, to be substituted as concessionaire
and operator of the Development Facility in accordance with the terms and conditions hereof, or
designate a qualified operator acceptable to GRP to operate the Development Facility, likewise under
the terms and conditions of this Agreement; Provided that if at the end of the 180-day period GRP shall
not have served the Unpaid Creditors and Concessionaire written notice of its choice, GRP shall be
deemed to have elected to take over the Development Facility with the concomitant assumption of
Attendant Liabilities.
(c) If GRP should, by written notice, allow the Unpaid Creditors to be substituted as concessionaire, the
latter shall form and organize a concession company qualified to take over the operation of the
Development Facility. If the concession company should elect to designate an operator for the
Development Facility, the concession company shall in good faith identify and designate a qualified
operator acceptable to GRP within one hundred eighty (180) days from receipt of GRPs written notice. If
the concession company, acting in good faith and with due diligence, is unable to designate a qualified
operator within the aforesaid period, then GRP shall at the end of the 180-day period take over the
Development Facility and assume Attendant Liabilities.
The term Attendant Liabilities under the 1997 Concession Agreement is defined as:
Attendant Liabilities refer to all amounts recorded and from time to time outstanding in the books of the
Concessionaire as owing to Unpaid Creditors who have provided, loaned or advanced funds
actually used for the Project, including all interests, penalties, associated fees, charges, surcharges,
indemnities, reimbursements and other related expenses, and further including amounts owed by
Concessionaire to its suppliers, contractors and sub-contractors.
Under the above quoted portions of Section 4.04 in relation to the definition of Attendant
Liabilities, default by PIATCO of its loans used to finance the NAIA IPT III project triggers the
occurrence of certain events that leads to the assumption by the Government of the liability for
the loans. Only in one instance may the Government escape the assumption of PIATCOs liabilities, i.e.,
when the Government so elects and allows a qualified operator to take over as
Concessionaire. However, this circumstance is dependent on the existence and availability of a
qualified operator who is willing to take over the rights and obligations of PIATCO under the
contract, a circumstance that is not entirely within the control of the Government.
Without going into the validity of this provision at this juncture, suffice it to state that Section 4.04
of the 1997 Concession Agreement may be considered a form of security for the loans PIATCO has
obtained to finance the project, an option that was not made available in the draft Concession
Agreement. Section 4.04 is an important amendment to the 1997 Concession Agreement because it
grants PIATCO a financial advantage or benefit which was not previously made available during
the bidding process. This financial advantage is a significant modification that translates to better
terms and conditions for PIATCO.
PIATCO, however, argues that the parties to the bidding procedure acknowledge that the draft
Concession Agreement is subject to amendment because the Bid Documents permit financing or
borrowing. They claim that it was the lenders who proposed the amendments to the draft Concession
Agreement which resulted in the 1997 Concession Agreement.
We agree that it is not inconsistent with the rationale and purpose of the BOT Law to allow the
project proponent or the winning bidder to obtain financing for the project, especially in this case which
involves the construction, operation and maintenance of the NAIA IPT III. Expectedly, compliance by the
project proponent of its undertakings therein would involve a substantial amount of investment. It is
therefore inevitable for the awardee of the contract to seek alternate sources of funds to support the

31
project. Be that as it may, this Court maintains that amendments to the contract bidded upon should
always conform to the general policy on public bidding if such procedure is to be faithful to its real nature
and purpose. By its very nature and characteristic, competitive public bidding aims to protect the public
interest by giving the public the best possible advantages through open competition. [45] It has been held
that the three principles in public bidding are (1) the offer to the public; (2) opportunity for competition;
and (3) a basis for the exact comparison of bids. A regulation of the matter which excludes any of these
factors destroys the distinctive character of the system and thwarts the purpose of its adoption. [46] These
are the basic parameters which every awardee of a contract bidded out must conform to, requirements
of financing and borrowing notwithstanding. Thus, upon a concrete showing that, as in this case, the
contract signed by the government and the contract-awardee is an entirely different contract from the
contract bidded, courts should not hesitate to strike down said contract in its entirety for violation of
public policy on public bidding. A strict adherence on the principles, rules and regulations on public
bidding must be sustained if only to preserve the integrity and the faith of the general public on the
procedure.
Public bidding is a standard practice for procuring government contracts for public service and for
furnishing supplies and other materials. It aims to secure for the government the lowest possible price
under the most favorable terms and conditions, to curtail favoritism in the award of government
contracts and avoid suspicion of anomalies and it places all bidders in equal footing. [47] Any
government action which permits any substantial variance between the conditions under which
the bids are invited and the contract executed after the award thereof is a grave abuse of
discretion amounting to lack or excess of jurisdiction which warrants proper judicial action.
In view of the above discussion, the fact that the foregoing substantial amendments were made
on the 1997 Concession Agreementrenders the same null and void for being contrary to public
policy. These amendments convert the 1997 Concession Agreement to anentirely different
agreement from the contract bidded out or the draft Concession Agreement. It is not difficult to see that
the amendments on (1) the types of fees or charges that are subject to MIAA regulation or control and
the extent thereof and (2) the assumption by the Government, under certain conditions, of the liabilities
of PIATCO directly translates concrete financial advantages to PIATCO that were previously not
available during the bidding process. These amendments cannot be taken as merely supplements to
or implementing provisions of those already existing in the draft Concession Agreement. The
amendments discussed above present new terms and conditions which provide financial benefit to
PIATCO which may have altered the technical and financial parameters of other bidders had they known
that such terms were available.
III. Direct Government Guarantee
Article IV, Section 4.04(b) and (c), in relation to Article 1.06, of the 1997 Concession Agreement
provides:
Section 4.04 Assignment
.
(b) In the event Concessionaire should default in the payment of an Attendant Liability, and the
default resulted in the acceleration of the payment due date of the Attendant Liability prior to its stated
date of maturity, the Unpaid Creditors and Concessionaire shall immediately inform GRP in writing of
such default. GRP shall within one hundred eighty (180) days from receipt of the joint written notice of
the Unpaid Creditors and Concessionaire, either (i) take over the Development Facility and assume the
Attendant Liabilities, or (ii) allow the Unpaid Creditors, if qualified to be substituted as concessionaire
and operator of the Development facility in accordance with the terms and conditions hereof, or
designate a qualified operator acceptable to GRP to operate the Development Facility, likewise under
the terms and conditions of this Agreement; Provided, that if at the end of the 180-day period GRP shall
not have served the Unpaid Creditors and Concessionaire written notice of its choice, GRP shall be
deemed to have elected to take over the Development Facility with the concomitant assumption
of Attendant Liabilities.
(c) If GRP, by written notice, allow the Unpaid Creditors to be substituted as concessionaire, the latter
shall form and organize a concession company qualified to takeover the operation of the Development
Facility. If the concession company should elect to designate an operator for the Development Facility,
the concession company shall in good faith identify and designate a qualified operator acceptable to

GRP within one hundred eighty (180) days from receipt of GRPs written notice.If the concession
company, acting in good faith and with due diligence, is unable to designate a qualified operator within
the aforesaid period, then GRP shall at the end of the 180-day period take over the Development
Facility and assume Attendant Liabilities.
.
Section 1.06. Attendant Liabilities
Attendant Liabilities refer to all amounts recorded and from time to time outstanding in the books
of the Concessionaire as owing to Unpaid Creditorswho have provided, loaned or advanced funds
actually used for the Project, including all interests, penalties, associated fees, charges,
surcharges, indemnities, reimbursements and other related expenses, and further including
amounts owed by Concessionaire to its suppliers, contractors and sub-contractors.[48]
It is clear from the above-quoted provisions that Government, in the event that PIATCO
defaults in its loan obligations, is obligated to pay all amounts recorded and from time to time
outstanding from the books of PIATCO which the latter owes to its creditors.[49] These amounts include
all interests, penalties, associated fees, charges, surcharges, indemnities, reimbursements and other
related expenses.[50] This obligation of the Government to pay PIATCOs creditors upon PIATCOs default
would arise if the Government opts to take over NAIA IPT III. It should be noted, however, that even if
the Government chooses the second option, which is to allow PIATCOs unpaid creditors operate NAIA
IPT III, the Government is still at a risk of being liable to PIATCOs creditors should the latter be unable
to designate a qualified operator within the prescribed period. [51] In effect, whatever option the
Government chooses to take in the event of PIATCOs failure to fulfill its loan obligations, the
Government is still at a risk of assuming PIATCOs outstanding loans. This is due to the fact that
the Government would only be free from assuming PIATCOs debts if the unpaid creditors would be able
to designate a qualified operator within the period provided for in the contract. Thus, the Governments
assumption of liability is virtually out of its control. The Government under the circumstances
provided for in the 1997 Concession Agreement is at the mercy of the existence, availability and
willingness of a qualified operator. The above contractual provisions constitute a direct government
guarantee which is prohibited by law.
One of the main impetus for the enactment of the BOT Law is the lack of government funds to
construct the infrastructure and development projects necessary for economic growth and
development. This is why private sector resources are being tapped in order to finance these
projects. The BOT law allows the private sector to participate, and is in fact encouraged to do so by way
of incentives, such as minimizing the unstable flow of returns,[52] provided that the government would not
have to unnecessarily expend scarcely available funds for the project itself. As such, direct guarantee,
subsidy and equity by the government in these projects are strictly prohibited.[53] This is but logical for
if the government would in the end still be at a risk of paying the debts incurred by the private
entity in the BOT projects, then the purpose of the law is subverted.
Section 2(n) of the BOT Law defines direct guarantee as follows:
(n) Direct government guarantee An agreement whereby the government or any of its agencies or local
government units assume responsibility for the repayment of debt directly incurred by the project
proponent in implementing the project in case of a loan default.
Clearly by providing that the Government assumes the attendant liabilities, which consists of
PIATCOs unpaid debts, the 1997 Concession Agreement provided for a direct government guarantee
for the debts incurred by PIATCO in the implementation of the NAIA IPT III project. It is of no moment
that the relevant sections are subsumed under the title of assignment. The provisions providing for
direct government guarantee which is prohibited by law is clear from the terms thereof.
The fact that the ARCA superseded the 1997 Concession Agreement did not cure this fatal
defect. Article IV, Section 4.04(c), in relation to Article I, Section 1.06, of the ARCA provides:
Section 4.04 Security
(c) GRP agrees with Concessionaire (PIATCO) that it shall negotiate in good faith and enter into
direct agreement with the Senior Lenders, or with an agent of such Senior Lenders (which
agreement shall be subject to the approval of the Bangko Sentral ng Pilipinas), in such form as may be
reasonably acceptable to both GRP and Senior Lenders, with regard, inter alia, to the following
parameters:
.

