SECOND DIVISION

March 28, 2014

G.R. No. 195031

INTERNATIONAL CONTAINER TERMINAL SERVICES, INC.,Petitioners,

vs.
CELESTE M. CHUA, Respondent.

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 dated 14 September 2010 and
Resolution2 dated 3 January 2011 of the Court of Appeals in CA-G.R. CV No.
78315. The challenged Decision denied herein International Container Terminal
Services, Inc. 's (petitioner) appeal and affirmed the Decision of the Regional Trial
Court (RTC) of Quezon City, Branch 76.

As found by the Court of Appeals, the antecedent facts are as follows:

On April 2, 1997, the twenty (20)-feet container van loaded with the personal effects
of [respondent] Celeste M. Chua arrived at the North Harbor, Manila, from Oakland,
California, x x x. On even date, it was unloaded from the vessel and was placed in
the depot belonging to [petitioner] for safekeeping pending the customs inspection.

On April 6, 1997, the container van was stripped and partially inspected by custom
authorities. Further inspection thereof was scheduled on May 8, 1997. However, on
the date scheduled, [petitioner’s] depot was gutted by fire and [respondent’s]
container van, together with forty-four (44) others, were burned. In the survey
conducted thereafter, seventy percent (70%) of the contents of the van was found to
be totally burnt while thirty percent (30%) thereof was wet, dirty, and unusable.
[Respondent] demanded reimbursement for the value of the goods. However, her
demands fell on deaf ears.

On August 23, 1999, [respondent] filed the suit below alleging, in essence, that the
proximate cause of the fire that engulfed [petitioner’s] depot was the combustible
chemicals stored threreat; and, that [petitioner], in storing the said flammable
chemicals in its depot, failed to exercise due diligence in the selection and
supervision of its employees and/or of their work. She also claims that, while the
value of the goods destroyed is x x x (US$87,667.00) x x x, she has in her
possession only the machine-copies of receipts showing an aggregate value of only
x x x (US$67,535.61) because, pursuant to [petitioner’s] request, she gave to the
latter’s representative the original receipts. x x x.

In its Answer, [petitioner] admits that it accepted, in good order, [respondent’s]

container van for storage and safekeeping at its depot but denies that there was
negligence on its part or that of its employees. It asserts that the fire that gutted its
depot was due to a fortuitous event because it exercised the due diligence required
by law. It maintains that [respondent] is not entitled to her claim because she did not
declare the true and correct value of the goods, as the Bill of Lading indicates that
the contents of the van have no commercial value. Asserting that [respondent] has
no cause of action or that [respondent’s] cause of action, if any, has already
prescribed because the complaint was not filed within twelve (12) months from the
time of damage or loss, it prays for the dismissal of the complaint. x x x.3

After the issues were joined, pre-trial ensued, during which, the parties failed to
settle amicably. The court thereafter conducted trial.

On 16 December 2002, the trial court rendered a decision ordering herein petitioner
to pay respondent actual damages in the amount of

US$67,535.61 or its equivalent in Philippine Peso at the time of the filing of the
complaint; moral damages in the amount of P50,000.00; and attorney’s fees of
P50,000.00.4

Aggrieved, petitioner filed an appeal to the Court of Appeals alleging that the trial
court erred in holding it liable for actual and moral damages, as well as for attorney’s
fees considering, among others, that: (1) respondent failed to prove negligence on
the part of petitioner; (2) the fire that caused the damage to and/or loss of
respondent’s cargo was a fortuitous event; and

(3) petitioner did not act in bad faith in denying respondent’s claim for
reimbursement of the value of the loss/damaged cargo. Petitioner added that,
assuming that it is liable to pay damages to respondent, the same should not exceed
the liability provided for in Philippine Ports Authority (PPA) Administrative Order No.
10-81.

In affirming the Decision of the trial court, the Court of Appeals declared that:

There is no dispute that the van containing [respondent’s] cargo was in [petitioner’s]
depot for safekeeping when the depot caught fire on May 8, 1997. There is,
therefore, no denying that, at that time, the subject van was under the custody and
control of [petitioner]. There is likewise no dispute that the fire started inside the
depot. Ergo, the RTC correctly ruled in applying the doctrine of res ipsa loquitur and
in placing upon [petitioner] the burden of proving lack of negligence. This is so
because the fire that occurred would not have happened in the ordinary course of
things if reasonable care and diligence had been exercised. Simply put, the fire
started because some negligence must have occurred. x x x.

xxxx

Also not convincing is [petitioner’s] assertion that the fire that razed its depot was
a force majeure and/or beyond its control considering that [i]n our jurisprudence, fire
may not be considered a natural disaster or calamity since it almost always arises
from some act of man or by human means. It cannot be an act of God unless
caused by lightning or a natural disaster or casualty not attributable to human
agency.

xxxx

On [petitioner’s] argument that [respondent’s] cause of action has prescribed under

its Terms of Business and the amount of its liability cannot exceed x x x
(PhP3,500.00) per package as provided under PPA Administrative Order No. 10-81,
suffice it to say that a person who is not privy to any contract is not bound thereby. It
bears reiterating the RTC’s finding that x x x the [respondent] has not signed any
contract with

[petitioner] wherein she agreed that the liability of the latter shall be limited only to a
certain amount. (Emphasis and italics supplied)

xxxx

[Petitioner’s] contention that [respondent] is not entitled to moral damages and

attorney’s fees as there was no finding that it acted in bad faith is belied by the
assailed disposition. Emphasis must be made that the RTC found that:

[Petitioner’s] outright denial and unjust refusal to heed [respondent’s] claim for
payment of the value of her lost/damaged shipment causing the latter to suffer
serious anxiety, mental anguish[,] and wounded feelings, warranting the award or
moral damages in the amount of P50,000.00 in favor of [respondent]. For having
been compelled to litigate due to [petitioner’s] omission, the Court determines that
[respondent] may recover attorney’s fees of P50,000.00, x x x.5

Its motion for reconsideration having been denied by the Court of Appeals in a
Resolution dated 3 January 2011, petitioner is now before us on the following
assignment of errors:
 1.THE COURT OF APPEALS ERRED IN AFFIRMING THE DECISION
OF THE COURT A QUO, HOLDING HEREIN PETITIONER LIABLE
FOR ACTUAL DAMAGES IN THE AMOUNT OF US$67,535.61 OR
ITS EQUIVALENT IN PHILIPPINE PESO, CONSIDERING THAT:

A.RESPONDENT FAILED TO PROVE BY PREPONDERANCE

OF EVIDENCE HER AFFIRMATIVE ALLEGATION THAT THE
DAMAGE TO AND/OR LOSS OF HER CARGO WAS
DIRECTLY AND EXCLUSIVELY BROUGHT ABOUT BY
PETITIONER’S FAULT OR NEGLIGENCE;

B.FIRE, WHICH CAUSED THE DAMAGE OR LOSS, HAS

BEEN HELD AS A FORTUITOUS EVENT, FORCE MAJEURE,
AND/OR EVENT BEYOND THE CONTROL OF MAN, HENCE,
PETITIONER SHOULD BE ABSOLVED FROM ANY LIABILITY;

C.RESPONDENT’S CAUSE OF ACTION HAS PRESCRIBED

AND/OR IS BARRED BY LACHES;

D.RESPONDENT FAILED TO PROVE ACTUAL DAMAGES OF

US$67,535.61; AND

E.ASSUMING, WITHOUT ADMITTING, THAT PETITIONER IS

LIABLE, THE LIABILITY SHOULD NOT EXCEED THE LIMIT
PROVIDED FOR IN PPA ADMINISTRATIVE ORDER NO. 10-
81;

2.THE COURT OF APPEALS ERRED IN AFFIRMING THE AWARD

OF P50,000.00 AS MORAL DAMAGES AND P50,000.00 AS
ATTORNEY’S FEES IN VIEW OF THE ABSENCE OF BAD FAITH ON
THE PART OF PETITIONER IN DENYING RESPONDENT’S CLAIM;
AND

3.THE COURT OF APPEALS ERRED IN NOT GRANTING

PETITIONER’S COUNTERCLAIM CONSIDERING RESPONDENT’S
BASELESS, EXCESSIVE AND UNJUSTIFIED CLAIMS.6

The Ruling of the Court

The petition is partly meritorious.

At the outset, it must be pointed out that it is clear from petitioner’s assignment of
errors that what the instant petition for review is challenging are the findings of fact
and the appreciation of evidence made by the trial court which were affirmed by the
Court of Appeals.7 While it is well-settled that only questions of law may be raised in
a petition for review under Rule 45 of the Rules of Court, it is equally well-settled that
the rule admits of exceptions,8 one of which is when the trial court or the Court of
Appeals manifestly overlooked certain relevant and undisputed facts that, if properly
considered, would justify a different conclusion.9 In this case, the records contain
evidence which justify the application of the exception.

This Court will no longer delve on the issue of whether or not the fire which caused
the loss of and/or damage to respondent’s personal effects is a fortuitous event
since both the trial court and the Court of Appeals correctly ruled that the fire which
occurred in this case cannot be considered an act of God since the same was not
caused by lightning or a natural disaster or other calamity not attributable to human
agency.

With respect to the issue of negligence, there is no doubt that, under the
circumstances of this case, petitioner is liable to respondent for damages on account
of the loss of the contents of her container van. Petitioner itself admitted during the
pre-trial of this case that respondent’s container van caught fire while stored within
its premises.10 Absent any justifiable explanation on the part of petitioner on the
cause of the fire as would absolve it from liability, the presumption that there was
negligence on its part comes into play. The situation in this case, therefore, calls for
the application of the doctrine of res ipsa loquitur.

The doctrine of res ipsa loquitur 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. In such instance, the plaintiff relies on proof of the happening of the
accident alone to establish negligence."11 The principle, furthermore, provides a
means by which a plaintiff can hold liable a defendant who, if innocent, should be
able to prove that he exercised due care to prevent the accident complained of from
happening. It is, consequently, the defendant’s responsibility to show that there was
no negligence on his part.12 The doctrine, however, "can be invoked when and only
when, under the circumstances involved, direct evidence is absent and not readily
available."13 Here, there was no evidence as to how or why the fire in the container
yard of petitioner started; hence, it was up to petitioner to satisfactorily prove that it
exercised the diligence required to prevent the fire from happening. This it failed to
do. Thus, the trial court and the Court of Appeals acted appropriately in applying the
principle of res ipsa loquitur to the case at bar.

As the findings and conclusions of the lower courts on this point are properly
supported by the evidence on record, we submit thereto, there being no basis to
disturb the same. We diverge, however, with respect to the award of damages.

Both the trial court and the Court of Appeals found that the liability of petitioner to
respondent amounts to US$67,535.61 as actual damages. This amount purportedly
represents the value of respondent’s shipment that was lost or destroyed as a result
of the fire in petitioner’s container yard where the van holding the said shipment was
in storage at that time. The value was computed based on the receipts – marked as
Exhibits "K" to "K-63"14 – submitted by respondent, which receipts allegedly cover
the items that were in the container van.

A painstaking examination of Exhibits "K" to "K-63" ("the receipts") reveals, however,

that the items specified therein do not exactly tally or coincide with the items listed in
the respective inspection reports submitted by the different marine surveyors which
conducted an inventory of the contents of respondent’s van after the fire. Thus, the
receipts contain articles which consist of grocery items, including perishables such
as green onions, chicken, honey dew,15Coffee Mate packets (bought way back in
1995), asparagus, turkey breast,16 grapes,17 bananas,18 fresh
meat,19 shrimps,20bread,21 etc. which definitely could not have been included in the
shipment to Manila. The inventoried items, on the other hand, primarily consist of
electronics and electrical appliances, such as: electric fans, chandeliers, microwave
ovens, jet skis, television sets, cassette players, speakers and computers.22

It is also significant to note that Exhibits "K" to "K-63" include receipts covering baby
products or items like baby bottle nipples, feeding bottles, baby lotion, baby oil,
stretch mark creams, baby wipes, crib blanket, pacifier,23 etc., as well as automobile
oils/lubricants, carburetor cleaners, engine degreasers and oil filters,24 used Vivitar
cameras,25 a Christmas tree26 and washers and dryers27 – which items do not,
however, appear in any of the inspection reports of the four marine surveyors which
conducted the inventory of the burned container van. In the same way, the
inspection reports include items which are not covered by the receipts submitted by
respondent, including microwave ovens, intercom telephones and a coffee maker.28

Also, some receipts are so poorly photocopied29 that the items listed therein can no
longer be properly read and only the total amount paid is visible. Still, others were
issued in the name of persons other than respondent, such as Exhibits "K-3," "K-10,"
"K-41," "K-50," and "K-59" to "K-63," in the name of "Patrick Vidamo,"30 Exhibit "K-8,"
("The Bombay Company" receipt, date unreadable) issued to "Tanya
Vidamo,"31 Exhibit "K-33," receipt issued to "Jane Santos"32 and Exhibits "K-34" and
"K-44," receipts in the name of "Ronny Santos."33

Exhibit "K-25,"34 on the other hand, appears to be a credit card billing statement but
the name of the credit card holder does not appear thereon. More importantly, it
includes a charge of US$338.97 for "BA auto repair" which, clearly, should not have
been included in the computation of the amount of actual damages due respondent.
Finally, Exhibit "K-40"35 shows a receipt for a total of 50 cartons of "commercial
garlic" and "giant garlic" valued at US$877.50 with a total weight of 1,600 (unit of
measure not specified). In the computation of the amount of actual damages,
however, what was indicated as the value of the items was "$1,600.00" 36 which is
actually the weight of the garlics purchased, instead of US$877.50, which is the
amount of the purchase.

