THIRD DIVISION "As to damages and attorney's fees, it appearing
from the records of this case that no evidence to
[G.R. No. 134692. August 1, 2000]
ELISEO FAJARDO, JR., and MARISSA
FAJARDO, petitioners, vs. FREEDOM TO BUILD,
INC., respondent.
DECISION
VITUG, J.:
Freedom To Build, Incorporated, an owner-developer and
seller of low-cost housing, sold to petitioner-spouses, a
house and lot designated Lot No. 33, Block 14, of the De la
Costa Homes in Barangka, Marikina, Metro Manila. The
Contract to Sell executed between the parties, contained a
Restrictive Covenant providing certain prohibitions, to wit:[1]
"Easements. For the good of the entire
community, the homeowner must observe a
two-meter easement in front. No structure of any
kind (store, garage, bodega, etc.) may be built on
the front easement.
"x x x.............................x x x.............................x x x
"Upward expansion. A second storey is not
prohibited. But the second storey expansion must
be placed above the back portion of the house and
should not extend forward beyond the apex of the
original building.
"x x x.............................x x x.............................x x x
"Front expansion: 2nd Storey: No unit may be
extended in the front beyond the line as designed
and implemented by the developer in the 60 sq. m.
unit. In other words, the 2nd floor expansion, in
front, is 6 meters back from the front property line
and 4 meters back from the front wall of the house,
just as provided in the 60 sq. m. units."[2]
The above restrictions were also contained in Transfer
Certificate of Title No. N-115384 covering the lot issued in
the name of petitioner-spouses.
The controversy arose when petitioners, despite repeated
warnings from respondent, extended the roof of their house
to the property line and expanded the second floor of their
house to a point directly above the original front
wall.[3] Respondent filed before the Regional Trial Court,
National Capital Judicial Region, Branch 261, Pasig City, an
action to demolish the unauthorized structures.
After trial, judgment was rendered against petitioners; thus:
"WHEREFORE, premises considered, defendant
spouses Eliseo B. Fajardo, Jr., and Marissa F.
Fajardo are hereby directed to immediately
demolish and remove the extension of their
expanded housing unit that exceeds the limitations
imposed by the Restrictive Covenant, otherwise
the Branch Sheriff of this Court shall execute this
decision at the expense of the defendants.
sustain the same was adduced by either of the
parties, the Court deems itproper not to award any.
"SO ORDERED."[4]
On appeal to it, the Court of Appeals affirmed the decision of
the trial court.
In their petition for review to this Court, the spouses contest
the judgment of the courts below. Adjacent owners
reportedly have no objection to the construction, and have
even expressed interest in undertaking a similar expansion in
their respective residences. Moreover, the couple's two
children, a son and a daughter, might soon get married and
then share, with their families, living quarters with petitioners.
The latter also assail the personality of private respondent to
question the construction which have effectively relinquished
its ownership, right or interest over the subdivision upon the
execution of the Deed of Absolute Sale in favor of the
individual homeowners. Per the contract between Freedom
to Build Incorporated and the De la Costa Low Income
Project Homeowners' Association (hereinafter homeowners'
association), petitioners aver, the enforcement of the
prohibitions contained in the "Restrictive Covenant" originally
residing on respondent is now lodged in the homeowners'
association. Petitioners maintain that it is incumbent upon
the homeowners' association, not on respondent, to enforce
compliance with the provisions of the covenant.
A perusal of the provisions of the covenant would show that
the restrictions therein imposed were intended -
"For the protection and benefit of the De La Costa
Low Income Housing Project, and of all the
persons who may now, or hereafter become
owners of any part of the project, and as part of the
consideration for the conveyance of the housing
unit, these restrictions are promulgated in order
that; the intents and purposes for which the project
was designed shall be upheld; to wit: subsequent
duly approved sale and assignments of housing
units shall be made only to low income families; a
certain level of privacy shall be observed; a
community spirit shall be fostered; and an
undisturbed possession and occupancy at the
homeowners shall be maintained."[5]
Restrictive covenants are not, strictly speaking, synonymous
with easements. While it may be correct to state that
restrictive covenants on the use of land or the location or
character of buildings or other structures thereon may
broadly be said to create easements or rights, it can also be
contended that such covenants, being limitations on the
manner in which one may use his own property,[6] do not
result in true easements,[7] but a case of servitudes (burden),
sometimes characterized to be negative easements or
reciprocal negative easements. Negative easement is the
most common easement created by covenant or agreement
whose effect is to preclude the owner of the land from doing
an act, which, if no easement existed, he would be entitled to
do.[8]
Courts which generally view restrictive covenants with
disfavor for being a restriction on the use of one's property,
have, nevertheless, sustained them[9] where the covenants
are reasonable,[10] not contrary to public policy,[11] or to
law,[12] and not in restraint of trade.[13] Subject to these
limitations, courts enforce restrictions to the same extent that
will lend judicial sanction to any other valid contractual
relationship.[14] In general, frontline restrictions on
constructions have been held to be valid stipulations.[15]
The provisions in a restrictive covenant prescribing the type
of the building to be erected are crafted not solely for the
purpose of creating easements, generally of light and view,
nor as a restriction as to the type of construction,[16] but may
also be aimed as a check on the subsequent uses of the
building[17] conformably with what the developer originally
might have intended the stipulations to be. In its
Memorandum, respondent states in arguing for the validity of
the restrictive covenant that the -
"x x x restrictions are not without specific purpose.
In a low cost-socialized housing, it is of public
knowledge that owners-developers are
constrained to build as many number of houses on
a limited land area precisely to
accommodate marginalized lot buyers, providing
as much as possible the safety, aesthetic and
decent living condition by controlling overcrowding.
Such project has been designed to accommodate
at least 100 families per hectare."[18]
There appears to be no cogent reasons for not upholding
restrictive covenants aimed to promote aesthetics, health,
and privacy or to prevent overcrowding.
Viewed accordingly, the statement of petitioners that their
immediate neighbors have not opposed the construction is
unavailing to their cause, the subject restrictive covenant not
being intended for the benefit of adjacent owners but to
prescribe the uses of the building, i.e., to ensure, among
other things, that the structures built on De la Costa Homes
Subdivision would prevent overcrowding and promote
privacy among subdivision dwellers. The argument then of
petitioners that expansion is necessary in order to
accommodate the individual families of their two children
must fail for like reason. Nor can petitioners claim good faith;
the restrictive covenants are explicitly written in the Contract
To Sell and annotated at the back of the Transfer Certificate
of Title.
"When the obligation consists in not doing and the
obligor does what has been forbidden him, it shall
be undone at his expense."
This Court is not unaware of its ruling in Ayala Corporation vs.
Ray Burton Development Corporation,[22] which has merely
adjudged the payment of damages in lieu of demolition. In
the aforementioned case, however, the elaborate
mathematical formula for the determination of compensatory
damages which takes into account the current construction
cost index during the immediately preceding 5 years based
on the weighted average of wholesale price and wage
indices of the National Census and Statistics Office and the
Bureau of Labor Statistics is explicitly provided for in the
Deed of Restrictions entered into by the parties. This unique
and peculiar circumstance, among other strong justifications
therein mentioned, is not extant in the case at bar.
In sum, the Court holds that -
(1)....The provisions of the Restrictive Covenant
are valid;
(2)....Petitioners must be held to be bound thereby;
and
(3)....Since the extension constructed exceeds the
floor area limits of the Restrictive Covenant,
petitioner-spouses can be required to demolish the
structure to the extent that it exceeds the
prescribed floor area limits.
WHEREFORE, the assailed decision, dated 13 July 1998, of
the Court of Appeals in CA-G.R. CV No. 50085, sustaining
that of the court a quo, is AFFIRMED. No costs.
SO ORDERED.
Melo, (Chairman), Panganiban,
Purisima, and Gonzaga-Reyes, JJ., concur.

Petitioners raise the issue of the personality of respondent to

enforce the provisions of the covenant. Broadly speaking, a
suit for equitable enforcement of a restrictive covenant can
only be made by one for whose benefit it is intended.[19] It is
not thus normally enforceable by one who has no right nor
interest in the land for the benefit of which the restriction has
been imposed.[20] Thus, a developer of a subdivision can
enforce restrictions, even as against remote grantees of lots,
only if he retains part of the land.[21] There would have been
merit in the argument of petitioners - that respondent, having
relinquished ownership of the subdivision to the homeowners,
is precluded from claiming any right or interest on the same
property - had not the homeowners' association, confirmed
by its board of directors, allowed respondent to enforce the
provisions of the restrictive covenant.

Finally, petitioners argue that for lack of a specific provision,

prescribing the penalty of demolition in the "Restrictive
Covenant" in the event of a breach thereof, the prayer of
respondent to demolish the structure should fail. This
argument has no merit; Article 1168 of the New Civil Code
states:
 demurrer to the complaint was overruled, but to the order overruling it
the defendant did not except. The defendant answered, alleging that
the document, the basis of the plaintiff's claim, was executed through
error on his part and through fraud on the part of the plaintiff. A trial was
had and judgment was entered for the plaintiff as prayed for in its
complaint. The defendant moved for a new trial on the ground that the
decision was not justified by the evidence, this motion was denied, to
its denial the defendant excepted, and he has brought the case here for
review.

Upon the questions of fact raised by the answer, the findings of the
court below are sustained by the evidence, in no event they can be said
to be plainly and manifestly against the weight of the evidence. Those
findings include a finding that there was no fraud on the part of the
plaintiff, no mistake on the part of the defendant, and that there was a
sufficient consideration for the contract, As has been said, there was in
the case to support all of these conclusions.

Upon one point, however, we think that the judgment was erroneous.
The contract send upon was executed on the 11th day of June, 1901.
By terms thereof the defendant promised to pay the plaintiff 8,000
pesos as follows: 500 pesos on the 30th of June, 1901, and the
remainder at the rate of 100 pesos a month, payable on the 30th day of
each month, until the entire 8,000 pesos was paid. The defendant paid
400 pesos and no more.

This suit was commenced on the 12th day of June, 1903. There was no
provision in the contract by which, upon failure to pay one installment of
the debt, the whole debt should thereupon become at once payable.
We are of the opinion that the obligation can be enforced in this action
for only the amount due and payable on the 12th day of June, 1903.

The court below gave no credit for the payment of 400 pesos admitted
by the complaint to have been received by the plaintiff. It is allowed
interest upon the entire debt from the 1st day of July, 1901. The
contract does not provide for the payment of any interest. There is no
provision in it declaring expressly that the failure to pay when due
should put the debtor in default. There was therefore no default which
would make him liable for interest until a demand was made. (Civil
Code, art. 1100; Manresa, Com. on Civil Code, vol 8, p. 56.) The
transaction did not constitute a mercantile loan and article 316 of the
Code of Commerce is not applicable. There was no evidence any
demand prior to the presentation of the complaint. The plaintiff is
therefore entitled to interest only from the commencement of the action.

The judgment is set aside and the case is remanded to the court below
with directions to determine the amount due in accordance with the
views hereinbefore expressed and to enter judgment for such amount.
Republic of the Philippines No costs will be allowed to either party in this court. So ordered.
SUPREME COURT
Manila
Arellano, C.J., Torres, Mapa, Johnson, Carson and Tracey, JJ., concur.
EN BANC
Republic of the Philippines
SUPREME COURT
G.R. No. 3019 February 9, 1907
Manila

LA COMPAÑIA GENERAL DE TABACOS DE EN BANC

FILIPINA, plaintiff-appellee,
vs.
VICENTE ARAZA, defendant-appellant. G.R. No. L-22359 November 28, 1924

T. L. McGirr for appellant. JULIO DE LA ROSA, plaintiff-appellant,

Domingo Franco for appellee. vs.
THE BANK OF THE PHILIPPINE ISLANDS, defendant-appellant.
WILLARD, J.:
Ramon Sotelo for plaintiff-appellant.
Araneta and Zaragoza for defendant-appellant.
The plaintiff brought this action in the court below to foreclose a
mortgage for 8,000 pesos upon certain land in the Province of Leyte. A

ROMUALDEZ, J.:
This action was instituted on June 11, 1923, by means of a complaint
on the ground that the defendant bank started a contest of designs and
plans for the construction of a building, announcing that the prizes
would be awarded not later that on November 30, 1921; that the
plaintiff took part in said contest, having performed work and incurred
expenses for that purpose; that said bank refrained from naming judges
and awarding the prizes in accordance with the conditions stipulated.
The plaintiff prays that judgment be rendered in his favor for the sum of
P30,000 as damages, with interest and the costs.
The defendant bank answered denying the facts contained in the
second and following paragraphs of the complaint.
After the trial, the court rendered judgment ordering the defendant bank
to pay the plaintiff an indemnity of P4,000 and the costs.
Both parties appealed from this judgment, the plaintiff assigning the
following errors as committed by the trial court:
1. In holding that the sum of P4,000 was a just and reasonable
indemnity to the plaintiff.
2. In not ordering the defendant bank to pay the P30,000 prayed for in
the complaint.
The defendant bank, in turn, assigned the following errors as
committed by the trial court:
1. In holding that the date set for the award of prizes is essential in the
contract.
2. In ordering that the sum of P4,000 be paid to the plaintiff.
The fundamental question on which the plaintiff's action depends is
raised in the first assignment of error made by the defendant bank, or,
whether or not the date set for the award of the prizes was essential in
the contract and, therefore, whether or not the failure to award the
prizes on said date was breach of contract on the part of the defendant.
First of all, we find that due to the fact that the bank started and
advertised the said contest, offering prizes under certain conditions,
and the plaintiff prepared, by labor and expense, and took part in said
contest, the bank is bound to comply with the promise made in the
rules and conditions prepared and advertised by it.
A binding obligation may even originate in advertisements addressed
to the general public. (6 R. C. L., 600.)
It is an elementary principle that where a party publishes an offer to the
world, and before it is withdrawn another acts upon it, the party making
the offer is bound to perform his promise. This principle is frequently
applied in cases of the offer of rewards, . . . (6 R. C. L., 607.)
What is to be determined is whether or not the defendant bank was in
default in not awarding the prizes on November, 30, 1921.
The plaintiff contends that it was, according to paragraph 2 of article
1100 of the Civil Code, the complete text of which is as follows:
Persons obliged to deliver or to do something are in default from the
moment the creditor demands of them judicially or extrajudicially the
fulfillment of their obligation.
Nevertheless, the demand of the creditor shall not be necessary in
order that the default may arise —
1. When the obligator or the law expressly so provides;
2. When by reason of the nature and circumstances of the obligation it
shall appear that the designation of the time at which the thing was to
be delivered or the service rendered was the principal inducement to
the creation of the obligation.
In reciprocal obligations neither of the obligators shall be in default if
the other does not fulfill or does not submit to the fulfillment of that
which is incumbent upon him. From the time on the obliges performs
his obligation the default begins for the other party.
And the party plaintiff contends that the said date was the principal
inducement because the current cost of concrete buildings at the time
was fixed. The fixation of said price cannot be considered as the
principal inducement of the contract, but undoubtedly only for the
uniformity of the designs to be presented and to secure greater justice
in the appreciation of the relative merits of each work submitted.
Such fixation of price, naturally, was not the principal inducement for
the contestants. Neither was it for the bank which could not certain that
said price would continue to be current price when it desired to
construct the building designed.
We do not find sufficient reason for considering that the date set for the
reward of the prizes was the principal inducement to the creation of the
obligation. And, taking into consideration the criterion that must be
followed in order to judge whether or not the time for the performance
of the obligation is the principal inducement in a given case, we hold
that it was not in the instant case.
The distinguished Manresa explains the matter in the following
terms: 1awphi1.net
These words ("principal inducement" in paragraph 2 of article 1100 of
the Civil Code) whose special meaning in connection with this article
and the circumstances of each obligation does not permit of their being
confused with the permanent general idea, and the distinct clearness of
consideration of contracts, may give rise to serious doubts by reason of
the breadth of expression, and must be judged in each particular case,
it being impossible to give a general rule to explain them. It will for
instance, be unquestionable that the hypothesis implied in this
exception is affected when the matter, for instance, is the delivery of
things of the rendition of services to be employed in agricultural work,
and the time of said work has been designated as the date for the
fulfillment of the obligation; it will also exist when, for instance, fruits or
any objects are to be delivered which might be used by the creditor in
industrial operations having a determinate period for carrying them out
and designated for their delivery; and, finally, it will also assist
whenever, as in these cases, it appears that the obligation would not
have been created for a date other than that fixed.
The defendant bank cannot be held to have been in default through the
mere lapse of time. For this judicial or extrajudicial demand was
necessary for the performance of the obligation, and it was not alleged
here, nor does it appear that before bringing this action the plaintiff had
ever demanded it from the defendant bank in any manner whatsoever.
The defendant bank, therefore, was not in default.
The plaintiff's allegation that the defendant bank abstained from
continuing the contest was not proven. On the contrary, it was proved,
and so stated in the decision appealed from, that during the trial of this
case in the Court of First Instance the designs were on the way to New
York where they were sent to a technical committee.

This committee, according to the new evidence before us presented by

the defendant bank and which we now hold admissibe and admit, was
appointed by the defendant bank for the study and determination of the
designs presented and entitled to the prizes advertised, and which
rendered its report and awarded the prizes in accordance with the rules
and conditions of the contract, except in regard to the date of such
award of prizes which, as we have found, is not essential to the
contract in question.

It appearing that the defendant bank was not in default it is needles to

discuss the other questions raised, all depending upon the existence of
said default.

We find the plaintiff has no cause of action in this case,

The judgment appealed from is reversed and the defendant is entirely

absolved from the complaint, without any express finding as to costs.
So ordered.

Johnson, Street, Malcolm, Villamor, Ostrand and Johns, JJ., concur.

Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-10801 February 28, 1961

MARIANO RODRIGUEZ and MARINA

RODRIGUEZ, plaintiffs-appellees,
vs.
PORFIRIO BELGICA and EMMA BELGICA, defendants-appellants.

Ignacio M. Orendain for plaintiffs-appellees.

Arsenio M. Cabrera and Jose S. Fineza for defendants-appellants.

PAREDES, J.:

This was originally a partition case, instituted in the Court of First

Instance of Rizal, Quezon City Branch. After a series of pleadings filed
by the parties, and on one of the hearings held, the defendants made a
verbal offer to compromise. Pursuant to the said offer, the plaintiffs, on
August 27, 1955, filed a "Motion re Offer to Compromise." What
transpired afterwards is best depicted in the following judgment of the
lower court: .

"The above-entitled case was scheduled in the calendar of this Court

today to consider the "Motion re Offer of Compromise" as a result of the
pre-trial held by the parties and their respective Attorneys in this case.

The parties have discussed and considered the terms and conditions
set forth in said Offer of Compromise submitted by the attorney for the
plaintiffs and as a result thereof they have arrived at an amicable
settlement, the terms of which were dictated in open court by the
attorneys of both parties in the presence of their clients, with the
exception of plaintiffs Mariano Rodriguez and his wife Marina
Rodriguez who were represented by their son, Atty. Jose Rodriguez.
The terms and conditions of said Compromise Agreement are as
follows: .
Atty. Fineza:
If your Honor please, as regards the Motion Re Offer of Compromise
presented by the plaintiffs dated August 26, 1955, we wish to inform
this Honorable Court that with regards to paragraph 1-A wherein the
length of time given to the defendants to pay the plaintiffs of
P35,000.00 is thirty (30) days, we request that said period be seventy
(70) days counted from today, August 30, 1955. With regard to
Paragraphs 1-B and 1-C, we are agreeable to the terms and conditions
therein stated: Court: .
Any objection to the said counter proposal of the defendants? .
Atty. Orendain: .
We have no objection, Your Honor.
Court: - (To defendant Mr. Porfirio Belgica).
Mr. Porfirio Belgica, have you heard what Atty. Fineza, your lawyer,
have proposed to the Court and are you agreeable to the same? .
Defendant Porfirio Belgica: .
Yes, Your Honor.
Atty. Fineza: .
Inasmuch as defendant Porfirio Belgica will have to negotiate a portion
of the part pertaining to him to raise the amount of P35,000.00 with
which he will pay the plaintiffs, we request that the plaintiffs make new
selection of the portion they desire as per plan Exhibit E.
Atty. Orendain:.
According to my clients, Your Honor, I was instructed to choose the
portion which is nearest to Quezon City, in other words, the portion in
the bigger lot which is the Southern portion as appears in Exhibit E and
which is encircled in red pencil, subject to relocation or readjustment
after a survey is made.
That the plaintiffs will sign the necessary transfer of the 36% in favor of
the defendants upon payment of the P35,000.00.
That the plaintiffs agree to grant authority to defendant Porfirio Belgica
to negotiate the sale or mortgage of the 36% which is proposed to be
conveyed to him, for the purpose of raising the P35,000.00 to be paid
to the plaintiffs.
That the Motion re Offer of Compromise is hereby made a part and
parcel of the Compromise Agreement, as modified.
Parties agree that in the event the defendants fail to pay to the plaintiffs
said amount of P35,000.00 within the period above fixed or stipulated,
the plaintiffs will automatically be the owners of the 36% of the two
parcels of land, and that the 14% pertaining to the defendants will be
taken from the portion towards Caloocan, or more particularly in the
portion encircled in blue pencil, subject to the survey and relocation of a
surveyor. Court: .
Make of record that this Compromise Agreement was made in open
court in the presence of Atty. Jose Rodriguez, who is the son of the
plaintiff Mariano Rodriguez, their attorney Mr. Ignacio M. Orendain, the
defendant Mr. Porfirio Belgica and his counsel Atty. Jose S. Fineza.
Parties respectfully pray this Honorable Court to render judgment in
accordance therewith without costs.
The transcript of the notes taken by the Stenographer of the
proceedings taken by the parties before they arrived at an amicable
settlement was signed by the parties and their respective attorneys and
submitted to this Court for corresponding decision.
IN VIEW OF THE FOREGOING, judgment is hereby rendered
approving en toto the foregoing Compromise Agreement and the
parties are hereby ordered to abide by and comply with the terms and
conditions contained in said Compromise Agreement, without
pronouncement as to costs.
On September 3, 1955, the defendants filed a Motion for Withdrawal of
Exhibits, particularly the Certificates of Titles covering the lands,
subject matter of the present controversy. Among the reasons given in
the motion was "the defendants have already taken steps to effect that
partition of the property for the purpose of delimiting the respectively
portion which would appertain to each, which delimitation has to be
effected in order that defendants may have the opportunity of
negotiating their half or any portion thereof to raise the P35,000.00
which he undertook to pay to plaintiffs. The above motion bore the
conformity of counsel for the plaintiffs.
On November 19, 1955, after the lapse of the seventy (70) day period
stipulated in the compromise agreement, and upon the failure of the
defendants to pay, the plaintiffs presented a motion praying that the
defendants be ordered to deliver to the plaintiffs the Certificates of the
Titles so that 14% of the property pertaining to the defendant could be
segregated. An opposition was registered by the defendants,
contending that the inability to meet the obligation to pay the
P35,000.00 was due to the deliberate refusal of the plaintiffs to grant
the authority to defendant Porfirio Belgica to negotiate the sale or
mortgage of the 36%; and that since the decision had created
reciprocal obligations, the refusal or failure on the part of one to comply
did not make the other in default. In the opposition, the defendants
prayed that the plaintiffs be ordered to grant defendant Porfirio Belgica
the authority to negotiate the sale or mortgage of the 36%. the lower
court, On November 26, 1955, ordered the defendants to surrender to
the Court the TCT's they withdrew, not latter than December 1, 1955.
On this date the defendants filed a "Motion to Compel Plaintiffs to
Comply with the Conditions of the Judgment", reiterating in substance,
the reason they invoked in their previous oppositions. On December 15,
1955, the trial court acting on the motion of the defendants, handed
down the following order, to wit:
"defendant Belgica's contention is that the plaintiffs Mariano Rodriguez
has refused to grant the authority adverted to. Said defendant, however,
has not done anything, nor has filed any petition with the Court
regarding the alleged refusal of the plaintiff Rodriguez to grant such
authority before the expiration of the 70-day period fixed by the parties
within which to pay the said amount of P35,000.00. The petition to
compel the plaintiffs to comply with the conditions of the judgment,
namely to command said plaintiffs to grant the authority above referred
to was only filed on December 1, 1955, or after the expiration of 90
days. In the opinion of the Court, the decision rendered in this case has
already become final and executory under the terms and conditions
stipulated by the parties and upon which said decision was based.
IN VIEW OF THE FOREGOING, the said motion to compel the
plaintiffs to comply with the condition embodied in the judgment is
hereby DENIED.".
The above ordered is now the subject to the present appeal, appellants
contending in their lone assignment of error that the lower court erred
"in denying the motion of December 1, 1955 (to compel the plaintiffs to
grant the authority), on the ground that because of the failure of
defendants-appelants to pay the plaintiffs-appelees the amount
P35,000.00 within the period of seventy days, the judgment of August counsel when he said, "According to my clients, Your Honor, I was
30,1955, has already become due and executory.". instructed to choose the portion which is nearest to Quezon City . . .".

Whether the denial of the motion of compel the plaintiffs to grant the In view hereof, the resolution of the lower court dated December 15,
authority is proper and legal, would seem to be the dominant issue.. 1955, is reversed, and another entered, ordering the
plaintiffs-appellees to execute in favor of the defendants-appellants the
proper authority to sell or mortgage 36% of the properties in litigation
On the plaintiffs-appellees was impose the obligation of granting to
within 30 days from notice of this decision and further directing the
defendants-appellants the requisite authority to negotiate either the
defendants-appellants to pay unto the plaintiffs-appellees the sum of
sale or mortgage of the 36% interest in the property. This is
P35,000.00 within 30 days from the date such authority is granted.
understandable, because on the face of the two certificates of the title
Without special pronouncement as to costs.
covering the properties, defendants owned only 14%, while plaintiffs
owned 86%. Without such authority executed by plaintiffs in favor of the
defendants, it was difficult, not to say impossible for the latter to affect a Bengzon, Actg. C.J., Padilla, Bautista Angelo, Concepcion, Reyes,
negotiation. This the plaintiffs the fully knew, because in the J.B.L., Barrera and Dizon, JJ., concur.
compromise, they acknowledged that the amount of P35,000.00 due to
them would be paid within 70 days from the August 30, 1953, with
money to be delivered from the sale of mortgage of the property. It was,
therefore, incumbent upon the plaintiffs "to grant authority" to
defendants to negotiate the sale or mortgage of the 36% of the property.
Considering that the reciprocal obligation has been established by the
compromise agreement, the sequence in which the reciprocal
obligations of the parties are to be performed, is quite clear. The giving
of the authority to sell or mortgage precedes the obligation of the
defendants to pay P35,000.00(Martinez vs. Cavives, 25 Phil. 581).
Until this authority is granted by the plaintiff, the 70 day period for
payment will not commence to run. The plaintiffs insinuated that
defendant did not ask for the authority. There was, however the
statement or allegation by the defendants to the effects that they made
verbal request for such authority but plaintiffs refused to give, a
statement or allegation discredited by the lower court. But even without
a request, from the very nature of the obligation assumed by plaintiffs,
demand by defendants that it be performed, was not necessary (Article
1169, par. 2, Civil Code).

It is true that defendants' petition to compel the plaintiffs to grant the

authority repeatedly mentioned, was only filed on December 1, 1955,
after the expiration of the 70-day period. It should, however, be
observed that the actuations or acts of the defendants have always
been lulled by a sense of an honest but insecure misunderstanding, as
to the scope and extent of the terms and conditions of the compromise.
To show that defendants had not abandoned their obligation to pay the
sum of P35,000.00, on September 3, 1955, within the 70-day period
which expired on November 8, 1955, they filed a motion to withdraw
documents and certificates of title to delimit the respective portions, in
order that they (defendants) might have an opportunity of negotiating
one-half or any portion to raise P35,000.00 to which motion the
plaintiffs agreed. While waiting for the grant of authority to descend, like
manna from Heaven, the defendants were surprised to receive, on
November 19, 1955, plaintiffs' motion to have the titles returned so that
the defendants' 14% could be segregated, as they (plaintiffs) wanted to
remain with the 86% of the properties.

The lower court and with it, the plaintiffs-appellees had indulged in fine
technicalities which in this particular case, would work injustice to the
defendants-appellants, more than anything else. The compromise
agreement being onerous the doubt should be settled in favor of the
greatest reciprocity of interests. Without the authority in question the
obligation of the defendants to pay the plaintiffs the sum of P35,000.00
cannot be considered as having matured, and the lapse of the 70-day
period fixed in the decision can not be adjudged as having resulted in
the forfeiture of their right to repurchase their 36% interest in the
properties (Price, Inc. v. Rilloraza, et al.. No. L-8253, May 25, 1955).