32
(iv) If the Concessionaire [PIATCO] is in default under a payment obligation owed to the Senior
Lenders, and as a result thereof the Senior Lenders have become entitled to accelerate the Senior
Loans, the Senior Lenders shall have the right to notify GRP of the same, and without prejudice to any
other rights of the Senior Lenders or any Senior Lenders agent may have (including without limitation
under security interests granted in favor of the Senior Lenders), to either in good faith identify and
designate a nominee which is qualified under sub-clause (viii)(y) below to operate the Development
Facility [NAIA Terminal 3] or transfer the Concessionaires [PIATCO] rights and obligations under this
Agreement to a transferee which is qualified under sub-clause (viii) below;
(vi) if the Senior Lenders, acting in good faith and using reasonable efforts, are unable to designate a
nominee or effect a transfer in terms and conditions satisfactory to the Senior Lenders within one
hundred eighty (180) days after giving GRP notice as referred to respectively in (iv) or (v) above, then
GRP and the Senior Lenders shall endeavor in good faith to enter into any other arrangement relating to
the Development Facility [NAIA Terminal 3] (other than a turnover of the Development Facility [NAIA
Terminal 3] to GRP) within the following one hundred eighty (180) days. If no agreement relating to the
Development Facility [NAIA Terminal 3] is arrived at by GRP and the Senior Lenders within the said 180day period, then at the end thereof the Development Facility [NAIA Terminal 3] shall be transferred
by the Concessionaire [PIATCO] to GRP or its designee and GRP shall make a termination
payment to Concessionaire [PIATCO] equal to the Appraised Value (as hereinafter defined) of the
Development Facility [NAIA Terminal 3] or the sum of the Attendant Liabilities, if greater.
Notwithstanding Section 8.01(c) hereof, this Agreement shall be deemed terminated upon the transfer of
the Development Facility [NAIA Terminal 3] to GRP pursuant hereto;
.
Section 1.06. Attendant Liabilities
Attendant Liabilities refer to all amounts in each case supported by verifiable evidence from time to
time owed or which may become owing by Concessionaire [PIATCO] to Senior Lenders or any
other persons or entities who have provided, loaned, or advanced funds or provided financial
facilities to Concessionaire [PIATCO] for the Project [NAIA Terminal 3], including, without
limitation, all principal, interest, associated fees, charges, reimbursements, and other related
expenses (including the fees, charges and expenses of any agents or trustees of such persons or
entities), whether payable at maturity, by acceleration or otherwise, and further including amounts owed
by Concessionaire [PIATCO] to its professional consultants and advisers, suppliers, contractors and
sub-contractors.[54]
It is clear from the foregoing contractual provisions that in the event that PIATCO fails to fulfill its
loan obligations to its Senior Lenders, the Government is obligated to directly negotiate and enter into
an agreement relating to NAIA IPT III with the Senior Lenders, should the latter fail to appoint a qualified
nominee or transferee who will take the place of PIATCO. If the Senior Lenders and the Government are
unable to enter into an agreement after the prescribed period, the Government must then pay PIATCO,
upon transfer of NAIA IPT III to the Government, termination payment equal to the appraised value of
the project or the value of the attendant liabilities whichever is greater. Attendant liabilities as
defined in the ARCA includes all amounts owed or thereafter may be owed by PIATCO not only to the
Senior Lenders with whom PIATCO has defaulted in its loan obligations but to all other persons who
may have loaned, advanced funds or provided any other type of financial facilities to PIATCO for NAIA
IPT III. The amount of PIATCOs debt that the Government would have to pay as a result of PIATCOs
default in its loan obligations -- in case no qualified nominee or transferee is appointed by the Senior
Lenders and no other agreement relating to NAIA IPT III has been reached between the Government
and the Senior Lenders -- includes, but is not limited to, all principal, interest, associated fees, charges,
reimbursements, and other related expenses . . . whether payable at maturity, by acceleration or
otherwise.[55] It is clear from the foregoing that the ARCA provides for a direct guarantee by the
government to pay PIATCOs loans not only to its Senior Lenders but all other entities who
provided PIATCO funds or services upon PIATCOs default in its loan obligation with its Senior
Lenders. The fact that the Governments obligation to pay PIATCOs lenders for the latters obligation
would only arise after the Senior Lenders fail to appoint a qualified nominee or transferee does not
detract from the fact that, should the conditions as stated in the contract occur, the ARCA still obligates

the Government to pay any and all amounts owed by PIATCO to its lenders in connection with NAIA IPT
III. Worse, the conditions that would make the Government liable for PIATCOs debts is triggered by
PIATCOs own default of its loan obligations to its Senior Lenders to which loan contracts the
Government was never a party to. The Government was not even given an option as to what course of
action it should take in case PIATCO defaulted in the payment of its senior loans. The Government,
upon PIATCOs default, would be merely notified by the Senior Lenders of the same and it is the Senior
Lenders who are authorized to appoint a qualified nominee or transferee. Should the Senior Lenders fail
to make such an appointment, the Government is then automatically obligated to directly deal and
negotiate with the Senior Lenders regarding NAIA IPT III. The only way the Government would not be
liable for PIATCOs debt is for a qualified nominee or transferee to be appointed in place of PIATCO to
continue the construction, operation and maintenance of NAIA IPT III. This pre-condition, however, will
not take the contract out of the ambit of a direct guarantee by the government as the existence,
availability and willingness of a qualified nominee or transferee is totally out of the governments
control. As such the Government is virtually at the mercy of PIATCO (that it would not default on its
loan obligations to its Senior Lenders), the Senior Lenders (that they would appoint a qualified nominee
or transferee or agree to some other arrangement with the Government) and the existence of a qualified
nominee or transferee who is able and willing to take the place of PIATCO in NAIA IPT III.
The proscription against government guarantee in any form is one of the policy
considerations behind the BOT Law. Clearly, in the present case, the ARCA obligates the
Government to pay for all loans, advances and obligations arising out of financial facilities extended to
PIATCO for the implementation of the NAIA IPT III project should PIATCO default in its loan obligations
to its Senior Lenders and the latter fails to appoint a qualified nominee or transferee. This in effect would
make the Government liable for PIATCOs loans should the conditions as set forth in the ARCA
arise. This is a form of direct government guarantee.
The BOT Law and its implementing rules provide that in order for an unsolicited proposal for a
BOT project may be accepted, the following conditions must first be met: (1) the project involves a new
concept in technology and/or is not part of the list of priority projects, (2) no direct government
guarantee, subsidy or equity is required, and (3) the government agency or local government unit
has invited by publication other interested parties to a public bidding and conducted the same.[56] The
failure to meet any of the above conditions will result in the denial of the proposal. It is further provided
that the presence of direct government guarantee, subsidy or equity will necessarily disqualify a
proposal from being treated and accepted as an unsolicited proposal.[57] The BOT Law clearly and
strictly prohibits direct government guarantee, subsidy and equity in unsolicited proposals that the mere
inclusion of a provision to that effect is fatal and is sufficient to deny the proposal. It stands to reason
therefore that if a proposal can be denied by reason of the existence of direct government guarantee,
then its inclusion in the contract executed after the said proposal has been accepted is likewise
sufficient to invalidate the contract itself. A prohibited provision, the inclusion of which would result in the
denial of a proposal cannot, and should not, be allowed to later on be inserted in the contract resulting
from the said proposal.The basic rules of justice and fair play alone militate against such an occurrence
and must not, therefore, be countenanced particularly in this instance where the government is exposed
to the risk of shouldering hundreds of million of dollars in debt.
This Court has long and consistently adhered to the legal maxim that those that cannot be done
directly cannot be done indirectly.[58] To declare the PIATCO contracts valid despite the clear
statutory prohibition against a direct government guarantee would not only make a mockery of
what the BOT Law seeks to prevent -- which is to expose the government to the risk of incurring
a monetary obligation resulting from a contract of loan between the project proponent and its
lenders and to which the Government is not a party to -- but would also render the BOT Law
useless for what it seeks to achieve - to make use of the resources of the private sector in the
financing, operation and maintenance of infrastructure and development projects [59] which are
necessary for national growth and development but which the government, unfortunately, could
ill-afford to finance at this point in time.
IV Temporary takeover of business affected with public interest
Article XII, Section 17 of the 1987 Constitution provides:

33
Section 17. In times of national emergency, when the public interest so requires, the State may, during
the emergency and under reasonable terms prescribed by it, temporarily take over or direct the
operation of any privately owned public utility or business affected with public interest.
The above provision pertains to the right of the State in times of national emergency, and in the
exercise of its police power, to temporarily take over the operation of any business affected with public
interest. In the 1986 Constitutional Commission, the term national emergency was defined to include
threat from external aggression, calamities or national disasters, but not strikes unless it is of such
proportion that would paralyze government service.[60] The duration of the emergency itself is the
determining factor as to how long the temporary takeover by the government would last. [61] The
temporary takeover by the government extends only to the operation of the business and not to the
ownership thereof. As such the government is not required to compensate the private entity-owner
of the said business as there is no transfer of ownership, whether permanent or temporary. The
private entity-owner affected by the temporary takeover cannot, likewise, claim just compensation for
the use of the said business and its properties as the temporary takeover by the government is in
exercise of its police power and not of its power of eminent domain.
Article V, Section 5.10 (c) of the 1997 Concession Agreement provides:
Section 5.10 Temporary Take-over of operations by GRP.
.
(c) In the event the development Facility or any part thereof and/or the operations of Concessionaire or
any part thereof, become the subject matter of or be included in any notice, notification, or declaration
concerning or relating to acquisition, seizure or appropriation by GRP in times of war or national
emergency, GRP shall, by written notice to Concessionaire, immediately take over the operations of the
Terminal and/or the Terminal Complex. During such take over by GRP, the Concession Period shall be
suspended; provided, that upon termination of war, hostilities or national emergency, the operations
shall be returned to Concessionaire, at which time, the Concession period shall commence to run
again. Concessionaire shall be entitled to reasonable compensation for the duration of the
temporary take over by GRP, which compensation shall take into account the reasonable cost for
the use of the Terminal and/or Terminal Complex, (which is in the amount at least equal to the
debt service requirements of Concessionaire, if the temporary take over should occur at the time
when Concessionaire is still servicing debts owed to project lenders), any loss or damage to the
Development Facility, and other consequential damages. If the parties cannot agree on the reasonable
compensation of Concessionaire, or on the liability of GRP as aforesaid, the matter shall be resolved in
accordance with Section 10.01 [Arbitration]. Any amount determined to be payable by GRP to
Concessionaire shall be offset from the amount next payable by Concessionaire to GRP.[62]
PIATCO cannot, by mere contractual stipulation, contravene the Constitutional provision
on temporary government takeover and obligate the government to pay reasonable cost for the
use of the Terminal and/or Terminal Complex.[63] Article XII, section 17 of the 1987 Constitution
envisions a situation wherein the exigencies of the times necessitate the government to temporarily take
over or direct the operation of any privately owned public utility or business affected with public
interest. It is the welfare and interest of the public which is the paramount consideration in determining
whether or not to temporarily take over a particular business. Clearly, the State in effecting the
temporary takeover is exercising its police power. Police power is the most essential, insistent, and
illimitable of powers.[64] Its exercise therefore must not be unreasonably hampered nor its exercise be a
source of obligation by the government in the absence of damage due to arbitrariness of its exercise.
[65]
Thus, requiring the government to pay reasonable compensation for the reasonable use of the
property pursuant to the operation of the business contravenes the Constitution.
V Regulation of Monopolies
A monopoly is a privilege or peculiar advantage vested in one or more persons or companies,
consisting in the exclusive right (or power) to carry on a particular business or trade, manufacture a
particular article, or control the sale of a particular commodity.[66] The 1987 Constitution strictly
regulates monopolies, whether private or public, and even provides for their prohibition if public
interest so requires. Article XII, Section 19 of the 1987 Constitution states:

Sec. 19. The state shall regulate or prohibit monopolies when the public interest so requires. No
combinations in restraint of trade or unfair competition shall be allowed.
Clearly, monopolies are not per se prohibited by the Constitution but may be permitted to exist to
aid the government in carrying on an enterprise or to aid in the performance of various services and
functions in the interest of the public.[67] Nonetheless, a determination must first be made as to
whether public interest requires a monopoly. As monopolies are subject to abuses that can inflict severe
prejudice to the public, they are subject to a higher level of State regulation than an ordinary business
undertaking.
In the cases at bar, PIATCO, under the 1997 Concession Agreement and the ARCA, is granted
the exclusive right to operate a commercial international passenger terminal within the Island of Luzon
at the NAIA IPT III.[68] This is with the exception of already existing international airports in Luzon such
as those located in the Subic Bay Freeport Special Economic Zone (SBFSEZ), Clark Special Economic
Zone (CSEZ) and in Laoag City.[69] As such, upon commencement of PIATCOs operation of NAIA IPT III,
Terminals 1 and 2 of NAIA would cease to function as international passenger terminals. This, however,
does not prevent MIAA to use Terminals 1 and 2 as domestic passenger terminals or in any other
manner as it may deem appropriate except those activities that would compete with NAIA IPT III in the
latters operation as an international passenger terminal.[70] The right granted to PIATCO to exclusively
operate NAIA IPT III would be for a period of twenty-five (25) years from the In-Service Date[71] and
renewable for another twenty-five (25) years at the option of the government.[72] Both the 1997
Concession Agreement and the ARCA further provide that, in view of the exclusive right granted
to PIATCO, the concession contracts of the service providers currently servicing Terminals 1
and 2 would no longer be renewed and those concession contracts whose expiration are
subsequent to the In-Service Date would cease to be effective on the said date.[73]
The operation of an international passenger airport terminal is no doubt an undertaking imbued
with public interest. In entering into a BuildOperate-and-Transfer contract for the construction, operation
and maintenance of NAIA IPT III, the government has determined that public interest would be served
better if private sector resources were used in its construction and an exclusive right to operate be
granted to the private entity undertaking the said project, in this case PIATCO. Nonetheless, the
privilege given to PIATCO is subject to reasonable regulation and supervision by the Government
through the MIAA, which is the government agency authorized to operate the NAIA complex, as well as
DOTC, the department to which MIAA is attached.[74]
This is in accord with the Constitutional mandate that a monopoly which is not prohibited must be
regulated.[75] While it is the declared policy of the BOT Law to encourage private sector participation by
providing a climate of minimum government regulations,[76] the same does not mean that Government
must completely surrender its sovereign power to protect public interest in the operation of a public
utility as a monopoly. The operation of said public utility can not be done in an arbitrary manner to the
detriment of the public which it seeks to serve. The right granted to the public utility may be exclusive
but the exercise of the right cannot run riot. Thus, while PIATCO may be authorized to exclusively
operate NAIA IPT III as an international passenger terminal, the Government, through the MIAA, has the
right and the duty to ensure that it is done in accord with public interest. PIATCOs right to operate NAIA
IPT III cannot also violate the rights of third parties.
Section 3.01(e) of the 1997 Concession Agreement and the ARCA provide:
3.01 Concession Period
.
(e) GRP confirms that certain concession agreements relative to certain services and operations
currently being undertaken at the Ninoy Aquino International Airport passenger Terminal I have a
validity period extending beyond the In-Service Date. GRP through DOTC/MIAA, confirms that
these services and operations shall not be carried over to the Terminal and the Concessionaire is
under no legal obligation to permit such carry-over except through a separate agreement duly
entered into with Concessionaire. In the event Concessionaire becomes involved in any litigation
initiated by any such concessionaire or operator, GRP undertakes and hereby holds Concessionaire
free and harmless on full indemnity basis from and against any loss and/or any liability resulting from
any such litigation, including the cost of litigation and the reasonable fees paid or payable to