Considering all the foregoing, this Court is, therefore, at a loss as to how the trial
court and the Court of Appeals arrived at the conclusion that the items in both lists
(Exhibits "K" to "K-63" and the inspection reports) are identical, so as to justify the
award of US$67,535.61 – the alleged total value of the receipts – as actual
damages. On the contrary, all the foregoing actually prove that the submitted
receipts do not accurately reflect the items in the container van and, therefore,
cannot be the basis for a grant of actual damages. Furthermore, the award of the
trial court failed to take into consideration that since most of the contents of
respondent’s container van are electronics or electrical items, the same are subject
to depreciation. The trial court and the Court of Appeals awarded actual damages
based on the value of the items at the time they were bought, which was around two
years prior to their shipment to the Philippines.

Article 2199 of the Civil Code states that "[e]xcept as provided by law or by
stipulation, one is entitled to an adequate compensation only for such pecuniary loss
suffered by him as he has duly proved. Such compensation is referred to as actual
or compensatory damages."37 "Actual damages are compensation for an injury that
will put the injured party in the position where it was before the injury. They pertain to
such injuries or losses that are actually sustained and susceptible of measurement.
Except as provided by law or by stipulation, a party is entitled to adequate
compensation only for such pecuniary loss as is duly proven. Basic is the rule that to
recover actual damages, not only must the amount of loss be capable of proof; it
must also be actually proven with a reasonable degree of certainty, premised upon
competent proof or the best evidence obtainable."38

In the case before us, respondent failed to adduce evidence adequate enough to
satisfactorily prove the amount of actual damages claimed.1âwphi1 The receipts she
submitted cannot be considered competent proof since she failed to prove that the
items listed therein are indeed the items that were in her container van and vice
versa. As pointed out above, there are discrepancies between the items listed in the
submitted receipts and those contained in the respective inspection reports of the
marine surveyors. Hence, the said receipts cannot be made the basis for the grant of
actual damages.

This Court has, time and again, emphasized that actual damages cannot be
presumed and courts, in making an award, must point out specific facts which could
afford a basis for measuring whatever compensatory or actual damages are
borne.39 An award of actual damages is "dependent upon competent proof of the
damages suffered and the actual amount thereof. The award must be based on the
evidence presented, not on the personal knowledge of the court; and certainly not on
flimsy, remote, speculative and unsubstantial proof."40

The foregoing notwithstanding, petitioner, nevertheless, cannot rely on PPA

Administrative Order No. 10-81 (its Management Contract with the Philippine Ports
Authority) as basis of its liability for damages. This administrative order limits
petitioner’s liability to not more than three Thousand Five Hundred Pesos
(P3,500.00) for each package (for import cargo) if the value of the cargo is not
specified or communicated to the arrastre operator in writing.41 Contrary to
petitioner’s claim, there is no contractual relationship between it and respondent
since the latter did not avail herself of petitioner’s services; hence, she cannot be
bound by the said management contract. The cases cited by petitioner wherein the
Supreme Court applied the provision of the Management Contract and limited the
arrastre operator’s liability to the amount stated therein are not applicable to the
case at bar because in all of those cited cases, the consignee either availed of the
services of the arrastre operator42 or is otherwise bound by the Management
Contract – despite non-availment of the services of the arrastre operator – as a
result of the consignee’s acceptance of the delivery of the cargo from the arrastre
operator.43 This absence of a contractual relationship is precisely also the reason
why respondent is not bound by petitioner’s Terms of Business which requires a
claimant to commence any action for damages against petitioner within 12 months
from the occurrence of the cause of the claim. Thus, respondent’s action against
petitioner cannot be said to have been barred by prescription or laches.

In the absence of competent proof on the amount of actual damages suffered, a

party is entitled to receive temperate damages.44 Article 2224 of the New Civil Code
provides that: "Temperate or moderate damages, which are more than nominal but
less than compensatory damages, may be recovered when the court finds that some
pecuniary loss has been suffered but its amount cannot, from the nature of the case,
be proved with certainty." The amount thereof is usually left to the sound discretion
of the courts but the same should be reasonable, bearing in mind that temperate
damages should be "more than nominal but less than compensatory."45Considering
the concomitant circumstances prevailing in this case, temperate damages in the
amount of P350,000.00 is deemed equitable.

Finally, we delete the award of moral damages and attorney’s fees, there being no
basis therefor.

Article 2217 of the New Civil Code provides:

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 or
omission.

Certainly, an award of moral damages must be anchored on a clear showing that the
party claiming the same actually experienced mental anguish, besmirched
reputation, sleepless nights, wounded feelings, or similar injury.46 In the case herein
under consideration, the records are bereft of any proof that respondent in fact
suffered moral damages as contemplated in the afore-quoted provision of the Civil
Code.47 The ruling of the trial court provides simply that: "[Petitioner’s] outright denial
and unjust refusal to heed [respondent’s] claim for payment of the value of her
lost/damaged shipment caus[ed] the latter to suffer serious anxiety, mental anguish
and wounded feelings warranting the award of moral damages x x x." 48 The
testimony of respondent, on the other hand, merely states that when she failed to
recover damages from petitioner, she "was saddened, had sleepless nights and
anxiety"49 without providing specific details of the suffering she allegedly went
through. "Since an award of moral damages is predicated on a categorical showing
by the claimant that she actually experienced emotional and mental sufferings, it
must be disallowed absent any evidence thereon."50

As to the award of attorney’s fees, Article 2208 of the Civil Code provides:

ART. 2208. In the absence of stipulation, attorney’s fees and expenses of litigation,
other than judicial costs, cannot be recovered, except:

1.When exemplary damages are awarded;

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;

3.In criminal cases of malicious prosecution against the plaintiff;

4.In case of a clearly unfounded civil action or proceeding against the plaintiff;

5.Where the defendant acted in gross and evident bad faith in refusing to
satisfy the plaintiff’s plainly valid, just and demandable claim;

6.In actions for legal support;

7.In actions for the recovery of wages of household helpers, laborers and
skilled workers;

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

10.When at least double judicial costs are awarded; and

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.

An award of attorney’s fees has always been the exception rather than the rule and
there must be some compelling legal reason to bring the case within the exception
and justify the award.51 In this case, none of the exceptions applies. "Attorney’s fees
are not awarded every time a party prevails in a suit. The policy of the Court is that
no premium should be placed on the right to litigate."52 "Even when a claimant is
compelled to litigate with third persons or to incur expenses to protect his rights, still,
attorney’s fees may not be awarded where no sufficient showing of bad faith could
be reflected in a party’s persistence in a case other than an erroneous conviction of
the righteousness of his cause."53

The trial court refused to award exemplary damages and denied respondent’s claim
therefore.54 It was, therefore, error for it and the Court of Appeals to award attorney’s
fees after rejecting respondent’s prayer for exemplary damages as the latter might
have served as basis for awarding attorney’s fees.55

Moreover, contrary to the findings of the trial court and the Court of Appeals,
petitioner did not outrightly deny and unjustly refuse the claim of respondent for
reimbursement of the value of her cargo that was lost in the fire. The records of this
case disclose that respondent sent a letter, dated 31 May 1997,56 to the Legal and
Claims Department of petitioner demanding the payment of US$87,667.00 – the
alleged value of her shipment. Petitioner responded to this communication by
sending a letter, dated 25 June 1997,57 addressed to respondent’s broker,
requesting the submission of documents, such as the itemized list of the damaged
goods, packing list and commercial invoices, in support of the claim of
US$87,667.00. The claim of respondent was eventually denied through a letter
dated 25 March 199958 prepared by petitioner’s counsel and coursed through
respondent’s counsel. The letter outlined the reasons for the denial of respondent’s
claim.

Under the foregoing circumstances, it cannot be said that petitioner unjustly refused
to heed respondent’s claim for damages. Petitioner immediately responded to the
initial demand for reimbursement and it subsequently denied the claim after
evaluation thereof. Petitioner clearly did not act in bad faith, especially since it
explained to respondent the reasons for the denial of her claim. The lower courts,
therefore, erred in finding that petitioner acted in bad faith, thereby further negating
the wisdom of awarding moral damages and attorney’s fees to respondent.

WHEREFORE, PREMISES CONSIDERED, the petition is PARTIALLY GRANTED.

The Decision of the Court of Appeals in CA- G.R. CV No. 78315 dated 14
September 2010 is MODIFIED in that the award of actual damages, moral damages
and attorney’s fees are DELETED. However, petitioner is ordered to pay respondent
TEMPERATE DAMAGES in the amount of P350,000.00.

SO ORDERED.

JOSE PORTUGAL PEREZ

Associate Justice

WE CONCUR:
 ANTONIO T. CARPIO
Associate Justice
Chairperson

ARTURO D. BRION MARIANO C. DEL CASTILLO

Associate Justice Associate Justice

BIENVENIDO L. REYES*
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 Court's 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, it is hereby certified that the conclusions in the above
Decision were reached in consultation before the case was assigned to the writer of
the opinion of the Court's Division.

MARIA LOURDES P.A. SERENO

Chief Justice

Footnotes

Per Special Order No. 1650 dated 13 March 2014.

1Rollo, pp. 72-81; Penned by Associate Justice Normandie 8. Pizarro with
Associate Justices Amelita G. Tolentino and Ruben C. Ayson concurring.
2 Id. at 83-84.
3 Id. at 73-75.
4 CA rollo, p. 41.
5 Rollo, pp. 19-22.

6 Id. at 34-35.
7 Phil. Home Assurance Corp. v. CA, 327 Phil. 255, 265 (1996).

8 Id. at 264.
9Eastern Shipping Lines, Inc. v. Prudential Guarantee and Assurance, Inc.,
G.R. No. 174116, 11 September 2009, 599 SCRA 565, 572 citing Philippine
Charter Insurance Corporation v. Unknown Owner of the Vessel M/V
"National Honor," G.R. No. 161833, 8 July 2005, 463 SCRA 202, 215.
10 Records, Vol. I, p. 140.
11Perla Compania De Seguros, Inc. v. Sps. Sarangaya III, 510 Phil. 676, 686
(2005) citing 57B Am Jur 2d, Negligence § 1819.
12 Id. at 687 citing 57B Am Jur 2d, Negligence § 1819.
13 Rodriguez v. CA, G.R. No. 121964, 17 June 1997, 272 SCRA 607, 621
citing Batiquin v. Court of Appeals, G.R. No. 118231, 5 July 1996, 258 SCRA
334, 344-345.
14 Records, Vol. I, pp. 155-218.
15 Id. at 160; Exhibit "K-5," receipt dated 9 November 1995.
16 Id. at 161; Exhibit "K-6," receipt dated 12 September 1995.
17Id. at 168, 173, and 177; Exhibits "K-13," receipt dated 18 August 1996, "K-
18," date of receipt unreadable and "K-22," receipt dated 26 September 1995,
respectively.
18Id. at 160 and 208; Exhibits "K-5," receipt dated 9 November 1995 and "K-
53," receipt dated 16 February 1997, respectively.
19Id. at 161 and 169; Exhibits "K-6," receipt dated 12 September 1995 and
"K-14," receipt dated 15 February 1996, respectively.
20Id. at 161, 169 and 208; Exhibits "K-6," dated 12 September 1995, "K-14,"
receipt dated 15 February 1996, and "K-53," receipt dated 16 February 1997,
respectively.
21Id. at 161, 173, 177, 207 and 208; Exhibits "K-6," receipt dated 12
September 1995 "K-18," date of receipt unreadable "K-22," receipt dated 26
September 1995, "K-52," receipt dated 25 October 1996, and "K-53," receipt
dated 9 January 1997, respectively.
22 Id. at 7-21; Exhibits "A" to "D-2."
23Id. at 157,173, and 217; Exhibits "K-2," receipt dated 31 October 1996, "K-
18," receipt dated 2 November 1995, and "K-62," receipt dated 23 January
1997, respectively.
24Id. at 159, 170, and 172; Exhibits "K-4," date of receipt unreadable, "K-15,"
receipt dated 10 February 1996, and "K-17," receipt dated 10 November
1995, respectively.
25 Id. at 157, 158 and 169; Exhibits "K-2," receipt dated 10 October 1995, "K-
3," receipt dated 17 October 1995 and "K-14," receipt dated 17 October 1995,
respectively.
26 Id. at 167; Exhibit "K-12," receipt dated 12 December 1996.
27 Id. at 204; Exhibit "K-49," receipt dated 11 January 1997.
28 Id. at 7-21; Exhibits "A" to "D-2."
29Id. at 163, 164, 172 and 174; Exhibits "K-8," "K-9," "K-17" and "K-19,"
respectively.
30 Id. at 158, 165, 196, 205, and 214-218.
31 Id. at 163.
32 Id. at 188.
33 Id. at 189 and 199, respectively.
34 Id. at 180.
35 Id. at 195.
36 Id. at 154; Item No. 41.
37 Emphasis supplied.
38Manila Electric Company (MERALCO) v. Castillo, G.R. No. 182976, 14
January 2013, 688 SCRA 455, 478 citing Manila Electric Company v.
T.E.A.M. Electronics Corporation, G.R. No. 131723, 13 December 2007, 540
SCRA 62, 79. Emphasis supplied.
39Canada v. All Commodities Marketing Corporation, 590 Phil. 3452, 350
(2008) citing B.F. Metal (Corporation) v. Sps. Rolando M. Lomotan, G.R. No.
170813, 16 April 2008, 551 SCRA 618.
40 Manila Electric Company (MERALCO) v. Castillo, supra note 38 at 481-482
citing Quisumbing v. Manila Electric Company, G.R. No. 142943, 3 April
2002, 380 SCRA 195, 211-212.
41Article VI, Section 6.01 of PPA Administrative Order No. 10-81 dated 13
April 1981 provides: ARTICLE VI. CLAIMS AND LIABILITY FOR LOSSES
AND DAMAGES

