Republic of the Philippines "3.
"3. A third Amended Deed of First Mortgage was executed on December 18, 1973 Annex `D' providing for
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 73345. April 7, 1993.
SOCIAL SECURITY SYSTEM, petitioner,
vs.
MOONWALK DEVELOPMENT & HOUSING CORPORATION, ROSITA U. ALBERTO, ROSITA U. ALBERTO, JMA
HOUSE, INC., MILAGROS SANCHEZ SANTIAGO, in her capacity as Register of Deeds for the Province of
Cavite, ARTURO SOLITO, in his capacity as Register of Deeds for Metro Manila District IV, Makati, Metro
Manila and the INTERMEDIATE APPELLATE COURT, respondents.
The Solicitor General for petitioner.
K.V. Faylona & Associates for private respondents.
DECISION
CAMPOS, JR., J p:
Before Us is a petition for review on certiorari of decision 1 of the then Intermediate Appellate Court affirming in toto
the decision of the former Court of First Instance of Rizal, Seventh Judicial District, Branch XXIX, Pasay City.
The facts as found by the Appellate Court are as follows:
"On February 20, 1980, the Social Security System, SSS for brevity, filed a complaint in the Court of First Instance of
Rizal against Moonwalk Development & Housing Corporation, Moonwalk for short, alleging that the former had
committed an error in failing to compute the 12% interest due on delayed payments on the loan of Moonwalk —
resulting in a chain of errors in the application of payments made by Moonwalk and, in an unpaid balance on the
principal loan agreement in the amount of P7,053.77 and, also in not reflecting in its statement or account an unpaid
balance on the said penalties for delayed payments in the amount of P7,517,178.21 as of October 10, 1979.
Moonwalk answered denying SSS' claims and asserting that SSS had the opportunity to ascertain the truth but failed
to do so.
The trial court set the case for pre-trial at which pre-trial conference, the court issued an order giving both parties thirty
(30) days within which to submit a stipulation of facts.
The Order of October 6, 1980 dismissing the complaint followed the submission by the parties on September 19, 1980
of the following stipulation of Facts:
"1. On October 6, 1971, plaintiff approved the application of defendant Moonwalk for an interim loan in the amount of
THIRTY MILLION PESOS (P30,000,000.00) for the purpose of developing and constructing a housing project in the
provinces of Rizal and Cavite;
"2. Out of the approved loan of THIRTY MILLION PESOS (P30,000,000.00), the sum of P9,595,000.00 was released
to defendant Moonwalk as of November 28, 1973;
restructuring of the payment of the released amount of P9,595,000.00.
"4. Defendants Rosita U. Alberto and Rosita U. Alberto, mother and daughter respectively, under paragraph 5 of the
aforesaid Third Amended Deed of First Mortgage substituted Associated Construction and Surveys Corporation,
Philippine Model Homes Development Corporation, Mariano Z. Velarde and Eusebio T. Ramos, as solidary obligors;
"5. On July 23, 1974, after considering additional releases in the amount of P2,659,700.00, made to defendant
Moonwalk, defendant Moonwalk delivered to the plaintiff a promissory note for TWELVE MILLION TWO HUNDRED
FIFTY FOUR THOUSAND SEVEN HUNDRED PESOS (P12,254,700.00) Annex `E', signed by Eusebio T. Ramos,
and the said Rosita U. Alberto and Rosita U. Alberto;
"6. Moonwalk made a total payment of P23,657,901.84 to SSS for the loan principal of P12,254,700.00 released to it.
The last payment made by Moonwalk in the amount of P15,004,905.74 were based on the Statement of Account,
Annex "F" prepared by plaintiff SSS for defendant;
"7. After settlement of the account stated in Annex 'F' plaintiff issued to defendant Moonwalk the Release of Mortgage
for Moonwalk's mortgaged properties in Cavite and Rizal, Annexes 'G' and 'H' on October 9, 1979 and October 11,
1979 respectively.
"8. In letters to defendant Moonwalk, dated November 28, 1979 and followed up by another letter dated December 17,
1979, plaintiff alleged that it committed an honest mistake in releasing defendant.
"9. In a letter dated December 21, 1979, defendant's counsel told plaintiff that it had completely paid its obligations to
SSS;
"10. The genuineness and due execution of the documents marked as Annex (sic) 'A' to 'O' inclusive, of the Complaint
and the letter dated December 21, 1979 of the defendant's counsel to the plaintiff are admitted.
"Manila for Pasay City, September 2, 1980." 2
On October 6, 1990, the trial court issued an order dismissing the complaint on the ground that the obligation was
already extinguished by the payment by Moonwalk of its indebtedness to SSS and by the latter's act of cancelling the
real estate mortgages executed in its favor by defendant Moonwalk. The Motion for Reconsideration filed by SSS with
the trial court was likewise dismissed by the latter.
These orders were appealed to the Intermediate Appellate Court. Respondent Court reduced the errors assigned by
the SSS into this issue: ". . . are defendants-appellees, namely, Moonwalk Development and Housing Corporation,
Rosita U. Alberto, Rosita U. Alberto, JMA House, Inc. still liable for the unpaid penalties as claimed by plaintiff-
appellant or is their obligation extinguished?" 3 As We have stated earlier, the respondent Court held that Moonwalk's
obligation was extinguished and affirmed the trial court.
Hence, this Petition wherein SSS raises the following grounds for review:
"First, in concluding that the penalties due from Moonwalk are "deemed waived and/or barred," the appellate court
disregarded the basic tenet that waiver of a right must be express, made in a clear and unequivocal manner. There is
no evidence in the case at bar to show that SSS made a clear, positive waiver of the penalties, made with full
knowledge of the circumstances.
Second, it misconstrued the ruling that SSS funds are trust funds, and SSS, being a mere trustee, cannot perform acts
affecting the same, including condonation of penalties, that would diminish property rights of the owners and
beneficiaries thereof. (United Christian Missionary Society v. Social Security Commission, 30 SCRA 982, 988 [1969]).
Third, it ignored the fact that penalty at the rate of 12% p.a. is not inequitable.
Fourth, it ignored the principle that equity will cancel a release on the ground of mistake of fact." 4
The same problem which confronted the respondent court is presented before Us: Is the penalty demandable even
after the extinguishment of the principal obligation?
The former Intermediate Appellate Court, through Justice Eduard P. Caguioa, held in the negative. It reasoned, thus:
"2. As we have explained under No. 1, contrary to what the plaintiff-appellant states in its Brief, what is sought to be
recovered in this case is not the 12% interest on the loan but the 12% penalty for failure to pay on time the
amortization. What is sought to be enforced therefore is the penal clause of the contract entered into between the
parties.
Now, what is a penal clause. A penal clause has been defined as
"an accessory obligation which the parties attach to a principal obligation for the purpose of insuring the performance
thereof by imposing on the debtor a special presentation (generally consisting in the payment of a sum of money) in
case the obligation is not fulfilled or is irregularly or inadequately fulfilled" (3 Castan 8th Ed. p. 118).
Now an accessory obligation has been defined as that attached to a principal obligation in order to complete the same
or take its place in the case of breach (4 Puig Peña Part 1 p. 76). Note therefore that an accessory obligation is
dependent for its existence on the existence of a principal obligation. A principal obligation may exist without an
accessory obligation but an accessory obligation cannot exist without a principal obligation. For example, the contract
of mortgage is an accessory obligation to enforce the performance of the main obligation of indebtedness. An
indebtedness can exist without the mortgage but a mortgage cannot exist without the indebtedness, which is the
principal obligation. In the present case, the principal obligation is the loan between the parties. The accessory
obligation of a penal clause is to enforce the main obligation of payment of the loan. If therefore the principal obligation
does not exist the penalty being accessory cannot exist.
Now then when is the penalty demandable? A penalty is demandable in case of non performance or late performance
of the main obligation. In other words in order that the penalty may arise there must be a breach of the obligation
either by total or partial non fulfillment or there is non fulfillment in point of time which is called mora or delay. The
debtor therefore violates the obligation in point of time if there is mora or delay. Now, there is no mora or delay unless
there is a demand. It is noteworthy that in the present case during all the period when the principal obligation was still
subsisting, although there were late amortizations there was no demand made by the creditor, plaintiff-appellant for
the payment of the penalty. Therefore up to the time of the letter of plaintiff-appellant there was no demand for the
payment of the penalty, hence the debtor was no in mora in the payment of the penalty.
However, on October 1, 1979, plaintiff-appellant issued its statement of account (Exhibit F) showing the total obligation
of Moonwalk as P15,004,905.74, and forthwith demanded payment from defendant-appellee. Because of the demand
for payment, Moonwalk made several payments on September 29, October 9 and 19, 1979 respectively, all in all
totalling P15,004,905.74 which was a complete payment of its obligation as stated in Exhibit F. Because of this
payment the obligation of Moonwalk was considered extinguished, and pursuant to said extinguishment, the real
estate mortgages given by Moonwalk were released on October 9, 1979 and October 10, 1979 (Exhibits G and H). For
all purposes therefore the principal obligation of defendant-appellee was deemed extinguished as well as the
accessory obligation of real estate mortgage; and that is the reason for the release of all the Real Estate Mortgages on
October 9 and 10, 1979 respectively.
Now, besides the Real Estate Mortgages, the penal clause which is also an accessory obligation must also be
deemed extinguished considering that the principal obligation was considered extinguished, and the penal clause
being an accessory obligation. That being the case, the demand for payment of the penal clause made by plaintiff-
appellant in its demand letter dated November 28, 1979 and its follow up letter dated December 17, 1979 (which
parenthetically are the only demands for payment of the penalties) are therefore ineffective as there was nothing to
demand. It would be otherwise, if the demand for the payment of the penalty was made prior to the extinguishment of
the obligation because then the obligation of Moonwalk would consist of: 1) the principal obligation 2) the interest of
12% on the principal obligation and 3) the penalty of 12% for late payment for after demand, Moonwalk would be in
mora and therefore liable for the penalty.
Let it be emphasized that at the time of the demand made in the letters of November 28, 1979 and December 17,
1979 as far as the penalty is concerned, the defendant-appellee was not in default since there was no mora prior to
the demand. That being the case, therefore, the demand made after the extinguishment of the principal obligation
which carried with it the extinguishment of the penal clause being merely an accessory obligation, was an exercise in
futility.
3. At the time of the payment made of the full obligation on October 10, 1979 together with the 12% interest by
defendant-appellee Moonwalk, its obligation was extinguished. It being extinguished, there was no more need for the
penal clause. Now, it is to be noted that penalty at anytime can be modified by the Court. Even substantial
performance under Art. 1234 authorizes the Court to consider it as complete performance minus damages. Now, Art,
1229 Civil Code of the Philippines provides:
"ART. 1229. The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly
complied with by the debtor. Even if there has been no performance, the penalty may also be reduced by the courts if
it is iniquitous or unconscionable."
If the penalty can be reduced after the principal obligation has been partly or irregularly complied with by the debtor,
which is nonetheless a breach of the obligation, with more reason the penal clause is not demandable when full
obligation has been complied with since in that case there is no breach of the obligation. In the present case, there
has been as yet no demand for payment of the penalty at the time of the extinguishment of the obligation, hence there
was likewise an extinguishment of the penalty.
Let Us emphasize that the obligation of defendant-appellee was fully complied with by the debtor, that is, the amount
loaned together with the 12% interest has been fully paid by the appellee. That being so, there is no basis for
demanding the penal clause since the obligation has been extinguished. Here there has been a waiver of the penal
clause as it was not demanded before the full obligation was fully paid and extinguished. Again, emphasis must be
made on the fact that plaintiff-appellant has not lost anything under the contract since in got back in full the amount
loan (sic) as well as the interest thereof. The same thing would have happened if the obligation was paid on time, for
then the penal clause, under the terms of the contract would not apply. Payment of the penalty does not mean gain or
loss of plaintiff-appellant since it is merely for the purpose of enforcing the performance of the main obligation has
been fully complied with and extinguished, the penal clause has lost its raison d' entre." 5
We find no reason to depart from the appellate court's decision. We, however, advance the following reasons for the
denial of this petition.
Article 1226 of the Civil Code provides:
"Art. 1226. In obligations with a penal clause, he penalty shall substitute the indemnity for damages and the payment
of interests in case of noncompliance, if there is no stipulation to the contrary. Nevertheless, damages shall be paid if
the obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the obligation.
The penalty may be enforced only when it is demandable in accordance with the provisions of this Code." (Emphasis
Ours.)
A penal clause is an accessory undertaking to assume greater liability in case of breach. 6 It has a double function: (1)
to provide for liquidated damages, and (2) to strengthen the coercive force of the obligation by the threat of greater
responsibility in the event of breach. 7 From the foregoing, it is clear that a penal clause is intended to prevent the
obligor from defaulting in the performance of his obligation. Thus, if there should be default, the penalty may be
enforced. One commentator of the Civil Code wrote:
"Now when is the penalty deemed demandable in accordance with the provisions of the Civil Code? We must make a
distinction between a positive and a negative obligation. With regard to obligations which are positive (to give and to
do), the penalty is demandable when the debtor is in mora; hence, the necessity of demand by the debtor unless the
same is excused . . ." 8
When does delay arise? Under the Civil Code, delay begins from the time the obligee judicially or extrajudicially
demands from the obligor the performance of the obligation.
"Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially or
extrajudicially demands from them the fulfillment of their obligation."
There are only three instances when demand is not necessary to render the obligor in default. These are the following:
"(1) When the obligation or the law expressly so declares;
(2) When from the nature and the circumstances of the obligation it appears that the designation of the time when the
thing is to be delivered or the service is to be rendered was a controlling motive for the establishment of the contract;
or
(3) When the demand would be useless, as when the obligor has rendered it beyond his power to perform." 9
This case does not fall within any of the established exceptions. Hence, despite the provision in the promissory note
that "(a)ll amortization payments shall be made every first five (5) days of the calendar month until the principal and
interest on the loan or any portion thereof actually released has been fully paid," 10 petitioner is not excused from
making a demand. It has been established that at the time of payment of the full obligation, private respondent
Moonwalk has long been delinquent in meeting its monthly arrears and in paying the full amount of the loan itself as
the obligation matured sometime in January, 1977. But mere delinquency in payment does not necessarily mean delay
in the legal concept. To be in default ". . . is different from mere delay in the grammatical sense, because it involves
the beginning of a special condition or status which has its own peculiar effects or results." 11 In order that the debtor
may be in default it is necessary that the following requisites be present: (1) that the obligation be demandable and
already liquidated; (2) that the debtor delays performance; and (3) that the creditor requires the performance judicially
and extrajudicially. 12 Default generally begins from the moment the creditor demands the performance of the
obligation. 13
Nowhere in this case did it appear that SSS demanded from Moonwalk the payment of its monthly amortizations.
Neither did it show that petitioner demanded the payment of the stipulated penalty upon the failure of Moonwalk to
meet its monthly amortization. What the complaint itself showed was that SSS tried to enforce the obligation sometime
in September, 1977 by foreclosing the real estate mortgages executed by Moonwalk in favor of SSS. But this
foreclosure did not push through upon Moonwalk's requests and promises to pay in full. The next demand for payment
happened on October 1, 1979 when SSS issued a Statement of Account to Moonwalk. And in accordance with said
statement, Moonwalk paid its loan in full. What is clear, therefore, is that Moonwalk was never in default because SSS
never compelled performance. Though it tried to foreclose the mortgages, SSS itself desisted from doing so upon the
entreaties of Moonwalk. If the Statement of Account could properly be considered as demand for payment, the
demand was complied with on time. Hence, no delay occurred and there was, therefore, no occasion when the penalty
became demandable and enforceable. Since there was no default in the performance of the main obligation —
payment of the loan — SSS was never entitled to recover any penalty, not at the time it made the Statement of
Account and certainly, not after the extinguishment of the principal obligation because then, all the more that SSS had
no reason to ask for the penalties. Thus, there could never be any occasion for waiver or even mistake in the
application for payment because there was nothing for SSS to waive as its right to enforce the penalty did not arise.
SSS, however, in buttressing its claim that it never waived the penalties, argued that the funds it held were trust funds
and as trustee, the petitioner could not perform acts affecting the funds that would diminish property rights of the
owners and beneficiaries thereof. To support its claim, SSS cited the case of United Christian Missionary Society v.
Social Security Commission. 14
We looked into the case and found out that it is not applicable to the present case as it dealt not with the right of the
SSS to collect penalties which were provided for in contracts which it entered into but with its right to collect premiums
and its duty to collect the penalty for delayed payment or non-payment of premiums. The Supreme Court, in that case,
stated:
"No discretion or alternative is granted respondent Commission in the enforcement of the law's mandate that the
employer who fails to comply with his legal obligation to remit the premiums to the System within the prescribed period
shall pay a penalty of three (3%) per month. The prescribed penalty is evidently of a punitive character, provided by
the legislature to assure that employers do not take lightly the State's exercise of the police power in the
implementation of the Republic's declared policy "to develop, establish gradually and perfect a social security system
which shall be suitable to the needs of the people throughout the Philippines and (to) provide protection to employers
against the hazards of disability, sickness, old age and death . . ."
Thus, We agree with the decision of the respondent court on the matter which We quote, to wit:
"Note that the above case refers to the condonation of the penalty for the non remittance of the premium which is
provided for by Section 22(a) of the Social Security Act . . . In other words, what was sought to be condoned was the
penalty provided for by law for non remittance of premium for coverage under the Social Security Act.
The case at bar does not refer to any penalty provided for by law nor does it refer to the non remittance of premium.
The case at bar refers to a contract of loan entered into between plaintiff and defendant Moonwalk Development and
Housing Corporation. Note, therefore, that no provision of law is involved in this case, nor is there any penalty imposed
by law nor a case about non-remittance of premium required by law. The present case refers to a contract of loan
payable in installments not provided for by law but by agreement of the parties. Therefore, the ratio decidendi of the
case of United Christian Missionary Society vs. Social Security Commission which plaintiff-appellant relies is not
applicable in this case; clearly, the Social Security Commission, which is a creature of the Social Security Act cannot
condone a mandatory provision of law providing for the payment of premiums and for penalties for non remittance.
The life of the Social Security Act is in the premiums because these are the funds from which the Social Security Act
gets the money for its purposes and the non-remittance of the premiums is penalized not by the Social Security
Commission but by law.
xxx xxx xxx
It is admitted that when a government created corporation enters into a contract with private party concerning a loan, it
descends to the level of a private person. Hence, the rules on contract applicable to private parties are applicable to it.
The argument therefore that the Social Security Commission cannot waive or condone the penalties which was
applied in the United Christian Missionary Society cannot apply in this case. First, because what was not paid were
installments on a loan but premiums required by law to be paid by the parties covered by the Social Security Act.
Secondly, what is sought to be condoned or waived are penalties not imposed by law for failure to remit premiums
required by law, but a penalty for non payment provided for by the agreement of the parties in the contract between
them . . ." 15
WHEREFORE, in view of the foregoing, the petition is DISMISSED and the decision of the respondent court is
AFFIRMED. LLpr
SO ORDERED.
Narvasa, C .J ., Padilla, Regalado and Nocon, JJ ., concur.
Footnotes
6. 4 TOLENTINO, CIVIL CODE OF THE PHILIPPINES 259 (1991 ed.).
8. 4 E.P. CAGUIOA, COMMENTS AND CASES ON CIVIL LAW 280 (1983 ed.).
9. CIVIL CODE, Art. 1169.
 FIRST DIVISION
[G.R. No. 133107. March 25, 1999]
RIZAL COMMERCIAL BANKING CORPORATION, petitioner, vs. COURT OF APPEALS and FELIPE
LUSTRE, respondents.
DECISION
KAPUNAN, J.:
A simple telephone call and an ounce-of good faith on the part of petitioner could have prevented the present
controversy.
On March 10, 1993, private respondent Atty. Felipe Lustre purchased a Toyota Corolla from Toyota Shaw, Inc.
for which he made a down payment of P164,620.00, the balance of the purchase price to be paid in 24 equal monthly
installments. Private respondent thus issued 24 postdated checks for the amount of P14,976.00 each. The first was
dated April 10, 1991; subsequent checks were dated every 10th day of each succeeding month.
To secure the balance, private respondent executed a promissory note[1] and a contract of chattel
mortgage[2] over the vehicle in favor of Toyota Shaw, Inc. The contract of chattel mortgage, in paragraph 11 thereof,
provided for an acceleration clause stating that should the mortgagor default in the payment of any installment, the whole
amount remaining unpaid shall become due. In addition, the mortgagor shall be liable for 25% of the principal due as
liquidated damages.
On March 14, 1991, Toyota Shaw, Inc. assigned all its rights and interests in the chattel mortgage to petitioner
Rizal Commercial Banking Corporation (RCBC).
All the checks dated April 10, 1991 to January 10, 1993 were thereafter encashed and debited by RCBC from
private respondent's account, except for RCBC Check No. 279805 representing the payment for August 10, 1991, which
was unsigned. Previously, the amount represented by RCBC Check No. 279805 was debited from private respondent's
account but was later recalled and re-credited to him.Because of the recall, the last two checks, dated February 10,
1993 and March 10, 1993, were no longer presented for payment. This was purportedly in conformity with petitioner
bank's procedure that once a client's account was forwarded to its account representative, all remaining checks
outstanding as of the date the account was forwarded were no longer presented for payment.
On the theory that respondent defaulted in his payments, the check representing the payment for August 10,
1991 being unsigned, petitioner, in a letter dated January 21, 1993, demanded from private respondent the payment of
the balance of the debt, including liquidated damages. The latter refused, prompting petitioner to file an action for
replevin and damages before the Pasay City Regional Trial Court (RTC). Private respondent, in his Answer, interposed
a counterclaim for damages.
After trial, the RTC[3] rendered a decision disposing of the case as follows:
WHEREFORE, in view of the foregoing, judgment is hereby rendered as follows:
I. The complaint, for lack of cause of action, is hereby DISMISSED and plaintiff RCBC is hereby ordered,
A. To accept the payment equivalent to the three checks amounting to a total of P44,938.00, without
interest
B. To release/cancel the mortgage on the car xxx upon payment of the amount of P44,938.00
without interest.
C. To pay the cost of suit
II. On The Counterclaim
A. Plaintiff RCBC to pay Atty. Lustre the amount of P200,000.00 as moral damages.
B. RCBC to pay P100,000.00 as exemplary damages.
C. RCBC to pay Atty. Obispo P50,000.00 as Attorney's fees. Atty. Lustre is not entitled to any fee
for lawyering for himself.
All awards for damages are subject to payment of fees to be assessed by the Clerk of Court, RTC, Pasay City.
SO ORDERED.
On appeal by petitioner, the Court of Appeals affirmed the decision of the RTC, thus:
We xxx concur with the trial court's ruling that the Chattel Mortgage contract being a contract of adhesion that is, one
wherein a party, usually a corporation, prepares the stipulations the contract, while the other party merely affixes his
signature or his "adhesion" thereto xxx - is to be strictly construed against appellant bank which prepared the form
Contract xxx. Hence xxx paragraph 11 of the Chattel Mortgage contract [containing the acceleration clause] should be
construed to cover only deliberate and advertent failure on the part of the mortgagor to pay an amortization as it
became due in line with the consistent holding of the Supreme Court construing obscurities and ambiguities in the
restrictive sense against the drafter thereof xxx in the light of
Article 1377 of the Civil Code.
In the case at bench, plaintiff-appellant's imputation of default to defendant-appellee rested solely on the fact that the
5th check issued by appellee xxx was recalled for lack of signature. However, the check was recalled only after the
amount covered thereby had been deducted from defendant-appellee's account, as shown by the testimony of
plaintiff's own witness Francisco Bulatao who was in charge of the preparation of the list and trial balances of bank
customers xxx. The "default" was therefore not a case of failure to pay, the check being sufficiently funded, and which
amount was in fact already debitted [sic] from appellee's account by the appellant bank which subsequently re-
credited the amount to defendant-appellee's account for lack of signature. All these actions RCBC did on its own
without notifying defendant until sixteen (16) months later when it wrote its demand letter dated January 21, 1993.
Clearly, appellant bank was remiss in the performance of its functions for it could have easily called the defendant's
attention to the lack of signature on the check and sent the check to, or summoned, the latter to affix his signature. It is
also to be noted that the demand letter contains no explanation as to how defendant-appellee incurred arrearages in
the amount of P66,255.70, which is why defendant-appellee made a protest notation thereon.
Notably, all the other checks issued by the appellee dated subsequent to August 10, 1991 and dated earlier than the
demand letter, were duly encashed. This fact should have already prompted the appellant bank to review its action
relative to the unsigned check. xxx[4]
We take exception to the application by both the trial and appellate courts of Article 1377 of the Civil Code, which
states:
The interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity.
It bears stressing that a contract of adhesion is just as binding as ordinary contracts.[5] It is true that we have, on
occasion, struck down such contracts as void when the weaker party is imposed upon in dealing with the dominant
bargaining party and is reduced to the alternative of taking it or leaving it, completely deprived of the opportunity to
bargain on equal footing.[6] Nevertheless, contracts of adhesion are not invalid per se;[7] they are not entirely
prohibited.[8] The one who adheres to the contract is in reality free to reject it entirely; if he adheres, he gives his
consent.[9]
While ambiguities in a contract of adhesion are to be construed against the party that prepared the same,[10] this
rule applies only if the stipulations in such contract are obscure or ambiguous. If the terms thereof are clear and leave
no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control.[11] In the latter Failing thus, petitioner is liable for damages caused to private respondent.[20] These include moral damages for
case, there would be no need for construction.[12] the mental anguish, serious anxiety, besmirched reputation, wounded feelings and social humiliation suffered by the
latter.[21] The trial court found that private respondent was
Here, the terms of paragraph 11 of the Chattel Mortgage Contract[13] are clear. Said paragraph states:

11. In case the MORTGAGOR fails to pay any of the installments, or to pay the interest that may be due as provided in
the said promissory note, the whole amount remaining unpaid therein shall immediately become due and payable and
the mortgage on the property (ies) herein-above described may be foreclosed by the MORTGAGEE, or the
MORTGAGEE may take any other legal action to enforce collection of the obligation hereby secured, and in either
case the MORTGAGOR further agrees to pay the MORTGAGEE an additional sum of 25% of the principal due and
unpaid, as liquidated damages, which said sum shall become part thereof. The MORTGAGOR hereby waives
reimbursement of the amount heretofore paid by him/it to the MORTGAGEE.
[a] client who has shared transactions for over twenty years with a bank xxx. The shabby treatment given the
defendant is unpardonable since he was put to shame and embarrassment after the case was filed in Court. He is a
lawyer in his own right, married to another member of the bar. He sired children who are all professionals in their
chosen field. He is known to the community of golfers with whom he gravitates. Surely, the filing of the case made
defendant feel so bad and bothered.
To deter others from emulating petitioners callous example, we affirm the award of exemplary damages.[22] As
exemplary damages are warranted, so are attorney's fees.[23]

The above terms leave no room for construction. All that is required is the application thereof. We, however, find excessive the amount of damages awarded by the trial court in favor of private respondent
with respect to his counterclaims and, accordingly, reduce the same as follows:
Petitioner claims that private respondent's check representing the fifth installment was "not encashed, [14] such
that the installment for August 1991 was not paid. By virtue of paragraph 11 above, petitioner submits that it "was justified
in treating the entire balance of the obligation as due and demandable."[15] Despite demand by petitioner, however, (a) Moral damages - fromP200,000.00 to P100,000.00,
private respondent refused to pay the balance of the debt. Petitioner, in sum, imputes delay on the part of private
respondent.
(b) (b)Exemplarydamages from P100,000.00 to P75,000.00,
We do not subscribe to petitioner's theory.
(c) (c) Attorney's fees - from P 50,000,00 to P 30,000.00.
Article 1170 of the Civil Code states that those who in the performance of their obligations are guilty of delay are
liable for damages. The delay in the performance of the obligation, however, must be either malicious or
negligent.[16] Thus, assuming that private respondent was guilty of delay in the payment of the value of the unsigned WHEREFORE, subject to these modifications, the decision of the Court of Appeals is AFFIRMED.
check, private respondent cannot be held liable for damages. There is no imputation, much less evidence, that private
respondent acted with malice or negligence in failing to sign the check. Indeed, we agree with the Court of Appeals' SO ORDERED.
finding that such omission was mere "inadvertence" on the part of private respondent. Toyota salesperson Jorge
Geronimo testified that he even verified whether private respondent had signed all the checks and in fact returned three Davide, Jr., C.J., (Chairman), Melo, and Pardo, JJ., concur.
or four unsigned checks to him for signing:

Atty. Obispo:

After these receipts were issued, what else did you do about the transaction? [5]
Articles 1305, 1308, Civil Code. Serra vs. Court of Appeals, 229 SCRA 60 (1994).

[6]
Phil. Commercial International Bank vs. Court Bank vs. Court of Appeals, 255 SCRA 299 (1996).
A: During our transaction with Atty. Lustre, I found out when he issued to me the 24 checks, I found out 3 to 4
checks are unsigned and I asked him to sign these checks. [7]
Philippine Airlines, Inc. vs. Court of Appeals, 255 SCRA 48 (1996); Telengtan Brothers & Sons, Inc. vs. Court of Appeals, 236 SCRA 617 (1994).

Atty. Obispo: [8]

Telengtan Brothers & Sons, Inc. vs. Court of Appeals, supra, Philippine American General Insurance Co., Inc. vs. Sweet Lines, Inc., 212 SCRA 194 (1992); Pan
American Airways vs. Rapadas, 209 SCRA 67 (1992); Saludo, Jr. vs. Court of Appeals, 207 SCRA 498 (1992).
What did you do? [9]
Serra vs. Court of Appeals, supra; Philippine American General Insurance Co., Inc. vs. Sweet Lines, Inc., supra; Saludo, Jr. vs. Court of Appeals, supra.

A: I asked him to sign the checks. After signing the checks, I reviewed again all the documents, after I reviewed all [10]
Angeles vs. Calasanz, 135 SCRA 323 (1985).
the documents and found out that all are completed and the downpayments was completed, we released to
[11]
him the car.[17] Article 1370, Civil Code. Salvatierra vs. Court of Appeals, 261 SCRA 45 (1996); Abella vs. Court of Appeals 257 SCRA 482 (1996); Syquia vs. Court of Appeals, 217
SCRA 624 (1993); Lufthansa German Airlines vs. Court of Appeals, 208 SCRA 708 (1992); Papa vs. Alonzo, 198 SCRA 564 (1991).

Even when the checks, were delivered to petitioner, it did not object to the unsigned check. In view of the lack of malice [16]
IV Tolentino, Commentaries and Jurisprudence on the Civil Code of the Philippines, 1991 ed., p. 113.
or negligence on the part of private respondent, petitioner's blind and mechanical invocation of paragraph 11 of the
[17]
contract of chattel mortgage was unwarranted. TSN, March 10, 1994, pp. 15-16.

[18]
Article 1159, Civil Code.
Petitioners conduct, in the light of the circumstances of this case, can only be described as mercenary. Petitioner
had already debited the value of the unsigned check from private respondent's account only to re-credit it much later to [19]
Article 19, Civil Code.
him. Thereafter, petitioner encashed checks subsequently dated, then abruptly refused to encash the last two. More
[20]
Article 19, in relation to Article 21, id.
than a year after the date of the unsigned check, petitioner, claiming delay and invoking paragraph 11, demanded from
private respondent payment of the value of said check and. that of the last two checks, including liquidated damages. As [21]
Article 2217, id.
pointed out by the trial court, this whole controversy could have been avoided if only petitioner bothered to call up private
respondent and ask him to sign the check. Good faith not only in compliance with its contractual obligations,[18] but also [22]
Article 2229, id.
in observance of the standard in human relations, for every person "to act with justice, give everyone his due, and [23]
Article 2208 (1), id
observe honesty and good faith."[19] behooved the bank to do so.
 FIRST DIVISION
[G.R. No. 115129. February 12, 1997]
IGNACIO BARZAGA, petitioner, vs. COURT OF APPEALS and ANGELITO ALVIAR, respondents.
DECISION
BELLOSILLO, J.:
The Fates ordained that Christmas 1990 be bleak for Ignacio Barzaga and his family. On the nineteenth of
December Ignacio's wife succumbed to a debilitating ailment after prolonged pain and suffering. Forewarned by her
attending physicians of her impending death, she expressed her wish to be laid to rest before Christmas day to spare
her family from keeping lonely vigil over her remains while the whole of Christendom celebrate the Nativity of their
Redeemer.
Drained to the bone from the tragedy that befell his family yet preoccupied with overseeing the wake for his
departed wife, Ignacio Barzaga set out to arrange for her interment on the twenty-fourth of December in
obedience semper fidelis to her dying wish. But her final entreaty, unfortunately, could not be carried out. Dire events
conspired to block his plans that forthwith gave him and his family their gloomiest Christmas ever.
This is Barzaga's story. On 21 December 1990, at about three o`clock in the afternoon, he went to the hardware
store of respondent Angelito Alviar to inquire about the availability of certain materials to be used in the construction of
a niche for his wife. He also asked if the materials could be delivered at once. Marina Boncales, Alviar's storekeeper,
replied that she had yet to verify if the store had pending deliveries that afternoon because if there were then all
subsequent purchases would have to be delivered the following day. With that reply petitioner left.
At seven o' clock the following morning, 22 December, Barzaga returned to Alviar's hardware store to follow up
his purchase of construction materials. He told the store employees that the materials he was buying would have to be
delivered at the Memorial Cemetery in Dasmarias, Cavite, by eight o'clock that morning since his hired workers were
already at the burial site and time was of the essence. Marina Boncales agreed to deliver the items at the designated
time, date and place. With this assurance, Barzaga purchased the materials and paid in full the amount
of P2,110.00. Thereafter he joined his workers at the cemetery, which was only a kilometer away, to await the delivery.
The construction materials did not arrive at eight o'clock as promised. At nine o' clock, the delivery was still
nowhere in sight. Barzaga returned to the hardware store to inquire about the delay. Boncales assured him that although
the delivery truck was not yet around it had already left the garage and that as soon as it arrived the materials would be
brought over to the cemetery in no time at all. That left petitioner no choice but to rejoin his workers at the memorial park
and wait for the materials.
By ten o'clock, there was still no delivery. This prompted petitioner to return to the store to inquire about the
materials. But he received the same answer from respondent's employees who even cajoled him to go back to the burial
place as they would just follow with his construction materials.
After hours of waiting - which seemed interminable to him - Barzaga became extremely upset. He decided to
dismiss his laborers for the day. He proceeded to the police station, which was just nearby, and lodged a complaint
against Alviar. He had his complaint entered in the police blotter. When he returned again to the store he saw the delivery
truck already there but the materials he purchased were not yet ready for loading. Distressed that Alviar's employees
were not the least concerned, despite his impassioned pleas, Barzaga decided to cancel his transaction with the store
and look for construction materials elsewhere.
In the afternoon of that day, petitioner was able to buy from another store. But since darkness was already setting
in and his workers had left, he made up his mind to start his project the following morning, 23 December. But he knew
that the niche would not be finish in time for the scheduled burial the following day. His laborers had to take a break on
Christmas Day and they could only resume in the morning of the twenty-sixth. The niche was completed in the afternoon
and Barzaga's wife was finally laid to rest. However, it was two-and-a-half (2-1/2) days behind schedule.
On 21 January 1991, tormented perhaps by his inability to fulfill his wife's dying wish, Barzaga wrote private
respondent Alviar demanding recompense for the damage he suffered.Alviar did not respond. Consequently, petitioner
sued him before the Regional Trial Court.[1]
Resisting petitioner's claim, private respondent contended that legal delay could not be validly ascribed to him
because no specific time of delivery was agreed upon between them. He pointed out that the invoices evidencing the
sale did not contain any stipulation as to the exact time of delivery and that assuming that the materials were not
delivered within the period desired by petitioner, the delivery truck suffered a flat tire on the way to the store to pick up
the materials. Besides, his men were ready to make the delivery by ten-thirty in the morning of 22 December but
petitioner refused to accept them. According to Alviar, it was this obstinate refusal of petitioner to accept delivery that
caused the delay in the construction of the niche and the consequent failure of the family to inter their loved one on the
twenty-fourth of December, and that, if at all, it was petitioner and no other who brought about all his personal woes.
Upholding the proposition that respondent incurred in delay in the delivery of the construction materials resulting
in undue prejudice to petitioner, the trial court ordered respondent Alviar to pay petitioner (a) P2,110.00 as refund for
the purchase price of the materials with interest per annum computed at the legal rate from the date of the filing of the
complaint, (b) P5,000.00 as temperate damages, (c) P20,000.00 as moral damages, (d) P5,000.00 as litigation
expenses, and (e) P5,000.00 as attorney's fees.
On appeal, respondent Court of Appeals reversed the lower court and ruled that there was no contractual
commitment as to the exact time of delivery since this was not indicated in the invoice receipts covering the sale.[2]
The arrangement to deliver the materials merely implied that delivery should be made within a reasonable time
but that the conclusion that since petitioner's workers were already at the graveyard the delivery had to be made at that
precise moment, is non-sequitur. The Court of Appeals also held that assuming that there was delay, petitioner still had
sufficient time to construct the tomb and hold his wife's burial as she wished.
We sustain the trial court. An assiduous scrutiny of the record convinces us that respondent Angelito Alviar was
negligent and incurred in delay in the performance of his contractual obligation. This sufficiently entitles petitioner Ignacio
Barzaga to be indemnified for the damage he suffered as a consequence of delay or a contractual breach. The law
expressly provides that those who in the performance of their obligation are guilty of fraud, negligence, or delay and
those who in any manner contravene the tenor thereof, are liable for damages.[3]
Contrary to the appellate court's factual determination, there was a specific time agreed upon for the delivery of
the materials to the cemetery. Petitioner went to private respondent's store on 21 December precisely to inquire if the
materials he intended to purchase could be delivered immediately. But he was told by the storekeeper that if there were
still deliveries to be made that afternoon his order would be delivered the following day. With this in mind Barzaga
decided to buy the construction materials the following morning after he was assured of immediate delivery according
to his time frame. The argument that the invoices never indicated a specific delivery time must fall in the face of the
positive verbal commitment of respondent's storekeeper. Consequently it was no longer necessary to indicate in the
invoices the exact time the purchased items were to be brought to the cemetery. In fact, storekeeper Boncales admitted
that it was her custom not to indicate the time of delivery whenever she prepared invoices.[4]
Private respondent invokes fortuitous event as his handy excuse for that "bit of delay" in the delivery of petitioner's
purchases. He maintains that Barzaga should have allowed his delivery men a little more time to bring the construction
materials over to the cemetery since a few hours more would not really matter and considering that his truck had a flat
tire. Besides, according to him, Barzaga still had sufficient time to build the tomb for his wife.
This is a gratuitous assertion that borders on callousness. Private respondent had no right to manipulate
petitioner's timetable and substitute it with his own. Petitioner had a deadline to meet. A few hours of delay was no
piddling matter to him who in his bereavement had yet to attend to other pressing family concerns. Despite this,
respondent's employees still made light of his earnest importunings for an immediate delivery. As petitioner bitterly
declared in court " x x x they (respondent's employees) were making a fool out of me." [5]
We also find unacceptable respondent's justification that his truck had a flat tire, for this event, if indeed it
happened, was forseeable according to the trial court, and as such should have been reasonably guarded against. The
nature of private respondent's business requires that he should be ready at all times to meet contingencies of this
kind. One piece of testimony by respondent's witness Marina Boncales has caught our attention - that the delivery truck
arrived a little late than usual because it came from a delivery of materials in Langcaan, Dasmarias,
Cavite.[6] Significantly, this information was withheld by Boncales from petitioner when the latter was negotiating with her
for the purchase of construction materials.Consequently, it is not unreasonable to suppose that had she told petitioner
of this fact and that the delivery of the materials would consequently be delayed, petitioner would not have bought the
materials from respondent's hardware store but elsewhere which could meet his time requirement. The deliberate
suppression of this information by itself manifests a certain degree of bad faith on the part of respondent's storekeeper.
The appellate court appears to have belittled petitioner's submission that under the prevailing circumstances time
was of the essence in the delivery of the materials to the grave site.However, we find petitioner's assertion to be
anchored on solid ground. The niche had to be constructed at the very least on the twenty-second of December
considering that it would take about two (2) days to finish the job if the interment was to take place on the twenty-fourth
of the month. Respondent's delay in the delivery of the construction materials wasted so much time that construction of
 [6]
the tomb could start only on the twenty-third. It could not be ready for the scheduled burial of petitioner's wife. This TSN, 6 December 1991, p. 35.
undoubtedly prolonged the wake, in addition to the fact that work at the cemetery had to be put off on Christmas day.
[7]
Art. 1169, last par., Civil Code.
This case is clearly one of non-performance of a reciprocal obligation.[7] In their contract of purchase and sale,
[8]
petitioner had already complied fully with what was required of him as purchaser, i.e., the payment of the purchase price Dichoso v. Court of Appeals, G.R. No. 55613, 10 December 1990, 192 SCRA 169; People v. Rosario, G.R. No.
of P2,110.00. It was incumbent upon respondent to immediately fulfill his obligation to deliver the goods otherwise delay 108789, 18 July 1995, 246 SCRA 658.
would attach.
[9]
Philippine Airlines, Inc. v. Court of Appeals, G.R. Nos. 50504-05, 13 August 1990, 188 SCRA 461.
We therefore sustain the award of moral damages. It cannot be denied that petitioner and his family suffered
wounded feelings, mental anguish and serious anxiety while keeping watch on Christmas day over the remains of their
loved one who could not be laid to rest on the date she herself had chosen. There is no gainsaying the inexpressible
pain and sorrow Ignacio Barzaga and his family bore at that moment caused no less by the ineptitude, cavalier behavior
and bad faith of respondent and his employees in the performance of an obligation voluntarily entered into.

We also affirm the grant of exemplary damages. The lackadaisical and feckless attitude of the employees of
respondent over which he exercised supervisory authority indicates gross negligence in the fulfillment of his business
obligations. Respondent Alviar and his employees should have exercised fairness and good judgment in dealing with
petitioner who was then grieving over the loss of his wife. Instead of commiserating with him, respondent and his
employees contributed to petitioner's anguish by causing him to bear the agony resulting from his inability to fulfill his
wife's dying wish.

We delete however the award of temperate damages. Under Art. 2224 of the Civil Code, temperate damages are
more than nominal but less than compensatory, and may be recovered when the court finds that some pecuniary loss
has been suffered but the amount cannot, from the nature of the case, be proved with certainty. In this case, the trial
court found that plaintiff suffered damages in the form of wages for the hired workers for 22 December 1990 and
expenses incurred during the extra two (2) days of the wake. The record however does not show that petitioner
presented proof of the actual amount of expenses he incurred which seems to be the reason the trial court awarded to
him temperate damages instead. This is an erroneous application of the concept of temperate damages. While petitioner
may have indeed suffered pecuniary losses, these by their very nature could be established with certainty by means of
payment receipts. As such, the claim falls unequivocally within the realm of actual or compensatory
damages. Petitioner's failure to prove actual expenditure consequently conduces to a failure of his claim. For in
determining actual damages, the court cannot rely on mere assertions, speculations, conjectures or guesswork but must
depend on competent proof and on the best evidence obtainable regarding the actual amount of loss.[8]

We affirm the award of attorney's fees and litigation expenses. Award of damages, attorney's fees and litigation
costs is left to the sound discretion of the court, and if such discretion be well exercised, as in this case, it will not be
disturbed on appeal.[9]

WHEREFORE, the decision of the Court of Appeals is REVERSED and SET ASIDE except insofar as it
GRANTED on a motion for reconsideration the refund by private respondent of the amount of P2,110.00 paid by
petitioner for the construction materials. Consequently, except for the award of P5,000.00 as temperate damages which
we delete, the decision of the Regional Trial Court granting petitioner (a) P2,110.00 as refund for the value of materials
with interest computed at the legal rate per annum from the date of the filing of the case; (b) P20,000.00 as moral
damages; (c) P10,000.00 as exemplary damages; (d) P5,000.00 as litigation expenses; and (4) P5,000.00 as attorney's
fees, is AFFIRMED. No costs.

SO ORDERED.

Padilla, (Chairman), Vitug, Kapunan, and Hermosisima, Jr., JJ., concur.