34
Concessionaires counsel of choice, all such amounts shall be fully deductible by way of an offset from
any amount which the Concessionaire is bound to pay GRP under this Agreement.
During the oral arguments on December 10, 2002, the counsel for the petitioners-in-intervention
for G.R. No. 155001 stated that there are two service providers whose contracts are still existing and
whose validity extends beyond the In-Service Date. One contract remains valid until 2008 and the other
until 2010.[77]
We hold that while the service providers presently operating at NAIA Terminal 1 do not have an
absolute right for the renewal or the extension of their respective contracts, those contracts whose
duration extends beyond NAIA IPT IIIs In-Service-Date should not be unduly prejudiced. These
contracts must be respected not just by the parties thereto but also by third parties. PIATCO cannot, by
law and certainly not by contract, render a valid and binding contract nugatory. PIATCO, by the mere
expedient of claiming an exclusive right to operate, cannot require the Government to break its
contractual obligations to the service providers. In contrast to the arrastre and stevedoring service
providers in the case of Anglo-Fil Trading Corporation v. Lazaro[78] whose contracts consist of
temporary hold-over permits, the affected service providers in the cases at bar, have a valid and binding
contract with the Government, through MIAA, whose period of effectivity, as well as the other terms and
conditions thereof, cannot be violated.
In fine, the efficient functioning of NAIA IPT III is imbued with public interest. The provisions of the
1997 Concession Agreement and the ARCA did not strip government, thru the MIAA, of its right to
supervise the operation of the whole NAIA complex, including NAIA IPT III. As the primary government
agency tasked with the job,[79] it is MIAAs responsibility to ensure that whoever by contract is given the
right to operate NAIA IPT III will do so within the bounds of the law and with due regard to the rights
of third parties and above all, the interest of the public.
CONCLUSION
In sum, this Court rules that in view of the absence of the requisite financial capacity of the Paircargo
Consortium, predecessor of respondent PIATCO, the award by the PBAC of the contract for the
construction, operation and maintenance of the NAIA IPT III is null and void. Further, considering that
the 1997 Concession Agreement contains material and substantial amendments, which amendments
had the effect of converting the 1997 Concession Agreement into an entirely different agreement from
the contract bidded upon, the 1997 Concession Agreement is similarly null and void for being contrary to
public policy. The provisions under Sections 4.04(b) and (c) in relation to Section 1.06 of the 1997
Concession Agreement and Section 4.04(c) in relation to Section 1.06 of the ARCA, which constitute a
direct government guarantee expressly prohibited by, among others, the BOT Law and its Implementing
Rules and Regulations are also null and void. The Supplements, being accessory contracts to the
ARCA, are likewise null and void.
WHEREFORE, the 1997 Concession Agreement, the Amended and Restated Concession
Agreement and the Supplements thereto are set aside for being null and void. SO ORDERED.

[G.R. No. 146364. June 3, 2004]

COLITO T. PAJUYO, petitioner, vs. COURT OF APPEALS and EDDIE GUEVARRA, respondents.
The Case
Before us is a petition for review[1] of the 21 June 2000 Decision[2] and 14 December 2000 Resolution of
the Court of Appeals in CA-G.R. SP No. 43129. The Court of Appeals set aside the 11 November 1996
decision[3] of the Regional Trial Court of Quezon City, Branch 81,[4]affirming the 15 December 1995
decision[5] of the Metropolitan Trial Court of Quezon City, Branch 31.[6]
The Antecedents

In June 1979, petitioner Colito T. Pajuyo (Pajuyo) paid P400 to a certain Pedro Perez for the rights over
a 250-square meter lot in Barrio Payatas, Quezon City. Pajuyo then constructed a house made of light
materials on the lot. Pajuyo and his family lived in the house from 1979 to 7 December 1985.
On 8 December 1985, Pajuyo and private respondent Eddie Guevarra (Guevarra) executed
a Kasunduan or agreement. Pajuyo, as owner of the house, allowed Guevarra to live in the house for
free provided Guevarra would maintain the cleanliness and orderliness of the house. Guevarra
promised that he would voluntarily vacate the premises on Pajuyos demand.
In September 1994, Pajuyo informed Guevarra of his need of the house and demanded that Guevarra
vacate the house. Guevarra refused.
Pajuyo filed an ejectment case against Guevarra with the Metropolitan Trial Court of Quezon City,
Branch 31 (MTC). In his Answer, Guevarra claimed that Pajuyo had no valid title or right of possession
over the lot where the house stands because the lot is within the 150 hectares set aside by
Proclamation No. 137 for socialized housing. Guevarra pointed out that from December 1985 to
September 1994, Pajuyo did not show up or communicate with him. Guevarra insisted that neither he
nor Pajuyo has valid title to the lot. On 15 December 1995, the MTC rendered its decision in favor of
Pajuyo. The dispositive portion of the MTC decision reads:
WHEREFORE, premises considered, judgment is hereby rendered for the plaintiff and against
defendant, ordering the latter to:
a)
b)

c)
d)

vacate the house and lot occupied by the defendant or any other person or
persons claiming any right under him;
pay unto plaintiff the sum of THREE HUNDRED PESOS (P300.00) monthly as
reasonable compensation for the use of the premises starting from the last
demand;
pay plaintiff the sum of P3,000.00 as and by way of attorneys fees; and
pay the cost of suit.

SO ORDERED.
Aggrieved, Guevarra appealed to the Regional Trial Court of Quezon City, Branch 81 (RTC).
On 11 November 1996, the RTC affirmed the MTC decision. The dispositive portion of the RTC decision
reads: WHEREFORE, premises considered, the Court finds no reversible error in the decision appealed
from, being in accord with the law and evidence presented, and the same is hereby affirmed en toto.
SO ORDERED.[8]
Guevarra received the RTC decision on 29 November 1996. Guevarra had only until 14
December 1996 to file his appeal with the Court of Appeals. Instead of filing his appeal with the Court of
Appeals, Guevarra filed with the Supreme Court a Motion for Extension of Time to File Appeal by
Certiorari Based on Rule 42 (motion for extension). Guevarra theorized that his appeal raised pure
questions of law. The Receiving Clerk of the Supreme Court received the motion for extension on 13
December 1996 or one day before the right to appeal expired.
On 3 January 1997, Guevarra filed his petition for review with the Supreme Court.
On 8 January 1997, the First Division of the Supreme Court issued a Resolution[9] referring the
motion for extension to the Court of Appeals which has concurrent jurisdiction over the case. The case
presented no special and important matter for the Supreme Court to take cognizance of at the first
instance.
On 28 January 1997, the Thirteenth Division of the Court of Appeals issued a
Resolution[10] granting the motion for extension conditioned on the timeliness of the filing of the motion.
On 27 February 1997, the Court of Appeals ordered Pajuyo to comment on Guevaras petition for
review. On 11 April 1997, Pajuyo filed his Comment.
On 21 June 2000, the Court of Appeals issued its decision reversing the RTC decision. The
dispositive portion of the decision reads:
WHEREFORE, premises considered, the assailed Decision of the court a quo in Civil Case No. Q-9626943 is REVERSED and SET ASIDE; and it is hereby declared that the ejectment case filed against
defendant-appellant is without factual and legal basis.
SO ORDERED.[11]