Section 6.01. Responsibility and Liability for Losses and

Damages, Exceptions – The CONTRACTOR shall, at its
own expense handle all merchandise in all work
undertaken by it hereunder diligently and in a skilful,
workman-like and efficient manner, the CONTRACTOR
shall be solely responsible as an independent
CONTRACTOR, and hereby agrees to accept liability
and to promptly pay to the shipping company
consignees, consignors or other interested party or
parties for the loss, damage or non- delivery of cargoes
to the extent of the actual invoice value of each package
which in no case shall be more than THREE THOUSAND
FIVE HUNDRED PESOS (P3,500.00) (for import cargo)
and ONE THOUSAND PESOS (P1,000.00) (for domestic
cargo) for each package unless the value of the cargo
importation is otherwise specified or manifested or
communicated in writing together with the declared bill of
lading value and supported by a certified packing list to
the CONTRACTOR by the interested party or parties
before the discharge or loading unto vessel of the goods,
as well as all damage that may be suffered on account of
loss, damage or destruction of any merchandise while in
the custody or under the control of the CONTRACTOR in
any pier, shed, warehouse facility or other designated
place under the supervision of the AUTHORITY but the
CONTRACTOR shall not be responsible for the condition
of the contents of any package received, nor for the
weight nor for any loss, injury or damage to the said
cargo before or while the goods are being received or
remains in the piers, sheds, warehouses or facility, if the
loss, injury or damage is caused by force majeure or
other causes beyond the CONTRACTOR’s control or
capacity to prevent or remedy, PROVIDED, that a formal
claim together with the necessary copies of Bill of Lading,
 Invoice, Certified Packing List and computation arrived at
covering the loss, injury or damage or non-delivery of
such goods shall have been filed with the CONTRATOR
within fifteen (15) days from date of issuance by the
CONTRACTOR of a certificate of non-delivery,
PROVIDED, However, that if said CONTRACTOR fails to
issue such certification within fifteen (15) days from the
receipt of a written request by the shipper/consignee or
his duly authorized representative or any interested party,
said certification shall be deemed to have been issued,
and thereafter, the fifteen (15) days period within which to
file the claim commence, PROVIDED, Finally, that the
request for certification of loss shall be made within thirty
(30) days from the date of delivery of the last package to
the consignee.

The CONTRACTOR shall be solely responsible for any and all

injury or damage that may arise on account of the negligence or
carelessness of the CONTRACTOR, its agent or employees in
the performance of the undertaking under the Contract. Further,
the CONTRACTOR hereby agrees to hold free the AUTHORITY
at all times from any claim that may be instituted by its
employees by reason of the provisions of the Labor Code, as
amended, Employees Liability in force or hereafter may be
enacted.
42E. Razon, Inc. v. Court of Appeals, 244 Phil. 375 (1988) and Northern
Motors, Inc. v. Prince Line, et. al., 107 Phil 253, 256-257 (1960) cited in the
Petition, rollo, pp. 55-56, respectively.

43 "In the performance of its job, an arrastre operator is bound by the

management contract it had executed with the Bureau of Customs. However,
a management contract, which is a sort of a stipulation pour autrui within the
meaning of Article 1311 of the Civil Code, is also binding on a consignee
because it is incorporated in the gate pass and delivery receipt which must be
presented by the consignee before delivery can be effected to it. x x x.
Indeed, upon taking delivery of the cargo, a consignee x x x tacitly accepts
the provisions of the management contract, including those which are
intended to limit the liability of one of the contracting parties, the arrastre
operator.

However, a consignee who does not avail of the services of the

arrastre operator is not bound by the management contract. Such an
exception to the rule does not obtain here as the consignee did in fact
accept delivery of the cargo from the arrastre operator." (Summa
 Insurance Corporation v. Court of Appeals, 323 Phil. 214, 223-224
(1996) cited in the Petition, rollo, p. 54.
44 Manila Electric Company (MERALCO) v. Castillo, supra note 38 at 482
citing Dueñas v. Guce- Africa, G.R. No. 165679, 5 October 2009, 603 SCRA
11, 22.
45 Manila Electric Company (MERALCO) v. Castillo, supra.
46De Guzman v. Tumolva, G.R. No. 188072, 19 October 2011, 659 SCRA
725, 734.
47 Id.
48 Records, Vol. I, pp. 418-419.
49Id., Vol. III, p. 41; TSN dated 25 August 2000, Direct Examination of
respondent.
50 De Guzman v. Tumolva, supra note 46 at 735 citing Metropolitan Bank and
Trust Co. v. Perez, G.R. No. 181842, 5 February 2010, 611 SCRA 740, 746
further citing Bank of Commerce v. Sps. San Pablo, G.R. No. 167848, 27
April 2007, 522 SCRA 713, 715. Emphasis supplied.
51Espino v. Spouses Bulut, G.R. No. 183811, 30 May 2011, 649 SCRA 453,
462 citing Hanjin Heavy Industries and Construction Co., Ltd. v. Dynamic
Planners and Construction Corp., G.R. Nos. 169408 and 170144, 30 April
2008, 553 SCRA 541.
52Manila Electric Company (MERALCO) v. Castillo, supra, note 38 citing
National Power Corporation v. Heirs of Macabangkit Sangkay, G.R. No.
165828, 24 August 2011, 656 SCRA 60, 92.
53 Development Bank of the Philippines v. Traverse Development
Corporation, G.R. No. 169293, 5 October 2011, 658 SCRA 614, 624
citing ABS-CBN Broadcasting Corporation v. Court of Appeals, 361 Phil. 499,
528 (1999).
54 Records, Vol. I, p. 418.
55 See Espino v. Spouses Bulut, supra note 51.
56 Records, Vol. I, p. 22; Exhibit "E."
57 Id. at 23; Exhibit "F."
 58 Id. at 133.

SECOND DIVISION

[G.R. No. 96410. July 3, 1992.]

NATIONAL POWER CORPORATION and BENJAMIN CHAVEZ, Petitioners, v.

THE COURT OF APPEALS, RICARDO CRUZ, DOMINGO CRUZ, FERNANDO
CRUZ, LEOPOLDO CRUZ, MARIA CRUZ, MAURA MARCIAL, JUAN PALAD,
NICANOR PALAD, ZOSIMO PALAD, NICASIO SAN PEDRO, FELIMON
SANTOS, ISAIAS SANTOS, JEREMIAS SANTOS, and JOSE
SANTOS, Respondents.

Ponciano G. Hernandez for Private Respondents.

SYLLABUS

1. CIVIL LAW; OBLIGATIONS AND CONTRACTS; NATURE AND EFFECT OF

OBLIGATIONS; CONCURRENT LIABILITY OF OBLIGOR IN CASE OF FORCE
MAJEURE. — The doctrine laid down in the case of Juan F. Nakpil and
Sons v. Court of Appeals, (144 SCRA 596 [1986]) is still good law, as far
as the concurrent liability of an obligor, in case of a force majeure, is
concerned. The case of National Power Corp. v. Court of Appeals, (L-
47481, 161 SCRA 334 [1988]) reiterated the ruling in Juan F. Nakpil &
Sons. In the former case, this Court ruled that the obligor cannot escape
liability, if upon the happening of a fortuitous event or an act of God, a
corresponding fraud, negligence, delay or violation or contravention in
any manner of the tenor of the obligation as provided in Article 1170 of
the Civil Code which results in loss or damage.

2. ID.; EXTRA-CONTRACTUAL OBLIGATIONS; QUASI-DELICT; LIABILITY

REGARDLESS OF CONTRACTUAL RELATIONS. — Petitioners contended
that unlike in Juan F. Nakpil & Sons, (supra) there was no privity of
contract between herein petitioners and private respondents. They further
alleged that they owed no specific duty to private respondents in the
same way that the architect of a building owed a specific duty to its
owner. Petitioners, however, failed to consider that even if there was no
contractual relation between themselves and private respondents, they
are still liable under the law on quasi-delict. Article 2176 of the Civil Code
explicitly provides "whoever by act or omission causes damage to another
there being fault or negligence is obliged to pay for the damage
done."cralaw virtua1aw library

3. ID.; FORCE MAJEURE; CONSTRUED. — Neither can petitioners escape

liability by invoking force majeure. Act of God or force majeure, by
definition, are extraordinary events not foreseeable or avoidable, events
that could not be foreseen, or which, though foreseen, are inevitable. 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.

4. ID.; ID.; WHERE NEGLIGENCE CONCURS THEREWITH, LIABILITY

ATTACH. — As a general rule, no person shall be responsible for those
events which could not be foreseen or which though foreseen, were
inevitable. However, the principle embodied in the act of God doctrine
strictly requires that the act must be occasioned solely by the violence of
nature. Human intervention is to be excluded from creating or entering
into the cause of the mischief. When the effect is found to be in part the
result of the participation of man, whether due to his active intervention
or neglect or failure to act, the whole occurrence is then humanized and
removed from the rules applicable to the acts of God. It has been held in
several cases 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 he must be free from any previous negligence or misconduct
by which the loss or damage may have been occasioned.

5. ID.; ID.; ID.; CASE AT BAR. — In the case at bar, although the
typhoon "Kading" was an act of God, petitioners can not escape liability
because their negligence was the proximate cause of the loss and
damage. As early as October 25, 1978 the newspaper had announced the
expected occurrence of a powerful typhoon code-named "Kading." On
October 26, 1978, Bulletin Today had as its headline the coming of the
typhoon. Despite these announcements, the water level in the dam was
maintained at its maximum from October 21 until midnight of October 26,
1978. At 2100 hrs. of October 26, 1978, NPC started to open the three
floodgates simultaneously from 1 meter to 8 meters at 0100 hrs. of
October 27, 1978, until all floodgates were opened to the maximum of 14
to 14.5 meters by 0600 hrs. of the same day. This was also the finding of
the court a quo, which We quote: The defendants contended that the
release of water had been `gradual.’ The lower court did not find this
true. The exhibit presented by the defendants show that on October 26,
1978 there was very little opening of the spillways, ranging from 1 meter
to 2 meters. However, from midnight or from the first hours of October
27, 1978 the opening of all the three (3) spillways started at 5 meters
and swiftly went as far up as 14 meters. As observed correctly by the trial
court had the opening of all the three (3) spillways been made earlier and
gradually, there would have been no need to open the same suddenly.
What made the situation worse was that the opening of the spillways was
made at the unholy hours when residents were asleep. The plaintiffs all
testified that they were never given any warning that the spillways would
be opened to that extent. . . ."cralaw virtua1aw library

6. ID.; LIABILITY; PRINCIPLE OF DAMNUM ABSQUE INJURIA; NOT

APPLICABLE IN THE PRESENCE OF GROSS NEGLIGENCE; CASE AT BAR.
— We cannot give credence to petitioners’ third assignment of error that
the damage caused by the opening of the dam was in the nature of
damnum absque injuria, which presupposes that although there was
physical damage, there was no legal injury in view of the fortuitous
events. There is no question that petitioners have the right, duty and
obligation to operate, maintain and preserve the facilities of Angat Dam,
but their negligence cannot be countenanced, however noble their
intention may be. The end does not justify the means, particularly
because they could have done otherwise than simultaneously opening the
spillways to such extent.