[1]
Assigned to RTC-Br. 21, Imus, Cavite, presided over by Judge Roy S. del Rosario, Rollo, p. 68.
[2]
Decision penned by Justice Manuel C. Herrera, concurred in by Justices Cezar D. Francisco and Buenaventura J.
Guerrero, Rollo, p. 38.
[3]
Art. 1170, Civil Code.
[4]
TSN, 6 December 1991, pp. 22-23.
[5]
TSN, 19 September 1991, p. 47.
 Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 174269 May 8, 2009
POLO S. PANTALEON, Petitioner,
vs.
AMERICAN EXPRESS INTERNATIONAL, INC., Respondent.
DECISION
TINGA, J.:
The petitioner, lawyer Polo Pantaleon, his wife Julialinda, daughter Anna Regina and son Adrian Roberto, joined an
escorted tour of Western Europe organized by Trafalgar Tours of Europe, Ltd., in October of 1991. The tour group
arrived in Amsterdam in the afternoon of 25 October 1991, the second to the last day of the tour. As the group had
arrived late in the city, they failed to engage in any sight-seeing. Instead, it was agreed upon that they would start early
the next day to see the entire city before ending the tour.
The following day, the last day of the tour, the group arrived at the Coster Diamond House in Amsterdam around 10
minutes before 9:00 a.m. The group had agreed that the visit to Coster should end by 9:30 a.m. to allow enough time
to take in a guided city tour of Amsterdam. The group was ushered into Coster shortly before 9:00 a.m., and listened
to a lecture on the art of diamond polishing that lasted for around ten minutes. 1 Afterwards, the group was led to the
store’s showroom to allow them to select items for purchase. Mrs. Pantaleon had already planned to purchase even
before the tour began a 2.5 karat diamond brilliant cut, and she found a diamond close enough in approximation that
she decided to buy.2 Mrs. Pantaleon also selected for purchase a pendant and a chain,3 all of which totaled U.S.
$13,826.00.
To pay for these purchases, Pantaleon presented his American Express credit card together with his passport to the
Coster sales clerk. This occurred at around 9:15 a.m., or 15 minutes before the tour group was slated to depart from
the store. The sales clerk took the card’s imprint, and asked Pantaleon to sign the charge slip. The charge purchase
was then referred electronically to respondent’s Amsterdam office at 9:20 a.m.
Ten minutes later, the store clerk informed Pantaleon that his AmexCard had not yet been approved. His son, who had
already boarded the tour bus, soon returned to Coster and informed the other members of the Pantaleon family that
the entire tour group was waiting for them. As it was already 9:40 a.m., and he was already worried about further
inconveniencing the tour group, Pantaleon asked the store clerk to cancel the sale. The store manager though asked
plaintiff to wait a few more minutes. After 15 minutes, the store manager informed Pantaleon that respondent had
demanded bank references. Pantaleon supplied the names of his depositary banks, then instructed his daughter to
return to the bus and apologize to the tour group for the delay.
At around 10:00 a.m, or around 45 minutes after Pantaleon had presented his AmexCard, and 30 minutes after the
tour group was supposed to have left the store, Coster decided to release the items even without respondent’s
approval of the purchase. The spouses Pantaleon returned to the bus. It is alleged that their offers of apology were
met by their tourmates with stony silence.4 The tour group’s visible irritation was aggravated when the tour guide
announced that the city tour of Amsterdam was to be canceled due to lack of remaining time, as they had to catch a
3:00 p.m. ferry at Calais, Belgium to London.5 Mrs. Pantaleon ended up weeping, while her husband had to take a
tranquilizer to calm his nerves.
It later emerged that Pantaleon’s purchase was first transmitted for approval to respondent’s Amsterdam office at 9:20
a.m., Amsterdam time, then referred to respondent’s Manila office at 9:33 a.m, then finally approved at 10:19 a.m.,
Amsterdam time.6 The Approval Code was transmitted to respondent’s Amsterdam office at 10:38 a.m., several
minutes after petitioner had already left Coster, and 78 minutes from the time the purchases were electronically
transmitted by the jewelry store to respondent’s Amsterdam office.
After the star-crossed tour had ended, the Pantaleon family proceeded to the United States before returning to Manila
on 12 November 1992. While in the United States, Pantaleon continued to use his AmEx card, several times without
hassle or delay, but with two other incidents similar to the Amsterdam brouhaha. On 30 October 1991, Pantaleon
purchased golf equipment amounting to US $1,475.00 using his AmEx card, but he cancelled his credit card purchase
and borrowed money instead from a friend, after more than 30 minutes had transpired without the purchase having
been approved. On 3 November 1991, Pantaleon used the card to purchase children’s shoes worth $87.00 at a store
in Boston, and it took 20 minutes before this transaction was approved by respondent.
On 4 March 1992, after coming back to Manila, Pantaleon sent a letter7 through counsel to the respondent, demanding
an apology for the "inconvenience, humiliation and embarrassment he and his family thereby suffered" for
respondent’s refusal to provide credit authorization for the aforementioned purchases.8 In response, respondent sent a
letter dated 24 March 1992,9 stating among others that the delay in authorizing the purchase from Coster was
attributable to the circumstance that the charged purchase of US $13,826.00 "was out of the usual charge purchase
pattern established."10 Since respondent refused to accede to Pantaleon’s demand for an apology, the aggrieved
cardholder instituted an action for damages with the Regional Trial Court (RTC) of Makati City, Branch
145.11 Pantaleon prayed that he be awarded ₱2,000,000.00, as moral damages; ₱500,000.00, as exemplary
damages; ₱100,000.00, as attorney’s fees; and ₱50,000.00 as litigation expenses.12
On 5 August 1996, the Makati City RTC rendered a decision13 in favor of Pantaleon, awarding him ₱500,000.00 as
moral damages, ₱300,000.00 as exemplary damages, ₱100,000.00 as attorney’s fees, and ₱85,233.01 as expenses
of litigation. Respondent filed a Notice of Appeal, while Pantaleon moved for partial reconsideration, praying that the
trial court award the increased amount of moral and exemplary damages he had prayed for.14 The RTC denied
Pantaleon’s motion for partial reconsideration, and thereafter gave due course to respondent’s Notice of Appeal.15
On 18 August 2006, the Court of Appeals rendered a decision16 reversing the award of damages in favor of Pantaleon,
holding that respondent had not breached its obligations to petitioner. Hence, this petition.
The key question is whether respondent, in connection with the aforementioned transactions, had committed a breach
of its obligations to Pantaleon. In addition, Pantaleon submits that even assuming that respondent had not been in
breach of its obligations, it still remained liable for damages under Article 21 of the Civil Code.
The RTC had concluded, based on the testimonial representations of Pantaleon and respondent’s credit authorizer,
Edgardo Jaurigue, that the normal approval time for purchases was "a matter of seconds." Based on that standard,
respondent had been in clear delay with respect to the three subject transactions. As it appears, the Court of Appeals
conceded that there had been delay on the part of respondent in approving the purchases. However, it made two
critical conclusions in favor of respondent. First, the appellate court ruled that the delay was not attended by bad faith,
malice, or gross negligence. Second, it ruled that respondent "had exercised diligent efforts to effect the approval" of
the purchases, which were "not in accordance with the charge pattern" petitioner had established for himself, as
exemplified by the fact that at Coster, he was "making his very first single charge purchase of US$13,826," and "the
record of [petitioner]’s past spending with [respondent] at the time does not favorably support his ability to pay for such
purchase."17
On the premise that there was an obligation on the part of respondent "to approve or disapprove with dispatch the
charge purchase," petitioner argues that the failure to timely approve or disapprove the purchase constituted mora
solvendi on the part of respondent in the performance of its obligation. For its part, respondent characterizes the
depiction by petitioner of its obligation to him as "to approve purchases instantaneously or in a matter of seconds."
Petitioner correctly cites that under mora solvendi, the three requisites for a finding of default are that the obligation is
demandable and liquidated; the debtor delays performance; and the creditor judicially or extrajudicially requires the
debtor’s performance.18 Petitioner asserts that the Court of Appeals had wrongly applied the principle of mora
accipiendi, which relates to delay on the part of the obligee in accepting the performance of the obligation by the
obligor. The requisites of mora accipiendi are: an offer of performance by the debtor who has the required capacity;
the offer must be to comply with the prestation as it should be performed; and the creditor refuses the performance
without just cause.19 The error of the appellate court, argues petitioner, is in relying on the invocation by respondent of
"just cause" for the delay, since while just cause is determinative of mora accipiendi, it is not so with the case of mora
solvendi.
We can see the possible source of confusion as to which type of mora to appreciate. Generally, the relationship
between a credit card provider and its card holders is that of creditor-debtor,20 with the card company as the creditor
extending loans and credit to the card holder, who as debtor is obliged to repay the creditor. This relationship already
takes exception to the general rule that as between a bank and its depositors, the bank is deemed as the debtor while
the depositor is considered as the creditor.21 Petitioner is asking us, not baselessly, to again shift perspectives and
again see the credit card company as the debtor/obligor, insofar as it has the obligation to the customer as
creditor/obligee to act promptly on its purchases on credit.
Ultimately, petitioner’s perspective appears more sensible than if we were to still regard respondent as the creditor in
the context of this cause of action. If there was delay on the part of respondent in its normal role as creditor to the
cardholder, such delay would not have been in the acceptance of the performance of the debtor’s obligation (i.e., the
repayment of the debt), but it would be delay in the extension of the credit in the first place. Such delay would not fall
under mora accipiendi, which contemplates that the obligation of the debtor, such as the actual purchases on credit,
has already been constituted. Herein, the establishment of the debt itself (purchases on credit of the jewelry) had not
yet been perfected, as it remained pending the approval or consent of the respondent credit card company.
Still, in order for us to appreciate that respondent was in mora solvendi, we will have to first recognize that there was
indeed an obligation on the part of respondent to act on petitioner’s purchases with "timely dispatch," or for the
purposes of this case, within a period significantly less than the one hour it apparently took before the purchase at
Coster was finally approved.
The findings of the trial court, to our mind, amply established that the tardiness on the part of respondent in acting on
petitioner’s purchase at Coster did constitute culpable delay on its part in complying with its obligation to act promptly
on its customer’s purchase request, whether such action be favorable or unfavorable. We quote the trial court, thus:
As to the first issue, both parties have testified that normal approval time for purchases was a matter of seconds.
Plaintiff testified that his personal experience with the use of the card was that except for the three charge purchases
subject of this case, approvals of his charge purchases were always obtained in a matter of seconds.
Defendant’s credit authorizer Edgardo Jaurique likewise testified:
Q. – You also testified that on normal occasions, the normal approval time for charges would be 3 to 4
seconds?
A. – Yes, Ma’am.
Both parties likewise presented evidence that the processing and approval of plaintiff’s charge purchase at the Coster
Diamond House was way beyond the normal approval time of a "matter of seconds".
Plaintiff testified that he presented his AmexCard to the sales clerk at Coster, at 9:15 a.m. and by the time he had to
leave the store at 10:05 a.m., no approval had yet been received. In fact, the Credit Authorization System (CAS)
record of defendant at Phoenix Amex shows that defendant’s Amsterdam office received the request to approve
plaintiff’s charge purchase at 9:20 a.m., Amsterdam time or 01:20, Phoenix time, and that the defendant relayed its
approval to Coster at 10:38 a.m., Amsterdam time, or 2:38, Phoenix time, or a total time lapse of one hour and [18]
minutes. And even then, the approval was conditional as it directed in computerese [sic] "Positive Identification of Card
holder necessary further charges require bank information due to high exposure. By Jack Manila."
The delay in the processing is apparent to be undue as shown from the frantic successive queries of Amexco
Amsterdam which reads: "US$13,826. Cardmember buying jewels. ID seen. Advise how long will this take?" They
were sent at 01:33, 01:37, 01:40, 01:45, 01:52 and 02:08, all times Phoenix. Manila Amexco could be unaware of the
need for speed in resolving the charge purchase referred to it, yet it sat on its hand, unconcerned.
xxx
To repeat, the Credit Authorization System (CAS) record on the Amsterdam transaction shows how Amexco
Netherlands viewed the delay as unusually frustrating. In sequence expressed in Phoenix time from 01:20 when the
charge purchased was referred for authorization, defendants own record shows:
01:22 – the authorization is referred to Manila Amexco
01:32 – Netherlands gives information that the identification of the cardmember has been presented and
he is buying jewelries worth US $13,826.
01:33 – Netherlands asks "How long will this take?"
02:08 – Netherlands is still asking "How long will this take?"
The Court is convinced that defendants delay constitute[s] breach of its contractual obligation to act on his use of the
card abroad "with special handling."22 (Citations omitted)
xxx
Notwithstanding the popular notion that credit card purchases are approved "within seconds," there really is no strict,
legally determinative point of demarcation on how long must it take for a credit card company to approve or disapprove
a customer’s purchase, much less one specifically contracted upon by the parties. Yet this is one of those instances
when "you’d know it when you’d see it," and one hour appears to be an awfully long, patently unreasonable length of
time to approve or disapprove a credit card purchase. It is long enough time for the customer to walk to a bank a
kilometer away, withdraw money over the counter, and return to the store.
Notably, petitioner frames the obligation of respondent as "to approve or disapprove" the purchase "in timely dispatch,"
and not "to approve the purchase instantaneously or within seconds." Certainly, had respondent disapproved
petitioner’s purchase "within seconds" or within a timely manner, this particular action would have never seen the light
of day. Petitioner and his family would have returned to the bus without delay – internally humiliated perhaps over the
rejection of his card – yet spared the shame of being held accountable by newly-made friends for making them miss
the chance to tour the city of Amsterdam.
We do not wish do dispute that respondent has the right, if not the obligation, to verify whether the credit it is extending
upon on a particular purchase was indeed contracted by the cardholder, and that the cardholder is within his means to
make such transaction. The culpable failure of respondent herein is not the failure to timely approve petitioner’s
purchase, but the more elemental failure to timely act on the same, whether favorably or unfavorably. Even assuming
that respondent’s credit authorizers did not have sufficient basis on hand to make a judgment, we see no reason why
respondent could not have promptly informed petitioner the reason for the delay, and duly advised him that resolving
the same could take some time. In that way, petitioner would have had informed basis on whether or not to pursue the
transaction at Coster, given the attending circumstances. Instead, petitioner was left uncomfortably dangling in the
chilly autumn winds in a foreign land and soon forced to confront the wrath of foreign folk.
Moral damages avail in cases of breach of contract where the defendant acted fraudulently or in bad faith, and the
court should find that under the circumstances, such damages are due. The findings of the trial court are ample in
establishing the bad faith and unjustified neglect of respondent, attributable in particular to the "dilly-dallying" of
respondent’s Manila credit authorizer, Edgardo Jaurique.23 Wrote the trial court:
While it is true that the Cardmembership Agreement, which defendant prepared, is silent as to the amount of time it <p
WE CONCUR:
should take defendant to grant authorization for a charge purchase, defendant acknowledged that the normal time for CONCHITA CARPIO MORALES*
approval should only be three to four seconds. Specially so with cards used abroad which requires "special handling", Associate Justice
Acting Chairperson
meaning with priority. Otherwise, the object of credit or charge cards would be lost; it would be so inconvenient to use
PRESBITERO J. VELASCO, JR. TERESITA LEONARDO DE CASTRO**
that buyers and consumers would be better off carrying bundles of currency or traveller’s checks, which can be Associate Justice Associate Justice
delivered and accepted quickly. Such right was not accorded to plaintiff in the instances complained off for reasons ARTURO D. BRION
known only to defendant at that time. This, to the Court’s mind, amounts to a wanton and deliberate refusal to comply Associate Justice
with its contractual obligations, or at least abuse of its rights, under the contract.24 ATTESTATION
I attest that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Court’s Division.
CONCHITA CARPIO MORALES
Associate Justice
xxx Acting Chairperson, Second Division
CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution, and the Division Acting Chairperson’s Attestation, it is hereby certified that the conclusions in the above
Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Court’s Division.
The delay committed by defendant was clearly attended by unjustified neglect and bad faith, since it alleges to have REYNATO S. PUNO
consumed more than one hour to simply go over plaintiff’s past credit history with defendant, his payment record and Chief Justice

his credit and bank references, when all such data are already stored and readily available from its computer. This Footnotes
Court also takes note of the fact that there is nothing in plaintiff’s billing history that would warrant the imprudent * Acting Chairperson.
** Per Special Order No. 619, Justice Teresita J. Leonardo-De Castro is hereby designated as additional member of the Second Division in lieu of
suspension of action by defendant in processing the purchase. Defendant’s witness Jaurique admits: Justice Leonardo A. Quisumbing, who is on official leave
1
Id. at 747.
2
Id. at 748-749.
Q. – But did you discover that he did not have any outstanding account?
3
Id. at 750.
4
Id. at 20.
5
Id. at 20-21.
6
Id. at 21-22; citing defendant’s Exhibit "9-G," "9-H" and "9-I."
A. – Nothing in arrears at that time. 7
8
Id. at 330-331.
Id. at 331.
9
Id. at 332-333.
10
Id. at 332.
Q. – You were well aware of this fact on this very date? 11
Docketed as Civil Case No. 92-1665. Id. at 335-340.
12
Id. at 339.
13
Penned by Judge Francisco Donato Villanueva; id. at 92-110.
14
Id. at 348-351.
A. – Yes, sir. 15
Id. at 360-362.
16
Decision penned by Court of Appeals Associate Justice E.J. Asuncion, , concurred by Associate Justices J. Mendoza and A. Tayag.
17
Rollo, p. 80.
18
See, e.g., Selegna Management v. UCPB, G.R. No. 165662, 3 May 2006.
Mr. Jaurique further testified that there were no "delinquencies" in plaintiff’s account.25 19
A. Tolentino, IV Civil Code of the Philippines (1991 ed.), at 108.
20
See, e.g., Pacific Banking Corp. v. IAC, G.R. No. 72275, 13 November 1991, 203 SCRA 496; Molino v. Security Diners International Corp., G.R.
No. 136780, 16 August 2001, 358 SCRA 363.
21
See, e.g., Citibank, N.A. v. Cabamongan, G.R. No. 146918, 2 May 2006, 488 SCRA 517.
It should be emphasized that the reason why petitioner is entitled to damages is not simply because respondent 22
Rollo, pp. 97-99.
incurred delay, but because the delay, for which culpability lies under Article 1170, led to the particular injuries under 23
Id. at 101.
24
Article 2217 of the Civil Code for which moral damages are remunerative.26 Moral damages do not avail to soothe the Id. at 105-106.
25
Id. at 104.
plaints of the simply impatient, so this decision should not be cause for relief for those who time the length of their 26
"Moral damages include physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shocks, social
credit card transactions with a stopwatch. The somewhat unusual attending circumstances to the purchase at Coster – humiliation, and similar injury. Though incapable of pecuniary computation, moral damages may be recovered if they are the proximate result of the
defendant's wrongful act or omission."
that there was a deadline for the completion of that purchase by petitioner before any delay would redound to the 27
See rollo, p. 107.
injury of his several traveling companions – gave rise to the moral shock, mental anguish, serious anxiety, wounded 28
Mercury Drug v. Baking, G.R. No. 156037, May 25, 2007, 523 SCRA 184, 191.
feelings and social humiliation sustained by the petitioner, as concluded by the RTC.27 Those circumstances are fairly
unusual, and should not give rise to a general entitlement for damages under a more mundane set of facts.

We sustain the amount of moral damages awarded to petitioner by the RTC. There is no hard-and-fast rule in
determining what would be a fair and reasonable amount of moral damages, since each case must be governed by its
own peculiar facts, however, it must be commensurate to the loss or injury suffered.28 Petitioner’s original prayer for
₱5,000,000.00 for moral damages is excessive under the circumstances, and the amount awarded by the trial court of
₱500,000.00 in moral damages more seemly.1avvphi1

Likewise, we deem exemplary damages available under the circumstances, and the amount of ₱300,000.00
appropriate. There is similarly no cause though to disturb the determined award of ₱100,000.00 as attorney’s fees,
and ₱85,233.01 as expenses of litigation.

WHEREFORE, the petition is GRANTED. The assailed Decision of the Court of Appeals is REVERSED and SET
ASIDE. The Decision of the Regional Trial Court of Makati, Branch 145 in Civil Case No. 92-1665 is hereby
REINSTATED. Costs against respondent.

SO ORDERED.
DANTE O. TINGA
Associate Justice
 SECOND DIVISION (SGD) HENRY PAJARILLO
[G.R. No. 145483. November 19, 2004] Sales Manager
LORENZO SHIPPING CORP., petitioner, vs. BJ MARTHEL INTERNATIONAL, INC., respondent.
Petitioner thereafter issued to respondent Purchase Order No. 13839,[3] dated 02 November 1989, for the
procurement of one set of cylinder liner, valued at P477,000, to be used for M/V Dadiangas Express. The purchase
DECISION order was co-signed by Jose Go, Jr., petitioners vice-president, and Henry Pajarillo. Quoted hereunder is the pertinent
portion of the purchase order:
CHICO-NAZARIO, J.:

Name of Description Qty. Amount

This is a petition for review seeking to set aside the Decision[1] of the Court of Appeals in CA-G.R. CV No. 54334
and its Resolution denying petitioners motion for reconsideration.
CYL. LINER M/E 1 SET P477,000.00
The factual antecedents of this case are as follows:

Petitioner Lorenzo Shipping Corporation is a domestic corporation engaged in coastwise shipping. It used to NOTHING FOLLOW
own the cargo vessel M/V Dadiangas Express. INV. #

Upon the other hand, respondent BJ Marthel International, Inc. is a business entity engaged in trading, marketing,
and selling of various industrial commodities. It is also an importer and distributor of different brands of engines and TERM OF PAYMENT: 25% DOWN PAYMENT
spare parts. 5 BI-MONTHLY INSTALLMENT[S]

From 1987 up to the institution of this case, respondent supplied petitioner with spare parts for the latters marine Instead of paying the 25% down payment for the first cylinder liner, petitioner issued in favor of respondent ten
engines. Sometime in 1989, petitioner asked respondent for a quotation for various machine parts. Acceding to this postdated checks[4] to be drawn against the formers account with Allied Banking Corporation. The checks were
request, respondent furnished petitioner with a formal quotation,[2] thus: supposed to represent the full payment of the aforementioned cylinder liner.

Subsequently, petitioner issued Purchase Order No. 14011,[5] dated 15 January 1990, for yet another unit of
May 31, 1989 cylinder liner. This purchase order stated the term of payment to be 25% upon delivery, balance payable in 5 bi-monthly
MINQ-6093 equal installment[s].[6] Like the purchase order of 02 November 1989, the second purchase order did not state the date
of the cylinder liners delivery.
LORENZO SHIPPING LINES On 26 January 1990, respondent deposited petitioners check that was postdated 18 January 1990, however, the
Pier 8, North Harbor same was dishonored by the drawee bank due to insufficiency of funds. The remaining nine postdated checks were
Manila eventually returned by respondent to petitioner.

The parties presented disparate accounts of what happened to the check which was previously
SUBJECT: PARTS FOR ENGINE MODEL
dishonored. Petitioner claimed that it replaced said check with a good one, the proceeds of which were applied to its
MITSUBISHI 6UET 52/60
other obligation to respondent. For its part, respondent insisted that it returned said postdated check to petitioner.

Dear Mr. Go: Respondent thereafter placed the order for the two cylinder liners with its principal in Japan, Daiei Sangyo Co.
Ltd., by opening a letter of credit on 23 February 1990 under its own name with the First Interstate Bank of Tokyo.

We are pleased to submit our offer for your above subject requirements. On 20 April 1990, Pajarillo delivered the two cylinder liners at petitioners warehouse in North Harbor, Manila. The
sales invoices[7] evidencing the delivery of the cylinder liners both contain the notation subject to verification under which
the signature of Eric Go, petitioners warehouseman, appeared.
Description Qty. Unit Price Total Price
Respondent thereafter sent a Statement of Account dated 15 November 1990[8] to petitioner. While the other
items listed in said statement of account were fully paid by petitioner, the two cylinder liners delivered to petitioner on
Nozzle Tip 6 pcs. P 5,520.00 33,120.00 20 April 1990 remained unsettled. Consequently, Mr. Alejandro Kanaan, Jr., respondents vice-president, sent a demand
Plunger & Barrel 6 pcs. 27,630.00 165,780.00 letter dated 02 January 1991[9] to petitioner requiring the latter to pay the value of the cylinder liners subjects of this
Cylinder Head 2 pcs. 1,035,000.00 2,070,000.00 case. Instead of heeding the demand of respondent for the full payment of the value of the cylinder liners, petitioner
Cylinder Liner 1 set 477,000.00 sent the former a letter dated 12 March 1991[10] offering to pay only P150,000 for the cylinder liners. In said letter,
petitioner claimed that as the cylinder liners were delivered late and due to the scrapping of the M/V Dadiangas Express,
TOTAL PRICE FOB P2,745,900.00 it (petitioner) would have to sell the cylinder liners in Singapore and pay the balance from the proceeds of said sale.
MANILA ___________
Shortly thereafter, another demand letter dated 27 March 1991[11] was furnished petitioner by respondents
DELIVERY: Within 2 months after receipt of firm order. counsel requiring the former to settle its obligation to respondent together with accrued interest and attorneys fees.
TERMS: 25% upon delivery, balance payable in 5 bi-monthly equal
Installment[s] not to exceed 90 days. Due to the failure of the parties to settle the matter, respondent filed an action for sum of money and damages
before the Regional Trial Court (RTC) of Makati City. In its complaint,[12]respondent (plaintiff below) alleged that despite
its repeated oral and written demands, petitioner obstinately refused to settle its obligations. Respondent prayed that
We trust you find our above offer acceptable and look forward to your most valued order.
petitioner be ordered to pay for the value of the cylinder liners plus accrued interest of P111,300 as of May 1991 and
additional interest of 14% per annum to be reckoned from June 1991 until the full payment of the principal; attorneys
Very truly yours, fees; costs of suits; exemplary damages; actual damages; and compensatory damages.
 On 25 July 1991, and prior to the filing of a responsive pleading, respondent filed an amended complaint with
preliminary attachment pursuant to Sections 2 and 3, Rule 57 of the then Rules of Court. [13] Aside from the prayer for
the issuance of writ of preliminary attachment, the amendments also pertained to the issuance by petitioner of the
postdated checks and the amounts of damages claimed.
In an Order dated 25 July 1991,[14] the court a quo granted respondents prayer for the issuance of a preliminary
attachment. On 09 August 1991, petitioner filed an Urgent Ex-Parte Motion to Discharge Writ of Attachment[15] attaching
thereto a counter-bond as required by the Rules of Court. On even date, the trial court issued an Order[16] lifting the levy
on petitioners properties and the garnishment of its bank accounts.
Petitioner afterwards filed its Answer[17] alleging therein that time was of the essence in the delivery of the cylinder
liners and that the delivery on 20 April 1990 of said items was late as respondent committed to deliver said items within
two (2) months after receipt of firm order[18] from petitioner. Petitioner likewise sought counterclaims for moral damages,
exemplary damages, attorneys fees plus appearance fees, and expenses of litigation.
Subsequently, respondent filed a Second Amended Complaint with Preliminary Attachment dated 25 October
1991.[19] The amendment introduced dealt solely with the number of postdated checks issued by petitioner as full
payment for the first cylinder liner it ordered from respondent. Whereas in the first amended complaint, only nine
postdated checks were involved, in its second amended complaint, respondent claimed that petitioner actually issued
ten postdated checks. Despite the opposition by petitioner, the trial court admitted respondents Second Amended
Complaint with Preliminary Attachment.[20]
Prior to the commencement of trial, petitioner filed a Motion (For Leave To Sell Cylinder Liners)[21] alleging therein
that [w]ith the passage of time and with no definite end in sight to the present litigation, the cylinder liners run the risk of
obsolescence and deterioration[22] to the prejudice of the parties to this case. Thus, petitioner prayed that it be allowed
to sell the cylinder liners at the best possible price and to place the proceeds of said sale in escrow. This motion,
unopposed by respondent, was granted by the trial court through the Order of 17 March 1991.[23]
After trial, the court a quo dismissed the action, the decretal portion of the Decision stating:
WHEREFORE, the complaint is hereby dismissed, with costs against the plaintiff, which is ordered to pay P50,000.00
to the defendant as and by way of attorneys fees.[24]
The trial court held respondent bound to the quotation it submitted to petitioner particularly with respect to the
terms of payment and delivery of the cylinder liners. It also declared that respondent had agreed to the cancellation of
the contract of sale when it returned the postdated checks issued by petitioner. Respondents counterclaims for moral,
exemplary, and compensatory damages were dismissed for insufficiency of evidence.
Respondent moved for the reconsideration of the trial courts Decision but the motion was denied for lack of
merit.[25]
Aggrieved by the findings of the trial court, respondent filed an appeal with the Court of Appeals[26] which reversed
and set aside the Decision of the court a quo. The appellate court brushed aside petitioners claim that time was of the
essence in the contract of sale between the parties herein considering the fact that a significant period of time had lapsed
between respondents offer and the issuance by petitioner of its purchase orders. The dispositive portion of the Decision
of the appellate court states:
WHEREFORE, the decision of the lower court is REVERSED and SET ASIDE. The appellee is hereby ORDERED to
pay the appellant the amount of P954,000.00, and accrued interest computed at 14% per annum reckoned from May,
1991.[27]
The Court of Appeals also held that respondent could not have incurred delay in the delivery of cylinder liners as
no demand, judicial or extrajudicial, was made by respondent upon petitioner in contravention of the express provision
of Article 1169 of the Civil Code which provides:
Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extrajudicially
demands from them the fulfillment of their obligation.
Likewise, the appellate court concluded that there was no evidence of the alleged cancellation of orders by
petitioner and that the delivery of the cylinder liners on 20 April 1990 was reasonable under the circumstances.
On 22 May 2000, petitioner filed a motion for reconsideration of the Decision of the Court of Appeals but this was
denied through the resolution of 06 October 2000.[28] Hence, this petition for review which basically raises the issues of
whether or not respondent incurred delay in performing its obligation under the contract of sale and whether or not said
contract was validly rescinded by petitioner.
That a contract of sale was entered into by the parties is not disputed. Petitioner, however, maintains that its
obligation to pay fully the purchase price was extinguished because the adverted contract was validly terminated due to
respondents failure to deliver the cylinder liners within the two-month period stated in the formal quotation dated 31 May
1989.
The threshold question, then, is: Was there late delivery of the subjects of the contract of sale to justify petitioner
to disregard the terms of the contract considering that time was of the essence thereof?
In determining whether time is of the essence in a contract, the ultimate criterion is the actual or apparent intention
of the parties and before time may be so regarded by a court, there must be a sufficient manifestation, either in the
contract itself or the surrounding circumstances of that intention.[29] Petitioner insists that although its purchase orders
did not specify the dates when the cylinder liners were supposed to be delivered, nevertheless, respondent should abide
by the term of delivery appearing on the quotation it submitted to petitioner. [30]Petitioner theorizes that the quotation
embodied the offer from respondent while the purchase order represented its (petitioners) acceptance of the proposed
terms of the contract of sale.[31] Thus, petitioner is of the view that these two documents cannot be taken separately as
if there were two distinct contracts.[32] We do not agree.
It is a cardinal rule in interpretation of contracts that if the terms thereof are clear and leave no doubt as to the
intention of the contracting parties, the literal meaning shall control.[33]However, in order to ascertain the intention of the
parties, their contemporaneous and subsequent acts should be considered.[34] While this Court recognizes the principle
that contracts are respected as the law between the contracting parties, this principle is tempered by the rule that the
intention of the parties is primordial[35] and once the intention of the parties has been ascertained, that element is deemed
as an integral part of the contract as though it has been originally expressed in unequivocal terms.[36]
In the present case, we cannot subscribe to the position of petitioner that the documents, by themselves, embody
the terms of the sale of the cylinder liners. One can easily glean the significant differences in the terms as stated in the
formal quotation and Purchase Order No. 13839 with regard to the due date of the down payment for the first cylinder
liner and the date of its delivery as well as Purchase Order No. 14011 with respect to the date of delivery of the second
cylinder liner. While the quotation provided by respondent evidently stated that the cylinder liners were supposed to be
delivered within two months from receipt of the firm order of petitioner and that the 25% down payment was due upon
the cylinder liners delivery, the purchase orders prepared by petitioner clearly omitted these significant items. The
petitioners Purchase Order No. 13839 made no mention at all of the due dates of delivery of the first cylinder liner and
of the payment of 25% down payment. Its Purchase Order No. 14011 likewise did not indicate the due date of delivery
of the second cylinder liner.
In the case of Bugatti v. Court of Appeals,[37] we reiterated the principle that [a] contract undergoes three distinct
stages preparation or negotiation, its perfection, and finally, its consummation. Negotiation begins from the time the
prospective contracting parties manifest their interest in the contract and ends at the moment of agreement of the
parties. The perfection or birth of the contract takes place when the parties agree upon the essential elements of the
contract. The last stage is the consummation of the contract wherein the parties fulfill or perform the terms agreed upon
in the contract, culminating in the extinguishment thereof.
In the instant case, the formal quotation provided by respondent represented the negotiation phase of the subject
contract of sale between the parties. As of that time, the parties had not yet reached an agreement as regards the terms
and conditions of the contract of sale of the cylinder liners. Petitioner could very well have ignored the offer or tendered
a counter-offer to respondent while the latter could have, under the pertinent provision of the Civil Code,[38] withdrawn
or modified the same. The parties were at liberty to discuss the provisions of the contract of sale prior to its perfection.
In this connection, we turn to the testimonies of Pajarillo and Kanaan, Jr., that the terms of the offer were, indeed,
renegotiated prior to the issuance of Purchase Order No. 13839.
During the hearing of the case on 28 January 1993, Pajarillo testified as follows:
Q: You testified Mr. Witness, that you submitted a quotation with defendant Lorenzo Shipping
Corporation dated rather marked as Exhibit A stating the terms of payment and delivery of the
cylinder liner, did you not?
 A: Yes sir. Q: Was there a re-negotiation of this term?

Q: I am showing to you the quotation which is marked as Exhibit A there appears in the quotation that A: This offer, yes. We offered a final requirement of 25% down payment upon delivery.
the delivery of the cylinder liner will be made in two months time from the time you received the
confirmation of the order. Is that correct? Q: What was the re-negotiated term?

A: Yes sir. A: 25% down payment

Q: Now, after you made the formal quotation which is Exhibit A how long a time did the defendant
make a confirmation of the order?
A: After six months.
Q: And this is contained in the purchase order given to you by Lorenzo Shipping Corporation?
A: Yes sir.
Q: Now, in the purchase order dated November 2, 1989 there appears only the date the terms of
payment which you required of them of 25% down payment, now, it is stated in the purchase
order the date of delivery, will you explain to the court why the date of delivery of the cylinder liner
was not mentioned in the purchase order which is the contract between you and Lorenzo
Shipping Corporation?
A: When Lorenzo Shipping Corporation inquired from us for that cylinder liner, we have inquired [with]
our supplier in Japan to give us the price and delivery of that item. When we received that
quotation from our supplier it is stated there that they can deliver within two months but we have
to get our confirmed order within June.
Q: To be paid when?
A: Supposed to be paid upon order.[40]
The above declarations remain unassailed. Other than its bare assertion that the subject contracts of sale did
not undergo further renegotiation, petitioner failed to proffer sufficient evidence to refute the above testimonies of
Pajarillo and Kanaan, Jr.
Notably, petitioner was the one who caused the preparation of Purchase Orders No. 13839 and No. 14011 yet it
utterly failed to adduce any justification as to why said documents contained terms which are at variance with those
stated in the quotation provided by respondent. The only plausible reason for such failure on the part of petitioner is
that the parties had, in fact, renegotiated the proposed terms of the contract of sale. Moreover, as the obscurity in the
terms of the contract between respondent and petitioner was caused by the latter when it omitted the date of delivery of
the cylinder liners in the purchase orders and varied the term with respect to the due date of the down payment,[41] said
obscurity must be resolved against it.[42]
Relative to the above discussion, we find the case of Smith, Bell & Co., Ltd. v. Matti,[43] instructive. There, we
held that

Q: But were you able to confirm the order from your Japanese supplier on June of that year? When the time of delivery is not fixed or is stated in general and indefinite terms, time is not of the essence of the
contract. . . .
A: No sir.

Q: Why? Will you tell the court why you were not able to confirm your order with your Japanese In such cases, the delivery must be made within a reasonable time.
supplier?

A: Because Lorenzo Shipping Corporation did not give us the purchase order for that cylinder liner. The law implies, however, that if no time is fixed, delivery shall be made within a reasonable time, in the absence of
anything to show that an immediate delivery intended. . . .
Q: And it was only on November 2, 1989 when they gave you the purchase order?

A: Yes sir. We also find significant the fact that while petitioner alleges that the cylinder liners were to be used for dry dock
repair and maintenance of its M/V Dadiangas Express between the later part of December 1989 to early January 1990,
Q: So upon receipt of the purchase order from Lorenzo Shipping Lines in 1989 did you confirm the the record is bereft of any indication that respondent was aware of such fact. The failure of petitioner to notify respondent
order with your Japanese supplier after receiving the purchase order dated November 2, 1989? of said date is fatal to its claim that time was of the essence in the subject contracts of sale.

A: Only when Lorenzo Shipping Corporation will give us the down payment of 25%.[39] In addition, we quote, with approval, the keen observation of the Court of Appeals:

For his part, during the cross-examination conducted by counsel for petitioner, Kanaan, Jr., testified in the
. . . It must be noted that in the purchase orders issued by the appellee, dated November 2, 1989 and January 15,
following manner:
1990, no specific date of delivery was indicated therein. If time was really of the essence as claimed by the appellee,
WITNESS: This term said 25% upon delivery. Subsequently, in the final contract, what was agreed they should have stated the same in the said purchase orders, and not merely relied on the quotation issued by the
upon by both parties was 25% down payment. appellant considering the lapse of time between the quotation issued by the appellant and the purchase orders of the
appellee.
Q: When?

A: Upon confirmation of the order. In the instant case, the appellee should have provided for an allowance of time and made the purchase order earlier if
indeed the said cylinder liner was necessary for the repair of the vessel scheduled on the first week of January,
... 1990. In fact, the appellee should have cancelled the first purchase order when the cylinder liner was not delivered on
the date it now says was necessary. Instead it issued another purchase order for the second set of cylinder liner. This
Q: And when was the down payment supposed to be paid? fact negates appellees claim that time was indeed of the essence in the consummation of the contract of sale between
the parties.[44]
A: It was not stated when we were supposed to receive that. Normally, we expect to receive at the
earliest possible time. Again, that would depend on the customers. Even after receipt of the
purchase order which was what happened here, they re-negotiated the terms and sometimes we Finally, the ten postdated checks issued in November 1989 by petitioner and received by the respondent as full
do accept that. payment of the purchase price of the first cylinder liner supposed to be delivered on 02 January 1990 fail to impress. It
is not an indication of failure to honor a commitment on the part of the respondent. The earliest maturity date of the
 [5]
checks was 18 January 1990. As delivery of said checks could produce the effect of payment only when they have Exhibit 5 for petitioner; Exhibit C for respondent; Records, p. 7.
[6]
Ibid.
been cashed,[45] respondents obligation to deliver the first cylinder liner could not have arisen as early as 02 January [7]
Exhibits G and H for respondent; Records, pp. 252-253.
1990 as claimed by petitioner since by that time, petitioner had yet to fulfill its undertaking to fully pay for the value of [8]
[9]
Exhibit J for respondent; Records, p. 255.
Exhibit K for respondent; Records, p. 256.
the first cylinder liner. As explained by respondent, it proceeded with the placement of the order for the cylinder liners [10]
Exhibit 6 for petitioner; Records, p. 269.
with its principal in Japan solely on the basis of its previously harmonious business relationship with petitioner. [11]
Exhibit S for respondent; Records, p. 263.
[12]
Records, pp. 1-5.
[13]
Records, pp. 13-20.
As an aside, let it be underscored that [e]ven where time is of the essence, a breach of the contract in that respect [14]
Records, pp. 27-29.
by one of the parties may be waived by the other partys subsequently treating the contract as still in force.[46] Petitioners [15]
Records, pp. 61-62.
[16]
receipt of the cylinder liners when they were delivered to its warehouse on 20 April 1990 clearly indicates that it Records, p. 58.
[17]
Records, pp. 87-95.
considered the contract of sale to be still subsisting up to that time. Indeed, had the contract of sale been cancelled [18]
Id.
already as claimed by petitioner, it no longer had any business receiving the cylinder liners even if said receipt was [19]
[20]
Records, pp. 115-122.
Order dated 09 December 1991; Records, p. 139.
subject to verification. By accepting the cylinder liners when these were delivered to its warehouse, petitioner [21]
Dated 20 January 1992; Records, pp. 143-144.
indisputably waived the claimed delay in the delivery of said items. [22]
Id.
[23]
Records, p. 152.
[24]
Rollo, p. 54.
We, therefore, hold that in the subject contracts, time was not of the essence. The delivery of the cylinder liners [25]
Order dated 04 December 1995; Records, pp. 389-390.
on 20 April 1990 was made within a reasonable period of time considering that respondent had to place the order for [26]
Decision dated 28 April 2000, Annex A of the Petition; Rollo, pp. 39-46.
[27]
Id. at 7; Rollo, p. 45.
the cylinder liners with its principal in Japan and that the latter was, at that time, beset by heavy volume of work. [47] [28]
Annex B of the Petition; Rollo, pp. 48-49.
[29]
17 Am Jur 2d, 333, p.772.
There having been no failure on the part of the respondent to perform its obligation, the power to rescind the [30]
Petition, p. 12; Rollo, p. 23.
[31]
Petition, p. 13; Rollo, p. 24.
contract is unavailing to the petitioner. Article 1191 of the New Civil Code runs as follows: [32]
Ibid.
[33]
Paramount Surety & Insurance Co., Inc. v. Court of Appeals, G.R. No. 38669, 31 March 1989, 171 SCRA 481.
[34]
Agro Conglomerates, Inc. v. Court of Appeals, et al., G.R. No. 117660, 18 December 2000, 348 SCRA 450.
[35]
The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what Golden Diamond, Inc. v. Court of Appeals, G.R. No. 131436, 31 May 2000, 332 SCRA 605.
[36]
Carceller v. Court of Appeals and State Investments Houses, Inc., G.R. No. 124791, 10 February 1999, 302 SCRA 718, 725.
is incumbent upon him. [37]
G.R. No. 138113, 17 October 2000, 343 SCRA 335, 346, citing Ang Yu Asuncion v. CA, G.R. No. 109125, 02 December 1994, 238 SCRA 602.
[38]
Article 1324 of the Civil Code states: When the offerer has allowed the offeree a certain period to accept, the offer may be withdrawn at any time before acceptance
by communicating such withdrawal, except when the option is founded upon a consideration, as something paid or promised.
[39]
TSN, 28 January 1993, pp. 4-8.
The law explicitly gives either party the right to rescind the contract only upon the failure of the other to perform [40]
TSN, 01 June 1993, pp. 9-10.
the obligation assumed thereunder.[48] The right, however, is not an unbridled one. This Court in the case of University [41]
Supra, note 3.
[42]
of the Philippines v. De los Angeles,[49] speaking through the eminent civilist Justice J.B.L. Reyes, exhorts: [43]
Ang v. Court of Appeals, G.R. No. 80058, 13 February 1989, 170 SCRA 286.
G.R. No. 16570, 09 March 1922, 44 Phil. 874, 881-882.
[44]
Decision dated 28 April 2000, p. 5; Rollo, p. 43.
Of course, it must be understood that the act of a party in treating a contract as cancelled or resolved on account [45]
Article 1249 of the Civil Code states that (t)he delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall produce the
of infractions by the other contracting party must be made known to the other and is always provisional, being ever effect of payment only when they have been cashed, or when through the fault of the creditor they have been impaired.
[46]
17A Am Jur. 2d 624, p. 633.
subject to scrutiny and review by the proper court. If the other party denied that rescission is justified, it is free to resort [47]
TSN, 28 January 1993, p. 18.
[48]
to judicial action in its own behalf, and bring the matter to court. Then, should the court, after due hearing, decide that [49]
Angeles, et al. v. Calasanz, et al., G.R. No. L-42283, 18 March 1985, 135 SCRA 329.
G.R. No. L-28602, 29 September 1970, 35 SCRA 102.
the resolution of the contract was not warranted, the responsible party will be sentenced to damages; in the contrary [50]
Id. at 107.
case, the resolution will be affirmed, and the consequent indemnity awarded to the party prejudiced. (Emphasis
supplied)

In other words, the party who deems the contract violated may consider it resolved or rescinded, and act
accordingly, without previous court action, but it proceeds at its own risk. For it is only the final judgment of the
corresponding court that will conclusively and finally settle whether the action taken was or was not correct in law. But
the law definitely does not require that the contracting party who believes itself injured must first file suit and wait for a
judgment before taking extrajudicial steps to protect its interest. Otherwise, the party injured by the others breach will
have to passively sit and watch its damages accumulate during the pendency of the suit until the final judgment of
rescission is rendered when the law itself requires that he should exercise due diligence to minimize its own damages. [50]

Here, there is no showing that petitioner notified respondent of its intention to rescind the contract of sale between
them. Quite the contrary, respondents act of proceeding with the opening of an irrevocable letter of credit on 23 February
1990 belies petitioners claim that it notified respondent of the cancellation of the contract of sale. Truly, no prudent
businessman would pursue such action knowing that the contract of sale, for which the letter of credit was opened, was
already rescinded by the other party.

WHEREFORE, premises considered, the instant Petition for Review on Certiorari is DENIED. The Decision of
the Court of Appeals, dated 28 April 2000, and its Resolution, dated 06 October 2000, are hereby AFFIRMED. No costs.

SO ORDERED.

Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Tinga, JJ., concur.

[1]
Penned by Associate Justice Eubulo G. Verzola with Associate Justices Roberto A. Barrios and Eriberto U. Rosario, Jr., concurring.
[2]
Exhibit 2 for petitioner; Exhibit A for respondent; Records, p. 244.
[3]
Exhibit 3 for petitioner; Exhibit B for respondent; Records, p. 6.
[4]
Exhibits 4-A to 4-J for petitioner; Exhibits E to E-9 for respondent; Records, pp. 248-250.
 Republic of the Philippines
Supreme Court
Manila
SECOND DIVISION
SOLAR HARVEST, INC., G.R. No. 176868
Petitioner,
Present:
CARPIO, J.,
Chairperson,
- versus - NACHURA,
PERALTA,
ABAD, and
MENDOZA, JJ.
DAVAO CORRUGATED CARTON CORPORATION,
Respondent. Promulgated:
July 26, 2010
x------------------------------------------------------------------------------------x
DECISION
NACHURA, J.:
Petitioner seeks a review of the Court of Appeals (CA) Decision[1] dated September 21, 2006 and Resolution[2] dated
February 23, 2007, which denied petitioners motion for reconsideration. The assailed Decision denied petitioners claim
for reimbursement for the amount it paid to respondent for the manufacture of corrugated carton boxes.
The case arose from the following antecedents:
In the first quarter of 1998, petitioner, Solar Harvest, Inc., entered into an agreement with respondent, Davao Corrugated
Carton Corporation, for the purchase of corrugated carton boxes, specifically designed for petitioners business of
exporting fresh bananas, at US$1.10 each. The agreement was not reduced into writing. To get the production
underway, petitioner deposited, on March 31, 1998, US$40,150.00 in respondents US Dollar Savings Account with
Westmont Bank, as full payment for the ordered boxes.
Despite such payment, petitioner did not receive any boxes from respondent. On January 3, 2001, petitioner wrote a
demand letter for reimbursement of the amount paid.[3] On February 19, 2001, respondent replied that the boxes had
been completed as early as April 3, 1998 and that petitioner failed to pick them up from the formers warehouse 30 days
from completion, as agreed upon. Respondent mentioned that petitioner even placed an additional order of 24,000
boxes, out of which, 14,000 had been manufactured without any advanced payment from petitioner. Respondent then
demanded petitioner to remove the boxes from the factory and to pay the balance of US$15,400.00 for the additional
boxes and P132,000.00 as storage fee.
On August 17, 2001, petitioner filed a Complaint for sum of money and damages against respondent. The Complaint
averred that the parties agreed that the boxes will be delivered within 30 days from payment but respondent failed to
manufacture and deliver the boxes within such time. It further alleged
6. That repeated follow-up was made by the plaintiff for the immediate production of the ordered
boxes, but every time, defendant [would] only show samples of boxes and ma[k]e repeated
promises to deliver the said ordered boxes.
7. That because of the failure of the defendant to deliver the ordered boxes, plaintiff ha[d] to
cancel the same and demand payment and/or refund from the defendant but the latter refused
to pay and/or refund the US$40,150.00 payment made by the former for the ordered boxes.[4]
In its Answer with Counterclaim,[5] respondent insisted that, as early as April 3, 1998, it had already completed production
of the 36,500 boxes, contrary to petitioners allegation. According to respondent, petitioner, in fact, made an additional
order of 24,000 boxes, out of which, 14,000 had been completed without waiting for petitioners payment. Respondent
stated that petitioner was to pick up the boxes at the factory as agreed upon, but petitioner failed to do so. Respondent
averred that, on October 8, 1998, petitioners representative, Bobby Que (Que), went to the factory and saw that the
boxes were ready for pick up. On February 20, 1999, Que visited the factory again and supposedly advised respondent
to sell the boxes as rejects to recoup the cost of the unpaid 14,000 boxes, because petitioners transaction to ship
bananas to China did not materialize. Respondent claimed that the boxes were occupying warehouse space and that
petitioner should be made to pay storage fee at P60.00 per square meter for every month from April 1998. As
counterclaim, respondent prayed that judgment be rendered ordering petitioner to pay $15,400.00, plus interest, moral
and exemplary damages, attorneys fees, and costs of the suit.
In reply, petitioner denied that it made a second order of 24,000 boxes and that respondent already completed the initial
order of 36,500 boxes and 14,000 boxes out of the secondorder. It maintained that
respondent only manufactured a sample of the ordered boxes and that respondent could not have produced 14,000
boxes without the required pre-payments.[6]
During trial, petitioner presented Que as its sole witness. Que testified that he ordered the boxes from respondent and
deposited the money in respondents account.[7] He specifically stated that, when he visited respondents factory, he saw
that the boxes had no print of petitioners logo.[8] A few months later, he followed-up the order and was told that the
company had full production, and thus, was promised that production of the order would be rushed. He told respondent
that it should indeed rush production because the need for the boxes was urgent. Thereafter, he asked his partner,
Alfred Ong, to cancel the order because it was already late for them to meet their commitment to ship the bananas
to China.[9] On cross-examination, Que further testified that China Zero Food, the Chinese company that ordered the
bananas, was sending a ship to Davao to get the bananas, but since there were no cartons, the ship could not proceed.
He said that, at that time, bananas from Tagum Agricultural Development Corporation (TADECO) were already there.
He denied that petitioner made an additional order of 24,000 boxes. He explained that it took three years to refer the
matter to counsel because respondent promised to pay.[10]
For respondent, Bienvenido Estanislao (Estanislao) testified that he met Que in Davao in October 1998 to inspect the
boxes and that the latter got samples of them. In February 2000, they inspected the boxes again and Que got more
samples. Estanislao said that petitioner did not pick up the boxes because the ship did not arrive.[11] Jaime Tan (Tan),
president of respondent, also testified that his company finished production of the 36,500 boxes on April 3, 1998 and
that petitioner made a second order of 24,000 boxes. He said that the agreement was for respondent to produce the
boxes and for petitioner to pick them up from the warehouse.[12] He also said that the reason why petitioner did not pick
up the boxes was that the ship that was to carry the bananas did not arrive. [13] According to him, during the last visit of
Que and Estanislao, he asked them to withdraw the boxes immediately because they were occupying a big space in his
plant, but they, instead, told him to sell the cartons as rejects. He was able to sell 5,000 boxes at P20.00 each for a total
of P100,000.00. They then told him to apply the said amount to the unpaid balance.
In its March 2, 2004 Decision, the Regional Trial Court (RTC) ruled that respondent did not commit any breach of faith
that would justify rescission of the contract and the consequent reimbursement of the amount paid by petitioner. The
RTC said that respondent was able to produce the ordered boxes but petitioner failed to obtain possession thereof
because its ship did not arrive. It thus dismissed the complaint and respondents counterclaims, disposing as follows:
WHEREFORE, premises considered, judgment is hereby rendered in favor of defendant and
against the plaintiff and, accordingly, plaintiffs complaint is hereby ordered DISMISSED without
pronouncement as to cost. Defendants counterclaims are similarly dismissed for lack of merit.
SO ORDERED.[14]
Petitioner filed a notice of appeal with the CA.
On September 21, 2006, the CA denied the appeal for lack of merit. [15] The appellate court held that petitioner failed to
discharge its burden of proving what it claimed to be the parties agreement with respect to the delivery of the boxes.
According to the CA, it was unthinkable that, over a period of more than two years, petitioner did not even demand for
the delivery of the boxes. The CA added that even assuming that the agreement was for respondent to deliver the boxes,
respondent would not be liable for breach of contract as petitioner had not yet demanded from it the delivery of the
boxes.[16]
Petitioner moved for reconsideration,[17] but the motion was denied by the CA in its Resolution of February 23, 2007.[18]
In this petition, petitioner insists that respondent did not completely manufacture the boxes and that it was respondent
which was obliged to deliver the boxes to TADECO.
We find no reversible error in the assailed Decision that would justify the grant of this petition.
Petitioners claim for reimbursement is actually one for rescission (or resolution) of contract under Article 1191 of the
Civil Code, which reads:
Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the
obligors should not comply with what is incumbent upon him.
 The injured party may choose between the fulfillment and the rescission of the obligation, with
the payment of damages in either case. He may also seek rescission, even after he has chosen
fulfillment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing
of a period.
This is understood to be without prejudice to the rights of third persons who have acquired the
thing, in accordance with Articles 1385 and 1388 and the Mortgage Law.
The right to rescind a contract arises once the other party defaults in the performance of his obligation. In
determining when default occurs, Art. 1191 should be taken in conjunction with Art. 1169 of the same law, which
provides:
Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee
judicially or extrajudicially demands from them the fulfillment of their obligation.
However, the demand by the creditor shall not be necessary in order that delay may exist:
(1) When the obligation or the law expressly so declares; or
(2) When from the nature and the circumstances of the obligation it appears
that the designation of the time when the thing is to be delivered or the service is to
be rendered was a controlling motive for the establishment of the contract; or
(3) When demand would be useless, as when the obligor has rendered it
beyond his power to perform.
In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready
to comply in a proper manner with what is incumbent upon him. From the moment one of the
parties fulfills his obligation, delay by the other begins.
In reciprocal obligations, as in a contract of sale, the general rule is that the fulfillment of the parties respective obligations
should be simultaneous. Hence, no demand is generally necessary because, once a party fulfills his obligation and the
other party does not fulfill his, the latter automatically incurs in delay. But when different dates for performance of the
obligations are fixed, the default for each obligation must be determined by the rules given in the first paragraph of the
present article,[19] that is, the other party would incur in delay only from the moment the other party demands fulfillment
of the formers obligation. Thus, even in reciprocal obligations, if the period for the fulfillment of the obligation is fixed,
demand upon the obligee is still necessary before the obligor can be considered in default and before a cause of action
for rescission will accrue.
Evident from the records and even from the allegations in the complaint was the lack of demand by petitioner upon
respondent to fulfill its obligation to manufacture and deliver the boxes. The Complaint only alleged that petitioner made
a follow-up upon respondent, which, however, would not qualify as a demand for the fulfillment of the obligation.
Petitioners witness also testified that they made a follow-up of the boxes, but not a demand. Note is taken of the fact
that, with respect to their claim for reimbursement, the Complaint alleged and the witness testified that a demand letter
was sent to respondent. Without a previous demand for the fulfillment of the obligation, petitioner would not have a
cause of action for rescission against respondent as the latter would not yet be considered in breach of its contractual
obligation.
Even assuming that a demand had been previously made before filing the present case, petitioners claim for
reimbursement would still fail, as the circumstances would show that respondent was not guilty of breach of contract.
The existence of a breach of contract is a factual matter not usually reviewed in a petition for review under Rule 45.[20] The
Court, in petitions for review, limits its inquiry only to questions of law. After all, it is not a trier of facts, and findings of
fact made by the trial court, especially when reiterated by the CA, must be given great respect if not considered as
final.[21] In dealing with this petition, we will not veer away from this doctrine and will thus sustain the factual findings of
the CA, which we find to be adequately supported by the evidence on record.
As correctly observed by the CA, aside from the pictures of the finished boxes and the production report thereof, there
is ample showing that the boxes had already been manufactured by respondent. There is the testimony of Estanislao
who accompanied Que to the factory, attesting that, during their first visit to the company, they saw the pile of petitioners
boxes and Que took samples thereof. Que, petitioners witness, himself confirmed this incident. He testified that Tan
pointed the boxes to him and that he got a sample and saw that it was blank. Ques absolute assertion that the boxes
were not manufactured is, therefore, implausible and suspicious.
In fact, we note that respondents counsel manifested in court, during trial, that his client was willing to shoulder expenses
for a representative of the court to visit the plant and see the boxes.[22] Had it been true that the boxes were not yet
completed, respondent would not have been so bold as to challenge the court to conduct an ocular inspection of their
warehouse. Even in its Comment to this petition, respondent prays that petitioner be ordered to remove the boxes from
its factory site,[23] which could only mean that the boxes are, up to the present, still in respondents premises.
We also believe that the agreement between the parties was for petitioner to pick up the boxes from respondents
warehouse, contrary to petitioners allegation. Thus, it was due to petitioners fault that the boxes were not delivered to
TADECO.
Petitioner had the burden to prove that the agreement was, in fact, for respondent to deliver the boxes within 30 days
from payment, as alleged in the Complaint. Its sole witness, Que, was not even competent to testify on the terms of the
agreement and, therefore, we cannot give much credence to his testimony. It appeared from the testimony of Que that
he did not personally place the order with Tan, thus:
Q. No, my question is, you went to Davao City and placed your order there?
A. I made a phone call.
Q. You made a phone call to Mr. Tan?
A. The first time, the first call to Mr. Alf[re]d Ong. Alfred Ong has a contact with Mr. Tan.
Q. So, your first statement that you were the one who placed the order is not true?
A. Thats true. The Solar Harvest made a contact with Mr. Tan and I deposited the money in the
bank.
Q. You said a while ago [t]hat you were the one who called Mr. Tan and placed the order for
36,500 boxes, isnt it?
A. First time it was Mr. Alfred Ong.
Q. It was Mr. Ong who placed the order[,] not you?
A. Yes, sir.[24]
Q. Is it not a fact that the cartons were ordered through Mr. Bienvenido Estanislao?
A. Yes, sir.[25]
Moreover, assuming that respondent was obliged to deliver the boxes, it could not have complied with such
obligation. Que, insisting that the boxes had not been manufactured, admitted that he did not give respondent the
authority to deliver the boxes to TADECO:
Q. Did you give authority to Mr. Tan to deliver these boxes to TADECO?
A. No, sir. As I have said, before the delivery, we must have to check the carton, the quantity
and quality. But I have not seen a single carton.
Q. Are you trying to impress upon the [c]ourt that it is only after the boxes are completed, will
you give authority to Mr. Tan to deliver the boxes to TADECO[?]
A. Sir, because when I checked the plant, I have not seen any carton. I asked Mr. Tan to rush
the carton but not[26]
Q. Did you give any authority for Mr. Tan to deliver these boxes to TADECO?
A. Because I have not seen any of my carton.
Q. You dont have any authority yet given to Mr. Tan?
A. None, your Honor.[27]
Surely, without such authority, TADECO would not have allowed respondent to deposit the boxes within its premises.
In sum, the Court finds that petitioner failed to establish a cause of action for rescission, the evidence having shown that
respondent did not commit any breach of its contractual obligation. As previously stated, the subject boxes are still within
respondents premises. To put a rest to this dispute, we therefore relieve respondent from the burden of having to keep
the boxes within its premises and, consequently, give it the right to dispose of them, after petitioner is given a period of
time within which to remove them from the premises.
 [2]
WHEREFORE, premises considered, the petition is DENIED. The Court of Appeals Decision dated September 21, 2006 Id. at 127.
[3]
and Resolution dated February 23, 2007 are AFFIRMED. In addition, petitioner is given a period Records, p. 96.
[4]
of 30 days from notice within which to cause the removal of the 36,500 Rollo, p. 27.
[5]
boxes from respondents warehouse. After the lapse of said period and petitioner fails to effect such removal, respondent Id. at 33-36.
[6]
shall have the right to dispose of the boxes in any manner it may deem fit. Records, 31-32.
[7]
TSN, July 10, 2003, p. 5.
[8]
SO ORDERED. Id. at 7.
[9]
Id. at 9-10.
[10]
Id. at 18-22.
[11]
ANTONIO EDUARDO B. NACHURA TSN, October 16, 2003, p. 14.
[12]
Associate Justice TSN, December 4, 2003, p. 13.
[13]
Id. at 15.
[14]
Rollo, p. 60.
[15]
WE CONCUR: Supra note 1, at 113-114.
[16]
Id. at 110-112.
[17]
Rollo, pp. 115-121.
[18]
Supra note 2.
[19]
ANTONIO T. CARPIO IV ARTURO M. TOLENTINO, Commentaries and Jurisprudence on the Civil Code of the Philippines (1985 ed.), p.
Associate Justice 10, citing 8 Manresa.
[20]
Chairperson Omengan v. Philippine National Bank, G.R. No. 161319, January 23, 2007, 512 SCRA 305, 309.
[21]
Filipinas (Pre-Fab Bldg.) Systems, Inc. v. MRT Development Corporation, G.R. Nos. 167829-30, November 13,
2007, 537 SCRA 609, 638-639.
[22]
TSN, December 4, 2003, p. 26.
[23]
Rollo, p. 137.
[24]
DIOSDADO M. PERALTAAssociate Justice ROBERTO A. ABAD TSN, July 10, 2003, p. 15.
[25]
Associate Justice Id. at 21.
[26]
Id. at 25.
[27]
Id. at 27.