The claim of the appellees that the appellants failed to comply with their
initial obligation to delimit the property, as stated by them in their
motion to withdraw, is not supported by the evidence. The delimitation
or segregation of the property to be sold or mortgaged which appellants
should have done first so that the authority could have been granted,
had long been accomplished. This is clear from the words of appellees'
 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-4874 March 2, 1909
MARIANO VELOSO, ET AL., plaintiffs-appellees,
vs.
ANICETA FONTANOSA, ET AL., defendants-appellants.
Martin M. Levering for appellants.
Rodriguez and Del Rosario for appellees.
ARELLANO, C.J.:
This case was brought by means of a bill of exceptions to this court for
a revision of the facts and evidence. The appeal being heard it
appears:
That a complaint was filed with the Court of First Instance of Cebu as
follows: (1) That Mariano Veloso, Damiana Veloso, and Melchor
Veloso are the sole lawful heirs of Gavino Veloso and Buenaventura
Veloso, their father and brother respectively; (2) that the defendants
are Aniceta Fontanosa, as widow of Roberto Ancajas, and Florentina,
Leona, Maria, Juan, Romualda, Vicenta, and Felix, all of the surname
of Ancajas, the lawful children of the deceased Roberto, and Estefania
Fontanosa, mother and legal guardian of the minor Jose Ancajas; (3)
that at he death of Gavino Veloso, Roberto Ancajas owed him the sum
of 5,065 pesos which he had borrowed prior to the year 1881; (4) that in
the apportionment of the estate, this debt of 5,065 pesos went to
Buenaventura Veloso as his portion; (5) that in the year 1882, Roberto
Ancajas, after having acknowledged the transfer of his indebtedness by
inheritance to Buenaventura Veloso, continued to receive sums of
money from the latter on the same conditions, that is, as loans, and
bound himself to make annual payments in sugar; (6) that on the 11th
of October, 1883, the debt of Roberto Ancajas amounted to 10,449.18
pesos, as shown by a liquidation of accounts made between them and
ratified by Roberto Ancajas in the said month on October, 1883; (7) that
on August 4, 1884, this balance amounted to 12,199.65 pesos; (8) that
on May 31, 1887, it rose to 14,439.40 pesos, which sum, however, was
reduced to 12,365.20 pesos by the payment of 2,074.20 pesos on
account; (9) that up to the year 1893 the defendants made payments
amounting to 642.27 pesos which reduced the amount owing to
11,722.43 pesos; (10) that on the death of Buenaventura Veloso, the
defendants, as his sole and lawful heirs, inherited, and that same year
divided between them all his property with the exception of the
above-mentioned credit, which is at present held pro indiviso between
them, and they, as the lawful heirs of Buenaventura Veloso, the
creditor, have repeatedly called upon the defendants to pay the said
credit, but the latter have constantly refused to do so, thus having rise
to the filing of the complaint; (11) that on account of their delinquency in
payment they have caused the plaintiffs damages to the value of
14,068.48 pesos; they therefore asked the court below to sentence the
defendants to pay both sums, with legal interest thereon from the time
they ceased to make payments, and the costs.
That the attorneys who answered the complaint, subscribed their
answer: "Attorneys for Aniceta Fontanosa, Maria, Juana, Romualda,
Vicenta, and Felix, all surnamed Ancajas, and for Estefania
Fontanosa," having previously signed the receipt for the complaint in
this manner: "Attorneys for the defendants, with the exception of
Florentina and Leona Ancajas."
That in the answer, in addition to the general of all the allegations in the
complaint, there was put forward as special defense: (1) That this
supposed right of action had prescribed before the action was instituted;
(2) that Romualda Ancajas and some of the other general heirs of
Roberto Ancajas were not of age, at the time of the death of Roberto
Ancajas, nor at the time of the supposed acceptance of the inheritance,
and that there was no judicial intervention in said acceptance.
The trial judge in his findings of fact considers that, among other
allegations of the complaint, the following have been proven:
That Aniceta Ancajas is the wife of the said deceased and that with the
exception of the minor Jose Ancajas, who is represented in these
proceedings by his legal guardian, Estefania Fontanosa, and is the
grandchild of the said deceased Roberto Ancajas, most of the
defendants are his children; that as heirs the said defendants took
possession of all the property of the said deceased after his death, and
at the present time are in possession as the undivided owners thereof.
(B. of E., 12.)
And as conclusions of law he says:
That the defendants being the heirs of Roberto Ancajas, deceased, and
having taken possession of the latter's property from the time of his
death to the present time, as heirs of the said deceased, and exercising
over the same all those acts which show ownership, which, if they were
not the heirs, they could not exercised, they have purely and simply
accepted the inheritance from their principal, and consequently, under
article 1003 of the Civil Code, they are liable for the encumbrances with
which the heritage is charged, not only with the property of their
principal but also with their own; that the defendants, as heirs of the
late Roberto Ancajas, having acknowledged and admitted the latter's
debt to Buenaventura Veloso, the principal of the plaintiffs, which
acknowledgment was made expressly and by means of the payments
made by them to the creditor, have contracted the express obligation to
pay it under the same terms as their aforesaid principal; that the
defendants are liable for the payment of the sum of P11,722.43 to the
plaintiffs, in their capacity of heirs, to Buenaventura Veloso, for the debt
contracted in his favor by their late principal Roberto Ancajas, and
which debt was acknowledged and admitted by them; that as the
defendants have acknowledged and admitted the said debt, toward the
settlement of which they made the last payment in the year 1893, the
right of action for its recovery, by article 1964 of the Civil Code, and in
accordance with article 943 of the Code of Commerce, prescribes after
the lapse of fifteen years, and inasmuch as the period fifteen years
from said date until the time the complaint herein was presented, has
not expired, the conclusion is that the said action is enforceable and
should be made effective; that, it being proven that Buenaventura
Veloso, the plaintiffs' principal, had brought suit against the defendants
in the year 1896 for the payment of said debt, it must be concluded that
the prescription of the action for recovery has been legally interrupted,
in conformity with the provisions of article 1973 of the Civil Code; that
the debt of P11,722.43 is a credit which originated from a mercantile
contract, and as the interest due the plaintiffs can not be determined,
they are entitled to recover the legal interest on said amount from the
defendants at the rate of 6 per cent per annum from the month of
September, 1893, until the full payment thereof.
The defendants appealed from this judgment of the lower court,
alleging the following errors:
1. The admission of the books marked as Exhibits A, B, and C as
evidence, and the overruling of the motion for their exclusion.
2. The admission of Exhibits D, E, F, and G as evidence.
3. The finding that the defendants are the heirs of the late Roberto
Ancajas, and that they purely and simply accepted the inheritance from
the said deceased.
4. The overruling of the motion for a new trial.
With regard to the first and second errors, charged against the
admission of the documentary evidence of the appellees, the rulings of
the court below are in accordance with the law. The books marked as
Exhibits A and B simply serve to show the origin and progress of the
debt, and they may be ignored from the moment there was entered on
folio 88 of the book marked Exhibit C a debit and credit account, of
which Exhibit E is an exact copy, and which shows the account
maintained between Buenaventura Veloso and Roberto Ancajas as
accepted by the latter and signed by him in proof of his conformity with
the balance of P10,449.18 appearing therein. This acknowledgment by
their principal must be decisive as to the heirs, and it must be held to be
proven that at least they are indebted in said sum of P10,449.18, since
against the admission and validity of Exhibit E nothing has been
alleged by the appellants in this instance.
As the successive liquidations which the trial court took into
consideration until reaching the one at bar are not specifically
impugned, either in this instance or in the court below, they are not now,
therefore, subject to revision by this court.
As to the prescription of the right of action which is subsidiarily alleged
in order to impugn the obligation which, according to the judgment
appealed from still exists, the appellants say that "the debt had
prescribed so far as the defendants are concerned, with the
questionable exception of the defendant Aniceta Fontanosa, widow of
Roberto Ancajas, because it appears that said Aniceta Fontanosa was
the only person who made any payment, and it is not possible that an
act performed by one of the defendants can prejudice the legal rights of
the others." (Brief, 5.)
The court below considered as proven: (1) The payments made by the
heirs after the death of Roberto Ancajas, the last of which was in 1893;
(2) a judicial complaint filed against these same defendants in 1896.
From these facts the court below makes the following deductions: First,
that the right of action that existed in 1893 to demand the settlement of
the debt which, by article 1964 of the Civil Code should prescribe at the
expiration of fifteen years, had not prescribed in 1906, the time of filing
the present complaint. Second, that in consequence of the filing of the
said complaint in 1896, the running of the statute was interrupted, as
prescribed by article 1973 of the Civil Code.
It has been proven that on the 11th of October, 1883, Roberto Ancajas
acknowledged that a balance of 10,449.18 pesos was standing against
him; that since that time he has received and paid amounts in
connection with said obligation, the last payment being made "shortly
before his death in 1888," as stated by the appellants in their brief on
page 5, that is, on May 5, 1888, as appears at folio 223 of the book
offered in evidence by the appellees as Exhibit C. It therefore follows
that in computing the time for prescription from said date it would be
necessary to take into consideration the fact that the Civil Code was not
yet in force, as it did not become effective until December 8, 1889, and
that, at that time, the period for the prescription of personal actions,
such as the one at issue, by law 5, title 8, book 11, of the Novisima
Recopilacion, was twenty years, which period should expire in 1908, so
that when the complaint herein was presented in 1906, the term had
not expired; therefore, we have not to consider the legal interruption of
a term which has not yet expired, as in the present case the question is
one of a period of prescription that commenced before the enforcement
of the Civil Code, which period, by the terms of the article 1939 of the
said code, must be governed by the laws then in force.
The Civil Code would only be applicable, if the whole period required
thereby for prescription had transpired after it was put in force,
notwithstanding the fact that, under the old laws, a longer lapse of time
was necessary (art. 1939, Civil Code). And since the 8th of December,
1889, when the Civil Code went into effect, the fifteen years required by
the provisions thereof for the prescription of the right of personal
actions have certainly elapsed. But in the present case the court below
has considered two forms of interruption of prescription of the right,
namely, the exercise thereof before the courts, and the act of the
acknowledgment of the debt by the debtor. The said court found that
payments were made in the years 1891, 1892, and 1893 by the widow
of the late Roberto Ancajas, and the period for the prescription must be
counted from the last-mentioned date, because the action could only
have been exercised thereafter. It is evident that since then the term
required by article 1964 of the Civil Code has not expired, and
supposing that such payments had not been made, the court below
considered as proven that in 1896, an action was brought for the
recovery of this debt, and against this consideration no error of law or
fact has been assigned. No judgment was rendered by reason of the
revolution that took place in 1898, and the record of the case was lost
through the same cause; facts which were agreed to between the
contending parties at this trial. And in conformity with the decision of
the supreme court of Spain of July 5, 1904, which interprets the right
sense of the aforesaid article 1973, the action then instituted and that
now brought are one and the same.
Against the finding of the court below as to the first method of
interruption of the prescription, in so far as it considered that the
payments made after the death of Roberto Ancajas by his widow,
Aniceta Fontanosa, were an acknowledgment of the debt, the
appellants allege "that an act performed by one of the defendants can
not prejudice the legal rights of the others." But, in accordance with
article 1974, interruption of prescription of rights of action in all kind of
obligations of the heirs of the debtor, benefits or prejudices them all
alike, inasmuch as each and all of them represent the principal, and
they jointly succeed him in his rights and obligations.
For all the above reasons the judgment entered by the trial court "That
payment shall be made to plaintiffs of the sum of P11,722.43 with
costs," is proper, for the reason that it is in accordance with the law and
the merits of the case.
But that the above-stated amount shall be in the Philippine pesos
"(P11,722.43)," as determined in the judgment, is not in accordance
with the law or the merits. Even the latest sum loaned on the 31st of
May, 1887, according to the last liquidation considered in point 8 of the
complaint, was that current at the time, and certainly the unit was not
then the Philippine peso.
Neither is the sentence contained in the judgment appealed from, that
"Legal interest on the said sum at the rate of 6 per cent per annum shall
be payable from the month of September, 1893," in accordance with
the law. It is proper to sentence the defendants to pay the legal interest
of 6 per cent per annum by reason of the default incurred by the heirs
of Ancajas (art. 1108, Civil Code), but such default can not date back of
September, 1893, that is, from the time of the last payment made by
them or by Aniceta Fontanosa. Article 1100 of the Civil Code reads:
Persons obliged . . . are in default from the moment when the creditor
demands the fulfillment of their obligation, judicially or extrajudicially,
And the judicial demand for the fulfillment of said obligation was only
made in 1896; hence, as the date of the complaint interposed in that
year has not been fixed, the next amount claimed therein should only
commence to bear legal interest from the latter part of 1896, or rather
from the beginning of 1897. In a decision of December 3, 1902, the
supreme court of Spain held:
That it is a principle of law, acknowledged and sanctioned by article
1100, in relation to article 1108 of the Civil Code, that interest upon
default only becomes due from the time of the judicial or extrajudicial
notice by the creditor to the debtor, unless otherwise expressly
provided by law, or by virtue of a contract, or on account of special
circumstances depending upon the nature of the obligation.
As to the third and fourth errors, it is true that, in view of the evidence
submitted with the bill of exceptions, and because all the facts of the
complaint have been generally denied by the defendants, the following
facts, which are stated in the judgment as resulting from the record,
have not been proven:

That the other defendants, apart from the widow of Ancajas, are the
children of the latter, and that Jose Ancajas is his grandchild, all of
them being his only heirs; that Estefania Fontanosa is the legal
guardian of the minor Jose Ancajas; that as such heirs they took
possession of all the property of the deceased and hold the same pro
indiviso.

And as a natural consequence, there is no ground for the most

important conclusion of law in the decision:

That, inasmuch as they took possession of the property of the late

Roberto Ancajas, and performed all those acts of ownership thereof
which, without being heirs they could not have performed, they purely
and simply accepted the inheritance from their principal, and have ever
since become liable for his debt, not only with the property they
received from him, but also with their own property.

Florentina Ancajas is the only person who appeared as the daughter of

Roberto Ancajas and testified as a witness for the plaintiffs, but it does
not appear that she, or another of the name of Leona (often
called León), have ever been summoned and cited to appear or that
they failed to answer the complaint. It is certain that they have not
answered it. From the testimony of this witness it appears that it was
Aniceta Fontanosa who, after the death of her husband, Roberto
Ancajas, made the three last payments on account of the latter's debt.

Thus, it is not proper that a sentence, rightly entered against the heirs
or successors of Roberto Ancajas, should particularly fall upon the
persons named in the complaint, and to whom the judgment refers, for
no other reason than that they were designated as such heirs in the
complaint.

For the reasons above set forth we hold that the net amount due to the
plaintiffs by such persons as may turn out to be the lawful heirs of
Roberto Ancajas, in addition to those who, apart from the minor Jose
Ancajas, appeared in this suit, has been rightly determined, that is, the
sum of 11,722.43 pesos, with legal interest thereon at the rate of 6 per
cent, from the time the suit was filed in 1896, with the costs of the first
instance against the defendants who answered the complaint. The
judgment appealed from is hereby set aside in order that a new trial
may he held for the purpose of properly determining who are the heirs
against whom should be directed the order of payment, and what were
the acts and form of acceptance of the inheritance, and of the
possession and method of possession of the property remaining at the
death of Roberto Ancajas; after which let a new judgment be rendered
which shall include a finding of the equivalent of the amount owing in
Philippine currency at the time of such decision. No special ruling is
made as to the costs in this instance. So ordered.
Republic of the Philippines
SUPREME COURT
Torres, Mapa, Johnson, Carson, and Williard, JJ., concur. Manila