7. ID.; ID.; PRIOR WRITTEN WARNING; INADEQUATE IN CASE AT BAR.

— Petitioners insist that their giving of prior written warning should
absolve them from liability. However, as observed by the Court of
Appeals: "The notices were not delivered, or even addressed to
responsible officials of the municipalities concerned who could have
disseminated the warning properly. They were delivered to ordinary
employees and policemen. As it happened, the said notices do not appear
to have reached the people concerned, which are the residents beside the
Angat River. The plaintiffs in this case definitely did not receive any such
warning. Indeed, the methods by which the defendants allegedly sent the
notice or warning was so ineffectual that they cannot claim, as they do in
their second assignment of error, that the sending of said notice has
absolved them from liability."

DECISION

NOCON, J.:

Before Us is a petition for review on certiorari instituted by the National

Power Corporation (NPC) and Benjamin Chavez, Plant Superintendent of
NPC, from the decision of the Court of Appeals promulgated on
September 18, 1990. 1 The appellate court affirmed in toto the decision
in Civil Case No. SM-1552 of the Regional Trial Court of Malolos, Bulacan,
Branch XVI, which awarded damages, interest, attorney’s fees and
litigation expenses against petitioners in the following amounts with
interest at 12% per annum from the date of filing of the complaint until
fully paid:chanrob1es virtual 1aw library

Ricardo Cruz P 22,800.00

Zosimo Palad 24,200.00

Isaias T. Santos 45,500.00

Felimon Santos 42,900.00

Maura T. Marcial 49,280.00

Domingo Cruz 121,900.00

Leopoldo Cruz 21,000.00

Maria R. Cruz 34,000.00

Nicanor Palad 28,768.00

Nicasio San Pedro 16,950.00

Juan Palad 27,600.00

Jose T. Santos 38,410.00

Jeremias T. Santos 11,500.00

Fernando Cruz 55,780.00

The petitioners were further ordered to pay the private respondents 30%
of the amounts payable by them as attorney’s fees and P10,000.00 as
litigation expenses, and to pay the costs of suit. 2chanrobles
virtualawlibrary chanrobles.com:chanrobles.com.ph

It appears that in the early morning hours of October 27, 1978, at the
height of typhoon "Kading", a massive flood covered the towns near
Angat Dam, particularly the town of Norzagaray, causing several deaths
and the loss and destruction of houses, farms, plants, working animals
and other properties of the people residing near the Angat River. Private
respondents recalled that on the said day, they were awakened by the
sound of rampaging water all around them. The water came swiftly and
strongly that before they could do anything to save their belongings, their
houses had submerged, some even swept away by the strong current. A
number of people were able to save their lives only by climbing trees.

Private respondents blamed the sudden rush of water to the reckless and
imprudent opening of all the three (3) floodgates of the Angat Dam
spillway, without prior warning to the people living near or within the
vicinity of the dam. 3

Petitioners denied private respondents’ allegations and, by way of

defense, contended that they have maintained the water in the Angat
Dam at a safe level and that the opening of the spillways was done
gradually and after all precautionary measures had been taken. Petitioner
NPC further contended that it had always exercised the diligence of a
good father in the selection of its officials and employees and in their
supervision. It also claimed that written warnings were earlier sent to the
towns concerned. At the time typhoon "Kading" hit Bulacan with its
torrential rain, a great volume of flood water flowed into the dam’s
reservoir necessitating the release of the water therein in order to
prevent the dam from collapsing and causing the loss of lives and
tremendous damage to livestock and properties.

Petitioners further contended that there was no direct causal relationship

between the alleged damages suffered by the respondents and the acts
and omissions attributed to the former. That it was the respondents who
assumed the risk of residing near the Angat River, and even assuming
that respondents suffered damages, the cause was due to a fortuitous
event and such damages are of the nature and character of damnum
absque injuria, hence, respondents have no cause of action against them.

As assignment of errors of the appellate court, petitioners raised the

following:chanrob1es virtual 1aw library

(a) IN HOLDING THAT THE RULING IN JUAN F. NAKPIL & SONS VS.
COURT OF APPEALS, 4 IS APPLICABLE TO THE INSTANT CASE UNDER
WHICH PETITIONERS ARE LIABLE EVEN THOUGH THE COMING OF A
TYPHOON WAS FORCE MAJEURE;

(b) IN NOT HOLDING THAT THE GIVING Of THE WRITTEN NOTICE OF

WARNING BY PETITIONERS ABSOLVED THEM FROM LIABILITY;

(c) IN NOT HOLDING THAT ANY DAMAGE SUFFERED BY PRIVATE

RESPONDENTS WAS DAMNUM ABSQUE INJURIA; and

(d) IN NOT AWARDING THE COUNTERCLAIM OF PETITIONERS FOR

ATTORNEY’S FEES AND EXPENSES OF LITIGATION.

We find the petition devoid of merit.chanrobles lawlibrary : rednad

We do not agree with the petitioners that the decision handed down in
Juan F. Nakpil & Sons, supra, is not applicable to the present case. The
doctrine laid down in the said case is still good law, as far as the
concurrent liability of an obligor, in case of a force majeure, is concerned.

The case of National Power Corp. v. Court of Appeal, 5 as a matter of

fact, reiterated the ruling in Juan F. Nakpil & Sons. In the former case,
this Court ruled that the obligor cannot escape liability, if upon the
happening of a fortuitous event or an act of God, a corresponding fraud,
negligence, delay or violation or contravention in any manner of the tenor
of the obligation as provided in Article 1170 of the Civil Code 6 which
results in loss or damage.

Petitioners contended that unlike in Juan F. Nakpil & Sons, there was no
privity of contract between herein petitioners and private respondents.
They further alleged that they owed no specific duty to private
respondents in the same way that the architect of a building owed a
specific duty to its owner. Petitioners, however, failed to consider that
even if there was no contractual relation between themselves and private
respondents, they are still liable under the law on quasi-delict. Article
2176 of the Civil Code explicitly provides "whoever by act or omission
causes damage to another there being fault or negligence is obliged to
pay for the damage done."cralaw virtua1aw library

Neither can petitioners escape liability by invoking force majeure. Act of

God or force majeure, by definition, are extraordinary events not
foreseeable or avoidable, events that could not be foreseen, or which,
though foreseen, are inevitable. 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. 7 As a general rule,
no person shall be responsible for those events which could not be
foreseen or which though foreseen, were inevitable. 8

However, the principle embodied in the act of God doctrine strictly

requires that the act must be occasioned solely by the violence of nature.
Human intervention is to be excluded from creating or entering into the
cause of the mischief. When the effect is found to be in part the result of
the participation of man, whether due to his active intervention or neglect
or failure to act, the whole occurrence is then humanized and removed
from the rules applicable to the acts of God. 9

"So generally it cannot be said that damage, injury or loss is due to an

act of God where it was caused merely by excessive or heavy rainfall,
storms and weather conditions which are not unusual in character, those
which could have been reasonably anticipated or where the injury
complained of is due rather to the negligence or mismanagement of man
than to the disturbance of the elements or where such damage, injury or
loss might have been mitigated or prevented by diligence exercised after
the occurrence." 10

In the case at bar, although the typhoon "Kading" was an act of God,
petitioners can not escape liability because their negligence was the
proximate cause of the loss and damage. The Court of Appeals found
that:jgc:chanrobles.com.ph

"As hereinabove stated, it has been shown that the defendants failed to
take the necessary safeguards to prevent the danger that the Angat Dam
posed in a situation of such nature as that of typhoon ‘Kading’. The
representative of the ‘PAGASA’ who testified in these proceedings, Justo
Iglesias, Jr., stated that based on their records the rainfall on October 26
and 27, 1978 is classified only as moderate, and could not have caused
flash floods. He testified that flash floods exceeds 50 millimeters per hour
and lasts for at least two (2) hours. He stated that typhoon ‘Yaning’ which
occurred on October 7 to 14, 1978 gave a much heavier rainfall than
‘Kading’, and so did other previous typhoons." 11

This was corroborated by the testimonies of private respondents, most of

whom have lived in the area all their lives, but had never before
experienced such flooding as would have placed them on alert, even
during previous stronger typhoons such as "Dading" and
"Yoling." chanrobles law library : red

What more, when the evidence shows that as early as October 25, 1978
the newspapers had announced the expected occurrence of a powerful
typhoon code-named "Kading." 12 On October 26, 1978 Bulletin Today
had as its headline the coming of the typhoon. 13 Despite these
announcements the water level in the dam was maintained at its
maximum from October 21 until midnight of October 26, 1978. 14

At 2100 hrs. of October 26, 1978, NPC started to open the three
floodgates simultaneously from 1 meter to 8 meters at 0100 hrs. of
October 27, 1978, until all floodgates were opened to the maximum of 14
to 14.5 meters by 0600 hrs. of the same day. 15

This was also the finding of the court a quo, which We

quote:jgc:chanrobles.com.ph

"The defendants contended that the release of water had been ‘gradual’.
The lower court did not find this true. The exhibit presented by the
defendants (Exhs. AA and BB-2) show that on October 26, 1978 there
was very little opening of the spillways, ranging from 1 meter to 2
meters. However, from midnight or from the first hours of October 27,
1978 the opening of all the three (3) spillways started at 5 meters and
swiftly went as far up as 14 meters. As observed correctly by the trial
court had the opening of all the three (3) spillways been made earlier and
gradually, there would have been no need to open the same suddenly.

"What made the situation worse was that the opening of the spillways
was made at the unholy hours when residents were asleep. The plaintiffs
all testified that they were never given any warning that the spillways
would be opened to that extent. . . ." 16

It has been held in several cases 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 he must be free from any previous negligence
or misconduct by which the loss or damage may have been occasioned.
17

Thus, We cannot give credence to petitioners’ third assignment of error

that the damage caused by the opening of the dam was in the nature of
damnum absque injuria, which presupposes that although there was
physical damage, there was no legal injury in view of the fortuitous
events. There is no question that petitioners have the right, duty and
obligation to operate, maintain and preserve the facilities of Angat Dam,
but their negligence cannot be countenanced, however noble their
intention may be. The end does not justify the means, particularly
because they could have done otherwise than simultaneously opening the
spillways to such extent. Needless to say, petitioners are not entitled to
counterclaim.

Petitioners insist that their giving of prior written warning should absolve
them from liability. Notice of warning was served by them on "a
responsible employee in the office of the mayor of the municipality, or in
the absence of such responsible employee, on a member of the municipal
police force." 18 That being the case, they alleged that the presumption
that official duty has been performed must be credited in their favor. The
presumption was, however, refuted by the evidence and testimonies of
respondents who all denied having been given any warning that the
spillways would be opened to such extent and at a short period of time.

‘The letter 19 itself, addressed merely "TO ALL CONCERNED", would not
strike one to be of serious importance, sufficient enough to set alarm and
cause people to take precautions for their safety’s sake. As testified to by
driver Leonardo Garcia of the NPC, he was instructed by Chavez to give
notice "to any personnel of the municipality [sic] or even the policemen of
the municipalities concerned regarding the release of water from the
reservoir." 20 His instructions did not specify the municipal officer who
should receive the notice, but that priority must be given to the police. 21
Thus, copies of the notices were given to Pat. Carillo of Norzagaray,
Cicero Castro, municipal employee of Angat, Pat. Jaime Nicholas of
Bustos, Cpl. Josefino Legaspi of Baliwag, Pat. Luzvimin Mariano of Plaridel
and Pat. Dantes Manukduk of Calumpit.

As observed by the Court of Appeals:chanrobles.com.ph : virtual law

library

"Clearly, the notices were not delivered, or even addressed to responsible

officials of the municipalities concerned who could have disseminated the
warning properly. They were delivered to ordinary employees and
policemen. As it happened, the said notices do not appear to have
reached the people concerned, which are the residents beside the Angat
River. The plaintiffs in this case definitely did not receive any such
warning. Indeed, the methods by which the defendants allegedly sent the
notice or warning was so ineffectual that they cannot claim, as they do in
their second assignment of error, that the sending of said notice has
absolved them from liability." 22

WHEREFORE, finding no reversible error in the Decision appealed from,

the same is hereby affirmed in toto, with cost against petitioner.