JOSE CATRAL MENDOZA

Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision were reached in consultation before the case was assigned to the
writer of the opinion of the Courts Division.

ANTONIO T. CARPIO
Associate Justice
Chairperson, Second Division

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution and the Division Chairperson's Attestation, I certify that the
conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the
opinion of the Courts Division.

RENATO C. CORONA
Chief Justice

[1]
Penned by Associate Justice Rebecca de Guia-Salvador, with Associate Justices Magdangal M. de Leon and
Ramon R. Garcia, concurring; rollo, pp. 103-114.
 FIRST DIVISION
[G.R. No. 150843. March 14, 2003]
CATHAY PACIFIC AIRWAYS, LTD., petitioner, vs. SPOUSES DANIEL VAZQUEZ and MARIA LUISA MADRIGAL
VAZQUEZ, respondents.
DECISION
DAVIDE, JR., C.J.:
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
for upgrading 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 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
CX-905, 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 decision[1] 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
Appeals[3] 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 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 non-accommodation.
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.
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.

Vitug, Carpio, and Azcuna, JJ., concur.

Ynares-Santiago, J., on leave.

[1]
Penned by Judge Escolastico O. Cruz, Jr.
[2]
Penned by Associate Justice Wenceslao I. Agnir, Jr., with Associate Justices Salvador J. Valdez, Jr., and Juan Q.
Enriquez, Jr., concurring.
[3]
357 SCRA 99 [2001].
[4]
Article 1318, Civil Code; ABS-CBN Broadcasting Corp. v. Court of Appeals, 301 SCRA 572, 592 [1999].
[5]
Websters Third New International Dictionary 270 (1986).
[6]
Blacks Law Dictionary 171 (5th ed .).
[7]
Strong v. Repide, 41 Phil. 947, 956 [1909].
[8]
Tan v. Northwest Airlines, Inc., 327 SCRA 263, 268 [2000]; Magat v. Court of Appeals, 337 SCRA 298, 307
[2000]; Morris v. Court of Appeals, 352 SCRA 428, 437 [2001]; Francisco v. Ferrer, 353 SCRA 261, 265
[2001].
[9]
TSN, 2 April 1988, 37-38; TSN, 17 April 1988, 37.
[10]
United Airlines, Inc. v. Court of Appeals, supra note 3.
[11]
Citytrust Banking Corporation v. Villanueva, 361 SCRA 446, 457 [2001].
[12]
Citytrust Banking Corporation v. Villanueva, supra; Francisco v. Ferrer, supra note 8, at 266.
[13]
Cathay Pacific Airways, Ltd. v. Court of Appeals, 219 SCRA 520, 524 [1993].
[14]
Id., 526; Tan v. Northwest Airlines, Inc., supra note 8; Morris v. Court of Appeals, supra note 8, at 436.
[15]
Morris v. Court of Appeals, supra note 8, at 436.
[16]
Article 2234, Civil Code.
[17]
Orosa v. Court of Appeals, 329 SCRA 652,665 [2000]; Morris v. Court of Appeals, supra note 8, at 437-438.
[18]
Rollo, 262.
[19]
Rollo, 50-51.
 Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 158911 March 4, 2008
MANILA ELECTRIC COMPANY, Petitioner,
vs.
MATILDE MACABAGDAL RAMOY, BIENVENIDO RAMOY, ROMANA RAMOY-RAMOS, ROSEMARIE RAMOY,
OFELIA DURIAN and CYRENE PANADO, Respondents.
DECISION
AUSTRIA-MARTINEZ, J.:
This resolves the Petition for Review on Certiorari under Rule 45 of the Rules of Court, praying that the Decision1 of
the Court of Appeals (CA) dated December 16, 2002, ordering petitioner Manila Electric Company (MERALCO) to pay
Leoncio Ramoy2 moral and exemplary damages and attorney's fees, and the CA Resolution3 dated July 1, 2003,
denying petitioner's motion for reconsideration, be reversed and set aside.
The Regional Trial Court (RTC) of Quezon City, Branch 81, accurately summarized the facts as culled from the
records, thus:
The evidence on record has established that in the year 1987 the National Power Corporation (NPC) filed with the
MTC Quezon City a case for ejectment against several persons allegedly illegally occupying its properties in Baesa,
Quezon City. Among the defendants in the ejectment case was Leoncio Ramoy, one of the plaintiffs in the case at bar.
On April 28, 1989 after the defendants failed to file an answer in spite of summons duly served, the MTC Branch 36,
Quezon City rendered judgment for the plaintiff [MERALCO] and "ordering the defendants to demolish or remove the
building and structures they built on the land of the plaintiff and to vacate the premises." In the case of Leoncio
Ramoy, the Court found that he was occupying a portion of Lot No. 72-B-2-B with the exact location of his apartments
indicated and encircled in the location map as No. 7. A copy of the decision was furnished Leoncio Ramoy (Exhibits 2,
2-A, 2-B, 2-C, pp. 128-131, Record; TSN, July 2, 1993, p. 5).
On June 20, 1990 NPC wrote Meralco requesting for the "immediate disconnection of electric power supply to all
residential and commercial establishments beneath the NPC transmission lines along Baesa, Quezon City (Exh. 7, p.
143, Record). Attached to the letter was a list of establishments affected which included plaintiffs Leoncio and Matilde
Ramoy (Exh. 9), as well as a copy of the court decision (Exh. 2). After deliberating on NPC's letter, Meralco decided to
comply with NPC's request (Exhibits 6, 6-A, 6-A-1, 6-B) and thereupon issued notices of disconnection to all
establishments affected including plaintiffs Leoncio Ramoy (Exhs. 3, 3-A to 3-C), Matilde Ramoy/Matilde Macabagdal
(Exhibits 3-D to 3-E), Rosemarie Ramoy (Exh. 3-F), Ofelia Durian (Exh. 3-G), Jose Valiza (Exh. 3-H) and Cyrene S.
Panado (Exh. 3-I).
In a letter dated August 17, 1990 Meralco requested NPC for a joint survey to determine all the establishments which
are considered under NPC property in view of the fact that "the houses in the area are very close to each other" (Exh.
12). Shortly thereafter, a joint survey was conducted and the NPC personnel pointed out the electric meters to be
disconnected (Exh. 13; TSN, October 8, 1993, p. 7; TSN, July 1994, p. 8).
In due time, the electric service connection of the plaintiffs [herein respondents] was disconnected (Exhibits D to G,
with submarkings, pp. 86-87, Record).
Plaintiff Leoncio Ramoy testified that he and his wife are the registered owners of a parcel of land covered by TCT No.
326346, a portion of which was occupied by plaintiffs Rosemarie Ramoy, Ofelia Durian, Jose Valiza and Cyrene S.
Panado as lessees. When the Meralco employees were disconnecting plaintiffs' power connection, plaintiff Leoncio
Ramoy objected by informing the Meralco foreman that his property was outside the NPC property and pointing out
the monuments showing the boundaries of his property. However, he was threatened and told not to interfere by the
armed men who accompanied the Meralco employees. After the electric power in Ramoy's apartment was cut off, the
plaintiffs-lessees left the premises.
During the ocular inspection ordered by the Court and attended by the parties, it was found out that the residence of
plaintiffs-spouses Leoncio and Matilde Ramoy was indeed outside the NPC property. This was confirmed by
defendant's witness R.P. Monsale III on cross-examination (TSN, October 13, 1993, pp. 10 and 11). Monsale also
admitted that he did not inform his supervisor about this fact nor did he recommend re-connection of plaintiffs' power
supply (Ibid., p. 14).
The record also shows that at the request of NPC, defendant Meralco re-connected the electric service of four
customers previously disconnected none of whom was any of the plaintiffs (Exh. 14).4
The RTC decided in favor of MERALCO by dismissing herein respondents' claim for moral damages, exemplary
damages and attorney's fees. However, the RTC ordered MERALCO to restore the electric power supply of
respondents.
Respondents then appealed to the CA. In its Decision dated December 16, 2002, the CA faulted MERALCO for not
requiring from National Power Corporation (NPC) a writ of execution or demolition and in not coordinating with the
court sheriff or other proper officer before complying with the NPC's request. Thus, the CA held MERALCO liable for
moral and exemplary damages and attorney's fees. MERALCO's motion for reconsideration of the Decision was
denied per Resolution dated July 1, 2003.
Hence, herein petition for review on certiorari on the following grounds:
I
THE COURT OF APPEALS GRAVELY ERRED WHEN IT FOUND MERALCO NEGLIGENT WHEN IT
DISCONNECTED THE SUBJECT ELECTRIC SERVICE OF RESPONDENTS.
II
THE COURT OF APPEALS GRAVELY ERRED WHEN IT AWARDED MORAL AND EXEMPLARY DAMAGES AND
ATTORNEY'S FEES AGAINST MERALCO UNDER THE CIRCUMSTANCES THAT THE LATTER ACTED IN GOOD
FAITH IN THE DISCONNECTION OF THE ELECTRIC SERVICES OF THE RESPONDENTS. 5
The petition is partly meritorious.
MERALCO admits6 that respondents are its customers under a Service Contract whereby it is obliged to supply
respondents with electricity. Nevertheless, upon request of the NPC, MERALCO disconnected its power supply to
respondents on the ground that they were illegally occupying the NPC's right of way. Under the Service Contract, "[a]
customer of electric service must show his right or proper interest over the property in order that he will be provided
with and assured a continuous electric service."7 MERALCO argues that since there is a Decision of the Metropolitan
Trial Court (MTC) of Quezon City ruling that herein respondents were among the illegal occupants of the NPC's right
of way, MERALCO was justified in cutting off service to respondents.
Clearly, respondents' cause of action against MERALCO is anchored on culpa contractual or breach of contract for the
latter's discontinuance of its service to respondents under Article 1170 of the Civil Code which provides:
Article 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay, and those who
in any manner contravene the tenor thereof, are liable for damages.
In Radio Communications of the Philippines, Inc. v. Verchez,8 the Court expounded on the nature of culpa contractual,
thus:
"In culpa contractual x x x the mere proof of the existence of the contract and the failure of its compliance
justify, prima facie, a corresponding right of relief. The law, recognizing the obligatory force of contracts, will not
permit a party to be set free from liability for any kind of misperformance of the contractual undertaking or a
contravention of the tenor thereof. A breach upon the contract confers upon the injured party a valid cause for
recovering that which may have been lost or suffered. The remedy serves to preserve the interests of the promissee
that may include his "expectation interest," which is his interest in having the benefit of his bargain by being put in as
good a position as he would have been in had the contract been performed, or his "reliance interest," which is his
interest in being reimbursed for loss caused by reliance on the contract by being put in as good a position as he would
have been in had the contract not been made; or his "restitution interest," which is his interest in having restored to
him any benefit that he has conferred on the other party. Indeed, agreements can accomplish little, either for their
makers or for society, unless they are made the basis for action. The effect of every infraction is to create a new duty,
that is, to make recompense to the one who has been injured by the failure of another to observe his contractual
obligation unless he can show extenuating circumstances, like proof of his exercise of due diligence x x x or of
the attendance of fortuitous event, to excuse him from his ensuing liability.9 (Emphasis supplied)
Article 1173 also provides that the fault or negligence of the obligor consists in the omission of that diligence which is
required by the nature of the obligation and corresponds with the circumstances of the persons, of the time and of the
place. The Court emphasized in Ridjo Tape & Chemical Corporation v. Court of Appeals10 that "as a public utility,
MERALCO has the obligation to discharge its functions with utmost care and diligence."11
The Court agrees with the CA that under the factual milieu of the present case, MERALCO failed to exercise the
utmost degree of care and diligence required of it. To repeat, it was not enough for MERALCO to merely rely on the
Decision of the MTC without ascertaining whether it had become final and executory. Verily, only upon finality of said
Decision can it be said with conclusiveness that respondents have no right or proper interest over the subject property,
thus, are not entitled to the services of MERALCO.
Although MERALCO insists that the MTC Decision is final and executory, it never showed any documentary evidence
to support this allegation. Moreover, if it were true that the decision was final and executory, the most prudent thing for
MERALCO to have done was to coordinate with the proper court officials in determining which structures are covered
by said court order. Likewise, there is no evidence on record to show that this was done by MERALCO.
The utmost care and diligence required of MERALCO necessitates such great degree of prudence on its part, and
failure to exercise the diligence required means that MERALCO was at fault and negligent in the performance of its
obligation. In Ridjo Tape,12 the Court explained:
[B]eing a public utility vested with vital public interest, MERALCO is impressed with certain obligations towards its
customers and any omission on its part to perform such duties would be prejudicial to its interest. For in the final
analysis, the bottom line is that those who do not exercise such prudence in the discharge of their duties shall be
made to bear the consequences of such oversight.13
This being so, MERALCO is liable for damages under Article 1170 of the Civil Code.
The next question is: Are respondents entitled to moral and exemplary damages and attorney's fees?
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.
In the present case, MERALCO wilfully caused injury to Leoncio Ramoy by withholding from him and his tenants the
supply of electricity to which they were entitled under the Service Contract. This is contrary to public policy because,
as discussed above, MERALCO, being a vital public utility, is expected to exercise utmost care and diligence in the
performance of its obligation. It was incumbent upon MERALCO to do everything within its power to ensure that the
improvements built by respondents are within the NPC’s right of way before disconnecting their power supply. The
Court emphasized in Samar II Electric Cooperative, Inc. v. Quijano14 that:
Electricity is a basic necessity the generation and distribution of which is imbued with public interest, and its provider
is a public utility subject to strict regulation by the State in the exercise of police power. Failure to comply with
these regulations will give rise to the presumption of bad faith or abuse of right. 15 (Emphasis supplied)
Thus, by analogy, MERALCO's failure to exercise utmost care and diligence in the performance of its obligation to
Leoncio Ramoy, its customer, is tantamount to bad faith. Leoncio Ramoy testified that he suffered wounded feelings
because of MERALCO's actions.16 Furthermore, due to the lack of power supply, the lessees of his four apartments on
subject lot left the premises.17 Clearly, therefore, Leoncio Ramoy is entitled to moral damages in the amount awarded
by the CA.
Leoncio Ramoy, the lone witness for respondents, was the only one who testified regarding the effects on him of
MERALCO's electric service disconnection. His co-respondents Matilde Ramoy, Rosemarie Ramoy, Ofelia Durian and
Cyrene Panado did not present any evidence of damages they suffered.
It is a hornbook principle that damages may be awarded only if proven. In Mahinay v. Velasquez, Jr.,18 the Court held
thus:
In order that moral damages may be awarded, there must be pleading and proof of moral suffering, mental
anguish, fright and the like. While respondent alleged in his complaint that he suffered mental anguish, serious
anxiety, wounded feelings and moral shock, he failed to prove them during the trial. Indeed, respondent should have
taken the witness stand and should have testified on the mental anguish, serious anxiety, wounded feelings and
other emotional and mental suffering he purportedly suffered to sustain his claim for moral damages. Mere allegations
do not suffice; they must be substantiated by clear and convincing proof. No other person could have proven such
damages except the respondent himself as they were extremely personal to him.
In Keirulf vs. Court of Appeals, we held:
"While no proof of pecuniary loss is necessary in order that moral damages may be awarded, the amount of indemnity
being left to the discretion of the court, it is nevertheless essential that the claimant should satisfactorily show the
existence of the factual basis of damages and its causal connection to defendant’s acts. This is so because moral
damages, though incapable of pecuniary estimation, 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. In Francisco vs. GSIS, the Court held
that there must be clear testimony on the anguish and other forms of mental suffering. Thus, if the plaintiff fails
to take the witness stand and testify as to his/her social humiliation, wounded feelings and anxiety, moral damages
cannot be awarded. In Cocoland Development Corporation vs. National Labor Relations Commission, the Court held
that "additional facts must be pleaded and proven to warrant the grant of moral damages under the Civil Code, these
being, x x x social humiliation, wounded feelings, grave anxiety, etc. that resulted therefrom."
x x x The award of moral damages must be anchored to a clear showing that respondent actually experienced mental
anguish, besmirched reputation, sleepless nights, wounded feelings or similar injury. There was no better witness to
this experience than respondent himself. Since respondent failed to testify on the witness stand, the trial court
did not have any factual basis to award moral damages to him.19 (Emphasis supplied)
Thus, only respondent Leoncio Ramoy, who testified as to his wounded feelings, may be awarded moral damages.20 WHEREFORE, the petition is PARTLY GRANTED. The Decision of the Court of Appeals
is AFFIRMED with MODIFICATION. The award for exemplary damages and attorney's fees is DELETED.

With regard to exemplary damages, Article 2232 of the Civil Code provides that in contracts and quasi-contracts, the
court may award exemplary damages if the defendant, in this case MERALCO, acted in a wanton, fraudulent, No costs.
reckless, oppressive, or malevolent manner, while Article 2233 of the same Code provides that such damages
cannot be recovered as a matter of right and the adjudication of the same is within the discretion of the
court.1avvphi1 SO ORDERED.

The Court finds that MERALCO fell short of exercising the due diligence required, but its actions cannot be considered MA. ALICIA AUSTRIA-MARTINEZ
wanton, fraudulent, reckless, oppressive or malevolent. Records show that MERALCO did take some measures, i.e., Associate Justice
coordinating with NPC officials and conducting a joint survey of the subject area, to verify which electric meters should
be disconnected although these measures are not sufficient, considering the degree of diligence required of it. Thus, in WE CONCUR:
this case, exemplary damages should not be awarded. CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson
MINITA V. CHICO-NAZARIO ANTONIO EDUARDO B. NACHURA
Since the Court does not deem it proper to award exemplary damages in this case, then the CA's award for attorney's Associate Justice Associate Justice
fees should likewise be deleted, as Article 2208 of the Civil Code states that in the absence of stipulation, attorney's RUBEN T. REYES
fees cannot be recovered except in cases provided for in said Article, to wit: Associate Justice
ATTESTATION
I attest that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Court’s Division.
CONSUELO YNARES-SANTIAGO
Article 2208. In the absence of stipulation, attorney’s fees and expenses of litigation, other than judicial costs, cannot Associate Justice
be recovered, except: Chairperson, Third Division
CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution, and the Division Chairperson’s Attestation, it is hereby certified that the conclusions in the above Decision had
been reached in consultation before the case was assigned to the writer of the opinion of the Court’s Division.
(1) When exemplary damages are awarded; REYNATO S. PUNO
Chief Justice

(2) When the defendant’s act or omission has compelled the plaintiff to litigate with third persons or to incur Footnotes
expenses to protect his interest; 1
2
Penned by Associate Justice Marina L. Buzon, with Associate Justices Josefina Guevara-Salonga and Danilo B. Pine, concurring; rollo, pp. 36-49.
Leoncio Ramoy was one of the original plaintiffs who filed the complaint with the Regional Trial Court of Quezon City. However, Leoncio Ramoy
died on July 19, 2001. Upon Motion for Substitution, the CA in its Resolution dated July 1, 2003 substituted Angelina Ramoy-Sanchez, Bienvenido
Ramoy, and Romana Ramoy-Ramos, as plaintiffs-appellants.
(3) In criminal cases of malicious prosecution against the plaintiff; 3
Rollo, pp. 51-53.
4
RTC Decision dated September 24, 1996, penned by Presiding Judge Wenceslao I. Agnir, Jr., rollo, pp. 58-60.
5
Id. at 20.
6
Answer, rollo, p. 73.
(4) In case of a clearly unfounded civil action or proceeding against the plaintiff; 7
Petition, id. at 26; Memorandum, id. at 159-160.
8
G.R. No. 164349, January 31, 2006, 481 SCRA 384.
9
Id. at 393-394.
10
350 Phil. 184 (1998).
(5) Where the defendant acted in gross and evident bad faith in refusing to satisfy the plaintiff’s plainly 11
Id. at 194.
valid, just and demandable claim; 12
Ridjo Tape & Chemical Corporation v. Court of Appeals, supra note 10.
13
Id. at 196.
14
G.R. No. 144474, April 27, 2007, 522 SCRA 364.
15
Id. at 375-376.
(6) In actions for legal support; 16
TSN, April 21, 1993, p. 7.
17
Id. at 9.
18
464 Phil. 146 (2004).
19
Id. at 149-150.
(7) In actions for the recovery of wages of household helpers, laborers and skilled workers; 20
Respondents did not claim actual damages.

(8) In actions for indemnity under workmen’s compensation and employer’s liability laws;

(9) In a separate civil action to recover civil liability arising from a crime;

(10) When at least double judicial costs are awarded;

(11) In any other case where the court deems it just and equitable that attorney’s fees and expenses of
litigation should be recovered.

In all cases, the attorney’s fees and expenses of litigation must be reasonable.

None of the grounds for recovery of attorney's fees are present.

 Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 95641 September 22, 1994
SANTOS B. AREOLA and LYDIA D. AREOLA, petitioners-appellants,
vs.
COURT OF APPEALS and PRUDENTIAL GUARANTEE AND ASSURANCE, INC., respondents-appellees.
Gutierrez, Cortes & Gonzales for petitioners.
Bengzon, Bengzon, Baraan & Fernandez Law Offices for private respondent.
ROMERO, J.:
On June 29, 1985, seven months after the issuance of petitioner Santos Areola's Personal Accident Insurance Policy
No. PA-20015, respondent insurance company unilaterally cancelled the same since company records revealed that
petitioner-insured failed to pay his premiums.
On August 3, 1985, respondent insurance company offered to reinstate same policy it had previously cancelled and
even proposed to extend its lifetime to December 17, 1985, upon a finding that the cancellation was erroneous and
that the premiums were paid in full by petitioner-insured but were not remitted by Teofilo M. Malapit, respondent
insurance company's branch manager.
These, in brief, are the material facts that gave rise to the action for damages due to breach of contract instituted by
petitioner-insured before
Branch 40 RTC, Dagupan City against respondent insurance company.
There are two issues for resolution in this case:
(1) Did the erroneous act of cancelling subject insurance policy entitle petitioner-insured to payment of damages?
(2) Did the subsequent act of reinstating the wrongfully cancelled insurance policy by respondent insurance company,
in an effort to rectify such error, obliterate whatever liability for damages it may have to bear, thus absolving it
therefrom?
From the factual findings of the trial court, it appears that petitioner-insured, Santos Areola, a lawyer from Dagupan
City, bought, through
the Baguio City branch of Prudential Guarantee and Assurance, Inc. (hereinafter referred to as Prudential), a personal
accident insurance policy covering the one-year period between noon of November 28, 1984 and noon of November
28, 1985. 1 Under the terms of the statement of account issued by respondent insurance company, petitioner-insured
was supposed to pay the total amount of P1,609.65 which included the premium of P1,470.00, documentary stamp of
P110.25 and 2% premium tax of P29.40. 2 At the lower left-hand corner of the statement of account, the following is
legibly printed:
This Statement of Account must not be considered a receipt. Official Receipt will be issued to
you upon payment of this account.
If payment is made to our representative, demand for a Provisional Receipt and if our Official
Receipts is (sic) not received by you within 7 days please notify us.
If payment is made to our office, demand for an OFFICIAL RECEIPT.
On December 17, 1984, respondent insurance company issued collector's provisional receipt No. 9300 to petitioner-
insured for the amount of P1,609.65 3 On the lower portion of the receipt the following is written in capital letters:
Note: This collector's provisional receipt will be confirmed by our official receipt. If our official
receipt is not received by you within 7 days, please notify us. 4
On June 29, 1985, respondent insurance company, through its Baguio City manager, Teofilo M. Malapit, sent
petitioner-insured Endorsement
No. BG-002/85 which "cancelled flat" Policy No. PA BG-20015 "for non-payment of premium effective as of inception
dated." 5 The same endorsement also credited "a return premium of P1,609.65 plus documentary stamps and
premium tax" to the account of the insured.
Shocked by the cancellation of the policy, petitioner-insured confronted Carlito Ang, agent of respondent insurance
company, and demanded the issuance of an official receipt. Ang told petitioner-insured that the cancellation of the
policy was a mistake but he would personally see to its rectification. However, petitioner-insured failed to receive any
official receipt from Prudential.
Hence, on July 15, 1985, petitioner-insured sent respondent insurance company a letter demanding that he be insured
under the same terms and conditions as those contained in Policy No. PA-BG-20015 commencing upon its receipt of
his letter, or that the current commercial rate of increase on the payment he had made under provisional receipt No.
9300 be returned within five days. 6 Areola also warned that should his demands be unsatisfied, he would sue for
damages.
On July 17, 1985, he received a letter from production manager Malapit informing him that the "partial payment" of
P1,000.00 he had made on the policy had been "exhausted pursuant to the provisions of the Short Period Rate Scale"
printed at the back of the policy. Malapit warned Areola that should be fail to pay the balance, the company's liability
would cease to operate. 7
In reply to the petitioner-insured's letter of July 15, 1985, respondent insurance company, through its Assistant Vice-
President Mariano M. Ampil III, wrote Areola a letter dated July 25, 1985 stating that the company was verifying
whether the payment had in fact been issued therefor. Ampil emphasized that the official receipt should have been
issued seven days from the issuance of the provisional receipt but because no official receipt had been issued in
Areola's name, there was reason to believe that no payment had been made. Apologizing for the inconvenience, Ampil
expressed the company's concern by agreeing "to hold you cover (sic) under the terms of the referenced policy until
such time that this matter is cleared." 8
On August 3, 1985, Ampil wrote Areola another letter confirming that the amount of P1,609.65 covered by provisional
receipt No. 9300 was in fact received by Prudential on December 17, 1984. Hence, Ampil informed
Areola that Prudential was "amenable to extending PGA-PA-BG-20015 up to December 17, 1985 or one year from the
date when payment was received." Apologizing again for the inconvenience caused Areola, Ampil exhorted him to
indicate his conformity to the proposal by signing on the space provided for in the letter. 9
The letter was personally delivered by Carlito Ang to Areola on
August 13, 1985 10 but unfortunately, Areola and his wife, Lydia, as early as August 6, 1985 had filed a complaint for
breach of contract with damages before the lower court.
In its Answer, respondent insurance company admitted that the cancellation of petitioner-insured's policy was due to
the failure of Malapit to turn over the premiums collected, for which reason no official receipt was issued to him.
However, it argued that, by acknowledging the inconvenience caused on petitioner-insured and after taking steps to
rectify its omission by reinstating the cancelled policy prior to the filing of the complaint, respondent insurance
company had complied with its obligation under the contract. Hence, it concluded that petitioner-insured no longer has
a cause of action against it. It insists that it cannot be held liable for damages arising from breach of contract, having
demonstrated fully well its fulfillment of its obligation.
The trial court, on June 30, 1987, rendered a judgment in favor of petitioner-insured, ordering respondent insurance
company to pay the former the following:
a) P1,703.65 as actual damages;
b) P200,000.00 as moral damages; and
c) P50,000.00 as exemplary damages;
2. To pay to the plaintiff, as and for attorney's fees the amount of P10,000.00; and
3. To pay the costs.
In its decision, the court below declared that respondent insurance company acted in bad faith in unilaterally cancelling
subject insurance policy, having done so only after seven months from the time that it had taken force and effect and
despite the fact of full payment of premiums and other charges on the issued insurance policy. Cancellation from the
date of the policy's inception, explained the lower court, meant that the protection sought by petitioner-insured from the
risks insured against was never extended by respondent insurance company. Had the insured met an accident at the
time, the insurance company would certainly have disclaimed any liability because technically, the petitioner could not
have been considered insured. Consequently, the trial court held that there was breach of contract on the part of
respondent insurance company, entitling petitioner-insured to an award of the damages prayed for.
This ruling was challenged on appeal by respondent insurance company, denying bad faith on its part in unilaterally
cancelling subject insurance policy.
After consideration of the appeal, the appellate court issued a reversal of the decision of the trial court, convinced that
the latter had erred in finding respondent insurance company in bad faith for the cancellation of petitioner-insured's
policy. According to the Court of Appeals, respondent insurance company was not motivated by negligence, malice or
bad faith in cancelling subject policy. Rather, the cancellation of the insurance policy was based on what the existing
records showed, i.e., absence of an official receipt issued to petitioner-insured confirming payment of premiums. Bad
faith, said the Court of Appeals, is some motive of self-interest or ill-will; a furtive design of ulterior purpose, proof of
which must be established convincingly. On the contrary, it further observed, the following acts indicate that
respondent insurance company did not act precipitately or willfully to inflict a wrong on petitioner-insured:
(a) the investigation conducted by Alfredo Bustamante to verify if petitioner-insured had indeed paid the premium; (b)
the letter of August 3, 1985 confirming that the premium had been paid on December 17, 1984; (c) the reinstatement
of the policy with a proposal to extend its effective period to December 17, 1985; and (d) respondent insurance
company's apologies for the "inconvenience" caused upon petitioner-insured. The appellate court added that
respondent insurance company even relieved Malapit, its Baguio City manager, of his job by forcing him to resign.
Petitioner-insured moved for the reconsideration of the said decision which the Court of Appeals denied. Hence, this
petition for review on certiorari anchored on these arguments:
I
Respondent Court of Appeals is guilty of grave abuse of discretion and committed a serious
and reversible error in not holding Respondent Prudential liable for the cancellation of the
insurance contract which was admittedly caused by the fraudulent acts and bad faith of its own
officers.
II
Respondent Court of Appeals committed serious and reversible error and abused its discretion
in ruling that the defenses of good faith and honest mistake can co-exist with the admitted
fraudulent acts and evident bad faith.
III
Respondent Court of Appeals committed a reversible error in not finding that even without
considering the fraudulent acts of its own officer in misappropriating the premium payment, the
act itself in cancelling the insurance policy was done with bad faith and/or gross negligence
and wanton attitude amounting to bad faith, because among others, it was
Mr. Malapit — the person who committed the fraud — who sent and signed the notice of
cancellation.
IV
Respondent Court of Appeals has decided a question of substance contrary to law and
applicable decision of the Supreme Court when it refused to award damages in favor of herein
Petitioner-Appellants.
It is petitioner-insured's submission that the fraudulent act of Malapit, manager of respondent insurance company's
branch office in Baguio, in misappropriating his premium payments is the proximate cause of the cancellation of the
insurance policy. Petitioner-insured theorized that Malapit's act of signing and even sending the notice of cancellation
himself, notwithstanding his personal knowledge of petitioner-insured's full payment of premiums, further reinforces
the allegation of bad faith. Such fraudulent act committed by Malapit, argued petitioner-insured, is attributable to
respondent insurance company, an artificial corporate being which can act only through its officers or employees.
Malapit's actuation, concludes petitioner-insured, is therefore not separate and distinct from that of respondent-
insurance company, contrary to the view held by the Court of Appeals. It must, therefore, bear the consequences of
the erroneous cancellation of subject insurance policy caused by the non-remittance by its own employee of the
premiums paid. Subsequent reinstatement, according to petitioner-insured, could not possibly absolve respondent
insurance company from liability, there being an obvious breach of contract. After all, reasoned out petitioner-insured,
damage had already been inflicted on him and no amount of rectification could remedy the same.
Respondent insurance company, on the other hand, argues that where reinstatement, the equitable relief sought by
petitioner-insured was granted at an opportune moment, i.e. prior to the filing of the complaint, petitioner-insured is left
without a cause of action on which to predicate his claim for damages. Reinstatement, it further explained, effectively
restored petitioner-insured to all his rights under the policy. Hence, whatever cause of action there might have been
against it, no longer exists and the consequent award of damages ordered by the lower court in unsustainable.
We uphold petitioner-insured's submission. Malapit's fraudulent act of misappropriating the premiums paid by
petitioner-insured is beyond doubt directly imputable to respondent insurance company. A corporation, such as
respondent insurance company, acts solely thru its employees. The latters' acts are considered as its own for which it
can be held to account. 11 The facts are clear as to the relationship between private respondent insurance company
and Malapit. As admitted by private respondent insurance company in its answer, 12 Malapit was the manager of its
Baguio branch. It is beyond doubt that he represented its interest and acted in its behalf. His act of receiving the
premiums collected is well within the province of his authority. Thus, his receipt of said premiums is receipt by private
respondent insurance company who, by provision of law, particularly under Article 1910 of the Civil Code, is bound by
the acts of its agent.
Article 1910 thus reads:
Art. 1910. The principal must comply with all the obligations which the agent may have
contracted within the scope of his authority.
 As for any obligation wherein the agent has exceeded his power, the principal is not bound Feliciano, Melo and Vitug, JJ., concur.
except when he ratifies it expressly or tacitly.

Bidin, J., is on leave.

Malapit's failure to remit the premiums he received cannot constitute a defense for private respondent insurance
company; no exoneration from liability could result therefrom. The fact that private respondent insurance company was
itself defrauded due to the anomalies that took place in its Baguio branch office, such as the non-accrual of said #Footnotes

premiums to its account, does not free the same from its obligation to petitioner Areola. As held in Prudential Bank v. 1 Exh. "A."
2 Exh. "B."
Court of Appeals 13 citing the ruling in McIntosh v. Dakota Trust Co.: 14 3 Exh. "C."
4 Exh. "2."
5 Exh. "D."
A bank is liable for wrongful acts of its officers done in the interests of the bank or in the course 6 Exh. "F."
7 Exh. "E."
of dealings of the officers in their representative capacity but not for acts outside the scope of 8 Exh. "G."
their authority. A bank holding out its officers and agent as worthy of confidence will not be 9 Exh. "H."
10 Notation on upper right hand corner of Exh. "H."
permitted to profit by the frauds they may thus be enabled to perpetrate in the apparent scope 11 Radio Communications of the Philippines v. Court of Appeals, et al., No. L-44748, August 29, 1986, 143 SCRA 657.
of their employment; nor will it be permitted to shirk its responsibility for such frauds, even 12 Rollo, p. 35.
though no benefit may accrue to the bank therefrom. Accordingly, a banking corporation is 13 G.R. No. 108957, June 14, 1993, 223 SCRA 350.
14 52 ND 752, 204 NW 818, 40 ALR 1021.
liable to innocent third persons where the representation is made in the course of its business 15 Tolentino, Arturo, Civil Code of the Philippines Commentaries and Jurisprudence, Vol. IV, p. 175.
by an agent acting within the general scope of his authority even though, in the particular case, 16 Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is
incumbent upon him.
the agent is secretly abusing his authority and attempting to perpetrate a fraud upon his The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in either case. He may also seek rescission,
principal or some other person, for his own ultimate benefit. even after he has chosen fulfillment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third persons who have the thing, in accordance with articles 1385 and 1388 and the Mortgage Law.
17 Article 2221 (Civil Code) — Nominal damages are adjudicated in order that a right of the plaintiff, which has been violated or
Consequently, respondent insurance company is liable by way of damages for the fraudulent acts committed by invaded by the defendant, may be vindicated or recognized and not for the purpose of indemnifying the plaintiff for any loss suffered
Malapit that gave occasion to the erroneous cancellation of subject insurance policy. Its earlier act of reinstating the by him.
18 Algarra v. Sandejas, No. 8385, March 24, 1914, 27 Phil. 284.
insurance policy can not obliterate the injury inflicted on petitioner-insured. Respondent company should be reminded
that a contract of insurance creates reciprocal obligations for both insurer and insured. Reciprocal obligations are
those which arise from the same cause and in which each party is both a debtor and a creditor of the other, such that
the obligation of one is dependent upon the obligation of the other. 15

Under the circumstances of instant case, the relationship as creditor and debtor between the parties arose from a
common cause: i.e., by reason of their agreement to enter into a contract of insurance under whose terms, respondent
insurance company promised to extend protection to petitioner-insured against the risk insured for a consideration in
the form of premiums to be paid by the latter. Under the law governing reciprocal obligations, particularly the second
paragraph of Article 1191, 16 the injured party, petitioner-insured in this case, is given a choice between fulfillment or
rescission of the obligation in case one of the obligors, such as respondent insurance company, fails to comply with
what is incumbent upon him. However, said article entitles the injured party to payment of damages, regardless of
whether he demands fulfillment or rescission of the obligation. Untenable then is reinstatement insurance company's
argument, namely, that reinstatement being equivalent to fulfillment of its obligation, divests petitioner-insured of a
rightful claim for payment of damages. Such a claim finds no support in our laws on obligations and contracts.

The nature of damages to be awarded, however, would be in the form of nominal damages 17 contrary to that granted
by the court below. Although the erroneous cancellation of the insurance policy constituted a breach of contract,
private respondent insurance company, within a reasonable time took steps to rectify the wrong committed by
reinstating the insurance policy of petitioner. Moreover, no actual or substantial damage or injury was inflicted on
petitioner Areola at the time the insurance policy was cancelled. Nominal damages are "recoverable where a legal
right is technically violated and must be vindicated against an invasion that has produced no actual present loss of any
kind, or where there has been a breach of contract and no substantial injury or actual damages whatsoever have been
or can be shown. 18

WHEREFORE, the petition for review on certiorari is hereby GRANTED and the decision of the Court of Appeals in
CA-G.R. No. 16902 on May 31, 1990, REVERSED. The decision of Branch 40, RTC Dagupan City, in Civil Case No.
D-7972 rendered on June 30, 1987 is hereby REINSTATED subject to the following modifications: (a) that nominal
damages amounting to P30,000.00 be awarded petitioner in lieu of the damages adjudicated by court a quo; and (b)
that in the satisfaction of the damages awarded therein, respondent insurance company is ORDERED to pay the legal
rate of interest computed from date of filing of complaint until final payment thereof.

SO ORDERED.
 FIRST DIVISION
[G.R. No. 117190. January 2, 1997]
JACINTO TANGUILIG doing business under the name and style J.M.T. ENGINEERING AND GENERAL
MERCHANDISING, petitioner, vs. COURT OF APPEALS and VICENTE HERCE JR., respondents.
DECISION
BELLOSILLO, J.:
This case involves the proper interpretation of the contract entered into between the parties.
Sometime in April 1987 petitioner Jacinto M. Tanguilig doing business under the name and style J. M.
T. Engineering and General Merchandising proposed to respondent Vicente Herce Jr. to construct a windmill system for
him. After some negotiations they agreed on the construction of the windmill for a consideration of P60,000.00 with
a one-year guaranty from the date of completion and acceptance by respondent Herce Jr. of the project. Pursuant to
the agreement respondent paid petitioner a down payment of P30,000.00 and an installment payment of P15,000.00,
leaving a balance of P15,000.00.
On 14 March 1988, due to the refusal and failure of respondent to pay the balance, petitioner filed a complaint to
collect the amount. In his Answer before the trial court respondent denied the claim saying that he had already paid this
amount to the San Pedro General Merchandising Inc. (SPGMI) which constructed the deep well to which the windmill
system was to be connected. According to respondent, since the deep well formed part of the system the payment he
tendered to SPGMI should be credited to his account by petitioner. Moreover, assuming that he owed petitioner a
balance of P15,000.00, this should be offset by the defects in the windmill system which caused the structure to collapse
after a strong wind hit their place.[1]
Petitioner denied that the construction of a deep well was included in the agreement to build the windmill system,
for the contract price of P60,000.00 was solely for the windmill assembly and its installation, exclusive of other incidental
materials needed for the project. He also disowned any obligation to repair or reconstruct the system and insisted that
he delivered it in good and working condition to respondent who accepted the same without protest. Besides, its collapse
was attributable to a typhoon, a force majeure, which relieved him of any liability.
In finding for plaintiff, the trial court held that the construction of the
deep well was not part of the windmill project as evidenced clearly by the letter proposals submitted by petitioner to
respondent.[2] It noted that "[i]f the intention of the parties is to include the construction of the deep well in the project,
the same should be stated in the proposals. In the absence of such an agreement, it could be safely concluded that the
construction of the deep well is not a part of the project undertaken by the plaintiff." [3] With respect to the repair of the
windmill, the trial court found that "there is no clear and convincing proof that the windmill system fell down due to the
defect of the construction."[4]
The Court of Appeals reversed the trial court. It ruled that the construction of the deep well was included in the
agreement of the parties because the term "deep well" was mentioned in both proposals. It also gave credence to the
testimony of respondent's witness Guillermo Pili, the proprietor of SPGMI which installed the deep well, that petitioner
Tanguilig told him that the cost of constructing the deep well would be deducted from the contract price
of P60,000.00. Upon these premises the appellate court concluded that respondent's payment of P15,000.00 to SPGMI
should be applied to his remaining balance with petitioner thus effectively extinguishing his contractual
obligation. However, it rejected petitioner's claim of force majeure and ordered the latter to reconstruct the windmill in
accordance with the stipulated one-year guaranty.
His motion for reconsideration having been denied by the Court of Appeals, petitioner now seeks relief from this
Court. He raises two issues: firstly, whether the agreement to construct the windmill system included the installation of
a deep well and, secondly, whether petitioner is under obligation to reconstruct the windmill after it collapsed.
We reverse the appellate court on the first issue but sustain it on the second.
The preponderance of evidence supports the finding of the trial court that the installation of a deep well was not
included in the proposals of petitioner to construct a windmill system for respondent. There were in fact two (2)
proposals: one dated 19 May 1987 which pegged the contract price at P87,000.00 (Exh. "1"). This was rejected by
respondent. The other was submitted three days later, i.e., on 22 May 1987 which contained more specifications but
proposed a lower contract price of P60,000.00 (Exh. "A"). The latter proposal was accepted by respondent and the
construction immediately followed. The pertinent portions of the first letter-proposal (Exh. "1") are reproduced hereunder
- a deep well; it would have also mentioned the party who would pay for the undertaking. It strains credulity that respondent
In connection with your Windmill System and Installation, we would like to quote to you as follows:
One (1) Set - Windmill suitable for 2 inches diameter deepwell, 2 HP, capacity, 14 feet in diameter, with 20 pieces blade, Tower
40 feet high, including mechanism which is not advisable to operate during extra-intensity wind. Excluding cylinder pump.
UNIT CONTRACT PRICE P87,000.00
The second letter-proposal (Exh. "A") provides as follows:
In connection with your Windmill system Supply of Labor Materials and Installation, operated water pump, we would like to
quote to you as follows -
One (1) set - Windmill assembly for 2 inches or 3 inches deep-well pump, 6 Stroke, 14 feet diameter, 1-lot blade materials, 40 feet
Tower complete with standard appurtenances up to Cylinder pump, shafting U.S. adjustable International Metal.
One (1) lot - Angle bar, G. I. pipe, Reducer Coupling, Elbow Gate valve, cross Tee coupling.
One (1) lot - Float valve.
One (1) lot - Concreting materials foundation.
F. O. B. Laguna
Contract Price P60,000.00
Notably, nowhere in either proposal is the installation of a deep well mentioned, even remotely. Neither is there
an itemization or description of the materials to be used in constructing the deep well. There is absolutely no mention in
the two (2) documents that a deep well pump is a component of the proposed windmill system. The contract prices fixed
in both proposals cover only the features specifically described therein and no other. While the words "deep
well" and "deep well pump" are mentioned in both, these do not indicate that a deep well is part of the windmill
system. They merely describe the type of deep well pump for which the proposed windmill would be suitable. As correctly
pointed out by petitioner, the words "deep well"preceded by the prepositions "for" and "suitable for" were meant only to
convey the idea that the proposed windmill would be appropriate for a deep well pump with a diameter of 2 to 3
inches. For if the real intent of petitioner was to include a deep well in the agreement to construct a windmill, he would
have used instead the conjunctions "and" or "with." Since the terms of the instruments are clear and leave no doubt as
to their meaning they should not be disturbed.
Moreover, it is a cardinal rule in the interpretation of contracts that the intention of the parties shall be accorded
primordial consideration[5] and, in case of doubt, their contemporaneous and subsequent acts shall be principally
considered.[6] An examination of such contemporaneous and subsequent acts of respondent as well as the attendant
circumstances does not persuade us to uphold him.
Respondent insists that petitioner verbally agreed that the contract price of P60,000.00 covered the installation
of a deep well pump. He contends that since petitioner did not have the capacity to install the pump the latter agreed to
have a third party do the work the cost of which was to be deducted from the contract price. To prove his point, he
presented Guillermo Pili of SPGMI who declared that petitioner Tanguilig approached him with a letter from respondent
Herce Jr. asking him to build a deep well pump as "part of the price/contract which Engineer (Herce) had with Mr.
Tanguilig."[7]
We are disinclined to accept the version of respondent. The claim of Pili that Herce Jr. wrote him a letter is
unsubstantiated. The alleged letter was never presented in court by private respondent for reasons known only to
him. But granting that this written communication existed, it could not have simply contained a request for Pili to install
would keep silent on this matter and leave it all to petitioner Tanguilig to verbally convey to Pilithat the deep well was of the complaint. In return, petitioner is ordered to "reconstruct subject defective windmill system, in accordance with the
part of the windmill construction and that its payment would come from the contract price of P60,000.00. one-year guaranty"[16]and to complete the same within three (3) months from the finality of this decision.

We find it also unusual that Pili would readily consent to build a deep well the payment for which would come SO ORDERED.
supposedly from the windmill contract price on the mere representation of petitioner, whom he had never met before,
without a written commitment at least from the former. For if indeed the deep well were part of the windmill project, the Padilla, (Chairman), Vitug, Kapunan, and Hermosisima, JJ., concur.
contract for its installation would have been strictly a matter between petitioner and Pili himself with the former assuming
the obligation to pay the price. That it was respondent Herce Jr. himself who paid for the deep well by handing over to
[1]
Pili the amount of P15,000.00 clearly indicates that the contract for the deep well was not part of the windmill project but TSN, 20 December 1988, pp. 10-12.
a separate agreement between respondent and Pili. Besides, if the price of P60,000.00 included the deep well, [2]
the obligation of respondent was to pay the entire amount to petitioner without prejudice to any action that Guillermo Pili Exh. "A" and Exh. "1."
or SPGMI may take, if any, against the latter. Significantly, when asked why he tendered payment directly to Pili and not [3]
to petitioner, respondent explained, rather lamely, that he did it "because he has (sic) the money, so (he) just paid the Rollo, p. 36.
money in his possession."[8] [4]
Id., p. 37.
Can respondent claim that Pili accepted his payment on behalf of petitioner? No. While the law is clear that [5]
Kasilag v. Rodriguez, 69 Phil. 217 (1939).
"payment shall be made to the person in whose favor the obligation hasbeen constituted, or his successor in
interest, or any person authorized to receive it,".[9] It does not appear from the record that Pili and/or SPGMI was [6]
Art. 1371, New Civil Code; GSIS v. Court of Appeals, G.R. No. 52478, 30 October 1986, 145 SCRA 311; Serrano v.
so authorized. Court of Appeals, No. L-46357, 9 October 1985, 139 SCRA 179.
Respondent cannot claim the benefit of the law concerning "payments made by a third person."[10] The Civil Code [7]
TSN, 13 April 1989, pp. 18-19.
provisions do not apply in the instant case because no creditor-debtor relationship between petitioner and Guillermo Pili
and/or SPGMI has been established regarding the construction of the deep well. Specifically, witness Pili did not testify [8]
TSN, 13 April 1989, p. 22.
that he entered into a contract with petitioner for the construction of respondent's deep well. If SPGMI was really
commissioned by petitioner to construct the deep well, an agreement particularly to this effect should have been entered [9]
Art. 1240, New Civil Code.
into.
[10]
Arts. 1236 and 1237, New Civil Code .
The contemporaneous and subsequent acts of the parties concerned effectively belie respondent's
assertions. These circumstances only show that the construction of the well by SPGMI was for the sole account of [11]
Nakpil v. Court of Appeals, Nos. L-47851, L-47863, L-47896, 3 October 1986, 144 SCRA
respondent and that petitioner merely supervised the installation of the well because the windmill was to be connected 596; National Power Corporation v. Court of Appeals, G.R. Nos. L-47379 and 47481, 16 May 1988, 161
to it. There is no legal nor factual basis by which this Court can impose upon petitioner an obligation he did not expressly SCRA 334; National PowerCorporation v. Court of Appeals, G.R. Nos. 103442-45, 21 May 1993, 222 SCRA
assume nor ratify. 415.