35
Pajuyo filed a motion for reconsideration of the decision. Pajuyo pointed out that the Court of
Appeals should have dismissed outright Guevarras petition for review because it was filed out of
time. Moreover, it was Guevarras counsel and not Guevarra who signed the certification against forumshopping.
On 14 December 2000, the Court of Appeals issued a resolution denying Pajuyos motion for
reconsideration. The dispositive portion of the resolution reads:
WHEREFORE, for lack of merit, the motion for reconsideration is hereby DENIED. No costs.
SO ORDERED.[12]
The Ruling of the MTC
The MTC ruled that the subject of the agreement between Pajuyo and Guevarra is the house and
not the lot. Pajuyo is the owner of the house, and he allowed Guevarra to use the house only by
tolerance. Thus, Guevarras refusal to vacate the house on Pajuyos demand made Guevarras continued
possession of the house illegal.
The Ruling of the RTC
The RTC upheld the Kasunduan, which established the landlord and tenant relationship between
Pajuyo and Guevarra. The terms of theKasunduan bound Guevarra to return possession of the house
on demand.
The RTC rejected Guevarras claim of a better right under Proclamation No. 137, the Revised
National Government Center Housing Project Code of Policies and other pertinent laws. In an ejectment
suit, the RTC has no power to decide Guevarras rights under these laws. The RTC declared that in an
ejectment case, the only issue for resolution is material or physical possession, not ownership.
The Ruling of the Court of Appeals
The Court of Appeals declared that Pajuyo and Guevarra are squatters. Pajuyo and Guevarra
illegally occupied the contested lot which the government owned.
Perez, the person from whom Pajuyo acquired his rights, was also a squatter. Perez had no right
or title over the lot because it is public land.The assignment of rights between Perez and Pajuyo, and
the Kasunduan between Pajuyo and Guevarra, did not have any legal effect. Pajuyo and Guevarra are
in pari delicto or in equal fault. The court will leave them where they are.
The Court of Appeals reversed the MTC and RTC rulings, which held that
the Kasunduan between Pajuyo and Guevarra created a legal tie akin to that of a landlord and tenant
relationship. The Court of Appeals ruled that the Kasunduan is not a lease contract but
a commodatumbecause the agreement is not for a price certain.
Since Pajuyo admitted that he resurfaced only in 1994 to claim the property, the appellate court
held that Guevarra has a better right over the property under Proclamation No. 137. President Corazon
C. Aquino (President Aquino) issued Proclamation No. 137 on 7 September 1987. At that time, Guevarra
was in physical possession of the property. Under Article VI of the Code of Policies Beneficiary Selection
and Disposition of Homelots and Structures in the National Housing Project (the Code), the actual
occupant or caretaker of the lot shall have first priority as beneficiary of the project. The Court of
Appeals concluded that Guevarra is first in the hierarchy of priority.
In denying Pajuyos motion for reconsideration, the appellate court debunked Pajuyos claim that
Guevarra filed his motion for extension beyond the period to appeal.
The Court of Appeals pointed out that Guevarras motion for extension filed before the Supreme
Court was stamped 13 December 1996 at 4:09 PM by the Supreme Courts Receiving Clerk. The Court
of Appeals concluded that the motion for extension bore a date, contrary to Pajuyos claim that the
motion for extension was undated. Guevarra filed the motion for extension on time on 13 December
1996 since he filed the motion one day before the expiration of the reglementary period on 14
December 1996. Thus, the motion for extension properly complied with the condition imposed by the
Court of Appeals in its 28 January 1997 Resolution. The Court of Appeals explained that the thirty-day
extension to file the petition for review was deemed granted because of such compliance.
The Court of Appeals rejected Pajuyos argument that the appellate court should have dismissed
the petition for review because it was Guevarras counsel and not Guevarra who signed the certification
against forum-shopping. The Court of Appeals pointed out that Pajuyo did not raise this issue in his
Comment. The Court of Appeals held that Pajuyo could not now seek the dismissal of the case after he
had extensively argued on the merits of the case. This technicality, the appellate court opined, was
clearly an afterthought.
The Issues

Pajuyo raises the following issues for resolution:

WHETHER THE COURT OF APPEALS ERRED OR ABUSED ITS AUTHORITY AND DISCRETION
TANTAMOUNT TO LACK OF JURISDICTION:
1.

2.

3.

4.

5.

in GRANTING, instead of denying, Private Respondents Motion for

an Extension of thirty days to file petition for review at the time when
there was no more period to extend as the decision of the Regional
Trial Court had already become final and executory.
in giving due course, instead of dismissing, private
respondents Petition for Review even though the certification against
forum-shopping was signed only by counsel instead of by petitioner
himself.
in ruling that the Kasunduan voluntarily entered into by the parties
was in fact a commodatum, instead of a Contract of Lease as found
by the Metropolitan Trial Court and in holding that the ejectment case
filed against defendant-appellant is without legal and factual basis.
in reversing and setting aside the Decision of the Regional Trial
Court in Civil Case No. Q-96-26943 and in holding that the parties
are in pari delicto being both squatters, therefore, illegal occupants of
the contested parcel of land.
in deciding the unlawful detainer case based on the so-called Code
of Policies of the National Government Center Housing Project
instead of deciding the same under the Kasunduan voluntarily
executed by the parties, the terms and conditions of which are the
laws between themselves.[13]

The Ruling of the Court

The procedural issues Pajuyo is raising are baseless. However, we find merit in the substantive issues
Pajuyo is submitting for resolution.
Procedural Issues
Pajuyo insists that the Court of Appeals should have dismissed outright Guevarras petition for
review because the RTC decision had already become final and executory when the appellate court
acted on Guevarras motion for extension to file the petition. Pajuyo points out that Guevarra had only
one day before the expiry of his period to appeal the RTC decision. Instead of filing the petition for
review with the Court of Appeals, Guevarra filed with this Court an undated motion for extension of 30
days to file a petition for review. This Court merely referred the motion to the Court of Appeals. Pajuyo
believes that the filing of the motion for extension with this Court did not toll the running of the period to
perfect the appeal. Hence, when the Court of Appeals received the motion, the period to appeal had
already expired.
We are not persuaded.
Decisions of the regional trial courts in the exercise of their appellate jurisdiction are appealable to
the Court of Appeals by petition for review in cases involving questions of fact or mixed questions of fact
and law.[14] Decisions of the regional trial courts involving pure questions of law are appealable directly to
this Court by petition for review.[15] These modes of appeal are now embodied in Section 2, Rule 41 of
the 1997 Rules of Civil Procedure.
Guevarra believed that his appeal of the RTC decision involved only questions of law. Guevarra
thus filed his motion for extension to file petition for review before this Court on 14 December 1996. On
3 January 1997, Guevarra then filed his petition for review with this Court. A perusal of Guevarras
petition for review gives the impression that the issues he raised were pure questions of law. There is a
question of law when the doubt or difference is on what the law is on a certain state of facts.[16] There is
a question of fact when the doubt or difference is on the truth or falsity of the facts alleged.[17]
In his petition for review before this Court, Guevarra no longer disputed the facts. Guevarras
petition for review raised these questions: (1) Do ejectment cases pertain only to possession of a

36
structure, and not the lot on which the structure stands? (2) Does a suit by a squatter against a fellow
squatter constitute a valid case for ejectment? (3) Should a Presidential Proclamation governing the lot
on which a squatters structure stands be considered in an ejectment suit filed by the owner of the
structure?
These questions call for the evaluation of the rights of the parties under the law on ejectment and
the Presidential Proclamation. At first glance, the questions Guevarra raised appeared purely
legal. However, some factual questions still have to be resolved because they have a bearing on the
legal questions raised in the petition for review. These factual matters refer to the metes and bounds of
the disputed property and the application of Guevarra as beneficiary of Proclamation No. 137.
The Court of Appeals has the power to grant an extension of time to file a petition for
review. In Lacsamana v. Second Special Cases Division of the Intermediate Appellate Court,[18] we
declared that the Court of Appeals could grant extension of time in appeals by petition for review.
In Liboro v. Court of Appeals,[19] we clarified that the prohibition against granting an extension of time
applies only in a case where ordinary appeal is perfected by a mere notice of appeal. The prohibition
does not apply in a petition for review where the pleading needs verification. A petition for review, unlike
an ordinary appeal, requires preparation and research to present a persuasive position.[20] The drafting
of the petition for review entails more time and effort than filing a notice of appeal.[21] Hence, the Court of
Appeals may allow an extension of time to file a petition for review.
In the more recent case of Commissioner of Internal Revenue v. Court of Appeals,[22] we held
that Liboros clarification of Lacsamanais consistent with the Revised Internal Rules of the Court of
Appeals and Supreme Court Circular No. 1-91. They all allow an extension of time for filing petitions for
review with the Court of Appeals. The extension, however, should be limited to only fifteen days save in
exceptionally meritorious cases where the Court of Appeals may grant a longer period.
A judgment becomes final and executory by operation of law. Finality of judgment becomes a fact
on the lapse of the reglementary period to appeal if no appeal is perfected.[23] The RTC decision could
not have gained finality because the Court of Appeals granted the 30-day extension to Guevarra.
The Court of Appeals did not commit grave abuse of discretion when it approved Guevarras
motion for extension. The Court of Appeals gave due course to the motion for extension because it
complied with the condition set by the appellate court in its resolution dated 28 January 1997. The
resolution stated that the Court of Appeals would only give due course to the motion for extension if filed
on time. The motion for extension met this condition.
The material dates to consider in determining the timeliness of the filing of the motion for
extension are (1) the date of receipt of the judgment or final order or resolution subject of the petition,
and (2) the date of filing of the motion for extension.[24] It is the date of the filing of the motion or
pleading, and not the date of execution, that determines the timeliness of the filing of that motion or
pleading. Thus, even if the motion for extension bears no date, the date of filing stamped on it is the
reckoning point for determining the timeliness of its filing.
Guevarra had until 14 December 1996 to file an appeal from the RTC decision. Guevarra filed his
motion for extension before this Court on 13 December 1996, the date stamped by this Courts
Receiving Clerk on the motion for extension. Clearly, Guevarra filed the motion for extension exactly one
day before the lapse of the reglementary period to appeal.
Assuming that the Court of Appeals should have dismissed Guevarras appeal on technical
grounds, Pajuyo did not ask the appellate court to deny the motion for extension and dismiss the petition
for review at the earliest opportunity. Instead, Pajuyo vigorously discussed the merits of the case. It was
only when the Court of Appeals ruled in Guevarras favor that Pajuyo raised the procedural issues
against Guevarras petition for review.
A party who, after voluntarily submitting a dispute for resolution, receives an adverse decision on
the merits, is estopped from attacking the jurisdiction of the court. [25] Estoppel sets in not because the
judgment of the court is a valid and conclusive adjudication, but because the practice of attacking the
courts jurisdiction after voluntarily submitting to it is against public policy.[26]
In his Comment before the Court of Appeals, Pajuyo also failed to discuss Guevarras failure to
sign the certification against forum shopping.Instead, Pajuyo harped on Guevarras counsel signing the
verification, claiming that the counsels verification is insufficient since it is based only on mere
information.