SO ORDERED.

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

Endnotes:
1. CA-G.R. CV No. 11770, Ricardo Cruz, Et. Al. v.
NPC, Et Al., promulgated Sept. 18, 1990.
Ponente: Justice Salome A. Montoya; Justices
Ricardo L. Pronove, Jr. and Alfredo L. Benipayo,
concurring.

2. Trial Court’s Decision, p. 6; Rollo, p. 58.

3. Respondents’ Memorandum, p. 2; Complaint,

p. 5, item 10.

4. L-47851, 144 SCRA 596 (1986).

5. L-47481, 161 SCRA 334 (1988).

6. Article 1170 — 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.

7. Gacal v. PAL, G.R. 55300, 183 SCRA 189

(1990).

8. Art. 1174, Civil Code.

9. National Power Corporation v. Court of Appeals,

supra, citing 1 Corpus Juris, pp. 174-1175.

10. 1 Corpus Juris Secundum, p. 1430.

11. Decision, p. 6.

12. Exhibit "T."

13. Exhibit "U."

14. Exhibits "BB", "BB-1", "BB-2."

15. Exhibits "BB-1" and "BB-2."

16. Rollo, p. 27.

17. National Power Corp. v. Court of Appeals,

supra; 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;
Lasam v. Smith, 45 Phil. 657.

18. Petition, p. 17.

19. Exhibit "1." Said letter

reads:jgc:chanrobles.com.ph

"October 24, 1978.

TO ALL CONCERNED.

Please be informed that at present our reservoir

(dam) is full and that we have been releasing
water intermittently for the past several days.

With the coming of typhoon Rita (Kading) we

expect to release greater volume of water, if it
pass over our place (sic).

In view of this kindly advise people residing along

the Angat River to keep alert and stay in safe
places.

(Sgd.) BENJAMIN L. CHAVEZ

Power Plant Superintendent"

20. TSN, January 25, 1984, pp. 10-11.

21. Id., pp. 18-20.

22. Decision, p. 5.
 SECOND DIVISION

CENTRAL BANK OF THE PHILIPPINES, G.R. No. 141835

Petitioner,
Present:

CARPIO MORALES,* J., Acting

versus - Chairperson,
TINGA,
NAZARIO,
NACHURA,** and
CITYTRUST BANKING CORPORATION, BRION, JJ.
Respondent.

Promulgated:
February 4, 2009
x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION

CARPIO MORALES, J.:

Pursuant to Republic Act No. 625, the old Central Bank Law, respondent Citytrust
Banking Corporation (Citytrust), formerly Feati Bank, maintained a demand deposit
account with petitioner Central Bank of the Philippines, now Bangko Sentral ng
Pilipinas.

As required, Citytrust furnished petitioner with the names and corresponding

signatures of five of its officers authorized to sign checks and serve as drawers and
indorsers for its account. And it provided petitioner with the list and corresponding
signatures of its roving tellers authorized to withdraw, sign receipts and perform other
transactions on its behalf. Petitioner later issued security identification cards to the
roving tellers one of whom was Rounceval Flores (Flores).

On July 15, 1977, Flores presented for payment to petitioners Senior Teller Iluminada
dela Cruz (Iluminada) two Citytrust checks of even date, payable to Citytrust, one in
the amount of P850,000 and the other in the amount of P900,000, both of which were
signed and indorsed by Citytrusts authorized signatory-drawers.

After the checks were certified by petitioners Accounting Department, Iluminada

verified them, prepared the cash transfer slip on which she affixed her signature,
stamped the checks with the notation Received Payment and asked Flores to, as he
did, sign on the space above such notation. Instead of signing his name,
however, Flores signed as Rosauro C. Cayabyab a fact Iluminada failed to notice.

Iluminada thereupon sent the cash transfer slip and checks to petitioners Cash
Department where an officer verified and compared the drawers signatures on the
checks against their specimen signatures provided by Citytrust, and finding the same
in order, approved the cash transfer slip and paid the corresponding amounts to
Flores. Petitioner then debited the amount of the checks totaling P1,750,000 from
Citytrusts demand deposit account.
More than a year and nine months later, Citytrust, by letter dated April 23, 1979,
alleging that the checks were already cancelled because they were stolen, demanded
petitioner to restore the amounts covered thereby to its demand deposit
account.Petitioner did not heed the demand, however.

Citytrust later filed a complaint for estafa, with reservation on the filing of a separate
civil action, against Flores. Flores was convicted.

Citytrust thereafter filed before the Regional Trial Court (RTC) of Manila a complaint
for recovery of sum of money with damages against petitioner which it alleged erred
in encashing the checks and in charging the proceeds thereof to its account, despite
the lack of authority of Rosauro C. Cayabyab.

By Decision[1] of November 13, 1991, Branch 32 of the RTC of Manila found both
Citytrust and petitioner negligent and accordingly held them equally liable for the
loss. Both parties appealed to the Court of Appeals which, by Decision[2] dated July 16,
1999, affirmed the trial courts decision, it holding that both parties contributed
equally to the fraudulent encashment of the checks, hence, they should equally share
the loss in consonance with Article 2179[3] vis a vis Article 1172[4] of the Civil Code.

In arriving at its Decision, the appellate court noted that while Citytrust failed to take
adequate precautionary measures to prevent the fraudulent encashment of its
checks, petitioner was not entirely blame-free in light of its failure to verify the
signature of Citytrusts agent authorized to receive payment.

Brushing aside petitioners contention that it cannot be sued, the appellate court held
that petitioners Charter specifically clothes it with the power to sue and be sued.

Also brushing aside petitioners assertion that Citytrusts reservation of the filing of a
separate civil action against Flores precluded Citytrust from filing the civil action
against it, the appellate court held that the action for the recovery of sum of money
is separate and distinct and is grounded on a separate cause of action from that of the
criminal case for estafa.

Hence, the present appeal, petitioner maintaining that Flores having been an
authorized roving teller, Citytrust is bound by his acts. Also maintaining that it was not
negligent in releasing the proceeds of the checks to Flores, the failure of its teller to
properly verify his signature notwithstanding, petitioner contends that verification
could be dispensed with, Flores having been known to be an authorized roving teller
of Citytrust who had had numerous transactions with it (petitioner) on its (Citytrusts)
behalf for five years prior to the questioned transaction.

Attributing negligence solely to Citytrust, petitioner harps on Citytrusts allowing

Flores to steal the checks and failing to timely cancel them;allowing Flores to wear the
issued identification card issued by it (petitioner); failing to report Flores absence
from work on the day of the incident; and failing to explain the circumstances
surrounding the supposed theft and cancellation of the checks.

Drawing attention to Citytrusts considerable delay in demanding the restoration of

the proceeds of the checks, petitioners argue that, assuming arguendothat its teller
was negligent, Citytrusts negligence, which preceded that committed by the teller,
was the proximate cause of the loss or fraud.

The petition is bereft of merit.

Petitioners teller Iluminada did not verify Flores signature on the flimsy excuse that
Flores had had previous transactions with it for a number of years.That circumstance
did not excuse the teller from focusing attention to or at least glancing at Flores as he
was signing, and to satisfy herself that the signature he had just affixed matched that
of his specimen signature. Had she done that, she would have readily been put on
notice that Flores was affixing, not his but a fictitious signature.
Given that petitioner is the government body mandated to supervise and regulate
banking and other financial institutions, this Courts ruling in Consolidated Bank and
Trust Corporation v. Court of Appeals[5] illumines:

The contract between the bank and its depositor is governed by the
provisions of the Civil Code on simple loan. Article 1980 of the Civil
Code expressly provides that x x x savings x x x deposits of money in
banks and similar institutions shall be governed by the provisions
concerning simple loan. There is a debtor-creditor relationship
between the bank and its depositor. The bank is the debtor and the
depositor is the creditor. The depositor lends the bank money and
the bank agrees to pay the depositor on demand. The savings deposit
agreement between the bank and the depositor is the contract that
determines the rights and obligations of the parties.

The law imposes on banks high standards in view of the fiduciary

nature of banking. Section 2 of Republic Act No. 8791 (RA 8791), which
took effect on 13 June 2000, declares that the State recognizes the
fiduciary nature of banking that requires high standards of integrity
and performance. This new provision in the general banking law,
introduced in 2000, is a statutory affirmation of Supreme Court
decisions, starting with the 1990 case of Simex International v. Court of
Appeals, holding that the bank is under obligation to treat the accounts
of its depositors with meticulous care, always having in mind the
fiduciary nature of their relationship.

This fiduciary relationship means that the banks obligation to observe

high standards of integrity and performance is deemed written into
every deposit agreement between a bank and its depositor. The
fiduciary nature of banking requires banks to assume a degree of
diligence higher than that of a good father of a family. Article 1172 of
the Civil Code states that the degree of diligence required of an obligor
is that prescribed by law or contract, and absent such stipulation then
the diligence of a good father of a family. Section 2 of RA 8791
prescribes the statutory diligence required from banks that banks must
observe high standards of integrity and performance in servicing their
 depositors.Although RA 8791 took effect almost nine years after the
unauthorized withdrawal of the P300,000 from L.C. Diazs savings
account, jurisprudence at the time of the withdrawal already imposed
on banks the same high standard of diligence required under RA No.
8791. (Emphasis supplied)

Citytrusts failure to timely examine its account, cancel the checks and notify

petitioner of their alleged loss/theft should mitigate petitioners liability, in

accordance with Article 2179 of the Civil Code which provides that if

the plaintiffs negligence was only contributory, the immediate and proximate cause

of the injury being the defendants lack of due care, the plaintiff may recover damages,

but the courts shall mitigate the damages to be awarded. For had Citytrust timely

discovered the loss/theft and/or subsequent encashment, their proceeds or part

thereof could have been recovered.

In line with the ruling in Consolidated Bank, the Court deems it proper to allocate the
loss between petitioner and Citytrust on a 60-40 ratio.

WHEREFORE, the assailed Court of Appeals Decision of July 16, 1999 is

hereby AFFIRMED with MODIFICATION, in that petitioner and Citytrust should bear
the loss on a 60-40 ratio.

SO ORDERED.

CONCHITA CARPIO MORALES

Associate Justice
Acting Chairperson

WE CONCUR:

DANTE O. TINGA PRESBITERO J. VELASCO, JR.

Associate Justice Associate Justice
 ANTONIO EDUARDO B. NACHURA ARTURO D. BRION
Associate Justice Associate Justice

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, 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.

REYNATO S. PUNO
Chief Justice

*
Acting Chairperson in lieu of Justice Leonardo A. Quisumbing who inhibited himself from
the case due to close relation to a party, per Raffle dated January 26, 2009.
**
Additional member per Raffle dated January 26, 2009.
[1]
CA rollo, pp. 160-172. Penned by Assisting Judge Benjamin P. Martinez.
[2]
Id. at 287-300. Penned by Associate Justice Oswaldo D. Agcaoili and concurred in by
Associate Justices Corona Ibay-Somera and Andres B. Reyes, Jr.
[3]
Art. 2179. When the plaintiffs own negligence was the immediate and proximate cause of
his injury, he cannot recover damages. But if his negligence was only contributory, the
immediate and proximate cause of the injury being the defendants lack of due care, the plaintiff
may recover damages, but the courts shall mitigate the damages to be awarded.
 [4]
Art. 1172. Responsibility arising from negligence in the performance of every kind of
obligation is also demandable, but such liability may be regulated by the courts, according to
the circumstances.
[5]
G.R. No. 138569, September 11, 2003, 410 SCRA 562, 574-575.

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 206806 June 25, 2014

ARCO PULP AND PAPER CO., INC. and CANDIDA A. SANTOS,Petitioners,

vs.
DAN T. LIM, doing business under the name and style of QUALITY PAPERS &
PLASTIC PRODUCTS ENTERPRISES,Respondent.

DECISION

LEONEN, J.:

Novation must be stated in clear and unequivocal terms to extinguish an obligation. It

cannot be presumed and may be implied only if the old and new contracts are
incompatible on every point.

Before us is a petition for review on certiorari1 assailing the Court of Appeals’

decision2 in CA-G.R. CV No. 95709, which stemmed from a complaint3 filed in the
Regional Trial Court of Valenzuela City, Branch 171, for collection of sum of money.