The second issue is not a novel one. In a long line of cases[11] this Court has consistently held that in order for a [12]
See Note 11.
party to claim exemption from liability by reason of fortuitous event under Art. 1174 of the Civil Code the event should
[13]
be the sole and proximate cause of the loss or destruction of the object of the contract. In Nakpil vs. Court of Rollo, p. 44.
Appeals,[12] four (4) requisites must concur: (a) the cause of the breach of the obligation must be independent of the will
[14]
of the debtor; (b) the event must be either unforeseeable or unavoidable; (c) the event must be such as to render it Sec. 3, par. (y), Rule 131, Revised Rules on Evidence.
impossible for the debtor to fulfill his obligation in a normal manner; and, (d) the debtor must be free from any participation [15]
in or aggravation of the injury to the creditor. Art. 1169, last par., New Civil Code.
[16]
Petitioner failed to show that the collapse of the windmill was due solely to a fortuitous event. Interestingly, the See CA Decision, p. 7; Rollo, p. 27.
evidence does not disclose that there was actually a typhoon on the day the windmill collapsed. Petitioner merely stated
that there was a "strong wind." But a strong wind in this case cannot be fortuitous - unforeseeable nor unavoidable. On
the contrary, a strong wind should be present in places where windmills are constructed, otherwise the windmills will not
turn.

The appellate court correctly observed that "given the newly-constructed windmill system, the same would not
have collapsed had there been no inherent defect in it which could only be attributable to the appellee."[13] It emphasized
that respondent had in his favor the presumption that "things have happened according to the ordinary course of nature
and the ordinary habits of life."[14] This presumption has not been rebutted by petitioner.

Finally, petitioner's argument that private respondent was already in default in the payment of his outstanding
balance of P15,000.00 and hence should bear his own loss, is untenable. In reciprocal obligations, neither party incurs
in delay if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon
him.[15] When the windmill failed to function properly it became incumbent upon petitioner to institute the proper repairs
in accordance with the guaranty stated in the contract. Thus, respondent cannot be said to have incurred in delay;
instead, it is petitioner who should bear the expenses for the reconstruction of the windmill. Article 1167 of the Civil Code
is explicit on this point that if a person obliged to do something fails to do it, the same shall be executed at his cost.

WHEREFORE, the appealed decision is MODIFIED. Respondent VICENTE HERCE JR. is directed to pay
petitioner JACINTO M. TANGUILIG the balance of P15,000.00 with interest at the legal rate from the date of the filing
 Republic of the Philippines SO ORDERED. (Record on Appeal p. 521; Rollo, L- 47851, p. 169).
SUPREME COURT
Manila
SECOND DIVISION The dispositive portion of the decision of the Court of Appeals reads:

G.R. No. L-47851 October 3, 1986 WHEREFORE, the judgment appealed from is modified to include an award of P200,000.00 in
favor of plaintiff-appellant Philippine Bar Association, with interest at the legal rate from
November 29, 1968 until full payment to be paid jointly and severally by defendant United
JUAN F. NAKPIL & SONS, and JUAN F. NAKPIL, petitioners, Construction Co., Inc. and third party defendants (except Roman Ozaeta). In all other respects,
vs. the judgment dated September 21, 1971 as modified in the December 8, 1971 Order of the
THE COURT OF APPEALS, UNITED CONSTRUCTION COMPANY, INC., JUAN J. CARLOS, and the PHILIPPINE lower court is hereby affirmed with COSTS to be paid by the defendant and third party
BAR ASSOCIATION, respondents. defendant (except Roman Ozaeta) in equal shares.

G.R. No. L-47863 October 3, 1986 SO ORDERED.

THE UNITED CONSTRUCTION CO., INC., petitioner, Petitioners Juan F. Nakpil & Sons in L-47851 and United Construction Co., Inc. and Juan J. Carlos in L-47863 seek
vs. the reversal of the decision of the Court of Appeals, among other things, for exoneration from liability while petitioner
COURT OF APPEALS, ET AL., respondents. Philippine Bar Association in L-47896 seeks the modification of aforesaid decision to obtain an award of
P1,830,000.00 for the loss of the PBA building plus four (4) times such amount as damages resulting in increased cost
of the building, P100,000.00 as exemplary damages; and P100,000.00 as attorney's fees.
G.R. No. L-47896 October 3, 1986

These petitions arising from the same case filed in the Court of First Instance of Manila were consolidated by this
PHILIPPINE BAR ASSOCIATION, ET AL., petitioners, Court in the resolution of May 10, 1978 requiring the respective respondents to comment. (Rollo, L-47851, p. 172).
vs.
COURT OF APPEALS, ET AL., respondents/
The facts as found by the lower court (Decision, C.C. No. 74958; Record on Appeal, pp. 269-348; pp. 520-521; Rollo,
L-47851, p. 169) and affirmed by the Court of Appeals are as follows:
PARAS, J.:

These are petitions for review on certiorari of the November 28, 1977 decision of the Court of Appeals in CA-G.R. No.
51771-R modifying the decision of the Court of First Instance of Manila, Branch V, in Civil Case No. 74958 dated
September 21, 1971 as modified by the Order of the lower court dated December 8, 1971. The Court of Appeals in
modifying the decision of the lower court included an award of an additional amount of P200,000.00 to the Philippine
Bar Association to be paid jointly and severally by the defendant United Construction Co. and by the third-party
defendants Juan F. Nakpil and Sons and Juan F. Nakpil.
The plaintiff, Philippine Bar Association, a civic-non-profit association, incorporated under the Corporation Law,
decided to construct an office building on its 840 square meters lot located at the comer of Aduana and Arzobispo
Streets, Intramuros, Manila. The construction was undertaken by the United Construction, Inc. on an "administration"
basis, on the suggestion of Juan J. Carlos, the president and general manager of said corporation. The proposal was
approved by plaintiff's board of directors and signed by its president Roman Ozaeta, a third-party defendant in this
case. The plans and specifications for the building were prepared by the other third-party defendants Juan F. Nakpil &
Sons. The building was completed in June, 1966.

The dispositive portion of the modified decision of the lower court reads: In the early morning of August 2, 1968 an unusually strong earthquake hit Manila and its environs and the building in
question sustained major damage. The front columns of the building buckled, causing the building to tilt forward
dangerously. The tenants vacated the building in view of its precarious condition. As a temporary remedial measure,
WHEREFORE, judgment is hereby rendered:
the building was shored up by United Construction, Inc. at the cost of P13,661.28.

(a) Ordering defendant United Construction Co., Inc. and third-party defendants (except
On November 29, 1968, the plaintiff commenced this action for the recovery of damages arising from the partial
Roman Ozaeta) to pay the plaintiff, jointly and severally, the sum of P989,335.68 with interest
collapse of the building against United Construction, Inc. and its President and General Manager Juan J. Carlos as
at the legal rate from November 29, 1968, the date of the filing of the complaint until full
defendants. Plaintiff alleges that the collapse of the building was accused by defects in the construction, the failure of
payment;
the contractors to follow plans and specifications and violations by the defendants of the terms of the contract.

(b) Dismissing the complaint with respect to defendant Juan J. Carlos;

Defendants in turn filed a third-party complaint against the architects who prepared the plans and specifications,
alleging in essence that the collapse of the building was due to the defects in the said plans and specifications. Roman
(c) Dismissing the third-party complaint; Ozaeta, the then president of the plaintiff Bar Association was included as a third-party defendant for damages for
having included Juan J. Carlos, President of the United Construction Co., Inc. as party defendant.

(d) Dismissing the defendant's and third-party defendants' counterclaims for lack of merit;
On March 3, 1969, the plaintiff and third-party defendants Juan F. Nakpil & Sons and Juan F. Nakpil presented a
written stipulation which reads:
(e) Ordering defendant United Construction Co., Inc. and third-party defendants (except
Roman Ozaeta) to pay the costs in equal shares.
 1. That in relation to defendants' answer with counterclaims and third- party complaints and the
third-party defendants Nakpil & Sons' answer thereto, the plaintiff need not amend its complaint
by including the said Juan F. Nakpil & Sons and Juan F. Nakpil personally as parties
defendant.
2. That in the event (unexpected by the undersigned) that the Court should find after the trial
that the above-named defendants Juan J. Carlos and United Construction Co., Inc. are free
from any blame and liability for the collapse of the PBA Building, and should further find that
the collapse of said building was due to defects and/or inadequacy of the plans, designs, and
specifications p by the third-party defendants, or in the event that the Court may find Juan F.
Nakpil and Sons and/or Juan F. Nakpil contributorily negligent or in any way jointly and
solidarily liable with the defendants, judgment may be rendered in whole or in part. as the case
may be, against Juan F. Nakpil & Sons and/or Juan F. Nakpil in favor of the plaintiff to all
intents and purposes as if plaintiff's complaint has been duly amended by including the said
Juan F. Nakpil & Sons and Juan F. Nakpil as parties defendant and by alleging causes of
action against them including, among others, the defects or inadequacy of the plans, designs,
and specifications prepared by them and/or failure in the performance of their contract with
plaintiff.
3. Both parties hereby jointly petition this Honorable Court to approve this stipulation. (Record
on Appeal, pp. 274-275; Rollo, L-47851,p.169).
Upon the issues being joined, a pre-trial was conducted on March 7, 1969, during which among others, the parties
agreed to refer the technical issues involved in the case to a Commissioner. Mr. Andres O. Hizon, who was ultimately
appointed by the trial court, assumed his office as Commissioner, charged with the duty to try the following issues:
1. Whether the damage sustained by the PBA building during the August 2, 1968 earthquake
had been caused, directly or indirectly, by:
(a) The inadequacies or defects in the plans and specifications prepared by third-party
defendants;
(b) The deviations, if any, made by the defendants from said plans and specifications and how
said deviations contributed to the damage sustained;
(c) The alleged failure of defendants to observe the requisite quality of materials and
workmanship in the construction of the building;
(d) The alleged failure to exercise the requisite degree of supervision expected of the architect,
the contractor and/or the owner of the building;
(e) An act of God or a fortuitous event; and
(f) Any other cause not herein above specified.
2. If the cause of the damage suffered by the building arose from a combination of the above-
enumerated factors, the degree or proportion in which each individual factor contributed to the
damage sustained;
3. Whether the building is now a total loss and should be completely demolished or whether it
may still be repaired and restored to a tenantable condition. In the latter case, the
determination of the cost of such restoration or repair, and the value of any remaining
construction, such as the foundation, which may still be utilized or availed of (Record on
Appeal, pp. 275-276; Rollo, L-47851, p. 169).
Thus, the issues of this case were divided into technical issues and non-technical issues. As aforestated the technical
issues were referred to the Commissioner. The non-technical issues were tried by the Court.
Meanwhile, plaintiff moved twice for the demolition of the building on the ground that it may topple down in case of a
strong earthquake. The motions were opposed by the defendants and the matter was referred to the Commissioner.
Finally, on April 30, 1979 the building was authorized to be demolished at the expense of the plaintiff, but not another
earthquake of high intensity on April 7, 1970 followed by other strong earthquakes on April 9, and 12, 1970, caused
further damage to the property. The actual demolition was undertaken by the buyer of the damaged building. (Record
on Appeal, pp. 278-280; Ibid.)
After the protracted hearings, the Commissioner eventually submitted his report on September 25, 1970 with the
findings that while the damage sustained by the PBA building was caused directly by the August 2, 1968 earthquake
whose magnitude was estimated at 7.3 they were also caused by the defects in the plans and specifications prepared
by the third-party defendants' architects, deviations from said plans and specifications by the defendant contractors
and failure of the latter to observe the requisite workmanship in the construction of the building and of the contractors,
architects and even the owners to exercise the requisite degree of supervision in the construction of subject building.
All the parties registered their objections to aforesaid findings which in turn were answered by the Commissioner.
The trial court agreed with the findings of the Commissioner except as to the holding that the owner is charged with full
nine supervision of the construction. The Court sees no legal or contractual basis for such conclusion. (Record on
Appeal, pp. 309-328; Ibid).
Thus, on September 21, 1971, the lower court rendered the assailed decision which was modified by the Intermediate
Appellate Court on November 28, 1977.
All the parties herein appealed from the decision of the Intermediate Appellate Court. Hence, these petitions.
On May 11, 1978, the United Architects of the Philippines, the Association of Civil Engineers, and the Philippine
Institute of Architects filed with the Court a motion to intervene as amicus curiae. They proposed to present a position
paper on the liability of architects when a building collapses and to submit likewise a critical analysis with computations
on the divergent views on the design and plans as submitted by the experts procured by the parties. The motion
having been granted, the amicus curiae were granted a period of 60 days within which to submit their position.
After the parties had all filed their comments, We gave due course to the petitions in Our Resolution of July 21, 1978.
The position papers of the amicus curiae (submitted on November 24, 1978) were duly noted.
The amicus curiae gave the opinion that the plans and specifications of the Nakpils were not defective. But the
Commissioner, when asked by Us to comment, reiterated his conclusion that the defects in the plans and
specifications indeed existed.
Using the same authorities availed of by the amicus curiae such as the Manila Code (Ord. No. 4131) and the 1966
Asep Code, the Commissioner added that even if it can be proved that the defects in the constructionalone (and not in
the plans and design) caused the damage to the building, still the deficiency in the original design and jack of specific
provisions against torsion in the original plans and the overload on the ground floor columns (found by an the experts
including the original designer) certainly contributed to the damage which occurred. (Ibid, p. 174).
In their respective briefs petitioners, among others, raised the following assignments of errors: Philippine Bar
Association claimed that the measure of damages should not be limited to P1,100,000.00 as estimated cost of repairs
or to the period of six (6) months for loss of rentals while United Construction Co., Inc. and the Nakpils claimed that it
was an act of God that caused the failure of the building which should exempt them from responsibility and not the
defective construction, poor workmanship, deviations from plans and specifications and other imperfections in the
case of United Construction Co., Inc. or the deficiencies in the design, plans and specifications prepared by petitioners
in the case of the Nakpils. Both UCCI and the Nakpils object to the payment of the additional amount of P200,000.00
imposed by the Court of Appeals. UCCI also claimed that it should be reimbursed the expenses of shoring the building
in the amount of P13,661.28 while the Nakpils opposed the payment of damages jointly and solidarity with UCCI.
The pivotal issue in this case is whether or not an act of God-an unusually strong earthquake-which caused the failure
of the building, exempts from liability, parties who are otherwise liable because of their negligence.
The applicable law governing the rights and liabilities of the parties herein is Article 1723 of the New Civil Code, which
provides:
Art. 1723. The engineer or architect who drew up the plans and specifications for a building is
liable for damages if within fifteen years from the completion of the structure the same should
collapse by reason of a defect in those plans and specifications, or due to the defects in the
ground. The contractor is likewise responsible for the damage if the edifice fags within the
same period on account of defects in the construction or the use of materials of inferior quality
furnished by him, or due to any violation of the terms of the contract. If the engineer or architect
supervises the construction, he shall be solidarily liable with the contractor.
Acceptance of the building, after completion, does not imply waiver of any of the causes of
action by reason of any defect mentioned in the preceding paragraph.
The action must be brought within ten years following the collapse of the building.
On the other hand, the general rule is that no person shall be responsible for events which could not be foreseen or
which though foreseen, were inevitable (Article 1174, New Civil Code).
An act of God has been defined as an accident, due directly and exclusively to natural causes without human
intervention, which by no amount of foresight, pains or care, reasonably to have been expected, could have been
prevented. (1 Corpus Juris 1174).
There is no dispute that the earthquake of August 2, 1968 is a fortuitous event or an act of God.
To exempt the obligor from liability under Article 1174 of the Civil Code, for a breach of an obligation due to an "act of
God," the following must concur: (a) the cause of the breach of the obligation must be independent of the will of the
debtor; (b) the event must be either unforseeable or unavoidable; (c) the event must be such as to render it impossible
for the debtor to fulfill his obligation in a normal manner; and (d) the debtor must be free from any participation in, or
aggravation of the injury to the creditor. (Vasquez v. Court of Appeals, 138 SCRA 553; Estrada v. Consolacion, 71
SCRA 423; Austria v. Court of Appeals, 39 SCRA 527; Republic of the Phil. v. Luzon Stevedoring Corp., 21 SCRA
279; Lasam v. Smith, 45 Phil. 657).
Thus, if upon the happening of a fortuitous event or an act of God, there concurs a corresponding fraud, negligence,
delay or violation or contravention in any manner of the tenor of the obligation as provided for in Article 1170 of the
Civil Code, which results in loss or damage, the obligor cannot escape liability.
The principle embodied in the act of God doctrine strictly requires that the act must be one occasioned exclusively by
the violence of nature and all human agencies are to be excluded from creating or entering into the cause of the
mischief. When the effect, the cause of which is to be considered, is found to be in part the result of the participation of
man, whether it be from active intervention or neglect, or failure to act, the whole occurrence is thereby humanized, as
it were, and removed from the rules applicable to the acts of God. (1 Corpus Juris, pp. 1174-1175).
Thus it has been held that when the negligence of a person concurs with an act of God in producing a loss, such
person is not exempt from liability by showing that the immediate cause of the damage was the act of God. To be
exempt from liability for loss because of an act of God, he must be free from any previous negligence or misconduct
by which that loss or damage may have been occasioned. (Fish & Elective Co. v. Phil. Motors, 55 Phil. 129; Tucker v.
Milan, 49 O.G. 4379; Limpangco & Sons v. Yangco Steamship Co., 34 Phil. 594, 604; Lasam v. Smith, 45 Phil. 657).
The negligence of the defendant and the third-party defendants petitioners was established beyond dispute both in the
lower court and in the Intermediate Appellate Court. Defendant United Construction Co., Inc. was found to have made
substantial deviations from the plans and specifications. and to have failed to observe the requisite workmanship in the
construction as well as to exercise the requisite degree of supervision; while the third-party defendants were found to
have inadequacies or defects in the plans and specifications prepared by them. As correctly assessed by both courts,
the defects in the construction and in the plans and specifications were the proximate causes that rendered the PBA
building unable to withstand the earthquake of August 2, 1968. For this reason the defendant and third-party
defendants cannot claim exemption from liability. (Decision, Court of Appeals, pp. 30-31).
It is well settled that the findings of facts of the Court of Appeals are conclusive on the parties and on this court (cases
cited in Tolentino vs. de Jesus, 56 SCRA 67; Cesar vs. Sandiganbayan, January 17, 1985, 134 SCRA 105, 121),
unless (1) the conclusion is a finding grounded entirely on speculation, surmise and conjectures; (2) the inference
made is manifestly mistaken; (3) there is grave abuse of discretion; (4) the judgment is based on misapprehension of
facts; (5) the findings of fact are conflicting , (6) the Court of Appeals went beyond the issues of the case and its
findings are contrary to the admissions of both appellant and appellees (Ramos vs. Pepsi-Cola Bottling Co., February
8, 1967, 19 SCRA 289, 291-292; Roque vs. Buan, Oct. 31, 1967, 21 SCRA 648, 651); (7) the findings of facts of the
Court of Appeals are contrary to those of the trial court; (8) said findings of facts are conclusions without citation of
specific evidence on which they are based; (9) the facts set forth in the petition as well as in the petitioner's main and
reply briefs are not disputed by the respondents (Garcia vs. CA, June 30, 1970, 33 SCRA 622; Alsua-Bett vs. Court of
Appeals, July 30, 1979, 92 SCRA 322, 366); (10) the finding of fact of the Court of Appeals is premised on the
supposed absence of evidence and is contradicted by evidence on record (Salazar vs. Gutierrez, May 29, 1970, 33
SCRA 243, 247; Cited in G.R. No. 66497-98, Sacay v. Sandiganbayan, July 10, 1986).
It is evident that the case at bar does not fall under any of the exceptions above-mentioned. On the contrary, the
records show that the lower court spared no effort in arriving at the correct appreciation of facts by the referral of
technical issues to a Commissioner chosen by the parties whose findings and conclusions remained convincingly
unrebutted by the intervenors/amicus curiae who were allowed to intervene in the Supreme Court.
In any event, the relevant and logical observations of the trial court as affirmed by the Court of Appeals that "while it is
not possible to state with certainty that the building would not have collapsed were those defects not present, the fact
remains that several buildings in the same area withstood the earthquake to which the building of the plaintiff was
similarly subjected," cannot be ignored.
The next issue to be resolved is the amount of damages to be awarded to the PBA for the partial collapse (and
eventual complete collapse) of its building.
The Court of Appeals affirmed the finding of the trial court based on the report of the Commissioner that the total
amount required to repair the PBA building and to restore it to tenantable condition was P900,000.00 inasmuch as it
was not initially a total loss. However, while the trial court awarded the PBA said amount as damages, plus unrealized
rental income for one-half year, the Court of Appeals modified the amount by awarding in favor of PBA an additional
sum of P200,000.00 representing the damage suffered by the PBA building as a result of another earthquake that
occurred on April 7, 1970 (L-47896, Vol. I, p. 92).
The PBA in its brief insists that the proper award should be P1,830,000.00 representing the total value of the building
(L-47896, PBA's No. 1 Assignment of Error, p. 19), while both the NAKPILS and UNITED question the additional
award of P200,000.00 in favor of the PBA (L- 47851, NAKPIL's Brief as Petitioner, p. 6, UNITED's Brief as Petitioner,
p. 25). The PBA further urges that the unrealized rental income awarded to it should not be limited to a period of one-
half year but should be computed on a continuing basis at the rate of P178,671.76 a year until the judgment for the
principal amount shall have been satisfied L- 47896, PBA's No. 11 Assignment of Errors, p. 19).
The collapse of the PBA building as a result of the August 2, 1968 earthquake was only partial and it is undisputed
that the building could then still be repaired and restored to its tenantable condition. The PBA, however, in view of its
lack of needed funding, was unable, thru no fault of its own, to have the building repaired. UNITED, on the other hand,
spent P13,661.28 to shore up the building after the August 2, 1968 earthquake (L-47896, CA Decision, p. 46).
Because of the earthquake on April 7, 1970, the trial court after the needed consultations, authorized the total
demolition of the building (L-47896, Vol. 1, pp. 53-54).
rains, floods, winds, earthquakes, and natural forces is precisely the reason why we have
professional experts like architects, and engineers. Designs and constructions vary under
varying circumstances and conditions but the requirement to design and build well does not
change.
The findings of the lower Court on the cause of the collapse are more rational and accurate.
Instead of laying the blame solely on the motions and forces generated by the earthquake, it
also examined the ability of the PBA building, as designed and constructed, to withstand and
successfully weather those forces.

There should be no question that the NAKPILS and UNITED are liable for the damage resulting from the partial and
eventual collapse of the PBA building as a result of the earthquakes.
We quote with approval the following from the erudite decision penned by Justice Hugo E. Gutierrez (now an
Associate Justice of the Supreme Court) while still an Associate Justice of the Court of Appeals:
There is no question that an earthquake and other forces of nature such as cyclones, drought,
floods, lightning, and perils of the sea are acts of God. It does not necessarily follow, however,
that specific losses and suffering resulting from the occurrence of these natural force are also
acts of God. We are not convinced on the basis of the evidence on record that from the
thousands of structures in Manila, God singled out the blameless PBA building in Intramuros
and around six or seven other buildings in various parts of the city for collapse or severe
damage and that God alone was responsible for the damages and losses thus suffered.
The evidence sufficiently supports a conclusion that the negligence and fault of both United
and Nakpil and Sons, not a mysterious act of an inscrutable God, were responsible for the
damages. The Report of the Commissioner, Plaintiff's Objections to the Report, Third Party
Defendants' Objections to the Report, Defendants' Objections to the Report, Commissioner's
Answer to the various Objections, Plaintiffs' Reply to the Commissioner's Answer, Defendants'
Reply to the Commissioner's Answer, Counter-Reply to Defendants' Reply, and Third-Party
Defendants' Reply to the Commissioner's Report not to mention the exhibits and the
testimonies show that the main arguments raised on appeal were already raised during the trial
and fully considered by the lower Court. A reiteration of these same arguments on appeal fails
to convince us that we should reverse or disturb the lower Court's factual findings and its
conclusions drawn from the facts, among them:
The Commissioner also found merit in the allegations of the defendants as to the physical
evidence before and after the earthquake showing the inadequacy of design, to wit:

The record is replete with evidence of defects and deficiencies in the designs and plans, Physical evidence before the earthquake providing (sic) inadequacy of design;
defective construction, poor workmanship, deviation from plans and specifications and other
imperfections. These deficiencies are attributable to negligent men and not to a perfect God.
1. inadequate design was the cause of the failure of the building.

The act-of-God arguments of the defendants- appellants and third party defendants-appellants
presented in their briefs are premised on legal generalizations or speculations and on 2. Sun-baffles on the two sides and in front of the building;
theological fatalism both of which ignore the plain facts. The lengthy discussion of United on
ordinary earthquakes and unusually strong earthquakes and on ordinary fortuitous events and
extraordinary fortuitous events leads to its argument that the August 2, 1968 earthquake was of a. Increase the inertia forces that move the building laterally toward the Manila Fire
such an overwhelming and destructive character that by its own force and independent of the Department.
particular negligence alleged, the injury would have been produced. If we follow this line of
speculative reasoning, we will be forced to conclude that under such a situation scores of
b. Create another stiffness imbalance.
buildings in the vicinity and in other parts of Manila would have toppled down. Following the
same line of reasoning, Nakpil and Sons alleges that the designs were adequate in accordance
with pre-August 2, 1968 knowledge and appear inadequate only in the light of engineering 3. The embedded 4" diameter cast iron down spout on all exterior columns reduces the cross-
information acquired after the earthquake. If this were so, hundreds of ancient buildings which sectional area of each of the columns and the strength thereof.
survived the earthquake better than the two-year old PBA building must have been designed
and constructed by architects and contractors whose knowledge and foresight were
unexplainably auspicious and prophetic. Fortunately, the facts on record allow a more down to 4. Two front corners, A7 and D7 columns were very much less reinforced.
earth explanation of the collapse. The failure of the PBA building, as a unique and distinct
construction with no reference or comparison to other buildings, to weather the severe
earthquake forces was traced to design deficiencies and defective construction, factors which Physical Evidence After the Earthquake, Proving Inadequacy of design;
are neither mysterious nor esoteric. The theological allusion of appellant United that God acts
in mysterious ways His wonders to perform impresses us to be inappropriate. The evidence 1. Column A7 suffered the severest fracture and maximum sagging. Also D7.
reveals defects and deficiencies in design and construction. There is no mystery about these
acts of negligence. The collapse of the PBA building was no wonder performed by God. It was
a result of the imperfections in the work of the architects and the people in the construction 2. There are more damages in the front part of the building than towards the rear, not only in
company. More relevant to our mind is the lesson from the parable of the wise man in the columns but also in slabs.
Sermon on the Mount "which built his house upon a rock; and the rain descended and the
floods came and the winds blew and beat upon that house; and it fen not; for it was founded
upon a rock" and of the "foolish upon the sand. And the rain descended and man which built 3. Building leaned and sagged more on the front part of the building.
his house the floods came, and the winds blew, and beat upon that house; and it fell and great
was the fall of it. (St. Matthew 7: 24-27)." The requirement that a building should withstand
4. Floors showed maximum sagging on the sides and toward the front corner parts of the (2) (a) The deviations, if any, made by the defendants from the plans and specifications, and
building. how said deviations contributed to the damage sustained by the building.

5. There was a lateral displacement of the building of about 8", Maximum sagging occurs at the (b) The alleged failure of defendants to observe the requisite quality of materials and
column A7 where the floor is lower by 80 cm. than the highest slab level. workmanship in the construction of the building.

6. Slab at the corner column D7 sagged by 38 cm. These two issues, being interrelated with each other, will be discussed together.

The Commissioner concluded that there were deficiencies or defects in the design, plans and
specifications of the PBA building which involved appreciable risks with respect to the
accidental forces which may result from earthquake shocks. He conceded, however, that the
fact that those deficiencies or defects may have arisen from an obsolete or not too
conservative code or even a code that does not require a design for earthquake forces
mitigates in a large measure the responsibility or liability of the architect and engineer designer.
The findings of the Commissioner on these issues were as follows:
We now turn to the construction of the PBA Building and the alleged deficiencies or defects in
the construction and violations or deviations from the plans and specifications. All these may
be summarized as follows:

The Third-party defendants, who are the most concerned with this portion of the a. Summary of alleged defects as reported by Engineer Mario M. Bundalian.
Commissioner's report, voiced opposition to the same on the grounds that (a) the finding is
based on a basic erroneous conception as to the design concept of the building, to wit, that the
(1) Wrongful and defective placing of reinforcing bars.
design is essentially that of a heavy rectangular box on stilts with shear wan at one end; (b) the
finding that there were defects and a deficiency in the design of the building would at best be
based on an approximation and, therefore, rightly belonged to the realm of speculation, rather (2) Absence of effective and desirable integration of the 3 bars in the cluster.
than of certainty and could very possibly be outright error; (c) the Commissioner has failed to
back up or support his finding with extensive, complex and highly specialized computations and
analyzes which he himself emphasizes are necessary in the determination of such a highly (3) Oversize coarse aggregates: 1-1/4 to 2" were used. Specification requires no larger than 1
technical question; and (d) the Commissioner has analyzed the design of the PBA building not inch.
in the light of existing and available earthquake engineering knowledge at the time of the
preparation of the design, but in the light of recent and current standards.
(4) Reinforcement assembly is not concentric with the column, eccentricity being 3" off when
on one face the main bars are only 1 1/2' from the surface.
The Commissioner answered the said objections alleging that third-party defendants'
objections were based on estimates or exhibits not presented during the hearing that the resort
to engineering references posterior to the date of the preparation of the plans was induced by (5) Prevalence of honeycombs,
the third-party defendants themselves who submitted computations of the third-party
defendants are erroneous.
(6) Contraband construction joints,

The issue presently considered is admittedly a technical one of the highest degree. It involves (7) Absence, or omission, or over spacing of spiral hoops,
questions not within the ordinary competence of the bench and the bar to resolve by
themselves. Counsel for the third-party defendants has aptly remarked that "engineering,
although dealing in mathematics, is not an exact science and that the present knowledge as to (8) Deliberate severance of spirals into semi-circles in noted on Col. A-5, ground floor,
the nature of earthquakes and the behaviour of forces generated by them still leaves much to
be desired; so much so "that the experts of the different parties, who are all engineers, cannot
agree on what equation to use, as to what earthquake co-efficients are, on the codes to be (9) Defective construction joints in Columns A-3, C-7, D-7 and D-4, ground floor,
used and even as to the type of structure that the PBA building (is) was (p. 29, Memo, of third-
party defendants before the Commissioner).
(10) Undergraduate concrete is evident,

The difficulty expected by the Court if tills technical matter were to be tried and inquired into by
the Court itself, coupled with the intrinsic nature of the questions involved therein, constituted (11) Big cavity in core of Column 2A-4, second floor,
the reason for the reference of the said issues to a Commissioner whose qualifications and
experience have eminently qualified him for the task, and whose competence had not been (12) Columns buckled at different planes. Columns buckled worst where there are no spirals or
questioned by the parties until he submitted his report. Within the pardonable limit of the where spirals are cut. Columns suffered worst displacement where the eccentricity of the
Court's ability to comprehend the meaning of the Commissioner's report on this issue, and the columnar reinforcement assembly is more acute.
objections voiced to the same, the Court sees no compelling reasons to disturb the findings of
the Commissioner that there were defects and deficiencies in the design, plans and
specifications prepared by third-party defendants, and that said defects and deficiencies b. Summary of alleged defects as reported by Engr. Antonio Avecilla.
involved appreciable risks with respect to the accidental forces which may result from
earthquake shocks.
Columns are first (or ground) floor, unless otherwise stated.
(1) Column D4 — Spacing of spiral is changed from 2" to 5" on centers,
(2) Column D5 — No spiral up to a height of 22" from the ground floor,
(3) Column D6 — Spacing of spiral over 4 l/2,
(4) Column D7 — Lack of lateral ties,
(5) Column C7 — Absence of spiral to a height of 20" from the ground level, Spirals are at 2"
from the exterior column face and 6" from the inner column face,
(6) Column B6 — Lack of spiral on 2 feet below the floor beams,
(7) Column B5 — Lack of spirals at a distance of 26' below the beam,
(8) Column B7 — Spirals not tied to vertical reinforcing bars, Spirals are uneven 2" to 4",
(9) Column A3 — Lack of lateral ties,
(10) Column A4 — Spirals cut off and welded to two separate clustered vertical bars,
(11) Column A4 — (second floor Column is completely hollow to a height of 30"
(12) Column A5 — Spirals were cut from the floor level to the bottom of the spandrel beam to a
height of 6 feet,
(13) Column A6 — No spirals up to a height of 30' above the ground floor level,
(14) Column A7— Lack of lateralties or spirals,
c. Summary of alleged defects as reported by the experts of the Third-Party defendants.
Ground floor columns.
(1) Column A4 — Spirals are cut,
(2) Column A5 — Spirals are cut,
(3) Column A6 — At lower 18" spirals are absent,
(4) Column A7 — Ties are too far apart,
(5) Column B5 — At upper fourth of column spirals are either absent or improperly spliced,
(6) Column B6 — At upper 2 feet spirals are absent,
(7) Column B7 — At upper fourth of column spirals missing or improperly spliced.
(8) Column C7— Spirals are absent at lowest 18"
(9) Column D5 — At lowest 2 feet spirals are absent,
(10) Column D6 — Spirals are too far apart and apparently improperly spliced,
(11) Column D7 — Lateral ties are too far apart, spaced 16" on centers.
There is merit in many of these allegations. The explanations given by the engineering experts
for the defendants are either contrary to general principles of engineering design for reinforced
concrete or not applicable to the requirements for ductility and strength of reinforced concrete
in earthquake-resistant design and construction.
We shall first classify and consider defects which may have appreciable bearing or relation to'
the earthquake-resistant property of the building.
As heretofore mentioned, details which insure ductility at or near the connections between
columns and girders are desirable in earthquake resistant design and construction. The
omission of spirals and ties or hoops at the bottom and/or tops of columns contributed greatly
to the loss of earthquake-resistant strength. The plans and specifications required that these
spirals and ties be carried from the floor level to the bottom reinforcement of the deeper beam
(p. 1, Specifications, p. 970, Reference 11). There were several clear evidences where this
was not done especially in some of the ground floor columns which failed.
There were also unmistakable evidences that the spacings of the spirals and ties in the
columns were in many cases greater than those called for in the plans and specifications
resulting again in loss of earthquake-resistant strength. The assertion of the engineering
experts for the defendants that the improper spacings and the cutting of the spirals did not
result in loss of strength in the column cannot be maintained and is certainly contrary to the
general principles of column design and construction. And even granting that there be no loss
in strength at the yield point (an assumption which is very doubtful) the cutting or improper
spacings of spirals will certainly result in the loss of the plastic range or ductility in the column
and it is precisely this plastic range or ductility which is desirable and needed for earthquake-
resistant strength.
There is no excuse for the cavity or hollow portion in the column A4, second floor, and although
this column did not fail, this is certainly an evidence on the part of the contractor of poor
construction.
The effect of eccentricities in the columns which were measured at about 2 1/2 inches
maximum may be approximated in relation to column loads and column and beam moments.
The main effect of eccentricity is to change the beam or girder span. The effect on the
measured eccentricity of 2 inches, therefore, is to increase or diminish the column load by a
maximum of about 1% and to increase or diminish the column or beam movements by about a
maximum of 2%. While these can certainly be absorbed within the factor of safety, they
nevertheless diminish said factor of safety.
The cutting of the spirals in column A5, ground floor is the subject of great contention between
the parties and deserves special consideration.
 The proper placing of the main reinforcements and spirals in column A5, ground floor, is the
responsibility of the general contractor which is the UCCI. The burden of proof, therefore, that
this cutting was done by others is upon the defendants. Other than a strong allegation and
assertion that it is the plumber or his men who may have done the cutting (and this was flatly
denied by the plumber) no conclusive proof was presented. The engineering experts for the
defendants asserted that they could have no motivation for cutting the bar because they can
simply replace the spirals by wrapping around a new set of spirals. This is not quite correct.
There is evidence to show that the pouring of concrete for columns was sometimes done
through the beam and girder reinforcements which were already in place as in the case of
column A4 second floor. If the reinforcement for the girder and column is to subsequently wrap
around the spirals, this would not do for the elasticity of steel would prevent the making of tight
column spirals and loose or improper spirals would result. The proper way is to produce correct
spirals down from the top of the main column bars, a procedure which can not be done if either
the beam or girder reinforcement is already in place. The engineering experts for the
defendants strongly assert and apparently believe that the cutting of the spirals did not
materially diminish the strength of the column. This belief together with the difficulty of slipping
the spirals on the top of the column once the beam reinforcement is in place may be a
sufficient motivation for the cutting of the spirals themselves. The defendants, therefore, should
be held responsible for the consequences arising from the loss of strength or ductility in column
A5 which may have contributed to the damages sustained by the building.
The lack of proper length of splicing of spirals was also proven in the visible spirals of the
columns where spalling of the concrete cover had taken place. This lack of proper splicing
contributed in a small measure to the loss of strength.
The effects of all the other proven and visible defects although nor can certainly be
accumulated so that they can contribute to an appreciable loss in earthquake-resistant
strength. The engineering experts for the defendants submitted an estimate on some of these
defects in the amount of a few percent. If accumulated, therefore, including the effect of
eccentricity in the column the loss in strength due to these minor defects may run to as much
as ten percent.
To recapitulate: the omission or lack of spirals and ties at the bottom and/or at the top of some
of the ground floor columns contributed greatly to the collapse of the PBA building since it is at
these points where the greater part of the failure occurred. The liability for the cutting of the
spirals in column A5, ground floor, in the considered opinion of the Commissioner rests on the
shoulders of the defendants and the loss of strength in this column contributed to the damage
which occurred.
It is reasonable to conclude, therefore, that the proven defects, deficiencies and violations of
the plans and specifications of the PBA building contributed to the damages which resulted
during the earthquake of August 2, 1968 and the vice of these defects and deficiencies is that
they not only increase but also aggravate the weakness mentioned in the design of the
structure. In other words, these defects and deficiencies not only tend to add but also to
multiply the effects of the shortcomings in the design of the building. We may say, therefore,
that the defects and deficiencies in the construction contributed greatly to the damage which
occurred.
Since the execution and supervision of the construction work in the hands of the contractor is
direct and positive, the presence of existence of all the major defects and deficiencies noted
and proven manifests an element of negligence which may amount to imprudence in the
construction work. (pp. 42-49, Commissioners Report).
As the parties most directly concerned with this portion of the Commissioner's report, the defendants voiced their
objections to the same on the grounds that the Commissioner should have specified the defects found by him to be
"meritorious"; that the Commissioner failed to indicate the number of cases where the spirals and ties were not carried
from the floor level to the bottom reinforcement of the deeper beam, or where the spacing of the spirals and ties in the
columns were greater than that called for in the specifications; that the hollow in column A4, second floor, the
eccentricities in the columns, the lack of proper length of splicing of spirals, and the cut in the spirals in column A5,
ground floor, did not aggravate or contribute to the damage suffered by the building; that the defects in the
construction were within the tolerable margin of safety; and that the cutting of the spirals in column A5, ground floor,
was done by the plumber or his men, and not by the defendants.
Answering the said objections, the Commissioner stated that, since many of the defects were minor only the totality of
the defects was considered. As regards the objection as to failure to state the number of cases where the spirals and
ties were not carried from the floor level to the bottom reinforcement, the Commissioner specified groundfloor columns
B-6 and C-5 the first one without spirals for 03 inches at the top, and in the latter, there were no spirals for 10 inches at
the bottom. The Commissioner likewise specified the first storey columns where the spacings were greater than that
called for in the specifications to be columns B-5, B-6, C-7, C-6, C-5, D-5 and B-7. The objection to the failure of the
Commissioner to specify the number of columns where there was lack of proper length of splicing of spirals, the
Commissioner mentioned groundfloor columns B-6 and B-5 where all the splices were less than 1-1/2 turns and were
not welded, resulting in some loss of strength which could be critical near the ends of the columns. He answered the
supposition of the defendants that the spirals and the ties must have been looted, by calling attention to the fact that
the missing spirals and ties were only in two out of the 25 columns, which rendered said supposition to be improbable.
The Commissioner conceded that the hollow in column A-4, second floor, did not aggravate or contribute to the
damage, but averred that it is "evidence of poor construction." On the claim that the eccentricity could be absorbed
within the factor of safety, the Commissioner answered that, while the same may be true, it also contributed to or
aggravated the damage suffered by the building.
The objection regarding the cutting of the spirals in Column A-5, groundfloor, was answered by the Commissioner by
reiterating the observation in his report that irrespective of who did the cutting of the spirals, the defendants should be
held liable for the same as the general contractor of the building. The Commissioner further stated that the loss of
strength of the cut spirals and inelastic deflections of the supposed lattice work defeated the purpose of the spiral
containment in the column and resulted in the loss of strength, as evidenced by the actual failure of this column.
Again, the Court concurs in the findings of the Commissioner on these issues and fails to find any sufficient cause to
disregard or modify the same. As found by the Commissioner, the "deviations made by the defendants from the plans
and specifications caused indirectly the damage sustained and that those deviations not only added but also
aggravated the damage caused by the defects in the plans and specifications prepared by third-party defendants.
(Rollo, Vol. I, pp. 128-142)
The afore-mentioned facts clearly indicate the wanton negligence of both the defendant and the third-party defendants
in effecting the plans, designs, specifications, and construction of the PBA building and We hold such negligence as
equivalent to bad faith in the performance of their respective tasks.
Relative thereto, the ruling of the Supreme Court in Tucker v. Milan (49 O.G. 4379, 4380) which may be in point in this
case reads:
One who negligently creates a dangerous condition cannot escape liability for the natural and probable consequences
thereof, although the act of a third person, or an act of God for which he is not responsible, intervenes to precipitate
the loss.
As already discussed, the destruction was not purely an act of God. Truth to tell hundreds of ancient buildings in the
vicinity were hardly affected by the earthquake. Only one thing spells out the fatal difference; gross negligence and
evident bad faith, without which the damage would not have occurred.
WHEREFORE, the decision appealed from is hereby MODIFIED and considering the special and environmental
circumstances of this case, We deem it reasonable to render a decision imposing, as We do hereby impose, upon the
defendant and the third-party defendants (with the exception of Roman Ozaeta) a solidary (Art. 1723, Civil
Code, Supra, p. 10) indemnity in favor of the Philippine Bar Association of FIVE MILLION (P5,000,000.00) Pesos to
cover all damages (with the exception of attorney's fees) occasioned by the loss of the building (including interest
charges and lost rentals) and an additional ONE HUNDRED THOUSAND (P100,000.00) Pesos as and for attorney's
fees, the total sum being payable upon the finality of this decision. Upon failure to pay on such finality, twelve (12%)
per cent interest per annum shall be imposed upon afore-mentioned amounts from finality until paid. Solidary costs
against the defendant and third-party defendants (except Roman Ozaeta).

SO ORDERED.

Feria (Chairman), Fernan, Alampay and Cruz, JJ., concur.

 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-21749 September 29, 1967
REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,
vs.
LUZON STEVEDORING CORPORATION, defendant-appellant.
Office of the Solicitor General for plaintiff-appellee.
H. San Luis and L.V. Simbulan for defendant-appellant.
REYES, J.B.L., J.:
The present case comes by direct appeal from a decision of the Court of First Instance of Manila (Case No. 44572)
adjudging the defendant-appellant, Luzon Stevedoring Corporation, liable in damages to the plaintiff-appellee Republic
of the Philippines.
In the early afternoon of August 17, 1960, barge L-1892, owned by the Luzon Stevedoring Corporation was being
towed down the Pasig river by tugboats "Bangus" and "Barbero"1 also belonging to the same corporation, when the
barge rammed against one of the wooden piles of the Nagtahan bailey bridge, smashing the posts and causing the
bridge to list. The river, at the time, was swollen and the current swift, on account of the heavy downpour of Manila
and the surrounding provinces on August 15 and 16, 1960.
Sued by the Republic of the Philippines for actual and consequential damage caused by its employees, amounting to
P200,000 (Civil Case No. 44562, CFI of Manila), defendant Luzon Stevedoring Corporation disclaimed liability
therefor, on the grounds that it had exercised due diligence in the selection and supervision of its employees; that the
damages to the bridge were caused by force majeure; that plaintiff has no capacity to sue; and that the Nagtahan
bailey bridge is an obstruction to navigation.
After due trial, the court rendered judgment on June 11, 1963, holding the defendant liable for the damage caused by
its employees and ordering it to pay to plaintiff the actual cost of the repair of the Nagtahan bailey bridge which
amounted to P192,561.72, with legal interest thereon from the date of the filing of the complaint.
Defendant appealed directly to this Court assigning the following errors allegedly committed by the court a quo, to wit:
I — The lower court erred in not holding that the herein defendant-appellant had exercised the diligence
required of it in the selection and supervision of its personnel to prevent damage or injury to
others.1awphîl.nèt
II — The lower court erred in not holding that the ramming of the Nagtahan bailey bridge by barge L-1892
was caused by force majeure.
III — The lower court erred in not holding that the Nagtahan bailey bridge is an obstruction, if not a
menace, to navigation in the Pasig river.
IV — The lower court erred in not blaming the damage sustained by the Nagtahan bailey bridge to the
improper placement of the dolphins.
V — The lower court erred in granting plaintiff's motion to adduce further evidence in chief after it has
rested its case.
VI — The lower court erred in finding the plaintiff entitled to the amount of P192,561.72 for damages which
is clearly exorbitant and without any factual basis.
However, it must be recalled that the established rule in this jurisdiction is that when a party appeals directly to the
Supreme Court, and submits his case there for decision, he is deemed to have waived the right to dispute any finding
of fact made by the trial Court. The only questions that may be raised are those of law (Savellano vs. Diaz, L-17441,
July 31, 1963; Aballe vs. Santiago, L-16307, April 30, 1963; G.S.I.S. vs. Cloribel, L-22236, June 22, 1965). A
converso, a party who resorts to the Court of Appeals, and submits his case for decision there, is barred from
contending later that his claim was beyond the jurisdiction of the aforesaid Court. The reason is that a contrary rule
would encourage the undesirable practice of appellants' submitting their cases for decision to either court in
expectation of favorable judgment, but with intent of attacking its jurisdiction should the decision be unfavorable
(Tyson Tan, et al. vs. Filipinas Compañia de Seguros) et al., L-10096, Res. on Motion to Reconsider, March 23, 1966).
Consequently, we are limited in this appeal to the issues of law raised in the appellant's brief.
Taking the aforesaid rules into account, it can be seen that the only reviewable issues in this appeal are reduced to
two:
1) Whether or not the collision of appellant's barge with the supports or piers of the Nagtahan bridge was in
law caused by fortuitous event or force majeure, and
2) Whether or not it was error for the Court to have permitted the plaintiff-appellee to introduce additional
evidence of damages after said party had rested its case.
As to the first question, considering that the Nagtahan bridge was an immovable and stationary object and
uncontrovertedly provided with adequate openings for the passage of water craft, including barges like of appellant's, it
is undeniable that the unusual event that the barge, exclusively controlled by appellant, rammed the bridge supports
raises a presumption of negligence on the part of appellant or its employees manning the barge or the tugs that towed
it. For in the ordinary course of events, such a thing does not happen if proper care is used. In Anglo American
Jurisprudence, the inference arises by what is known as the "res ipsa loquitur" rule (Scott vs. London Docks Co., 2 H
& C 596; San Juan Light & Transit Co. vs. Requena, 224 U.S. 89, 56 L. Ed., 680; Whitwell vs. Wolf, 127 Minn. 529,
149 N.W. 299; Bryne vs. Great Atlantic & Pacific Tea Co., 269 Mass. 130; 168 N.E. 540; Gribsby vs. Smith, 146 S.W.
2d 719).
The appellant strongly stresses the precautions taken by it on the day in question: that it assigned two of its most
powerful tugboats to tow down river its barge L-1892; that it assigned to the task the more competent and experienced
among its patrons, had the towlines, engines and equipment double-checked and inspected; that it instructed
its patrons to take extra precautions; and concludes that it had done all it was called to do, and that the accident,
therefore, should be held due to force majeure or fortuitous event.
These very precautions, however, completely destroy the appellant's defense. For caso fortuito or force majeure(which
in law are identical in so far as they exempt an obligor from liability)2 by definition, are extraordinary events not
foreseeable or avoidable, "events that could not be foreseen, or which, though foreseen, were inevitable" (Art. 1174,
Civ. Code of the Philippines). It is, therefore, not enough that the event should not have been foreseen or anticipated,
as is commonly believed, but it must be one impossible to foresee or to avoid. The mere difficulty to foresee the
happening is not impossibility to foresee the same: "un hecho no constituye caso fortuito por la sola circunstancia de
que su existencia haga mas dificil o mas onerosa la accion diligente del presento ofensor" (Peirano
Facio, Responsibilidad Extra-contractual, p. 465; Mazeaud Trait de la Responsibilite Civil, Vol. 2, sec. 1569). The very
measures adopted by appellant prove that the possibility of danger was not only foreseeable, but actually foreseen,
and was not caso fortuito.
Otherwise stated, the appellant, Luzon Stevedoring Corporation, knowing and appreciating the perils posed by the
swollen stream and its swift current, voluntarily entered into a situation involving obvious danger; it therefore assured
the risk, and can not shed responsibility merely because the precautions it adopted turned out to be insufficient.
Hence, the lower Court committed no error in holding it negligent in not suspending operations and in holding it liable
for the damages caused.

It avails the appellant naught to argue that the dolphins, like the bridge, were improperly located. Even if true, these
circumstances would merely emphasize the need of even higher degree of care on appellant's part in the situation
involved in the present case. The appellant, whose barges and tugs travel up and down the river everyday, could not
safely ignore the danger posed by these allegedly improper constructions that had been erected, and in place, for
years.

On the second point: appellant charges the lower court with having abused its discretion in the admission of plaintiff's
additional evidence after the latter had rested its case. There is an insinuation that the delay was deliberate to enable
the manipulation of evidence to prejudice defendant-appellant.