A partys failure to sign the certification against forum shopping is different from the partys failure
to sign personally the verification. The certificate of non-forum shopping must be signed by the party,
and not by counsel.[27] The certification of counsel renders the petition defective.[28]
On the other hand, the requirement on verification of a pleading is a formal and not a jurisdictional
requisite.[29] It is intended simply to secure an assurance that what are alleged in the pleading are true
and correct and not the product of the imagination or a matter of speculation, and that the pleading is
filed in good faith.[30] The party need not sign the verification. A partys representative, lawyer or any
person who personally knows the truth of the facts alleged in the pleading may sign the verification. [31]
We agree with the Court of Appeals that the issue on the certificate against forum shopping was
merely an afterthought. Pajuyo did not call the Court of Appeals attention to this defect at the early stage
of the proceedings. Pajuyo raised this procedural issue too late in the proceedings.
Absence of Title over the Disputed Property will not Divest the Courts of Jurisdiction to Resolve
the Issue of Possession
Settled is the rule that the defendants claim of ownership of the disputed property will not divest
the inferior court of its jurisdiction over the ejectment case.[32] Even if the pleadings raise the issue of
ownership, the court may pass on such issue to determine only the question of possession, especially if
the ownership is inseparably linked with the possession.[33] The adjudication on the issue of ownership is
only provisional and will not bar an action between the same parties involving title to the land. [34] This
doctrine is a necessary consequence of the nature of the two summary actions of ejectment, forcible
entry and unlawful detainer, where the only issue for adjudication is the physical or material possession
over the real property.[35]
In this case, what Guevarra raised before the courts was that he and Pajuyo are not the owners of
the contested property and that they are mere squatters. Will the defense that the parties to the
ejectment case are not the owners of the disputed lot allow the courts to renounce their jurisdiction over
the case? The Court of Appeals believed so and held that it would just leave the parties where they are
since they are in pari delicto.
We do not agree with the Court of Appeals.
Ownership or the right to possess arising from ownership is not at issue in an action for recovery
of possession. The parties cannot present evidence to prove ownership or right to legal possession
except to prove the nature of the possession when necessary to resolve the issue of physical
possession.[36] The same is true when the defendant asserts the absence of title over the property. The
absence of title over the contested lot is not a ground for the courts to withhold relief from the parties in
an ejectment case.
The only question that the courts must resolve in ejectment proceedings is - who is entitled to the
physical possession of the premises, that is, to the possession de facto and not to the possession de
jure.[37] It does not even matter if a partys title to the property is questionable,[38] or when both parties
intruded into public land and their applications to own the land have yet to be approved by the proper
government agency.[39]Regardless of the actual condition of the title to the property, the party in
peaceable quiet possession shall not be thrown out by a strong hand, violence or terror.[40] Neither is the
unlawful withholding of property allowed. Courts will always uphold respect for prior possession.
Thus, a party who can prove prior possession can recover such possession even against the
owner himself.[41] Whatever may be the character of his possession, if he has in his favor prior
possession in time, he has the security that entitles him to remain on the property until a person with a
better right lawfully ejects him.[42] To repeat, the only issue that the court has to settle in an ejectment
suit is the right to physical possession.
In Pitargue v. Sorilla,[43] the government owned the land in dispute. The government did not
authorize either the plaintiff or the defendant in the case of forcible entry case to occupy the land. The
plaintiff had prior possession and had already introduced improvements on the public land. The plaintiff
had a pending application for the land with the Bureau of Lands when the defendant ousted him from
possession. The plaintiff filed the action of forcible entry against the defendant. The government was not
a party in the case of forcible entry.
The defendant questioned the jurisdiction of the courts to settle the issue of possession because
while the application of the plaintiff was still pending, title remained with the government, and the Bureau
of Public Lands had jurisdiction over the case. We disagreed with the defendant.We ruled that courts
have jurisdiction to entertain ejectment suits even before the resolution of the application. The plaintiff,

37
by priority of his application and of his entry, acquired prior physical possession over the public land
applied for as against other private claimants. That prior physical possession enjoys legal protection
against other private claimants because only a court can take away such physical possession in an
ejectment case.
While the Court did not brand the plaintiff and the defendant in Pitargue[44] as squatters, strictly
speaking, their entry into the disputed land was illegal. Both the plaintiff and defendant entered the
public land without the owners permission. Title to the land remained with the government because it
had not awarded to anyone ownership of the contested public land. Both the plaintiff and the defendant
were in effect squatting on government property. Yet, we upheld the courts jurisdiction to resolve the
issue of possession even if the plaintiff and the defendant in the ejectment case did not have any title
over the contested land.
Courts must not abdicate their jurisdiction to resolve the issue of physical possession because of
the public need to preserve the basic policy behind the summary actions of forcible entry and unlawful
detainer. The underlying philosophy behind ejectment suits is to prevent breach of the peace and
criminal disorder and to compel the party out of possession to respect and resort to the law alone to
obtain what he claims is his.[45] The party deprived of possession must not take the law into his own
hands.[46] Ejectment proceedings are summary in nature so the authorities can settle speedily actions to
recover possession because of the overriding need to quell social disturbances. [47]
We further explained in Pitargue the greater interest that is at stake in actions for recovery of
possession. We made the following pronouncements in Pitargue:
The question that is before this Court is: Are courts without jurisdiction to take cognizance of possessory
actions involving these public lands before final award is made by the Lands Department, and before
title is given any of the conflicting claimants? It is one of utmost importance, as there are public lands
everywhere and there are thousands of settlers, especially in newly opened regions. It also involves a
matter of policy, as it requires the determination of the respective authorities and functions of two
coordinate branches of the Government in connection with public land conflicts.
Our problem is made simple by the fact that under the Civil Code, either in the old, which was in force in
this country before the American occupation, or in the new, we have a possessory action, the aim and
purpose of which is the recovery of the physical possession of real property, irrespective of the question
as to who has the title thereto. Under the Spanish Civil Code we had the accion interdictal, a summary
proceeding which could be brought within one year from dispossession (Roman Catholic Bishop of
Cebu vs. Mangaron, 6 Phil. 286, 291); and as early as October 1, 1901, upon the enactment of the
Code of Civil Procedure (Act No. 190 of the Philippine Commission) we implanted the common law
action of forcible entry (section 80 of Act No. 190), the object of which has been stated by this Court to
beto prevent breaches of the peace and criminal disorder which would ensue from the
withdrawal of the remedy, and the reasonable hope such withdrawal would create that some
advantage must accrue to those persons who, believing themselves entitled to the possession
of property, resort to force to gain possession rather than to some appropriate action in the
court to assert their claims. (Supia and Batioco vs. Quintero and Ayala, 59 Phil. 312, 314.) So before
the enactment of the first Public Land Act (Act No. 926) the action of forcible entry was already available
in the courts of the country. So the question to be resolved is, Did the Legislature intend, when it vested
the power and authority to alienate and dispose of the public lands in the Lands Department, to exclude
the courts from entertaining the possessory action of forcible entry between rival claimants or occupants
of any land before award thereof to any of the parties? Did Congress intend that the lands applied for, or
all public lands for that matter, be removed from the jurisdiction of the judicial Branch of the
Government, so that any troubles arising therefrom, or any breaches of the peace or disorders caused
by rival claimants, could be inquired into only by the Lands Department to the exclusion of the courts?
The answer to this question seems to us evident. The Lands Department does not have the means to
police public lands; neither does it have the means to prevent disorders arising therefrom, or contain
breaches of the peace among settlers; or to pass promptly upon conflicts of possession. Then its
power is clearly limited to disposition and alienation, and while it may decide conflicts of
possession in order to make proper award, the settlement of conflicts of possession which is
recognized in the court herein has another ultimate purpose, i.e., the protection of actual
possessors and occupants with a view to the prevention of breaches of the peace. The power to