The facts are as follows:

Dan T. Lim works in the business of supplying scrap papers, cartons, and other raw
materials, under the name Quality Paper and Plastic Products, Enterprises, to factories
engaged in the paper mill business.4 From February 2007 to March 2007, he delivered
scrap papers worth 7,220,968.31 to Arco Pulp and Paper Company, Inc. (Arco Pulp and
Paper) through its Chief Executive Officer and President, Candida A. Santos.5The
parties allegedly agreed that Arco Pulp and Paper would either pay Dan T. Lim the
value of the raw materials or deliver to him their finished products of equivalent value.6
Dan T. Lim alleged that when he delivered the raw materials, Arco Pulp and Paper
issued a post-dated check dated April 18, 20077 in the amount of 1,487,766.68 as
partial payment, with the assurance that the check would not bounce. 8 When he
deposited the check on April 18, 2007, it was dishonored for being drawn against a
closed account.9

On the same day, Arco Pulp and Paper and a certain Eric Sy executed a memorandum
of agreement10 where Arco Pulp and Paper bound themselves to deliver their finished
products to Megapack Container Corporation, owned by Eric Sy, for his account.
According to the memorandum, the raw materials would be supplied by Dan T. Lim,
through his company, Quality Paper and Plastic Products. The memorandum of
agreement reads as follows:

Per meeting held at ARCO, April 18, 2007, it has been mutually agreed between Mrs.
Candida A. Santos and Mr. Eric Sy that ARCO will deliver 600 tons Test Liner 150/175
GSM, full width 76 inches at the price of ₱18.50 per kg. to Megapack Container for Mr.
Eric Sy’s account. Schedule of deliveries are as follows:

....

It has been agreed further that the Local OCC materials to be used for the production of
the above Test Liners will be supplied by Quality Paper & Plastic Products Ent., total of
600 Metric Tons at ₱6.50 per kg. (price subject to change per advance notice). Quantity
of Local OCC delivery will be based on the quantity of Test Liner delivered to Megapack
Container Corp. based on the above production schedule.11

On May 5, 2007, Dan T.Lim sent a letter12 to Arco Pulp and Paper demanding payment
of the amount of 7,220,968.31, but no payment was made to him.13

Dan T. Lim filed a complaint14 for collection of sum of money with prayer for attachment
with the Regional Trial Court, Branch 171, Valenzuela City, on May 28, 2007. Arco Pulp
and Paper filed its answer15 but failed to have its representatives attend the pre-trial
hearing. Hence, the trial court allowed Dan T. Lim to present his evidence ex parte. 16

On September 19, 2008, the trial court rendered a judgment in favor of Arco Pulp and
Paper and dismissed the complaint, holding that when Arco Pulp and Paper and Eric Sy
entered into the memorandum of agreement, novation took place, which extinguished
Arco Pulp and Paper’s obligation to Dan T. Lim.17

Dan T. Lim appealed18 the judgment with the Court of Appeals. According to him,
novation did not take place since the memorandum of agreement between Arco Pulp
and Paper and Eric Sy was an exclusive and private agreement between them. He
argued that if his name was mentioned in the contract, it was only for supplying the
parties their required scrap papers, where his conformity through a separate contract
was indispensable.19
On January 11, 2013, the Court of Appeals20 rendered a decision21 reversing and
setting aside the judgment dated September 19, 2008 and ordering Arco Pulp and
Paper to jointly and severally pay Dan T. Lim the amount of ₱7,220,968.31 with interest
at 12% per annum from the time of demand; ₱50,000.00 moral damages; ₱50,000.00
exemplary damages; and ₱50,000.00 attorney’s fees.22

The appellate court ruled that the facts and circumstances in this case clearly showed
the existence of an alternative obligation.23 It also ruled that Dan T. Lim was entitled to
damages and attorney’s fees due to the bad faith exhibited by Arco Pulp and Paper in
not honoring its undertaking.24

Its motion for reconsideration25 having been denied,26 Arco Pulp and Paper and its
President and Chief Executive Officer, Candida A. Santos, bring this petition for review
on certiorari.

On one hand, petitioners argue that the execution of the memorandum of agreement
constituted a novation of the original obligation since Eric Sy became the new debtor of
respondent. They also argue that there is no legal basis to hold petitioner Candida A.
Santos personally liable for the transaction that petitioner corporation entered into with
respondent. The Court of Appeals, they allege, also erred in awarding moral and
exemplary damages and attorney’s fees to respondent who did not show proof that he
was entitled to damages.27

Respondent, on the other hand, argues that the Court of Appeals was correct in ruling
that there was no proper novation in this case. He argues that the Court of Appeals was
correct in ordering the payment of 7,220,968.31 with damages since the debt of
petitioners remains unpaid.28 He also argues that the Court of Appeals was correct in
holding petitioners solidarily liable since petitioner Candida A. Santos was "the prime
mover for such outstanding corporate liability."29 In their reply, petitioners reiterate that
novation took place since there was nothing in the memorandum of agreement showing
that the obligation was alternative. They also argue that when respondent allowed them
to deliver the finished products to Eric Sy, the original obligation was novated. 30

A rejoinder was submitted by respondent, but it was noted without action in view of A.M.
No. 99-2-04-SC dated November 21, 2000.31

The issues to be resolved by this court are as follows:

1. Whether the obligation between the parties was extinguished by novation

2. Whether Candida A. Santos was solidarily liable with Arco Pulp and Paper
Co., Inc.

3. Whether moral damages, exemplary damages, and attorney’s fees can be

awarded
The petition is denied.

The obligation between the

parties was an alternative
obligation

The rule on alternative obligations is governed by Article 1199 of the Civil Code, which
states:

Article 1199. A person alternatively bound by different prestations shall completely

perform one of them.

The creditor cannot be compelled to receive part of one and part of the other
undertaking.

"In an alternative obligation, there is more than one object, and the fulfillment of one is
sufficient, determined by the choice of the debtor who generally has the right of
election."32The right of election is extinguished when the party who may exercise that
option categorically and unequivocally makes his or her choice known. 33

The choice of the debtor must also be communicated to the creditor who must receive
notice of it since: The object of this notice is to give the creditor . . . opportunity to
express his consent, or to impugn the election made by the debtor, and only after said
notice shall the election take legal effect when consented by the creditor, or if impugned
by the latter, when declared proper by a competent court.34

According to the factual findings of the trial court and the appellate court, the original
contract between the parties was for respondent to deliver scrap papers worth
₱7,220,968.31 to petitioner Arco Pulp and Paper. The payment for this delivery became
petitioner Arco Pulp and Paper’s obligation. By agreement, petitioner Arco Pulp and
Paper, as the debtor, had the option to either (1) pay the price or(2) deliver the finished
products of equivalent value to respondent.35

The appellate court, therefore, correctly identified the obligation between the parties as
an alternative obligation, whereby petitioner Arco Pulp and Paper, after receiving the
raw materials from respondent, would either pay him the price of the raw materials or, in
the alternative, deliver to him the finished products of equivalent value.

When petitioner Arco Pulp and Paper tendered a check to respondent in partial
payment for the scrap papers, they exercised their option to pay the price.
Respondent’s receipt of the check and his subsequent act of depositing it constituted
his notice of petitioner Arco Pulp and Paper’s option to pay.

This choice was also shown by the terms of the memorandum of agreement, which was
executed on the same day. The memorandum declared in clear terms that the delivery
of petitioner Arco Pulp and Paper’s finished products would be to a third person, thereby
extinguishing the option to deliver the finished products of equivalent value to
respondent.

The memorandum of
agreement did not constitute
a novation of the original
contract

The trial court erroneously ruled that the execution of the memorandum of agreement
constituted a novation of the contract between the parties. When petitioner Arco Pulp
and Paper opted instead to deliver the finished products to a third person, it did not
novate the original obligation between the parties.

The rules on novation are outlined in the Civil Code, thus:

Article 1291. Obligations may be modified by:

(1) Changing their object or principal conditions;

(2) Substituting the person of the debtor;

(3) Subrogating a third person in the rights of the creditor. (1203)

Article 1292. In order that an obligation may be extinguished by another which

substitute the same, it is imperative that it be so declared in unequivocal terms, or that
the old and the new obligations be on every point incompatible with each other. (1204)

Article 1293. Novation which consists in substituting a new debtor in the place of the
original one, may be made even without the knowledge or against the will of the latter,
but not without the consent of the creditor. Payment by the new debtor gives him the
rights mentioned in Articles 1236 and 1237. (1205a)

Novation extinguishes an obligation between two parties when there is a substitution of

objects or debtors or when there is subrogation of the creditor. It occurs only when the
new contract declares so "in unequivocal terms" or that "the old and the new obligations
be on every point incompatible with each other."36

Novation was extensively discussed by this court in Garcia v. Llamas:37

Novation is a mode of extinguishing an obligation by changing its objects or principal

obligations, by substituting a new debtor in place of the old one, or by subrogating a
third person to the rights of the creditor. Article 1293 of the Civil Code defines novation
as follows:

"Art. 1293. Novation which consists in substituting a new debtor in the place of the
original one, may be made even without the knowledge or against the will of the latter,
but not without the consent of the creditor. Payment by the new debtor gives him rights
mentioned in articles 1236 and 1237."

In general, there are two modes of substituting the person of the debtor: (1) expromision
and (2) delegacion. In expromision, the initiative for the change does not come from —
and may even be made without the knowledge of — the debtor, since it consists of a
third person’s assumption of the obligation. As such, it logically requires the consent of
the third person and the creditor. In delegacion, the debtor offers, and the creditor
accepts, a third person who consents to the substitution and assumes the obligation;
thus, the consent of these three persons are necessary. Both modes of substitution by
the debtor require the consent of the creditor.

Novation may also be extinctive or modificatory. It is extinctive when an old obligation is

terminated by the creation of a new one that takes the place of the former. It is merely
modificatory when the old obligation subsists to the extent that it remains compatible
with the amendatory agreement. Whether extinctive or modificatory, novation is made
either by changing the object or the principal conditions, referred to as objective or real
novation; or by substituting the person of the debtor or subrogating a third person to the
rights of the creditor, an act known as subjective or personal novation. For novation to
take place, the following requisites must concur:

1) There must be a previous valid obligation.

2) The parties concerned must agree to a new contract.

3) The old contract must be extinguished.

4) There must be a valid new contract.

Novation may also be express or implied. It is express when the new obligation declares
in unequivocal terms that the old obligation is extinguished. It is implied when the new
obligation is incompatible with the old one on every point. The test of incompatibility is
whether the two obligations can stand together, each one with its own independent
existence.38 (Emphasis supplied)

Because novation requires that it be clear and unequivocal, it is never presumed, thus:

In the civil law setting, novatio is literally construed as to make new. So it is deeply
rooted in the Roman Law jurisprudence, the principle — novatio non praesumitur —that
novation is never presumed.At bottom, for novation tobe a jural reality, its animus must
be ever present, debitum pro debito — basically extinguishing the old obligation for the
new one.39 (Emphasis supplied) There is nothing in the memorandum of agreement that
states that with its execution, the obligation of petitioner Arco Pulp and Paper to
respondent would be extinguished. It also does not state that Eric Sy somehow
substituted petitioner Arco Pulp and Paper as respondent’s debtor. It merely shows that
petitioner Arco Pulp and Paper opted to deliver the finished products to a third person
instead.

The consent of the creditor must also be secured for the novation to be valid:

Novation must be expressly consented to. Moreover, the conflicting intention and acts of
the parties underscore the absence of any express disclosure or circumstances with
which to deduce a clear and unequivocal intent by the parties to novate the old
agreement.40 (Emphasis supplied)

In this case, respondent was not privy to the memorandum of agreement, thus, his
conformity to the contract need not be secured. This is clear from the first line of the
memorandum, which states:

Per meeting held at ARCO, April 18, 2007, it has been mutually agreed between Mrs.
Candida A. Santos and Mr. Eric Sy. . . .41

If the memorandum of agreement was intended to novate the original agreement

between the parties, respondent must have first agreed to the substitution of Eric Sy as
his new debtor. The memorandum of agreement must also state in clear and
unequivocal terms that it has replaced the original obligation of petitioner Arco Pulp and
Paper to respondent. Neither of these circumstances is present in this case.

Petitioner Arco Pulp and Paper’s act of tendering partial payment to respondent also
conflicts with their alleged intent to pass on their obligation to Eric Sy. When respondent
sent his letter of demand to petitioner Arco Pulp and Paper, and not to Eric Sy, it
showed that the former neither acknowledged nor consented to the latter as his new
debtor. These acts, when taken together, clearly show that novation did not take place.
Since there was no novation, petitioner Arco Pulp and Paper’s obligation to respondent
remains valid and existing. Petitioner Arco Pulp and Paper, therefore, must still pay
respondent the full amount of ₱7,220,968.31.