We find no merit in the contention. Whether or not further evidence will be allowed after a party offering the evidence
has rested his case, lies within the sound discretion of the trial Judge, and this discretion will not be reviewed except in
clear case of abuse.3

In the present case, no abuse of that discretion is shown. What was allowed to be introduced, after plaintiff had rested
its evidence in chief, were vouchers and papers to support an item of P1,558.00 allegedly spent for the reinforcement
of the panel of the bailey bridge, and which item already appeared in Exhibit GG. Appellant, in fact, has no reason to
charge the trial court of being unfair, because it was also able to secure, upon written motion, a similar order dated
November 24, 1962, allowing reception of additional evidence for the said defendant-appellant.4

WHEREFORE, finding no error in the decision of the lower Court appealed from, the same is hereby affirmed. Costs
against the defendant-appellant.

Concepcion, C.J., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Angeles and Fernando, JJ., concur.
Bengzon, J.P. J., on leave, took no part.

Footnotes

1
The lead-tugboat "Bangus" was pulling the barge, while the tugboat "Barbero" was holding or restraining it
at the back.

2
Lasam vs. Smith, 45 Phil. 661.

3
Lopez vs. Liboro, 81 Phil. 429.

4
p. 89, Record on Appeal.
 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. 108164 February 23, 1995
FAR EAST BANK AND TRUST COMPANY, petitioner,
vs.
THE HONORABLE COURT OF APPEALS, LUIS A. LUNA and CLARITA S. LUNA, respondents.
VITUG, J.:
Some time in October 1986, private respondent Luis A. Luna applied for, and was accorded, a FAREASTCARD
issued by petitioner Far East Bank and Trust Company ("FEBTC") at its Pasig Branch. Upon his request, the bank
also issued a supplemental card to private respondent Clarita S. Luna.
In August 1988, Clarita lost her credit card. FEBTC was forthwith informed. In order to replace the lost card, Clarita
submitted an affidavit of loss. In cases of this nature, the bank's internal security procedures and policy would appear
to be to meanwhile so record the lost card, along with the principal card, as a "Hot Card" or "Cancelled Card" in its
master file.
On 06 October 1988, Luis tendered a despedida lunch for a close friend, a Filipino-American, and another guest at the
Bahia Rooftop Restaurant of the Hotel Intercontinental Manila. To pay for the lunch, Luis presented his
FAREASTCARD to the attending waiter who promptly had it verified through a telephone call to the bank's Credit Card
Department. Since the card was not honored, Luis was forced to pay in cash the bill amounting to P588.13. Naturally,
Luis felt embarrassed by this incident.
In a letter, dated 11 October 1988, private respondent Luis Luna, through counsel, demanded from FEBTC the
payment of damages. Adrian V. Festejo, a vice-president of the bank, expressed the bank's apologies to Luis. In his
letter, dated 03 November 1988, Festejo, in part, said:
In cases when a card is reported to our office as lost, FAREASTCARD undertakes the necessary action to
avert its unauthorized use (such as tagging the card as hotlisted), as it is always our intention to protect
our cardholders.
An investigation of your case however, revealed that FAREASTCARD failed to inform you about its
security policy. Furthermore, an overzealous employee of the Bank's Credit Card Department did not
consider the possibility that it may have been you who was presenting the card at that time (for which
reason, the unfortunate incident occurred). 1
Festejo also sent a letter to the Manager of the Bahia Rooftop Restaurant to assure the latter that private respondents
were "very valued clients" of FEBTC. William Anthony King, Food and Beverage Manager of the Intercontinental Hotel,
wrote back to say that the credibility of private respondent had never been "in question." A copy of this reply was sent
to Luis by Festejo.
Still evidently feeling aggrieved, private respondents, on 05 December 1988, filed a complaint for damages with the
Regional Trial Court ("RTC") of Pasig against FEBTC.
On 30 March 1990, the RTC of Pasig, given the foregoing factual settings, rendered a decision ordering FEBTC to pay
private respondents (a) P300,000.00 moral damages; (b) P50,000.00 exemplary damages; and (c) P20,000.00
attorney's fees.
On appeal to the Court of Appeals, the appellate court affirmed the decision of the trial court.
Its motion for reconsideration having been denied by the appellate court, FEBTC has come to this Court with this
petition for review.
There is merit in this appeal.
In culpa contractual, moral damages may be recovered where the defendant is shown to have acted in bad faith or
with malice in the breach of the contract. 2 The Civil Code provides:
Art. 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. (Emphasis supplied)
Bad faith, in this context, includes gross, but not simple, negligence.3 Exceptionally, in a contract of carriage, moral
damages are also allowed in case of death of a passenger attributable to the fault (which is presumed4 ) of the
common carrier.5
Concededly, the bank was remiss in indeed neglecting to personally inform Luis of his own card's cancellation.
Nothing in the findings of the trial court and the appellate court, however, can sufficiently indicate any deliberate intent
on the part of FEBTC to cause harm to private respondents. Neither could FEBTC's negligence in failing to give
personal notice to Luis be considered so gross as to amount to malice or bad faith.
Malice or bad faith implies a conscious and intentional design to do a wrongful act for a dishonest purpose or moral
obliquity; it is different from the negative idea of negligence in that malice or bad faith contemplates a state of mind
affirmatively operating with furtive design or ill will.6
We are not unaware of the previous rulings of this Court, such as in American Express International,
Inc., vs. Intermediate Appellate Court (167 SCRA 209) and Bank of Philippine Islands vs. Intermediate Appellate
Court (206 SCRA 408), sanctioning the application of Article 21, in relation to Article 2217 and Article 22197 of the Civil
Code to a contractual breach similar to the case at bench. Article 21 states:
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.
Article 21 of the Code, it should be observed, contemplates a conscious act to cause harm. Thus, even if we are to
assume that the provision could properly relate to a breach of contract, its application can be warranted only when the
defendant's disregard of his contractual obligation is so deliberate as to approximate a degree of misconduct certainly
no less worse than fraud or bad faith. Most importantly, Article 21 is a mere declaration of a general principle in human
relations that clearly must, in any case, give way to the specific provision of Article 2220 of the Civil Code authorizing
the grant of moral damages in culpa contractual solely when the breach is due to fraud or bad faith.
Mr. Justice Jose B.L. Reyes, in his ponencia in Fores vs. Miranda8 explained with great clarity the predominance that
we should give to Article 2220 in contractual relations; we quote:
Anent the moral damages ordered to be paid to the respondent, the same must be discarded. We have
repeatedly ruled (Cachero vs. Manila Yellow Taxicab Co. Inc., 101 Phil. 523; 54 Off. Gaz., [26], 6599;
Necesito, et al. vs. Paras, 104 Phil., 75; 56 Off. Gaz., [23] 4023), that moral damages are not recoverable
in damage actions predicated on a breach of the contract of transportation, in view of Articles 2219 and
2220 of the new Civil Code, which provide as follows:
Art. 2219. Moral damages may be recovered in the following and analogous cases:
(1) A criminal offense resulting in physical injuries;
 (2) Quasi-delicts causing physical injuries;
xxx xxx xxx
Art. 2220. Wilful 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.
By contrasting the provisions of these two articles it immediately becomes apparent that:
(a) In case of breach of contract (including one of transportation) proof of bad faith or fraud (dolus), i.e.,
wanton or deliberately injurious conduct, is essential to justify an award of moral damages; and
(b) That a breach of contract can not be considered included in the descriptive term "analogous cases"
used in Art. 2219; not only because Art. 2220 specifically provides for the damages that are caused
contractual breach, but because the definition of quasi-delict in Art. 2176 of the Code expressly excludes
the cases where there is a "preexisitng contractual relations between the parties."
Art. 2176. Whoever by act or omission causes damage to another, there being fault
or negligence, is obliged to pay for the damage done. Such fault or negligence, if
there is no pre-existing contractual relation between the parties, is called a quasi-
delict and is governed by the provisions of this Chapter.
The exception to the basic rule of damages now under consideration is a mishap resulting in the death of a
passenger, in which case Article 1764 makes the common carrier expressly subject to the rule of Art.
2206, that entitles the spouse, descendants and ascendants of the deceased passenger to "demand moral
damages for mental anguish by reason of the death of the deceased" (Necesito vs. Paras, 104 Phil. 84,
Resolution on motion to reconsider, September 11, 1958). But the exceptional rule of Art. 1764 makes it all
the more evident that where the injured passenger does not die, moral damages are not recoverable
unless it is proved that the carrier was guilty of malice or bad faith. We think it is clear that the mere
carelessness of the carrier's driver does not per se constitute or justify an inference of malice or bad faith
on the part of the carrier; and in the case at bar there is no other evidence of such malice to support the
award of moral damages by the Court of Appeals. To award moral damages for breach of contract,
therefore, without proof of bad faith or malice on the part of the defendant, as required by Art. 2220, would
be to violate the clear provisions of the law, and constitute unwarranted judicial legislation.
xxx xxx xxx
The distinction between fraud, bad faith or malice in the sense of deliberate or wanton wrong doing and
negligence (as mere carelessness) is too fundamental in our law to be ignored (Arts. 1170-1172); their
consequences being clearly differentiated by the Code.
Art. 2201. In contracts and quasi-contracts, the damages for which the obligor who
acted in good faith is liable shall be those that are the natural and probable
consequences of the breach of the obligation, and which the parties have foreseen
or could have reasonably foreseen at the time the obligation was constituted.
In case of fraud, bad faith, malice or wanton attitude, the obligor shall be
responsible for all damages which may be reasonably attributed to the non-
performance of the obligation.
It is to be presumed, in the absence of statutory provision to the contrary, that this difference was in the
mind of the lawmakers when in Art. 2220 they limited recovery of moral damages to breaches of contract
in bad faith. It is true that negligence may be occasionally so gross as to amount to malice; but the fact
must be shown in evidence, and a carrier's bad faith is not to be lightly inferred from a mere finding that the
contract was breached through negligence of the carrier's employees.
The Court has not in the process overlooked another rule that a quasi-delict can be the cause for breaching a contract
that might thereby permit the application of applicable principles on tort9 even where there is a pre-existing contract
between the plaintiff and the defendant (Phil. Airlines vs. Court of Appeals, 106 SCRA 143; Singson vs. Bank of Phil.
Islands, 23 SCRA 1117; and Air France vs. Carrascoso, 18 SCRA 155). This doctrine, unfortunately, cannot improve
private respondents' case for it can aptly govern only where the act or omission complained of would constitute an
actionable tort independently of the contract. The test (whether a quasi-delict can be deemed to underlie the breach of
a contract) can be stated thusly: Where, without a pre-existing contract between two parties, an act or omission can
nonetheless amount to an actionable tort by itself, the fact that the parties are contractually bound is no bar to the
application of quasi-delict provisions to the case. Here, private respondents' damage claim is predicated solely on their
contractual relationship; without such agreement, the act or omission complained of cannot by itself be held to stand
as a separate cause of action or as an independent actionable tort.
The Court finds, therefore, the award of moral damages made by the court a quo, affirmed by the appellate court, to
be inordinate and substantially devoid of legal basis.
Exemplary or corrective damages, in turn, are intended to serve as an example or as correction for the public good in
addition to moral, temperate, liquidated or compensatory damages (Art. 2229, Civil Code; see Prudenciado vs.
Alliance Transport System, 148 SCRA 440; Lopez vs. Pan American World Airways, 16 SCRA 431). In criminal
offenses, exemplary damages are imposed when the crime is committed with one or more aggravating circumstances
(Art. 2230, Civil Code). In quasi-delicts, such damages are granted if the defendant is shown to have been so guilty of
gross negligence as to approximate malice (See Art. 2231, Civil Code; CLLC E.G. Gochangco Workers Union vs.
NLRC, 161 SCRA 655; Globe Mackay Cable and Radio Corp. vs. CA, 176 SCRA 778). In contracts and quasi-
contracts, the court may award exemplary damages if the defendant is found to have acted in a wanton, fraudulent,
reckless, oppressive, or malevolent manner (Art. 2232, Civil Code; PNB vs. Gen. Acceptance and Finance Corp., 161
SCRA 449).
Given the above premises and the factual circumstances here obtaining, it would also be just as arduous to sustain
the exemplary damages granted by the courts below (see De Leon vs. Court of Appeals, 165 SCRA 166).
Nevertheless, the bank's failure, even perhaps inadvertent, to honor its credit card issued to private respondent Luis
should entitle him to recover a measure of damages sanctioned under Article 2221 of the Civil Code providing thusly:
Art. 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.
Reasonable attorney's fees may be recovered where the court deems such recovery to be just and equitable (Art.
2208, Civil Code). We see no issue of sound discretion on the part of the appellate court in allowing the award thereof
by the trial court.
WHEREFORE, the petition for review is given due course. The appealed decision is MODIFIED by deleting the award
of moral and exemplary damages to private respondents; in its stead, petitioner is ordered to pay private respondent
Luis A. Luna an amount of P5,000.00 by way of nominal damages. In all other respects, the appealed decision is
AFFIRMED. No costs.
SO ORDERED.
Narvasa, C.J., Feliciano, Padilla, Bidin, Regalado, Davide, Jr., Romero, Bellosillo, Melo, Quiason, Puno, Kapunan, (10) Acts and actions referred to in articles 21, 26, 27, 28, 29, 30, 32, 34, and 35.
Mendoza and Francisco, JJ., concur.

The parents of the female seduced, abducted, raped, or abused, referred to in No. 3 of this
article, may also recover moral damages.

Footnotes The spouse, descendants, ascendants, and brother and sisters may bring action mentioned in
No. 9 of this article, in the order named.

1 Rollo, p. 52.
8 105 Phil. 266, 273-276.

2 Necesito vs. Paras, 104 Phil. 75; Panay Electric Co. vs. CA, 119 SCRA 456; Sweet Lines,
Inc. vs. CA, 121 SCRA 769; Rex Taxicab Co., Inc. vs. Bautista, 109 Phil. 712.
3 Philippine Airlines vs. Court of Appeals, 106 SCRA 143.
9 In culpa aquiliana, moral damages may be recovered when the act or omission complained
of causes physical injuries or where the defendant is guilty of intentional tort (Article 2219
[2][10], Civil Code).

4 Art. 1756, Civil Code.

5 Art. 1764. Damages in cases comprised in this Section shall be awarded in accordance with
the Title XVIII of this Book, concerning Damages. Article 2206 shall also apply to the death of a
passenger caused by the breach of contract by a common carrier.

6 See Luzon Brokerage, Co., Inc. vs. Maritime Building, Co., Inc., 43 SCRA 93; also Black's
Law Dictionary.

7 Art. 2217. Moral damages include physical suffering, mental anguish, fright, serious anxiety,
besmirched reputation, wounded feelings, moral shock, social humiliation, and similar injury.
Though incapable of pecuniary computation, moral damages may be recovered if they are the
proximate result of the defendant's wrongful act for omission.

Art. 2219. Moral damages may be recovered in the following and analogous cases:

(1) A criminal offense resulting in physical injuries;

(2) Quasi-delicts causing physical injuries;

(3) Seduction, abduction, rape, or other lascivious acts;

(4) Adultery or concubinage;

(5) Illegal or arbitrary detention or arrest;

(6) Illegal search;

(7) Libel, slander or any other form of defamation;

(8) Malicious prosecution;

(9) Acts mentioned in article 309;

 Republic of the Philippines
SUPREME COURT
Baguio City
THIRD DIVISION
G.R. No. 179337 April 30, 2008
JOSEPH SALUDAGA, petitioner,
vs.
FAR EASTERN UNIVERSITY and EDILBERTO C. DE JESUS in his capacity as President of FEU, respondents.
DECISION
YNARES-SANTIAGO, J.:
This Petition for Review on Certiorari1 under Rule 45 of the Rules of Court assails the June 29, 2007 Decision2 of the
Court of Appeals in CA-G.R. CV No. 87050, nullifying and setting aside the November 10, 2004 Decision3 of the
Regional Trial Court of Manila, Branch 2, in Civil Case No. 98-89483 and dismissing the complaint filed by petitioner;
as well as its August 23, 2007 Resolution4 denying the Motion for Reconsideration.5
The antecedent facts are as follows:
Petitioner Joseph Saludaga was a sophomore law student of respondent Far Eastern University (FEU) when he was
shot by Alejandro Rosete (Rosete), one of the security guards on duty at the school premises on August 18, 1996.
Petitioner was rushed to FEU-Dr. Nicanor Reyes Medical Foundation (FEU-NRMF) due to the wound he
sustained.6Meanwhile, Rosete was brought to the police station where he explained that the shooting was accidental.
He was eventually released considering that no formal complaint was filed against him.
Petitioner thereafter filed a complaint for damages against respondents on the ground that they breached their
obligation to provide students with a safe and secure environment and an atmosphere conducive to learning.
Respondents, in turn, filed a Third-Party Complaint7 against Galaxy Development and Management Corporation
(Galaxy), the agency contracted by respondent FEU to provide security services within its premises and Mariano D.
Imperial (Imperial), Galaxy's President, to indemnify them for whatever would be adjudged in favor of petitioner, if any;
and to pay attorney's fees and cost of the suit. On the other hand, Galaxy and Imperial filed a Fourth-Party Complaint
against AFP General Insurance.8
On November 10, 2004, the trial court rendered a decision in favor of petitioner, the dispositive portion of which reads:
WHEREFORE, from the foregoing, judgment is hereby rendered ordering:
1. FEU and Edilberto de Jesus, in his capacity as president of FEU to pay jointly and severally
Joseph Saludaga the amount of P35,298.25 for actual damages with 12% interest per annum
from the filing of the complaint until fully paid; moral damages of P300,000.00, exemplary
damages of P500,000.00, attorney's fees of P100,000.00 and cost of the suit;
2. Galaxy Management and Development Corp. and its president, Col. Mariano Imperial to
indemnify jointly and severally 3rd party plaintiffs (FEU and Edilberto de Jesus in his capacity
as President of FEU) for the above-mentioned amounts;
3. And the 4th party complaint is dismissed for lack of cause of action. No pronouncement as to
costs.
SO ORDERED.9
Respondents appealed to the Court of Appeals which rendered the assailed Decision, the decretal portion of which
provides, viz:
WHEREFORE, the appeal is hereby GRANTED. The Decision dated November 10, 2004 is hereby
REVERSED and SET ASIDE. The complaint filed by Joseph Saludaga against appellant Far Eastern
University and its President in Civil Case No. 98-89483 is DISMISSED.
SO ORDERED.10
Petitioner filed a Motion for Reconsideration which was denied; hence, the instant petition based on the following
grounds:
THE COURT OF APPEALS SERIOUSLY ERRED IN MANNER CONTRARY TO LAW AND
JURISPRUDENCE IN RULING THAT:
5.1. THE SHOOTING INCIDENT IS A FORTUITOUS EVENT;
5.2. RESPONDENTS ARE NOT LIABLE FOR DAMAGES FOR THE INJURY RESULTING FROM A
GUNSHOT WOUND SUFFERED BY THE PETITIONER FROM THE HANDS OF NO LESS THAN THEIR
OWN SECURITY GUARD IN VIOLATION OF THEIR BUILT-IN CONTRACTUAL OBLIGATION TO
PETITIONER, BEING THEIR LAW STUDENT AT THAT TIME, TO PROVIDE HIM WITH A SAFE AND
SECURE EDUCATIONAL ENVIRONMENT;
5.3. SECURITY GAURD, ALEJANDRO ROSETE, WHO SHOT PETITIONER WHILE HE WAS WALKING
ON HIS WAY TO THE LAW LIBRARY OF RESPONDENT FEU IS NOT THEIR EMPLOYEE BY VIRTUE
OF THE CONTRACT FOR SECURITY SERVICES BETWEEN GALAXY AND FEU NOTWITHSTANDING
THE FACT THAT PETITIONER, NOT BEING A PARTY TO IT, IS NOT BOUND BY THE SAME UNDER
THE PRINCIPLE OF RELATIVITY OF CONTRACTS; and
5.4. RESPONDENT EXERCISED DUE DILIGENCE IN SELECTING GALAXY AS THE AGENCY WHICH
WOULD PROVIDE SECURITY SERVICES WITHIN THE PREMISES OF RESPONDENT FEU. 11
Petitioner is suing respondents for damages based on the alleged breach of student-school contract for a safe learning
environment. The pertinent portions of petitioner's Complaint read:
6.0. At the time of plaintiff's confinement, the defendants or any of their representative did not bother to
visit and inquire about his condition. This abject indifference on the part of the defendants continued even
after plaintiff was discharged from the hospital when not even a word of consolation was heard from them.
Plaintiff waited for more than one (1) year for the defendants to perform their moral obligation but the wait
was fruitless. This indifference and total lack of concern of defendants served to exacerbate plaintiff's
miserable condition.
xxxx
11.0. Defendants are responsible for ensuring the safety of its students while the latter are within the
University premises. And that should anything untoward happens to any of its students while they are
 within the University's premises shall be the responsibility of the defendants. In this case, defendants,
despite being legally and morally bound, miserably failed to protect plaintiff from injury and thereafter, to
mitigate and compensate plaintiff for said injury;
12.0. When plaintiff enrolled with defendant FEU, a contract was entered into between them. Under this
contract, defendants are supposed to ensure that adequate steps are taken to provide an atmosphere
conducive to study and ensure the safety of the plaintiff while inside defendant FEU's premises. In the
instant case, the latter breached this contract when defendant allowed harm to befall upon the plaintiff
when he was shot at by, of all people, their security guard who was tasked to maintain peace inside the
campus.12
In Philippine School of Business Administration v. Court of Appeals,13 we held that:
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. 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.14
It is undisputed that petitioner was enrolled as a sophomore law student in respondent FEU. As such, there was
created a contractual obligation between the two parties. On petitioner's part, he was obliged to comply with the rules
and regulations of the school. On the other hand, respondent FEU, as a learning institution is mandated to impart
knowledge and equip its students with the necessary skills to pursue higher education or a profession. At the same
time, it is obliged to ensure and take adequate steps to maintain peace and order within the campus.
It is settled that in culpa contractual, the mere proof of the existence of the contract and the failure of its compliance
justify, prima facie, a corresponding right of relief.15 In the instant case, we find that, when petitioner was shot inside
the campus by no less the security guard who was hired to maintain peace and secure the premises, there is a prima
facie showing that respondents failed to comply with its obligation to provide a safe and secure environment to its
students.
In order to avoid liability, however, respondents aver that the shooting incident was a fortuitous event because they
could not have reasonably foreseen nor avoided the accident caused by Rosete as he was not their employee;16and
that they complied with their obligation to ensure a safe learning environment for their students by having exercised
due diligence in selecting the security services of Galaxy.
After a thorough review of the records, we find that respondents failed to discharge the burden of proving that they
exercised due diligence in providing a safe learning environment for their students. They failed to prove that they
ensured that the guards assigned in the campus met the requirements stipulated in the Security Service Agreement.
Indeed, certain documents about Galaxy were presented during trial; however, no evidence as to the qualifications of
Rosete as a security guard for the university was offered.
Respondents also failed to show that they undertook steps to ascertain and confirm that the security guards assigned
to them actually possess the qualifications required in the Security Service Agreement. It was not proven that they
examined the clearances, psychiatric test results, 201 files, and other vital documents enumerated in its contract with
Galaxy. Total reliance on the security agency about these matters or failure to check the papers stating the
qualifications of the guards is negligence on the part of respondents. A learning institution should not be allowed to
completely relinquish or abdicate security matters in its premises to the security agency it hired. To do so would result
to contracting away its inherent obligation to ensure a safe learning environment for its students.
Consequently, respondents' defense of force majeure must fail. In order for force majeure to be considered,
respondents must show that no negligence or misconduct was committed that may have occasioned the loss. An act
of God cannot be invoked to protect a person who has failed to take steps to forestall the possible adverse
consequences of such a loss. One's negligence may have concurred with an act of God in producing damage and
injury to another; nonetheless, showing that the immediate or proximate cause of the damage or injury was a fortuitous
event would not exempt one from liability. When the effect is found to be partly the result of a person's participation -
whether by active intervention, neglect or failure to act - the whole occurrence is humanized and removed from the
rules applicable to acts of God.17
Article 1170 of the Civil Code provides that those who are negligent in the performance of their obligations are liable
for damages. Accordingly, for breach of contract due to negligence in providing a safe learning environment,
respondent FEU is liable to petitioner for damages. It is essential in the award of damages that the claimant must have
satisfactorily proven during the trial the existence of the factual basis of the damages and its causal connection to
defendant's acts.18
In the instant case, it was established that petitioner spent P35,298.25 for his hospitalization and other medical
expenses.19 While the trial court correctly imposed interest on said amount, however, the case at bar involves an
obligation arising from a contract and not a loan or forbearance of money. As such, the proper rate of legal interest is
six percent (6%) per annum of the amount demanded. Such interest shall continue to run from the filing of the
complaint until the finality of this Decision.20 After this Decision becomes final and executory, the applicable rate shall
be twelve percent (12%) per annum until its satisfaction.
The other expenses being claimed by petitioner, such as transportation expenses and those incurred in hiring a
personal assistant while recuperating were however not duly supported by receipts.21 In the absence thereof, no actual
damages may be awarded. Nonetheless, temperate damages under Art. 2224 of the Civil Code may be recovered
where it has been shown that the claimant suffered some pecuniary loss but the amount thereof cannot be proved with
certainty. Hence, the amount of P20,000.00 as temperate damages is awarded to petitioner.
As regards the award of moral damages, there is no hard and fast rule in the determination of what would be a fair
amount of moral damages since each case must be governed by its own peculiar circumstances.22 The testimony of
petitioner about his physical suffering, mental anguish, fright, serious anxiety, and moral shock resulting from the
shooting incident23 justify the award of moral damages. However, 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. 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 the 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. 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.24 We deem it just and reasonable under the circumstances to award petitioner moral
damages in the amount of P100,000.00.
Likewise, attorney's fees and litigation expenses in the amount of P50,000.00 as part of damages is reasonable in
view of Article 2208 of the Civil Code.25 However, the award of exemplary damages is deleted considering the
absence of proof that respondents acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner.
We note that the trial court held respondent De Jesus solidarily liable with respondent FEU. In Powton Conglomerate,
Inc. v. Agcolicol,26 we held that:
[A] corporation is invested by law with a personality separate and distinct from those of the persons
composing it, such that, save for certain exceptions, corporate officers who entered into contracts in behalf
of the corporation cannot be held personally liable for the liabilities of the latter. Personal liability of a
corporate director, trustee or officer along (although not necessarily) with the corporation may so validly
attach, as a rule, only when - (1) he assents to a patently unlawful act of the corporation, or when he is
 guilty of bad faith or gross negligence in directing its affairs, or when there is a conflict of interest resulting
in damages to the corporation, its stockholders or other persons; (2) he consents to the issuance of
watered down stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary
his written objection thereto; (3) he agrees to hold himself personally and solidarily liable with the
corporation; or (4) he is made by a specific provision of law personally answerable for his corporate
action.27
None of the foregoing exceptions was established in the instant case; hence, respondent De Jesus should not be held
solidarily liable with respondent FEU.
Incidentally, although the main cause of action in the instant case is the breach of the school-student contract,
petitioner, in the alternative, also holds respondents vicariously liable under Article 2180 of the Civil Code, which
provides:
Art. 2180. The obligation imposed by Article 2176 is demandable not only for one's own acts or omissions,
but also for those of persons for whom one is responsible.
xxxx
Employers shall be liable for the damages caused by their employees and household helpers acting within
the scope of their assigned tasks, even though the former are not engaged in any business or industry.
xxxx
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 damage.
We agree with the findings of the Court of Appeals that respondents cannot be held liable for damages under Art.
2180 of the Civil Code because respondents are not the employers of Rosete. The latter was employed by Galaxy.
The instructions issued by respondents' Security Consultant to Galaxy and its security guards are ordinarily no more
than requests commonly envisaged in the contract for services entered into by a principal and a security agency. They
cannot be construed as the element of control as to treat respondents as the employers of Rosete.28
As held in Mercury Drug Corporation v. Libunao:29
30
In Soliman, Jr. v. Tuazon, we held that where the security agency recruits, hires and assigns the works of
its watchmen or security guards to a client, the employer of such guards or watchmen is such agency, and
not the client, since the latter has no hand in selecting the security guards. Thus, the duty to observe the
diligence of a good father of a family cannot be demanded from the said client:
… [I]t is settled in our jurisdiction that where the security agency, as here, recruits, hires and
assigns the work of its watchmen or security guards, the agency is the employer of such
guards or watchmen. Liability for illegal or harmful acts committed by the security guards
attaches to the employer agency, and not to the clients or customers of such agency. As a
general rule, a client or customer of a security agency has no hand in selecting who among the
pool of security guards or watchmen employed by the agency shall be assigned to it; the duty
to observe the diligence of a good father of a family in the selection of the guards cannot, in the
ordinary course of events, be demanded from the client whose premises or property are
protected by the security guards.
xxxx
The fact that a client company may give instructions or directions to the security guards assigned to it,
does not, by itself, render the client responsible as an employer of the security guards concerned and
liable for their wrongful acts or omissions.31
We now come to respondents' Third Party Claim against Galaxy. In Firestone Tire and Rubber Company of the
Philippines v. Tempengko,32 we held that:
The third-party complaint is, therefore, a procedural device whereby a 'third party' who is neither a party
nor privy to the act or deed complained of by the plaintiff, may be brought into the case with leave of court,
by the defendant, who acts as third-party plaintiff to enforce against such third-party defendant a right for
contribution, indemnity, subrogation or any other relief, in respect of the plaintiff's claim. The third-party
complaint is actually independent of and separate and distinct from the plaintiff's complaint. Were it not for
this provision of the Rules of Court, it would have to be filed independently and separately from the original
complaint by the defendant against the third-party. But the Rules permit defendant to bring in a third-party
defendant or so to speak, to litigate his separate cause of action in respect of plaintiff's claim against a
third-party in the original and principal case with the object of avoiding circuitry of action and unnecessary
proliferation of law suits and of disposing expeditiously in one litigation the entire subject matter arising
from one particular set of facts.33
Respondents and Galaxy were able to litigate their respective claims and defenses in the course of the trial of
petitioner's complaint. Evidence duly supports the findings of the trial court that Galaxy is negligent not only in the
selection of its employees but also in their supervision. Indeed, no administrative sanction was imposed against
Rosete despite the shooting incident; moreover, he was even allowed to go on leave of absence which led eventually
to his disappearance.34 Galaxy also failed to monitor petitioner's condition or extend the necessary assistance, other
than the P5,000.00 initially given to petitioner. Galaxy and Imperial failed to make good their pledge to reimburse
petitioner's medical expenses.
For these acts of negligence and for having supplied respondent FEU with an unqualified security guard, which
resulted to the latter's breach of obligation to petitioner, it is proper to hold Galaxy liable to respondent FEU for such
damages equivalent to the above-mentioned amounts awarded to petitioner.
Unlike respondent De Jesus, we deem Imperial to be solidarily liable with Galaxy for being grossly negligent in
directing the affairs of the security agency. It was Imperial who assured petitioner that his medical expenses will be
shouldered by Galaxy but said representations were not fulfilled because they presumed that petitioner and his family
were no longer interested in filing a formal complaint against them.35
WHEREFORE, the petition is GRANTED. The June 29, 2007 Decision of the Court of Appeals in CA-G.R. CV No.
87050 nullifying the Decision of the trial court and dismissing the complaint as well as the August 23, 2007 Resolution
denying the Motion for Reconsideration are REVERSED and SET ASIDE. The Decision of the Regional Trial Court of
Manila, Branch 2, in Civil Case No. 98-89483 finding respondent FEU liable for damages for breach of its obligation to
provide students with a safe and secure learning atmosphere, is AFFIRMED with the following MODIFICATIONS:
a. respondent Far Eastern University (FEU) is ORDERED to pay petitioner actual damages in the amount of
P35,298.25, plus 6% interest per annum from the filing of the complaint until the finality of this Decision. After this
decision becomes final and executory, the applicable rate shall be twelve percent (12%) per annum until its
satisfaction;
b. respondent FEU is also ORDERED to pay petitioner temperate damages in the amount of P20,000.00; moral
damages in the amount of P100,000.00; and attorney's fees and litigation expenses in the amount of P50,000.00;
c. the award of exemplary damages is DELETED.
The Complaint against respondent Edilberto C. De Jesus is DISMISSED. The counterclaims of respondents are
likewise DISMISSED.
Galaxy Development and Management Corporation (Galaxy) and its president, Mariano D. Imperial are ORDEREDto In the absence of stipulation, attorney's fees and expenses of litigation, other than judicial costs,
jointly and severally pay respondent FEU damages equivalent to the above-mentioned amounts awarded to petitioner. cannot be recovered, except:
(2) when the defendant's act or omission has compelled the plaintiff to litigate with third persons or to
incur expenses to protect his interest;
26
SO ORDERED. 448 Phil. 643 (2003).
27
Id. at 656.
28
Records, Vol. I, pp. 43-55 (FEU) and pp. 56-68 (Galaxy).
29
CONSUELO YNARES-SANTIAGO G.R. No. 144458, July 14, 2004, 434 SCRA 404.
30
Associate Justice G.R. No. 66207, May 18, 1992, 209 SCRA 47.
31
Mercury Drug Corporation v. Libunao, supra at 414-418.
32
137 Phil. 239 (1969).
33
WE CONCUR: Id. at 243-244.
34
Rollo, p. 74.
MA. ALICIA AUSTRIA-MARTINEZ 35
Records, Vol. I, p. 330.
Associate Justice

MINITA V. CHICO-NAZARIO ANTONIO EDUARDO B. NACHURA

Associate Justice Associate Justice

RUBEN T. REYES
Associate Justice

ATTESTATION
I attest that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer
of the opinion of the Court's Division.
CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson, Third Division

CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution and the Division Chairperson's Attestation, I certify that the conclusions in
the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Court's
Division.
REYNATO S. PUNO
Chief Justice

Footnotes
1
Rollo, pp. 3-33.
2
Id. at 38-62; penned by Associate Justice Mariano C. Del Castillo and concurred in by Associate Justices
Arcangelita Romilla Lontok and Romeo F. Barza.
3
Id. at 67-75; penned by Judge Alejandro G. Bijasa.
4
Id. at 64-65.
5
Id. at 160-177.
6
Id. at 188.
7
Records, Vol. I, pp. 136-139.
8
Id. at 287-290.
9
Rollo, pp. 74-75.
10
Id. at 61.
11
Id. at 13-14.
12
Records, Vol. I, pp. 1-6.
13
G.R. No. 84698, February 4, 1992, 205 SCRA 729.
14
Id. at 733-734.
15
FGU Insurance Corporation v. G.P. Sarmiento Trucking Corporation, 435 Phil. 333, 341 (2002).
16
Records, Vol. 1, pp. 76-86.
17
Mindex Resources Development v. Morillo, 428 Phil. 934, 944 (2002).
18
Roque, Jr. v. Torres, G.R. No. 157632, December 6, 2006, 510 SCRA 336, 348.
19
TSN, September 20, 1999, pp. 20-21; Records, Vol. I, pp. 316-322; Records, Vol. II, p. 597.
20
Eastern Shipping Lines, Inc. v. Court of Appeals, G.R. No. 97412, July 12, 1994, 234 SCRA 78, 95-97.
21
TSN, September 27, 1999, pp. 5, 9.
22
Roque v. Torres, supra note 18 at 349.
23
TSN, September 20, 1999, pp. 10, 12-13; September 27, 1999, pp. 3, 5-9.
24
ABS-CBN Broadcasting Corporation v. Court of Appeals, 361 Phil. 499, 529-530 (1999).
25
Civil Code, Art. 2208:
 Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 185798 January 13, 2014
FIL-ESTATE PROPERTIES, INC. AND FIL-ESTATE NETWORK INC., Petitioners,
vs.
SPOUSES CONRADO AND MARIA VICTORIA RONQUILLO, Respondents.
DECISION
PEREZ, J.:
Before the Court is a petition for review on certiorari under Rule 45 of the 1997 Rules .of Civil Procedure assailing the
Decision1 of the Court of Appeals in CA-G.R. SP No. 100450 which affirmed the Decision of the Office of the President
in O.P. Case No. 06-F-216.
As culled from the records, the facts are as follow:
Petitioner Fil-Estate Properties, Inc. is the owner and developer of the Central Park Place Tower while co-petitioner
Fil-Estate Network, Inc. is its authorized marketing agent. Respondent Spouses Conrado and Maria Victoria Ronquillo
purchased from petitioners an 82-square meter condominium unit at Central Park Place Tower in Mandaluyong City
for a pre-selling contract price of FIVE MILLION ONE HUNDRED SEVENTY-FOUR THOUSAND ONLY
(₱5,174,000.00). On 29 August 1997, respondents executed and signed a Reservation Application Agreement
wherein they deposited ₱200,000.00 as reservation fee. As agreed upon, respondents paid the full downpayment of
₱1,552,200.00 and had been paying the ₱63,363.33 monthly amortizations until September 1998.
Upon learning that construction works had stopped, respondents likewise stopped paying their monthly amortization.
Claiming to have paid a total of ₱2,198,949.96 to petitioners, respondents through two (2) successive letters,
demanded a full refund of their payment with interest. When their demands went unheeded, respondents were
constrained to file a Complaint for Refund and Damages before the Housing and Land Use Regulatory Board
(HLURB). Respondents prayed for reimbursement/refund of ₱2,198,949.96 representing the total amortization
payments, ₱200,000.00 as and by way of moral damages, attorney’s fees and other litigation expenses.
On 21 October 2000, the HLURB issued an Order of Default against petitioners for failing to file their Answer within the
reglementary period despite service of summons.2
Petitioners filed a motion to lift order of default and attached their position paper attributing the delay in construction to
the 1997 Asian financial crisis. Petitioners denied committing fraud or misrepresentation which could entitle
respondents to an award of moral damages.
On 13 June 2002, the HLURB, through Arbiter Atty. Joselito F. Melchor, rendered judgment ordering petitioners to
jointly and severally pay respondents the following amount:
a) The amount of TWO MILLION ONE HUNDRED NINETY-EIGHT THOUSAND NINE HUNDRED FORTY
NINE PESOS & 96/100 (₱2,198,949.96) with interest thereon at twelve percent (12%) per annum to be
computed from the time of the complainants’ demand for refund on October 08, 1998 until fully paid,
b) ONE HUNDRED THOUSAND PESOS (₱100,000.00) as moral damages,
c) FIFTY THOUSAND PESOS (₱50,000.00) as attorney’s fees,
d) The costs of suit, and
e) An administrative fine of TEN THOUSAND PESOS (₱10,000.00) payable to this Office fifteen (15) days
upon receipt of this decision, for violation of Section 20 in relation to Section 38 of PD 957.3
The Arbiter considered petitioners’ failure to develop the condominium project as a substantial breach of their
obligation which entitles respondents to seek for rescission with payment of damages. The Arbiter also stated that
mere economic hardship is not an excuse for contractual and legal delay.
Petitioners appealed the Arbiter’s Decision through a petition for review pursuant to Rule XII of the 1996 Rules of
Procedure of HLURB. On 17 February 2005, the Board of Commissioners of the HLURB denied4 the petition and
affirmed the Arbiter’s Decision. The HLURB reiterated that the depreciation of the peso as a result of the Asian
financial crisis is not a fortuitous event which will exempt petitioners from the performance of their contractual
obligation.
Petitioners filed a motion for reconsideration but it was denied5 on 8 May 2006. Thereafter, petitioners filed a Notice of
Appeal with the Office of the President. On 18 April 2007, petitioners’ appeal was dismissed6 by the Office of the
President for lack of merit. Petitioners moved for a reconsideration but their motion was denied7 on 26 July 2007.
Petitioners sought relief from the Court of Appeals through a petition for review under Rule 43 containing the same
arguments they raised before the HLURB and the Office of the President:
I.
THE HONORABLE OFFICE OF THE PRESIDENT ERRED IN AFFIRMING THE DECISION OF THE HONORABLE
HOUSING AND LAND USE REGULATORY BOARD AND ORDERING PETITIONERS-APPELLANTS TO REFUND
RESPONDENTS-APPELLEES THE SUM OF ₱2,198,949.96 WITH 12% INTEREST FROM 8 OCTOBER 1998 UNTIL
FULLY PAID, CONSIDERING THAT THE COMPLAINT STATES NO CAUSE OF ACTION AGAINST PETITIONERS-
APPELLANTS.
II.
THE HONORABLE OFFICE OF THE PRESIDENT ERRED IN AFFIRMING THE DECISION OF THE OFFICE
BELOW ORDERING PETITIONERS-APPELLANTS TO PAY RESPONDENTS-APPELLEES THE SUM OF
₱100,000.00 AS MORAL DAMAGES AND ₱50,000.00 AS ATTORNEY’S FEES CONSIDERING THE ABSENCE OF
ANY FACTUAL OR LEGAL BASIS THEREFOR.
III.
THE HONORABLE OFFICE OF THE PRESIDENT ERRED IN AFFIRMING THE DECISION OF THE HOUSING AND
LAND USE REGULATORY BOARD ORDERING PETITIONERS-APPELLANTS TO PAY ₱10,000.00 AS
ADMINISTRATIVE FINE IN THE ABSENCE OF ANY FACTUAL OR LEGAL BASIS TO SUPPORT SUCH FINDING. 8
On 30 July 2008, the Court of Appeals denied the petition for review for lack of merit. The appellate court echoed the
HLURB Arbiter’s ruling that "a buyer for a condominium/subdivision unit/lot unit which has not been developed in
accordance with the approved condominium/subdivision plan within the time limit for complying with said
developmental requirement may opt for reimbursement under Section 20 in relation to Section 23 of Presidential
Decree (P.D.) 957 x x x."9 The appellate court supported the HLURB Arbiter’s conclusion, which was affirmed by the
HLURB Board of Commission and the Office of the President, that petitioners’ failure to develop the condominium
project is tantamount to a substantial breach which warrants a refund of the total amount paid, including interest. The
appellate court pointed out that petitioners failed to prove that the Asian financial crisis constitutes a fortuitous event
which could excuse them from the performance of their contractual and statutory obligations. The appellate court also
affirmed the award of moral damages in light of petitioners’ unjustified refusal to satisfy respondents’ claim and the
legality of the administrative fine, as provided in Section 20 of Presidential Decree No. 957.
Petitioners sought reconsideration but it was denied in a Resolution10 dated 11 December 2008 by the Court of
Appeals.
Aggrieved, petitioners filed the instant petition advancing substantially the same grounds for review:
A.
THE HONORABLE COURT OF APPEALS ERRED WHEN IT AFFIRMED IN TOTO THE DECISION OF THE OFFICE
OF THE PRESIDENT WHICH SUSTAINED RESCISSION AND REFUND IN FAVOR OF THE RESPONDENTS
DESPITE LACK OF CAUSE OF ACTION.
B.
GRANTING FOR THE SAKE OF ARGUMENT THAT THE PETITIONERS ARE LIABLE UNDER THE PREMISES,
THE HONORABLE COURT OF APPEALS ERRED WHEN IT AFFIRMED THE HUGE AMOUNT OF INTEREST OF
TWELVE PERCENT (12%).
C.
THE HONORABLE COURT OF APPEALS LIKEWISE ERRED WHEN IT AFFIRMED IN TOTO THE DECISION OF
THE OFFICE OF THE PRESIDENT INCLUDING THE PAYMENT OF ₱100,000.00 AS MORAL DAMAGES,
₱50,000.00 AS ATTORNEY’S FEES AND ₱10,000.00 AS ADMINISTRATIVE FINE IN THE ABSENCE OF ANY
FACTUAL OR LEGAL BASIS TO SUPPORT SUCH CONCLUSIONS.11
Petitioners insist that the complaint states no cause of action because they allegedly have not committed any act of
misrepresentation amounting to bad faith which could entitle respondents to a refund. Petitioners claim that there was
a mere delay in the completion of the project and that they only resorted to "suspension and reformatting as a
testament to their commitment to their buyers." Petitioners attribute the delay to the 1997 Asian financial crisis that
befell the real estate industry. Invoking Article 1174 of the New Civil Code, petitioners maintain that they cannot be
held liable for a fortuitous event.
Petitioners contest the payment of a huge amount of interest on account of suspension of development on a project.
They liken their situation to a bank which this Court, in Overseas Bank v. Court of Appeals,12 adjudged as not liable to
pay interest on deposits during the period that its operations are ordered suspended by the Monetary Board of the
Central Bank.
Lastly, petitioners aver that they should not be ordered to pay moral damages because they never intended to cause
delay, and again blamed the Asian economic crisis as the direct, proximate and only cause of their failure to complete
the project. Petitioners submit that moral damages should not be awarded unless so stipulated except under the
instances enumerated in Article 2208 of the New Civil Code. Lastly, petitioners refuse to pay the administrative fine
because the delay in the project was caused not by their own deceptive intent to defraud their buyers, but due to
unforeseen circumstances beyond their control.
Three issues are presented for our resolution: 1) whether or not the Asian financial crisis constitute a fortuitous event
which would justify delay by petitioners in the performance of their contractual obligation; 2) assuming that petitioners
are liable, whether or not 12% interest was correctly imposed on the judgment award, and 3) whether the award of
moral damages, attorney’s fees and administrative fine was proper.
It is apparent that these issues were repeatedly raised by petitioners in all the legal fora. The rulings were consistent
that first, the Asian financial crisis is not a fortuitous event that would excuse petitioners from performing their
contractual obligation; second, as a result of the breach committed by petitioners, respondents are entitled to rescind
the contract and to be refunded the amount of amortizations paid including interest and damages; and third,
petitioners are likewise obligated to pay attorney’s fees and the administrative fine.
This petition did not present any justification for us to deviate from the rulings of the HLURB, the Office of the
President and the Court of Appeals.
Indeed, the non-performance of petitioners’ obligation entitles respondents to rescission under Article 1191 of the New
Civil Code which states:
Article 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not
comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation, with payment of damages in
either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible.
More in point is Section 23 of Presidential Decree No. 957, the rule governing the sale of condominiums, which
provides:
Section 23. Non-Forfeiture of Payments.1âwphi1 No installment payment made by a buyer in a subdivision or
condominium project for the lot or unit he contracted to buy shall be forfeited in favor of the owner or developer when
the buyer, after due notice to the owner or developer, desists from further payment due to the failure of the owner or
developer to develop the subdivision or condominium project according to the approved plans and within the time limit
for complying with the same. Such buyer may, at his option, be reimbursed the total amount paid including
amortization interests but excluding delinquency interests, with interest thereon at the legal rate. (Emphasis supplied).
Conformably with these provisions of law, respondents are entitled to rescind the contract and demand reimbursement
for the payments they had made to petitioners.
Notably, the issues had already been settled by the Court in the case of Fil-Estate Properties, Inc. v. Spouses
Go13promulgated on 17 August 2007, where the Court stated that the Asian financial crisis is not an instance of caso
fortuito. Bearing the same factual milieu as the instant case, G.R. No. 165164 involves the same company, Fil-Estate,
albeit about a different condominium property. The company likewise reneged on its obligation to respondents therein
by failing to develop the condominium project despite substantial payment of the contract price. Fil-Estate advanced
the same argument that the 1997 Asian financial crisis is a fortuitous event which justifies the delay of the construction
project. First off, the Court classified the issue as a question of fact which may not be raised in a petition for review
considering that there was no variance in the factual findings of the HLURB, the Office of the President and the Court
of Appeals. Second, the Court cited the previous rulings of Asian Construction and Development Corporation v.
Philippine Commercial International Bank 14 and Mondragon Leisure and Resorts Corporation v. Court of
Appeals15 holding that the 1997 Asian financial crisis did not constitute a valid justification to renege on obligations.
The Court expounded:
Also, we cannot generalize that the Asian financial crisis in 1997 was unforeseeable and beyond the control of a
business corporation. It is unfortunate that petitioner apparently met with considerable difficulty e.g. increase cost of
materials and labor, even before the scheduled commencement of its real estate project as early as 1995. However, a
real estate enterprise engaged in the pre-selling of condominium units is concededly a master in projections on
commodities and currency movements and business risks. The fluctuating movement of the Philippine peso in the
foreign exchange market is an everyday occurrence, and fluctuations in currency exchange rates happen everyday,
thus, not an instance of caso fortuito.16
The aforementioned decision becomes a precedent to future cases in which the facts are substantially the same, as in
this case. The principle of stare decisis, which means adherence to judicial precedents, applies.
In said case, the Court ordered the refund of the total amortizations paid by respondents plus 6% legal interest Pursuant to Section 13, Article VIII of the Constitution and the Division Chairperson s Attestation, I certify that the conclusions in the above Decision had been
reached in consultation before the case was assigned to the writer of the opinion of the Court’s Division.
computed from the date of demand. The Court also awarded attorney’s fees. We follow that ruling in the case before
us.
MARIA LOURDES P. A. SERENO
Chief Justice
The resulting modification of the award of legal interest is, also, in line with our recent ruling in Nacar v. Gallery
Frames,17 embodying the amendment introduced by the Bangko Sentral ng Pilipinas Monetary Board in BSP-MB
Circular No. 799 which pegged the interest rate at 6% regardless of the source of obligation.

Footnotes
We likewise affirm the award of attorney’s fees because respondents were forced to litigate for 14 years and incur
expenses to protect their rights and interest by reason of the unjustified act on the part of petitioners.18 The imposition 1
Penned by Associate Justice Arturo G. Tayag with Associate Justices Martin S. Villarama, Jr. (now Supreme Court Associate Justice) and Noel G.
of ₱10,000.00 administrative fine is correct pursuant to Section 38 of Presidential Decree No. 957 which reads: Tijam, concurring. Rollo, pp. 34-46.

Section 38. Administrative Fines. The Authority may prescribe and impose fines not exceeding ten thousand pesos for 2
Id. at 68.
violations of the provisions of this Decree or of any rule or regulation thereunder. Fines shall be payable to the
Authority and enforceable through writs of execution in accordance with the provisions of the Rules of Court. 3
Id. at 92.

Finally, we sustain the award of moral damages. In order that moral damages may be awarded in breach of contract 4
Id. at 113-115.
cases, the defendant must have acted in bad faith, must be found guilty of gross negligence amounting to bad faith, or
must have acted in wanton disregard of contractual obligations.19 The Arbiter found petitioners to have acted in bad 5
Id. at 129-130.
faith when they breached their contract, when they failed to address respondents’ grievances and when they
adamantly refused to refund respondents' payment.
6
Id. at 178-180.

In fine, we find no reversible error on the merits in the impugned Court of Appeals' Decision and Resolution.
7
Id. at 191.

WHEREFORE, the petition is PARTLY GRANTED. The appealed Decision is AFFIRMED with the MODIFICATION 8
See Petition for Review filed with the Court of Appeals. Id. at 198-199.
that the legal interest to be paid is SIX PERCENT (6%) on the amount due computed from the time of respondents'
demand for refund on 8 October 1998.
9
Id. at 42.

SO ORDERED.
10
Id. at 48-49.

JOSE PORTUGAL PEREZ

Associate Justice 11
Id. at 16-17.

WE CONCUR: 12
192 Phil. 355 (1981).

ANTONIO T. CARPIO 13
557 Phil. 377 (2007).
Associate Justice
Chairperson
14
522 Phil. 168, 180-181 (2006).

ARTURO D. BRION MARIANO C. DEL CASTILLO

Associate Justice Associate Justice 15
499 Phil. 268, 279 (2005).