SECOND DIVISION

G.R. No. L-45710 October 3, 1985

CENTRAL BANK OF THE PHILIPPINES and ACTING DIRECTOR

ANTONIO T. CASTRO, JR. OF THE DEPARTMENT OF
COMMERCIAL AND SAVINGS BANK, in his capacity as statutory
receiver of Island Savings Bank, petitioners,
vs.
THE HONORABLE COURT OF APPEALS and SULPICIO M.
TOLENTINO, respondents.
I.B. Regalado, Jr., Fabian S. Lombos and Marino E. Eslao for
petitioners.
Antonio R. Tupaz for private respondent.
MAKASIAR, CJ.:
This is a petition for review on certiorari to set aside as null and void the
decision of the Court of Appeals, in C.A.-G.R. No. 52253-R dated
February 11, 1977, modifying the decision dated February 15, 1972 of
the Court of First Instance of Agusan, which dismissed the petition of
respondent Sulpicio M. Tolentino for injunction, specific performance or
rescission, and damages with preliminary injunction.
On April 28, 1965, Island Savings Bank, upon favorable
recommendation of its legal department, approved the loan application
for P80,000.00 of Sulpicio M. Tolentino, who, as a security for the loan,
executed on the same day a real estate mortgage over his 100-hectare
land located in Cubo, Las Nieves, Agusan, and covered by TCT No.
T-305, and which mortgage was annotated on the said title the next day.
The approved loan application called for a lump sum P80,000.00 loan,
repayable in semi-annual installments for a period of 3 years, with 12%
annual interest. It was required that Sulpicio M. Tolentino shall use the
loan proceeds solely as an additional capital to develop his other
property into a subdivision.
On May 22, 1965, a mere P17,000.00 partial release of the P80,000.00
loan was made by the Bank; and Sulpicio M. Tolentino and his wife
Edita Tolentino signed a promissory note for P17,000.00 at 12% annual
interest, payable within 3 years from the date of execution of the
contract at semi-annual installments of P3,459.00 (p. 64, rec.). An
advance interest for the P80,000.00 loan covering a 6-month period
amounting to P4,800.00 was deducted from the partial release of
P17,000.00. But this pre-deducted interest was refunded to Sulpicio M.
Tolentino on July 23, 1965, after being informed by the Bank that there
was no fund yet available for the release of the P63,000.00 balance (p.
47, rec.). The Bank, thru its vice-president and treasurer, promised
repeatedly the release of the P63,000.00 balance (p. 113, rec.).
On August 13, 1965, the Monetary Board of the Central Bank, after
finding Island Savings Bank was suffering liquidity problems, issued
Resolution No. 1049, which provides:
In view of the chronic reserve deficiencies of the Island Savings Bank
against its deposit liabilities, the Board, by unanimous vote, decided as
follows:
1) To prohibit the bank from making new loans and investments [except
investments in government securities] excluding extensions or
renewals of already approved loans, provided that such extensions or
renewals shall be subject to review by the Superintendent of Banks,
who may impose such limitations as may be necessary to insure
correction of the bank's deficiency as soon as possible;
xxx xxx xxx
(p. 46, rec.).
On June 14, 1968, the Monetary Board, after finding thatIsland Savings
Bank failed to put up the required capital to restore its solvency, issued
Resolution No. 967 which prohibited Island Savings Bank from doing
business in the Philippines and instructed the Acting Superintendent of
Banks to take charge of the assets of Island Savings Bank (pp. 48-49,
rec).
On August 1, 1968, Island Savings Bank, in view of non-payment of the
P17,000.00 covered by the promissory note, filed an application for the
extra-judicial foreclosure of the real estate mortgage covering the
100-hectare land of Sulpicio M. Tolentino; and the sheriff scheduled the
auction for January 22, 1969.
On January 20, 1969, Sulpicio M. Tolentino filed a petition with the
Court of First Instance of Agusan for injunction, specific performance or
rescission and damages with preliminary injunction, alleging that since
Island Savings Bank failed to deliver the P63,000.00 balance of the
P80,000.00 loan, he is entitled to specific performance by ordering
Island Savings Bank to deliver the P63,000.00 with interest of 12% per
annum from April 28, 1965, and if said balance cannot be delivered, to
rescind the real estate mortgage (pp. 32-43, rec.).
On January 21, 1969, the trial court, upon the filing of a P5,000.00
surety bond, issued a temporary restraining order enjoining the Island
Savings Bank from continuing with the foreclosure of the mortgage (pp.
86-87, rec.).
On January 29, 1969, the trial court admitted the answer in intervention
praying for the dismissal of the petition of Sulpicio M. Tolentino and the
setting aside of the restraining order, filed by the Central Bank and by
the Acting Superintendent of Banks (pp. 65-76, rec.).
On February 15, 1972, the trial court, after trial on the merits rendered
its decision, finding unmeritorious the petition of Sulpicio M. Tolentino,
ordering him to pay Island Savings Bank the amount of PI 7 000.00
plus legal interest and legal charges due thereon, and lifting the
restraining order so that the sheriff may proceed with the foreclosure
(pp. 135-136. rec.
On February 11, 1977, the Court of Appeals, on appeal by Sulpicio M.
Tolentino, modified the Court of First Instance decision by affirming the
dismissal of Sulpicio M. Tolentino's petition for specific performance,
but it ruled that Island Savings Bank can neither foreclose the real
estate mortgage nor collect the P17,000.00 loan pp. 30-:31. rec.).
Hence, this instant petition by the central Bank.
The issues are:
1. Can the action of Sulpicio M. Tolentino for specific performance
prosper?
2. Is Sulpicio M. Tolentino liable to pay the P17,000.00 debt covered by
the promissory note?
3. If Sulpicio M. Tolentino's liability to pay the P17,000.00 subsists, can
his real estate mortgage be foreclosed to satisfy said amount?
When Island Savings Bank and Sulpicio M. Tolentino entered into an
P80,000.00 loan agreement on April 28, 1965, they undertook
reciprocal obligations. In reciprocal obligations, the obligation or
promise of each party is the consideration for that of the other (Penaco
vs. Ruaya, 110 SCRA 46 [1981]; Vda. de Quirino vs, Pelarca 29 SCRA
1 [1969]); and when one party has performed or is ready and willing to
perform his part of the contract, the other party who has not performed
or is not ready and willing to perform incurs in delay (Art. 1169 of the
Civil Code). The promise of Sulpicio M. Tolentino to pay was the
consideration for the obligation of Island Savings Bank to furnish the
P80,000.00 loan. When Sulpicio M. Tolentino executed a real estate
mortgage on April 28, 1965, he signified his willingness to pay the
P80,000.00 loan. From such date, the obligation of Island Savings
Bank to furnish the P80,000.00 loan accrued. Thus, the Bank's delay in
furnishing the entire loan started on April 28, 1965, and lasted for a
period of 3 years or when the Monetary Board of the Central Bank
issued Resolution No. 967 on June 14, 1968, which prohibited Island
Savings Bank from doing further business. Such prohibition made it
legally impossible for Island Savings Bank to furnish the P63,000.00
balance of the P80,000.00 loan. The power of the Monetary Board to
take over insolvent banks for the protection of the public is recognized
by Section 29 of R.A. No. 265, which took effect on June 15, 1948, the
validity of which is not in question.
The Board Resolution No. 1049 issued on August 13,1965 cannot
interrupt the default of Island Savings Bank in complying with its
obligation of releasing the P63,000.00 balance because said resolution
merely prohibited the Bank from making new loans and investments,
and nowhere did it prohibit island Savings Bank from releasing the
balance of loan agreements previously contracted. Besides, the mere
pecuniary inability to fulfill an engagement does not discharge the
obligation of the contract, nor does it constitute any defense to a decree
of specific performance (Gutierrez Repide vs. Afzelius and Afzelius, 39
Phil. 190 [1918]). And, the mere fact of insolvency of a debtor is never
an excuse for the non-fulfillment of an obligation but 'instead it is taken
as a breach of the contract by him (vol. 17A, 1974 ed., CJS p. 650)
The fact that Sulpicio M. Tolentino demanded and accepted the refund
of the pre-deducted interest amounting to P4,800.00 for the supposed
P80,000.00 loan covering a 6-month period cannot be taken as a
waiver of his right to collect the P63,000.00 balance. The act of Island
Savings Bank, in asking the advance interest for 6 months on the
supposed P80,000.00 loan, was improper considering that only
P17,000.00 out of the P80,000.00 loan was released. A person cannot
be legally charged interest for a non-existing debt. Thus, the receipt by
Sulpicio M. 'Tolentino of the pre-deducted interest was an exercise of
his right to it, which right exist independently of his right to demand the
completion of the P80,000.00 loan. The exercise of one right does not
affect, much less neutralize, the exercise of the other.
The alleged discovery by Island Savings Bank of the over-valuation of
the loan collateral cannot exempt it from complying with its reciprocal
obligation to furnish the entire P80,000.00 loan. 'This Court previously
ruled that bank officials and employees are expected to exercise
caution and prudence in the discharge of their functions (Rural Bank of
Caloocan, Inc. vs. C.A., 104 SCRA 151 [1981]). It is the obligation of
the bank's officials and employees that before they approve the loan
application of their customers, they must investigate the existence and
evaluation of the properties being offered as a loan security. The recent
rush of events where collaterals for bank loans turn out to be
non-existent or grossly over-valued underscore the importance of this
responsibility. The mere reliance by bank officials and employees on
their customer's representation regarding the loan collateral being
offered as loan security is a patent non-performance of this
responsibility. If ever bank officials and employees totally reIy on the
representation of their customers as to the valuation of the loan
collateral, the bank shall bear the risk in case the collateral turn out to
be over-valued. The representation made by the customer is
immaterial to the bank's responsibility to conduct its own investigation.
Furthermore, the lower court, on objections of' Sulpicio M. Tolentino,
had enjoined petitioners from presenting proof on the alleged
over-valuation because of their failure to raise the same in their
pleadings (pp. 198-199, t.s.n. Sept. 15. 1971). The lower court's action
is sanctioned by the Rules of Court, Section 2, Rule 9, which states that
"defenses and objections not pleaded either in a motion to dismiss or in
the answer are deemed waived." Petitioners, thus, cannot raise the
same issue before the Supreme Court.
Since Island Savings Bank was in default in fulfilling its reciprocal
obligation under their loan agreement, Sulpicio M. Tolentino, under
Article 1191 of the Civil Code, may choose between specific
performance or rescission with damages in either case. But since
Island Savings Bank is now prohibited from doing further business by
Monetary Board Resolution No. 967, WE cannot grant specific
performance in favor of Sulpicio M, Tolentino.
Rescission is the only alternative remedy left. WE rule, however, that
rescission is only for the P63,000.00 balance of the P80,000.00 loan,
because the bank is in default only insofar as such amount is
concerned, as there is no doubt that the bank failed to give the
P63,000.00. As far as the partial release of P17,000.00, which Sulpicio
M. Tolentino accepted and executed a promissory note to cover it, the
bank was deemed to have complied with its reciprocal obligation to
furnish a P17,000.00 loan. The promissory note gave rise to Sulpicio M.
Tolentino's reciprocal obligation to pay the P17,000.00 loan when it
falls due. His failure to pay the overdue amortizations under the
promissory note made him a party in default, hence not entitled to
rescission (Article 1191 of the Civil Code). If there is a right to rescind
the promissory note, it shall belong to the aggrieved party, that is,
Island Savings Bank. If Tolentino had not signed a promissory note
setting the date for payment of P17,000.00 within 3 years, he would be
entitled to ask for rescission of the entire loan because he cannot
possibly be in default as there was no date for him to perform his
reciprocal obligation to pay.
Since both parties were in default in the performance of their respective
reciprocal obligations, that is, Island Savings Bank failed to comply with
its obligation to furnish the entire loan and Sulpicio M. Tolentino failed
to comply with his obligation to pay his P17,000.00 debt within 3 years
as stipulated, they are both liable for damages.
Article 1192 of the Civil Code provides that in case both parties have
committed a breach of their reciprocal obligations, the liability of the
first infractor shall be equitably tempered by the courts. WE rule that
the liability of Island Savings Bank for damages in not furnishing the
entire loan is offset by the liability of Sulpicio M. Tolentino for damages,
in the form of penalties and surcharges, for not paying his overdue
P17,000.00 debt. The liability of Sulpicio M. Tolentino for interest on his
PI 7,000.00 debt shall not be included in offsetting the liabilities of both
parties. Since Sulpicio M. Tolentino derived some benefit for his use of
the P17,000.00, it is just that he should account for the interest thereon.
WE hold, however, that the real estate mortgage of Sulpicio M.
Tolentino cannot be entirely foreclosed to satisfy his P 17,000.00 debt.
The consideration of the accessory contract of real estate mortgage is
the same as that of the principal contract (Banco de Oro vs. Bayuga, 93
SCRA 443 [1979]). For the debtor, the consideration of his obligation to
pay is the existence of a debt. Thus, in the accessory contract of real
estate mortgage, the consideration of the debtor in furnishing the
mortgage is the existence of a valid, voidable, or unenforceable debt
(Art. 2086, in relation to Art, 2052, of the Civil Code).
The fact that when Sulpicio M. 'Tolentino executed his real estate
mortgage, no consideration was then in existence, as there was no
debt yet because Island Savings Bank had not made any release on
the loan, does not make the real estate mortgage void for lack of
consideration. It is not necessary that any consideration should pass at
the time of the execution of the contract of real mortgage (Bonnevie vs.
C.A., 125 SCRA 122 [1983]). lt may either be a prior or subsequent
matter. But when the consideration is subsequent to the mortgage, the
mortgage can take effect only when the debt secured by it is created as
a binding contract to pay (Parks vs, Sherman, Vol. 176 N.W. p. 583,
cited in the 8th ed., Jones on Mortgage, Vol. 2, pp. 5-6). And, when
there is partial failure of consideration, the mortgage becomes
unenforceable to the extent of such failure (Dow. et al. vs. Poore, Vol.
172 N.E. p. 82, cited in Vol. 59, 1974 ed. CJS, p. 138). Where the
indebtedness actually owing to the holder of the mortgage is less than
the sum named in the mortgage, the mortgage cannot be enforced for
more than the actual sum due (Metropolitan Life Ins. Co. vs. Peterson,
Vol. 19, F(2d) p. 88, cited in 5th ed., Wiltsie on Mortgage, Vol. 1, P.
180).
Since Island Savings Bank failed to furnish the P63,000.00 balance of
the P8O,000.00 loan, the real estate mortgage of Sulpicio M. Tolentino
became unenforceable to such extent. P63,000.00 is 78.75% of
P80,000.00, hence the real estate mortgage covering 100 hectares is
unenforceable to the extent of 78.75 hectares. The mortgage covering
the remainder of 21.25 hectares subsists as a security for the
P17,000.00 debt. 21.25 hectares is more than sufficient to secure a
P17,000.00 debt.
The rule of indivisibility of a real estate mortgage provided for by Article
2089 of the Civil Code is inapplicable to the facts of this case.
Article 2089 provides:
A pledge or mortgage is indivisible even though the debt may be
divided among the successors in interest of the debtor or creditor.
Therefore, the debtor's heirs who has paid a part of the debt can not
ask for the proportionate extinguishment of the pledge or mortgage as
long as the debt is not completely satisfied.
Neither can the creditor's heir who have received his share of the debt
return the pledge or cancel the mortgage, to the prejudice of other heirs
who have not been paid.
The rule of indivisibility of the mortgage as outlined by Article 2089
above-quoted presupposes several heirs of the debtor or creditor which
does not obtain in this case. Hence, the rule of indivisibility of a
mortgage cannot apply
WHEREFORE, THE DECISION OF THE COURT OF APPEALS
DATED FEBRUARY 11, 1977 IS HEREBY MODIFIED, AND
1. SULPICIO M. TOLENTINO IS HEREBY ORDERED TO PAY IN
FAVOR OF HEREIN PETITIONERS THE SUM OF P17.000.00, PLUS
P41,210.00 REPRESENTING 12% INTEREST PER ANNUM
COVERING THE PERIOD FROM MAY 22, 1965 TO AUGUST 22,
1985, AND 12% INTEREST ON THE TOTAL AMOUNT COUNTED
FROM AUGUST 22, 1985 UNTIL PAID;
2. IN CASE SULPICIO M. TOLENTINO FAILS TO PAY, HIS REAL
ESTATE MORTGAGE COVERING 21.25 HECTARES SHALL BE
FORECLOSED TO SATISFY HIS TOTAL INDEBTEDNESS; AND
3. THE REAL ESTATE MORTGAGE COVERING 78.75 HECTARES
IS HEREBY DECLARED UNEN FORCEABLE AND IS HEREBY
ORDERED RELEASED IN FAVOR OF SULPICIO M. TOLENTINO.
NO COSTS. SO ORDERED.
Concepcion, Jr., Escolin, Cuevas and Alampay, JJ., concur.
Aquino (Chairman) and Abad Santos, JJ., took no part.
[ GR No. L-8253, May 25, 1955 ]
PRICE v. EMILIO RILLORAZA +
DECISION
G.R. No. L-8253
CONCEPCION, J.:
This is an original action for certiorari. Upon the filing of the
corresponding bond, a writ of preliminary injunction was issued by this
Court, soon after the institution of the case.
It appears that, on March 20, 1951, respondent Manuel S. Camus and
petitioner Price, Inc. - hereafter referred to as Camus and price,
respectively - entered into a contract, whereby the former leased to the
latter, for a period of ten (10) years, from April 1, 1951, the property
described in the deed of lease, Annes A, the pertinent parts of which
provide:
"1. That the said party of the first part Lessor,
hereby grants, demise and let unto the said party
of the second part Lessee, for lawful business
purposes, all that certain strong stone material
building with the lot and parcel of land, with an
area of 1,700 square meters, situated, lying and
being at No. 60 C. Arellano Street, Malabon, Rizal,
covered as Lots No. 15 and No. 16, Block No. 1,
Tambobong Estate, Psd. - 11759 of the Rural
Progress Administration, to have and to hold the
same for the full term of ten (10) years from April
1st, 1951 to March 31, 1960, inclusive, at the
monthly rental of P300.00 Philippine Currency, for
the above-mentioned building, to be paid without
the necessity of express demand therefor on
the.1st five (5) days of each ensuing month at the
residence of the party of the first part Lessor at
Malabon, Rizal; and also at the monthly rental of
One Hundred Pesos (P100.00) Philippine
Currency, for the use of the leased premises,
payable beginning when the construction of the
factory is already finished, and likewise payable at
the time and place aforementioned;
 "2. That the party of the second part Lessee, shall
have or cause to erect, build or construct a Factory
Building and Warehouse of strong
materials appropriate to or in furtherance of the
business of the party of the second part Lessee,
on the said lot the plan as to the form and size and
other specifications thereof being subject to the
joint approval of both parties concerned, at the
expense of the party of the second part lessee;
and that the buildings thereon constructed shall be
insured with a competent Insurance Company by
the party of the second part Lessee, in an amount
equal to the insurable interest of the party of the
first part Lessor, in the sum of at least Fifty
Thousand Pesos (P50,000.00) Philippine
Currency, for himself, his heirs and/or
administrators as his , beneficiary; and that the
insured buildings (Factory Building and
Warehouse) hereinbefore mentioned shall
authmatically become, without cost, the property of
the party of the first part Lessor, immediately upon
the termination of this contract;
"3. That the party of the second part Lessee
agrees and covenants that, in case the
aforementioned Factory Building and Warehouse
are destroyed by fire during the life-time of this
lease, the proceeds or money to be paid by and to
be collected from the insurance company shall be
utilized in erecting a new set of Factory
Building and Warehouse, exactly as those
destroyed; and in case the money to be paid by
the insurance company will not be sufficient for the
purpose, the party of the second part Lessee shall
put in additionalfunds with which to build the said
now set of Factory Building and Warehouse, and
no extension of the life-time of this lease as a
consequence thereby is contemplated;
XXXX
"5. That the party of the first part Lessor, likewise
covenants and agrees to cause or make the
necessary filling, at his sole expense, within a year
from the signing of this contract, the vacant portion
of the lot along the river with an area of about 500
square meters to increase its elevation and enable
the party of the second part Lessee, to facilitate or
make use of the whole lot; as well as to construct,
build or cause to erect the
necessary concrete stone walls provided with
barbed wire on top thereof and all expenses
incurred or to be incurred incident to the filling as
well as to the construction, building and erection of
the stone walls, one (1) meter high, with barbed
wire to be borne solely by the party of the first part
Lessor." (Annex A, pp. 1-3) (Underscoring
supplied.)
On January 19, 1954, Price instituted Civil Case No, 2582 of the Court
of First Instance of Rizal, against Camus, for specific performance,
damages, and extension of the period of said lease, upon the ground of
non-compliance with the provisions of the above-quoted paragraph 5 of
Annex A. About three (3) days later, or on or about January 22, l954,
Camus, in turn, commenced Civil Case No. 1159 of the Justice of the
Peace Court of Malabon, Rizal, against Price, for forcible entry and
detainer, upon the ground of non-payment of the rentals from February
16, 1953. In his answer therein, Price denied the main allegations of
the complaint and averred, by way of special defenses, the aforesaid
breach of contract by Camus, and
"R. That as a result of all the foregoing facts,
showing that plaintiff refuses to comply with the
obligations imposed upon him by the contract of
lease, herein defendant on January 20, 1954 filed
a civil action in the Court of First Instance of Rizal,
where it is docketed as Civil Case No. 2582,
against the herein plaintiff for specific performance
and damages. This case is now pending in the
said Court of First Instance.
"S. That actually the matter litigated in this present
suit is included among the issues raised in Civil
Case No. 2582, CFI-Rizal, the essence of which
calls for an interpretation of a contract with
reciprocal obligation.
"T. That this Honorable Court with limited
jurisdiction is not competent to decide on issue
properly raised and included in a civil case already
pending in the Court of First Instance of Rizal, and
which court is that of competent jurisdiction."
(Annex D, p. 5) (Underscoring supplied.)
In due course, the justice of the peace court rendered, in said case No.
1159, a decision - dated February 10, 1954, copy of which, according
to Price, was received on March 2, 1954 - in favor of Camus and
against Price,
"x x x condemning the sail defendant to pay to the
plaintiff the sum of FOUR THOUSAND SIX
HUNDRED (P4,600.00), with interest thereon at
the legal rate from the date of the filing of the
complaint, for arrears in rentals from February 16,
1953, to January 31, 1954, and the sum of FOUR
HUNDRED PESOS (P400.00) a month thereafter
until the premises are vacated; to pay to the
plaintiff the sum of ONE THOUSAND PESOS
(P1,000.00) as liquidated damages acoording to
the terms of the contract Annex A'; to pay to the
plaintiff the sum of FIVE HUNDRED PESOS
(P500.00) as attorney's fees also according to the
terms of the contract Annex 'A', and to pay the
costs of the suit. Defendant is also hereby
condemned to vacate the premises mentioned in
the complaint and to turn over the possession
thereof to the plaintiff." (Annex E.)
Price duly appealed from this decision, seasonably paying the
corresponding docket fees and filing the requisite notice of appeal and
cash bond, as well as a surety bond for the agregate sum of P6,900,
covering:
"a. P4,600.00 for alleged rentals from February 16,
1953 to January 31, 1954;
"b. P1,000.00 for alleged liquidated damages;
"c. P500.00 for allege 1 attorney's fee;
"d, P400.00 for rental for February, 1954;
"e. P400.00 for rental for March, 1954." (Annex G)
Instead of paying to Camus, or depositing in court, the amount of the
rentals for the succeeding months, at 400 each, Price filed, on or about
April 8, 1954, a bond for P1,200 "to answer for the rentals for the month
(of April, May and June, 1954, inclusive, in the event the plaintiff
secures a final judgment in his favor," (Annex H.) Hence, on May 29,
1954, Camus filed, with the Court of First Instance of Rizal - before
which the ejectment case was then pending on appeal, as Civil Case
No. 2650 of said court - a petition for the execution of the decision of
the justice of the peace court. Price objected thereto upon the ground
"First,that defendant's bond posted since April 6,
1954 in the amount of P1,200.00 covering rentals
for April, May and June, 1954 is sufficient
compliance with the provisions of Rule 72, Section
8, of the Rules of Court; second, that plaintiff has
waived the right to an immediate execution based
on the claim that the rentals for April and May,
 1954 have not been paid or deposited, because he
has not objected to the bond posted and offered to
him since April 8, 1954; and third, that even
supposing, without admitting, that the bond is not a
compliance with the payment provided for in Rule
72, Section 8, still the error, if any, is a case of
innocent mistake and excusable negligence, which,
under the jurisprudence citied above, make the
delay in payment under the circumstances not a
ground for immediate execution, and that under
such circumstances defendant should be afforded
an opportunity to make the payment or deposit in
cash if the court so desires." (Annex I, pp. 6-7.)
and prayed:
"That the plaintiff's petition should be denied; and if
this Honorable Court should rule that the bond
posted is not sufficient compliance with the law,
the defendant should be given a period of 3 days
from notice within which to make the deposit in
cash in lieu of the posted bond." (Annex I, p. 7.)
Acting upon said petition of May 29, 1954, the Court of first Instance,
presided over by Hon. Emilio Rilloraza, Judge, issued, said Case No,
2650, an order (Annex J), dated July 24, 1954 - copy of which is said to
have been received by Price on September 10, 1954 - directing the
execution of the aforementioned decision of the justice of the peace
court. On September 11, 1954, the Clerk of Court of Rizal issued the
writ of execution (Annex K), which said officer, as ex-officio Provincial
Sheriff, threatened to enforce. Hence, Price instituted the present
action for certiorari, with the prayer.
"That the order of respondent judge, directing the
immediate execution of the judgment of the Justice
of the Peace Court of Malabon, Rizal, be annulled,
the same having been rendered with grave abuse
of discretion and without jurisdiction and in wanton
disregard of the facts and circumstances of the
case, and that ponding these proceedings, a writ
of preliminary injunction be issued against the
respondents restraining them from carrying out the
order of the respondent judge, Annex 'J', as well as
the writ of execution issued pursuant thereto on
September 11, 1954, Annex 'K', with costs against
respondents."
As already adverted to, the writ of preliminary injunction prayed for was
issued upon the filing of a bond for P1,000.00.
In their answer, respondents admit some of the allegations of the
petition and deny other allegations thereof, Among other things, they,
moreover, allege that the obligations of Camus, under the contract of
lease, are independent of those of Price; that the filling and
construction provided in said contract, have "already been totally"
completed; and that the order of July 24, 1954, and the writ of
execution were duly issued, for Price had failed, either to pay, or to
deposit, the amount of the rentals for April, May and June, 1954.
At the outset, it should be noted that the very pictures submitted by
respondents, as Annexes 9 and 10 to their answer, dated October 11,
1954, show that the stone wall constructed by Camus is of "adobe",
and has no barbed wire fence, whereas the contract of lease provides
for "concrete stone walls x x with barbed wire." Furtheremore, although
the portion of the leased property reproduced in Annex 9 appears to
have been filled, there is evidence (which has not been contradicted) to
the effect that the elevation of said portion is lower by 40 centimeters
than the average elevation of said property (see Annex L) . Moreover,
the pictures Annexes M, N and O, taken on February 16, 1954, reveal
that said portion was then unfilled and even under water, Anyhow, it is
not even claimed that said filling and construction had been completed
within the year, which expired on March 20, 1952, stipulated in the
contract of lease. In fact, the answer filed by respondents before this
Court impliedly admits the failure of Camus to make the filling and
construction within said period. This admission is even clearer in his
answer in Case No. 2532, dated February 4, 1954, for he alleged in
said pleading:
"3. That sometime in 1951, after signing the
aforesaid Contract of Lease, an agreement was
entered into by and between plaintiff and
defendant that the filling up of the aforesaid portion
of the said lot would be done as soon as the
dredger of the Bureau of Public Works would be
taken to Malabon River to fill up the market site of
Malabon, Rizal, in which event the said dredger
would then be contracted and utilized by
defendant to do the filling up of the said portion,
but the said dredger was not as yet been brought
to Malabon River up to the present;
"4. That defendant has begun filling up the said
portion of the promises in question
with adobe stones since May, 1951, and as matter
of fact, the base of the stone wall along the
Malabon River of the said lot has already been
erected and finished since October, 1951, in order
to contain the fillings to be made by the
aforementioned dredger, and defendant has
already spent for this purpose more than P1,200,
and for this reason, plaintiff could not now
complain, and is now in estoppel from demanding
the completion of the filling up of the portion of the
said premises, and the construction of the stone
wall with barbed wire on top, in accordance with
the said Contract of Lease." (annex 3, pars. 3 and
4) (underscoring supplied.)
Incidentally, this paragraph (4) tends to weaken, or, even, refute, the
allegations of paragraph (3), for, if, as therein stated, it had been
agreed - although, it would seem, orally - after the execution of the
contract of lease,
"that the filling x x x would be done as soon as the
dredger of the Bureau of Public Work would be
taken to Malabon river to fill up the market site of
Malabon, Rizal, in which event the said dredger
would then be contracted ana utillized by the
defendant (Camus) to do the filling xxx but the said
dredger has not as yet been brought to Malabon
river up to tho present time"
then there would seem to be no reason for Camus to begin the filling
"since May, 1951 " as averred in paragraph 4 of his aforementioned
answer in Case No. 2582,
At any rate, there is prima facie, if not strong, evidence that Camus had
not complied with some of his obligations under the contract of lease,
and that this breach of contract dates back to March 20, 1952, or about
eleven (11) months prior to the alleged default of Price in the payment
of rentals (or from February 16, 1953). In this connection, the last
paragraph of Article 1169 of the Civil Code of the Philippines provides:
"In reciprocal obligation, neither party incurs in
delay if the other does not comply or is not ready to
comply in a proper manner with what is incumbent
upon him. From the moment one of the parties
fulfills his obligation, delay by the other begins."
It should be noted, also, that respondent Judge, as well as the Justice
of the Peace of Malabon, were aware of the pendency of Civil Case No.
2582 of the Court of First Instance of Rizal, for specific performance of
the contract of lease. Said action was explicitly pleaded by Price, in the
answer filed with the justice of the peace court, which answer formed
part of the record before respondent Judge, when he issued the order
complained, of. He knew, or must have known, therefore, that Camus
was charged with non-performance of his (Camus') obligations as
lessor; that this was, and is, the basis of the action and the main issue
in Case No. 2582 of the court of first instance, for specific performance
of said obligations; that the court of first instance has jurisdiction to
decide said issue and action; that the jurisdiction of said court of first
instance is, either exclusive, or concurrent with the justice of the peace
court; that, if exclusive, the justice of the peace court would not be
competent to pass upon said issue; that, neither would the latter court
have authority to determine said issue, if it had concurrent jurisdiction
with the court of first instance, this being the court which first assumed
authority over said case, for Case No. 2582 was filed therein several
days before the ejectment case in the justice of the peace court; that
the determination of said issue in Case No. 2582 is essential to the
settlement of the dispute in Case No. 1159; that.accordingly, the issue
in Case No. 2582 constitutes a prejudicial question, as regards the
subject matter of the controversy in Case No. 1159; and that,
consequently, the justice of the peace court should have, at least,
deferred the hearing and determination of Case No. 1159, until after
the rendition of judgment in Case No. 2582.
Indeed, the situation confronting the court may be likened to that which
would obtain if a person instituted a detainer case to secure possession
of a land - to which he claims to be entitle as owner thereof - held,
under claim of title in fee simple, by another who has already sued the
former in order to quiet title. Since the right of possession asserted by
the plaintiff in the detainer case depends upon his alleged dominion,
which is controverted in the action to quiet title, the justice of the peace
court must dismiss said detainer case for want of jurisdiction to settle
the question ownership, upon which plaintiff's claim is based. (Torres v.
Peña, 44 O.G. 2699; Peñalosa v. Garcia, 44 O.G. 2709; Cruz v. Garcia,
45 O.G. 227; Canaynay v. Sarmiento, 45 O.G, 252). Similarly, the
forcible entry and detainer case instituted by Camus, is predicated
upon the alleged default of Price in the paynent of rentals. Pursuant to
Article 1169 of our Civil Code, Price would not be in default, even in
case of non-payment of the rentals, if Camus had not fulfilled his
obligations as a lessor, as intended by Price in the action for specific
performance already commenced by him. Price, therefore, cannot be
guilty of unlawful detainer, unless Camus is exonerated, in the action
for specific performance, from the charge of breach of the contract of
lease. By analogy with the former illustration, it could be argued,
therefore, that the justice of the peace court cannot pass upon the right
of possession invoked by Camus in the ejectment case, for the same
depends upon whether Camus had complied or not with his part of the
contract of lease, which, in turn, is the issue in Case No, 2582, In other
words, respondent Judge had, before him sufficient facts to doubt the
propriety, if not the validity, of the decision of the justice of the peace
court.
must be decided, together with all the issues incidental thereto, or
necessarily included therein, such as the termination of the lease, the
extinction of the title of Price over said building and its acquisition by
Camus (Rule 39, Section 45, Rules of Court), which are, clearly,
beyond the jurisdiction of the justice of the peace court. If these
questions were eventually decided, in Case No. 2582, in favor of Price,
Case No, 1159 and the decision of the justice of the peace court in
favor of Camus, would become untenable. Apart from this, Price might
seek to recover damages for the injury occasioned by his ejectment,
and Camus might be unable to indemnify said damages. In short, the
execution of the decision of the jusitce of the peace court would ruin the
business of Price, deprive it of the possession of building probably
worth not less than P50,000, which is its property, until otherwise
declared in Case No. 2582 - and this has not been done as yet - and
may cause irreparable injury to Price,
Upon the other hand, although the rentals for April, May and June,
1954, have not been paid or deposited in cash, a bond has been given
to guarantee its payment. Besides, Price has offered to make said cash
deposit, if authorized by the court to do so. It may not be a^iss to add
that Price, is, to all appearance, more than sufficiently solvent to pay
the sum of P1,200 represented by said rentals, and must have been
paying or depositing the amount of the rentals for the months following
June, 1954. Hence, Camus would suffer no possible damage if Price
were now allowed to deposit in cash said sum of P1,200.
In conclusion, in issuing the order complained of as well as the writ of
execution, despite the strong equities in favor of Price and the dubious
legality or prop of the decision of the justice of the peace court,
respondent Judge has committed a grave abuse of discretion.
Wherefore, (1) the writ prayed for is hereby granted, (2) the order of
respondent Judge, dated July 24, 1954, and said writ of execution, are
set aside and annulled, (3) the writ of preliminary injunction issued
herein is hereby made permanent and (4) petitioner Price, Inc. is given
three (3) days, from entry of judgment in this case, within which to
deposit in court the amount of the rentals for April. May and June, 1954.
Respondent Manuel S. Camus shall pay the costs.
IT IS SO ORDERED.
Pablo, Bengzon, Padilla, Montemayor, Reyes, Bautista Angelo,
Labrador, and Reyes, J.B.L., JJ., concur.

Again, Price has established and is operating on the leased premises a

candy factory, which would have to be closed, with the corresponding
injury to the business of Price, if said decision were executed.
Moreover, Price would then be divested of the possession of a building,
which must be worth not less than P50,000, it has constructed on the
leased premises, in accordance with the contract of lease. Pursuant
thereto, Price is the owner of said building for the duration of the lease,
Hence, the deprivation of said possession would violate the dominical
rights of Price, which include the enjoyment, and consequently, the
possession and use of said building.