Petitioners are liable for

damages

Under Article 2220 of the Civil Code, moral damages may be awarded in case of breach
of contract where the breach is due to fraud or bad faith:

Art. 2220. Willfull 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)

Moral damages are not awarded as a matter of right but only after the party claiming it
proved that the breach was due to fraud or bad faith. As this court stated:
Moral damages are not recoverable simply because a contract has been breached.
They are recoverable only if the party from whom it is claimed acted fraudulently or in
bad faith or in wanton disregard of his contractual obligations. The breach must be
wanton, reckless, malicious or in bad faith, and oppressive or abusive.42

Further, the following requisites must be proven for the recovery of moral damages:

An award of moral damages would require certain conditions to be met, to wit: (1)first,
there must be an injury, whether physical, mental or psychological, clearly sustained by
the claimant; (2) second, there must be culpable act or omission factually established;
(3) third, the wrongful act or omission of the defendant is the proximate cause of the
injury sustained by the claimant; and (4) fourth, the award of damages is predicated on
any of the cases stated in Article 2219 of the Civil Code.43

Here, the injury suffered by respondent is the loss of ₱7,220,968.31 from his business.
This has remained unpaid since 2007. This injury undoubtedly was caused by petitioner
Arco Pulp and Paper’s act of refusing to pay its obligations.

When the obligation became due and demandable, petitioner Arco Pulp and Paper not
only issued an unfunded check but also entered into a contract with a third person in an
effort to evade its liability. This proves the third requirement.

As to the fourth requisite, Article 2219 of the Civil Code provides that moral damages
may be awarded in the following instances:

Article 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;

(10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34, and 35.
Breaches of contract done in bad faith, however, are not specified within this
enumeration. When a party breaches a contract, he or she goes against Article 19 of
the Civil Code, which states: Article 19. Every person must, in the exercise of his rights
and in the performance of his duties, act with justice, give everyone his due, and
observe honesty and good faith.

Persons who have the right to enter into contractual relations must exercise that right
with honesty and good faith. Failure to do so results in an abuse of that right, which may
become the basis of an action for damages. Article 19, however, cannot be its sole
basis:

Article 19 is the general rule which governs the conduct of human relations. By itself, it
is not the basis of an actionable tort. Article 19 describes the degree of care required so
that an actionable tort may arise when it is alleged together with Article 20 or Article
21.44

Article 20 and 21 of the Civil Code are as follows:

Article 20. Every person who, contrary to law, wilfully or negligently causes damage to
another, shall indemnify the latter for the same.

Article 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.

To be actionable, Article 20 requires a violation of law, while Article 21 only concerns

with lawful acts that are contrary to morals, good customs, and public policy:

Article 20 concerns violations of existing law as basis for an injury. It allows recovery
should the act have been willful or negligent. Willful may refer to the intention to do the
act and the desire to achieve the outcome which is considered by the plaintiff in tort
action as injurious. Negligence may refer to a situation where the act was consciously
done but without intending the result which the plaintiff considers as injurious.

Article 21, on the other hand, concerns injuries that may be caused by acts which are
not necessarily proscribed by law. This article requires that the act be willful, that is, that
there was an intention to do the act and a desire to achieve the outcome. In cases
under Article 21, the legal issues revolve around whether such outcome should be
considered a legal injury on the part of the plaintiff or whether the commission of the act
was done in violation of the standards of care required in Article 19.45

When parties act in bad faith and do not faithfully comply with their obligations under
contract, they run the risk of violating Article 1159 of the Civil Code:

Article 1159. Obligations arising from contracts have the force of law between the
contracting parties and should be complied with in good faith.
Article 2219, therefore, is not an exhaustive list of the instances where moral damages
may be recovered since it only specifies, among others, Article 21. When a party
reneges on his or her obligations arising from contracts in bad faith, the act is not only
contrary to morals, good customs, and public policy; it is also a violation of Article 1159.
Breaches of contract become the basis of moral damages, not only under Article 2220,
but also under Articles 19 and 20 in relation to Article 1159.

Moral damages, however, are not recoverable on the mere breach of the contract.
Article 2220 requires that the breach be done fraudulently or in bad faith. In Adriano v.
Lasala:46

To recover moral damages in an action for breach of contract, the breach must be
palpably wanton, reckless and malicious, in bad faith, oppressive, or abusive. Hence,
the person claiming bad faith must prove its existence by clear and convincing evidence
for the law always presumes good faith.

Bad faith does not simply connote bad judgment or negligence. It imports a dishonest
purpose or some moral obliquity and conscious doing of a wrong, a breach of known
duty through some motive or interest or ill will that partakes of the nature of fraud. It is,
therefore, a question of intention, which can be inferred from one’s conduct and/or
contemporaneous statements.47 (Emphasis supplied)

Since a finding of bad faith is generally premised on the intent of the doer, it requires an
examination of the circumstances in each case.

When petitioner Arco Pulp and Paper issued a check in partial payment of its obligation
to respondent, it was presumably with the knowledge that it was being drawn against a
closed account. Worse, it attempted to shift their obligations to a third person without
the consent of respondent.

Petitioner Arco Pulp and Paper’s actions clearly show "a dishonest purpose or some
moral obliquity and conscious doing of a wrong, a breach of known duty through some
motive or interest or ill will that partakes of the nature of fraud." 48 Moral damages may,
therefore, be awarded.

Exemplary damages may also be awarded. Under the Civil Code, exemplary damages
are due in the following circumstances:

Article 2232. In contracts and quasi-contracts, the court may award exemplary damages
if the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent
manner.

Article 2233. Exemplary damages cannot be recovered as a matter of right; the court
will decide whether or not they should be adjudicated.
Article 2234. While the amount of the exemplary damages need not be proven, the
plaintiff must show that he is entitled to moral, temperate or compensatory damages
before the court may consider the question of whether or not exemplary damages
should be awarded.

In Tankeh v. Development Bank of the Philippines,49 we stated that:

The purpose of exemplary damages is to serve as a deterrent to future and subsequent

parties from the commission of a similar offense. The case of People v. Ranteciting
People v. Dalisay held that:

Also known as ‘punitive’ or ‘vindictive’ damages, exemplary or corrective damages are

intended to serve as a deterrent to serious wrong doings, and as a vindication of undue
sufferings and wanton invasion of the rights of an injured or a punishment for those
guilty of outrageous conduct. These terms are generally, but not always, used
interchangeably. In common law, there is preference in the use of exemplary damages
when the award is to account for injury to feelings and for the sense of indignity and
humiliation suffered by a person as a result of an injury that has been maliciously and
wantonly inflicted, the theory being that there should be compensation for the hurt
caused by the highly reprehensible conduct of the defendant—associated with such
circumstances as willfulness, wantonness, malice, gross negligence or recklessness,
oppression, insult or fraud or gross fraud—that intensifies the injury. The terms punitive
or vindictive damages are often used to refer to those species of damages that may be
awarded against a person to punish him for his outrageous conduct. In either case,
these damages are intended in good measure to deter the wrongdoer and others like
him from similar conduct in the future.50 (Emphasis supplied; citations omitted)

The requisites for the award of exemplary damages are as follows:

(1) they may be imposed by way of example in addition to compensatory

damages, and only after the claimant's right to them has been established;

(2) that they cannot be recovered as a matter of right, their determination

depending upon the amount of compensatory damages that may be awarded to
the claimant; and

(3) the act must be accompanied by bad faith or done in a wanton, fraudulent,
oppressive or malevolent manner.51

Business owners must always be forthright in their dealings. They cannot be allowed to
renege on their obligations, considering that these obligations were freely entered into
by them. Exemplary damages may also be awarded in this case to serve as a deterrent
to those who use fraudulent means to evade their liabilities.

Since the award of exemplary damages is proper, attorney’s fees and cost of the suit
may also be recovered.
Article 2208 of the Civil Code states:

Article 2208. In the absence of stipulation, attorney's fees and expenses of litigation,
other than judicial costs, cannot be recovered, except:

(1) When exemplary damages are awarded[.]

Petitioner Candida A. Santos
is solidarily liable with
petitioner corporation

Petitioners argue that the finding of solidary liability was erroneous since no evidence
was adduced to prove that the transaction was also a personal undertaking of petitioner
Santos. We disagree.

In Heirs of Fe Tan Uy v. International Exchange Bank,52 we stated that:

Basic is the rule in corporation law that a corporation is a juridical entity which is vested
with a legal personality separate and distinct from those acting for and in its behalf and,
in general, from the people comprising it. Following this principle, obligations incurred by
the corporation, acting through its directors, officers and employees, are its sole
liabilities. A director, officer or employee of a corporation is generally not held personally
liable for obligations incurred by the corporation. Nevertheless, this legal fiction may be
disregarded if it is used as a means to perpetrate fraud or an illegal act, or as a vehicle
for the evasion of an existing obligation, the circumvention of statutes, or to confuse
legitimate issues.

....

Before a director or officer of a corporation can be held personally liable for corporate
obligations, however, the following requisites must concur: (1) the complainant must
allege in the complaint that the director or officer assented to patently unlawful acts of
the corporation, or that the officer was guilty of gross negligence or bad faith; and (2)
the complainant must clearly and convincingly prove such unlawful acts, negligence or
bad faith.

While it is true that the determination of the existence of any of the circumstances that
would warrant the piercing of the veil of corporate fiction is a question of fact which
cannot be the subject of a petition for review on certiorari under Rule 45, this Court can
take cognizance of factual issues if the findings of the lower court are not supported by
the evidence on record or are based on a misapprehension of facts. 53(Emphasis
supplied)

As a general rule, directors, officers, or employees of a corporation cannot be held

personally liable for obligations incurred by the corporation. However, this veil of
corporate fiction may be pierced if complainant is able to prove, as in this case, that (1)
the officer is guilty of negligence or bad faith, and (2) such negligence or bad faith was
clearly and convincingly proven.

Here, petitioner Santos entered into a contract with respondent in her capacity as the
President and Chief Executive Officer of Arco Pulp and Paper. She also issued the
check in partial payment of petitioner corporation’s obligations to respondent on behalf
of petitioner Arco Pulp and Paper. This is clear on the face of the check bearing the
account name, "Arco Pulp & Paper, Co., Inc."54 Any obligation arising from these acts
would not, ordinarily, be petitioner Santos’ personal undertaking for which she would be
solidarily liable with petitioner Arco Pulp and Paper.

We find, however, that the corporate veil must be pierced. In Livesey v. Binswanger
Philippines:55

Piercing the veil of corporate fiction is an equitable doctrine developed to address

situations where the separate corporate personality of a corporation is abused or used
for wrongful purposes. Under the doctrine, the corporate existence may be disregarded
where the entity is formed or used for non-legitimate purposes, such as to evade a just
and due obligation, or to justify a wrong, to shield or perpetrate fraud or to carry out
similar or inequitable considerations, other unjustifiable aims or intentions, in which
case, the fiction will be disregarded and the individuals composing it and the two
corporations will be treated as identical.56(Emphasis supplied)

According to the Court of Appeals, petitioner Santos was solidarily liable with petitioner
Arco Pulp and Paper, stating that:

In the present case, We find bad faith on the part of the [petitioners] when they
unjustifiably refused to honor their undertaking in favor of the [respondent]. After the
check in the amount of 1,487,766.68 issued by [petitioner] Santos was dishonored for
being drawn against a closed account, [petitioner] corporation denied any privity with
[respondent]. These acts prompted the [respondent] to avail of the remedies provided
by law in order to protect his rights.57

We agree with the Court of Appeals. Petitioner Santos cannot be allowed to hide behind
the corporate veil.1âwphi1 When petitioner Arco Pulp and Paper’s obligation to
respondent became due and demandable, she not only issued an unfunded check but
also contracted with a third party in an effort to shift petitioner Arco Pulp and Paper’s
liability. She unjustifiably refused to honor petitioner corporation’s obligations to
respondent. These acts clearly amount to bad faith. In this instance, the corporate veil
may be pierced, and petitioner Santos may be held solidarily liable with petitioner Arco
Pulp and Paper.

The rate of interest due on

the obligation must be
reduced in view of Nacar v.
Gallery Frames58
In view, however, of the promulgation by this court of the decision dated August 13,
2013 in Nacar v. Gallery Frames,59the rate of interest due on the obligation must be
modified from 12% per annum to 6% per annum from the time of demand.

Nacar effectively amended the guidelines stated in Eastern Shipping v. Court of

Appeals,60 and we have laid down the following guidelines with regard to the rate of
legal interest:

To recapitulate and for future guidance, the guidelines laid down in the case of Eastern
Shipping Linesare accordingly modified to embody BSP-MB Circular No. 799, as
follows:

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts,

delicts or quasi-delicts is breached, the contravenor can be held liable for damages. The
provisions under Title XVIII on "Damages" of the Civil Code govern in determining the
measure of recoverable damages.