16
ESTELA M. PERLAS-BERNABE Fil-Estate Properties, Inc. v. Spouses Go, supra note 13 at 384.
Associate Justice

17
G.R. No. 189871, 13 August 2013.
ATTESTATION

18
Maglasang v. Northwestern University, Inc., G.R. No. 188986, 20 March 2013, 694 SCRA 128, 140.
I attest that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Court’s Division.

19
Almeda Development and Equipment Corp. v. Metro Motor Sales, Inc., 534 Phil. 672, 675 (2006).
ANTONIO T. CARPIO
Associate Justice
Second Division, Chairperson

CERTIFICATION
 Republic of the Philippines
SUPREME COURT June 20, 1995 Trust Receipt No. 95-20171016 ₱750,089.25
Manila
December 13, 1995 Trust Receipt No. 96-379089 17
₱92,919.00

SECOND DIVISION December 13, 1995 Trust Receipt No. 96/20258118 ₱224,713.58

G.R. No. 177921 December 4, 2013

METRO CONCAST STEEL CORPORATION, SPOUSES JOSE S. DYCHIAO AND TIUOH YAN, SPOUSES
GUILLERMO AND MERCEDES DYCHIAO, AND SPOUSES VICENTE AND FILOMENA DYCHIAO, Petitioners,
vs.
ALLIED BANK CORPORATION, Respondent.
RESOLUTION
PERLAS-BERNABE, J.:
Assailed in this petition for review on certiorari1 are the Decision2 dated February 12, 2007 and the Resolution3dated
May 10, 2007 of the Court of Appeals (CA) in CA-G.R. CV No. 86896 which reversed and set aside the
Decision4 dated January 17, 2006 of the Regional Trial Court of Makati, Branch 57 (RTC) in Civil Case No. 00-1563,
thereby ordering petitioners Metro Concast Steel Corporation (Metro Concast), Spouses Jose S. Dychiao and Tiu Oh
Yan, Spouses Guillermo and Mercedes Dychiao, and Spouses Vicente and Filomena Duchiao (individual petitioners)
to solidarily pay respondent Allied Bank Corporation (Allied Bank) the aggregate amount of ₱51,064,094.28, with
applicable interests and penalty charges.
The Facts
On various dates and for different amounts, Metro Concast, a corporation duly organized and existing under and by
virtue of Philippine laws and engaged in the business of manufacturing steel,5 through its officers, herein individual
petitioners, obtained several loans from Allied Bank. These loan transactions were covered by a promissory note and
separate letters of credit/trust receipts, the details of which are as follows:
The interest rate under Promissory Note No. 96-21301 was pegged at 15.25% per annum (p.a.), with penalty charge
of 3% per month in case of default; while the twelve (12) trust receipts uniformly provided for an interest rate of 14%
p.a. and 1% penalty charge. By way of security, the individual petitioners executed several Continuing
Guaranty/Comprehensive Surety Agreements19 in favor of Allied Bank. Petitioners failed to settle their obligations
under the aforementioned promissory note and trust receipts, hence, Allied Bank, through counsel, sent them demand
letters,20 all dated December 10, 1998, seeking payment of the total amount of ₱51,064,093.62, but to no avail. Thus,
Allied Bank was prompted to file a complaint for collection of sum of money21 (subject complaint) against petitioners
before the RTC, docketed as Civil Case No. 00-1563. In their second22 Amended Answer,23petitioners admitted their
indebtedness to Allied Bank but denied liability for the interests and penalties charged, claiming to have paid the total
sum of ₱65,073,055.73 by way of interest charges for the period covering 1992 to 1997.24
They also alleged that the economic reverses suffered by the Philippine economy in 1998 as well as the devaluation of
the peso against the US dollar contributed greatly to the downfall of the steel industry, directly affecting the business of
Metro Concast and eventually leading to its cessation. Hence, in order to settle their debts with Allied Bank, petitioners
offered the sale of Metro Concast’s remaining assets, consisting of machineries and equipment, to Allied Bank, which
the latter, however, refused. Instead, Allied Bank advised them to sell the equipment and apply the proceeds of the
sale to their outstanding obligations. Accordingly, petitioners offered the equipment for sale, but since there were no
takers, the equipment was reduced into ferro scrap or scrap metal over the years. In 2002, Peakstar Oil Corporation
(Peakstar), represented by one Crisanta Camiling (Camiling), expressed interest in buying the scrap metal. During the
negotiations with Peakstar, petitioners claimed that Atty. Peter Saw (Atty. Saw), a member of Allied Bank’s legal
department, acted as the latter’s agent. Eventually, with the alleged conformity of Allied Bank, through Atty. Saw, a
Memorandum of Agreement25 dated November 8, 2002 (MoA) was drawn between Metro Concast, represented by
petitioner Jose Dychiao, and Peakstar, through Camiling, under which Peakstar obligated itself to purchase the scrap
metal for a total consideration of ₱34,000,000.00, payable as follows:
(a) ₱4,000,000.00 by way of earnest money – ₱2,000,000.00 to be paid in cash and the other
₱2,000,000.00 to be paid in two (2) post-dated checks of ₱1,000,000.00 each;26 and

(b) the balance of ₱30,000,000.00 to be paid in ten (10) monthly installments of ₱3,000,000.00, secured by
Date Document Amount bank guarantees from Bankwise, Inc. (Bankwise) in the form of separate post-dated checks.27

December 13, 1996 Promissory Note No. 96-213016 ₱2,000,000.00

Unfortunately, Peakstar reneged on all its obligations under the MoA.1âwphi1 In this regard, petitioners asseverated
November 7, 1995 Trust Receipt No. 96-2023657 ₱608,603.04 that:

May 13, 1996 Trust Receipt No. 96-9605228 ₱3,753,777.40 (a) their failure to pay their outstanding loan obligations to Allied Bank must be considered as force
majeure ; and
May 24, 1996 Trust Receipt No. 96-960524 9
₱4,602,648.08

March 21, 1997 Trust Receipt No. 97-204724 10

₱7,289,757.79 (b) since Allied Bank was the party that accepted the terms and conditions of payment proposed by
Peakstar, petitioners must therefore be deemed to have settled their obligations to Allied Bank. To bolster
June 7, 1996 Trust Receipt No. 96-20328011 ₱17,340,360.73 their defense, petitioner Jose Dychiao (Jose Dychiao) testified28 during trial that it was Atty. Saw himself
who drafted the MoA and subsequently received29 the ₱2,000,000.00 cash and the two (2) Bankwise post-
dated checks worth ₱1,000,000.00 each from Camiling. However, Atty. Saw turned over only the two (2)
July 26, 1995 Trust Receipt No. 95-20194312 ₱670,709.24
checks and ₱1,500,000.00 in cash to the wife of Jose Dychiao.30
August 31, 1995 Trust Receipt No. 95-20205313 ₱313,797.41
Claiming that the subject complaint was falsely and maliciously filed, petitioners prayed for the award of moral
November 16, 1995 Trust Receipt No. 96-202439 14
₱13,015,109.87 damages in the amount of ₱20,000,000.00 in favor of Metro Concast and at least ₱25,000,000.00 for each individual
petitioner, ₱25,000,000.00 as exemplary damages, ₱1,000,000.00 as attorney’s fees, ₱500,000.00 for other litigation
July 3, 1996 Trust Receipt No. 96-20355215 ₱401,608.89 expenses, including costs of suit.
 The RTC Ruling
After trial on the merits, the RTC, in a Decision31 dated January 17, 2006, dismissed the subject complaint, holding
that the "causes of action sued upon had been paid or otherwise extinguished." It ruled that since Allied Bank was duly
represented by its agent, Atty. Saw, in all the negotiations and transactions with Peakstar – considering that Atty. Saw
(a) drafted the MoA,
(b) accepted the bank guarantee issued by Bankwise, and
(c) was apprised of developments regarding the sale and disposition of the scrap metal – then it stands to
reason that the MoA between Metro Concast and Peakstar was binding upon said bank.
The CA Ruling
32
Allied Bank appealed to the CA which, in a Decision dated February 12, 2007, reversed and set aside the ruling of
the RTC, ratiocinating that there was "no legal basis in fact and in law to declare that when Bankwise reneged its
guarantee under the [MoA], herein [petitioners] should be deemed to be discharged from their obligations lawfully
incurred in favor of [Allied Bank]."33
The CA examined the MoA executed between Metro Concast, as seller of the ferro scrap, and Peakstar, as the buyer
thereof, and found that the same did not indicate that Allied Bank intervened or was a party thereto. It also pointed out
the fact that the post-dated checks pursuant to the MoA were issued in favor of Jose Dychiao. Likewise, the CA found
no sufficient evidence on record showing that Atty. Saw was duly and legally authorized to act for and on behalf of
Allied Bank, opining that the RTC was "indulging in hypothesis and speculation" 34 when it made a contrary
pronouncement. While Atty. Saw received the earnest money from Peakstar, the receipt was signed by him on behalf
of Jose Dychiao.35
It also added that "[i]n the final analysis, the aforesaid checks and receipts were signed by [Atty.] Saw either as
representative of [petitioners] or as partner of the latter’s legal counsel, and not in anyway as representative of [Allied
Bank]."36
Consequently, the CA granted the appeal and directed petitioners to solidarily pay Allied Bank their corresponding
obligations under the aforementioned promissory note and trust receipts, plus interests, penalty charges and
attorney’s fees. Petitioners sought reconsideration37 which was, however, denied in a Resolution38 dated May 10,
2007. Hence, this petition.
The Issue Before the Court
At the core of the present controversy is the sole issue of whether or not the loan obligations incurred by the
petitioners under the subject promissory note and various trust receipts have already been extinguished.
The Court’s Ruling
Article 1231 of the Civil Code states that obligations are extinguished either by payment or performance, the loss of
the thing due, the condonation or remission of the debt, the confusion or merger of the rights of creditor and debtor,
compensation or novation.
In the present case, petitioners essentially argue that their loan obligations to Allied Bank had already been
extinguished due to Peakstar’s failure to perform its own obligations to Metro Concast pursuant to the MoA. Petitioners
classify Peakstar’s default as a form of force majeure in the sense that they have, beyond their control, lost the funds
they expected to have received from the Peakstar (due to the MoA) which they would, in turn, use to pay their own
loan obligations to Allied Bank. They further state that Allied Bank was equally bound by Metro Concast’s MoA with
Peakstar since its agent, Atty. Saw, actively represented it during the negotiations and execution of the said
agreement. Petitioners’ arguments are untenable. At the outset, the Court must dispel the notion that the MoA would
have any relevance to the performance of petitioners’ obligations to Allied Bank. The MoA is a sale of assets contract,
while petitioners’ obligations to Allied Bank arose from various loan transactions. Absent any showing that the terms
and conditions of the latter transactions have been, in any way, modified or novated by the terms and conditions in the
MoA, said contracts should be treated separately and distinctly from each other, such that the existence, performance
or breach of one would not depend on the existence, performance or breach of the other. In the foregoing respect, the
issue on whether or not Allied Bank expressed its conformity to the assets sale transaction between Metro Concast
and Peakstar (as evidenced by the MoA) is actually irrelevant to the issues related to petitioners’ loan obligations to
the bank. Besides, as the CA pointed out, the fact of Allied Bank’s representation has not been proven in this case and
hence, cannot be deemed as a sustainable defense to exculpate petitioners from their loan obligations to Allied Bank.
Now, anent petitioners’ reliance on force majeure, suffice it to state that Peakstar’s breach of its obligations to Metro
Concast arising from the MoA cannot be classified as a fortuitous event under jurisprudential formulation. As
discussed in Sicam v. Jorge:39
Fortuitous events by definition are extraordinary events not foreseeable or avoidable.1âwphi1 It is therefore, not
enough that the event should not have been foreseen or anticipated, as is commonly believed but it must be one
impossible to foresee or to avoid. The mere difficulty to foresee the happening is not impossibility to foresee the same.
To constitute a fortuitous event, the following elements must concur: (a) the cause of the unforeseen and unexpected
occurrence or of the failure of the debtor to comply with obligations must be independent of human will; (b) it must
be impossible to foresee the event that constitutes the caso fortuito or, if it can be foreseen, it must be impossible to
avoid; (c) the occurrence must be such as to render it impossible for the debtor to fulfill obligations in a
normal manner; and (d) the obligor must be free from any participation in the aggravation of the injury or
loss.40(Emphases supplied)
While it may be argued that Peakstar’s breach of the MoA was unforseen by petitioners, the same us clearly not
"impossible"to foresee or even an event which is independent of human will." Neither has it been shown that said
occurrence rendered it impossible for petitioners to pay their loan obligations to Allied Bank and thus, negates the
former’s force majeure theory altogether. In any case, as earlier stated, the performance or breach of the MoA bears
no relation to the performance or breach of the subject loan transactions, they being separate and distinct sources of
obligations. The fact of the matter is that petitioners’ loan obligations to Allied Bank remain subsisting for the basic
reason that the former has not been able to prove that the same had already been paid41 or, in any way, extinguished.
In this regard, petitioners’ liability, as adjudged by the CA, must perforce stand. Considering, however, that Allied
Bank’s extra-judicial demand on petitioners appears to have been made only on December 10, 1998, the computation
of the applicable interests and penalty charges should be reckoned only from such date.
WHEREFORE, the petition is DENIED. The Decision dated February 12, 2007 and Resolution dated May 10, 2007 of
the Court of Appeals in CA-G.R. CV No. 86896 are hereby AFFIRMED with MODIFICATION reckoning the applicable
interests and penalty charges from the date of the extrajudicial demand or on December 10, 1998. The rest of the
appellate court’s dispositions stand.
SO ORDERED.
ESTELA M. PERLAS-BERNABE
Associate Justice
WE CONCUR:
ANTONIO T. CARPIO
Associate Justice
Chairperson
PRESBITERO J. VELASCO, JR.* ARTURO D. BRION
Associate Justice Associate Justice
JOSE PORTUGAL PEREZ
Associate Justice
ATTESTATION
I attest that the conclusions in the above Resolution had been reached in consulation before the case was assigned to the wri ter of the When the existence of a debt is fully established by the evidence contained in the record, the burden or proving
opinion of the Court’s Division. that it has been extinguished by payment devolves upon the debtor who offers such a defense to the claim of
ANTONIO T. CARPIO the creditor. Where the debtor introduces some evidence of payment, the burden if proof – shifts to the
Associate Justice creditor, who is then under a duty or producing some evidence to show non-payment.
Chairman, Second Division
CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution, and the Division Chairperson’s Attestation, I certify that the conclusions in the
above Resolution had been reached in consultation before the case was assigned to the writer of the opinion of the Court’s Division.
MARIA LOURDES P.A. SERENO
Chief Justice

Footnotes
* Designated Additional Member per raffle dated November 20, 2013.
1
Rollo pp. 8-29.
2
Id. at 133-142. Penned by Associate Justice Conrado M. Vasquez, Jr. with Associate Justices Mariano C. Del Castillo (now
Supreme Court Associate Justice) and Lucenito N. Tagle, concurring.
3
Id. at 155.
4
Id. at 70-74. Penned by Judge Reinato G. Quilala.
5
Records, Complaint, p. 1; See also Amended Answer dated November 11, 2004, p. 386-392.
6
Id. at 28-29.
7
Letter of Credit (LC) No. MDO1376390 in the amount of US$23,140.80 in favor of Tianjin Metals and Minerals Import and
Export Corporation for the shipment of 77.136 metric tons of fire bricks; id. at 30-34.
8
LC No. MDO2103583 in the amount of ₱5,005,036.53 in favor of National Steel Corporation for the purchase of 575.490
metric tons of prime quality billets; id. at 35-39.
9
LC No. MDO2103613 in the amount of ₱6,136,864.11 in favor of National Steel Corporation for the purchase and
importation of 705.630 metric tons of prime quality billets; id. at 40-45.
10
LC No. MDO1410105 in the amount of US$272,000.00 in favor of United Energy International Ltd. for the purchase of
1,000 metric tons of wire rods; id. at 46-50.
11
LC No. MDO1391194 in the amount of US$690,000.00 in favor of Vanomet AG for the purchase and shipment of 2,500
metric tons of prime newly produced hot rolled steel wire rods; id. at 51-55.
12
LC No. MDO1369733 in the amount of US$27,270.00 in favor of Tianjin Machinery Import and Export Corporation for the
purchase of 18 metric tons of artificial graphite electrodes HP; id. at 56-60.
13
LC No. MDO1371720 in the amount of US$12,210.00 in favor of Redland Minerals Burnt Product Sales for the purchase
of 66 metric tons deadburned dolomite in Dolofrit 180 quality; id. at 10-11 and 61-64.
14
LC No. MDO1377205 in the amount of US$465,000.00 in favor of Balli Trading Ltd. for the purchase and shipment of
1,500 metric tons of prime newly produced wire rods; id. at 65-69.
15
LC No. MDO1393154 in the amount of US$15,270.30 in favor of China Shougang International Trade and Engineering
Corporation for the purchase of 12 pieces of finishing roll and 6 pieces intermediate roll; id. at 12-13 and 70-73.
16
LC No. MDO1367587 in the amount of US$29,175.00 in favor of Hitachi Metals Singapore Pte., Ltd. for the purchase of 5
pieces of roughing rolls for 2nd stand; id. at 74-76A.
17
LC No. MDO1379089 in the amount of US$11,700.00 in favor of RAMI Ceramic Industries (1991) Ltd. for the purchase
and shipment of 500 pieces of RAMI top refractories for continuous casting machine; id. at 77-80.
18
LC No. MDO1379089 in the amount of US$11,700.00 in favour of RAMI Ceramic Industries for the purchase of 364 pieces
of RAMI top refractories for continuous casting machine flogate type; id. at 81-84.
19
Id. at 85-89.
20
Id. at 422-431.
21
Id. at 1-27.
22
Admitted per Order dated December 28, 2004; id. at 406.
23
Id. at 386-392.
24
Id. at 387.
25
Id. at 393-394.
26
Item No. 2 of MoA; id. at 393.
27
Item No. 3 of MoA; id.
28
Records, TSN, June 23, 2005, pp. 629, 632-633.
29
Id. at 639; See also Exh. "10," p. 455.
30
Id. at 633-634.
31
Id. at 70-74.
32
Id. at 133-142.
33
Rollo, p. 138.
34
Id.
35
Records, p. 455.
36
Rollo, p. 138.
37
Id. at 144-153.
38
Id. at 155.
39
556 Phil. 278 (2007).
40
Id. at 291.
41
It is well to note that the party who alleges the affirmative defense of payment has the burden of proving it. As held in the
case of Bank of the Phil. Islands v. Sps. Royeca (581 Phil. 188, 195 [2009]):
As a general rule, one who pleads payment has the burden of proving it. Even where the plaintiff must allege,
rather than on the plaintiff to prove non-payment. The debtor has the burden of showing with legal certainty
that the obligation has been discharge by payment.
 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-7859 February 12, 1913
VICTORIA SEOANE, administratrix of The Intestate Estate of Eduardo Fargas, plaintiff-appellee,
vs.
CATALINA FRANCO, administratrix of The Intestate Estate of Manuel Franco, defendant-appellant.
Ramon Salinas, for appellant.
Gibbs, McDonough and Blanco, for appellee.
MORELAND, J.:
This is an appeal from a judgment of the Court of First Instance of Zamboanga in favor of the plaintiff, holding that the
right of action upon the mortgage debt which was the basis of the claim presented against the plaintiff's estate had
prescribed.
The mortgage in question was executed on the 13th of October, 1884, to secure the payment of the sum of P4,876.01,
the mortgagor agreeing to pay the sum "little by little." The claim appears to have been presented to the plaintiff's
intestate on the 8th of August, 1911. Nothing has been paid either of principal or of interest.
We are of the opinion that this case falls within the provisions of article 1128 of the Civil Code, which reads as follows:
1128. When the obligation does not fix a term, but it can be inferred from its nature and circumstance that
there was an intention of granting it to the debtor, the courts shall fix the duration of such a term.
The courts shall also fix the duration of a term when it may have been left at the will of the debtor.
The obligation in question seems to leave the duration of the period for the payment thereof to the will of the debtor. It
appears also that it was the intention of the instrument to give the debtor time within which to pay the obligation. In
such cases this court has held, on several occasions, that the obligation is not due and payable until an action has
been commenced by the mortgagee against the mortgagor for the purpose of having the court fix the date on and after
which the instrument shall be payable and the date of maturity is fixed in pursuance thereof. The case of Eleizegui vs.
The Manila Lawn Tennis Club (2 Phil. Rep., 309), in which the opinion was written by the Chief Justice of the court, is
the leading case upon the subject. In that case the question was over the duration of a lease concerning "a piece of
land for a fixed consideration and to endure at the will of the lessee." In discussing the question the court said (p. 310):
With respect to the term of the lease the present question has arisen. In its discussion three theories have
been presented: One which makes the duration depend upon the will of the lessor, who, upon one month's
notice given to the lessee, may terminate the lease so stipulated; another which, on the contrary, makes it
dependent upon the will of the lessee, as stipulated; and the third, in accordance with which the right is
reserved to the court to fix the duration of the term.
The clause on which the case turns is as follows (p. 312):
Mr. Williamson, or whoever may succeed him as secretary of the club, may terminate this lease whenever
desired without other formality than that of giving a month's notice. The owners of the land undertake to
maintain the club as tenant as long as the latter shall see fit.
Considering the case the court said (314):
The Civil Code has made provision for such a case in all kinds of obligations. In speaking in general of
obligations with a term it has supplied the deficiency of the former law with respect to the "duration of the
term when it has been left to the will of the debtor," and provides that in this case the term shall be fixed by
the courts. (Art. 1128, sec. 2.) In every contract, as laid down by the authorities, there is always a creditor
who is entitled to demand the performance, and a debtor upon whom rests the obligation to perform the
undertaking. In bilateral contracts the contracting parties are mutually creditors and debtors. Thus, in this
contract of lease, the lessee is the creditor with respect to the rights enumerated in article 1554, and is the
debtor with respect to the obligations imposed by articles 1555 and 1561. The term within which
performance of the latter obligation is due is what has been left to the will of the debtor. This term it is
which must be fixed by the courts.
The only action which can be maintained under the terms of the contract is that bywhich it is sought to be
obtain from the judge the determination of this period, and not the unlawful detainer action which has been
brought — an action which presupposes the expiration of the term and makes it the duty of the judge to
simply the decree the eviction. To maintain the latter action it is sufficient to show the expiration of the term
of the contract, whether conventional or legal; in order to decree the relief to be granted in the former
action it is necessary for the judge to look into the character and conditions of the mutual undertakings with
a view to supplying the lacking element of a time at which the lease is to expire.
The case of Barreto vs. The City of Manila (7 Phil. Rep., 416) dealt with a case where the terms of a donation did not
fix the time of the performance of the condition placed upon the donation, and the court held that the period must be
determined by the court in a proper action in accordance with article 1128 of the Civil Code, saying (p. 420):
The contract having fixed no period in which the condition should be fulfilled, the provisions of article 1128
of the Civil Code are applicable and it is the duty of the court to fix a suitable time for its
fulfillment. Eleizegui vs. The Manila Lawn Tennis Club, 2 Phil. Rep., 309. (11 Phil. Rep., 624.1)
In the case of Levy Hermanos vs. Paterno (18 Phil. Rep., 353) the court said (p. 355):
The defendant having bound himself to pay his debt to the plaintiffs in partial payments, as set forth in the
note in question, it is seen that the obligation is one of payment by installments, since its fulfillment cannot
be required immediately nor does its existence depend upon the happening of any particular event. But,
thought the obligation is one of payment by installments, nevertheless no fixed day was specified for its
fulfillment, so that the period for payment is undetermined or was not fixed by the parties when they
executed the contract. Besides, it is evident that the term for payment was granted for the exclusive benefit
of the defendant and for his own convenience, as by the language of the document, the plaintiffs gained
nothing by the fact that the debt was not immediately demandable. Nor was any interest stipulated on the
debt during the time that it should remain unpaid by the defendant. For the foregoing reasons, and in
whatever manner this case be considered, it is unquestionable that it falls within the provisions of article
1128 of the Civil Code. . . .
The obligation being manifestly defective with regard to the duration of the period granted to the debtor,
that is, to the defendant, that defect must be cured by the courts through judicial decision which shall
determine the said duration, under the power expressly granted them for such purpose by the legal
provisions just above transcribed.
The trial court, therefore, acted in accordance with the law in exercising the said power in the present
case, by fixing the duration of the period on the basis that the payment of the debt should be made at the
 rate of P200 a month; and we see no abuse of judicial discretion of fixing such a rate, considering the Footnotes
importance of the obligation and the absence of any stipulation of interest in favor of the creditors.
1
Barretto vs. City of Manila.
From these decisions it is clear that the instrument sued upon in the case at bar is one which leaves the period of
payment at the will of the mortgagor. Such being the case, an action should have been brought for the purpose of
having the court set a date on which the instrument should become due and payable. Until such action was
prosecuted no suit could be brought for the recovery of the amount named in the instrument. It is, therefore, clear that
this action is premature. The instrument has been sued upon before it is due. The action must accordingly be
dismissed.

Ordinarily when an action of this sort is dismissed the plaintiff may at once begin his action for the purpose of fixing a
date upon which the instrument shall become due. From the undisputed facts in this case and from the facts and
conditions that very probably cannot be charged hereafter, it is our present opinion that such action is itself prescribed.
Section 38 of the Code of Civil Procedure reads as follows:

SEC. 38. To what this chapter does not apply. — This chapter shall not apply to actions already
commenced, or to cases wherein the right of action has already accrued; but the statutes in force when the
action or right of action accrued shall be applicable to such cases according to the subject of the action
and without regard to the form; nor shall this chapter apply in the case of a continuing and subsisting trust,
nor to an action by the vendee of real property in possession thereof to obtain the conveyance of
it: Provided, nevertheless, That all rights of action which have already accrued, except those named in the
last preceding paragraph, must be vindicated by the commencement of an action or proceeding to enforce
the same within ten years after this Act comes into effect.

This section evidently covers all rights of action of whatever kind or nature, except those which have special limitations
and are referred to in subsequent sections. A right of action to fix a day for the determination of the time of payment is
included within the terms of this section. The mortgage in question having left the period of payment to the will of the
mortgagor, an action could have been maintained by the mortgagee at any time after its execution for the naming of a
date on which the instrument must be paid in full. The right of action accrued as soon as the instrument was executed.
Such action, therefore, falls within the provisions of section 38, and not having been commenced within the ten years
next following the 1st day of October, 1901, such action cannot, under the facts as they now appear, be maintained.

While the expression of an opinion as to the prescription of the action to fix a date for the maturity of the obligation in
question is unnecessary for a complete resolution of the case before us, still we do not hesitate to express that opinion
for the reasons which we have heretofore given in one or two cases, particularly that of Lichauco vs. Limjuco(19 Phil.
Rep., 12). That case went off upon the finding of the court that the action could not be maintained by the plaintiff,
Lichauco, on behalf of his brothers and sisters and upon that finding the complaint was dismissed. While the merits in
that case were not necessarily before us, we nevertheless took up the facts as they appeared and expressed our
opinion of what the result of the case would be upon the merits if it subsequently came before us upon the same facts.
In that case we said (p. 17):

We believe, however, that, for the information of the parties interested in the subject matter of this action
and to the end that unnecessary litigation may be avoided, the opinion of the court should be given upon
the facts presented in this case. Knowing what our opinion is upon these facts it is probable that the heirs
will not care to pursue the litigation further unless, which is somewhat unlikely, they are able to present
new facts. We, therefore, proceed to a consideration of the case upon the merits as presented by the
record.

The judgment is affirmed, with the costs against the appellant. So ordered.

Arellano, C.J., Torres, Mapa, and Trent, JJ., concur.

 SECOND DIVISION
[G.R. No. 124922. June 22, 1998]
JIMMY CO, doing business under the name & style DRAGON METAL MANUFACTURING, Petitioner, vs.
COURT OF APPEALS and BROADWAY MOTOR SALES CORPORATION, Respondents.
DECISION
MARTINEZ, J.:
On July 18, 1990, petitioner entrusted his Nissan pick-up car 1988 model[1] to private respondent - which is
engaged in the sale, distribution and repair of motor vehicles - for the following job repair services and supply of parts:
- Bleed injection pump and all nozzles;
- Adjust valve tappet;
- Change oil and filter;
- Open up and service four wheel brakes, clean and adjust;
- Lubricate accelerator linkages;
- Replace aircon belt; and
- Replace battery[2]
Private respondent undertook to return the vehicle on July 21, 1990 fully serviced and supplied in accordance
with the job contract. After petitioner paid in full the repair bill in the amount of P1,397.00,[3] private respondent issued
to him a gate pass for the release of the vehicle on said date. But came July 21, 1990, the latter could not release the
vehicle as its battery was weak and was not yet replaced. Left with no option, petitioner himself bought a new battery
nearby and delivered it to private respondent for installation on the same day. However, the battery was not installed
and the delivery of the car was rescheduled to July 24, 1990 or three (3) days later. When petitioner sought to reclaim
his car in the afternoon of July 24, 1990, he was told that it was carnapped earlier that morning while being road-tested
by private respondents employee along Pedro Gil and Perez Streets in Paco, Manila. Private respondent said that the
incident was reported to the police.
Having failed to recover his car and its accessories or the value thereof, petitioner filed a suit for damages against
private respondent anchoring his claim on the latters alleged negligence. For its part, private respondent contended that
it has no liability because the car was lost as a result of a fortuitous event - the carnapping. During pre-trial, the parties
agreed that:
(T)he cost of the Nissan Pick-up four (4) door when the plaintiff purchased it from the defendant is P332,500.00
excluding accessories which were installed in the vehicle by the plaintiff consisting of four (4) brand new tires,
magwheels, stereo speaker, amplifier which amount all in all to P20,000.00. It is agreed that the vehicle was lost on
July 24, 1990 `approximately two (2) years and five (5) months from the date of the purchase. It was agreed that the
plaintiff paid the defendant the cost of service and repairs as early as July 21, 1990 in the amount of P1,397.00 which
amount was received and duly receipted by the defendant company. It was also agreed that the present value of a
brand new vehicle of the same type at this time is P425,000.00 without accessories.[4]
They likewise agreed that the sole issue for trial was who between the parties shall bear the loss of the vehicle
which necessitates the resolution of whether private respondent was indeed negligent.[5] After trial, the court a quo found
private respondent guilty of delay in the performance of its obligation and held it liable to petitioner for the value of the
lost vehicle and its accessories plus interest and attorneys fees.[6] On appeal, the Court of Appeals (CA) reversed the
ruling of the lower court and ordered the dismissal of petitioners damage suit.[7] The CA ruled that: (1) the trial court was
limited to resolving the issue of negligence as agreed during pre-trial; hence it cannot pass on the issue of delay; and
(2) the vehicle was lost due to a fortuitous event.
In a petition for review to this Court, the principal query raised is whether a repair shop can be held liable for the
loss of a customers vehicle while the same is in its custody for repair or other job services?
The Court resolves the query in favor of the customer. First, on the technical aspect involved. Contrary to the
CAs pronouncement, the rule that the determination of issues at a pre-trial conference bars the consideration of other
issues on appeal, except those that may involve privilege or impeaching matter,[8] is inapplicable to this case. The
question of delay, though not specifically mentioned as an issue at the pre-trial may be tackled by the court considering
that it is necessarily intertwined and intimately connected with the principal issue agreed upon by the parties, i.e. who
will bear the loss and whether there was negligence. Petitioners imputation of negligence to private respondent is
premised on delay which is the very basis of the formers complaint. Thus, it was unavoidable for the court to resolve the
case, particularly the question of negligence without considering whether private respondent was guilty of delay in the
performance of its obligation.
On the merits. It is a not a defense for a repair shop of motor vehicles to escape liability simply because the
damage or loss of a thing lawfully placed in its possession was due to carnapping. Carnapping per se cannot be
considered as a fortuitous event. The fact that a thing was unlawfully and forcefully taken from anothers rightful
possession, as in cases of carnapping, does not automatically give rise to a fortuitous event. To be considered as such,
carnapping entails more than the mere forceful taking of anothers property. It must be proved and established that the
event was an act of God or was done solely by third parties and that neither the claimant nor the person alleged to be
negligent has any participation.[9] In accordance with the Rules of evidence, the burden of proving that the loss was due
to a fortuitous event rests on him who invokes it[10]- which in this case is the private respondent. However, other than
the police report of the alleged carnapping incident, no other evidence was presented by private respondent to the effect
that the incident was not due to its fault. A police report of an alleged crime, to which only private respondent is privy,
does not suffice to established the carnapping. Neither does it prove that there was no fault on the part of private
respondent notwithstanding the parties agreement at the pre-trial that the car was carnapped. Carnapping does not
foreclose the possibility of fault or negligence on the part of private respondent.
Even assuming arguendo that carnapping was duly established as a fortuitous event, still private respondent
cannot escape liability. Article 1165[11] of the New Civil Code makes an obligor who is guilty of delay responsible even
for a fortuitous event until he has effected the delivery. In this case, private respondent was already in delay as it was
supposed to deliver petitioners car three (3) days before it was lost. Petitioners agreement to the rescheduled delivery
does not defeat his claim as private respondent had already breached its obligation. Moreover, such accession cannot
be construed as waiver of petitioners right to hold private respondent liable because the car was unusable and thus,
petitioner had no option but to leave it.
Assuming further that there was no delay, still working against private respondent is the legal presumption under
Article 1265 that its possession of the thing at the time it was lost was due to its fault.[12] This presumption is reasonable
since he who has the custody and care of the thing can easily explain the circumstances of the loss. The vehicle owner
has no duty to show that the repair shop was at fault. All that petitioner needs to prove, as claimant, is the simple fact
that private respondent was in possession of the vehicle at the time it was lost. In this case, private respondents
possession at the time of the loss is undisputed. Consequently, the burden shifts to the possessor who needs to present
controverting evidence sufficient enough to overcome that presumption. Moreover, the exempting circumstances -
earthquake, flood, storm or other natural calamity - when the presumption of fault is not applicable[13] do not concur in
this case. Accordingly, having failed to rebut the presumption and since the case does not fall under the exceptions,
private respondent is answerable for the loss.
It must likewise be emphasized that pursuant to Articles 1174 and 1262 of the New Civil Code, liability attaches
even if the loss was due to a fortuitous event if the nature of the obligation requires the assumption of risk.[14] Carnapping
is a normal business risk for those engaged in the repair of motor vehicles. For just as the owner is exposed to that risk
so is the repair shop since the car was entrusted to it. That is why, repair shops are required to first register with the
Department of Trade and Industry (DTI)[15] and to secure an insurance policy for the shop covering the property entrusted
by its customer for repair, service or maintenance as a pre-requisite for such registration/accreditation.[16] Violation of
this statutory duty constitutes negligence per se.[17] Having taken custody of the vehicle, private respondent is obliged
not only to repair the vehicle but must also provide the customer with some form of security for his property over which
he loses immediate control. An owner who cannot exercise the seven (7) juses or attributes of ownership the right to
possess, to use and enjoy, to abuse or consume, to accessories, to dispose or alienate, to recover or vindicate and to
the fruits -[18] is a crippled owner. Failure of the repair shop to provide security to a motor vehicle owner would leave the
 [13]
latter at the mercy of the former. Moreover, on the assumption that private respondents repair business is duly registered, New Civil Code, Article 1265.
it presupposes that its shop is covered by insurance from which it may recover the loss. If private respondent can recover [14]
Article 1174. Except in cases expressly specified by the law, or when it is otherwise declared bystipulation, or when the nature of the
from its insurer, then it would be unjustly enriched if it will not compensate petitioner to whom no fault can be attributed.
obligation requires the assumption of risk, no person shall be responsible for those events which could not be foreseen, or which, though
Otherwise, if the shop is not registered, then the presumption of negligence applies. foreseen, were inevitable.

One last thing. With respect to the value of the lost vehicle and its accessories for which the repair shop is liable,
it should be based on the fair market value that the property would command at the time it was entrusted to it or such
other value as agreed upon by the parties subsequent to the loss. Such recoverable value is fair and reasonable
considering that the value of the vehicle depreciates. This value may be recovered without prejudice to such other
damages that a claimant is entitled under applicable laws.
WHEREFORE, premises considered, the decision of the Court Appeals is REVERSED and SET ASIDE and the
decision of the court a quo is REINSTATED.
SO ORDERED.
Regalado (Chairman), Melo, Puno and Mendoza, JJ. concur.
[1]
Registered in the name of petitioner with Plate No. PJK-666.
[2]
Rollo, p. 81.
[3]
Covered by CBC Receipt No. 691148; Rollo, p. 10.
[4]
Rollo, pp. 28-29.
[5]
Rollo, p. 29.
[6]
The dispositive portion of the trial courts decision reads:
Accordingly, this Court finds the defendant liable to the plaintiff for the value of the vehicle in question. Defendant is ordered to pay plaintiff
the value of the vehicle in the amount of Three Hundred Thirty Two Thousand Five Hundred Pesos representing the acquisition cost of the
vehicle plus the amount of Twenty Thousand Pesos representing the cost of the four brand new tires, magwheels, pioneer stereo, speakers,
air-conditioner, which were installed by the plaintiff in his vehicle after the plaintiff bought the vehicle from the defendant. While it is true that
plaintiff purchased from the defendant the vehicle about two years and five months before the same was lost, and therefore the vehicle had
already depreciated from its original value at the time it was lost, it is also true as agreed upon by the parties in the pre-trial, that the present
value of a brand new vehicle of the same type has at this time increased to Four Hundred Thousand Pesos without accessories, so whatever
is awarded by this Court to the plaintiff in this decision would not even be sufficient to purchase a brand new vehicle at the present prices.
This Court believes that the amount awarded to the plaintiff above-stated represents a fair compromise, considering the depreciation of the
vehicle from the time it was purchased and to the time it was lost and which is off-seated by the increase cost of a brand new vehicle at the
present time. Defendant is likewise ordered to pay plaintiff legal interest in the amount above-stated from the date of the finality of this
decision until full payment of the obligation. Further, defendant is ordered to pay plaintiff Ten Thousand Pesos by attorneys fees. (sic was
not included so as not to clutter the narration); Rollo, pp. 78, 94.
[7]
CA Decision promulgated August 31, 1995 penned by Justice Austria-Martinez with Justices Lantin and Salas, concurring; Rollo, pp. 26-
32.
[8]
Caltex v. CA, 212 SCRA 448; Bergado v. CA, 173 SCRA 497 citing Permanent Concrete Products, Inc. v. Teodoro, 26 SCRA 332. In the
Bergado case (p. 501), the court reiterated the rule that the specific exceptions to the general rule to be observed in pre-trials emphasized
in Gicano v. Gegato, 157 SCRA 140 is that trial courts have authority and discretion to dismiss an action on the ground of prescription when
the parties pleadings or other facts on record show it to be indeed time-barred; and it may do so on the basis of a motion to dismiss, or an
answer which sets up such ground as an affirmative defense; or even if the ground is alleged after judgment on the merits, as in a motion
for reconsideration; or even if the defense has not been asserted at all, as where no statement thereof is found in the pleadings, or where a
defendant had been declared in default. What is essential only, to repeat, is that the facts demonstrating the lapse of the prescriptive period,
be otherwise sufficiently and satisfactorily apparent on the record; either in the averments of the plaintiffs, or otherwise established by the
evidence."
[9]
Lasam v. Smith, 45 Phil. 657; General Enterprises, Inc., v. Llianga Bay Logging Co., Inc., 120 Phil. 702; Tugade v. CA, 85 SCRA 226.
[10]
Section 1, Rule 131, 1989 Revised Rules on Evidence provides: Burden of proof. - Burden of proof is the duty of a party to present
evidence on the facts in issue necessary to establish his claim or defense by the amount of evidence required by law. (Italics supplied).
[11]
Article 1165. x x x x x x x x x
Article 1262. x x x x x x x x x
When by law or stipulation, the obligor is liable even for fortuitous event, the loss of the thing does not extinguish the obligation, and he shall
be responsible for damages. The same rule applies when the nature of the obligation requires the assumption of risk. (Italics supplied).
[15]
P.D. 1572 (EMPOWERING THE SECRETARY OF TRADE TO REGULATE AND CONTROL THE OPERATION OF SERVICE AND
REPAIR ENTERPRISES FOR MOTOR VEHICLES, HEAVY EQUIPMENT AND ENGINES AND ENGINEERING WORKS; ELECTRONICS,
ELECTRICAL, AIRCONDITIONING AND REFRIGERATION; OFFICE EQUIPMENT; MEDICAL AND DENTAL EQUIPMENT; AND OTHER
CONSUMER MECHANICAL AND INDUSTRIAL EQUIPMENT; APPLIANCES OR DEVICES, INCLUDING THE TECHNICAL PERSONNEL
EMPLOYED THEREIN).
Section 1. Accreditation. All enterprises and technical personnel employed therein engaged in the service and repair of motor vehicles,
heavy equipment, engines and engineering works; electronics, electrical, air-conditioning and refrigeration; office equipment; medical and
dental equipment; and other consumer industrial electro-mechanical, chemical and gaseous equipment, machinery, appliances or
devices should Apply for accreditation with the Department of Trade within ninety (90) days from the promulgation of this decree and should
apply for renewal on or before the 31st day of January of every year thereafter. No such service or repair enterprises and technical personnel
shall be licensed or permitted to operate in the Philippines for the first time without first being accredited by the Department of Trade.
[16]
DTI Ministry Order No. 32, Rule III
Section 1. REQUIREMENTS FOR ACCREDITATION:
(1) Enterprise applying for original accreditation shall submit the following:
1.1 List of machineries/equipment/tools in useful condition;
1.2 List of certified engineers/accredited technicians mechanics with their personal data;
1.3 Copy of Insurance Policy of the shop covering the property entrusted by its customer for repair, service or maintenance together with a
copy of the official receipt covering the full payment of premium;
1.4 Copy of Bond referred to under Section 7, Rule III of this Rules and Regulations;
1.5 Written service warranty in the form prescribed by the Bureau;
1.6 Certificate issued by the Securities and Exchange Commission and Articles of Incorporation or Partnership in case of corporation or
partnership;
1.7 Such other additional documents which the director may require from time to time.
Section 8. INSURANCE POLICY
The insurance policy for the following risks like theft, pilferage, fire, flood and loss should cover exclusively the machines, motor vehicles,
heavy equipment, engines, electronics, electrical, airconditioners, refrigerators, office machines, and data processing equipment, medical
and dental equipment, other consumer mechanical and industrial equipment stored for repair and/or in the premises of the applicant. (Italics
supplied).
[17]
Cipriano v. CA, 263 SCRA 711 citing F.F. Cruz and Co., Inc. v. CA, 164 SCRA 731 and Teague v. Fernandez, 51 SCRA 181.
[18]
Paras, Civil Code of the Philippines, Annotated, 1989 ed., vol. II, p. 70; De Leon, Comments and Cases on Property, 1993 ed. p. 77; See
also Article 428 of the New Civil Code which states that The owner has the right to enjoy and dispose of a thing, without other limitations
than those established by law.
The owner has also a right of action against the holder and possessor of the thing in order to recover it.

If the obligor delays, or has promised to deliver the same thing to two or more persons who do not have the same interest, he shall be
responsible for fortuitous event until he has effected the delivery. (Italics supplied).
[12]
Article 1265. Whenever the thing is lost in the possession of the debtor, it shall be presumed that the loss was due to his fault, unless
there is proof to the contrary, and without prejudice to the provisions of Article 1165. This presumption does not apply in case of earthquake,
flood, storm, or other natural calamity. (Italics supplied).
 Petitioner Sicam filed his Answer contending that he is not the real party-in-interest as the pawnshop was incorporated on April 20,
Republic of the Philippines 1987 and known as Agencia de R.C. Sicam, Inc; that petitioner corporation had exercised due care and diligence in the safekeeping
Supreme Court of the articles pledged with it and could not be made liable for an event that is fortuitous.
Manila
Respondents subsequently filed an Amended Complaint to include petitioner corporation.

THIRD DIVISION Thereafter, petitioner Sicam filed a Motion to Dismiss as far as he is concerned considering that he is not the real party-in-interest.
Respondents opposed the same. The RTC denied the motion in an Order dated November 8, 1989.[5]
After trial on the merits, the RTC rendered its Decision [6] dated January 12, 1993, dismissing respondents complaint as well as
ROBERTO C. SICAM and AGENCIA G.R. NO. 159617 petitioners counterclaim. The RTC held that petitioner Sicam could not be made personally liable for a claim arising out of a
de R.C. SICAM, INC., corporate transaction; that in the Amended Complaint of respondents, they asserted that plaintiff pawned assorted jewelries in
Petitioners, defendants' pawnshop; and that as a consequence of the separate juridical personality of a corporation, the corporate debt or credit
Present: is not the debt or credit of a stockholder.

YNARES-SANTIAGO, J., The RTC further ruled that petitioner corporation could not be held liable for the loss of the pawned jewelry since it had not been
Chairperson, rebutted by respondents that the loss of the pledged pieces of jewelry in the possession of the corporation was occasioned by armed
- versus - AUSTRIA-MARTINEZ, robbery; that robbery is a fortuitous event which exempts the victim from liability for the loss, citing the case of Austria v. Court of
CHICO-NAZARIO, and Appeals;[7] and that the parties transaction was that of a pledgor and pledgee and under Art. 1174 of the Civil Code, the pawnshop
NACHURA, JJ. as a pledgee is not responsible for those events which could not be foreseen.