It is true that, pursuant to paragraph 14 of the contract of lease,

"x x x in case of a breach of any of the covenants

on the part of the party of the second part Lessee,
herein contained, the party of the first part Lessor,
may, while the default shall continue, and
notwithstanding any waiver of any prior breach of
conditions, without notice or demand, enter upon
the premises and thereby terminate this lease and
may thereupon expel and remove the party of the
second part Lessee." (Underscoring supplied.)
As a corollary thereof, title to said building would pass from Price to
Camus upon the termination of the lease. However, said right of
Camus to terminate the lease could be exercised only "while the default
(of Price) shall continue," and Price is not in default as long as - in the
words of Article 1169 of our Civil Code - Camus "does not comply or is
not ready to comply in a proper manner with what is incumbent upon
him" and there is prima facie proof of breach of contract by Camus,
Anyhow, this is, as above stated, the issue in Case No, 2582, wherein it THIRD DIVISION
 [G.R. No. 118126. March 4, 1996]
TRANS-ASIA SHIPPING LINES, INC., petitioner, vs. COURT OF
APPEALS and ATTY. RENATO T.
ARROYO, respondents.
DECISION
DAVIDE, JR., J.:
As formulated by the petitioner, the issue in this petition for
review on certiorari under Rule 45 of the Rules of Court is as follows:
In case of interruption of a vessels voyage and the consequent delay in
that vessels arrival at its port of destination, is the right of a passenger
affected thereby to be determined and governed by the vague Civil
Code provision on common carriers, or shall it be, in the absence of a
specific provision thereon, governed by Art. 698 of the Code of
Commerce?[1]
The petitioner considers it a novel question of law.
Upon a closer evaluation, however, of the challenged decision of
the Court of Appeals of 23 November 1994,[2] vis-a-vis, the decision of
29 June 1992 in Civil Case No. 91-491 of the Regional Trial Court
(RTC) of Cagayan de Oro City, Branch 24,[3] as well as the allegations
and arguments adduced by the parties, we find the petitioners
formulation of the issue imprecise. As this Court sees it, what stands for
resolution is a common carriers liability for damages to a passenger
who disembarked from the vessel upon its return to the port of origin,
after it suffered engine trouble and had to stop at sea, having
commenced the contracted voyage on one engine.
The antecedents are summarized by the Court of Appeals as
follows:
Plaintiff [herein private respondent Atty. Renato Arroyo], a public
attorney, bought a ticket [from] defendant [herein petitioner], a
corporation engaged in x x x inter-island shipping, for the voyage of
M/V Asia Thailand vessel to Cagayan de Oro City from Cebu City on
November 12, 1991.
At around 5:30 in the evening of November 12, 1991, plaintiff boarded
the M/V Asia Thailand vessel. At that instance, plaintiff noticed that
some repair works [sic] were being undertaken on the engine of the
vessel. The vessel departed at around 11:00 in the evening with only
one (1) engine running.
After an hour of slow voyage, the vessel stopped near Kawit Island and
dropped its anchor thereat. After half an hour of stillness, some
passengers demanded that they should be allowed to return
to Cebu Cityfor they were no longer willing to continue their voyage to
Cagayan de Oro City. The captain acceded [sic] to their request and
thus the vessel headed back to Cebu City.
At Cebu City, plaintiff together with the other passengers who
requested to be brought back to Cebu City, were allowed to disembark.
Thereafter, the vessel proceeded to Cagayan de Oro City. Plaintiff, the
next day, boarded the M/V Asia Japan for its voyage to Cagayan de
Oro City, likewise a vessel of defendant.
On account of this failure of defendant to transport him to the place of
destination on November 12, 1991, plaintiff filed before the trial court a
complaint for damages against defendant.[4]
In his complaint, docketed as Civil Case No. 91-491, plaintiff
(hereinafter private respondent) alleged that the engines of the M/V
Asia Thailand conked out in the open sea, and for more than an hour it
was stalled and at the mercy of the waves, thus causing fear in the
passengers. It sailed back to Cebu City after it regained power, but for
unexplained reasons, the passengers, including the private respondent,
were arrogantly told to disembark without the necessary precautions
against possible injury to them. They were thus unceremoniously
dumped, which only exacerbated the private respondents mental
distress. He further alleged that by reason of the petitioners wanton,
reckless, and willful acts, he was unnecessarily exposed to danger and,
having been stranded in Cebu City for a day, incurred additional
expenses and loss of income. He then prayed that he be awarded
P1,100.00, P50,000.00, and P25,000.00 as compensatory, moral, and
exemplary damages, respectively.[5]
In his pre-trial brief, the private respondent asserted that his
complaint was an action for damage&arising from bad faith, breach of
contract and from tort, with the former arising from the petitioners
failure to carry [him] to his place of destination as contracted, while the
latter from the conduct of the [petitioner] resulting [in] the infliction of
emotional distress to the private respondent.[6]
After due trial, the trial court rendered its decision[7] and ruled that
the action was only for breach of contract, with Articles 1170, 1172, and
1173 of the Civil Code as applicable law - not Article 2180 of the same
Code. It was of the opinion that Article 1170 made a person liable for
damages if, in the performance of his obligation, he was guilty of fraud,
negligence, or delay, or in any manner contravened the tenor thereof;
moreover, pursuant to Article 2201 of the same Code, to be entitled to
damages, the non-performance of the obligation must have been
tainted not only by fraud, negligence, or delay, but also bad faith,
malice, and wanton attitude. It then disposed of the case as follows:
WHEREFORE, it not appearing from the evidence that plaintiff was left
in the Port of Cebu because of the fault, negligence, malice or wanton
attitude of defendants employees, the complaint is DISMISSED.
Defendants counterclaim is likewise dismissed it not appearing also
that filing of the case by plaintiff was motivated by malice or bad faith. [8]
The trial court made the following findings to support its
disposition:
In the light of the evidence adduced by the parties and of the above
provisions of the New Civil Code, the issue to be resolved, in the
resolution of this case is whether or not, defendant thru its employee in
[sic] the night of November 12, 1991, committed fraud, negligence, bad
faith or malice when it left plaintiff in the Port of Cebu when it sailed
back to Cagayan de Oro City after it has [sic] returned from Kawit
Island.
Evaluation of the evidence of the parties tended to show nothing that
defendant committed fraud. As early as 3:00 p.m. of November 12,
1991, defendant did not hide the fact that the cylinder head cracked.
Plaintiff even saw during its repair. If he had doubts as to the vessels
capacity to sail, he had time yet to take another boat. The ticket could
be returned to defendant and corresponding cash [would] be returned
to him.
Neither could negligence, bad faith or malice on the part of defendant
be inferred from the evidence of the parties. When the boat arrived at
[the] Port of Cebu after it returned from Kawit Island, there was an
announcement that passengers who would like to disembark were
given ten (10) minutes only to do so. By this announcement, it could be
inferred that the boat will [sic] proceed to Cagayan de Oro City. If
plaintiff entertained doubts, he should have asked a member of the
crew of the boat or better still, the captain of the boat. But as admitted
by him, he was of the impression only that the boat will not proceed to
Cagayan de Oro that evening so he disembarked. He was instead, the
ones [sic] negligent. Had he been prudent, with the announcement that
those who will disembark were given ten minutes only, he should have
lingered a little by staying in his cot and inquired whether the boat will
proceed to Cagayan de Oro City or not. Defendant cannot be expected
to be telling [sic] the reasons to each passenger. Announcement by
microphone was enough.
The court is inclined to believe that the story of defendant that the boat
returned to the Port of Cebu because of the request of the passengers
in view of the waves. That it did not return because of the defective
engines as shown by the fact that fifteen (15) minutes after the boat
docked [at] the Port of Cebu and those who wanted to proceed to
Cagayan de Oro disembarked, it left for Cagayan de Oro City.
The defendant got nothing when the boat returned to Cebu to let those
who did not want to proceed to Cagayan de Oro City including plaintiff
disembarked. On the contrary, this would mean its loss instead
because it will have to refund their tickets or they will use it the next trip
without paying anymore. It is hard therefore, to imagine how defendant
by leaving plaintiff in Cebu could have acted in bad faith, negligently,
want only and with malice.
If plaintiff, therefore, was not able to [m]ake the trip that night
of November 12, 1991, it was not because defendant maliciously did it
to exclude him [from] the trip. If he was left, it was because of his fault
or negligence.[9]
Unsatisfied, the private respondent appealed to the Court of
Appeals (CA-G.R. CV No. 39901) and submitted for its determination
the following assignment of errors: (1) the trial court erred in not finding
that the defendant-appellee was guilty of fraud, delay, negligence, and
bad faith; and (2) the trial court erred in not awarding moral and
exemplary damages.[10]
In its decision of 23 November 1994,[11] the Court of Appeals
reversed the trial courts decision by applying Article 1755 in relation to
Articles 2201, 2208, 2217, and 2232 of the Civil Code and, accordingly,
awarded compensatory, moral, and exemplary damages as follows:
WHEREFORE, premises considered, the appealed decision is hereby
REVERSED and SET ASIDE and another one is rendered ordering
defendant-appellee to pay plaintiff-appellant:
1. P20,000.00 as moral damages;
2. P10,000.00 as exemplary damages;
3. P5,000.00 as attorneys fees;
4. Cost of suit.
SO ORDERED.[12]
It did not, however, allow the grant of damages for the delay in
the performance of the petitioners obligation as the requirement of
demand set forth in Article 1169 of the Civil Code had not been met by
the private respondent. Besides, it found that the private respondent
offered no evidence to prove that his contract of carriage with the
petitioner provided for liability in case of delay in departure, nor that a
designation of the time of departure was the controlling motive for the
establishment of the contract. On the latter, the court a quo observed
that the private respondent even admitted he was unaware of the
vessels departure time, and it was only when he boarded the vessel
that he became aware of such. Finally, the respondent Court found no
reasonable basis for the private respondents belief that demand was
useless because the petitioner had rendered it beyond its power to
perform its obligation; on the contrary, he even admitted that the
petitioner had been assuring the passengers that the vessel would
leave on time, and that it could still perform its obligation to transport
them as scheduled.
To justify its award of damages, the Court of Appeals ratiocinated
as follows:
It is an established and admitted fact that the vessel before the voyage
had undergone some repair work on the cylinder head of the engine. It
is likewise admitted by defendant-appellee that it left
the port of Cebu City with only one engine running. Defendant-appellee
averred:
x x x The dropping of the vessels anchor after running slowly on only
one engine when it departed earlier must have alarmed some nervous
passengers x x x
The entries in the logbook which defendant-appellee itself
offered as evidence categorically stated therein that the vessel stopped
at Kawit Island because of engine trouble. It reads:
2330 HRS STBD ENGINE EMERGENCY STOP
2350 HRS DROP ANCHOR DUE TO. ENGINE TROUBLE, 2 ENGINE
STOP.
The stoppage was not to start and synchronized [sic] the engines
of the vessel as claimed by defendant-appellee. It was because one of
the engines of the vessel broke down; it was because of the disability of
the vessel which from the very beginning of the voyage was known to
defendant-appellee.
Defendant-appellee from the very start of the voyage knew for a
fact that the vessel was not yet in its sailing condition because the
second engine was still being repaired. Inspite of this knowledge,
defendant-appellee still proceeded to sail with only one engine running.
Defendant-appellee at that instant failed to exercise the diligence
which all common carriers should exercise in transporting or carrying
passengers. The law does not merely require extraordinary diligence in
the performance of the obligation. The law mandates that common
carrier[s] should exercise utmost diligence in the transport of
passengers.
Article 1755 of the New Civil Code provides:
ART. 1755. A common carrier is bound to carry the passengers safely
as far as human care and foresight can provide, using the utmost
diligence of very cautious persons, with a due regard for all the
circumstances.
Utmost diligence of a VERY CAUTIOUS person dictates that
defendant-appellee should have pursued the voyage only when its
vessel was already fit to sail. Defendant-appellee should have made
certain that the vessel [could] complete the voyage before starting [to]
sail. Anything less than this, the vessel [could not] sail x x x with so
many passengers on board it.
However, defendant-appellant [sic] in complete disregard of the
safety of the passengers, chose to proceed with its voyage even if only
one engine was running as the second engine was still being repaired
during the voyage. Defendant-appellee disregarded the not very
remote possibility that because of the disability of the vessel, other
problems might occur which would endanger the lives of the
passengers sailing with a disabled vessel.
As expected, x x x engine trouble occurred. Fortunate[ly] for
defendant-appellee, such trouble only necessitated the stoppage of the
vessel and did not cause the vessel to capsize. No wonder why some
passengers requested to be brought back to Cebu City. Common
carriers which are mandated to exercise utmost diligence should not be
taking these risks.
On this premise, plaintiff-appellant should not be faulted why he
chose to disembark from the vessel with the other passengers when it
returned back to Cebu City. Defendant-appellee may call him a very
panicky passenger or a nervous person, but this will not relieve
defendant-appellee from the liability it incurred for its failure to exercise
utmost diligence.[13]
xxx xxx xxx
As to the second assigned error, we find that plaintiff-appellant is
entitled to the award of moral and exemplary damages for the breach
committed by defendant-appellee.
As discussed, defendant-appellee in sailing to Cagayan de Oro
City with only one engine and with full knowledge of the true condition
of the vessel, acted in bad faith with malice, in complete disregard for
the safety of the passengers and only for its own personal
advancement/interest.
The Civil Code provides:
Art 2201.
xxx xxx xxx
In case of fraud, bad faith, malice or wanton attitude, the obligor shall
be responsible for all damages which may be reasonably attributed to
the non-performance of the obligation.
Plaintiff-appellant is entitled to moral damages for the mental
anguish, fright and serious anxiety he suffered during the voyage when
the vessels engine broke down and when he disembarked from the
vessel during the wee hours of the morning at Cebu City when it
returned.[14]
Moral damages are recoverable in a damage suit predicated
upon a breach of contract of carriage where it is proved that the carrier
was guilty of fraud or bad faith even if death does not result.[15]
Fraud and bad faith by defendant-appellee having been
established, the award of moral damages is in order.[16]
To serve as a deterrent to the commission of similar acts in the
future, exemplary damages should be imposed upon
defendant-appellee.[17] Exemplary damages are designed by our civil
law to permit the courts to reshape behavior that is socially deleterious
in its consequence by creating x x x negative incentives or deterrents
against such behavior.[18]
Moral damages having been awarded, exemplary damages
maybe properly awarded. When entitlement to moral damages has
been established, the award of exemplary damages is proper.[19]
The petitioner then instituted this petition and submitted the
question of law earlier adverted to.
Undoubtedly, there was, between the petitioner and the private
respondent, a contract of common carriage. The laws of primary
application then are the provisions on common carriers under Section 4,
Chapter 3, Title VIII, Book IV of the Civil Code, while for all other
matters not regulated thereby, the Code of Commerce and special
laws.[20]
Under Article 1733 of the Civil Code, the petitioner was bound to
observe extraordinary diligence in ensuring the safety of the private
respondent. That meant that the petitioner was, pursuant to Article
1755 of the said Code, bound to carry the private respondent safely as
far as human care and foresight could provide, using the utmost
diligence of very cautious persons, with due regard for all the
circumstances. In this case, we are in full accord with the Court of
Appeals that the petitioner failed to discharge this obligation.
Before commencing the contracted voyage, the petitioner
undertook some repairs on the cylinder head of one of the vessels
engines. But even before it could finish these repairs, it allowed the
vessel to leave the port of origin on only one functioning engine,
instead of two. Moreover, even the lone functioning engine was not in
perfect condition as sometime after it had run its course, it conked out.
This caused the vessel to stop and remain adrift at sea, thus in order to
prevent the ship from capsizing, it had to drop anchor. Plainly, the
vessel was unseaworthy even before the voyage began. For a vessel
to be seaworthy, it must be adequately equipped for the voyage and
manned with a sufficient number of competent officers and crew.[21] The
failure of a common carrier to maintain in seaworthy condition its vessel
involved in a contract of carriage is a clear breach of is duty prescribed
in Article 1755 of the Civil Code.
As to its liability for damages to the private respondent, Article
1764 of the Civil Code expressly provides:
ART. 1764. Damages in cases comprised in this Section shall be
awarded in accordance with Title XVIII of this Book, concerning
Damages. Article 2206 shall also apply to the death of a passenger
caused by the breach of contract by common carrier.
The damages comprised in Title XVIII of the Civil Code are actual or
compensatory, moral, nominal, temperate or moderate, liquidated, and
exemplary.
In his complaint, the private respondent claims actual or
compensatory, moral, and exemplary damages.
Actual or compensatory damages represent the adequate
compensation for pecuniary loss suffered and for profits the obligee
failed to obtain.[22]
In contracts or quasi-contracts, the obligor is liable for all the
damages which may be reasonably attributed to the non-performance
of the obligation if he is guilty of fraud, bad faith, malice, or wanton
attitude.[23]
Moral damages include moral suffering, mental anguish, fright,
serious anxiety, besmirched reputation, wounded feelings, moral shock,
social humiliation, or similar injury. They may be recovered in the cases
enumerated in Article 2219 of the Civil Code, likewise, if they are the
proximate result of, as in this case, the petitioners breach of the
contract of carriage.[24] Anent a breach of a contract of common
carriage, moral damages may be awarded if the common carrier, like
the petitioner, acted fraudulently or in bad faith.[25]
Exemplary damages are imposed by way of example or
correction for the public good, in addition to moral, temperate,
liquidated or compensatory damages.[26] In contracts and
quasi-contracts, exemplary damages may be awarded if the defendant
acted in a wanton fraudulent, reckless, oppressive or malevolent
manner.[27] It cannot, however, be considered as a matter of right; the
court having to decide whether or not they should be
adjudicated.[28] Before the court may consider an award for exemplary
damages, the plaintiff must first show that he is entitled to moral,
temperate or compensatory damages; but it is not necessary that he
prove the monetary value thereof.[29]
The Court of Appeals did not grant the private respondent actual
or compensatory damages, reasoning that no delay was incurred since
there was no demand, as required by Article 1169 of the Civil Code.
This article, however, finds no application in this case because, as
found by the respondent Court, there was in fact no delay in the
commencement of the contracted voyage. If any delay was incurred, it
was after the commencement of such voyage, more specifically, when
the voyage was subsequently interrupted when the vessel had to stop
near KawitIsland after the only functioning engine conked out.
As to the rights and duties of the parties strictly arising out of
such delay, the Civil Code is silent. However, as correctly pointed out
by the petitioner, Article 698 of the Code of Commerce specifically
provides for such a situation. It reads:
In case a voyage already begun should be interrupted, the passengers
shall be obliged to pay the fare in proportion to the distance covered,
without right to recover for losses and damages if the interruption is due
to fortuitous event or force majeure, but with a right to indemnity if the
interruption should have been caused by the captain exclusively. If the
interruption should be caused by the disability of the vessel and a
passenger should agree to await the repairs, he may not be required to
pay any increased price of passage, but his living expenses during the
stay shall be for his own account.
This article applies suppletorily pursuant to Article 1766 of the Civil
Code.
Of course, this does not suffice for a resolution of the case at
bench for, as earlier stated, the cause of the delay or interruption was
the petitioners failure to observe extraordinary diligence. Article 698
must then be read together with Articles 2199, 2200, 2201, and 2208 in
relation to Article 21 of the Civil Code. So read, it means that the
petitioner is liable for any pecuniary loss or loss of profits which the
private respondent may have suffered by reason thereof. For the
private respondent, such would be the loss of income if unable to report
to his office on the day he was supposed to arrive were it not for the
delay. This, however, assumes that he stayed on the vessel and was
with it when it thereafter resumed its voyage; but he did not. As he and
some passengers resolved not to complete the voyage, the vessel had
to return to its port of origin and allow them to disembark. The private
respondent then took the petitioners other vessel the following day,
using the ticket he had purchased for the previous days voyage.
Any further delay then in the private respondents arrival at the
port of destination was caused by his decision to disembark. Had he
remained on the first vessel, he would have reached his destination
at noon of 13 November 1991, thus been able to report to his office in
the afternoon. He, therefore, would have lost only the salary for half of
a day. But actual or compensatory damages must be proved, [30] which
the private respondent failed to do. There is no convincing evidence
that he did not receive his salary for 13 November 1991 nor that his
absence was not excused.
We likewise fully agree with the Court of Appeals that the
petitioner is liable for moral and exemplary damages. In allowing its
unseaworthy M/V Asia Thailand to leave the port of origin and
undertake the contracted voyage, with full awareness that it was
exposed to perils of the sea, it deliberately disregarded its solemn duty
to exercise extraordinary diligence and obviously acted with bad faith
and in a wanton and reckless manner. On this score, however, the
petitioner asserts that the safety of the vessel and passengers was
never at stake because the sea was calm in the vicinity where it
stopped as faithfully recorded in the vessels log book (Exhibit 4).
Hence, the petitioner concludes, the private respondent was merely
over-reacting to the situation obtaining then.[31]
We hold that the petitioners defense cannot exculpate it nor
mitigate its liability. On the contrary, such a claim demonstrates beyond
cavil the petitioners lack of genuine concern for the safety of its
passengers. It was, perhaps, only providential that the sea happened to
be calm. Even so, the petitioner should not expect its passengers to act
in the manner it desired. The passengers were not stoics; becoming
alarmed, anxious, or frightened at the stoppage of a vessel at sea in an
unfamiliar zone at nighttime is not the sole prerogative of the
faint-hearted. More so in the light of the many tragedies at sea resulting
in the loss of lives of hopeless passengers and damage to property
simply because common carriers failed in their duty to exercise
extraordinary diligence in the performance of their obligations.
We cannot, however, give our affirmance to the award of
attorneys fees. Under Article 2208 of the Civil Code, these are
recoverable only in the concept of actual damages,[32] not as moral
damages[33] nor judicial costs.[34] Hence, to merit such an award, it is
settled that the amount thereof must be proven.[35] Moreover, such
must be specifically prayed for - as was not done in this case - and may
not be deemed incorporated within a general prayer for such other
relief and remedy as this court may deem just and equitable. [36] Finally,
it must be noted that aside from the following, the body of the
respondent Courts decision was devoid of any statement regarding
attorneys fees:
Plaintiff-appellant was forced to litigate in order that he can claim moral
and exemplary damages for the suffering he encurred [sic]. He is
entitled to attorneys fees pursuant to Article 2208 of the Civil Code. It
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;
2. When the defendants act or omission has
compelled the plaintiff to litigate with third persons
or to incur expenses to protect his interest.
This Court holds that the above does not satisfy the benchmark of
factual, legal and equitable justification needed as basis for an award of
attorneys fees.[37] In sum, for lack of factual and legal basis, the award
of attorneys fees must be deleted.
WHEREFORE, the instant petition is DENIED and the
challenged decision of the Court of Appeals in CA-G.R. CV No. 39901
is AFFIRMED subject to the modification as to the award for attorneys
fees which is hereby SET ASIDE.
Costs against the petitioner.
SO ORDERED.
Narvasa, C.J. (Chairman), Melo, Francisco, and Panganiban,
JJ., concur.
FIRST DIVISION
[G.R. No. L-46558 : July 31, 1981.]
PHILIPPINE AIR LINES, INC., Petitioner, vs. THE COURT OF
APPEALS and JESUS V. SAMSON, Respondents.
DECISION
GUERRERO, J.:
This is a petition for review on Certiorari of the decision of the Court of
Appeals 1 dated April 18, 1977, affirming with modification the decision
of the Court of First Instance of Albay in Civil Case No. 1279, entitled
“Jesus V. Samson, plaintiff, vs. Philippine Air Lines, Inc., defendant,”
for damages.
The dispositive portion of the trial court’s decision reads:
“WHEREFORE, for all the foregoing considerations, judgment is
hereby rendered in favor of the plaintiff and against the defendant
ordering the defendant to pay the plaintiff, the following sums:
P1988,000.00 as unearned income or damages; P50,000.00 for moral
damages; P20,000.00 as attorney’s fees and P5,000.00 as expenses
of litigation, or a total of P273,000.00. Costs against the defendant.”
The appellate court modified the above decision, to wit:
“However, Plaintiff-Appellee, who has been deprived of his
job since 1954, is entitled to the legal rate of interest on the
P198,000.00 unearned income from the filing of the
complaint cranad(Sec. 8, Rule 51, Rules of Court).
WHEREFORE, with the modification indicated above, the
judgment appealed from is affirmed, with costs against
defendant-appellant.”
The complaint filed on July 1, 1954 by plaintiff Jesus V. Samson,
private respondent herein, averred that on January 8, 1951, he flew as
co-pilot on a regular flight from Manila to Legaspi with stops at Daet,
Camarines Norte and Pili, Camarines Sur, with Captain Delfin
Bustamante as commanding pilot of a C-47 plane belonging to
defendant Philippine Air Lines, Inc., now the herein petitioner; that on
attempting to land the plane at Daet airport, Captain Delfin Bustamante
due to his very slow reaction and poor judgment overshot the airfield
and as a result, notwithstanding the diligent efforts of the plaintiff
co-pilot to avert an accident, the airplane crashlanded beyond the
runway; that the jolt caused the head of the plaintiff to hit and break
through the thick front windshield of the airplane causing him severe
brain concussion, wounds and abrasions on the forehead with intense
pain and suffering cranad(par. 6, complaint).:onad
The complaint further alleged that instead of giving plaintiff expert and
proper medical treatment called for by the nature and severity of his
injuries, defendant simply referred him to a company physician, a
general medical practitioner, who limited the treatment to the exterior
injuries without examining the severe brain concussion of
plaintiff cranad(par. 7, complaint); that several days after the accident,
defendant Philippine Air Lines called back the plaintiff to active duty as
co-pilot, and inspite of the latter’s repeated request for expert medical
assistance, defendant had not given him any cranad(par. 8, complaint);
that as a consequence of the brain injury sustained by plaintiff from the
crash, he had been having periodic dizzy spells and had been suffering
from general debility and nervousness cranad(par. 9, complaint); that
defendant airline company instead of submitting the plaintiff to expert
medical treatment, discharged the latter from its employ on December
21, 1953 on grounds of physical disability, thereby causing plaintiff not
only to lose his job but to become physically unfit to continue as aviator
due to defendant’s negligence in not giving him the proper medical
attention cranad(pars. 10-11, complaint). Plaintiff prayed for damages
in the amount of P180,000.00 representing his unearned income,
P50,000.00 as moral damages, P20,000.00 as attorney’s fees and
P5,000.00 as expenses, or a total of P255,000.00.
In its answer filed on July 28, 1954, defendant PAL denied the
substantial averments in the complaint, alleging among others, that the
accident was due solely and exclusively to inevitable unforeseen
circumstances whereby plaintiff sustained only superficial wounds and
minor injuries which were promptly treated by defendant’s medical
personnel cranad(par. 5, answer); that plaintiff did not sustain brain
injury or cerebral concussion from the accident since he passed the
annual physical and medical examination given thereafter on April 24,
1951; that the headaches and dizziness experienced by plaintiff were
due to emotional disturbance over his inability to pass the required
up-grading or promotional course given by defendant
company cranad(par. 6, answer), and that, as confirmed by an expert
neuro-surgeon, plaintiff was suffering-from neurosis and in view of this
unfitness and disqualification from continuing as a pilot, defendant had
to terminate plaintiff’s employment cranad(pars. 7, 9, answer).
Further, defendant alleged that by the very nature of its business as a
common carrier, it is bound to employ only pilots who are proficient and
in good mental, emotional and physical condition; that the pilot, Captain
Delfin Bustamante, was a competent and proficient pilot, and although
he was already afflicted with a tumor of the nasopharynx even before
the accident of January 8, 1951, the Civil Aeronautics Administration, in
passing upon the fitness of pilots, gave Capt. Bustamante a waiver of
physical standards to enable him to retain his first class airman
certificate since the affliction had not in the least affected his
proficiency cranad(pars. 16-17, answer). By way of counterclaim,
defendant prayed for P10,000.00 as expenses for the litigation.
On March 25, 1958, defendant filed a Motion to Dismiss on the ground
that the complaint is essentially a Workmen’s Compensation claim,
stating a cause of action not cognizable within the general jurisdiction
of the court. The Motion to Dismiss was denied in the order of April 14,
1958. After the reception of evidence, the trial court rendered on
January 15, 1973 the decision, the dispositive portion of which has
been earlier cited.
The defendant Philippine Air Lines, Inc. appealed the decision to the
Court of Appeals as being contrary to law and unsupported by the
evidence. It raised as errors of the trial court cranad(a) the holding that
the damages allegedly suffered by plaintiff are attributable to the
accident of January 8, 1951 which was due to the negligence of
defendant in having allowed Capt. Delfin Bustamante to continue flying
despite his alleged slow reaction and poor judgment; cranad(b) the
finding that defendant was negligent in not having given plaintiff proper
and adequate expert medical treatment and assistance for the injuries
allegedly sustained in the accident of January 8, 1951; andcranad(c) in
ordering defendant to pay actual or compensatory damages, moral
damages and attorney’s fees to the plaintiff.
On April 18, 1977, the Court of Appeals rendered its decision affirming
the judgment of the lower court but modified the award of damages by
imposing legal rate of interest on the P198,000.00 unearned income
from the filing of the complaint, citing Sec. 8, Rule 51 of the Rules of
Court.
Its motion for reconsideration of the above judgment having been
denied, Philippine Air Lines, Inc. filed this instant petition
for Certiorari on the ground that the decision is not in accord with law or
with the applicable jurisprudence, aside from its being replete with
findings in the nature of speculation, surmises and conjectures not
borne out by the evidence on record thereby resulting to
misapprehension of facts and amounting to a grave abuse of
discretion cranad(p. 7, Petition).