II. With regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof, is imposed,
as follows:

1. When the obligation is breached, and it consists in the payment of a sum of

money, i.e., a loan or forbearance of money, the interest due should be that
which may have been stipulated in writing. Furthermore, the interest due shall
itself earn legal interest from the time it is judicially demanded. In the absence of
stipulation, the rate of interest shall be 6% per annum to be computed from
default, i.e., from judicial or extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.

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
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 or until the
demand can be established with reasonable certainty. Accordingly, where the
demand is established with reasonable certainty, the 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 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 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, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 6% per annum from such finality until its
 satisfaction, this interim period being deemed to be by then an equivalent to a
forbearance of credit.

And, in addition to the above, judgments that have become final and executory prior to
July 1, 2013, shall not be disturbed and shall continue to be implemented applying the
rate of interest fixed therein.61 (Emphasis supplied; citations omitted.)

According to these guidelines, the interest due on the obligation of ₱7,220,968.31

should now be at 6% per annum, computed from May 5, 2007, when respondent sent
his letter of demand to petitioners. This interest shall continue to be due from the finality
of this decision until its full satisfaction.

WHEREFORE, the petition is DENIED in part. The decision in CA-G.R. CV No. 95709 is
AFFIRMED.

Petitioners Arco Pulp & Paper Co., Inc. and Candida A. Santos are hereby ordered
solidarily to pay respondent Dan T. Lim the amount of ₱7,220,968.31 with interest of 6%
per annum at the time of demand until finality of judgment and its full satisfaction, with
moral damages in the amount of ₱50,000.00, exemplary damages in the amount of
₱50,000.00, and attorney's fees in the amount of ₱50,000.00.

SO ORDERED.

MARVIC MARIO VICTOR F. LEONEN

Associate Justice

WE CONCUR:

DIOSDADO M. PERALTA*
Associate Justice
Acting Chairperson

MARTIN S. VILLARAMA, JR.** JOSE CATRAL MENDOZA

Associate Justice Associate Justice

BIENVENIDO L. 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.
DIOSDADO M. PERALTA
Associate Justice
Acting Chairperson, Third Division

C E R T I F I C AT I O N

Pursuant to Section 13, Article VIII of the Constitution and the Division Acting
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.

MARIA LOURDES P. A. SERENO

Chief Justice

Footnotes

* Associate Justice Diosdado M. Peralta was designated as Acting Chairperson

of the Third Division per Special Order No. 1707 dated June 17, 2014, vice
Associate Justice Presbitero J. Velasco, Jr., in view of the latter's official trip to
Nairobi, Kenya on June 22 to 25, 2014 and to South Africa on June 26 to 29,
2014.

** Associate Justice Martin S. Villarama, Jr. was designated as Acting Member

per Special Order No. 1691 dated May 22, 2014, in view of the vacancy in the
Third Division.

*** Associate Justice Bienvenido L. Reyes was designated as Acting Member of

the Third Division per Special Order No. 1704 dated June 17, 2014, vice
Associate Justice Presbitero J. Velasco, Jr., in view of the latter's official trip to
Nairobi, Kenya on June 22 to 25, 2014 and to South Africa on June 26 to 29,
2014.
1 Rollo, pp. 8–20.
2 Id. at 101–110.
3 Id. at 22–29.
4 Id. at 23, complaint.
5 Id.
6 Id. at 101–102, CA decision.
7 Id. at 38.
8 Id. at 23.
9 Id. at 38.
10 Id. at 39.
11 Id.
12 Id. at 40.
13 Id. at 24.
14 Id. at 22–29.
15 Id. at 41–45.
16 Id. at 52, RTC decision.
17 Id. at 51–54.
18 Id. at 71–95.
19 Id. at 85.
20Per Seventeenth Division, penned by J. Villon, and concurred in by J. Macalino
and J. Inting.
21 Rollo, pp. 101–110.
22 Id. at 110, CA decision.
23 Id. at 107, CA decision.
24 Id. at 109, CA decision.
25 Id. at 111–116.
26 Id. at 121–122.
27 Id. at 8–20.
28 Id. at 126–131.
29 Id. at 129, comment.
30 Id. at 133–136.
31 Entitled In Re: In Dispensing with Rejoinder, which states that:

"[U]pon the filing of a Reply (when required), no REJOINDER shall be

required by the Court.

Instead, the Court shall resolve either to (a) give due course to the petition
and either consider the case submitted for decision based on the
pleadings or require the parties to submit their respective memoranda; or
(b) deny or dismiss the petition, as the case may be."
32Dissenting opinion of Justice Ynares-Santiago in Chavez v. PEA, 451 Phil. 1,
102–103 (2003) [Per J. Carpio, En Banc], citing A. M. TOLENTINO,
COMMENTARIES AND JURISPRUDENCE ON THE CIVIL CODE OF THE
PHILIPPINESIV, 203 (1991).
33Borbon II v. Service wide Specialists, 328 Phil. 150, 157–158 (1996) [Per J.
Vitug, First Division].
34 Ong Guan Can v. Century Insurance Co., Ltd., 46 Phil. 592, 594 (1924) [PerJ.
Villamor, En Banc]. See also CIVIL CODE, art. 1201.
35 See rollo, p. 53, RTC decision, and rollo, p. 108, CA decision.
36 CIVIL CODE, art. 1292.
37 462 Phil. 779 (2003) [Per. J. Panganiban, First Division].
38 Id. at 788–790, citing Idolor v. CA,404 Phil. 220, 228 (2001) [Per J. Gonzaga-
Reyes, Third Division]; Agro Conglomerates, Inc. v. CA, 401 Phil. 644, 655
(2000) [Per J. Quisumbing, Second Division]; De Cortes v. Venturanza, 170 Phil.
55, 68 (1977) [Per J. Makasiar, First Division]; PNB v. Mallari and The First Nat'l.
Surety & Assurance Co., Inc., 104 Phil. 437, 441 (1958) [Per J. Felix, En Banc];
A. M.TOLENTINO, CIVIL CODE OF THE PHILIPPINES, IV, 390 (1991); Garcia
v. Khu Yek Chiong, 65 Phil. 466, 468 (1938) [Per C.J. Avanceña, En Banc];
Babst v. CA,403 Phil. 244 (2001) [Per J. Ynares-Santiago, First Division];
Spouses Bautista v. Pilar Development Corporation, 371 Phil. 533 (1999) [Per J.
Puno, First Division]; Security Bank and Trust Company, Inc. v. Cuenca,396 Phil.
108, 122 (2000) [Per J. Panganiban, Third Division]; Reyes v. CA,332 Phil. 40,
50 (1996) [Per J. Torres, Jr., Second Division]; Molino v. Security Diners
International Corporation,415 Phil. 587 (2001) [Per J. Gonzaga-Reyes, Third
Division].
39Reyes v. Court of Appeals, 332 Phil. 40, 56 (1996) [Per J. Torres, Jr., Second
Division].
40Land Bank of the Philippines v. Ong, G.R. No. 190755, November 24, 2010,
636 SCRA 266, 277 [Per J. Velasco, Jr., First Division], citing Philippine Savings
Bank v. Spouses Mañalac, 496 Phil. 671, 687– 688 (2005) [Per J. Ynares-
Santiago, First Division].
41 Rollo, p. 39.
42 Philippine Savings Bank v. Spouses Castillo, G.R. No. 193178, May 30, 2011,
649 SCRA 527, 538 [Per J. Nachura, Second Division], citing Philippine National
Bank v. Rocamora, 616 Phil. 369, 385 (2009) [Per J. Brion, Second Division];
Pilipinas Shell Petroleum Corporation v. John Bordman Ltd. of Iloilo, Inc., 509
Phil. 728, 751 (2005) [Per J. Panganiban, Third Division].
43Francisco v. Ferrer, Jr., 405 Phil. 741, 749–750 (2001) [Per J. Pardo, First
Division].
44Concurring opinion of J. Leonen, Alano v. Logmao, G.R. No. 175540, April 7,
2014
<http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2014/april201
4/175540_leonen.pdf> [Per J. Peralta, Third Division].
45 Id.
46G.R. No. 197842, October 9, 2013
<http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2013/october2
013/197842.pdf> [Per J. Mendoza, Third Division].
47 Id., citing Erlinda Francisco v. Ferrer, Jr.,405 Phil. 741, 745 (2001) [Per J.
Pardo, First Division]; Magat v. Court of Appeals, 392 Phil. 63, 76 (2000) [Per J.
Pardo, First Division]; Far East Bank & Trust Company v. Court of Appeals, 311
Phil. 783, 787 (1995) [Per J. Vitug, En Banc]; Ace Haulers Corporation v. Court
of Appeals, 393 Phil. 220, 230 (2000) [Per J. Pardo, First Division]; Tan v.
Northwest Airlines, Inc., 383 Phil. 1026, 1032 (2000) [Per J. Pardo, First
Division]; Ford Philippines, Inc. v. Court of Appeals, 335 Phil. 1, 9 (1997) [Per J.
Francisco, Third Division]; and Llorente, Jr. v. Sandiganbayan, 350 Phil. 820, 843
(1998) [Per J. Panganiban, First Division].
48Adriano v. Lasala, G.R. No. 197842, October 9, 2013
<http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2013/october2
013/197842.pdf> [Per J. Mendoza, Third Division].
49G.R. No. 171428, November 11, 2013
<http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2013/novemb
er2013/171428.pdf> [Per J. Leonen, Third Division].
50 Id.
51 Francisco v. Ferrer, Jr., 405 Phil. 741, 750 (2001) [Per J. Pardo, First Division],
citing National Steel Corporation v. Regional Trial Court of Lanao del Norte, Br.
2, Iligan City, 364 Phil. 240, 257–258 (1999) [Per J. Purisima, Third Division].
52G.R. No. 166282–83, February 13, 2013, 690 SCRA 519 [Per J. Mendoza,
Third Division].
53Id. at 525–527, citing Garcia v. Social Security Commission Legal and
Collection,565 Phil. 193, 209–210 (2007) [Per Chico-Nazario, Third Division];
Aratea v. Suico, 547 Phil. 407, 414 (2007) [Per J. Garcia, First Division];
Prudential Bank v. Alviar, 502 Phil. 595 (2005) [Per J. Tinga, Second Division];
Francisco v. Mallen, Jr., G.R. No. 173169, September 22, 2010, 631 SCRA 118,
123 [Per J. Carpio, Second Division]; Sarona v. National Labor Relations
Commission, G.R. No. 185280, January 18, 2012, 663 SCRA 394, 415 [Per J.
Reyes, Second Division].
54 Rollo, p. 38.
55G.R. No. 177493, March 19, 2014
<http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2014/march20
14/177493.pdf> [Per J. Brion, Second Division].
56 Id., citingJ. C. VITUG(Retired Supreme Court Associate Justice),
COMMERCIAL LAW AND JURISPRUDENCE, II, 9 (2006); Lim v. Court of
Appeals, 380 Phil. 60, 76 (2000) [Per J. Buena, Second Division]; Philippine
National Bank v. Ritratto Group, Inc., 414 Phil. 494, 505 (2001) [Per J. Kapunan,
First Division]; National Federation of Labor Union (NAFLU) v. Ople, 227 Phil.
113 (1986) [Per J. Gutierrez, Jr., Second Division]; Commissioner of Internal
Revenue v. Norton & Harrison Company, 120 Phil. 684 (1964) [Per J. Paredes,
En Banc].
57 Rollo, p. 109.
58 G.R. No. 189871, August 13, 2013, 703 SCRA 439 [Per J. Peralta, En Banc].
59 Id.
60G.R. No. 97412, July 12, 1994, 234 SCRA 78 [Per J. Vitug, En Banc]. The
guidelines previously stated that:

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-

contracts, delicts or quasi-delicts is breached, the contravenor can be held
liable for damages. The provisions under Title XVIII on "Damages" of the
Civil Code govern in determining the measure of recoverable damages.
 II. With regard particularly to an award of interest in the concept of actual
and compensatory damages, the rate of interest, as well as the accrual
thereof, is imposed, as follows:

1. When the obligation is breached, and it consists in the payment

of a sum of money, i.e., a loan or forbearance of money, the
interest due should be that which may have been stipulated in
writing. Furthermore, the interest due shall itself earn legal interest
from the time it is judicially demanded. In the absence of stipulation,
the rate of interest shall be 12%per annum to be computed from
default, i.e., from judicial or extrajudicial demand under and subject
to the provisions of Article 1169of the Civil Code.

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 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 or until the demand
can be established with reasonable certainty. Accordingly, where
the demand is established with reasonable certainty, the 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 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 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, whether the case falls under paragraph 1
or paragraph 2, above, 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.
61Nacar v. Gallery Frames, GR. No. 189871, August 13, 2013, 703 SCRA 439,
457 458 [Per J. Peralta, En Banc].