LULU V. JORGE and CESAR Respondents appealed the RTC Decision to the CA. In a Decision dated March 31, 2003, the CA reversed the RTC,
JORGE, Promulgated: the dispositive portion of which reads as follows:
Respondents. August 8, 2007
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x WHEREFORE, premises considered, the instant Appeal is GRANTED, and the Decision dated January 12,
1993,of the Regional Trial Court of Makati, Branch 62, is hereby REVERSED and SET ASIDE, ordering
the appellees to pay appellants the actual value of the lost jewelry amounting to P272,000.00, and attorney'
DECISION fees of P27,200.00.[8]

AUSTRIA-MARTINEZ, J.:
Before us is a Petition for Review on Certiorari filed by Roberto C. Sicam, Jr. (petitioner Sicam) and Agencia de R.C. Sicam, Inc.
(petitioner corporation) seeking to annul the Decision[1] of the Court of Appeals dated March 31, 2003, and its Resolution [2] dated
August 8, 2003, in CA G.R. CV No. 56633.
It appears that on different dates from September to October 1987, Lulu V. Jorge (respondent Lulu) pawned several pieces of jewelry
with Agencia de R. C. Sicam located at No. 17 Aguirre Ave., BF Homes Paraaque, Metro Manila, to secure a loan in the total amount
of P59,500.00.
On October 19, 1987, two armed men entered the pawnshop and took away whatever cash and jewelry were found inside the
pawnshop vault. The incident was entered in the police blotter of the Southern Police District, Paraaque Police Station as follows:
Investigation shows that at above TDPO, while victims were inside the office, two (2) male unidentified
persons entered into the said office with guns drawn. Suspects(sic) (1) went straight inside and poked his
gun toward Romeo Sicam and thereby tied him with an electric wire while suspects (sic) (2) poked his gun
toward Divina Mata and Isabelita Rodriguez and ordered them to lay (sic) face flat on the floor. Suspects
asked forcibly the case and assorted pawned jewelries items mentioned above.
Suspects after taking the money and jewelries fled on board a Marson Toyota unidentified plate number.[3]
Petitioner Sicam sent respondent Lulu a letter dated October 19, 1987 informing her of the loss of her jewelry due to the robbery
incident in the pawnshop. On November 2, 1987, respondent Lulu then wrote a letter [4] to petitioner Sicam expressing disbelief
stating that when the robbery happened, all jewelry pawned were deposited with Far East Bank near the pawnshop since it had been
the practice that before they could withdraw, advance notice must be given to the pawnshop so it could withdraw the jewelry from
the bank. Respondent Lulu then requested petitioner Sicam to prepare the pawned jewelry for withdrawal on November
6, 1987 but petitioner Sicam failed to return the jewelry.
On September 28, 1988, respondent Lulu joined by her husband, Cesar Jorge, filed a complaint against petitioner Sicam with the
Regional Trial Court of Makati seeking indemnification for the loss of pawned jewelry and payment of actual, moral and exemplary
damages as well as attorney's fees. The case was docketed as Civil Case No. 88-2035.
In finding petitioner Sicam liable together with petitioner corporation, the CA applied the doctrine of piercing the veil of corporate
entity reasoning that respondents were misled into thinking that they were dealing with the pawnshop owned by petitioner Sicam as
all the pawnshop tickets issued to them bear the words Agencia de R.C. Sicam; and that there was no indication on the pawnshop
tickets that it was the petitioner corporation that owned the pawnshop which explained why respondents had to amend their
complaintimpleading petitioner corporation.
The CA further held that the corresponding diligence required of a pawnshop is that it should take steps to secure and protect the
pledged items and should take steps to insure itself against the loss of articles which are entrusted to its custody as it derives earnings
from the pawnshop trade which petitioners failed to do; that Austria is not applicable to this case since the robbery incident happened
in 1961 when the criminality had not as yet reached the levels attained in the present day; that they are at least guilty of contributory
negligence and should be held liable for the loss of jewelries; and that robberies and hold-ups are foreseeable risks in that those
engaged in the pawnshop business are expected to foresee.
The CA concluded that both petitioners should be jointly and severally held liable to respondents for the loss of the pawned jewelry.
Petitioners motion for reconsideration was denied in a Resolution dated August 8, 2003.
Hence, the instant petition for review with the following assignment of errors:
THE COURT OF APPEALS ERRED AND WHEN IT DID, IT OPENED ITSELF TO REVERSAL, WHEN
IT ADOPTED UNCRITICALLY (IN FACT IT REPRODUCED AS ITS OWN WITHOUT IN THE
MEANTIME ACKNOWLEDGING IT) WHAT THE RESPONDENTS ARGUED IN THEIR BRIEF,
WHICH ARGUMENT WAS PALPABLY UNSUSTAINABLE.
THE COURT OF APPEALS ERRED, AND WHEN IT DID, IT OPENED ITSELF TO REVERSAL BY
THIS HONORABLE COURT, WHEN IT AGAIN ADOPTED UNCRITICALLY (BUT WITHOUT
ACKNOWLEDGING IT) THE SUBMISSIONS OF THE RESPONDENTS IN THEIR BRIEF WITHOUT
ADDING ANYTHING MORE THERETO DESPITE THE FACT THAT THE SAID ARGUMENT OF
THE RESPONDENTS COULD NOT HAVE BEEN SUSTAINED IN VIEW OF UNREBUTTED
EVIDENCE ON RECORD.[9]
Anent the first assigned error, petitioners point out that the CAs finding that petitioner Sicam is personally liable for the loss of the
pawned jewelries is a virtual and uncritical reproduction of the arguments set out on pp. 5-6 of the Appellants brief.[10]

Petitioners argue that the reproduced arguments of respondents in their Appellants Brief suffer from infirmities, as follows:
(1) Respondents conclusively asserted in paragraph 2 of their Amended Complaint that Agencia de
R.C. Sicam, Inc. is the present owner of Agencia de R.C. Sicam Pawnshop, and therefore, the CA cannot
rule against said conclusive assertion of respondents;
(2) The issue resolved against petitioner Sicam was not among those raised and litigated in the trial court;
and
(3) By reason of the above infirmities, it was error for the CA to have pierced the corporate veil since a
corporation has a personality distinct and separate from its individual stockholders or members.
Anent the second error, petitioners point out that the CA finding on their negligence is likewise an unedited reproduction of
respondents brief which had the following defects:
(1) There were unrebutted evidence on record that petitioners had observed the diligence
required of them, i.e, they wanted to open a vault with a nearby bank for purposes of safekeeping the
pawned articles but was discouraged by the Central Bank (CB) since CB rules provide that they can only
store the pawned articles in a vault inside the pawnshop premises and no other place;
(2) Petitioners were adjudged negligent as they did not take insurance against the loss of the
pledged jelweries, but it is judicial notice that due to high incidence of crimes, insurance companies
refused to cover pawnshops and banks because of high probability of losses due to robberies;
(3) In Hernandez v. Chairman, Commission on Audit (179 SCRA 39, 45-46), the victim of robbery was
exonerated from liability for the sum of money belonging to others and lost by him to robbers.
Respondents filed their Comment and petitioners filed their Reply thereto. The parties subsequently submitted their respective
Memoranda.
We find no merit in the petition.
To begin with, although it is true that indeed the CA findings were exact reproductions of the arguments raised in respondents
(appellants) brief filed with the CA, we find the same to be not fatally infirmed. Upon examination of the Decision, we find that it
expressed clearly and distinctly the facts and the law on which it is based as required by Section 8, Article VIII of the Constitution.
The discretion to decide a case one way or another is broad enough to justify the adoption of the arguments put forth by one of the
parties, as long as these are legally tenable and supported by law and the facts on records. [11]
Our jurisdiction under Rule 45 of the Rules of Court is limited to the review of errors of law committed by the appellate
court. Generally, the findings of fact of the appellate court are deemed conclusive and we are not duty-bound to analyze and calibrate
all over again the evidence adduced by the parties in the court a quo.[12] This rule, however, is not without exceptions, such as where
the factual findings of the Court of Appeals and the trial court are conflicting or contradictory[13] as is obtaining in the instant case.
However, after a careful examination of the records, we find no justification to absolve petitioner Sicam from liability.
The CA correctly pierced the veil of the corporate fiction and adjudged petitioner Sicam liable together with petitioner
corporation. The rule is that the veil of corporate fiction may be pierced when made as a shield to perpetrate fraud and/or confuse
legitimate issues. [14] The theory of corporate entity was not meant to promote unfair objectives or otherwise to shield them.[15]
Notably, the evidence on record shows that at the time respondent Lulu pawned her jewelry, the pawnshop was owned by
petitioner Sicam himself. As correctly observed by the CA, in all the pawnshop receipts issued to respondent Lulu in September
1987, all bear the words Agencia de R. C. Sicam, notwithstanding that the pawnshop was allegedly incorporated in April 1987. The
receipts issued after such alleged incorporation were still in the name of Agencia de R. C. Sicam, thus inevitably misleading, or at
the very least, creating the wrong impression to respondents and the public as well, that the pawnshop was owned solely by
petitioner Sicam and not by a corporation.
Even petitioners counsel, Atty. Marcial T. Balgos, in his letter[16] dated October 15, 1987 addressed to the Central Bank, expressly
referred to petitioner Sicam as the proprietor of the pawnshop notwithstanding the alleged incorporation in April 1987.
We also find no merit in petitioners' argument that since respondents had alleged in their Amended Complaint that petitioner
corporation is the present owner of the pawnshop, the CA is bound to decide the case on that basis.
Section 4 Rule 129 of the Rules of Court provides that an admission, verbal or written, made by a party in the course of the
proceedings in the same case, does not require proof. The admission may be contradicted only by showing that it was made through
palpable mistake or that no such admission was made.
Thus, the general rule that a judicial admission is conclusive upon the party making it and does not require proof, admits of two
exceptions, to wit: (1) when it is shown that such admission was made through palpable mistake, and (2) when it is shown that no
such admission was in fact made. The latter exception allows one to contradict an admission by denying that he made such an
admission.[17]
The Committee on the Revision of the Rules of Court explained the second exception in this wise:
x x x if a party invokes an admission by an adverse party, but cites the admission out of context, then the
one making the admission may show that he made no such admission, or that his admission was taken
out of context.
x x x that the party can also show that he made no such admission, i.e., not in the sense in which the
admission is made to appear.
That is the reason for the modifier such because if the rule simply states that the admission may be
contradicted by showing that no admission was made, the rule would not really be providing for a
contradiction of the admission but just a denial. [18] (Emphasis supplied).
While it is true that respondents alleged in their Amended Complaint that petitioner corporation is the present owner of the
pawnshop, they did so only because petitioner Sicamalleged in his Answer to the original complaint filed against him that he was
not the real party-in-interest as the pawnshop was incorporated in April 1987. Moreover, a reading of the Amended Complaint in its
entirety shows that respondents referred to both petitioner Sicam and petitioner corporation where they (respondents) pawned their
assorted pieces of jewelry and ascribed to both the failure to observe due diligence commensurate with the business which resulted
in the loss of their pawned jewelry.
Markedly, respondents, in their Opposition to petitioners Motion to Dismiss Amended Complaint, insofar as petitioner Sicam is
concerned, averred as follows:
Roberto C. Sicam was named the defendant in the original complaint because the pawnshop tickets
involved in this case did not show that the R.C. Sicam Pawnshop was a corporation. In paragraph 1 of his
Answer, he admitted the allegations in paragraph 1 and 2 of the Complaint. He merely added that defendant
is not now the real party in interest in this case.
It was defendant Sicam's omission to correct the pawnshop tickets used in the subject transactions in this
case which was the cause of the instant action. He cannot now ask for the dismissal of the
complaint against him simply on the mere allegation that his pawnshop business is now incorporated. It is
a matter of defense, the merit of which can only be reached after consideration of the evidence to be
presented in due course.[19]
Unmistakably, the alleged admission made in respondents' Amended Complaint was taken out of context by petitioner Sicam to suit
his own purpose. Ineluctably, the fact that petitioner Sicam continued to issue pawnshop receipts under his name and not under the
corporation's name militates for the piercing of the corporate veil.
We likewise find no merit in petitioners' contention that the CA erred in piercing the veil of corporate fiction of petitioner
corporation, as it was not an issue raised and litigated before the RTC.
Petitioner Sicam had alleged in his Answer filed with the trial court that he was not the real party-in-interest because since April 20,
1987, the pawnshop business initiated by him was incorporated and known as Agencia de R.C. Sicam. In the pre-trial brief filed by
petitioner Sicam, he submitted that as far as he was concerned, the basic issue was whether he is the real party in interest against
whom the complaint should be directed. [20] In fact, he subsequently moved for the dismissal of the complaint as to him but was not
favorably acted upon by the trial court. Moreover, the issue was squarely passed upon, although erroneously, by the trial court in its
Decision in this manner:
x x x The defendant Roberto Sicam, Jr likewise denies liability as far as he is concerned for the reason
that he cannot be made personally liable for a claim arising from a corporate transaction.
This Court sustains the contention of the defendant Roberto C. Sicam, Jr. The amended complaint itself
asserts that plaintiff pawned assorted jewelries in defendant's pawnshop. It has been held that as a
 consequence of the separate juridical personality of a corporation, the corporate debt or credit is not the
debt or credit of the stockholder, nor is the stockholder's debt or credit that of a corporation. [21]
Clearly, in view of the alleged incorporation of the pawnshop, the issue of whether petitioner Sicam is personally liable is
inextricably connected with the determination of the question whether the doctrine of piercing the corporate veil should or should
not apply to the case.
The next question is whether petitioners are liable for the loss of the pawned articles in their possession.
Petitioners insist that they are not liable since robbery is a fortuitous event and they are not negligent at all.
We are not persuaded.
Article 1174 of the Civil Code provides:
Art. 1174. Except in cases expressly specified by the law, or when it is otherwise declared by stipulation,
or when the nature of the obligation requires the assumption of risk, no person shall be responsible for those
events which could not be foreseen or which, though foreseen, were inevitable.
Fortuitous events by definition are extraordinary events not foreseeable or avoidable. It is therefore, not enough that the event should
not have been foreseen or anticipated, as is commonly believed but it must be one impossible to foresee or to avoid. The mere
difficulty to foresee the happening is not impossibility to foresee the same. [22]
To constitute a fortuitous event, the following elements must concur: (a) the cause of the unforeseen and unexpected occurrence or
of the failure of the debtor to comply with obligations must be independent of human will; (b) it must be impossible to foresee the
event that constitutes the caso fortuito or, if it can be foreseen, it must be impossible to avoid; (c) the occurrence must be such as to
render it impossible for the debtor to fulfill obligations in a normal manner; and, (d) the obligor must be free from any participation
in the aggravation of the injury or loss. [23]
The burden of proving that the loss was due to a fortuitous event rests on him who invokes it. [24] And, in order for a fortuitous event
to exempt one from liability, it is necessary that one has committed no negligence or misconduct that may have occasioned the
loss. [25]
It has been held that an act of God cannot be invoked to protect a person who has failed to take steps to forestall the possible adverse
consequences of such a loss. One's negligence may have concurred with an act of God in producing damage and injury to another;
nonetheless, showing that the immediate or proximate cause of the damage or injury was a fortuitous event would not exempt one
from liability. When the effect is found to be partly the result of a person's participation -- whether by active intervention, neglect
or failure to act -- the whole occurrence is humanized and removed from the rules applicable to acts of God. [26]
Petitioner Sicam had testified that there was a security guard in their pawnshop at the time of the robbery. He likewise testified that
when he started the pawnshop business in 1983, he thought of opening a vault with the nearby bank for the purpose of safekeeping
the valuables but was discouraged by the Central Bank since pawned articles should only be stored in a vault inside the
pawnshop. The very measures which petitioners had allegedly adopted show that to them the possibility of robbery was not only
foreseeable, but actually foreseen and anticipated. Petitioner Sicams testimony, in effect, contradicts petitioners defense of fortuitous
event.
Moreover, petitioners failed to show that they were free from any negligence by which the loss of the pawned jewelry may have
been occasioned.
Robbery per se, just like carnapping, is not a fortuitous event. It does not foreclose the possibility of negligence on the part of herein
petitioners. In Co v. Court of Appeals,[27]the Court held:
It is not a defense for a repair shop of motor vehicles to escape liability simply because the
damage or loss of a thing lawfully placed in its possession was due to carnapping. Carnapping per se
cannot be considered as a fortuitous event. The fact that a thing was unlawfully and forcefully taken
from another's rightful possession, as in cases of carnapping, does not automatically give rise to a
fortuitous event. To be considered as such, carnapping entails more than the mere forceful taking
of another's property. It must be proved and established that the event was an act of God or was
done solely by third parties and that neither the claimant nor the person alleged to be negligent
has any participation. In accordance with the Rules of Evidence, the burden of proving that the
loss was due to a fortuitous event rests on him who invokes it which in this case is the private
respondent.However, other than the police report of the alleged carnapping incident, no other evidence
was presented by private respondent to the effect that the incident was not due to its fault. A police report
of an alleged crime, to which only private respondent is privy, does not suffice to establish
the carnapping. Neither does it prove that there was no fault on the part of private respondent
notwithstanding the parties' agreement at the pre-trial that the car was carnapped. Carnapping does not
foreclose the possibility of fault or negligence on the part of private respondent. [28]
Just like in Co, petitioners merely presented the police report of the Paraaque Police Station on the robbery committed
based on the report of petitioners' employees which is not sufficient to establish robbery. Such report also does not prove that
petitioners were not at fault.
On the contrary, by the very evidence of petitioners, the CA did not err in finding that petitioners are guilty of concurrent or
contributory negligence as provided in Article 1170 of the Civil Code, to wit:
Art. 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay, and
those who in any manner contravene the tenor thereof, are liable for damages. [29]
Article 2123 of the Civil Code provides that with regard to pawnshops and other establishments which are engaged in making loans
secured by pledges, the special laws and regulations concerning them shall be observed, and subsidiarily, the provisions on pledge,
mortgage and antichresis.
The provision on pledge, particularly Article 2099 of the Civil Code, provides that the creditor shall take care of the thing pledged
with the diligence of a good father of a family. This means that petitioners must take care of the pawns the way a prudent person
would as to his own property.
In this connection, Article 1173 of the Civil Code further provides:
Art. 1173. The fault or negligence of the obligor consists in the omission of that diligence which is required
by the nature of the obligation and corresponds with the circumstances of the persons, of time and of the
place. When negligence shows bad faith, the provisions of Articles 1171 and 2201, paragraph 2 shall apply.
If the law or contract does not state the diligence which is to be observed in the performance,
that which is expected of a good father of a family shall be required.
We expounded in Cruz v. Gangan[30] that negligence is the omission to do something which a reasonable man, guided
by those considerations which ordinarily regulate the conduct of human affairs, would do; or the doing of something which a prudent
and reasonable man would not do.[31] It is want of care required by the circumstances.
A review of the records clearly shows that petitioners failed to exercise reasonable care and caution that an ordinarily prudent person
would have used in the same situation. Petitioners were guilty of negligence in the operation of their pawnshop business.
Petitioner Sicam testified, thus:
Court:
Q. Do you have security guards in your pawnshop?
A. Yes, your honor.
Q. Then how come that the robbers were able to enter the premises when according to you there was a
security guard?
A. Sir, if these robbers can rob a bank, how much more a pawnshop.
Q. I am asking you how were the robbers able to enter despite the fact that there was a security guard?
A. At the time of the incident which happened about 1:00 and 2:00 o'clock in the afternoon and it happened
on a Saturday and everything was quiet in the area BF Homes Paraaque they pretended to pawn an
article in the pawnshop, so one of my employees allowed him to come in and it was only when it was
announced that it was a hold up.
Q. Did you come to know how the vault was opened?
A. When the pawnshop is official (sic) open your honor the pawnshop is partly open. The combination is
off.
Q. No one open (sic) the vault for the robbers?
A. No one your honor it was open at the time of the robbery.
 Q. It is clear now that at the time of the robbery the vault was open the reason why the robbers were able to
get all the items pawned to you inside the vault.
A. Yes sir.[32]
revealing that there were no security measures adopted by petitioners in the operation of the pawnshop. Evidently, no sufficient
precaution and vigilance were adopted by petitioners to protect the pawnshop from unlawful intrusion. There was no clear showing
that there was any security guard at all. Or if there was one, that he had sufficient training in securing a pawnshop. Further, there is
no showing that the alleged security guard exercised all that was necessary to prevent any untoward incident or to ensure that no
suspicious individuals were allowed to enter the premises. In fact, it is even doubtful that there was a security guard, since it is quite
impossible that he would not have noticed that the robbers were armed with caliber .45 pistols each, which were allegedly poked at
the employees.[33] Significantly, the alleged security guard was not presented at all to corroborate petitioner Sicam's claim; not
one of petitioners' employees who were present during the robbery incident testified in court.
Furthermore, petitioner Sicam's admission that the vault was open at the time of robbery is clearly a proof of petitioners' failure to
observe the care, precaution and vigilance that the circumstances justly demanded. Petitioner Sicam testified that once the pawnshop
was open, the combination was already off. Considering petitioner Sicam's testimony that the robbery took place on a Saturday
afternoon and the area in BF Homes Paraaque at that time was quiet, there was more reason for petitioners to have exercised
reasonable foresight and diligence in protecting the pawned jewelries. Instead of taking the precaution to protect them, they let open
the vault, providing no difficulty for the robbers to cart away the pawned articles.
We, however, do not agree with the CA when it found petitioners negligent for not taking steps to insure themselves against loss of
the pawned jewelries.
Under Section 17 of Central Bank Circular No. 374, Rules and Regulations for Pawnshops, which took effect on July 13, 1973, and
which was issued pursuant to Presidential Decree No. 114, Pawnshop Regulation Act, it is provided that pawns pledged must be
insured, to wit:
Sec. 17. Insurance of Office Building and Pawns- The place of business of a pawnshop and the pawns
pledged to it must be insured against fire and against burglary as well as for the latter(sic), by an
insurance company accredited by the Insurance Commissioner.
However, this Section was subsequently amended by CB Circular No. 764 which took effect on October 1, 1980, to wit:
Sec. 17 Insurance of Office Building and Pawns The office building/premises and pawns of a pawnshop
must be insured against fire. (emphasis supplied).
where the requirement that insurance against burglary was deleted. Obviously, the Central Bank considered it not feasible
to require insurance of pawned articles against burglary.
The robbery in the pawnshop happened in 1987, and considering the above-quoted amendment, there is no statutory duty imposed
on petitioners to insure the pawned jewelry in which case it was error for the CA to consider it as a factor in concluding that
petitioners were negligent.
Nevertheless, the preponderance of evidence shows that petitioners failed to exercise the diligence required of them under the Civil
Code.
The diligence with which the law requires the individual at all times to govern his conduct varies with the nature of the situation in
which he is placed and the importance of the act which he is to perform. [34] Thus, the cases of Austria v. Court of
Appeals,[35] Hernandez v. Chairman, Commission on Audit[36] and Cruz v. Gangan[37] cited by petitioners in their pleadings, where
the victims of robbery were exonerated from liability, find no application to the present case.
In Austria, Maria Abad received from Guillermo Austria a pendant with diamonds to be sold on commission basis, but
which Abad failed to subsequently return because of a robbery committed upon her in 1961. The incident became the subject of a
criminal case filed against several persons. Austria filed an action against Abad and her husband (Abads) for recovery of the pendant
or its value, but the Abads set up the defense that the robbery extinguished their obligation. The RTC ruled in favor of Austria, as
the Abadsfailed to prove robbery; or, if committed, that Maria Abad was guilty of negligence. The CA, however, reversed the RTC
decision holding that the fact of robbery was duly established and declared the Abads not responsible for the loss of the jewelry on
account of a fortuitous event. We held that for the Abads to be relieved from the civil liability of returning the pendant under Art.
1174 of the Civil Code, it would only be sufficient that the unforeseen event, the robbery, took place without any concurrent fault
on the debtors part, and this can be done by preponderance of evidence; that to be free from liability for reason of fortuitous event,
the debtor must, in addition to the casus itself, be free of any concurrent or contributory fault or negligence.[38]
We found in Austria that under the circumstances prevailing at the time the Decision was promulgated in 1971, the City of Manila
and its suburbs had a high incidence of crimes against persons and property that rendered travel after nightfall a matter to be
sedulously avoided without suitable precaution and protection; that the conduct of Maria Abad in returning alone to her house in the
evening carrying jewelry of considerable value would have been negligence per se and would not exempt her from responsibility in
the case of robbery. However we did not hold Abad liable for negligence since, the robbery happened ten years previously; i.e.,
1961, when criminality had not reached the level of incidence obtaining in 1971.
In contrast, the robbery in this case took place in 1987 when robbery was already prevalent and petitioners in fact had already
foreseen it as they wanted to deposit the pawn with a nearby bank for safekeeping. Moreover, unlike in Austria, where no negligence
was committed, we found petitioners negligent in securing their pawnshop as earlier discussed.
In Hernandez, Teodoro Hernandez was the OIC and special disbursing officer of the Ternate Beach Project of the Philippine
Tourism in Cavite. In the morning of July 1, 1983, a Friday, he went to Manila to encash two checks covering the wages of the
employees and the operating expenses of the project. However for some reason, the processing of the check was delayed and was
completed at about 3 p.m. Nevertheless, he decided to encash the check because the project employees would be waiting for their
pay the following day; otherwise, the workers would have to wait until July 5, the earliest time, when the main office would open.
At that time, he had two choices: (1) return to Ternate, Cavite that same afternoon and arrive early evening; or (2) take the money
with him to his house in Marilao, Bulacan, spend the night there, and leave for Ternate the following day. He chose the second
option, thinking it was the safer one. Thus, a little past 3 p.m., he took a passenger jeep bound for Bulacan. While the jeep was
on Epifanio de los Santos Avenue, the jeep was held up and the money kept by Hernandez was taken, and the robbers jumped out
of the jeep and ran. Hernandez chased the robbers and caught up with one robber who was subsequently charged with robbery and
pleaded guilty. The other robber who held the stolen money escaped. The Commission on Audit found Hernandez negligent because
he had not brought the cash proceeds of the checks to his office in Ternate, Cavite for safekeeping, which is the normal procedure
in the handling of funds. We held that Hernandez was not negligent in deciding to encash the check and bringing it home
to Marilao, Bulacan instead of Ternate, Cavite due to the lateness of the hour for the following reasons: (1) he was moved by
unselfish motive for his co-employees to collect their wages and salaries the following day, a Saturday, a non-working, because
to encashthe check on July 5, the next working day after July 1, would have caused discomfort to laborers who were dependent on
their wages for sustenance; and (2) that choosing Marilao as a safer destination, being nearer, and in view of the comparative hazards
in the trips to the two places, said decision seemed logical at that time. We further held that the fact that two robbers attacked him
in broad daylight in the jeep while it was on a busy highway and in the presence of other passengers could not be said to be a result
of his imprudence and negligence.
Unlike in Hernandez where the robbery happened in a public utility, the robbery in this case took place in the pawnshop which is
under the control of petitioners. Petitioners had the means to screen the persons who were allowed entrance to the premises and to
protect itself from unlawful intrusion. Petitioners had failed to exercise precautionary measures in ensuring that the robbers were
prevented from entering the pawnshop and for keeping the vault open for the day, which paved the way for the robbers to easily cart
away the pawned articles.
In Cruz, Dr. Filonila O. Cruz, Camanava District Director of Technological Education and Skills Development Authority (TESDA),
boarded the Light Rail Transit (LRT) fromSen. Puyat Avenue to Monumento when her handbag was slashed and the contents were
stolen by an unidentified person. Among those stolen were her wallet and the government-issued cellular phone. She then reported
the incident to the police authorities; however, the thief was not located, and the cellphone was not recovered. She also reported the
loss to the Regional Director of TESDA, and she requested that she be freed from accountability for the cellphone. The Resident
Auditor denied her request on the ground that she lacked the diligence required in the custody of government property and was
ordered to pay the purchase value in the total amount of P4,238.00. The COA found no sufficient justification to grant the request
for relief from accountability. We reversed the ruling and found that riding the LRT cannot per se be denounced as a negligent act
more so because Cruzs mode of transit was influenced by time and money considerations; that she boarded the LRT to be able to
arrive in Caloocan in time for her 3 pm meeting; that any prudent and rational person under similar circumstance can reasonably be
expected to do the same; that possession of a cellphone should not hinder one from boarding the LRT coach as Cruz did considering
that whether she rode a jeep or bus, the risk of theft would have also been present; that because of her relatively low position and
pay, she was not expected to have her own vehicle or to ride a taxicab; she did not have a government assigned vehicle; that placing
the cellphone in a bag away from covetous eyes and holding on to that bag as she did is ordinarily sufficient care of a cellphone while
traveling on board the LRT; that the records did not show any specific act of negligence on her part and negligence can never be
presumed.
Unlike in the Cruz case, the robbery in this case happened in petitioners' pawnshop and they were negligent in not
exercising the precautions justly demanded of a pawnshop.
WHEREFORE, except for the insurance aspect, the Decision of the Court of Appeals dated March 31, 2003 and its
Resolution dated August 8, 2003, are AFFIRMED.
Costs against petitioners.
 [7]
148-A Phil. 462 (1971).
[8]
SO ORDERED. CA rollo, p. 72.
[9]
Rollo, pp. 5-6.
[10]
Rollo, p. 7.
[11]
MA. ALICIA AUSTRIA-MARTINEZ Nuez v. National Labor Relations Commission, G.R. No. 107574, December 28, 1994, 239 SCRA 518, 526.
[12]
Associate Justice Litonjua v. Fernandez, G.R. No. 148116, April 14, 2004, 427 SCRA 478, 489 citing Roble v. Arbasa, 414 Phil. 343 (2001).
[13]
Fuentes v. Court of Appeals, 335 Phil. 1163, 1168 (1997).
[14]
WE CONCUR: See Jacinto v. Court of Appeals, G.R. No. 80043, June 6, 1991, 198 SCRA 211, 216.
[15]
See Sibagat Timber Corporation v. Garcia, G.R. No. 98185, December 11, 1992, 216 SCRA 470, 474.
[16]
Id. at 124-125; Exhibit 4.
[17]
Atillo III v. Court of Appeals, 334 Phil. 546, 552 (1997).
[18]
Minutes of the meeting held on October 22, 1986, p. 9.
[19]
CONSUELO YNARES-SANTIAGO Records, p. 67.
[20]
Associate Justice Id. at 38.
[21]
Chairperson Id. at 147.
[22]
Republic v. Luzon Stevedoring Corporation, 128 Phil. 313, 318 (1967).
[23]
Mindex Resources Development Corporation v. Morillo, 428 Phil. 934, 944 (2002).
[24]
Co v. Court of Appeals, 353 Phil. 305, 313 (1998).
[25]
Mindex Resources Development Corporation v. Morillo, supra citing Tolentino, CIVIL CODE OF THE PHILIPPINES, Vol. IV,
MINITA V. CHICO-NAZARIO ANTONIO EDUARDO B. NACHURA 1991 ed., p. 126, citing Sian v. Inchausti & Co., 22 Phil. 152 (1912); Juan F. Nakpil & Sons v. Court of Appeals, 228
Associate Justice Associate Justice Phil. 564, 578 (1986). Cf. Metal Forming Corporation v. Office of the President, 317 Phil. 853, 859 (1995).
[26]
Id. citing Nakpil and Sons v. Court of Appeals, supra note 25, at 578.
[27]
Supra note 24.
[28]
ATTESTATION Id. at 312-313.
[29]
CIVIL CODE, Art. 1170.
[30]
I attest that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the 443 Phil. 856, 863 (2003) citing McKee v. Intermediate Appellate Court, 211 SCRA 517 (1992).
[31]
opinion of the Courts Division. Cruz v. Gangan, supra note 30, at 863.
[32]
TSN, January 21, 1992, pp.17-18.
[33]
Exhibit 1, Excerpt from the Police Blotter dated October 17, 1987 of the Paraaque Police Station, p. 121.
[34]
Cruz v. Gangan, supra note 30, at 863 citing SANGCO, TORTS AND DAMAGES, Vol. 1, 1993 rev. ed. p. 5.
[35]
Supra note 7.
[36]
CONSUELO YNARES-SANTIAGO G.R. No. 71871, November 6, 1989, 179 SCRA 39.
[37]
Associate Justice Supra note 30.
[38]
Chairperson, Third Division Austria v. Court of Appeals, supra note 7, at 466-467.

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, and the Division Chairpersons attestation, it is hereby certified that the
conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the
Courts Division.

REYNATO S. PUNO
Chief Justice

[1]
CA rollo, pp. 63-73; Penned by Justice Bernardo P. Abesamis (ret.) and concurred in by Justices Sergio L. Pestao and Noel
G. Tijam.
[2]
Id. at p. 114.
[3]
Id. at 121; Exhibit 1.
[4]
Id. at 107-108; Exhibit I.
[5]
Id. at 63-65; Per Judge Salvador P. de Guzman, Jr.
[6]
Id. at 146-147; Penned by Judge Roberto C. Diokno of Branch 62 as the case was unloaded to him.
 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-29640 June 10, 1971
GUILLERMO AUSTRIA, petitioner,
vs.
THE COURT OF APPEALS (Second Division), PACIFICO ABAD and MARIA G. ABAD, respondents.
Antonio Enrile Inton for petitioner.
Jose A. Buendia for respondents.
REYES, J.B.L., J.:
Guillermo Austria petitions for the review of the decision rendered by the Court of Appeal (in CA-G.R. No. 33572-R),
on the sole issue of whether in a contract of agency (consignment of goods for sale) it is necessary that there be prior
conviction for robbery before the loss of the article shall exempt the consignee from liability for such loss.
In a receipt dated 30 January 1961, Maria G. Abad acknowledged having received from Guillermo Austria one (1)
pendant with diamonds valued at P4,500.00, to be sold on commission basis or to be returned on demand. On 1
February 1961, however, while walking home to her residence in Mandaluyong, Rizal, Abad was said to have been
accosted by two men, one of whom hit her on the face, while the other snatched her purse containing jewelry and
cash, and ran away. Among the pieces of jewelry allegedly taken by the robbers was the consigned pendant. The
incident became the subject of a criminal case filed in the Court of First Instance of Rizal against certain persons
(Criminal Case No. 10649, People vs. Rene Garcia, et al.).
As Abad failed to return the jewelry or pay for its value notwithstanding demands, Austria brought in the Court of First
Instance of Manila an action against her and her husband for recovery of the pendant or of its value, and damages.
Answering the allegations of the complaint, defendants spouses set up the defense that the alleged robbery had
extinguished their obligation.
After due hearing, the trial court rendered judgment for the plaintiff, and ordered defendants spouses, jointly and
severally, to pay to the former the sum of P4,500.00, with legal interest thereon, plus the amount of P450.00 as
reasonable attorneys' fees, and the costs. It was held that defendants failed to prove the fact of robbery, or, if indeed it
was committed, that defendant Maria Abad was guilty of negligence when she went home without any companion,
although it was already getting dark and she was carrying a large amount of cash and valuables on the day in
question, and such negligence did not free her from liability for damages for the loss of the jewelry.
Not satisfied with his decision, the defendants went to the Court of Appeals, and there secured a reversal of the
judgment. The appellate court overruling the finding of the trial court on the lack of credibility of the two defense
witnesses who testified on the occurrence of the robbery, and holding that the facts of robbery and defendant Maria
Abad's possesion of the pendant on that unfortunate day have been duly published, declared respondents not
responsible for the loss of the jewelry on account of a fortuitous event, and relieved them from liability for damages to
the owner. Plaintiff thereupon instituted the present proceeding.
It is now contended by herein petitioner that the Court of Appeals erred in finding that there was robbery in the case,
although nobody has been found guilty of the supposed crime. It is petitioner's theory that for robbery to fall under the
category of a fortuitous event and relieve the obligor from his obligation under a contract, pursuant to Article 1174 of
the new Civil Code, there ought to be prior finding on the guilt of the persons responsible therefor. In short, that the
occurrence of the robbery should be proved by a final judgment of conviction in the criminal case. To adopt a different
view, petitioner argues, would be to encourage persons accountable for goods or properties received in trust or
consignment to connive with others, who would be willing to be accused in court for the robbery, in order to be
absolved from civil liability for the loss or disappearance of the entrusted articles.
We find no merit in the contention of petitioner.
It is recognized in this jurisdiction that to constitute a caso fortuito that would exempt a person from responsibility, it is
necessary that (1) the event must be independent of the human will (or rather, of the debtor's or obligor's); (2) the
occurrence must render it impossible for the debtor to fulfill the obligation in a normal manner; and that (3) the obligor
must be free of participation in or aggravation of the injury to the creditor.1 A fortuitous event, therefore, can be
produced by nature, e.g., earthquakes, storms, floods, etc., or by the act of man, such as war, attack by bandits,
robbery,2 etc., provided that the event has all the characteristics enumerated above.
It is not here disputed that if respondent Maria Abad were indeed the victim of robbery, and if it were really true that
the pendant, which she was obliged either to sell on commission or to return to petitioner, were taken during the
robbery, then the occurrence of that fortuitous event would have extinguished her liability. The point at issue in this
proceeding is how the fact of robbery is to be established in order that a person may avail of the exempting provision
of Article 1174 of the new Civil Code, which reads as follows:
ART. 1174. Except in cases expressly specified by law, or when it is otherwise declared by
stipulation, or when the nature of the obligation requires the assumption of risk, no person shall
be responsible for those events which could not be foreseen, or which, though foreseen, were
inevitable.
It may be noted the reform that the emphasis of the provision is on the events, not on the agents or factors responsible
for them. To avail of the exemption granted in the law, it is not necessary that the persons responsible for the
occurrence should be found or punished; it would only be sufficient to established that the enforceable event, the
robbery in this case did take place without any concurrent fault on the debtor's part, and this can be done by
preponderant evidence. To require in the present action for recovery the prior conviction of the culprits in the criminal
case, in order to establish the robbery as a fact, would be to demand proof beyond reasonable doubt to prove a fact in
a civil case.
It is undeniable that in order to completely exonerate the debtor for reason of a fortutious event, such debtor must, in
addition to the cams itself, be free of any concurrent or contributory fault or negligence.3 This is apparent from Article
1170 of the Civil Code of the Philippines, providing that:
ART. 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or
delay, and those who in any manner contravene the tenor thereof, are liable for damages.
It is clear that under the circumstances prevailing at present in the City of Manila and its suburbs, with their high
incidence of crimes against persons and property that renders travel after nightfall a matter to be sedulously avoided
without suitable precaution and protection, the conduct of respondent Maria G. Abad, in returning alone to her house
in the evening, carrying jewelry of considerable value would be negligent per se and would not exempt her from
responsibility in the case of a robbery. We are not persuaded, however, that the same rule should obtain ten years
previously, in 1961, when the robbery in question did take place, for at that time criminality had not by far reached the
levels attained in the present day.
There is likewise no merit in petitioner's argument that to allow the fact of robbery to be recognized in the civil case
before conviction is secured in the criminal action, would prejudice the latter case, or would result in inconsistency
should the accused obtain an acquittal or should the criminal case be dismissed. It must be realized that a court
finding that a robbery has happened would not necessarily mean that those accused in the criminal action should be
found guilty of the crime; nor would a ruling that those actually accused did not commit the robbery be inconsistent
with a finding that a robbery did take place. The evidence to establish these facts would not necessarily be the same.
WHEREFORE, finding no error in the decision of the Court of Appeals under review, the petition in this case is hereby
dismissed with costs against the petitioner.
Concepcion, C.J., Dizon, Makalintal, Zaldivar, Fernando, Teehankee, Barredo, Villamor and Makasiar, JJ., concur.
Castro, J., took no part.
Footnotes
1 Reyes & Puno, Outline of Philippine Civil Law, Vol. IV, pages 25-26, citing Lasam vs. Smith, 45 Phil. 657, 661.
2 Tolentino, Civil Code of the Philippines, Vol. IV, 1962 ed., page 117, citing 3 Salvat 83-84.
3 V. Lachica vs. Gayoso, 48 Off. Gaz. (No. 1) 205, and cases cited; Lanaso Fruit SS Co. vs. Univ. Ins. Co., 82 L. Ed. 422.
 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. 71871 November 6, 1989
TEODORO M. HERNANDEZ, petitioner,
vs.
THE HONORABLE CHAIRMAN, COMMISSION ON AUDIT, respondent.
Al-Fred O. Concepcion for petitioner.
CRUZ, J.:
It was one of those prosaic decisions not requiring deep thought or long deliberation. The petitioner arrived at it almost
as a matter of course, applying what he believed then to be common sense. Little did he realize until later that it would
cause him much anguish, even endanger his life, and ultimately lead to this litigation. But such are the quirks of fate.
At the time of the incident in question, Teodoro M. Hernandez was the officer-in-charge and special disbursing officer
of the Ternate Beach Project of the Philippine Tourism Authority in Cavite. As such, he went to the main office of the
Authority in Manila on July 1, 1983, to encash two checks covering the wages of the employees and the operating
expenses of the Project. He estimated that the money would be available by ten o'clock in the morning and that he
would be back in Ternate by about two o'clock in the afternoon of the same day. For some reason, however, the
processing of the checks was delayed and was completed only at three o'clock that afternoon. The petitioner decided
nevertheless to encash them because the Project employees would be waiting for their pay the following day. He
thought he had to do this for their benefit as otherwise they would have to wait until the following Tuesday at the
earliest when the main office would reopen. And so, on that afternoon of July 1, 1983, he collected the cash value of
the checks and left the main office with not an insubstantial amount of money in his hands. 1
What would he do with the money in the meantime? The petitioner had two choices, to wit: (1) return to Ternate,
Cavite, that same afternoon and arrive there in the early evening; or (2) take the money with him to his house in
Marilao, Bulacan, spend the night there, and leave for Ternate the following morning. He opted for the second, thinking
it the safer one. And so, on that afternoon of July 1, 1983, at a little past three o'clock, he took a passenger jeep bound
for his house in Bulacan.
It was while the vehicle was along Epifanio de los Santos Avenue that two persons boarded with knives in hand and
robbery in mind. One pointed his weapon at the petitioner's side while the other slit his pocket and forcibly took the
money he was carrying. The two then jumped out of the jeep and ran. Hernandez, after the initial shock, immediately
followed in desperate pursuit. He caught up with Virgilio Alvarez and overcame him after a scuffle. The petitioner
sustained injuries in the lip arms and knees. Alvarez was subsequently charged with robbery and pleaded guilty. But
the hold-upper who escaped is still at large and the stolen money he took with him has not been recovered. 2
On July 5, 1983, the petitioner, invoking the foregoing facts, filed a request for relief from money accountability under
Section 638 of the Revised Administrative Code. This was favorably indorsed by the General Manager of the
Philippine Tourism Authority the same day 3 and by its Corporate Auditor on July 27, 1983. 4 The Regional Director,
National Capital Region, of the Commission on Audit, made a similar recommendation on January 17, 1984, and also
absolved Hernandez of negligence. 5 On June 29, 1984, however, the Commission on Audit, through then Chairman
Francisco S. Tantuico, jr. denied the petitioner's request, observing inter alia:
In the instant case, the loss of the P10,175.00 under the accountability of Mr. Hernandez can
be attributed to his negligence because had he brought the cash proceeds of the checks
(replenishment fund) to the Beach Park in Ternate, Cavite, immediately after encashment for
safekeeping in his office, which is the normal procedure in the handling of public funds, the loss
of said cash thru robbery could have been aborted. 6
In the petition at bar, Hernandez claims that the respondent Commission on Audit acted with grave abuse of discretion
in denying him relief and in holding him negligent for the loss of the stolen money. He avers he has done only what
any reasonable man would have done and should not be held accountable for a fortuitous event over which he had no
control.
The petitioner stresses that he decided to encash the checks in the afternoon of July 1, 1983, which was a Friday, out
of concern for the employees of the Project, who were depending on him to make it possible for them to collect their
pay the following day. July 2 and 3 being non-working days and July 4 being a holiday, they could receive such
payment only on the following Tuesday unless he brought the encashed checks on July 1, 1983, and took it to Ternate
the following day.
On his decision to take the money home that afternoon instead of returning directly to Ternate, he says that the first
course was more prudent as he saw it, if only because his home in Marilao, Bulacan, was much nearer than his office
in Ternate, Cavite. The drive to Ternate would take three hours, including a 30-minute tricycle ride along the dark and
lonely Naic-Ternate road; and as he would be starting after three o'clock in the afternoon, it was not likely that he
would reach his destination before nightfall. By contrast, the road to Marilao was nearer and safer (or so he reasonably
thought) and there was less risk involved in his taking the money the following morning to Ternate rather than on that
same afternoon of July 1.
The petitioner maintains that the likelihood of robbery during the time in question was stronger in Ternate than in
Marilao, so he should not be blamed if the robbery did occur while he was on the way to Marilao that afternoon. That
was a fortuitous event that could not have reasonably been foreseen, especially on that busy highway. At any rate, he
contends, he had not been remiss in protecting the money in his custody; in fact, he immediately pursued the hold-
uppers and succeeded in catching one of them who was subsequently prosecuted and convicted. It might have been
different if he had simply resigned himself to the robbery and allowed the culprits to go scot-free. But he acted. His
action after the robbery only goes to show his vigilance over the money entrusted to his custody and his readiness to
protect it even at great personal risk.
In his Comment, then Solicitor-General Sedfrey A. Ordonez supported the denial of the petitioner's request, arguing
that Hernandez was negligent in the safekeeping of the stolen funds as correctly found by the Commission on
Audit. 7 Later, however, his successor, Solicitor General Francisco I. Chavez, submitted a Manifestation in Lieu of
Memorandum in which he sided with the petitioner, agreeing that Hernandez had not committed any negligence or,
assuming he was guilty of contributory negligence, had made up for it with his efforts to retrieve the money and his
capture of one of the robbers, who was eventually convicted. 8 This prompted the respondent Commission on Audit to
submit its own memorandum.
The Commission on Audit insists in this memorandum that the petitioner should not be relieved from his money
accountability because it was his own negligence that led to the loss of the cash he had sought to take not to Ternate
in Cavite but to Marilao.
Its contention is that the petitioner should not have encashed the cheeks on July 1, 1983, as the hour was already late
and he knew he could not return to Ternate before nightfall. Knowing this, he should have prudently deferred
encashing the checks until the morning of the next working day on July 5, 1983, when he could have safely taken the
money to Ternate. His alleged concern for the convenience of his fellow workers was not really a valid reason because
one of the checks he had encashed, in the greater amount of P6,964.00, was in fact not for salaries and wages but for
the operating expenses of the Project. There was no urgency to encash that check. Moreover, if it is true that he had
that much concern for the employees, he should have gone to the main office earlier than July 1, 1983, since the
vouchers representing the checks had already been prepared as of June 29, 1983.
The memorandum concludes that in deciding to take the money with him to Marilao after imprudently withdrawing it
from the main office, the petitioner was assuming a risk from which he cannot now be excused after the loss of the
money as a result of the robbery to which it was unreasonably exposed. In any event, the burden of proof in petitions
for relief from money accountability rests with the petitioner, who has not clearly established that the loss of the money
was not the result of his negligence.
Section 638 of the Revised Administrative Code reads as follows:
 Section 638. Credit for loss occurring in transit or due to casualty — Notice to Auditor. — When ACCORDINGLY, the petition is GRANTED, without any pronouncement as to costs. It is so ordered.
a loss of government funds or property occurs while the same is in transit or is caused by fire,
theft, or other casualty, the officer accountable therefor or having custody thereof shall
immediately notify the Auditor General, or the provincial auditor, according as a matter is within Fernan, C.J., Narvasa, Melencio-Herrera, Gutierrez, Jr., Paras, Feliciano, Gancayco, Padilla, Bidin, Sarmiento, Cortes,
the original jurisdiction of the one or the other, and within thirty days or such longer period as Griño-Aquino, Medialdea and Regalado, JJ., concur.
the Auditor, or provincial auditor, may in the particular case allow, shall present his application
for relief, with the available evidence in support thereof. An officer who fails to comply with this
requirement shall not be relieved of liability or allowed credit for any such loss in the settlement
of his accounts.
Footnotes
This provision has since then been reiterated, with some slight modification, in Section 73 of P.D. No. 1445, otherwise
known as the "Government Auditing Code of the Philippines," which was promulgated on June 11. 1978. 1 Rollo, p. 8.

Applying the letter and spirit of the above-mentioned laws, and after considering the established facts in the light of the 2 Ibid., p. 19.
arguments of the parties, this Court inclines in favor of the petitioner.

3 Id., p. 26.
Hindsight is a cruel judge. It is so easy to say, after the event, that one should have done this and not that or that he
should not have acted at all, or else this problem would not have arisen at all. That is all very well as long as one is
examining something that has already taken place. One can hardly be wrong in such a case. But the trouble with this 4 Id., pp, 27-28.
retrospective assessment is that it assumes for everybody an uncanny prescience that will enable him by some
mysterious process to avoid the pitfalls and hazards that he is expected to have foreseen. It does not work out that
way in real life. For most of us, all we can rely on is a reasoned conjecture of what might happen, based on common 5 Id., p. 29.
sense and our own experiences, or our intuition, if you will, and without any mystic ability to peer into the future. So it
was with the petitioner.
6 Id., p. 31.

It is pointless to argue that Hernandez should have encashed the vouchers earlier because they were dated anyway
7 Id., pp. 126-127.
on June 29, 1983. He was not obliged to encash the checks earlier and then again there might have been any number
of reasons why he did so only on July 1, 1983. The point is that he did encash the checks on that date and took the
money to Marilao and not Ternate in view of the lateness of the hour. The question before us is whether these acts are 8 Id., pp. 188-189.
so tainted with negligence or recklessness as to justify the denial of the petitioner's request for relief from
accountability for the stolen money.

It seems to us that the petitioner was moved only by the best of motives when he encashed the checks on July 1,
1983, so his co-employees in Ternate could collect their salaries and wages the following day. Significantly, although
this was a non-working day, he was intending to make the trip to his office the following day for the unselfish purpose
of accommodating his fellow workers. The other alternative was to encash the check is on July 5, 1983, the next
working day after July 1, 1983, which would have meant a 5-day wait for the payment of the said salaries and wages.
Being a modest employee himself, Hernandoz must have realized the great discomfort it would cause the laborer who
were dependent on their wages for their sustenance and were anxious to collect their pay as soon as possible.

For such an attitude, Hernandez should be commended rather than faulted.

As for Hernandez's choice between Marilao, Bulacan, and Ternate, Cavite, one could easily agree that the former was
the safer destination, being nearer, and in view of the comparative hazards in the trips to the two places. It is true that
the petitioner miscalculated, but the Court feels he should not be blamed for that. The decision he made seemed
logical at that time and was one that could be expected of a reasonable and prudent person. And if, as it happened,
the two robbers attacked him in broad daylight in the jeep while it was on a busy highway, and in the presence of other
passengers, it cannot be said that all this was the result of his imprudence and negligence. This was undoubtedly a
fortuitous event covered by the said provisions, something that could not have been reasonably foreseen although it
could have happened, and did.

We find, in sum, that under the circumstances as above narrated, the petitioner is entitled to be relieved from
accountability for the money forcibly taken from him in the afternoon of July 1, 1983. To impose such liability upon him
would be to read the law too sternly when it should be softened by the proven facts.
 THIRD DIVISION
[G.R. No. 113003. October 17, 1997]
ALBERTA YOBIDO and CRESENCIO YOBIDO, petitioners, vs. COURT OF APPEALS, LENY TUMBOY, ARDEE
TUMBOY and JASMIN TUMBOY, respondents.
DECISION
ROMERO, J.:
In this petition for review on certiorari of the decision of the Court of Appeals, the issue is whether or not the
explosion of a newly installed tire of a passenger vehicle is a fortuitous event that exempts the carrier from liability for
the death of a passenger.
On April 26, 1988, spouses Tito and Leny Tumboy and their minor children named Ardee and Jasmin, boarded
at Mangagoy, Surigao del Sur, a Yobido Liner bus bound for Davao City. Along Picop Road in Km. 17, Sta. Maria,
Agusan del Sur, the left front tire of the bus exploded. The bus fell into a ravine around three (3) feet from the road and
struck a tree. The incident resulted in the death of 28-year-old Tito Tumboy and physical injuries to other passengers.
On November 21, 1988, a complaint for breach of contract of carriage, damages and attorneys fees was filed by
Leny and her children against Alberta Yobido, the owner of the bus, and Cresencio Yobido, its driver, before the Regional
Trial Court of Davao City. When the defendants therein filed their answer to the complaint, they raised the affirmative
defense of caso fortuito. They also filed a third-party complaint against Philippine Phoenix Surety and Insurance, Inc.
This third-party defendant filed an answer with compulsory counterclaim. At the pre-trial conference, the parties agreed
to a stipulation of facts.[1]
Upon a finding that the third party defendant was not liable under the insurance contract, the lower court
dismissed the third party complaint. No amicable settlement having been arrived at by the parties, trial on the merits
ensued.
The plaintiffs asserted that violation of the contract of carriage between them and the defendants was brought
about by the drivers failure to exercise the diligence required of the carrier in transporting passengers safely to their
place of destination. According to Leny Tumboy, the bus left Mangagoy at 3:00 oclock in the afternoon. The winding
road it traversed was not cemented and was wet due to the rain; it was rough with crushed rocks. The bus which was
full of passengers had cargoes on top. Since it was running fast, she cautioned the driver to slow down but he merely
stared at her through the mirror. At around 3:30 p.m., in Trento, she heard something explode and immediately, the bus
fell into a ravine.
For their part, the defendants tried to establish that the accident was due to a fortuitous event. Abundio Salce,
who was the bus conductor when the incident happened, testified that the 42-seater bus was not full as there were only
32 passengers, such that he himself managed to get a seat. He added that the bus was running at a speed of 60 to 50
and that it was going slow because of the zigzag road. He affirmed that the left front tire that exploded was a brand new
tire that he mounted on the bus on April 21, 1988 or only five (5) days before the incident. The Yobido Liner secretary,
Minerva Fernando, bought the new Goodyear tire from Davao Toyo Parts on April 20, 1988 and she was present when
it was mounted on the bus by Salce. She stated that all driver applicants in Yobido Liner underwent actual driving tests
before they were employed. Defendant Cresencio Yobido underwent such test and submitted his professional drivers
license and clearances from the barangay, the fiscal and the police.
On August 29, 1991, the lower court rendered a decision[2] dismissing the action for lack of merit. On the issue
of whether or not the tire blowout was a caso fortuito, it found that the falling of the bus to the cliff was a result of no
other outside factor than the tire blow-out. It held that the ruling in the La Mallorca and Pampanga Bus Co. v. De
Jesus[3] that a tire blowout is a mechanical defect of the conveyance or a fault in its equipment which was easily
discoverable if the bus had been subjected to a more thorough or rigid check-up before it took to the road that morning
is inapplicable to this case. It reasoned out that in said case, it was found that the blowout was caused by the established
fact that the inner tube of the left front tire was pressed between the inner circle of the left wheel and the rim which had
slipped out of the wheel. In this case, however, the cause of the explosion remains a mystery until at present. As such,
the court added, the tire blowout was a caso fortuito which is completely an extraordinary circumstance independent of
the will of the defendants who should be relieved of whatever liability the plaintiffs may have suffered by reason of the
explosion pursuant to Article 1174[4] of the Civil Code.
Dissatisfied, the plaintiffs appealed to the Court of Appeals. They ascribed to the lower court the following errors:
(a) finding that the tire blowout was a caso fortuito; (b) failing to hold that the defendants did not exercise utmost and/or
extraordinary diligence required of carriers under Article 1755 of the Civil Code, and (c) deciding the case contrary to
the ruling in Juntilla v. Fontanar,[5] and Necesito v. Paras.[6]
On August 23, 1993, the Court of Appeals rendered the Decision[7] reversing that of the lower court. It held that:
To Our mind, the explosion of the tire is not in itself a fortuitous event. The cause of the blow-out, if due to a factory defect,
improper mounting, excessive tire pressure, is not an unavoidable event. On the other hand, there may have been adverse
conditions on the road that were unforeseeable and/or inevitable, which could make the blow-out a caso fortuito. The fact that the
cause of the blow-out was not known does not relieve the carrier of liability. Owing to the statutory presumption of negligence
against the carrier and its obligation to exercise the utmost diligence of very cautious persons to carry the passenger safely as far
as human care and foresight can provide, it is the burden of the defendants to prove that the cause of the blow-out was a fortuitous
event. It is not incumbent upon the plaintiff to prove that the cause of the blow-out is not caso-fortuito.
Proving that the tire that exploded is a new Goodyear tire is not sufficient to discharge defendants burden. As enunciated in
Necesito vs. Paras, the passenger has neither choice nor control over the carrier in the selection and use of its equipment, and the
good repute of the manufacturer will not necessarily relieve the carrier from liability.
Moreover, there is evidence that the bus was moving fast, and the road was wet and rough. The driver could have explained that
the blow-out that precipitated the accident that caused the death of Toto Tumboy could not have been prevented even if he had
exercised due care to avoid the same, but he was not presented as witness.
The Court of Appeals thus disposed of the appeal as follows:
WHEREFORE, the judgment of the court a quo is set aside and another one entered ordering defendants to pay plaintiffs the sum
of P50,000.00 for the death of Tito Tumboy, P30,000.00 in moral damages, and P7,000.00 for funeral and burial expenses.
SO ORDERED.
The defendants filed a motion for reconsideration of said decision which was denied on November 4, 1993 by
the Court of Appeals. Hence, the instant petition asserting the position that the tire blowout that caused the death of Tito
Tumboy was a caso fortuito. Petitioners claim further that the Court of Appeals, in ruling contrary to that of the lower
court, misapprehended facts and, therefore, its findings of fact cannot be considered final which shall bind this
Court. Hence, they pray that this Court review the facts of the case.
The Court did re-examine the facts and evidence in this case because of the inapplicability of the established
principle that the factual findings of the Court of Appeals are final and may not be reviewed on appeal by this Court. This
general principle is subject to exceptions such as the one present in this case, namely, that the lower court and the
Court of Appeals arrived at diverse factual findings.[8] However, upon such re-examination, we found no reason to
overturn the findings and conclusions of the Court of Appeals.
As a rule, when a passenger boards a common carrier, he takes the risks incidental to the mode of travel he has
taken. After all, a carrier is not an insurer of the safety of its passengers and is not bound absolutely and at all events to
carry them safely and without injury.[9] However, when a passenger is injured or dies while travelling, the law presumes
that the common carrier is negligent. Thus, the Civil Code provides:
Art. 1756. In case of death or injuries to passengers, common carriers are presumed to have been at fault or to have acted
negligently, unless they prove that they observed extraordinary diligence as prescribed in articles 1733 and 1755.
Article 1755 provides that (a) common carrier is bound to carry the passengers safely as far as human care and
foresight can provide, using the utmost diligence of very cautious persons, with a due regard for all the circumstances.
Accordingly, in culpa contractual, once a passenger dies or is injured, the carrier is presumed to have been at fault or
to have acted negligently. This disputable presumption may only be overcome by evidence that the carrier had observed
extraordinary diligence as prescribed by Articles 1733,[10] 1755 and 1756 of the Civil Code or that the death or injury of
the passenger was due to a fortuitous event.[11] Consequently, the court need not make an express finding of fault or
negligence on the part of the carrier to hold it responsible for damages sought by the passenger.[12]
 In view of the foregoing, petitioners contention that they should be exempt from liability because the tire blowout SO ORDERED.
was no more than a fortuitous event that could not have been foreseen, must fail. A fortuitous event is possessed of the
following characteristics: (a) the cause of the unforeseen and unexpected occurrence, or the failure of the debtor to Narvasa, C.J., (Chairman), Melo, Francisco, and Panganiban, JJ., concur.
comply with his obligations, must be independent of human will; (b) it must be impossible to foresee the event which
constitutes the caso fortuito, or if it can be foreseen, it must be impossible to avoid; (c) the occurrence must be such as
to render it impossible for the debtor to fulfill his obligation in a normal manner; and (d) the obligor must be free from
any participation in the aggravation of the injury resulting to the creditor.[13] As Article 1174 provides, no person shall be [1]
Record, pp. 77-78.
responsible for a fortuitous event which could not be foreseen, or which, though foreseen, was inevitable. In other words,
there must be an entire exclusion of human agency from the cause of injury or loss.[14] [2]
Penned by Judge William M. Layague.