Petitioner raises the fundamental question in the case at bar as follows:
Is there a causal connection between the injuries suffered by private
respondent during the accident on 8 January 1951 and the subsequent
“periodic dizzy spells, headache and general debility” of which private
respondent complained every now and then, on the one hand, and
such “periodic dizzy spells, headache and general debility” allegedly
caused by the accident and private respondent’s eventual discharge
from employment, on the other? PAL submits that respondent court’s
award of damages to private respondent is anchored on findings in the
nature of speculations, surmises and conjectures and not borne out by
the evidence on record, thereby resulting in a misapprehension of facts
and amounting to a grave abuse of discretion.
Petitioner’s submission is without merit.
As found by the respondent court, the following are the essential facts
of the case:
“It appears that plaintiff, a licensee aviator, was employed by
defendant a few years prior to January 8, 1951 as a regular
co-pilot on a guaranteed basic salary of P750.00 a month.
He was assigned to and/or paired with pilot Delfin
Bustamante.
Sometime in December 1950, he complained to defendant
through its authorized official about the slow reaction and
poor judgment of pilot Delfin Bustamante. Notwithstanding
said complaint, defendant allowed the pilot to continue flying.
On January 8, 1951, the two manned the regular afternoon
flight of defendant’s plane from Manila to Legaspi, with stops
at Daet, Camarines Norte, and Pili, Camarines Sur. Upon
making a landing at Daet, the pilot, with his slow reaction and
poor judgment, overshot the airfield and, as a result of and
notwithstanding diligent efforts of plaintiff to avert an accident,
the airplane crash-landed beyond the runway into a
mangrove. The jolt and impact caused plaintiff to hit his head
upon the front windshield of the plane thereby causing his
brain concussions and wounds on the forehead, with
concomittant intense pain.
Plaintiff was not given proper medical attention and
treatment demanded by the nature and severity of his
injuries. Defendant merely referred him to its clinic attended
by general practitioners on his external injuries. His brain
injury was never examined, much less treated. On top of that
negligence, defendant recalled plaintiff to active duty as a
 co-pilot, completely ignoring his plea for expert medical
assistance.
Suffering periodic dizzy spells, headache and general
debility, plaintiff every now and then complained to defendant.
To make matters worst for plaintiff, defendant discharged
him from his employment on December 21, 1953. In
consequence, plaintiff has been beset with additional worries,
basically financial. He is now a liability instead of a provider,
of his family.
On July 1, 1954, plaintiff filed a complaint for damages.
Defendant vainly sought to dismiss the complaint after filing
an answer. Then, the judgment and this appeal.”
Continuing, the respondent Court of Appeals further held:
“There is no question about the employment of plaintiff by
defendant, his age and salary, the overshooting by pilot
Bustamante of the airfield and crashlanding in a mangrove,
his hitting his head on the front windshield of the plane, his
intermittent dizzy spells, headache and general debility for
which he was discharged from his employment on December
21, 1953. As the lower court aptly stated:
‘From the evidence adduced by the parties, the
Court finds the following facts to be uncontroverted:
That the plaintiff Jesus V. Samson, on January 8,
1951 and a few years prior thereto, December 21,
1953, was a duly licensed pilot employed as a
regular co-pilot of the defendant with assignment
in its domestic air service in the Philippines; that on
January 8, 1951, the defendant’s airplane met an
accident in crashlanding at the Daet Airport,
Camarines Norte by overshooting the runway and
reaching the mangroves at the edge of the landing
strip; that the jolt caused plaintiff’s head to hit the
front windshield of the airplane causing him to
suffer wounds and abrasion on the forehead; that
the defendant, instead of giving the plaintiff expert
and proper medical treatment called for by the
nature and severity of the injuries of the plaintiff,
simply referred him to the clinic of the defendant’s
physicians who are only general medical
practitioners and not brain specialists; that the
defendant’s physicians limited their treatment to
the exterior injuries on the forehead of the plaintiff
and made no examination of the severe
concussion of the brain of the plaintiff; that the
Medical Director and Flight Surgeon of the
defendant were not able to definitely determine the
cause of the complaint of the plaintiff as to the
periodic attack of dizziness, spells and headache;
that due to this laxity of the defendant’s physician
and the continuous suffering of the ailment of the
plaintiff complained of, he demanded for expert
medical assistance for his brain injury and to send
him to the United States, which demand was
turned down and in effect denied by the defendant;
that instead the defendant referred the plaintiff to a
neurologist, Dr. Victor Reyes; that from the time
that said accident occurred on January 21, 1953,
he was ordered grounded on several occasions
because of his complaint of dizzy spells and
headache; that instead of submitting the plaintiff to
expert medical treatment as demanded by him and
denied by the defendant, he was discharged from
its employment on December 21, 1953 on the
ground of physical disability, and that the plaintiff,
at the time when the defendant’s plane met the
accident, up to the time he was discharged, was
regularly employed as a co-pilot and receiving a
basic salary of P750.00 a month plus extra pay for
flying time, and bonuses amounting to P300.00 a
month.’
Even defendant-appellant itself admits as not controverted
the following facts which generally admit what have been
stated above as not controverted.
“In the case at bar, the following facts are not the subject of
controversy:
‘(1) First, that from July 1950 to 21 December 1953,
plaintiff was employed with defendant company as
a first officer or co-pilot and served in that capacity
in defendant’s domestic services.
(2) Second, that on January 1951, plaintiff did fly
on defendant’s PI-C 94, as first officer or co-pilot,
with the late Capt. Delfin Bustamante in command
as pilot; that while making a landing at the Daet
airport on that date, PI-C 94 did meet an accident
as stated above.
(3) Third, that at or about the time of the discharge
from defendant company, plaintiff had complained
of “spells of dizziness,” “headaches” and
“nervousness”, by reason of which he was
grounded from flight duty. In short, that at that time,
or approximately from November 1953 up to the
date of his discharge on 21 December 1953,
plaintiff was actually physically unfit to discharge
his duties as pilot.
(4) Fourth, that plaintiff’s unfitness for flight duty
was properly established after a thorough medical
examination by competent medical
experts.’cralaw cranad(pp. 11-12, appellant’s brief)
hence, there can hardly be an issue, factual, legal or
medical.”
Taking exception from “the rest of the essential facts of the case as
found by the respondent court” PAL claims said facts are not fully borne
out by the evidence on record and insists that the injuries suffered by
private respondent during the accident on January 8, 1951 were
superficial in nature; that the “periodic spells, headache, and general
debility” complaint of every now and then by private respondent
subsequent to the Jan. 8, 1951 incident were due to emotional
disturbances and that no negligence can be attributed to Capt. Delfin
Bustamante much less to PAL for the occurrence on January 8, 1951,
hence PAL cannot be held liable for damages.
Petitioner claims absence of any causal connection between private
respondent’s superficial injuries and his alleged subsequent “periodic
spells, headache and general debility,” pointing out that these
subsequent ailments were found by competent physician, including an
expert neuro-surgeon, to be due to emotional disturbances insights the
conclusions of Dr. Trajano V. Bernardo that respondent’s complaints
were “psychosomatic symptoms” on the basis of declarations made by
respondent himself, which conclusions are supported by similar
diagnosis made by Drs. Damaceno J. Ago and Villaraza stating that
respondent Samson was suffering from neurosis as well as the report
of Dr. Victor Reyes, a neurological specialist, indicating that the
symptoms were probably, most probably due to psychogenic factors
and have no organic basis.
In claiming that there is no factual basis for the finding of the
respondent court that the crash-landing caused respondent’s “brain
concussion . cra ., with concomittant intense pain, for on the contrary,
testimonial evidence establish the superficiality of the injuries sustained
by respondent during the accident of January 8, 1951,” petitioner
quotes portions of the testimony of Dr. Manuel S. Sayas, who declared
that he removed the band-aid on the forehead of respondent and that
he found out after removal that the latter had two contussed superficial
wounds over the supra orbiter regions or just above the eyes
measuring one centimeter long and one millimeter deep. He examined
and found his blood pressure normal, no discharges from the nose and
ears. Dr. Trajano V. Bernardo also testified that when he examined
respondent Samson three days after the accident, the wound was
already healed and found nothing wrong with his ears, nose and throat
so that he was declared fit for duty after the sixth day.
Petitioner goes further. It contends that there is no causal connection
between respondent’s superficial injuries sustained during the accident
on January 8, 1951 and plaintiff’s discharge from employment with PAL
on December 21, 1953. According to PAL, it was the repeated
recurrence of respondent’s neurasthenic symptoms cranad(dizzy
spells, headache, nervousness) which prompted PAL’s Flight Surgeon,
Dr. Bernardo, to recommend that plaintiff be grounded permanently as
respondent was “psychologically unfit to resume his duties as pilot.”
PAL concludes that respondent’s eventual discharge from employment
with PAL was effected for absolutely valid reasons, and only after he
was thoroughly examined and found unfit to carry out his
responsibilities and duties as a pilot.:onad
We agree with the respondent court in finding that the dizzy spells,
headache and general debility of private respondent Samson was an
after-effect of the crash-landing and We find that such holding is
supported by substantial evidence, which We quote from the court’s
decision, to wit:
“Defendant would imply that plaintiff suffered only superficial
wounds which were treated and not brain injury. It would, by
the opinion of its company doctors, Dr. Bernardo and Dr.
Reyes, attribute the dizzy spells and headache to organic or
as phychosomatic, neurasthenic or psychogenic, which we
find outlandishly exaggerated.
That plaintiff’s condition as psychosomatic rather than
organic in nature is allegedly confirmed by the fact that on
six cranad(6) separate occasions after the accident he
passed the required CAA physical examination for airman’s
certificate. cranad(Exhs. 78, 79, 80, 81, 83 and 92). We
noticed, however, that there were other similar physical
examinations conducted by the CAA on the person of plaintiff
the report on which were not presented in evidence.
Obviously, only those which suited defendants cause were
hand-picked and offered in evidence.
We hesitate to accept the opinion of the defendant’s two
physicians, considering that Dr. Bernardo admittedly referred
to Dr. Reyes because he could not determine the cause of
the dizzy spells and headache and the latter admitted that ‘it
is extremely hard to be certain of the cause of his dizzy
spells,’ and suggested a possibility that it ‘was due to
postraumatic syndrome, evidently due to the injuries suffered
by the plaintiff in hitting the forehead against the windshield
of the plane during the accident.’ Judgment are not based on
possibilities.
The admitted difficulty of defendant’s doctors in determining
the cause of the dizzy spells and headache cannot be a
sound basis for finding against the plaintiff and in favor of
defendant. Whatever it might be, the fact is that such dizzy
spells, headache and general debility was an after-effect of
the crash-landing. Be it brain injury or psychosomatic,
neurasthenic or psychogenic, there is no gainsaying the fact
that it was caused by the crash-landing. As an effect of the
cause, not fabricated or concocted, plaintiff has to be
indemnified. The fact is that such effect caused his
discharge.
We are prone to believe the testimony of the plaintiff’s
doctors.
Dr. Morales, a surgeon, found that blood was coming from
plaintiff’s ears and nose. He testified that plaintiff was
suffering from cerebral concussion as a result of traumatic
injury to the brain caused by his head hitting on the
windshield of the plane during the
crash-landing cranad(Exhibit “G”).
Dr. Conrado Aramil, a neurologist and psychiatrist with
experience in two hospitals abroad, found abnormality
reflected by the electroencephalogram examination in the
frontal area on both sides of plaintiff’s head cranad(Exhibits
“K”, “K-1”).
The opinion of these two specialist renders unnecessary that
of plaintiff’s wife who is a physician in her own right and
because of her relation to the plaintiff, her testimony and
opinion may not be discussed here, although her testimony
is crystallized by the opinions of Dr. Ador Dionisio, Dr.
Marquez, Dr. Jose O. Chan, Dr. Yambao and Dr. Sandico.
Even the doctors presented by defendant admit vital facts
about plaintiff’s brain injury. Dr. Bernardo admits that due to
the incident, the plaintiff continuously complained of his
fainting spells, dizziness and headache everytime he flew as
a co-pilot and everytime he went to defendant’s clinic no less
than 25 timescranad(Exhibits “15” to “36”), that he
complained of the same to Dr. Reyes; that he promised to
help send plaintiff to the United States for expert medical
assistance provided that whatever finding thereat should not
be attributed to the crash-landing incident to which plaintiff
did not agree and that plaintiff was completely ignored by the
defendant in his plea for expert medical assistance. They
admitted that they could not determine definitely the cause of
the fainting spells, dizziness and headache, which justifies
the demand for expert medical assistance.”
We also find the imputation of gross negligence by respondent court to
PAL for having allowed Capt. Delfin Bustamante to fly on that fateful
day of the accident on January 8, 1951 to be correct, and We affirm the
same, duly supported as it is by substantial evidence, clearly
established and cited in the decision of said court which states as
follows:
“The pilot was sick. He admittedly had tumor of the
nasopharynx cranad(nose). He is now in the Great Beyond.
The spot is very near the brain and the eyes. Tumor on the
spot will affect the sinus, the breathing, the eyes which are
very near it. No one will certify the fitness to fly a plane of one
suffering from the disease.
“. cra . The fact First Pilot Bustamante has a long standing
tumor of the Nasopharynx for which reason he was grounded
since November 1947 is admitted in the letter cranad(Exh.
69-A) of Dr. Bernardo to the Medical Director of the CAA
requesting waiver of physical standards. The request for
waiver of physical standards is itself a positive proof that the
physical condition of Capt. Bustamante is short of the
standard set by the CAA. The Deputy Administrator of the
CAA granted the request relying on the representation and
recommendation made by Dr. Bernardo cranad(See Exh. 69).
We noted, however, that the request cranad(Exh. 69-A) says
that ‘it is believed that his continuing to fly as a co-pilot does
not involve any hazard.’cralaw cranad(Italics supplied).
Flying as a First Officer entails a very different responsibility
than flying as a mere co-pilot. Defendant requested the CAA
to allow Capt. Bustamante to fly merely as a co-pilot and it is
safe to conclude that the CAA approved the request thus
allowing Bustamante to fly only as a co-pilot. For having
allowed Bustamante to fly as a First Officer on January 8,
1951, defendant is guilty of gross negligence and therefore
should be made liable for the resulting accident.
As established by the evidence, the pilot used to get treatments from Dr.
Sycangco. He used to complain of pain in the face more particularly in
the nose which caused him to have sleepless nights. Plaintiff’s
observation of the pilot was reported to the Chief Pilot who did nothing
about it. Captain Carbonel of the defendant corroborated plaintiff of this
matter. The complaint against the slow reaction of the pilot at least
proved the observation. The observation could be disregarded. The
fact that the complaint was not in writing does not detract anything from
the seriousness thereof, considering that a miscalculation would not
only cause the death of the crew but also of the passengers.
One month prior to the crash-landing, when the pilot was preparing to
land in Daet, plaintiff warned him that they were not in the vicinity of
Daet but above the town of Ligao. The plane hit outside the airstrip. In
another instance, the pilot would hit the Mayon Volcano had not plaintiff
warned him. These more than prove what plaintiff had complained of.
Disregard thereof by defendant is condemnable.
To bolster the claim that Capt. Bustamante has not suffered from any
kind of sickness which hampered his flying ability, appellant contends
that for at least one or more years following the accident of January 8,
1951, Capt. Bustamante continued to fly for defendant company as a
pilot, and did so with great skill and proficiency, and without any further
accident or mishap, citing tsn. pp. 756-765, January 20, 1965. We have
painstakingly perused the records, particularly the transcript of
stenographic notes cited, but found nothing therein to substantiate
appellant’s contention. Instead, We discovered that the citation covers
the testimony of Dr. Bernardo on the physical condition of Bustamante
and nothing about his skills or proficiency to fly nor on the mishaps or
accidents, matters which are beyond Dr. Bernardo’s competence
anyway.
Assuming that the pilot was not sick or that the tumor did not affect the
pilot in managing the plane, the evidence shows that the overshooting
of the runway and crash-landing at the mangrove was caused by the
pilot for which acts the defendant must answer for damages caused
thereby. And for this negligence of defendant’s employee, it is
liable cranad(Joaquin vs. Aniceto, 12 SCRA 308). At least, the law
presumes the employer negligent imposing upon it the burden of
proving that it exercised the diligence of a good father of a family in the
supervision of its employees.
Defendant would want to tie plaintiff to the report he signed about the
crash-landing. The report was prepared by his pilot and because the
latter pleaded that he had a family too and would have nowhere to go if
he lost his job, plaintiff’s compassion would not upturn the truth about
the crash-landing. We are for the truth not logic of any argumentation.
At any rate, it is incorrect to say that the Accident Report cranad(Exh.
12 & 12-A), signed by plaintiff, exculpated Capt. Bustamante from any
fault. We observed that the Report does not categorically state that
Capt. Bustamante was not at fault. It merely relates in chronological
sequence what Capt. Bustamante and plaintiff did from the take-off
from Manila to the landing in Daet which resulted in an accident. On the
contrary, we may infer the negligence of Bustamante from the following
portion of the Report, to wit:
“. cra . I felt his brakes strong but as we neared the
intersection of the NE-SW runway, the brakes were not as
strong and I glanced at the system pressure which indicated
900 lbs. per sq. m.”
It was during the above precise instance that Capt. Bustamante lost his
bearing and disposition. Had he maintained the pressure on the brakes
the plane would not have overshot the runway. Verily, Bustamante
displayed slow reaction and poor judgment.cranad(CA decision, pp.
8-12).
This Court is not impressed by, much less can We accept petitioner’s
invocation to calibrate once again the evidence testified to in detail and
plucked from the voluminous transcript to support petitioner’s own
conclusion. It is not the task of this Court to discharge the functions of a
trier of facts much less to enter into a calibration of the evidence,
notwithstanding petitioner’s wail that the judgment of the respondent
court is based entirely on speculations, surmises and conjectures. We
are convinced that respondent court’s judgment is supported by strong,
clear and substantial evidence.:onad
Petitioner is a common carrier engaged in the business of carrying or
transporting passengers or goods or both, by land, water, or air, for
compensation, offering their services to the public, as defined in Art.
1732, New Civil Code. The law is clear in requiring a common carrier to
exercise the highest degree of care in the discharge of its duty and
business of carriage and transportation under Arts. 1733, 1755 and
1756 of the New Civil Code. These Articles provide:
Art. 1733. Common carriers, from the nature of their business and for
reasons of public policy, are bound to observe extraordinary diligence
in the vigilance over the goods and for the safety of the passengers
transported by them, according to all the circumstances of each case.
Such extraordinary diligence in the vigilance over the goods is further
expressed in Articles 1734, and 1745, Nos. 5, 6, and 7, while the
extraordinary diligence for the safety of the passengers is further set
forth in articles 1755 and 1756.
Art. 1755. A common carrier is bound to carry the passenger safely as
far as human care and foresight can provide, using the utmost
diligence of very cautious persons, with a due regard for all the
circumstances.
Art. 1756. In case of death of or injuries to passengers, common
carriers are presumed to have been at fault or to have acted negligently,
unless they prove that they observed extraordinary diligence as
prescribed in Articles 1733 and 1755.
The duty to exercise the utmost diligence on the part of common
carriers is for the safety of passengers as well as for the members of
the crew or the complement operating the carrier, the airplane in the
case at bar. And this must be so for any omission, lapse or neglect
thereof will certainly result to the damage, prejudice, nay injuries and
even death to all aboard the plane, passengers and crew members
alike.
Now to the damages. The Court of Appeals affirmed the award of
damages made by the trial court, stating that “the damages awarded
plaintiff by the lower court are in accordance with the facts, law and
jurisprudence.” The court further observed that “defendant-appellant is
still fortunate, considering that the unearned income was reckoned with
only up to 1968 and not up to the present as plaintiff-appellee is still
living. Whatever mathematical error defendant-appellant could show by
abstract argumentation, the same must be compensated by such
deficiency of the damages awarded to plaintiff-appellee.”
As awarded by the trial court, private respondent was entitled to
P198,000.00 as unearned income or compensatory damages;
P50,000.00 for moral damages, P20,000.00 as attorney’s fees and
P5,000.00 as expenses of litigation, or a total of P273,000.00.
The trial court arrived at the sum of P198,000.00 as unearned income
or damages by considering that respondent Samson “could have
continued to work as airline pilot for fifteen more years, he being only
38 years at the time the services were terminated by the
defendant cranad(PAL) and he would have earned P120,000.00 from
1954 to 1963 or a period of ten cranad(10) years at the rate of one
thousand per month cranad(P750.00 basic salary plus P300.00 extra
pay for extra flying time and bonuses; and considering further that in
1964 the basic pay of defendant’s pilot was increased to P12,000.00
annually, the plaintiff could have earned from 1964 to 1968 the sum of
P60,000.00 in the form of salaries and another P18,000.00 as bonuses
and extra pay for extra flying time at the same rate of P300 a month, or
a grand total of P198,000.00 for the entire period. This claim of the
plaintiff for loss or impairment of earning capacity is based on the
provision of Article 2205 of the New Civil Code of the Philippines which
provides that “damages may be recovered for loss or impairment of
earning capacity in cases of temporary or permanent personal injury.”
This provision of law has been construed and interpreted in the case of
Aureliano Ropato, et al. vs. La Mallorca General Partnership, 56 O.G.,
7812, which rules that law allows the recovery of damages for loss or
impairment of earning capacity in cases of temporary or permanent
personal injury.” chanroblesvirtualawlibrary(Decision, CFI, pp. 98-99,
Record on Appeal)
The respondent appellate court modified the above award by ordering
payment of legal interest on the P198,000.00 unearned income from
the filing of the claim, citing Sec. 8, Rule 51 of the Rules of Court.
Petitioner assails the award of the total sum of P198,000.00 as
unearned income up to 1968 as being tenuous because firstly, the trial
court’s finding affirmed by the respondent court is allegedly based on
pure speculation and conjecture and secondly, the award of P300.00 a
month as extra pay for extra flying time from 1954 to 1968 is likewise
speculative. PAL likewise rejects the award of moral damages in the
amount of P50,000.00 on the ground that private respondent’s action
before the trial court does not fall under any of the cases enumerated in
the law cranad(Art. 2219 of the New Civil Code) for which moral
damages are recoverable and that although private respondent’s action
gives the appearance that it is covered under quasi-delict as provided
in Art. 21 of the New Civil Code, the definition of quasi-delict in Art.
2176 of the New Civil Code expressly excludes cases where there is a
pre-existing contractual relation between the parties, as in the case
under consideration, where an employer-employee relationship existed
between PAL and private respondent. It is further argued that private
respondent’s action cannot be deemed to be covered by Art. 21,
inasmuch as there is no evidence on record to show that PAL “wilfully
cause(d) loss or injury to cranad(private respondent) in a manner that
is contrary to morals, good customs or public policy . cra .” Nor can
private respondent’s action be considered “analogous” to either of the
foregoing, for the reasons are obvious that it is
not.” chanroblesvirtualawlibrary(Memorandum of petitioner, pp.
418-421, Records)
Having affirmed the gross negligence of PAL in allowing Capt. Delfin
Bustamante to fly the plane to Daet on January 8, 1951 whose slow
reaction and poor judgment was the cause of the crash-landing of the
plane which resulted in private respondent Samson hitting his head
against the windshield and causing him injuries for which reason PAL
terminated his services and employment as pilot after refusing to
provide him with the necessary medical treatment of respondent’s
periodic spells, headache and general debility produced from said
injuries, We must necessarily affirm likewise the award of damages or
compensation under the provisions of Art. 1711 and Art. 1712 of the
New Civil Code which provide:
Art. 1711. Owners of enterprises and other employers are obliged to
pay compensation for the death or injuries to their laborers, workmen,
mechanics or other employees, even though the event may have been
purely accidental or entirely due to a fortuitous cause, if the death or
personal injury arose out of and in the course of the employment. The
employer is also liable for compensation if the employee contracts any
illness or disease caused by such employment or as the result of the
nature of the employment. If the mishap was due to the employee’s
own notorious negligence, or voluntary act, or drunkenness, the
employer shall not be liable for compensation. When the employee’s
lack of due care contributed to his death or injury, the compensation
shall be equitably reduced.
Art. 1712. If the death or injury is due to the negligence of a
fellow-worker, the latter and the employer shall be solidarily liable for
compensation. If a fellow-worker’s intentional or malicious act is the
only cause of the death or injury, the employer shall not be answerable,
unless it should be shown that the latter did not exercise due diligence
in the selection or supervision of the plaintiffs fellow-worker.
The grant of compensatory damages to the private respondent made
by the trial court and affirmed by the appellate court by computing his
basic salary per annum at P750.00 a month as basic salary and
P300.00 a month for extra pay for extra flying time including bonus
given in December every year is justified. The correct computation
however should be P750 plus P300 x 12 months = P12,600 per annum
x 10 years = P126,000.00 cranad(not P120,000.00 as computed by the
court a quo). The further grant of increase in the basic pay of the pilots
to P12,000 annually for 1964 to 1968 totalling P60,000.00 and another
P18,000.00 as bonuses and extra pay for extra flying time at the same
rate of P300.00 a month totals P78,000.00. Adding
P126,000.00 cranad(1964 to 1968 compensation) makes a grand total
of P204,000.00 cranad(not P198,000.00 as originally computed).
As to the grant of moral damages in the sum of P50,000.00 We also
approve the same. We have noted and considered the holding of the
appellate court in the matter of bad faith on the part of PAL, stated
hereunder, this wise:
“None of the essential facts material to the determination of
the case have been seriously assailed: the overshooting of
runway and crash-landing into the mangroves; the hitting of
plaintiff’s head to the front windshield of the plane; the oozing
of blood out of his ears, nose and mouth; the intermittent
dizzy spells, headaches and general debility thereafter for
which he was discharged from his employment; the condition
of not to attribute the cause of the ailment to the
crash-landing imposed in bad faith for a demanded special
medical service abroad; and the resultant brain injury which
defendant’s doctors could not understand nor diagnose.”
xxx
“The act of defendant-appellant in unjustly refusing
plaintiff-appellee’s demand for special medical service
abroad for the reason that plaintiff-appellee’s deteriorating
physical condition was not due to the accident violates the
provisions of Article 19 of the Civil Code on human relations
“to act with justice, give everyone his due, and observe
honesty and good faith.” chanroblesvirtualawlibrary(CA
Resolution, pp. 151-152, Records)
We reject the theory of petitioner that private respondent is not entitled
to moral damages. Under the facts found by the trial court and affirmed
by the appellate court and under the law and jurisprudence cited and
applied, the grant of moral damages in the amount of P50,000.00 is
proper and justified.
The fact that private respondent suffered physical injuries in the head
when the plane crash-landed due to the negligence of Capt.
Bustamante is undeniable. The negligence of the latter is clearly a
quasi-delict and therefore Article 2219, cranad(2) New Civil Code is
applicable, justifying the recovery of moral damages.
Even from the standpoint of the petitioner that there is an
employer-employee relationship between it and private respondent
arising from the contract of employment, private respondent is still
entitled to moral damages in view of the finding of bad faith or malice by
the appellate court, which finding We hereby affirm, applying the
provisions of Art. 2220, New Civil Code which provides that willful injury
to property may be a legal ground for awarding moral damages if the
court should find that, under the circumstances, such damages are
justly due. The same rule applies to breaches of contract where the
defendant acted fraudulently or in bad faith.
The justification in the award of moral damages under Art. 19 of the
New Civil Code on Human Relations which requires that 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, as applied by respondent court is also well-taken and We hereby
give Our affirmance thereto.
With respect to the award of attorney’s fees in the sum of P20,000.00
the same is likewise correct. As pointed out in the decision of the Court
of Appeals, “the plaintiff is entitled to attorney’s fees because he was
forced to litigate in order to enforce his valid claim cranad(Ganaban vs.
Bayle, 30 SCRA 365; De la Cruz vs. De la Cruz, 22 SCRA 33; and
many others); defendant acted in bad faith in refusing plaintiff’s valid
claim cranad(Filipino Pipe Foundry Corporation vs. Central Bank, 23
SCRA 1044); and plaintiff was dismissed and was forced to go to court
to vindicate his right cranad(Nadura vs. Benguet Consolidated, Inc., 5
SCRA 879).”
We also agree with the modification made by the appellate court in
ordering payment of legal interest from the date judicial demand was
made by Pilot Samson against PAL with the filing of the complaint in
the lower court. We affirm the ruling of the respondent court which
reads:
“Lastly, the defendant-appellant claims that the legal rate of
interest on the unearned compensation should be computed
from the date of the judgment in the lower court, not from the
filing of the complaint, citing a case where the issue raised in
the Supreme Court was limited to when the judgment was
rendered in the lower court or in the appellate court, which
 does not mean that it should not be computed from the filing
of the complaint.
Articles 1169, 2209 and 2212 of the Civil Code govern when
interest shall be computed. Thereunder interest begins to
accrue upon demand, extrajudicial or judicial. A complaint is
a judicial demand cranad(Cabarroguis vs. Vicente, 107 Phil.
340). Under Article 2212 of the Civil Code, interest due shall
earn legal interest from the time it is judicially demanded,
although the obligation may be silent upon this
point.” chanroblesvirtualawlibrary(CA Resolution, pp.
153-154, Records).
The correct amount of compensatory damages upon which legal
interest shall accrue from the filing of the complaint is P204,000.00 as
herein computed and not P198,000.00.
WHEREFORE, in view of all the foregoing, the judgment of the
appellate court is hereby affirmed with slight modification in that the
correct amount of compensatory damages is P204,000.00. With costs
against petitioner.
SO ORDERED.
Republic of the Philippines