dispose and alienate could not have been intended to include the power to prevent or settle
disorders or breaches of the peace among rival settlers or claimants prior to the final award. As
to this, therefore, the corresponding branches of the Government must continue to exercise power and
jurisdiction within the limits of their respective functions. The vesting of the Lands Department with
authority to administer, dispose, and alienate public lands, therefore, must not be understood as
depriving the other branches of the Government of the exercise of the respective functions or
powers thereon, such as the authority to stop disorders and quell breaches of the peace by the
police, the authority on the part of the courts to take jurisdiction over possessory actions arising
therefrom not involving, directly or indirectly, alienation and disposition.
Our attention has been called to a principle enunciated in American courts to the effect that courts have
no jurisdiction to determine the rights of claimants to public lands, and that until the disposition of the
land has passed from the control of the Federal Government, the courts will not interfere with the
administration of matters concerning the same. (50 C. J. 1093-1094.) We have no quarrel with this
principle. The determination of the respective rights of rival claimants to public lands is different from the
determination of who has the actual physical possession or occupation with a view to protecting the
same and preventing disorder and breaches of the peace. A judgment of the court ordering restitution of
the possession of a parcel of land to the actual occupant, who has been deprived thereof by another
through the use of force or in any other illegal manner, can never be prejudicial interference with the
disposition or alienation of public lands. On the other hand, if courts were deprived of jurisdiction of
cases involving conflicts of possession, that threat of judicial action against breaches of the
peace committed on public lands would be eliminated, and a state of lawlessness would
probably be produced between applicants, occupants or squatters, where force or might, not
right or justice, would rule.
It must be borne in mind that the action that would be used to solve conflicts of possession between
rivals or conflicting applicants or claimants would be no other than that of forcible entry. This action, both
in England and the United States and in our jurisdiction, is a summary and expeditious remedy whereby
one in peaceful and quiet possession may recover the possession of which he has been deprived by a
stronger hand, by violence or terror; its ultimate object being to prevent breach of the peace and criminal
disorder. (Supia and Batioco vs. Quintero and Ayala, 59 Phil. 312, 314.) The basis of the remedy is mere
possession as a fact, of physical possession, not a legal possession. (Mediran vs. Villanueva, 37 Phil.
752.) The title or right to possession is never in issue in an action of forcible entry; as a matter of fact,
evidence thereof is expressly banned, except to prove the nature of the possession. (Second 4, Rule
72, Rules of Court.) With this nature of the action in mind, by no stretch of the imagination can
conclusion be arrived at that the use of the remedy in the courts of justice would constitute an
interference with the alienation, disposition, and control of public lands. To limit ourselves to the case at
bar can it be pretended at all that its result would in any way interfere with the manner of the alienation
or disposition of the land contested? On the contrary, it would facilitate adjudication, for the question of
priority of possession having been decided in a final manner by the courts, said question need no longer
waste the time of the land officers making the adjudication or award. (Emphasis ours)
The Principle of Pari Delicto is not Applicable to Ejectment Cases
The Court of Appeals erroneously applied the principle of pari delicto to this case.
Articles 1411 and 1412 of the Civil Code[48] embody the principle of pari delicto. We explained the
principle of pari delicto in these words:
The rule of pari delicto is expressed in the maxims ex dolo malo non eritur actio and in pari delicto potior
est conditio defedentis. The law will not aid either party to an illegal agreement. It leaves the parties
where it finds them.[49]
The application of the pari delicto principle is not absolute, as there are exceptions to its
application. One of these exceptions is where the application of the pari delicto rule would violate wellestablished public policy.[50]
In Drilon v. Gaurana,[51] we reiterated the basic policy behind the summary actions of forcible
entry and unlawful detainer. We held that:
It must be stated that the purpose of an action of forcible entry and detainer is that, regardless of the
actual condition of the title to the property, the party in peaceable quiet possession shall not be turned
out by strong hand, violence or terror. In affording this remedy of restitution the object of the statute is to
prevent breaches of the peace and criminal disorder which would ensue from the withdrawal of the

38
remedy, and the reasonable hope such withdrawal would create that some advantage must accrue to
those persons who, believing themselves entitled to the possession of property, resort to force to gain
possession rather than to some appropriate action in the courts to assert their claims. This is the
philosophy at the foundation of all these actions of forcible entry and detainer which are designed to
compel the party out of possession to respect and resort to the law alone to obtain what he claims is his.
[52]

Clearly, the application of the principle of pari delicto to a case of ejectment between squatters is
fraught with danger. To shut out relief to squatters on the ground of pari delicto would openly invite
mayhem and lawlessness. A squatter would oust another squatter from possession of the lot that the
latter had illegally occupied, emboldened by the knowledge that the courts would leave them where they
are. Nothing would then stand in the way of the ousted squatter from re-claiming his prior possession at
all cost.
Petty warfare over possession of properties is precisely what ejectment cases or actions for
recovery of possession seek to prevent.[53]Even the owner who has title over the disputed property
cannot take the law into his own hands to regain possession of his property. The owner must go to
court.
Courts must resolve the issue of possession even if the parties to the ejectment suit are
squatters. The determination of priority and superiority of possession is a serious and urgent matter that
cannot be left to the squatters to decide. To do so would make squatters receive better treatment under
the law. The law restrains property owners from taking the law into their own hands. However, the
principle of pari delictoas applied by the Court of Appeals would give squatters free rein to dispossess
fellow squatters or violently retake possession of properties usurped from them. Courts should not leave
squatters to their own devices in cases involving recovery of possession.
Possession is the only Issue for Resolution in an Ejectment Case
The case for review before the Court of Appeals was a simple case of ejectment. The Court of
Appeals refused to rule on the issue of physical possession. Nevertheless, the appellate court held that
the pivotal issue in this case is who between Pajuyo and Guevarra has the priority right as beneficiary of
the contested land under Proclamation No. 137.[54] According to the Court of Appeals, Guevarra enjoys
preferential right under Proclamation No. 137 because Article VI of the Code declares that the actual
occupant or caretaker is the one qualified to apply for socialized housing.
The ruling of the Court of Appeals has no factual and legal basis.
First. Guevarra did not present evidence to show that the contested lot is part of a relocation site
under Proclamation No. 137. Proclamation No. 137 laid down the metes and bounds of the land that it
declared open for disposition to bona fide residents.
The records do not show that the contested lot is within the land specified by Proclamation No.
137. Guevarra had the burden to prove that the disputed lot is within the coverage of Proclamation No.
137. He failed to do so.
Second. The Court of Appeals should not have given credence to Guevarras unsubstantiated
claim that he is the beneficiary of Proclamation No. 137. Guevarra merely alleged that in the survey the
project administrator conducted, he and not Pajuyo appeared as the actual occupant of the lot.
There is no proof that Guevarra actually availed of the benefits of Proclamation No. 137. Pajuyo
allowed Guevarra to occupy the disputed property in 1985. President Aquino signed Proclamation No.
137 into law on 11 March 1986. Pajuyo made his earliest demand for Guevarra to vacate the property in
September 1994.
During the time that Guevarra temporarily held the property up to the time that Proclamation No.
137 allegedly segregated the disputed lot, Guevarra never applied as beneficiary of Proclamation No.
137. Even when Guevarra already knew that Pajuyo was reclaiming possession of the property,
Guevarra did not take any step to comply with the requirements of Proclamation No. 137.
Third. Even assuming that the disputed lot is within the coverage of Proclamation No. 137 and
Guevarra has a pending application over the lot, courts should still assume jurisdiction and resolve the
issue of possession. However, the jurisdiction of the courts would be limited to the issue of physical
possession only.
In Pitargue,[55] we ruled that courts have jurisdiction over possessory actions involving public land
to determine the issue of physical possession. The determination of the respective rights of rival
claimants to public land is, however, distinct from the determination of who has the actual physical

possession or who has a better right of physical possession.[56] The administrative disposition and
alienation of public lands should be threshed out in the proper government agency.[57]
The Court of Appeals determination of Pajuyo and Guevarras rights under Proclamation No. 137
was premature. Pajuyo and Guevarra were at most merely potential beneficiaries of the law. Courts
should not preempt the decision of the administrative agency mandated by law to determine the
qualifications of applicants for the acquisition of public lands. Instead, courts should expeditiously
resolve the issue of physical possession in ejectment cases to prevent disorder and breaches of peace.
[58]