Under the circumstances of this case, the explosion of the new tire may not be considered a fortuitous [3]
123 Phil. 875 (1966).
event. There are human factors involved in the situation. The fact that the tire was new did not imply that it was entirely [4]
Art. 1174. Except in cases expressly specified by the law, or when it is otherwise declared by stipulation, or when the nature of the obligation requires the assumption
free from manufacturing defects or that it was properly mounted on the vehicle. Neither may the fact that the tire bought of risk, no person shall be responsible for those events which could not be foreseen, or which, though foreseen, were inevitable.
and used in the vehicle is of a brand name noted for quality, resulting in the conclusion that it could not explode within
[5]
five days use. Be that as it may, it is settled that an accident caused either by defects in the automobile or through the L-45637, May 31, 1985, 136 SCRA 624.
negligence of its driver is not a caso fortuito that would exempt the carrier from liability for damages.[15] [6]
104 Phil. 75 (1958).

Moreover, a common carrier may not be absolved from liability in case of force majeure or fortuitous event [7]
Penned by Associate Justice Minerva P. Gonzaga-Reyes and concurred in by Associate Justices Vicente V. Mendoza and Pacita Caizares-Nye.
alone. The common carrier must still prove that it was not negligent in causing the death or injury resulting from an
[8]
accident.[16] This Court has had occasion to state: Philippine Rabbit Bus Lines, Inc. v. IAC, G.R. Nos. 66102-04, August 30, 1990, 189 SCRA 158, 159.

[9]
TOLENTINO, CIVIL CODE OF THE PHILIPPINES, Vol. V, 1992 ed., p. 312.

While it may be true that the tire that blew-up was still good because the grooves of the tire were still visible, this fact alone does
not make the explosion of the tire a fortuitous event. No evidence was presented to show that the accident was due to adverse road
conditions or that precautions were taken by the jeepney driver to compensate for any conditions liable to cause accidents. The
sudden blowing-up, therefore, could have been caused by too much air pressure injected into the tire coupled by the fact that the
jeepney was overloaded and speeding at the time of the accident. [17]
[10]
Art. 1733. Common carriers, from the nature of their business and for reasons of public policy, are bound to observe extraordinary diligence in the vigilance over the
goods and for the safety of the passengers transported by them, according to all the circumstances of each case.
Such extraordinary diligence in the vigilance over the goods is further expressed in articles 1734, 1735, and 1745, Nos. 5, 6, and 7, while the extraordinary diligence for
the safety of the passengers is further set forth in articles 1755 and 1756.
[11]
Phil. Rabbit Bus Lines, Inc. vs. IAC, supra, at pp. 171-172 citing Lasam v. Smith, Jr., 45 Phil. 657 (1924).

[12]
It is interesting to note that petitioners proved through the bus conductor, Salce, that the bus was running at 60- Batangas Trans. Co. v. Caguimbal, 130 Phil. 166, 171 (1968) citing Brito Sy v. Malate Taxicab & Garage, Inc., 102 Phil. 482 (1957).

50 kilometers per hour only or within the prescribed lawful speed limit. However, they failed to rebut the testimony of [13]
Metal Forming Corp. v. Office of the President, 317 Phil. 853, 859 (1995); Vasquez v. Court of Appeals, L-42926, September 13, 1985, 138 SCRA 553, 557 citing
Leny Tumboy that the bus was running so fast that she cautioned the driver to slow down. These contradictory facts Lasam v. Smith, supra at p. 661 and Austria v. Court of Appeals, 148-A Phil. 462 (1971); Estrada v. Consolacion, L-40948, June 29, 1976, 71 SCRA 523,530; Republic
must, therefore, be resolved in favor of liability in view of the presumption of negligence of the carrier in the law. Coupled of the Phil. v. Luzon Stevedoring Corporation, 128 Phil. 313 (1967).
with this is the established condition of the road rough, winding and wet due to the rain. It was incumbent upon the [14]
Vasquez v. Court of Appeals, supra, at p. 557.
defense to establish that it took precautionary measures considering partially dangerous condition of the road. As stated
above, proof that the tire was new and of good quality is not sufficient proof that it was not negligent. Petitioners should [15]
Son v. Cebu Autobus Co., 94 Phil. 893, 896 (1954) citing Lasam v. Smith, supra.
have shown that it undertook extraordinary diligence in the care of its carrier, such as conducting daily routinary check- [16]
Bachelor Express, Inc. v. Court of Appeals, G.R. No. 85691, July 31, 1990, 188 SCRA 216, 222-223.
ups of the vehicles parts. As the late Justice J.B.L. Reyes said:
[17]
Juntilla v. Fontanar, supra, at p. 630.

It may be impracticable, as appellee argues, to require of carriers to test the strength of each and every part of its vehicles before [18]
Necesito v. Paras, supra at p. 82.
each trip; but we are of the opinion that a due regard for the carriers obligations toward the traveling public demands adequate
[19]
Art. 1764. Damages in cases comprised in this Section shall be awarded in accordance with Title XVIII of this Book, concerning Damages. Article 2206 shall also
periodical tests to determine the condition and strength of those vehicle portions the failure of which may endanger the safety of apply to the death of a passenger caused by the breach of contract by a common carrier.
the passengers.[18]
[20]
Art. 2206. The amount of damages for death caused by a crime or quasi-delict shall be at least three thousand pesos, even though there may have been mitigating
circumstances. x x x.
Having failed to discharge its duty to overthrow the presumption of negligence with clear and convincing evidence, [21]
Sulpicio Lines, Inc. v. Court of Appeals, 316 Phil. 455, 460 (1995) citing People v. Flores, G.R. Nos. 103801-02, October 19, 1994, 237 SCRA 653.
petitioners are hereby held liable for damages. Article 1764[19] in relation to Article 2206[20] of the Civil Code prescribes
the amount of at least three thousand pesos as damages for the death of a passenger. Under prevailing jurisprudence, [22]
Sulpicio Lines, Inc. v. Court of Appeals, supra at pp. 460-461 citing Trans World Air Lines v. Court of Appeals, G.R. No. 78656, August 30, 1988, 165 SCRA 143;
the award of damages under Article 2206 has been increased to fifty thousand pesos (P50,000.00).[21] Philippine Rabbit Bus Lines, Inc. v. Esguerra, 203 Phil. 107 (1982) and Vasquez v. Court of Appeals, supra.

[23]
Art. 2229, Civil Code.
Moral damages are generally not recoverable in culpa contractual except when bad faith had been
proven. However, the same damages may be recovered when breach of contract of carriage results in the death of a [24]
Art. 2232, supra.
passenger,[22] as in this case. Exemplary damages, awarded by way of example or correction for the public good when
moral damages are awarded,[23]may likewise be recovered in contractual obligations if the defendant acted in wanton, [25]
Sulpicio Lines, Inc. v. Court of Appeals, supra at p. 461.
fraudulent, reckless, oppressive, or malevolent manner.[24] Because petitioners failed to exercise the extraordinary
diligence required of a common carrier, which resulted in the death of Tito Tumboy, it is deemed to have acted
recklessly.[25] As such, private respondents shall be entitled to exemplary damages.

WHEREFORE, the Decision of the Court of Appeals is hereby AFFIRMED subject to the modification that
petitioners shall, in addition to the monetary awards therein, be liable for the award of exemplary damages in the amount
of P20,000.00. Costs against petitioners.
 Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-45637 May 31, 1985
ROBERTO JUNTILLA, petitioner,
vs.
CLEMENTE FONTANAR, FERNANDO BANZON and BERFOL CAMORO, respondents.
Valentin A. Zozobrado for petitioner.
Ruperto N. Alfarara for respondents.
GUTIERREZ, JR., J.:
This is a petition for review, on questions of law, of the decision of the Court of First Instance of Cebu which reversed
the decision of the City Court of Cebu and exonerated the respondents from any liability arising from a vehicular
accident.
The background facts which led to the filing of a complaint for breach of contract and damages against the
respondents are summarized by the Court of First Instance of Cebu as follows:
The facts established after trial show that the plaintiff was a passenger of the public utility
jeepney bearing plate No. PUJ-71-7 on the course of the trip from Danao City to Cebu City.
The jeepney was driven by defendant Berfol Camoro. It was registered under the franchise of
defendant Clemente Fontanar but was actually owned by defendant Fernando Banzon. When
the jeepney reached Mandaue City, the right rear tire exploded causing the vehicle to turn
turtle. In the process, the plaintiff who was sitting at the front seat was thrown out of the
vehicle. Upon landing on the ground, the plaintiff momentarily lost consciousness. When he
came to his senses, he found that he had a lacerated wound on his right palm. Aside from this,
he suffered injuries on his left arm, right thigh and on his back. (Exh. "D"). Because of his
shock and injuries, he went back to Danao City but on the way, he discovered that his "Omega"
wrist watch was lost. Upon his arrival in Danao City, he immediately entered the Danao City
Hospital to attend to his injuries, and also requested his father-in-law to proceed immediately to
the place of the accident and look for the watch. In spite of the efforts of his father-in-law, the
wrist watch, which he bought for P 852.70 (Exh. "B") could no longer be found.
xxx xxx xxx
Petitioner Roberto Juntilla filed Civil Case No. R-17378 for breach of contract with damages before the City Court of
Cebu City, Branch I against Clemente Fontanar, Fernando Banzon and Berfol Camoro.
The respondents filed their answer, alleging inter alia that the accident that caused losses to the petitioner was beyond
the control of the respondents taking into account that the tire that exploded was newly bought and was only slightly
used at the time it blew up.
After trial, Judge Romulo R. Senining of the Civil Court of Cebu rendered judgment in favor of the petitioner and
against the respondents. The dispositive portion of the decision reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendants
and the latter are hereby ordered, jointly and severally, to pay the plaintiff the sum of P750.00
as reimbursement for the lost Omega wrist watch, the sum of P246.64 as unrealized salary of
the plaintiff from his employer, the further sum of P100.00 for the doctor's fees and medicine,
an additional sum of P300.00 for attorney's fees and the costs.
The respondents appealed to the Court of First Instance of Cebu, Branch XIV.
Judge Leonardo B. Canares reversed the judgment of the City Court of Cebu upon a finding that the accident in
question was due to a fortuitous event. The dispositive portion of the decision reads:
WHEREFORE, judgment is hereby rendered exonerating the defendants from any liability to
the plaintiff without pronouncement as to costs.
A motion for reconsideration was denied by the Court of First Instance.
The petitioner raises the following alleged errors committed by the Court of First Instance of Cebu on appeal—
a. The Honorable Court below committed grave abuse of discretion in failing to take
cognizance of the fact that defendants and/or their employee failed to exercise "utmost and/or
extraordinary diligence" required of common carriers contemplated under Art. 1755 of the Civil
Code of the Philippines.
b. The Honorable Court below committed grave abuse of discretion by deciding the case
contrary to the doctrine laid down by the Honorable Supreme Court in the case of Necesito et
al. v. Paras, et al.
We find the petition impressed with merit.
The City Court and the Court of First Instance of Cebu found that the right rear tire of the passenger jeepney in which
the petitioner was riding blew up causing the vehicle to fall on its side. The petitioner questions the conclusion of the
respondent court drawn from this finding of fact.
The Court of First Instance of Cebu erred when it absolved the carrier from any liability upon a finding that the tire blow
out is a fortuitous event. The Court of First Instance of Cebu ruled that:
After reviewing the records of the case, this Court finds that the accident in question was due to
a fortuitous event. A tire blow-out, such as what happened in the case at bar, is an inevitable
accident that exempts the carrier from liability, there being absence of a showing that there was
misconduct or negligence on the part of the operator in the operation and maintenance of the
vehicle involved. The fact that the right rear tire exploded, despite being brand new, constitutes
a clear case of caso fortuito which can be a proper basis for exonerating the defendants from
liability. ...
The Court of First Instance relied on the ruling of the Court of Appeals in Rodriguez v. Red Line Transportation
Co., CA G.R. No. 8136, December 29, 1954, where the Court of Appeals ruled that:
A tire blow-out does not constitute negligence unless the tire was already old and should not
have been used at all. Indeed, this would be a clear case of fortuitous event.
The foregoing conclusions of the Court of First Instance of Cebu are based on a misapprehension of overall facts from
which a conclusion should be drawn. The reliance of the Court of First Instance on the Rodriguez case is not in order.
In La Mallorca and Pampanga Bus Co. v. De Jesus, et al. (17 SCRA 23), we held that:
Petitioner maintains that a tire blow-out is a fortuitous event and gives rise to no liability for
negligence, citing the rulings of the Court of Appeals in Rodriguez v. Red Line Transportation
Co., CA G.R. No. 8136, December 29, 1954, and People v. Palapad, CA-G.R. No. 18480, June
27, 1958. These rulings, however, not only are not binding on this Court but were based on
considerations quite different from those that obtain in the case at bar. The appellate court
there made no findings of any specific acts of negligence on the part of the defendants and
 confined itself to the question of whether or not a tire blow-out, by itself alone and without a
showing as to the causative factors, would generate liability. ...
In the case at bar, there are specific acts of negligence on the part of the respondents. The records show that the
passenger jeepney turned turtle and jumped into a ditch immediately after its right rear tire exploded. The evidence
shows that the passenger jeepney was running at a very fast speed before the accident. We agree with the
observation of the petitioner that a public utility jeep running at a regular and safe speed will not jump into a ditch when
its right rear tire blows up. There is also evidence to show that the passenger jeepney was overloaded at the time of
the accident. The petitioner stated that there were three (3) passengers in the front seat and fourteen (14) passengers
in the rear.
It is sufficient to reiterate that the source of a common carrier's legal liability is the contract of carriage, and by entering
into the said contract, it binds itself to carry the passengers safely as far as human care and foresight can provide,
using the utmost diligence of a very cautious person, with a due regard for all the circumstances. The records show
that this obligation was not met by the respondents.
The respondents likewise argue that the petitioner cannot recover any amount for failure to prove such damages
during the trial. The respondents submit that if the petitioner was really injured, why was he treated in Danao City and
not in Mandaue City where the accident took place. The respondents argue that the doctor who issued the medical
certificate was not presented during the trial, and hence not cross-examined. The respondents also claim that the
petitioner was not wearing any wrist watch during the accident.

While it may be true that the tire that blew-up was still good because the grooves of the tire were still visible, this fact
alone does not make the explosion of the tire a fortuitous event. No evidence was presented to show that the accident
was due to adverse road conditions or that precautions were taken by the jeepney driver to compensate for any
conditions liable to cause accidents. The sudden blowing-up, therefore, could have been caused by too much air
pressure injected into the tire coupled by the fact that the jeepney was overloaded and speeding at the time of the
accident.
It should be noted that the City Court of Cebu found that the petitioner had a lacerated wound on his right palm aside
from injuries on his left arm, right thigh and on his back, and that on his way back to Danao City, he discovered that his
"Omega" wrist watch was lost. These are findings of facts of the City Court of Cebu which we find no reason to disturb.
More so when we consider the fact that the Court of First Instance of Cebu impliedly concurred in these matters when
it confined itself to the question of whether or not the tire blow out was a fortuitous event.

WHEREFORE, the decision of the Court of First Instance of Cebu, Branch IV appealed from is hereby REVERSED
In Lasam v. Smith (45 Phil. 657), we laid down the following essential characteristics of caso fortuito: and SET ASIDE, and the decision of the City Court of Cebu, Branch I is REINSTATED, with the modification that the
damages shall earn interest at 12% per annum and the attorney's fees are increased to SIX HUNDRED PESOS
(P600.00). Damages shall earn interests from January 27, 1975.
xxx xxx xxx

SO ORDERED.
... In a legal sense and, consequently, also in relation to contracts, a caso fortuito presents the
following essential characteristics: (1) The cause of the unforeseen and unexpected
occurrence, or of the failure of the debtor to comply with his obligation, must be independent of Teehankee (Chairman), Melencio-Herrera, Plana, Relova, De la Fuente and Alampay, JJ., concur.
the human will. (2) It must be impossible to foresee the event which constitutes the caso
fortuito, or if it can be foreseen, it must be impossible to avoid. (3) The occurrence must be
such as to render it impossible for the debtor to fulfill his obligation in a normal manner. And (4)
the obligor (debtor) must be free from any participation in the aggravation of the injury resulting
to the creditor. (5 Encyclopedia Juridica Espanola, 309.)

In the case at bar, the cause of the unforeseen and unexpected occurrence was not independent of the human will.
The accident was caused either through the negligence of the driver or because of mechanical defects in the tire.
Common carriers should teach their drivers not to overload their vehicles, not to exceed safe and legal speed limits,
and to know the correct measures to take when a tire blows up thus insuring the safety of passengers at all times.
Relative to the contingency of mechanical defects, we held in Necesito, et al. v. Paras, et al. (104 Phil. 75), that:

... The preponderance of authority is in favor of the doctrine that a passenger is entitled to
recover damages from a carrier for an injury resulting from a defect in an appliance purchased
from a manufacturer, whenever it appears that the defect would have been discovered by the
carrier if it had exercised the degree of care which under the circumstances was incumbent
upon it, with regard to inspection and application of the necessary tests. For the purposes of
this doctrine, the manufacturer is considered as being in law the agent or servant of the carrier,
as far as regards the work of constructing the appliance. According to this theory, the good
repute of the manufacturer will not relieve the carrier from liability' (10 Am. Jur. 205, s, 1324;
see also Pennsylvania R. Co. v. Roy, 102 U.S. 451; 20 L. Ed. 141; Southern R. Co. v. Hussey,
74 ALR 1172; 42 Fed. 2d 70; and Ed Note, 29 ALR 788.: Ann. Cas. 1916E 929).

The rationale of the carrier's liability is the fact that the passenger has neither choice nor
control over the carrier in the selection and use of the equipment and appliances in use by the
carrier. Having no privity whatever with the manufacturer or vendor of the defective equipment,
the passenger has no remedy against him, while the carrier usually has. It is but logical,
therefore, that the carrier, while not an insurer of the safety of his passengers, should
nevertheless be held to answer for the flaws of his equipment if such flaws were at all
discoverable. ...
 THIRD DIVISION
PERLA COMPANIA DE SEGUROS, G.R. No. 147746
INC. and BIENVENIDO S. PASCUAL,
Petitioners, Present :
PANGANIBAN, J., Chairman,
SANDOVAL-GUTIERREZ,
- versus - CORONA,
CARPIO MORALES and
GARCIA, JJ.
SPS. GAUDENCIO SARANGAYA III
and PRIMITIVA B. SARANGAYA,
Respondents.
Promulgated : October 25, 2005
x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x
DECISION
CORONA, J.:
This is an appeal by certiorari under Rule 45 of the 1997 Rules of Civil Procedure seeking to annul
the decisions of the Court of Appeals (CA) dated June 29, 2000 and March 31, 2001, respectively, which
affirmed the decision of the Regional Trial Court (RTC), Branch 21 of Santiago, Isabela.
In 1986, respondent spouses Gaudencio Sarangaya III and Primitiva Sarangaya erected a semi-
concrete, semi-narra, one-storey commercial building fronting the provincial road of Santiago, Isabela. The
building was known as Super A Building and was subdivided into three doors, each of which was leased
out. The two-storey residence of the Sarangayas was behind the second and third doors of the building. On
the left side of the commercial building stood the office of the Matsushita Electric Philippine Corporation
(Matsushita).
In 1988, petitioner Perla Compania de Seguros, Inc. (petitioner-corporation), through its branch
manager and co-petitioner Bienvenido Pascual, entered into a contract of lease of the first door of the Super
A Building, abutting the office of Matsushita. Petitioner-corporation renovated its rented space and divided
it into two. The left side was converted into an office while the right was used by Pascual as a garage for a
1981 model 4-door Ford Cortina, a company-provided vehicle he used in covering the different towns within
his area of supervision.
On July 7, 1988, Pascual left for San Fernando, Pampanga but did not bring the car with him.
Three days later, he returned to Santiago and, after checking his appointments the next day, decided to
warm up the car. When he pulled up the handbrake and switched on the ignition key, the engine made an
odd sound and did not start. Thinking it was just the gasoline percolating into the engine, he again stepped
on the accelerator and started the car. This revved the engine but petitioner again heard an unusual sound.
He then saw a small flame coming out of the engine. Startled, he turned it off, alighted from the vehicle and
started to push it out of the garage when suddenly, fire spewed out of its rear compartment and engulfed
the whole garage. Pascual was trapped inside and suffered burns on his face, legs and arms.
Meanwhile, respondents were busy watching television when they heard two loud explosions. The
smell of gasoline permeated the air and, in no time, fire spread inside their house, destroying all their
belongings, furniture and appliances.
The city fire marshall conducted an investigation and thereafter submitted a report to the
provincial fire marshall. He concluded that the fire was accidental. The report also disclosed that petitioner-
corporation had no fire permit as required by law.
Based on the same report, a criminal complaint for Reckless Imprudence Resulting to (sic) Damage
in (sic) Property[1] was filed against petitioner Pascual. On the other hand, petitioner-corporation was asked
to pay the amount of P7,992,350, inclusive of the value of the commercial building. At the prosecutors office,
petitioner Pascual moved for the withdrawal of the complaint, which was granted.
Respondents later on filed a civil complaint based on quasi-delict against petitioners for a sum of
money and damages, alleging that Pascual acted with gross negligence while petitioner-corporation lacked
the required diligence in the selection and supervision of Pascual as its employee. They prayed for payment
of the following damages:
1. P2,070,000.00 - representing the value of the 2-storey residential building and the 3-door
apartment;
2. P5,922,350.00 - representing the value of the jewelries, appliances, [furniture], fixtures and
cash;
3. P8,300.00 a month for [lost rental] income from July 1995 until such time that the premises
is restored to its former condition or payment for its value, whichever comes first;
4. P2,000,000.00 for moral damages;
5. P1,000,000.00 for exemplary damages, and
6. Attorneys fees equivalent to 15% of the total amount to be awarded to the plaintiffs.[2]
During the trial, respondents presented witnesses who testified that a few days before the
incident, Pascual was seen buying gasoline in a container from a nearby gas station. He then placed the
container in the rear compartment of the car.
In his answer, Pascual insisted that the fire was purely an accident, a caso fortuito, hence, he was
not liable for damages. He also denied putting a container of gasoline in the cars rear compartment. For its
part, petitioner-corporation refused liability for the accident on the ground that it exercised due diligence of
a good father of a family in the selection and supervision of Pascual as its branch manager.
After the trial, the court a quo ruled in favor of respondents. The decretal portion of the decision
read:
WHEREFORE, in the light of the foregoing considerations judgment is hereby
rendered ORDERING the defendants, Bienvenido Pascual and Perla Compania de Seguros,
Inc. to pay jointly and solidarily to the plaintiffs spouses Gaudencio and Primitiva Sarangaya
the total sum of Two Million Nine Hundred Four Thousand Eight Hundred and Eighty Pesos
([P]2,904,880.00) as actual damages with legal interest thereon from December 12, 1995 until
fully paid.[3] (emphasis supplied)
The court a quo declared that, although the respondents failed to prove the precise cause of the
fire that engulfed the garage, Pascual was nevertheless negligent based on the doctrine of res ipsa
loquitur. It did not, however, categorically rule that the gasoline container allegedly placed in the rear
[4]
compartment of the car caused the fire. The trial court instead declared that both petitioners failed to adduce
sufficient evidence to prove that they employed the necessary care and diligence in the upkeep of the
car.[5] Contrary to the claims of petitioner-corporation, the trial court also found that it failed to employ the
diligence of a good father of a family, as required by law, in the selection and supervision of Pascual.
With respect to the amount of damages, the trial court awarded to respondents no more than
their claim for actual damages covering the cost of the 2-storey residential building and the commercial
building, including their personal properties. It explained:
According to the plaintiff Gaudencio Sarangaya III, he made a list of what was lost.
His list includes the commercial building that was burned which he valued at P2,070,000.00. The
 defendants take exception to the value given by the plaintiff and for this purpose they submitted
the tax declaration of the building which states that the market value is P183,770.00. The Court
takes judicial notice that the valuation appearing on the tax declaration of property is always
lower [than] the correct value thereof. Considering that the building that was burned was a two-
storey residential house with a commercial building annex with a total floor area of 241 square
meters as stated in the tax declaration, mostly concrete mixed with narra and other lumber
materials, the value given by the plaintiffs of P2,070,000.00 is reasonable and credible and it
shall be awarded to the plaintiffs.
The other items listed are assorted [furniture] and fixtures totaling P307,000.00
assorted appliances worth P358,350.00; two filing cabinets worth P7,000.00 and clothing and
other personal effects costing P350,000.00, household utensils costing P15,000.00. The Court
finds them reasonable and credible considering the social and financial stature of the plaintiffs
who are businessmen. There could be no question that they were able to acquire and own quite
a lot of home furnishings and personal belongings. The costing however is high considering that
these belongings were already used for quite some time so a 20% depreciation should be
equitably deducted from the cost of acquisition submitted by plaintiffs. Thus, the total amount
recoverable would be P1,037,350.00 less 20% or a total of P829,880.00. The P5,000.00
representing foodstock can also be ordered paid to the plaintiffs. x x x.[6]
On appeal to the Court of Appeals, the appellate court again ruled in favor of respondents but modified the
amount of damages awarded by the trial court. It held:
x x x the Decision of the Court a quo is AFFIRMED, with the modification that the Appellants are
hereby ordered to pay the Appellees, jointly and severally, the total amount ofP600,000.00 by
way of nominal damages under Articles 2222 and 2223 of the New Civil Code, with interest
thereon, at the rate of 6% per annum from the date of the Decision of this Court.[7]
The appellate court was in accord with the trial courts findings that the doctrine of res ipsa
loquitur was correctly applied in determining the liability of Pascual and that petitioner-corporation, as the
employer, was vicariously liable to respondents. Nonetheless, for respondents failure to substantiate their
actual loss, the appellate court granted nominal damages of P600,000 to them.
Petitioners and respondents filed their respective motions for reconsideration.
In their MR, petitioners contested the findings of fact of the appellate court. They denied any
liability whatsoever to respondents but this was rejected by the CA for lack of merit. Thus, the present
appeal.
Respondents, on the other hand, argued in their MR that the award of nominal damages was
erroneous. They prayed that, in lieu of the award of nominal damages, the case should instead be remanded
to the trial court for reception of additional evidence on their claim for actual damages. The CA granted
respondents MR. Hence they did not appeal the CAs decision to us. According to the CA:
Anent Plaintiffs-Appellees plea that, in lieu of the Courts award of nominal damages,
the case be remanded to the Court a quo, in the interest of justice, to enable them to adduce
evidence to prove their claim for actual damages, we find the same meritorious.
Accordingly, the Decision of the Court is hereby amended to read as follows:
IN THE LIGHT OF ALL THE FOREGOING, the Decision of the Court a quo appealed
from is AFFIRMED. The award of nominal damages is set aside. Let the records be
remanded to the Court a quo for the reception of additional evidence by the Plaintiffs-
Appellees and the Defendants-Appellants anent Plaintiffs-Appellees claim for actual
damages.[8] (emphasis supplied)
Via this petition, petitioners ascribe the following errors to the appellate court:
(a) THE COURT OF APPEALS ERRED IN APPLYING THE DOCTRINE OF [RES IPSA
LOQUITUR] IN THE PRESENT CASE;
(b) THE COURT OF APPEALS ERRED WHEN IT FOUND PERLA NEGLIGENT IN THE
SUPERVISION OF PASCUAL, AND CONSEQUENTLY, VICARIOUSLY LIABLE
FOR THE FIRE BECAUSE PERLA FAILED TO ADDUCE EVIDENCE OF
SUPERVISION OF EMPLOYEES CARE AND UPKEEP OF COMPANY VEHICLES
REQUIRED BY THE SUPREME COURT ON TRANSPORTATION COMPANIES;
AND
(c) THE COURT OF APPEALS ERRED WHEN IT ORDERED THE REMAND OF THE CASE
TO RTC ISABELA FOR RECEPTION OF ADDITIONAL EVIDENCE BY THE
SARANGAYA SPOUSES ON THEIR CLAIM FOR ACTUAL DAMAGES.[9]
Res ipsa loquitur is a Latin phrase which literally means the thing or the transaction speaks for
itself.[10] It relates to the fact of an injury that sets out an inference to the cause thereof or establishes the
plaintiffs prima facie case.[11] The doctrine rests on inference and not on presumption. [12] The facts of the
occurrence warrant the supposition of negligence and they furnish circumstantial evidence of negligence
when direct evidence is lacking.[13]
The doctrine is based on the theory that the defendant either knows the cause of the accident or
has the best opportunity of ascertaining it and the plaintiff, having no knowledge thereof, is compelled to
allege negligence in general terms.[14] In such instance, the plaintiff relies on proof of the happening of the
accident alone to establish negligence. [15]
The doctrine provides a means by which a plaintiff can pin liability on a defendant who, if
innocent, should be able to explain the care he exercised to prevent the incident complained of. Thus, it is
the defendants responsibility to show that there was no negligence on his part. [16]
To sustain the allegation of negligence based on the doctrine of res ipsa loquitur, the following
requisites must concur:
1) the accident is of a kind which does not ordinarily occur unless someone is
negligent;
2) the cause of the injury was under the exclusive control of the person in charge
and
3) the injury suffered must not have been due to any voluntary action or contribution
on the part of the person injured.[17]
Under the first requisite, the occurrence must be one that does not ordinarily occur unless there
is negligence. Ordinary refers to the usual course of events. [18] Flames spewing out of a car engine, when it
is switched on, is obviously not a normal event. Neither does an explosion usually occur when a car engine
is revved. Hence, in this case, without any direct evidence as to the cause of the accident, the doctrine of res
ipsa loquitur comes into play and, from it, we draw the inference that based on the evidence at hand, someone
was in fact negligent and responsible for the accident.
The test to determine the existence of negligence in a particular case may be stated as follows:
did the defendant in committing the alleged negligent act, use reasonable care and caution which an
ordinarily prudent person in the same situation would have employed? [19] If not, then he is guilty of
negligence.
Here, the fact that Pascual, as the caretaker of the car, failed to submit any proof that he had it
periodically checked (as its year-model and condition required) revealed his negligence. A prudent man
should have known that a 14-year-old car, constantly used in provincial trips, was definitely prone to damage
and other defects. For failing to prove care and diligence in the maintenance of the vehicle, the necessary
inference was that Pascual had been negligent in the upkeep of the car.

Pascual attempted to exculpate himself from liability by insisting that the incident was a caso
fortuito. We disagree.
The exempting circumstance of caso fortuito may be availed only when: (a) the cause of the
unforeseen and unexpected occurrence was independent of the human will; (b) it was impossible to foresee
the event which constituted the caso fortuito or, if it could be foreseen, it was impossible to avoid; (c) the
occurrence must be such as to render it impossible to perform an obligation in a normal manner and (d) the
person tasked to perform the obligation must not have participated in any course of conduct that aggravated
the accident.[20]
Petitioner-corporations argument that the liability attached to employers only applies in cases
involving the supervision of employees in the transportation business is incorrect. Article 2180 of the Civil
Code states that employers shall be liable for the damage caused by their employees. The liability is imposed
on all those who by their industry, profession or other enterprise have other persons in their service or
supervision.[28] Nowhere does it state that the liability is limited to employers in the transportation business.
WHEREFORE, the petition is hereby DENIED and the
decision[29] of the Court of Appeals affirmed in toto.
Costs against petitioners.

In fine, human agency must be entirely excluded as the proximate cause or contributory cause
of the injury or loss.[21] In a vehicular accident, for example, a mechanical defect will not release the
defendant from liability if it is shown that the accident could have been prevented had he properly SO ORDERED.
maintained and taken good care of the vehicle. [22]

The circumstances on record do not support the defense of Pascual. Clearly, there was no caso [1]
Rollo, p. 132.
fortuito because of his want of care and prudence in maintaining the car.
[2]
Rollo, p. 773.
[3]
Penned by Judge Fe Albano Madrid, Rollo, p. 397.
[4]
Rollo, pp. 9-10.
Under the second requisite, the instrumentality or agency that triggered the occurrence must be [5]
[6]
Id.
one that falls under the exclusive control of the person in charge thereof. In this case, the car where the fire [7]
Rollo, p. 554.
Penned by Justice Romeo J. Callejo, Sr. (now Associate Justice of the Supreme Court), and concurred in by Justices Salome A. Montoya and Martin S. Villarama, Jr. of the First
originated was under the control of Pascual. Being its caretaker, he alone had the responsibility to maintain Division, Rollo, pp. 11-48.
it and ensure its proper functioning. No other person, not even the respondents, was charged with that
[8]
Rollo, pp. 60-61.
[9]
Rollo, p. 722
obligation except him. [10]
Ramos v. Court of Appeals et al., 378 Phil. 1198 (1999).
[11]
Id.
[12]
Risberg v. Duluth, 47 Northeastern Reporter, 2nd, 113.
Where the circumstances which caused the accident are shown to have been under the [13]
Sweeney v. Erving, 57 L.Ed. 815, cited in Gray v. Baltimore, Federal Reporter, 2nd, 671.
management or control of a certain person and, in the normal course of events, the incident would not have [14]
57B Am Jur 2d, Negligence 1819
[15]
happened had that person used proper care, the inference is that it occurred because of lack of such [16]
Id.
Id.
care.[23] The burden of evidence is thus shifted to defendant to establish that he observed all that was [17]
Reyes v. Sisters of Mercy Hospital, G.R. No. 130547, 3 October 2000, 341 SCRA 760.
necessary to prevent the accident from happening. In this aspect, Pascual utterly failed.
[18]
Webster Third New International Dictionary.
[19]
Picart v. Smith, 37 Phil. 809 (1918).
[20]
Yobido v. Court of Appeals, 346 Phil. 1 (1997).
Under the third requisite, there is nothing in the records to show that respondents contributed [21]
[22]
Vasquez v. Court of Appeals, No. L-42926, 13 September 1985, 138 SCRA 553.
Supra.
to the incident. They had no access to the car and had no responsibility regarding its maintenance even if it [23]
Africa, et al. v. Caltex (Phils.) Inc., et al. 123 Phil. 272 (1966).
was parked in a building they owned. [24]
Article 2180, Civil Code of the Philippines.
[25]
Metro Manila Transit Corp. v. CA, 359 Phil. 18 (1998).
[26]
Id.
On the second assigned error, we find no reason to reverse the decision of the Court of Appeals. [27]
Id.
The relationship between the two petitioners was based on the principle of pater familias according to which
[28]
Arturo Tolentino, Civil Code of the Philippines, Annotated, Vol. V, p. 615.
[29]
If judgment is not rendered upon the whole case, or for all the relief asked and a trial is necessary, remanding the case to the trial court for further determination of claims for damages
the employer becomes liable to the party aggrieved by its employee if he fails to prove due diligence of a good is not reversible error (Ramos v. Court of Appeals, 4 December 1989, 179 SCRA 719); see also Marmont Resort Hotel v. Guiange, G.R. No. L-79734, 8 December
father of a family in the selection and supervision of his employees.[24] The burden of proof that such diligence 1988, 168 SCRA 373.
was observed devolves on the employer who formulated the rules and procedures for the selection and hiring
of his employees.

In the selection of prospective employees, employers are required to examine them as to their
qualifications, experience and service records. [25] While the petitioner-corporation does not appear to have
erred in considering Pascual for his position, its lack of supervision over him made it jointly and solidarily
liable for the fire.

In the supervision of employees, the employer must formulate standard operating procedures,
monitor their implementation and impose disciplinary measures for the breach thereof. [26] To fend off
vicarious liability, employers must submit concrete proof, including documentary evidence, that they
complied with everything that was incumbent on them. [27] Here, petitioner-corporations evidence hardly
included any rule or regulation that Pascual should have observed in performing his functions. It also did
not have any guidelines for the maintenance and upkeep of company property like the vehicle that caught
fire. Petitioner-corporation did not require periodic reports on or inventories of its properties either. Based
on these circumstances, petitioner-corporation clearly did not exert effort to be apprised of the condition of
Pascuals car or its serviceability.
 SECOND DIVISION 09 August 1999 (the date the respondent received the demand letter) until the same is fully
paid.
FIL-ESTATE PROPERTIES, INC., G.R. No. 165164
Petitioner,
2. Ordering the respondent to pay to the complainants P25,000.00 attorneys fees as and by way
Present:
of damages.
QUISUMBING, J., Chairperson,
CARPIO, All other claims and counterclaims are dismissed.
- versus - CARPIO MORALES,
TINGA, and
IT IS SO ORDERED.[5]
VELASCO, JR., JJ.

SPOUSES GONZALO and CONSUELO GO, Promulgated:

Respondents.
The Board of Commissioners of the HLURB denied petitioners petition for review and consequent motion for
August 17, 2007
reconsideration.[6] The Office of the President dismissed petitioners appeal and denied its motion for reconsideration. [7]
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

RESOLUTION On appeal, asserting that both the HLURB and the Office of the President committed reversible errors, Fil-Estate asked
the Court of Appeals to set aside the orders it is appealing.
QUISUMBING, J.:

For review on certiorari are the Decision[1] dated June 9, 2004 of the Court of Appeals in CA-G.R. SP No. 79624, and
its Resolution[2] dated August 3, 2004, denying the motion for reconsideration.
The Court of Appeals affirmed the actions taken by the HLURB and the Office of the President and declared that the
Asian financial crisis could not be considered a fortuitous event and that respondents right is provided for in Section 23[8] of
Presidential Decree (P.D.) No. 957, otherwise known as The Subdivision and Condominium Buyers Protective Decree. The appellate
court also noted that there was yet no crisis in 1995 and 1996 when the project should have been started, and petitioner cannot blame
the 1997 crisis for failure of the project, nor for even not starting it, because the project should have been completed by 1997.

The basic facts in this case are undisputed.

The appellate court denied petitioners motion for reconsideration.

On December 29, 1995, petitioner Fil-Estate Properties, Inc. (Fil-Estate) entered into a contract to sell a condominium unit to
respondent spouses Gonzalo and Consuelo Go at Eight Sto. Domingo Place, a condominium project of petitioner located on Sto. Domingo Hence, this petition raising two issues for our resolution as follows:
Avenue, Quezon City. The spouses paid a total of P3,439,000.07 of the full contract price set at P3,620,000.00.

Because petitioner failed to develop the condominium project, on August 4, 1999, the spouses demanded the refund of I.
the amount they paid, plus interest. When petitioner did not refund the spouses, the latter filed a complaint against petitioner for
reimbursement of P3,620,000 representing the lump sum price of the condominium unit, plus interest, P100,000 attorneys fees, and THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE ASIAN FINANCIAL
expenses of litigation before the Housing and Land Use Regulatory Board (HLURB).
CRISIS IS NOT A FORTUITOUS EVENT THAT WOULD EXCUSE THE DELIVERY BY
PETITIONER OF THE SUBJECT CONDOMINIUM UNIT TO RESPONDENTS.

In answer, petitioner claimed that respondents had no cause of action since the delay in the construction of the
condominium was caused by the financial crisis that hit the Asian region, a fortuitous event over which petitioner had no control. II.

On July 18, 2000, the HLURB Regional Director approved the decision of the Housing and Land Use Arbiter in favor
of the spouses Go. The HLURB ratiocinated that the Asian financial crisis that resulted in the depreciation of the peso is not a
fortuitous event as any fluctuation in the value of the peso is a daily occurrence which is foreseeable and its deleterious effects
avoided by economic measures. The HLURB went on to say that when petitioner discontinued the development of its
condominium project, it failed to fulfill its contractual obligations to the spouses. And following Article 1475[3] of the Civil Code,
upon perfection of the contract, the parties, here the spouses Go, may demand performance. And under Article 1191[4] of the same
code, should one of the parties, in this instance Fil-Estate, fail to comply with the obligation, the aggrieved party may choose between
fulfillment or rescission of the obligation, with damages in either case. Inasmuch as Fil-Estate could no longer fulfill
its obligation, the spouses Go may ask for rescission of the contract with damages. The dispositive portion of the decision reads:
WHEREFORE, the foregoing considered, judgment is hereby rendered as follows:
1. Ordering the respondent, Fil-Estate Properties, Inc., to refund to the
complainants, P3,439,000.07 (the amount proved) plus 12% interest thereon reckoned from
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING PETITIONER LIABLE FOR THE
PAYMENT OF ATTORNEYS FEES.[9]
On the first issue, did the Court of Appeals err in ruling that the Asian financial crisis was not a fortuitous event?
Petitioner, citing Article 1174[10] of the Civil Code, argues that the Asian financial crisis was a fortuitous event being
unforeseen or inevitable. Petitioner likewise cites Servando v. Philippine Steam Navigation Co.,[11] to bolster its case. Petitioner
explains that the extreme economic exigency and extraordinary currency fluctuations could not have been reasonably foreseen and
were beyond the contemplation of both parties when they entered the contract. Petitioner further asserts that the resultant economic
collapse of the real estate industry was unforeseen by the whole Asia and if it was indeed foreseeable, then all those engaged in the
real estate business should have foreseen the impending fiasco. Petitioner adds that it had not committed any fraud; that it had all
the required government permits; and that it had not abandoned the project but only suspended the work.It also admits its obligation
to complete the project. It says that it had in fact asked the HLURB for extension to complete it. [12]
 In their Comment, respondents submit that the instant petition be rejected outright for the reason that petitioner has not WHEREFORE, the petition is DENIED for lack of merit. Petitioner is hereby ordered (1) to reimburse
raised any question of law in the instant petition. The questions of whether or not the Asian financial crisis is a fortuitous event, and respondents P3,439,000.07 at 6% interest starting August 4, 1999until full payment, and (2) to pay respondents P100,000.00
whether or not attorneys fees should be granted, are questions of facts which the Court of Appeals recognized as such. attorneys fees. Costs against petitioner.

Respondent spouses reiterate that contrary to what petitioner avers, the delay in the construction of the building was SO ORDERED.
not attributable to the Asian financial crisis which happened in 1997[13] because petitioner did not even start the project in 1995 when
it should have done, so that it could have finished it in 1997, as stipulated in the contract.

Preliminarily, respondents bring to the attention of this Court the strange discrepancy in the dates of notarization of the
Certification of Non-Forum Shopping and the Affidavit of Service both notarized on September 24, 2004, while the Secretarys
Certification was notarized a day earlier on September 23, 2004. However, we shall not delve into technicalities, but we shall proceed
with the resolution of the issues raised on the merits.
CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution, and the Division Chairpersons Attestation, I certify that the conclusions in the above Resolution
had been reached in consultation before the case was assigned to the writer of the opinion of the Courts Division.

REYNATO S. PUNO
Indeed, the question of whether or not an event is fortuitous is a question of fact. As a general rule, questions of fact
Chief Justice
may not be raised in a petition for review for as long as there is no variance between the findings of the lower court and the appellate
court, as in this case where the HLURB, the Office of the President, and the Court of Appeals were agreed on the fact.

[1]
Rollo, pp. 26-31. Penned by Associate Justice Renato C. Dacudao, with Associate Justices Edgardo F. Sundiam and Japar B. Dimaampao concurring.
Worthy of note, in a previous case, Asian Construction and Development Corporation v. Philippine Commercial [2]
Id. at 33.
International Bank,[14] the Court had said that the 1997 financial crisis that ensued in Asia did not constitute a valid justification to [3]
Art. 1475. The contract of sale is perfected at the moment there is a meeting of minds upon the thing which is the object of the contract and upon the
renege on obligations. We emphatically stressed the same view in Mondragon Leisure and Resorts Corporation v. Court of price.
Appeals,[15] that the Asian financial crisis in 1997 is not among the fortuitous events contemplated under Article 1174 of the Civil From that moment, the parties may reciprocally demand performance, subject to the provisions of the law governing the form of contracts.
[4]
Code. Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon
him.
The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in eit her case. He may also seek
rescission, even after he has chosen fulfillment, if the latter should become impossible.
Also, we cannot generalize that the Asian financial crisis in 1997 was unforeseeable and beyond the control of a The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.
business corporation. It is unfortunate that petitioner apparently met with considerable difficulty e.g. increase cost of materials and This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance with Articles 1385 and 1388 and the
labor, even before the scheduled commencement of its real estate project as early as 1995. However, a real estate enterprise engaged Mortgage Law.
[5]
Rollo, p. 40.
in the pre-selling of condominium units is concededly a master in projections on commodities and currency movements and business [6]
Id. at 59-63.
risks. The fluctuating movement of the Philippine peso in the foreign exchange market is an everyday occurrence, and fluctuations [7]
Id. at 92 and 97.
in currency exchange rates happen everyday, thus, not an instance of caso fortuito. [8]
SEC. 23. Non-Forfeiture of Payments. No installment payment made by a buyer in a subdivision or condominium project for the lot or unit he contracted
to buy shall be forfeited in favor of the owner or developer when the buyer, after due notice to the owner or developer, desists from further payment
due to the failure of the owner or developer to develop the subdivision or condominium project according to the approved plans and within the
time limit for complying with the same. Such buyer may, at his option, be reimbursed the total amount paid including amortization interest[s] but
Are respondents entitled to reimbursement of the amount paid, plus interest and attorneys fees? excluding delinquency interests, with interest thereon at the legal rate.
[9]
Rollo, p. 16.
[10]
Art. 1174. Except in cases expressly specified by the law, or when it is otherwise declared by stipulation, or when the nature of the obligation requires
Yes. Section 23 of P.D. No. 957 is clear on this point. the assumption of risk, no person shall be responsible for those events which could not be foreseen, or which though foreseen, were inevitable.
[11]
Nos. L-36481-2, October 23, 1982, 117 SCRA 832.
[12]
Rollo, pp. 16-20.
[13]
Id. at 30.
[14]
It will be noted that respondents sent a demand letter dated August 4, 1999 to Fil-Estate asking for the return of the G.R. No. 153827, April 25, 2006, 488 SCRA 192, 206.
[15]
total amount paid including amortization interests and legal interest due thereon. [16] The latter did not respond favorably, and so the G.R. No. 154188, June 15, 2005, 460 SCRA 279, 289.
[16]
Rollo, p. 26.
spouses filed a complaint demanding the reimbursement of P3,620,000 representing the lump sum price of the condominium unit [17]
G.R. No. 97412, July 12, 1994, 234 SCRA 78, 96-97. The rule partly reads:
with interest at the legal rate, and P100,000 attorneys fees. But the respondents actually sought the refund of P3,620,000.00, the 2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at
lump sum cost of the condominium, more than their actual payment of P3,439,000.07. We are thus constrained to award the discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages except when
only P3,439,000.07, representing the sum of their actual payments plus amortization interests and interest at legal rate which is 6% or until the demand can be established with reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the
per annum from the date of demand on August 4, 1999. We are not unaware that the appellate court pegged the interest rate at 12% interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be
on the basis of Resolution No. R-421, Series of 1988 of the HLURB. But, conformably with our ruling in Eastern Shipping Lines, so reasonably established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is made (at
which time the quantification of damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal
Inc. v. Court of Appeals,[17] the award of 12% interest on the amount of refund must be reduced to 6%. interest shall, in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest shall be 12% per annum from such
finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit.
Moreover, we are constrained to modify the Court of Appeals grant of attorneys fees from P25,000 to P100,000 as just See also Schmitz Transport & Brokerage Corporation v. Transport Venture, Inc., G.R. No. 150255, April 22, 2005, 456 SCRA 557,
575; V.V. Soliven Realty Corp. v. Ong, G.R. No. 147869, January 26, 2005, 449 SCRA 339, 350; Heirs of IgnaciaAguilar-Reyes v. Mijares, G.R.
and equitable since respondents were compelled to secure the services of counsel over eight years to protect their interest due to
No. 143826, August 28, 2003, 410 SCRA 97, 110-111.
petitioners delay in the performance of their clear obligation.