Makasiar and De Castro, JJ., concur. Supreme Court

Manila
Teehankee and Melencio-Herrera, JJ., concur in the result.

FIRST DIVISION

Leonides C. Dio, G.R. No. 145871

Petitioner,

Present:

PANGANIBAN, C.J.

- versus - (Chairperson)

YNARES-SANTIAGO,

AUSTRIA-MARTINEZ,

CALLEJO, SR., and

CHICO-NAZARIO, JJ.

Lina Jardines, Promulgated:

Respondent. January 31, 2006

x----------------------------------------------x

DECISION

AUSTRIA-MARTINEZ, J.:

This resolves the petition for review on certiorari seeking to set aside
the Decision[1] of the Court of Appeals (CA) dated June 9,
2000 dismissing the appeal in CA-G.R. CV No. 56118 and the
Resolution dated October 25, 2000 denying the motion for
reconsideration.
The antecedent facts are as follows.
On December 14, 1992, Leonides C. Dio (petitioner) filed a Petition for
Consolidation of Ownership with
the Regional Trial Court of Baguio City, Branch 7 (RTC). She alleged
that: on January 31, 1987, Lina Jardines (respondent) executed in her
favor a Deed of Sale with Pacto de Retro over a parcel of land with
improvements thereon covered by Tax Declaration No. 44250, the
consideration for which amounted to P165,000.00; it was stipulated in
the deed that the period for redemption would expire in six months or
on July 29, 1987; such period expired but neither respondent nor any
of her legal representatives were able to redeem or repurchase the
subject property; as a consequence, absolute ownership over the
property has been consolidated in favor of petitioner.[2]
Respondent countered in her Answer that: the Deed of Sale
with Pacto de Retro did not embody the real intention of the parties;
the transaction actually entered into by the parties was one of simple
loan and the Deed of Sale with Pacto de Retro was executed just as a
security for the loan; the amount borrowed by respondent during the
first week of January 1987 was only P50,000.00 with monthly interest
of 9% to be paid within a period of six months, but since said amount
was insufficient to buy construction materials for the house she was
then building, she again borrowed an additional amount of P30,000.00;
it was never the intention of respondent to sell her property to
petitioner; the value of respondents residential house alone is over a
million pesos and if the value of the lot is added, it would be around
one and a half million pesos; it is unthinkable that respondent would
sell her property worth one and a half million pesos for
only P165,000.00; respondent has even paid a total of P55,000.00 out
of the amount borrowed and she is willing to settle the unpaid amount,
but petitioner insisted on appropriating the property of respondent
which she put up as collateral for the loan; respondent has been the
one paying for the realty taxes on the subject property; and due to the
malicious suit filed by petitioner, respondent suffered moral damages.
On September 14, 1993, petitioner filed an Amended Complaint
adding allegations that she suffered actual and moral damages. Thus,
she prayed that she be declared the absolute owner of the property
and/or that respondent be ordered to pay her P165,000.00 plus the
agreed monthly interest of 10%; moral and exemplary damages,
attorneys fees and expenses of litigation.
Respondent then filed her Answer to the Amended Complaint
reiterating the allegations in her Answer but increasing the alleged
valuation of the subject property to more than two million pesos.
After trial, the RTC rendered its Decision dated November
20, 1996, the dispositive portion of which reads as follows:
WHEREFORE, in view of all the foregoing, judgment is
hereby rendered as follows:
a) Declaring the contract (Exh. A) entered into by
the contending parties as one of deed of sale with right to
repurchase or pacto de retro sale;
b) Declaring the plaintiff Dio to have acquired
whatever rights Jardines has over the parcel of land involved
it being that Jardines has no torrens title yet over said land;
c) Declaring the plaintiff Dio the owner of the
residential house and other improvements standing on the
parcel of land in question;
d) Ordering the consolidation of ownership
of Dio over the residential house and other improvements,
and over the rights, she (Dio) acquired over the parcel of
land in question; and ordering the corresponding
government official (The City Assessor) of Baguio City to
undertake the consolidation by putting in the name of
plaintiff Dio the ownership and/or rights which she acquired
from the defendant Jardines in the corresponding document
(Tax Declarations) on file in his/her office; after the plaintiff
has complied with all the requirements and has paid the fees
necessary or incident to the issuance of a new tax
declaration as required by law;
e) Ordering the cancellation of Tax Declaration
44250;
f) Ordering defendant Jardines to pay actual
and/or compensatory damages to the plaintiff as follows:
1) P3,000.00 representing expenses in going to
and from Jardines place to collect the
redemption money;
2) P1,000.00 times the number of times Dio came
to Baguio to attend the hearing of the case as
evidenced by the signatures of Dio appearing on
the minutes of the proceedings found in
the Rollo of the case;
3) P10,000.00 attorneys fee.
Costs against defendant Jardines.
SO ORDERED.[3]
Respondent then appealed to the CA which reversed the
RTC judgment. The CA held that the true nature of the contract
between herein parties is one of equitable mortgage, as shown by the
fact that (a) respondent is still in actual physical possession of the
property; (b) respondent is the one paying the real property taxes on
the property; and (c) the amount of the supposed sale
price, P165,000.00, earns monthly interest. The dispositive portion of
the CA Decision promulgated on June 9, 2000 reads:
WHEREFORE, foregoing premises considered, we find that
the Regional Trial Court, First Judicial Region, Branch
07, Baguio City, committed reversible errors in rendering its
decision dated 20 November 1996 in Civil Case No. 2669-R,
entitled Leonides G. Dio, etc. vs. Lina Jardines. The appeal
at bar is herby GRANTED and the assailed decision is
hereby REVERSED and SET ASIDE.Let a new judgment
be entered as follows:
 1. Declaring that the true nature of the contract
entered into by the contending parties as one of equitable
mortgage and not a pacto de retro sale;
2. Ordering the defendant-appellant to pay
plaintiff-appellee legal interest on the amount
of P165,000.00 from July 29, 1987, the time the said interest
fell due, until fully paid;
3. No pronouncement as to cost.
SO ORDERED.[4]
Petitioner moved for reconsideration of said decision, but the same
was denied per Resolution dated October 25, 2000.
Hence, herein petition for review on certiorari alleging that:
1. THE LOWER COURT COMMITTED
ERROR IN DECLARING THAT THE TRUE NATURE
THE CONTRACT ENTERED INTO BY THE PARTIES
ONE EQUITABLE MORTGAGE AND NOT A PACTO
RETRO SALE;
2. THE LOWER COURT COMMITTED AN
ERROR IN ORDERING THE RESPONDENT TO PAY
PETITIONER LEGAL INTEREST DESPITE THE
CONFLICTING ADMISSIONS OF THE PARTIES THAT
THE AGREED INTERESTS WAS EITHER 9% OR 10%;
3. THE FINDINGS OF FACTS OF THE LOWER
COURT ARE CONTRARY TO EVIDENCE AND THE
ADMISSIONS OF THE PARTIES;
4. THE LOWER COURT COMMITTED AN
ERROR IN GOING BEYOND THE ISSUES OF THE CASE
BY DELETING THE AWARD FOR DAMAGES DESPITE
THE FACT THAT THE SAME WAS NOT RAISED AS AN
ISSUE IN THE APPEAL; [5]
The petition lacks merit.
The Court finds the allegations of petitioner that the findings
of fact of the CA are contrary to evidence and admissions of the parties
and that it erred in declaring the contract between the parties as an
equitable mortgage to be absolutely unfounded.
A close examination of the records of this case reveals that
the findings of fact of the CA are all based on documentary evidence
and on admissions and stipulation of facts made by the parties. The
CAs finding that there was no gross inadequacy of the price of
respondents residential house as stated in the contract, was based on
respondents own evidence, Tax Declaration No. 44250, which stated
that the actual market value of subject residential house in 1986 was
only P93,080.00. The fact that respondent has remained in actual
physical possession of the property in question, and that respondent
has been the one paying the real property taxes on the subject
property was established by the admission made by petitioner during
the pre-trial conference and embodied in the Pre-Trial
Order[6] dated May 25, 1994. The finding that the purchase price in the
amount of P165,000.00 earns monthly interest was based on
petitioners own testimony and admission in her appellees brief that the
amount of P165,000.00, if not paid on July 29, 1987, shall bear an
interest of 10% per month.
The Court sees no reversible error with the foregoing
findings of fact made by the CA. The CA correctly ruled that the true
nature of the contract entered into by herein parties was one of
equitable mortgage.
Article 1602 of the Civil Code enumerates the instances
when a purported pacto de retro sale may be considered an equitable
mortgage, to wit:
Art. 1602. The contract shall be presumed to be
an equitable mortgage, in any of the following cases:
(1) When the price of a sale with right to repurchase
is unusually inadequate;
(2) When the vendor remains in possession as
lessee or otherwise;
(3) When upon or after the expiration of the right to
repurchase another instrument extending the
period of redemption or granting a new period is
executed;
(4) When the purchaser retains for himself a part of the
purchase price;
AN
OF
(5) When the vendor binds himself to pay the taxes on
AS
the thing sold;
DE
(6) In any other case where it may be fairly inferred that the
real intention of the parties is that the transaction
shall secure the payment of a debt or the
performance of any other obligation.
In any of the foregoing cases, any money, fruits,
or other benefit to be received by the vendee as rent or
otherwise shall be considered as interest which shall be
subject to the usury laws. (Emphasis supplied)
In Legaspi vs. Ong,[7] the Court further explained that:
The presence of even one of the
above-mentioned circumstances as enumerated in Article
1602 is sufficient basis to declare a contract of sale with right
to repurchase as one of equitable mortgage. As stated by
the Code Commission which drafted the new Civil Code, in
practically all of the so-called contracts of sale with right of
repurchase, the real intention of the parties is that the
pretended purchase price is money loaned and in order to
secure the payment of the loan, a contract purporting to be a
sale with pacto de retro is drawn up.[8]
In the same case, the Court cited Article 1603 of the Civil Code, which
provides that in case of doubt, a contract purporting to be a sale with
right to repurchase shall be construed as an equitable mortgage.[9]
In the instant case, the presence of the circumstances
provided for under paragraphs (2) and (5) of Article 1602 of the Civil
Code, and the fact that petitioner herself demands payment of
interests on the purported purchase price of the subject property,
clearly show that the intention of the parties was merely for the
property to stand as security for a loan. The transaction between
herein parties was then correctly construed by the CA as an equitable
mortgage.
The allegation that the appellate court should not have deleted the
award for actual and/or compensatory damages is likewise
unmeritorious.
Section 8, Rule 51 of the Rules of Court provides as follows:
Sec. 8. Questions that may be decided. No error which
does not affect the jurisdiction over the subject matter or the
validity of the judgment appealed from or the proceedings
 therein will be considered unless stated in the assignment of
errors, or closely related to or dependent on an assigned
error and properly argued in the brief, save as the court may
pass upon plain errors and clerical errors.
Clearly, the appellate court may pass upon plain errors even if they are
not stated in the assignment of errors. In Villegas vs. Court of
Appeals,[10] the Court held:
[T]he Court is clothed with ample authority to review matters,
even if they are not assigned as errors in the appeal, if it
finds that their consideration is necessary in arriving at a just
decision of the case.[11]
In the present case, the RTCs award for actual damages is a
plain error because a reading of said trial courts Decision readily
discloses that there is no sufficient evidence on record to prove that
petitioner is entitled to the same. Petitioners only evidence to prove her
claim for actual damages is her testimony that she has
spent P3,000.00 in going to and from respondents place to try to
collect payment and that she spent P1,000.00 every time she travels
from Bulacan, where she resides, to Baguio in order to attend the
hearings.
In People vs. Sara,[12] the Court held that a witness
testimony cannot be considered as competent proof and cannot
replace the probative value of official receipts to justify the award of
actual damages, for jurisprudence instructs that the same must be duly
substantiated by receipts.[13] Hence, there being no official receipts
whatsoever to support petitioners claim for actual or compensatory
damages, said claim must be denied.
The appellate court was also correct in ordering respondent
to pay legal interest on the amount of P165,000.00.
Both parties admit that they came to an agreement whereby
respondent shall pay petitioner interest, at 9% (according to
respondent) or 10% (according to petitioner) per month, if she is
unable to pay the principal amount of P165,000.00 on July 29, 1987.
In the Pre-Trial Order[14] dated May 25, 1994, one of the
issues for resolution of the trial court was whether or not the interest to
be paid under the agreement is 10% or 9% or whether or not this
amount of interest shall be reduced equitably pursuant to law. [15]
The factual milieu of Carpo vs. Chua[16] is closely analogous
to the present case. In the Carpo case, petitioners therein contracted a
loan in the amount of P175,000.00 from respondents therein, payable
within six months with an interest rate of 6% per month. The loan was
not paid upon demand. Therein petitioners claimed that following the
Courts ruling in Medel vs. Court of Appeals,[17] the rate of interest of 6%
per month or 72% per annum as stipulated in the principal loan
agreement is null and void for being excessive, iniquitous,
unconscionable and exorbitant. The Court then held thus:
In a long line of cases, this Court has invalidated
similar stipulations on interest rates for being excessive,
iniquitous, unconscionable and exorbitant. In Solangon v.
Salazar, we annulled the stipulation of 6% per month or 72%
per annum interest on a P60,000.00 loan. In Imperial
v. Jaucian, we reduced the interest rate from 16% to 1.167%
per month or 14% per annum. In Ruiz v. Court of Appeals,
we equitably reduced the agreed 3% per month or 36% per
annum interest to 1% per month or 12% per annum
interest. The 10% and 8% interest rates per month on
a P1,000,000.00 loan were reduced to 12% per annum
in Cuaton v. Salud. Recently, this Court, in Arrofo v. Quino,
reduced the 7% interest per month on a P15,000.00 loan
amounting to 84% interest per annum to 18% per annum.
There is no need to unsettle the principle affirmed
in Medel and like cases. From that perspective, it is
apparent that the stipulated interest in the subject loan is
excessive, iniquitous, unconscionable and
exorbitant. Pursuant to the freedom of contract principle
embodied in Article 1306 of the Civil Code, contracting
parties may establish such stipulations, clauses, terms and
conditions as they may deem convenient, provided they are
not contrary to law, morals, good customs, public order, or
public policy. In the ordinary course, the codal provision may
be invoked to annul the excessive stipulated interest.
In the case at bar, the stipulated interest rate is 6%
per month, or 72% per annum. By the standards set in the
above-cited cases, this stipulation is similarly
invalid. x x x.[18]
Applying the afore-cited rulings to the instant case, the
inescapable conclusion is that the agreed interest rate of 9% per
month or 108% per annum, as claimed by respondent; or 10% per
month or 120% per annum, as claimed by petitioner, is clearly
excessive, iniquitous, unconscionable and exorbitant. Although
respondent admitted that she agreed to the interest rate of 9%, which
she believed was exorbitant, she explained that she was constrained
to do so as she was badly in need of money at that time. As declared in
the Medelcase[19] and Imperial vs. Jaucian,[20] [i]niquitous and
unconscionable stipulations on interest rates, penalties and attorneys
fees are contrary to morals. Thus, in the present case, the rate of
interest being charged on the principal loan of P165,000.00, be it 9%
or 10% per month, is void. The CA correctly reduced
the exhorbitant rate to legal interest.
In Trade & Investment Development Corporation of the
Philippines vs. Roblett Industrial Construction Corporation,[21] the
Court held that:
In Eastern Shipping Lines, Inc. v. Court of Appeals,
this Court laid down the following rules with respect to the
manner of computing legal interest:
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 1169 of the Civil
Code. [22] (Underscoring supplied)
Applied to the present case, since the agreed interest rate is
void, the parties are considered to have no stipulation regarding the
interest rate. Thus, the rate of interest should be 12% per annum to be
computed from judicial or extrajudicial demand, subject to the
provisions of Article 1169 of the Civil Code, to wit:
Art. 1169. Those obliged to deliver or to do
something incur in delay from the time the obligee judicially
or extrajudicially demands from them the fulfillment of the
obligation.
 However, the demand by the creditor shall not be
necessary in order that delay may exist:
(1) When the obligation or the law expressly so
declares; or
(2) When from the nature and the
circumstances of the obligation it appears
that the designation of the time when the
thing is to be delivered or the service is to be
rendered was a controlling motive for the
establishment of the contract; or
(3) When demand would be useless, as when
the obligor has rendered it beyond his power
to perform.
xxxx

The records do not show any of the circumstances

enumerated above. Consequently, the 12% interest should be
reckoned from the date of extrajudicial demand.

Petitioner testified that she went to respondents place

several times to try to collect payment, but she (petitioner) failed to
specify the dates on which she made such oral demand.The
only evidence which clearly shows the date when petitioner made a
demand on respondent is the demand letter dated March 19,
1989 (Exh. C), which was received by respondent or her agent
on March 29, 1989 per the Registry Return Receipt (Exh. C-1). Hence,
the interest of 12% per annum should only begin to run from March 29,
1989, the date respondent received the demand letter from petitioner.

WHEREFORE, the petition is hereby DENIED. The Decision

of the Court of Appeals dated June 9, 2000 is AFFIRMED with
the MODIFICATION that the legal interest rate to be paid by
respondent on the principal amount of P165,000.00 is twelve (12%)
percent per annum from March 29, 1989 until fully paid. EN BANC

SO ORDERED.
G.R. No. 34147 September 24, 1935
MA. ALICIA AUSTRIA-MARTINEZ
Associate Justice SEBASTIANA RODRIGUEZ, Plaintiff-Appellee, vs. IRINEA
CAOIBES, Defendant-Appellant.

Ramon Diokno for appellant.

Claro M. Recto, Jesus Morfe and Sumulong, Lavides and Sumulong for
appellee.

VILLA-REAL, J.:

This is an appeal taken by the defendant Irinea Caoibes from the order
of the Court First Instance of Batangas of December 14, 1934, denying
the motion of said defendant-appellant of September 25, 1934, asking
that the order of the said court of September 10, 1934, be set aside,
and that the sale made by the sheriff and the deed executed
thereunder be disapproved. The order of September 10, 1934, is as
follows:

Upon submission of the plaintiff's motion of August

2, 1934, asking for the approval of the sale made
by the sheriff to the plaintiff of the properties which
are the subject of this case, and the opposition to
the approval of said sale, the said opposition is
overruled, and the deed of sale of July 27, 1934,
made by the sheriff, ratified before the notary
public, N.U. Babao, and registered on page 34 of
his notarial book No. 2, as document No. 137,
series of 1934, is approved. So
ordered.chanroblesvirtualawlibrary chanrobles
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Batangas, Batangas, September 10, 1934.

(Sgd.) PEDRO MA. SISON, Judge

In support of her appeal, the defendant-appellant assigns the following
alleged errors committed by the trial court in its judgment, namely:
1. In amending the judgment of this Honorable
Supreme Court by converting an ordinary
judgment to pay a sum of money into a foreclosure
of a mortgage indebtedness, and in executing it as
such.chanroblesvirtualawlibrary chanrobles virtual
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2. In confirming the sale by the provincial sheriff
without trial or notice of trial to the parties in order
that they may befully heard, and notwithstanding
the fact (1) That the final judgment rendered in the
case was not for the foreclosure of the mortgage
but an ordinary judgment to pay a sum of money;
(2) that the bidding being by parcels, the award
was for a lump sum; (3) that there has been
included in the notice of the public sale interest
from November 9, 1931, whereas it should be only
from the date of decision of this Honorable
Supreme Court, November 22, 1933, when the
account of the advertised debit to P1,183.64; (4)
that there has been included in the deed "fees and
publication P219.12", without justification and,
apparently, exaggerated, there being no right to
charge
interest.chanroblesvirtualawlibrary chanrobles
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3. In ordering the issuance of a writ of possession
in favor of the plaintiff of the properties foreclosed.
The order to which the defendant-appellant's first alleged alleged
assignment of error refers is not that of September 14, 1934, to which
she accepted and from which she announced her intention to appeal,
but that of March 12, 1934, which reads:
Motion granted: the defendant is ordered to pay
the plaintiff, within three months, three months, the
sum of P10,180.97, with legal interest from the
date of the complaint, and the costs, and in the
event said payment is not made within the period
fixed, the properties will be sold in accordance with
law in order to make good said amount. So
ordered.chanroblesvirtualawlibrary chanrobles
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Given in open court, Batangas, Batangas, March
12, 1934.
(Sgd.) FERNANDO JUGO, Judge
The defendant neither excepted to nor appealed from this last order.
The question raised by the defendant-appellant in the first alleged error
assigned is the jurisdiction of the trial court rendered in this same case
on the former appeal (G.R. No. 39044, Nov. 22, 1933 [58 Phil., 977]),
the dispositive part of which is as follows:
Wherefore, the appealed judgment is reversed,
and the defendant-appellant Irinea Caoibes is
ordered to pay the palintiff-appellant Sebastiana
Rodriguez the sum of P10,180.97, with legal
interest and costs. So ordered.
Section 256 of the Code of Civil Procedure, as amended by Act No.
2640, provides:
SEC. 256. Trial and judgment in foreclosure
suits. - If upon trial in such action the court shall
find the facts set forth in the complaint to be true, it
shall ascertain the amount due to the plaintiff upon
the mortgage debt or obligation, including interest
and costs, and shall render judgment for the sum
so found due and order that the same be paid into
court within a period of not less than three months
from and after the date on which the order was
made, and that in default of such payment the land
shall be sold to realize the mortgage debt and
costs.
In Soriano vs. Enriquez (24 Phil., 584), this court enunciated the
following doctrine:
4. ID.; ID.; JUDGMENT UNDER CODE OF CIVIL
PROCEDURE. - Section 256 of the code of Civil
Procedure requires a judgment to be rendered for
a specific amount, and that an order be made
requiring that the amount, and that an order be
made requiring that the amount for which judgment
is rendered be paid into court within a specified
time. Section 260 requires the rendition of a
judgment for the defficiency against the defendant,
who shall be personally liable to the plaintiff, and
execution may issue thereon at once.
The case at hand is for the foreclosure of a mortgage. It was tried as
such in the Court of First Instance of Batangas as well as in this court
on appeal. In reversing the appealed decision, by an involuntarily
omission it was not ordered to deposit the amount of the judgment with
the clerk of the court of origin, within the period of not less than three
months, and, in default thereof, to sell the mortgaged properties to pay
the motgaged indebtedness and the costs. This involuntarily omission
of an imperative mandate of section 256 of the Code of Civil Procedure,
above quoted, cannot alter the nature of the action, and the
amendment of the decision may be asked to correct the defect,
inasmuch as said provision is a necessary part
hereof.chanroblesvirtualawlibrary chanrobles virtual law library
On this point the America jurisprudence has laid down the following
doctrine:
A judgment or decree of foreclosure may be
corrected after its rendition in respect of an error or
omission, so as to make it conform to the intention
of the court of the facts of the case, . . .. (42
Corpus Juris, 158.)chanrobles virtual law library
If anything has been omitted from the judgment
which is necessarily or properly a part of it, and
which was intended and understood to be a part of
it, but failed to be incorporated in it through the
negligence or inadvertence of the court of counsel,
or the clerk, the omission may be supplied by an
amendment even after the term. . . . (34 Corpus
Juris, 235.)
As to whether or not the herein plaintiff-appellee had waived her right to
foreclose the mortgage in the first appeal, it was held inHijos de I. de la
Rama vs. Sajo (45 Phil., 703), cited by said plaintiff-appellee, that:
ACTION; MORTAGE, FORECLOSURE OF. - In
the absence of statutory provisions of the contrary,
 the mortgagee may waived his right to foreclose a
mortgage, and maintain a personal action for the
recovery of his indebtedness. He may also obtain
an attachment when the property of the defendant
is in danger of being disposed of or lost.
In said case there was a waiver from the commencement of the action
to foreclosed the mortgage, the mortgagee having merely brought a
personal suit to recover a sum of money. In the present case, there
was no such waiver because, as has been said, the case was tried as
an action to foreclose a mortgage in the Court of First Instance as well
as in this court, and the mere fact that in her brief in the first appeal the
herein plaintiff-appellee only asked that the appealed judgment be
reversed and another be rendered ordering the defendant-appellant to
pay to said plaintiff-appellee the sum of P10,180.97, with legal interest
and the costs in both instances, does not constitute a waiver of the
action to foreclose the mortgage which had already been commenced
and tried in first and second
instances.chanroblesvirtualawlibrary chanrobles virtual law library
While the order of the Court of First Instance of Batangas of March 12,
1934, above quoted, is more comprehensive than the dispositive part
of the judgment of this court, and while the proper thing to do would
have been to file a motion with this court asking the amendment of said
dispositive part and supplying the omission, the aforesaid amendatory
order not being prejudicial, we do not believe it necessary to reverse
the same, it being sufficient that we adopt the amplification as we do
hereby.chanroblesvirtualawlibrary chanrobles virtual law library
As the second alleged error assigned, it appears from the bill of
exceptions that the defendant-appellant, on August 9, 1934, filed on
opposition to the motion for the plaintiff-appellee wherein the latter
asked for the confirmation of the sale of the mortgaged properties
made by the sheriff, setting forth reasons in support of her opposition
and asking that the aforesaid sale be disapproved. The order
confirming the aforesaid sale from which the defendant-appellant has
taken the instant appeal has been entered after considering the
plaintiff's motion and the defendant's opposition thereto, and this is the
sufficient compliance with the law inasmuch as the defendant-appellant
has had the opportunity, through her opposition, to set out her grounds
against the confirmation of said sale, consisting in that the prices for
which the different lots were sold were inadequate in the light of their
market value.chanroblesvirtualawlibrary chanrobles virtual law library
As to the sale of the mortgaged properties, the record shows that said
properties consist of several lots and these were sold to the purchaser
as the highest bidder for each lot, but when the sheriff issued the deed
of sale he did so for all the lots as a whole and for the total price thereof.
While section 463 of the Code of Civil Procedure requires that the
certificate of sale to be furnished by the sheriff to the purchaser should
specify the price paid for each lot, the omission to make this
specification in the certificate of sale is not a sufficient ground to annul
the sale, the purchaser being entitled, if she so desires, to ask for the
amendment of said certificate
sale.chanroblesvirtualawlibrary chanrobles virtual law library
As to the question of the date from which interest should be paid on the
amount of the judgment, which is the amount of the indebtedness, the
same should be the date of the filing of the complaint to recover the
mortgage indebtedness and to foreclose the mortgage, because the
defendant-appellant was legally in default and the amount owing
already liquidated from the said date. (Veloso vs. Fontanosa, 13 Phil.,
79; De la Peña vs. Hidalgo, 16 Phil., 450.)chanrobles virtual law library
The challenge as the sum of P219.12 which the sheriff charged for fees
and expenses of publication is no ground for the disapproval of the
sale.chanroblesvirtualawlibrary chanrobles virtual law library
The points raised in the second alleged error assigned are, therefore,
without merit.chanroblesvirtualawlibrary chanrobles virtual law library
Passing on to the third alleged error assigned, the fact that the real
property is undivided is no bar to placing the purchaser in possession
of the property owned in common by various co-owners in order to take
the place of the vendors as to his undivided share. The holding
in Pabico vs. Ong Pauco (43 Phil., 572), was that the purchaser of land
at the public sale under an ordinary execution is not entitled to the
possession of the land at a public sale under an ordinary execution is
not entitled to the possession of the land sold before the expiration of
the period of one year for the consolidation of the sale. ( See
also Powell vs. National Bank, 54 Phil., 54.) The case at hand being for
the judicial foreclosure of a mortgage, there is no right of redemption
and the purchaser acquires full ownership of the land sold as soon as
the sale is confirmed. (Benedicto vs.Yulo, 26 Phil., 160.)chanrobles
virtual law library
For the foregoing considerations, we are of the opinion and so hold: (1)
That the omission to state in the dispositive part of a judgment,
rendered in a case for the foreclosure of a mortgage, that the
mortgagor should pay the amount of the judgment to the court within a
period or not the less than three months, as provided in section 256 of
the Code of Civil Procedure, may be corrected even after the said
judgment had become final; and (2) that the filing of a written opposition
to a motion to approve a sale of mortgaged properties is sufficient
compliance with the requirement that the confirmation of the sale be
made upon hearing the parties.chanroblesvirtualawlibrary chanrobles
virtual law library
Wherefore, the appealed order being in accordance with law, it is
hereby affirmed in all its parts, with the cost to the appellant. So
ordered.chanroblesvirtualawlibrary chanrobles virtual law library
Malcolm, Imperial, Butte, and Goddard, JJ., concur.
FIRST DIVISION
[G.R. No. 117190. January 2, 1997]
JACINTO TANGUILIG doing business under the name and style
J.M.T. ENGINEERING AND GENERAL
MERCHANDISING, petitioner, vs. COURT OF APPEALS
of
and VICENTE HERCE JR., respondents.
DECISION
BELLOSILLO, J.:
This case involves the proper interpretation of the contract
entered into between the parties.
Sometime in April 1987 petitioner Jacinto M. Tanguilig doing
business under the name and style J. M. T. Engineering and General
Merchandising proposed to respondent Vicente Herce Jr. to construct a
windmill system for him. After some negotiations they agreed on the
construction of the windmill for a consideration of P60,000.00 with
a one-year guaranty from the date of completion and acceptance by
respondent Herce Jr. of the project. Pursuant to the agreement
respondent paid petitioner a down payment of P30,000.00 and an
installment payment of P15,000.00, leaving a balance of P15,000.00.
On 14 March 1988, due to the refusal and failure of respondent
to pay the balance, petitioner filed a complaint to collect the amount. In
his Answer before the trial court respondent denied the claim saying
that he had already paid this amount to the San Pedro General
Merchandising Inc. (SPGMI) which constructed the deep well to which
the windmill system was to be connected. According to respondent,
since the deep well formed part of the system the payment he tendered
to SPGMI should be credited to his account by petitioner. Moreover,
assuming that he owed petitioner a balance of P15,000.00, this should
be offset by the defects in the windmill system which caused the
structure to collapse after a strong wind hit their place. [1]
Petitioner denied that the construction of a deep well was
included in the agreement to build the windmill system, for the contract
price of P60,000.00 was solely for the windmill assembly and its
installation, exclusive of other incidental materials needed for the
project. He also disowned any obligation to repair or reconstruct the
system and insisted that he delivered it in good and working condition
to respondent who accepted the same without protest. Besides, its
collapse was attributable to a typhoon, a force majeure, which relieved
him of any liability.
In finding for plaintiff, the trial court held that the construction of
the deep well was not part of the windmill project as evidenced clearly
by the letter proposals submitted by petitioner to respondent.[2] It noted
that "[i]f the intention of the parties is to include the construction of the
deep well in the project, the same should be stated in the proposals. In
the absence of such an agreement, it could be safely concluded that
the construction of the deep well is not a part of the project undertaken
by the plaintiff."[3] With respect to the repair of the windmill, the trial
court found that "there is no clear and convincing proof that the windmill
system fell down due to the defect of the construction."[4]
The Court of Appeals reversed the trial court. It ruled that the
construction of the deep well was included in the agreement of the
parties because the term "deep well" was mentioned in both proposals.
It also gave credence to the testimony of respondent's witness
Guillermo Pili, the proprietor of SPGMI which installed the deep well,
that petitioner Tanguilig told him that the cost of constructing the deep
well would be deducted from the contract price of P60,000.00. Upon
these premises the appellate court concluded that respondent's
payment of P15,000.00 to SPGMI should be applied to his remaining
balance with petitioner thus effectively extinguishing his contractual
obligation. However, it rejected petitioner's claim of force majeure and
ordered the latter to reconstruct the windmill in accordance with the
stipulated one-year guaranty.
His motion for reconsideration having been denied by the Court
of Appeals, petitioner now seeks relief from this Court. He raises two
issues: firstly, whether the agreement to construct the windmill system
included the installation of a deep well and, secondly, whether
petitioner is under obligation to reconstruct the windmill after it
collapsed.
We reverse the appellate court on the first issue but sustain it on
the second.
The preponderance of evidence supports the finding of the trial
court that the installation of a deep well was not included in the
proposals of petitioner to construct a windmill system for
respondent. There were in fact two (2) proposals: one dated 19 May
1987 which pegged the contract price at P87,000.00 (Exh. "1"). This
was rejected by respondent. The other was submitted three days later,
i.e., on 22 May 1987 which contained more specifications but proposed
a lower contract price of P60,000.00 (Exh. "A"). The latter proposal was
accepted by respondent and the construction immediately
followed. The pertinent portions of the first letter-proposal (Exh. "1") are
reproduced hereunder -
In connection with your Windmill System and Installation, we would like
to quote to you as follows:
One (1) Set - Windmill suitable for 2 inches diameter deepwell, 2 HP,
capacity, 14 feet in diameter, with 20 pieces blade, Tower 40 feet high,
including mechanism which is not advisable to operate during
extra-intensity wind. Excluding cylinder pump.
UNIT CONTRACT PRICE P87,000.00
The second letter-proposal (Exh. "A") provides as follows:
In connection with your Windmill system Supply of Labor Materials and
Installation, operated water pump, we would like to quote to you as
follows -
One (1) set - Windmill assembly for 2 inches or 3 inches deep-well
pump, 6 Stroke, 14 feet diameter, 1-lot blade materials, 40 feet Tower
complete with standard appurtenances up to Cylinder pump, shafting
U.S. adjustable International Metal.
One (1) lot - Angle bar, G. I. pipe, Reducer Coupling, Elbow Gate valve,
cross Tee coupling.
One (1) lot - Float valve.
One (1) lot - Concreting materials foundation.
F. O. B. Laguna
Contract Price P60,000.00
Notably, nowhere in either proposal is the installation of a deep
well mentioned, even remotely. Neither is there an itemization or
description of the materials to be used in constructing the deep
well. There is absolutely no mention in the two (2) documents that a
deep well pump is a component of the proposed windmill system. The
contract prices fixed in both proposals cover only the features
specifically described therein and no other. While the words "deep
well" and "deep well pump" are mentioned in both, these do not
indicate that a deep well is part of the windmill system. They merely
describe the type of deep well pump for which the proposed windmill
would be suitable. As correctly pointed out by petitioner, the
words "deep well"preceded by the prepositions "for" and "suitable
for" were meant only to convey the idea that the proposed windmill
would be appropriate for a deep well pump with a diameter of 2 to 3
inches. For if the real intent of petitioner was to include a deep well in
the agreement to construct a windmill, he would have used instead the
conjunctions "and" or "with." Since the terms of the instruments are
clear and leave no doubt as to their meaning they should not be
disturbed.
Moreover, it is a cardinal rule in the interpretation of contracts
that the intention of the parties shall be accorded primordial
consideration[5] and, in case of doubt, their contemporaneous and
subsequent acts shall be principally considered.[6] An examination of
such contemporaneous and subsequent acts of respondent as well as
the attendant circumstances does not persuade us to uphold him.
Respondent insists that petitioner verbally agreed that the
contract price of P60,000.00 covered the installation of a deep well
pump. He contends that since petitioner did not have the capacity to
install the pump the latter agreed to have a third party do the work the
cost of which was to be deducted from the contract price. To prove his
point, he presented Guillermo Pili of SPGMI who declared that
petitioner Tanguilig approached him with a letter from respondent
Herce Jr. asking him to build a deep well pump as "part of the
price/contract which Engineer (Herce) had with Mr. Tanguilig."[7]
We are disinclined to accept the version of respondent. The
claim of Pili that Herce Jr. wrote him a letter is unsubstantiated. The
alleged letter was never presented in court by private respondent for
reasons known only to him. But granting that this written
communication existed, it could not have simply contained a request
for Pili to install a deep well; it would have also mentioned the party
who would pay for the undertaking. It strains credulity that respondent
would keep silent on this matter and leave it all to petitioner Tanguilig to
verbally convey to Pilithat the deep well was part of the windmill
construction and that its payment would come from the contract price
of P60,000.00.
We find it also unusual that Pili would readily consent to build a
deep well the payment for which would come supposedly from the
windmill contract price on the mere representation of petitioner, whom
he had never met before, without a written commitment at least from
the former. For if indeed the deep well were part of the windmill project,
the contract for its installation would have been strictly a matter
between petitioner and Pili himself with the former assuming the
obligation to pay the price. That it was respondent Herce Jr. himself
who paid for the deep well by handing over to Pili the amount
of P15,000.00 clearly indicates that the contract for the deep well was
not part of the windmill project but a separate agreement between
respondent and Pili. Besides, if the price of P60,000.00 included the
deep well, the obligation of respondent was to pay the entire amount to
petitioner without prejudice to any action that Guillermo Pili or SPGMI
may take, if any, against the latter. Significantly, when asked why he
tendered payment directly to Pili and not to petitioner,
respondent explained, rather lamely, that he did it "because he has (sic)
the money, so (he) just paid the money in his possession."[8]
Can respondent claim that Pili accepted his payment on
behalf of petitioner? No. While the law is clear that "payment shall
be made to the person in
whose favor the obligation hasbeen constituted, or his successor
in interest, or any person authorized to receive it,".[9] It does not
appear from the record that Pili and/or SPGMI was so authorized.
Respondent cannot claim the benefit of the law concerning
"payments made by a third person."[10] The Civil Code provisions do not
apply in the instant case because no creditor-debtor relationship
between petitioner and Guillermo Pili and/or SPGMI has been
established regarding the construction of the deep well. Specifically,
witness Pili did not testify that he entered into a contract with petitioner
for the construction of respondent's deep well. If SPGMI was really
commissioned by petitioner to construct the deep well, an agreement
particularly to this effect should have been entered into.
places where windmills are constructed, otherwise the windmills will not
turn.
The appellate court correctly observed that "given the
newly-constructed windmill system, the same would not have collapsed
had there been no inherent defect in it which could only be attributable
to the appellee."[13] It emphasized that respondent had in his favor the
presumption that "things have happened according to the ordinary
course of nature and the ordinary habits of life." [14] This presumption
has not been rebutted by petitioner.
Finally, petitioner's argument that private respondent was
already in default in the payment of his outstanding balance
of P15,000.00 and hence should bear his own loss, is untenable. In
reciprocal obligations, neither party incurs in delay if the other does not
comply or is not ready to comply in a proper manner with what is
incumbent upon him.[15] When the windmill failed to function properly it
became incumbent upon petitioner to institute the proper repairs in
accordance with the guaranty stated in the contract. Thus, respondent
cannot be said to have incurred in delay; instead, it is petitioner who
should bear the expenses for the reconstruction of the windmill. Article
1167 of the Civil Code is explicit on this point that if a person obliged to
do something fails to do it, the same shall be executed at his cost.
WHEREFORE, the appealed decision
is MODIFIED. Respondent VICENTE HERCE JR. is directed to pay
petitioner JACINTO M. TANGUILIG the balance of P15,000.00 with
interest at the legal rate from the date of the filing of the complaint. In
return, petitioner is ordered to "reconstruct subject defective windmill
system, in accordance with the one-year guaranty"[16]and to complete
the same within three (3) months from the finality of this decision.
SO ORDERED.
Padilla, (Chairman), Vitug, Kapunan, and Hermosisima,
JJ., concur.