Pajuyo is Entitled to Physical Possession of the Disputed Property

Guevarra does not dispute Pajuyos prior possession of the lot and ownership of the house built on
it. Guevarra expressly admitted the existence and due execution of
the Kasunduan. The Kasunduan reads:
Ako, si COL[I]TO PAJUYO, may-ari ng bahay at lote sa Bo. Payatas, Quezon City, ay nagbibigay
pahintulot kay G. Eddie Guevarra, na pansamantalang manirahan sa nasabing bahay at lote ng walang
bayad. Kaugnay nito, kailangang panatilihin nila ang kalinisan at kaayusan ng bahay at lote.
Sa sandaling kailangan na namin ang bahay at lote, silay kusang aalis ng walang reklamo.
Based on the Kasunduan, Pajuyo permitted Guevarra to reside in the house and lot free of rent,
but Guevarra was under obligation to maintain the premises in good condition. Guevarra promised to
vacate the premises on Pajuyos demand but Guevarra broke his promise and refused to heed Pajuyos
demand to vacate.
These facts make out a case for unlawful detainer. Unlawful detainer involves the withholding by a
person from another of the possession of real property to which the latter is entitled after the expiration
or termination of the formers right to hold possession under a contract, express or implied.[59]
Where the plaintiff allows the defendant to use his property by tolerance without any contract, the
defendant is necessarily bound by an implied promise that he will vacate on demand, failing which, an
action for unlawful detainer will lie.[60] The defendants refusal to comply with the demand makes his
continued possession of the property unlawful.[61] The status of the defendant in such a case is similar to
that of a lessee or tenant whose term of lease has expired but whose occupancy continues by tolerance
of the owner.[62]
This principle should apply with greater force in cases where a contract embodies the permission
or tolerance to use the property. TheKasunduan expressly articulated Pajuyos forbearance. Pajuyo did
not require Guevarra to pay any rent but only to maintain the house and lot in good condition. Guevarra
expressly vowed in the Kasunduan that he would vacate the property on demand. Guevarras refusal to
comply with Pajuyos demand to vacate made Guevarras continued possession of the property unlawful.
We do not subscribe to the Court of Appeals theory that the Kasunduan is one of commodatum.
In a contract of commodatum, one of the parties delivers to another something not consumable so
that the latter may use the same for a certain time and return it.[63] An essential feature
of commodatum is that it is gratuitous. Another feature of commodatum is that the use of the thing
belonging to another is for a certain period.[64] Thus, the bailor cannot demand the return of the thing
loaned until after expiration of the period stipulated, or after accomplishment of the use for which
the commodatum is constituted.[65] If the bailor should have urgent need of the thing, he may demand its
return for temporary use.[66] If the use of the thing is merely tolerated by the bailor, he can demand the
return of the thing at will, in which case the contractual relation is called a precarium.[67] Under the Civil
Code, precarium is a kind of commodatum.[68]
The Kasunduan reveals that the accommodation accorded by Pajuyo to Guevarra was not
essentially gratuitous. While the Kasunduan did not require Guevarra to pay rent, it obligated him to
maintain the property in good condition. The imposition of this obligation makes theKasunduan a
contract different from a commodatum. The effects of the Kasunduan are also different from that of
a commodatum. Case law on ejectment has treated relationship based on tolerance as one that is akin
to a landlord-tenant relationship where the withdrawal of permission would result in the termination of
the lease.[69] The tenants withholding of the property would then be unlawful. This is settled
jurisprudence.
Even assuming that the relationship between Pajuyo and Guevarra is one of commodatum, Guevarra as
bailee would still have the duty to turn over possession of the property to Pajuyo, the bailor. The
obligation to deliver or to return the thing received attaches to contracts for safekeeping, or contracts of

39
commission, administration and commodatum.[70] These contracts certainly involve the obligation to
deliver or return the thing received.[71] Guevarra turned his back on the Kasunduan on the sole ground
that like him, Pajuyo is also a squatter. Squatters, Guevarra pointed out, cannot enter into a contract
involving the land they illegally occupy. Guevarra insists that the contract is void. Guevarra should know
that there must be honor even between squatters. Guevarra freely entered into
the Kasunduan. Guevarra cannot now impugn the Kasunduan after he had benefited from
it. The Kasunduan binds Guevarra. The Kasunduan is not void for purposes of determining who
between Pajuyo and Guevarra has a right to physical possession of the contested
property. The Kasunduan is the undeniable evidence of Guevarras recognition of Pajuyos better right of
physical possession. Guevarra is clearly a possessor in bad faith. The absence of a contract would not
yield a different result, as there would still be an implied promise to vacate. Guevarra contends that
there is a pernicious evil that is sought to be avoided, and that is allowing an absentee squatter who
(sic) makes (sic) a profit out of his illegal act.[72] Guevarra bases his argument on the preferential right
given to the actual occupant or caretaker under Proclamation No. 137 on socialized housing. We are not
convinced. Pajuyo did not profit from his arrangement with Guevarra because Guevarra stayed in the
property without paying any rent. There is also no proof that Pajuyo is a professional squatter who rents
out usurped properties to other squatters. Moreover, it is for the proper government agency to decide
who between Pajuyo and Guevarra qualifies for socialized housing. The only issue that we are
addressing is physical possession.
Prior possession is not always a condition sine qua non in ejectment.[73] This is one of the distinctions
between forcible entry and unlawful detainer.[74] In forcible entry, the plaintiff is deprived of physical
possession of his land or building by means of force, intimidation, threat, strategy or stealth. Thus, he
must allege and prove prior possession.[75] But in unlawful detainer, the defendant unlawfully withholds
possession after the expiration or termination of his right to possess under any contract, express or
implied. In such a case, prior physical possession is not required.[76]
Pajuyos withdrawal of his permission to Guevarra terminated the Kasunduan. Guevarras transient
right to possess the property ended as well. Moreover, it was Pajuyo who was in actual possession of
the property because Guevarra had to seek Pajuyos permission to temporarily hold the property and
Guevarra had to follow the conditions set by Pajuyo in the Kasunduan. Control over the property still
rested with Pajuyo and this is evidence of actual possession.
Pajuyos absence did not affect his actual possession of the disputed property. Possession in the
eyes of the law does not mean that a man has to have his feet on every square meter of the ground
before he is deemed in possession.[77] One may acquire possession not only by physical occupation, but
also by the fact that a thing is subject to the action of ones will.[78] Actual or physical occupation is not
always necessary.[79]
Ruling on Possession Does not Bind Title to the Land in Dispute
We are aware of our pronouncement in cases where we declared that squatters and intruders
who clandestinely enter into titled government property cannot, by such act, acquire any legal right to
said property.[80] We made this declaration because the person who had title or who had the right to legal

possession over the disputed property was a party in the ejectment suit and that party instituted the
case against squatters or usurpers.
In this case, the owner of the land, which is the government, is not a party to the ejectment
case. This case is between squatters. Had the government participated in this case, the courts could
have evicted the contending squatters, Pajuyo and Guevarra.
Since the party that has title or a better right over the property is not impleaded in this case, we
cannot evict on our own the parties. Such a ruling would discourage squatters from seeking the aid of
the courts in settling the issue of physical possession. Stripping both the plaintiff and the defendant of
possession just because they are squatters would have the same dangerous implications as the
application of the principle ofpari delicto. Squatters would then rather settle the issue of physical
possession among themselves than seek relief from the courts if the plaintiff and defendant in the
ejectment case would both stand to lose possession of the disputed property. This would subvert the
policy underlying actions for recovery of possession.
Since Pajuyo has in his favor priority in time in holding the property, he is entitled to remain on the
property until a person who has title or a better right lawfully ejects him. Guevarra is certainly not that
person. The ruling in this case, however, does not preclude Pajuyo and Guevarra from introducing
evidence and presenting arguments before the proper administrative agency to establish any right to
which they may be entitled under the law.[81]
In no way should our ruling in this case be interpreted to condone squatting. The ruling on the
issue of physical possession does not affect title to the property nor constitute a binding and conclusive
adjudication on the merits on the issue of ownership.[82] The owner can still go to court to recover
lawfully the property from the person who holds the property without legal title. Our ruling here does not
diminish the power of government agencies, including local governments, to condemn, abate, remove or
demolish illegal or unauthorized structures in accordance with existing laws.
Attorneys Fees and Rentals
The MTC and RTC failed to justify the award of P3,000 attorneys fees to Pajuyo. Attorneys fees
as part of damages are awarded only in the instances enumerated in Article 2208 of the Civil Code.
[83]
Thus, the award of attorneys fees is the exception rather than the rule.[84] Attorneys fees are not
awarded every time a party prevails in a suit because of the policy that no premium should be placed on
the right to litigate.[85] We therefore delete the attorneys fees awarded to Pajuyo.
We sustain the P300 monthly rentals the MTC and RTC assessed against Guevarra. Guevarra
did not dispute this factual finding of the two courts. We find the amount reasonable compensation to
Pajuyo. The P300 monthly rental is counted from the last demand to vacate, which was on 16 February
1995.
WHEREFORE, we GRANT the petition. The Decision dated 21 June 2000 and Resolution dated
14 December 2000 of the Court of Appeals in CA-G.R. SP No. 43129 are SET ASIDE. The Decision
dated 11 November 1996 of the Regional Trial Court of Quezon City, Branch 81 in Civil Case No. Q-9626943, affirming the Decision dated 15 December 1995 of the Metropolitan Trial Court of Quezon City,
Branch 31 in Civil Case No. 12432, is REINSTATED with MODIFICATION. The award of attorneys fees
is deleted. No costs.
SO ORDERED