The contemporaneous and subsequent acts of the parties

concerned effectively belie respondent's assertions. These
circumstances only show that the construction of the well by SPGMI
was for the sole account of respondent and that petitioner merely
supervised the installation of the well because the windmill was to be
connected to it. There is no legal nor factual basis by which this Court
can impose upon petitioner an obligation he did not expressly assume
nor ratify.

The second issue is not a novel one. In a long line of

cases[11] this Court has consistently held that in order for a party to
claim exemption from liability by reason of fortuitous event under Art.
1174 of the Civil Code the event should be the sole
and proximate cause of the loss or destruction of the object of the
contract. In Nakpil vs. Court of Appeals,[12] four (4) requisites must
concur: (a) the cause of the breach of the obligation must be
independent of the will of the debtor; (b) the event must be either
unforeseeable or unavoidable; (c) the event must be such as to render
it impossible for the debtor to fulfill his obligation in a normal manner;
and, (d) the debtor must be free from any participation in or aggravation
of the injury to the creditor.

Petitioner failed to show that the collapse of the windmill was due
solely to a fortuitous event. Interestingly, the evidence does not
disclose that there was actually a typhoon on the day the windmill
collapsed. Petitioner merely stated that there was a "strong wind." But
a strong wind in this case cannot be fortuitous - unforeseeable nor
unavoidable. On the contrary, a strong wind should be present in

FIRST DIVISION
[G.R. No. 153004. November 5, 2004]
SANTOS VENTURA HOCORMA FOUNDATION, INC., petitioner, vs.
ERNESTO V. SANTOS and RIVERLAND,
INC., respondents
DECISION
QUISUMBING, J.:
Subject of the present petition for review on certiorari is
the Decision,[1] dated January 30, 2002, as well as the April 12,
2002, Resolution[2] of the Court of Appeals in CA-G.R. CV No.
55122. The appellate court reversed the Decision,[3] dated October 4,
1996, of the Regional Trial Court of Makati City, Branch 148, in Civil
Case No. 95-811, and likewise denied petitioners Motion for
Reconsideration.
The facts of this case are undisputed.
Ernesto V. Santos and Santos Ventura Hocorma Foundation, Inc.
(SVHFI) were the plaintiff and defendant, respectively, in several civil
cases filed in different courts in the Philippines.On October 26, 1990,
the parties executed a Compromise Agreement[4] which amicably
ended all their pending litigations. The pertinent portions of the
Agreement read as follows:
1. Defendant Foundation shall pay Plaintiff Santos P14.5
Million in the following manner:
a. P1.5 Million immediately upon the execution of
this agreement;
b. The balance of P13 Million shall be paid,
whether in one lump sum or in
installments, at the discretion of the
Foundation, within a period of not more
than two (2) years from the execution of
this agreement; provided, however, that
in the event that the Foundation does not
pay the whole or any part of such balance,
the same shall be paid with the
corresponding portion of the land or real
properties subject of the aforesaid cases
and previously covered by the notices of lis
pendens, under such terms and conditions
as to area, valuation, and location mutually
acceptable to both parties; but in no case
shall the payment of such balance be
later than two (2) years from the date of
this agreement; otherwise, payment of
any unpaid portion shall only be in the form
of land aforesaid;
2. Immediately upon the execution of this agreement
(and [the] receipt of the P1.5 Million), plaintiff
Santos shall cause the dismissal with prejudice of
Civil Cases Nos. 88-743, 1413OR, TC-1024, 45366
and 18166 and voluntarily withdraw the appeals in
Civil Cases Nos. 4968 (C.A.-G.R. No. 26598) and
88-45366 (C.A.-G.R. No. 24304) respectively and for
the immediate lifting of the aforesaid various
notices of lis pendens on the real properties
aforementioned (by signing herein attached
corresponding documents, for such lifting);
provided, however, that in the event that defendant
Foundation shall sell or dispose of any of the lands
previously subject of lis pendens, the proceeds of any
such sale, or any part thereof as may be required, shall
be partially devoted to the payment of the Foundations
obligations under this agreement as may still be
subsisting and payable at the time of any such sale or
sales;
...
5. Failure of compliance of any of the foregoing terms and
conditions by either or both parties to this agreement
shall ipso facto and ipso jure automatically entitle the
aggrieved party to a writ of execution for the
enforcement of this agreement. [Emphasis supplied][5]
In compliance with the Compromise Agreement,
respondent Santos moved for the dismissal of the aforesaid civil
cases. He also caused the lifting of the notices of lis pendens on the
real properties involved. For its part, petitioner SVHFI, paid P1.5 million
to respondent Santos, leaving a balance of P13 million.
Subsequently, petitioner SVHFI sold to Development Exchange
Livelihood Corporation two real properties, which were previously
subjects of lis pendens. Discovering the disposition made by the
petitioner, respondent Santos sent a letter to the petitioner demanding
the payment of the remaining P13 million, which was ignored by the
latter. Meanwhile, on September 30, 1991,
the Regional Trial Court of Makati City, Branch 62, issued
a Decision[6] approving the compromise agreement.
On October 28, 1992, respondent Santos sent another letter to
petitioner inquiring when it would pay the balance of P13 million. There
was no response from petitioner. Consequently,
respondent Santos applied with the Regional Trial Court of Makati City,
Branch 62, for the issuance of a writ of execution of its compromise
judgment dated September 30, 1991. The RTC granted the writ. Thus,
on March 10, 1993, the Sheriff levied on the real properties of petitioner,
which were formerly subjects of the lis pendens. Petitioner, however,
filed numerous motions to block the enforcement of the said writ. The
challenge of the execution of the aforesaid compromise judgment even
reached the Supreme Court. All these efforts, however, were futile.
On November 22, 1994, petitioners real properties located in
Mabalacat, Pampanga were auctioned. In the said auction, Riverland,
Inc. was the highest bidder for P12 million and it was issued a
Certificate of Sale covering the real properties subject of the auction
sale. Subsequently, another auction sale was held on February 8, 1995,
for the sale of real properties of petitioner in Bacolod City. Again,
Riverland, Inc. was the highest bidder. The Certificates of Sale issued
for both properties provided for the right of redemption within one year
from the date of registration of the said properties.
On June 2, 1995, Santos and Riverland Inc. filed a Complaint
for Declaratory Relief and Damages[7] alleging that there was delay
on the part of petitioner in paying the balance of P13 million. They
further alleged that under the Compromise Agreement, the obligation
became due on October 26, 1992, but payment of the remaining P12
million was effected only on November 22, 1994. Thus, respondents
prayed that petitioner be ordered to pay legal interest on the obligation,
penalty, attorneys fees and costs of litigation. Furthermore, they prayed
that the aforesaid sales be declared final and not subject to legal
redemption.
In its Answer,[8] petitioner countered that respondents have no
cause of action against it since it had fully paid its obligation to the
latter. It further claimed that the alleged delay in the payment of the
balance was due to its valid exercise of its rights to protect its interests
as provided under the Rules. Petitioner counterclaimed for attorneys
fees and exemplary damages.
On October 4, 1996, the trial court rendered
a Decision[9] dismissing herein respondents complaint and ordering
them to pay attorneys fees and exemplary damages to
petitioner.Respondents then appealed to the Court of Appeals. The
appellate court reversed the ruling of the trial court:
WHEREFORE, finding merit in the appeal, the appealed Decision is
hereby REVERSED and judgment is hereby rendered ordering
appellee SVHFI to pay appellants Santos and Riverland, Inc.: (1) legal
interest on the principal amount of P13 million at the rate of 12% per
annum from the date of demand on October 28, 1992 up to the date of
actual payment of the whole obligation; and (2) P20,000 as attorneys
fees and costs of suit.
SO ORDERED.
Hence this petition for review on certiorari where petitioner
assigns the following issues:
I reciprocal concessions, avoid a litigation or put an end to one already
WHETHER OR NOT THE COURT OF APPEALS
COMMITTED REVERSIBLE ERROR WHEN IT
AWARDED LEGAL INTEREST IN FAVOR OF THE
RESPONDENTS, MR. SANTOS AND RIVERLAND, INC.,
NOTWITHSTANDING THE FACT THAT NEITHER IN
THE COMPROMISE AGREEMENT NOR IN THE
COMPROMISE JUDGEMENT OF HON. JUDGE DIOKNO
PROVIDES FOR PAYMENT OF INTEREST TO THE
RESPONDENT
II
WHETHER OF NOT THE COURT OF APPEALS ERRED
IN AWARDING LEGAL IN[T]EREST IN FAVOR OF THE
RESPONDENTS, MR. SANTOS AND RIVERLAND, INC.,
NOTWITHSTANDING THE FACT THAT THE
OBLIGATION OF THE PETITIONER TO RESPONDENT
SANTOS TO PAY A SUM OF MONEY HAD BEEN
CONVERTED TO AN OBLIGATION TO PAY IN KIND
DELIVERY OF REAL PROPERTIES OWNED BY THE
PETITIONER WHICH HAD BEEN FULLY PERFORMED
III
WHETHER OR NOT RESPONDENTS ARE BARRED
FROM DEMANDING PAYMENT OF INTEREST BY
REASON OF THE WAIVER PROVISION IN THE
COMPROMISE AGREEMENT, WHICH BECAME THE
LAW AMONG THE PARTIES[10]
The only issue to be resolved is whether the respondents are
entitled to legal interest.
Petitioner SVHFI alleges that where a compromise agreement or
compromise judgment does not provide for the payment of interest, the
legal interest by way of penalty on account of fault or delay shall not be
due and payable, considering that the obligation or loan, on which the
payment of legal interest could be based, has been superseded by the
compromise agreement.[11] Furthermore, the petitioner argues that the
respondents are barred by res judicata from seeking legal interest on
account of the waiver clause in the duly approved compromise
agreement.[12] Article 4 of the compromise agreement provides:
Plaintiff Santos waives and renounces any and all other claims
that he and his family may have on the defendant Foundation
arising from and in connection with the aforesaid civil cases, and
defendant Foundation, on the other hand, also waives and renounces
any and all claims that it may have against plaintiff Santos in
connection with such cases.[13] [Emphasis supplied.]
Lastly, petitioner alleges that since the compromise agreement
did not provide for a period within which the obligation will become due
and demandable, it is incumbent upon respondent Santos to ask for
judicial intervention for purposes of fixing the period. It is only when a
fixed period exists that the legal interests can be computed.
Respondents profer that their right to damages is based on delay
in the payment of the obligation provided in the Compromise
Agreement. The Compromise Agreement provides that payment must
be made within the two-year period from its execution. This was
approved by the trial court and became the law governing their
contract. Respondents posit that petitioners failure to comply entitles
them to damages, by way of interest.[14]
The petition lacks merit.
A compromise is a contract whereby the parties, by making
commenced.[15] It is an agreement between two or more persons, who,
for preventing or putting an end to a lawsuit, adjust their difficulties by
mutual consent in the manner which they agree on, and which
everyone of them prefers in the hope of gaining, balanced by the
danger of losing.[16]
The general rule is that a compromise has upon the parties the
effect and authority of res judicata, with respect to the matter definitely
stated therein, or which by implication from its terms should be deemed
to have been included therein.[17] This holds true even if the agreement
has not been judicially approved.[18]
In the case at bar, the Compromise Agreement was entered into
by the parties on October 26, 1990.[19] It was judicially approved
on September 30, 1991.[20] Applying existing jurisprudence, the
compromise agreement as a consensual contract became binding
between the parties upon its execution and not upon its court
approval. From the time a compromise is validly entered into, it
becomes the source of the rights and obligations of the parties
thereto. The purpose of the compromise is precisely to replace and
terminate controverted claims.[21]
In accordance with the compromise agreement, the respondents
asked for the dismissal of the pending civil cases. The petitioner, on the
other hand, paid the initial P1.5 million upon the execution of the
agreement. This act of the petitioner showed that it acknowledges that
the agreement was immediately executory and enforceable upon its
execution.
As to the remaining P13 million, the terms and conditions of the
compromise agreement are clear and unambiguous. It provides:
...
b. The balance of P13 Million shall be paid, whether in one lump sum or
in installments, at the discretion of the Foundation, within a period of
not more than two (2) years from the execution of this
agreement[22] [Emphasis supplied.]
...
 The two-year period must be counted from October 26, 1990, the
date of execution of the compromise agreement, and not on the judicial
approval of the compromise agreement on September 30, 1991. When
respondents wrote a demand letter to petitioner on October 28, 1992,
the obligation was already due and demandable. When the petitioner
failed to pay its due obligation after the demand was made, it incurred
delay.

Article 1169 of the New Civil Code provides:

Those obliged to deliver or to do something incur in delay from the

time the obligee judicially or extrajudicially demands from them
the fulfillment of their obligation. [Emphasis supplied]

Delay as used in this article is synonymous to default

or mora which means delay in the fulfillment of obligations. It is the
non-fulfillment of the obligation with respect to time.[23]

In order for the debtor to be in default, it is necessary that the

following requisites be present: (1) that the obligation be demandable
and already liquidated; (2) that the debtor delays performance; and (3)
that the creditor requires the performance judicially or extrajudicially.[24]

In the case at bar, the obligation was already due and

demandable after the lapse of the two-year period from the execution
of the contract. The two-year period ended on October 26, 1992. When
the respondents gave a demand letter on October 28, 1992, to the
petitioner, the obligation was already due and
demandable. Furthermore, the obligation is liquidated because the
debtor knows precisely how much he is to pay and when he is to pay it.

The second requisite is also present. Petitioner delayed in the

performance. It was able to fully settle its outstanding balance only
on February 8, 1995, which is more than two years after the
extra-judicial demand. Moreover, it filed several motions and elevated
adverse resolutions to the appellate court to hinder the execution of a
final and executory judgment, and further delay the fulfillment of its
obligation.

Third, the demand letter sent to the petitioner on October 28,

1992, was in accordance with an extra-judicial demand contemplated
by law.

Verily, the petitioner is liable for damages for the delay in the
performance of its obligation. This is provided for in Article 1170[25] of
the New Civil Code.

When the debtor knows the amount and period when he is to pay,
interest as damages is generally allowed as a matter of right.[26] The
complaining party has been deprived of funds to which he is entitled by
virtue of their compromise agreement. The goal of compensation
requires that the complainant be compensated for the loss of use of
those funds. This compensation is in the form of interest. [27] In the
absence of agreement, the legal rate of interest shall prevail.[28] The
legal interest for loan as forbearance of money is 12% per annum[29] to
be computed from default, i.e., from judicial or extrajudicial demand
under and subject to the provisions of Article 1169 of the Civil Code.[30]

WHEREFORE, the petition is DENIED for lack of merit. The

Decision dated January 30, 2002 of the Court of Appeals and its April
12, 2002 Resolution in CA-G.R. CV No. 55122 are AFFIRMED. Costs
against petitioner.

SO ORDERED.

Davide, Jr. C.J. (Chairman), Ynares-Santiago and Carpio, FIRST DIVISION

JJ., concur.
Azcuna, J., on leave.

[G.R. No. 154973. June 21, 2005]

THE PRESIDENT OF PHILIPPINE DEPOSIT INSURANCE
CORPORATION AS LIQUIDATOR OF PACIFIC BANKING
CORPORATION, petitioner, vs. HON. WILFREDO D.
REYES, Pairing Judge, RTC Manila, Branch 31; ANG
ENG JOO; ANG KEONG LAN; and E.J. ANG
INTERNATIONAL, LTD., represented by FORNIER &
FORNIER LAW, respondents.
DECISION
DAVIDE, JR., C.J.:
May an investment in a corporation, whose existence has been
terminated, be entitled to an interest in the concept of actual and
compensatory damages from the time such investment was made until
the closure of the corporation? This is the pivotal issue in this petition
for certiorari filed by the President of the Philippine Deposit Insurance
Corporation (PDIC), in his capacity as the Liquidator of the Pacific
Banking Corporation (PaBC).
The antecedent facts are as follows:
On 5 July 1985, pursuant to Resolution No. 699 of the Monetary
Board of the Central Bank of the Philippines, the PaBC was placed
under receivership on the ground of insolvency. Subsequently, it was
placed under liquidation, and a liquidator was designated.
On 7 April 1986, the Central Bank of the Philippines, through the
Office of the Solicitor General, filed with the Regional Trial Court (RTC)
of Manila, Branch 31, a petition for assistance in the liquidation of
PaBC.
On 17 May 1991, Vitaliano N. Naagas, President of the PDIC,
was appointed by the Central Bank as Liquidator.
On 26 June 1992, private respondents Ang Eng Joo, Ang Keong
Lan, and E.J. Ang International Ltd. (hereafter Singaporeans), then
represented by their attorney-in-fact Gonzalo C. Sy, filed their claim
before the liquidating court. Citing Republic Act No. 5186, otherwise
known as the Investment Incentives Act, they claimed to be preferred
creditors and prayed for the return of their equity investment in the
amount of US$2,531,632.18 with interest until the closure of the PaBC.
After due hearing or on 11 September 1992, the liquidation court,
through Presiding Judge Regino Veridiano II, issued an order that
reads as follows:
At this stage of the liquidation proceedings, the claimants who are
foreign investors should already be paid. If there is any doubt as to
whether claimants who are foreign investors should be treated as
preferred claimants, the doubt should be resolved in favor of claimants
since it is of judicial notice that government adopted the policy to entice
foreign investors to help boost the economy. Claimants who are foreign
investors should be treated with liberality such that they should be
categorized among preferred creditors. Claimants were invited to invest
at PaBC in 1981 and after a short period of less than four (4) years the
bank was closed in 1985 due to mismanagement.[1]
WHEREFORE, premises considered, the Liquidator of PaBC is
ordered to pay claimants through their Attorney-in-Fact Gonzalo C. Sy,
their total investment of US$2,531,632.18 as preferred creditors.
Dividends and/or interest that accrued in favor of claimants is hereby
deferred pending study by the Liquidator who is hereby ordered to
submit his report and recommendation within thirty (30) days from
receipt of this Order.[2]
His motion for reconsideration having been denied, the
Liquidator filed a notice of appeal. In an Order dated 28 October 1992,
the liquidation court struck off the record the notice of appeal for having
been filed beyond the 15-day period to appeal, and directed the
execution of the Order of 11 September 1992.
The Liquidator thus filed a petition for certiorari before the Court
of Appeals, which was, however, dismissed on the ground that the
notice of appeal was correctly dismissed by the liquidation court for
having been filed out of time. In our decision[3] of 20 March 1995 in G.R.
Nos. 109373 and 112991, we sustained the Court of Appeals, but on a
different ground. We held that while the Liquidator filed the notice of
appeal within the reglementary 30-day period provided in special
proceedings, he failed to file the requisite record on appeal, and thus
the appeal was not perfected on time, causing the 11 September 1992
Order to become final and executory.
Consequently, the liquidation court, through the pairing judge
Hon. Wilfredo D. Reyes, issued an Order dated 13 April 1998
implementing the execution order of 28 October 1992 by directing the
President of the Land Bank of the Philippines (LBP) to release to the
Sheriff the garnished amount of US$2,531,632.18 or its peso
equivalent computed at the current exchange rate, to be paid to the
Singaporeans.
The Bureau of Internal Revenue (BIR) and the Bangko Sentral
ng Pilipinas promptly filed before the liquidation court separate motions
to hold in abeyance the liquidation courts orders of 28 October 1992
and 13 April 1998.[4] The Liquidator also filed an urgent motion to
prohibit the Singaporeans from withdrawing the money from their
account with the LBP.[5] It was accompanied by an application for a
temporary restraining order and/or preliminary injunction praying that
Gonzalo C. Sy be prohibited from withdrawing the amount
of P82,658,671.43 from his account with the LBP and be directed to
return any funds that might already have been withdrawn by him.
On 12 May 1998, Judge Reyes issued an Order[6] denying the
motions and ordered the payment of accrued legal interest on the
Singaporeans equity investment of US$2,531,632.18 at the rate of 12%
per annum computed from 15 October 1981, the date the outward
remittance and the investment were actually made, until its full payment,
at the exchange rate prevailing at the time of payment.
Finally, on 15 May 1998, Judge Reyes issued another
Order[7] directing the President of the Philippine National Bank (PNB) to
release the garnished amount sufficient to cover the additional sum
of P172,374,220.64.
Aggrieved by these orders, the BIR, PDIC, and the Liquidator
filed before the Court of Appeals a petition for certiorari, mandamus,
and prohibition with a prayer for a temporary restraining
order[8] assailing Judge Reyes Orders of 13 April 1998, 12 May 1998,
and 15 May 1998.
In its decision[9] of 31 January 2002, the Court of Appeals
affirmed the Orders of 13 April 1998 and 15 May 1998, but modified the
Order of 12 May 1998 as follows:
(1) [P]ayment of accrued legal interest in the sum
of P56,034,877.04 still left uncollected shall be
made to private respondents, Singaporeans, directly
or through their new attorney-in-fact and legal
counsel, the law firm of Fornier & Fornier;
(2) [E]njoining respondent Gonzalo C. Sy from withdrawing
the garnished amount from his savings/current
account with the Land Bank of the Philippines or any
other bank in which funds released from the
garnished accounts of PaBC, LBP and PNB have
been deposited; and
(3) [A]n amount equivalent to 15% of the remaining
garnished amount or the balance of accrued legal
interest of Pesos 56,034,877.04 shall be withheld
and remitted to petitioner Bureau of Internal
Revenue, without prejudice to the right of said
petitioner to make other assessments for taxes in
the future.
Consequently, the writ of preliminary injunction issued on September
14, 1998 is hereby DISSOLVED. By virtue hereof, the garnished
amount from the savings/current account with the Land Bank of the
Philippines or any other bank in which funds released from the
garnished accounts of PaBC, LBP and PNB have been deposited may
now be released only to private respondents, Singaporeans, directly or
through their new attorney-in-fact and legal counsel, the law firm of
Fornier & Fornier.[10]
After an unsuccessful motion for reconsideration,[11] the
Liquidator came before us assigning the following errors:
4.1
THE RESPONDENT APPELLATE COURT COMMITTED A
FUNDAMENTAL ERROR OF FACT AND LAW WHEN IT DECLARED
THE SINGAPOREANS EQUITY INVESTMENT WITH CLOSED
PACIFIC BANKING CORPORATION ENTITLED TO PAYMENT OF
INTEREST.
4.2
THE RESPONDENT APPELLATE COURT COMMITTED A
FUNDAMENTAL ERROR OF FACT AND LAW WHEN IT APPLIED
THE LANDMARK CASE OF EASTERN SHIPPING LINES, INC. V. CA
(G.R. NO. 97412, JULY 12, 1994) IN FIXING THE RATES OF
INTEREST AND/OR DIVIDENDS THAT ALLEGEDLY ACCRUED ON
THE EQUITY INVESTMENT OF THE SINGAPOREANS ON PABC.
4.3
ASSUMING FOR THE SAKE OF ARGUMENT THAT PABC IS LIABLE
FOR COMPENSATORY DAMAGES TO THE SINGAPOREAN
EQUITY HOLDERS, ACCRUAL OF THE 6% INTEREST RATE
SHOULD COMMENCE FROM DEMAND.
4.4
ASSUMING FOR THE SAKE OF ARGUMENT THE CORRECTNESS
OF THE RESPONDENT APPELLATE COURTS IMPOSITION OF THE
6% AND 12% INTEREST RATE ON THE EQUITY INVESTMENTS OF
THE SINGAPOREAN EQUITY HOLDERS, THE LATTER SHOULD
ONLY BE ENTITLED TO A TOTAL AMOUNT OF P73,246,702.21 BY
WAY OF THE ALLEGED ACCRUED DIVIDENDS AND/OR
INTERESTS.
4.5
FOLLOWING THE JANUARY 31, 2002 DECISION OF THE
RESPONDENT APPELLATE COURT WHICH DIRECTED THE
PAYMENT OF ALLEGED ACCRUED DIVIDENDS AND/OR
INTEREST COMMENCING ON OCTOBER 15, 1981 WHERE THE
PREVAILING EXCHANGE RATE WAS P8.067 TO A DOLLAR, THE
OVERPAYMENT TO THE SINGAPOREAN EQUITY HOLDERS
SHALL AMOUNT TO P182,893,303.55. [12]
Anent the first issue, the Liquidator interprets the affirmation by
the Court of Appeals of the 12 May 1998 Order of Judge Reyes as
amounting to an unlawful grant of undeclared dividends. He argues that
the only fruits that can arise from an equity investment are dividends
declared from unrestricted retained earnings by the Board of Directors
in accordance with the Corporation Code. Absent a declaration in this
case, the interest awarded has no legal basis.
As for the second and third issues, the Liquidator argues that no
actual damages can arise from the closure of the bank. The ruling
in Eastern Shipping Lines, Inc. v. Court of Appeals[13] is not applicable
because that case clearly refers to an award of interest in the concept
of actual and compensatory damages in case of breach of an obligation.
The failure of PaBC to return the Singaporeans equity investment
because of its closure is not a breach of an obligation the closure being
akin to a force majeure. If indeed PaBC is liable to the Singaporeans
for actual and compensatory damages, accrual thereof should be
reckoned from the date of demand pursuant to Article 1169 of the Civil
Code. Instead of running from 15 October 1981 when the
Singaporeans bought their shares in PaBC, the 6% interest rate should
be reckoned from 26 June 1992, the date the Singaporeans filed their
claim in the liquidation court.
The Liquidator likewise asserts that there is already an
overpayment of accrued dividends or interests. The liquidation courts
Order of 12 May 1998 awarded an interest of 12% per annum to be
computed from 15 October 1981 (the date of actual remittance of the
investment) until full payment. Pursuant to that Order, the PNB
released P116,339,343.60. On appeal, however, the Court of Appeals
modified the decision and awarded an interest of 6% per annum from
15 October 1981 up to PaBCs closure, as well as an interest of
12% per annum from 11 October 1992, when the 11 September 1992
Order became final and executory, until 17 April 1998, when the equity
investment of US$2,531,632.18 was fully paid. With the prevailing
exchange rate of P8.067 to a dollar on 15 October 1981, the total peso
equivalent of the Singaporeans claim is
only P30,230,338.29 P20,422,676.80 of which represents the principal
equity investment of US$2,531,632.18 and P9,807,661.49, as alleged
accrued interest. As of 18 May 1998, the total releases to the
Singaporeans from the garnished funds of the PaBC amounted
to P213,123,641.84. There is therefore an overpayment
of P182,893,303.55. Thus, the order of the Court of Appeals to further
release P56,034,877.04 from the garnished funds would result to
unjust enrichment in favor of the Singaporeans.
For their part, the Singaporeans assert that the Court of Appeals
committed no error in affirming their entitlement to accrued interests in
the amount of P56,034,877.04 and in ordering its payment less 15% in
taxes as agreed upon by the BIR. The Order of 11 September 1992
included the payment of the principal due the Singaporeans as
preferred creditors, but it deferred the payment of interest on the
principal for study by the Liquidator. Unfortunately, no study and
recommendation was done since September 1992; thus, the liquidation
court took it upon itself to arithmetically compute and fix the amount of
interest at the legal rate of 12% per annum as reflected in the Order of
12 May 1998. Likewise, the award of 12% interest has become the law
of the case with respect to the Liquidator and the Singaporeans.
The Singaporeans also argue that the petition should be
dismissed because it assails errors of judgment, not errors of
jurisdiction. They submit that the filing of a special civil action
for certiorari rather than an appeal is wrong, improper, and fatal to the
case. Moreover, the issue of overpayment is a question of fact that
could not be threshed out in a special civil action for certiorari.
We shall first tackle the procedural issue of the propriety of the
petition filed by the Liquidator.
A petition for certiorari is the proper remedy when a tribunal,
board, or officer exercising judicial or quasi-judicial functions has acted
without or in excess of jurisdiction, or with grave abuse of discretion
amounting to lack or excess of jurisdiction and there is no appeal nor
any plain, speedy, and adequate remedy at law.[14] Grave abuse of
discretion is defined as the capricious, whimsical exercise of judgment
as is equivalent to lack of jurisdiction. An error of judgment committed
in the exercise of its legitimate jurisdiction is not the same as grave
abuse of discretion. Thus, the special writ of certiorari is not the remedy
for errors of judgment that can be corrected by appeal. [15]
Although denominated as a petition for certiorari under Rule 65
of the Rules of Civil Procedure, the petition assigns errors of judgment
of the Court of Appeals. It does not allege grave abuse of discretion
committed by the Court of Appeals. However, in the interest of justice,
this Court shall treat the petition as an appeal under Rule 45 of the
Rules of Civil Procedure especially since it was filed within the
reglementary period for filing an appeal. Sections 1 and 2 of Rule 45 of
the 1997 Rules of Civil Procedure provide:
SECTION 1. Filing of petition with Supreme Court. A party desiring to
appeal by certiorari from a judgment or final order or resolution of the
Court of Appeals, the Sandiganbayan, the Regional Trial Court or other
courts whenever authorized by law, may file with the Supreme Court a
verified petition for review on certiorari. The petition shall raise only
questions of law which must be distinctly set forth.
SEC. 2. Time for filing; extension. The petition shall be filed within
fifteen (15) days from notice of the judgment or final order or resolution
appealed from, or of the denial of the petitioners motion for new trial or
reconsideration filed in due time after notice of the judgment. On
motion duly filed and served, with full payment of the docket and other
lawful fees and the deposit for costs before the expiration of the
reglementary period, the Supreme Court may for justifiable reasons
grant an extension of thirty (30) days only within which to file the
petition.
The records show that the Liquidator received on 30 August
2002 a copy of the resolution of the Court of Appeals denying his
motion for reconsideration. He had fifteen days, or until 14 September
2002, to file a petition for review on certiorari. Since 14 September
2002 fell on a Saturday, he could file his petition on the next working
day, which was 16 September 2002.[16]Indeed, the Liquidator filed the
instant petition and paid the necessary docket and legal fees on 16
September 2002.
Before delving into the merits of the case, it bears stressing that
we are constrained to make our judgment according to the confines set
by the 11 September 1992 Order of the liquidation court.
According to the principle of the law of the case, whatever is
once irrevocably established as the controlling legal rule or decision
between the same parties in the same case continues to be the law of
the case.[17] To this the Court must adhere, whether the legal principles
laid down were correct on general principles or not, or whether the
question is right or wrong.[18]
As a result, upon the finality of the 11 September 1992 Order, the
following issues were laid to rest: (1) the Singaporeans are deemed
preferred creditors; and (2) they are entitled to the payment of their total
investment amounting to US$2,531,632.18.
The determination of interests or dividends was, however,
deferred pending a report to be submitted by the Liquidator. It was only
in the 12 May 1998 Order of the liquidation court that an interest was
awarded, giving rise to a new question of law. Therefore, the award of
interest is not a controlling legal rule or decision that had been
previously established as between the parties, since the parties did not
have the chance to argue on that issue.
A perusal of the 12 May 1998 Order shows that the liquidation
court awarded interest not as a form of accrued dividends or return of
investment, but as actual and compensatory damages. Categorically,
the order states:
The December 16, 1993 decision of the Court of Appeals ruled that the
remittance of earnings of this type of foreign investment is guaranteed
(CA decision, p. 15, emphasis supplied). Legal interests are earnings
and they are provided for by law arising from the withholding of funds
due to a party. They are not computed on the amount of earnings of a
business.[19]
We take note of the fact that when the trial court, in its Order of
11 September 1992, declared the Singaporeans to have the status of
preferred creditors, it did so only for the purpose of giving them priority
in the order of payment upon the liquidation of the PaBC. Relying only
on the Investment Incentive Act, the trial court did not decide whether
the Singaporeans investment was a loan or equity. Since the
Singaporeans were declared preferred creditors for a limited purpose, it
does not follow that the court likewise implied that the original
remittance of the Singaporeans was in the nature of a loan or
forbearance of money, goods, or credit.
The Court of Appeals found that the equity investment of
US$2,531,632.18 was not a loan or forbearance of money; hence,
Central Bank Circular No. 416, prescribing 12% interest per annum on
loans or forbearance of money, goods, or credit is inapplicable. It
applied Article 2209 of the Civil Code, which provides for the legal
interest of 6% per annum in the absence of a stipulation to the contrary.
Thus, the Court of Appeals modified the Order of 12 May 1998 and
reduced the rate of interest on the investment of US$2,531,632.18 from
12% to 6% to run from 15 October 1981 when the outward remittance
and equity investment was actually made up to the closure of PaBC.
Also, following Eastern Shipping Lines, Inc. v. Court of Appeals it
upheld the grant of 12% interest on the monetary award of
US$2,531,632.18 to run from the date of the finality of the 11
September 1992 Order until its satisfaction.
In Eastern Shipping Lines, Inc. v. Court of Appeals, we laid down
the following guidelines:
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 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 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.[20]
It is undisputed that the amount of US$2,531,632.58 remitted by
the Singaporeans represented the 154,462 PaBC common shares
previously issued to, and owned by, Mandarin Development
Corporation bought by the Singaporeans at the price of US$16.39 per
share. The investment was approved by the Central Bank under
Monetary Board Resolution No. 323 dated 19 February 1982 and
constituted about 11% of the total subscribed capital stock of PaBC.
Clearly, the amount remitted to PaBC by the Singaporeans was an
investment.
An investment is an expenditure to acquire property or other
assets in order to produce revenue. It is the placing of capital or laying
out of money in a way intended to secure income or profit from its
employment. To invest is to purchase securities of a more or less
permanent nature, or to place money or property in business ventures
or real estate, or otherwise lay it out, so that it may produce a revenue
or income.[21]
Thus, unlike a deposit of money or a loan that earns interest, the
investment of the Singaporeans cannot be assured of a dividend or an
interest on the amount invested. For, interests or dividends are granted
only after profits or gains are generated.
We therefore agree with the Court of Appeals in holding that the
amount of US$2,531,632.18 remitted by the Singaporeans to PaBC
was not a loan or forbearance of money in favor of PaBC. Hence No.
II-1 of the above-quoted guidelines in Eastern Shipping Lines does not
come into play. Neither can we apply Central Bank Circular No. 416,
which imposes the rate of 12% per annum on loans and forbearance of
money. Nor can No. II-2 of the above-quoted guidelines be invoked
because, as correctly pointed out by the Liquidator, the closure of the
PaBC did not constitute a breach of obligation. Article 2209 of the Civil
Code, which was relied upon by the Court of Appeals, does not find
application either. That Article, which provides for 6% interest per
annum, governs when there is a delay in the payment of a sum of
money. Such is not the case here.
Thus, the Court of Appeals award of 6% interest on the
Singaporeans equity investment as actual or compensatory damages
from the date of its remittance until the closure of PaBC has no leg to
stand on and must, therefore, be deleted.
The interest that may be awarded as actual or compensatory
damages in this case is that provided in No. II-3 of the afore-quoted
guidelines. Upon the finality of the Order of 11 September 1992, the
award of US$2,531,632.18 representing the Singaporeans equity
investment became a judgment debt. As such, it shall bear an interest
of 12% per annum from the finality of the Order until its full satisfaction.
However, the grant of the said interest does not bar the
Singaporeans from claiming liquidating dividends which may have
accrued from their equity investment after being determined by the
Liquidator. In the liquidation of a corporation, after the payment of all
corporate debts and liabilities, the remaining assets, if any, must be
distributed to the stockholders in proportion to their interests in the
corporation. The share of each stockholder in the assets upon
liquidation is what is known as liquidating dividend.[22] Verily, the
Singaporeans are entitled to 11% of the total liquidating dividend, this
being in proportion to their 11% interest of the total subscribed capital
stock of PaBC.
Anent the fourth issue, the Court is unable to determine the
veracity of the alleged overpayments in the absence of verified records
on the total payments made in favor of the Singaporeans. The award of
the Court of Appeals of P56,034,877.04 representing uncollected
interest is likewise unsubstantiated because it was not shown how the
amount was derived.
To resolve this question of fact, the case is hereby remanded to
the trial court to recompute the payments vis--vis the total amount due
the Singaporeans, also considering the undisputed award of 12%
interest per annum on the judgment debt of US$2,531,632.18 to be
reckoned from 22 October 1992,[23] when the 11 September 1992
Order became final, until its full satisfaction.
WHEREFORE, the decision of the Court of Appeals of 31
January 2002 in CA-G.R. SP No. 47878 is hereby AFFIRMED insofar
as the respondents ANG ENG JOO, ANG KEONG LAN, and E.J. ANG
INTERNATIONAL, LTD., are entitled to the payment of 12%
interest per annum in the form of actual or compensatory damages on
the judgment award of US$2,531,632.18 to run from 22 October 1992,
when the 11 September 1992 Order of the Regional Trial Court of
Manila, Branch 31, became final and executory, until the amount is fully
paid. The said decision is, however, MODIFIED as follows:
1. The award of interest at the rate of 6% per annum as
actual or compensatory damages from 15 October
1981 until the closure of PaBC is hereby deleted for
lack of basis without prejudice, however, to liquidating
dividends or interests as may be determined by the
Liquidator.
2. The Regional Trial Court of Manila, Branch 31, is hereby
directed to make a recomputation of all the total
amounts paid by the petitioner Liquidator in favor of the
private respondent Singaporeans taking into account
the exact amount due them, and to issue the proper
orders for payment, if warranted. The amount due shall
include the 12% rate of legal interests on the judgment
debt of US$2,531,632.18.
SO ORDERED.
Quisumbing, Ynares-Santiago, Carpio, and Azcuna, JJ., concur.
SECOND DIVISION
[G.R. No. 149734. November 19, 2004]
DR. DANIEL VAZQUEZ and MA. LUIZA M. VAZQUEZ, petitioners
vs. AYALA CORPORATION, respondent.
DECISION
TINGA, J.:
The rise in value of four lots in one of the countrys prime
residential developments, Ayala Alabang Village in Muntinlupa City,
over a period of six (6) years only, represents big money. The huge
price difference lies at the heart of the present controversy. Petitioners
insist that the lots should be sold to them at 1984 prices while
respondent maintains that the prevailing market price in 1990 should
be the selling price.
Dr. Daniel Vazquez and Ma. Luisa Vazquez[1] filed this Petition
for Review on Certiorari[2] dated October 11, 2001 assailing
the Decision[3] of the Court of Appeals dated September 6, 2001 which
reversed the Decision[4] of the Regional Trial Court (RTC) and
dismissed their complaint for specific performance and damages
against Ayala Corporation.
Despite their disparate rulings, the RTC and the appellate court
agree on the following antecedents:[5]
On April 23, 1981, spouses Daniel Vasquez and Ma. Luisa M. Vasquez
(hereafter, Vasquez spouses) entered into a Memorandum of
Agreement (MOA) with Ayala Corporation (hereafter, AYALA) with
AYALA buying from the Vazquez spouses, all of the latters shares of
stock in Conduit Development, Inc. (hereafter, Conduit). The main
asset of Conduit was a 49.9 hectare property in Ayala Alabang,
Muntinlupa, which was then being developed by Conduit under a
development plan where the land was divided into Villages 1, 2 and 3
of the Don Vicente Village. The development was then being
undertaken for Conduit by G.P. Construction and Development Corp.
(hereafter, GP Construction).
Under the MOA, Ayala was to develop the entire property, less what
was defined as the Retained Area consisting of 18,736 square meters.
This Retained Area was to be retained by the Vazquez spouses. The
area to be developed by Ayala was called the Remaining Area. In this
Remaining Area were 4 lots adjacent to the Retained Area and Ayala
agreed to offer these lots for sale to the Vazquez spouses at the
prevailing price at the time of purchase. The relevant provisions of the
MOA on this point are:
5.7. The BUYER hereby commits that it will develop the Remaining
Property into a first class residential subdivision of the same
class as its New Alabang Subdivision, and that it intends to
complete the first phase under its amended development plan
within three (3) years from the date of this Agreement. x x x
5.15. The BUYER agrees to give the SELLERS a first option to
purchase four developed lots next to the Retained Area at the
prevailing market price at the time of the purchase.
The parties are agreed that the development plan referred to in
paragraph 5.7 is not Conduits development plan, but Ayalas
amended development plan which was still to be formulated as of
the time of the MOA. While in the Conduit plan, the 4 lots to be
offered for sale to the Vasquez Spouses were in the first phase
thereof or Village 1, in the Ayala plan which was formulated a year
later, it was in the third phase, or Phase II-c.
Under the MOA, the Vasquez spouses made several express
warranties, as follows:
3.1. The SELLERS shall deliver to the BUYER:
xxx
3.1.2. The true and complete list, certified by the Secretary and
Treasurer of the Company showing:
xxx
D. A list of all persons and/or entities with whom the Company has
pending contracts, if any.
xxx
3.1.5. Audited financial statements of the Company as at Closing date.
4. Conditions Precedent
All obligations of the BUYER under this Agreement are subject to
fulfillment prior to or at the Closing, of the following conditions:
4.1. The representations and warranties by the SELLERS
contained in this Agreement shall be true and correct at the time
of Closing as though such representations and warranties were
made at such time; and
xxx
6. Representation and Warranties by the SELLERS
The SELLERS jointly and severally represent and warrant to the
BUYER that at the time of the execution of this Agreement and at the
Closing:
xxx
6.2.3. There are no actions, suits or proceedings pending, or to the
knowledge of the SELLERS, threatened against or affecting the
SELLERS with respect to the Shares or the Property; and
7. Additional Warranties by the SELLERS
7.1. With respect to the Audited Financial Statements required to be
submitted at Closing in accordance with Par. 3.1.5 above, the SELLER
jointly and severally warrant to the BUYER that:
7.1.1 The said Audited Financial Statements shall show that on the day
of Closing, the Company shall own the Remaining Property, free from
all liens and encumbrances and that the Company shall have no
obligation to any party except for billings payable to GP
Construction & Development Corporation and advances made by
Daniel Vazquez for which BUYER shall be responsible in
accordance with Par. 2 of this Agreement.
7.1.2 Except to the extent reflected or reserved in the Audited
Financial Statements of the Company as of Closing, and those
disclosed to BUYER, the Company as of the date thereof, has no
liabilities of any nature whether accrued, absolute, contingent or
otherwise, including, without limitation, tax liabilities due or to become
due and whether incurred in respect of or measured in respect of the
Companys income prior to Closing or arising out of transactions or
state of facts existing prior thereto.
7.2 SELLERS do not know or have no reasonable ground to know
of any basis for any assertion against the Company as at closing
or any liability of any nature and in any amount not fully reflected
or reserved against such Audited Financial Statements referred to
above, and those disclosed to BUYER.
xxx xxx xxx
7.6.3 Except as otherwise disclosed to the BUYER in writing on or
before the Closing, the Company is not engaged in or a party to,
or to the best of the knowledge of the SELLERS, threatened with,
any legal action or other proceedings before any court or
administrative body, nor do the SELLERS know or have reasonable
grounds to know of any basis for any such action or proceeding or of
any governmental investigation relative to the Company.
7.6.4 To the knowledge of the SELLERS, no default or breach exists
in the due performance and observance by the Company of any
term, covenant or condition of any instrument or agreement to
which the company is a party or by which it is bound, and no
condition exists which, with notice or lapse of time or both, will
constitute such default or breach.
After the execution of the MOA, Ayala caused the suspension of work
on Village 1 of the Don Vicente Project. Ayala then received a letter
from one Maximo Del Rosario of Lancer General Builder Corporation
informing Ayala that he was claiming the amount of P1,509,558.80 as
the subcontractor of G.P. Construction...
G.P. Construction not being able to reach an amicable settlement with
Lancer, on March 22, 1982, Lancer sued G.P. Construction, Conduit
and Ayala in the then Court of First Instance of Manila in Civil Case No.
82-8598. G.P. Construction in turn filed a cross-claim against Ayala.
G.P. Construction and Lancer both tried to enjoin Ayala from
undertaking the development of the property. The suit was terminated
only on February 19, 1987, when it was dismissed with prejudice after
Ayala paid both Lancer and GP Construction the total of
P4,686,113.39.
Taking the position that Ayala was obligated to sell the 4 lots adjacent
to the Retained Area within 3 years from the date of the MOA, the
Vasquez spouses sent several reminder letters of the approaching
so-called deadline. However, no demand after April 23, 1984, was ever
made by the Vasquez spouses for Ayala to sell the 4 lots. On the
contrary, one of the letters signed by their authorized agent, Engr.
Eduardo Turla, categorically stated that they expected development of
Phase 1 to be completed by February 19, 1990, three years from the
settlement of the legal problems with the previous contractor.
By early 1990 Ayala finished the development of the vicinity of the 4
lots to be offered for sale. The four lots were then offered to be sold to
the Vasquez spouses at the prevailing price in 1990. This was rejected
by the Vasquez spouses who wanted to pay at 1984 prices, thereby
leading to the suit below.
After trial, the court a quo rendered its decision, the dispositive portion
of which states:
THEREFORE, judgment is hereby rendered in favor of plaintiffs and
against defendant, ordering defendant to sell to plaintiffs the relevant
lots described in the Complaint in the Ayala Alabang Village at the price
of P460.00 per square meter amounting to P1,349,540.00; ordering
defendant to reimburse to plaintiffs attorneys fees in the sum
of P200,000.00 and to pay the cost of the suit.
In its decision, the court a quo concluded that the Vasquez spouses
were not obligated to disclose the potential claims of GP Construction,
Lancer and Del Rosario; Ayalas accountants should have opened the
records of Conduit to find out all claims; the warranty against suit is with
respect to the shares of the Property and the Lancer suit does not
affect the shares of stock sold to Ayala; Ayala was obligated to develop
within 3 years; to say that Ayala was under no obligation to follow a
time frame was to put the Vasquezes at Ayalas mercy; Ayala did not
develop because of a slump in the real estate market; the MOA was
drafted and prepared by the AYALA who should suffer its ambiguities;
the option to purchase the 4 lots is valid because it was supported by
consideration as the option is incorporated in the MOA where the
parties had prestations to each other. [Emphasis supplied]
Ayala Corporation filed an appeal, alleging that the trial court
erred in holding that petitioners did not breach their warranties under
the MOA[6] dated April 23, 1981; that it was obliged to develop the land
where the four (4) lots subject of the option to purchase are located
within three (3) years from the date of the MOA; that it was in delay;
and that the option to purchase was valid because it was incorporated
in the MOA and the consideration therefor was the commitment by
Ayala Corporation to petitioners embodied in the MOA.
As previously mentioned, the Court of Appeals reversed the
RTC Decision. According to the appellate court, Ayala Corporation was
never informed beforehand of the existence of the Lancer claim. In fact,
Ayala Corporation got a copy of the Lancer subcontract only on May 29,
1981 from G.P. Constructions lawyers. The Court of Appeals thus held
that petitioners violated their warranties under the MOA when they
failed to disclose Lancers claims. Hence, even conceding that Ayala
Corporation was obliged to develop and sell the four (4) lots in question
within three (3) years from the date of the MOA, the obligation was
suspended during the pendency of the case filed by Lancer.
Interpreting the MOAs paragraph 5.7 above-quoted, the
appellate court held that Ayala Corporation committed to develop the
first phase of its own amended development plan and not Conduits
development plan. Nowhere does the MOA provide that Ayala
Corporation shall follow Conduits development plan nor is Ayala
Corporation prohibited from changing the sequence of the phases of
the property it will develop.
Anent the question of delay, the Court of Appeals ruled that there
was no delay as petitioners never made a demand for Ayala
Corporation to sell the subject lots to them. According to the appellate
court, what petitioners sent were mere reminder letters the last of which
was dated prior to April 23, 1984 when the obligation was not yet
demandable. At any rate, the Court of Appeals found that petitioners in
fact waived the three (3)-year period when they sent a letter through
their agent, Engr. Eduardo Turla, stating that they expect that the
development of Phase I will be completed by 19 February 1990, three
years from the settlement of the legal problems with the previous
contractor.[7]
The appellate court likewise ruled that paragraph 5.15
above-quoted is not an option contract but a right of first refusal there
being no separate consideration therefor. Since petitioners refused
Ayala Corporations offer to sell the subject lots at the reduced 1990
price of P5,000.00 per square meter, they have effectively waived their
right to buy the same.
In the instant Petition, petitioners allege that the appellate court
erred in ruling that they violated their warranties under the MOA; that
Ayala Corporation was not obliged to develop the Remaining Property
within three (3) years from the execution of the MOA; that Ayala was
not in delay; and that paragraph 5.15 of the MOA is a mere right of first
refusal. Additionally, petitioners insist that the Court should review the
factual findings of the Court of Appeals as they are in conflict with those
of the trial court.
Ayala Corporation filed a Comment on the Petition[8] dated March
26, 2002, contending that the petition raises questions of fact and
seeks a review of evidence which is within the domain of the Court of
Appeals. Ayala Corporation maintains that the subcontract between GP
Construction, with whom Conduit contracted for the development of the
property under a Construction Contract dated October 10, 1980, and
Lancer was not disclosed by petitioners during the negotiations.
Neither was the liability for Lancers claim included in the Audited
Financial Statements submitted by petitioners after the signing of the
MOA. These justify the conclusion that petitioners breached their
warranties under the afore-quoted paragraphs of the MOA. Since the
Lancer suit ended only in February 1989, the three (3)-year period
within which Ayala Corporation committed to develop the property
should only be counted thence. Thus, when it offered the subject lots to
petitioners in 1990, Ayala Corporation was not yet in delay.
In response to petitioners contention that there was no action or
proceeding against them at the time of the execution of the MOA on
April 23, 1981, Ayala Corporation avers that the facts and
circumstances which gave rise to the Lancer claim were already extant
then. Petitioners warranted that their representations under the MOA
shall be true and correct at the time of Closing which shall take place
within four (4) weeks from the signing of the MOA.[9] Since the MOA
was signed on April 23, 1981, Closing was approximately the third
week of May 1981. Hence, Lancers claims, articulated in a letter which
Ayala Corporation received on May 4, 1981, are among the liabilities
warranted against under paragraph 7.1.2 of the MOA.
Moreover, Ayala Corporation asserts that the warranties under
the MOA are not just against suits but against all kinds of liabilities not
reflected in the Audited Financial Statements. It cannot be faulted for
relying on the express warranty that except for billings payable to GP
Construction and advances made by petitioner Daniel Vazquez in the
amount of P38,766.04, Conduit has no other liabilities. Hence,
petitioners cannot claim that Ayala Corporation should have examined
and investigated the Audited Financial Statements of Conduit and
should now assume all its obligations and liabilities including the
Lancer suit and the cross-claim of GP Construction.
Furthermore, Ayala Corporation did not make a commitment to
complete the development of the first phase of the property within three
(3) years from the execution of the MOA. The provision refers to a mere
declaration of intent to develop the first phase of its (Ayala
Corporations) own development plan and not Conduits. True to its
intention, Ayala Corporation did complete the development of the first
phase (Phase II-A) of its amended development plan within three (3)
years from the execution of the MOA. However, it is not obliged to
develop the third phase (Phase II-C) where the subject lots are located
within the same time frame because there is no contractual stipulation
in the MOA therefor. It is free to decide on its own the period for the
development of Phase II-C. If petitioners wanted to impose the same
three (3)-year timetable upon the third phase of the amended
development plan, they should have filed a suit to fix the time table in
accordance with Article 1197[10] of the Civil Code. Having failed to do so,
Ayala Corporation cannot be declared to have been in delay.
Ayala Corporation further contends that no demand was made
on it for the performance of its alleged obligation. The letter dated
October 4, 1983 sent when petitioners were already aware of the
Lancer suit did not demand the delivery of the subject lots by April 23,
1984. Instead, it requested Ayala Corporation to keep petitioners
posted on the status of the case. Likewise, the letter dated March 4,
1984 was merely an inquiry as to the date when the development of
Phase 1 will be completed. More importantly, their letter dated June 27,
1988 through Engr. Eduardo Turla expressed petitioners expectation
that Phase 1 will be completed by February 19, 1990.
Lastly, Ayala Corporation maintains that paragraph 5.15 of the
MOA is a right of first refusal and not an option contract.
Petitioners filed their Reply[11] dated August 15, 2002 reiterating
the arguments in their Petition and contending further that they did not
violate their warranties under the MOA because the case was filed by
Lancer only on April 1, 1982, eleven (11) months and eight (8) days
after the signing of the MOA on April 23, 1981. Ayala Corporation
admitted that it received Lancers claim before the Closing date. It
therefore had all the time to rescind the MOA. Not having done so, it
can be concluded that Ayala Corporation itself did not consider the
matter a violation of petitioners warranty.
Moreover, petitioners submitted the Audited Financial
Statements of Conduit and allowed an acquisition audit to be
conducted by Ayala Corporation. Thus, the latter bought Conduit with
open eyes.
Petitioners also maintain that they had no knowledge of the
impending case against Conduit at the time of the execution of the
MOA. Further, the MOA makes Ayala Corporation liable for the
payment of all billings of GP Construction. Since Lancers claim was
actually a claim against GP Construction being its sub-contractor, it is
Ayala Corporation and not petitioners which is liable.
Likewise, petitioners aver that although Ayala Corporation may
change the sequence of its development plan, it is obliged under the
MOA to develop the entire area where the subject lots are located in
three (3) years.
They also assert that demand was made on Ayala Corporation to
comply with their obligation under the MOA. Apart from their reminder
letters dated January 24, February 18 and March 5, 1984, they also
sent a letter dated March 4, 1984 which they claim is a categorical
demand for Ayala Corporation to comply with the provisions of the
MOA.
The parties were required to submit their respective memoranda
in the Resolution[12] dated November 18, 2002. In compliance with this
directive, petitioners submitted their Memorandum[13] dated February
14, 2003 on even date, while Ayala Corporation filed
its Memorandum[14] dated February 14, 2003 on February 17, 2003.
We shall first dispose of the procedural question raised by the
instant petition.
It is well-settled that the jurisdiction of this Court in cases brought
to it from the Court of Appeals by way of petition for review under Rule
45 is limited to reviewing or revising errors of law imputed to it, its
findings of fact being conclusive on this Court as a matter of general
principle. However, since in the instant case there is a conflict between
the factual findings of the trial court and the appellate court, particularly
as regards the issues of breach of warranty, obligation to develop and
incurrence of delay, we have to consider the evidence on record and
resolve such factual issues as an exception to the general rule. [15] In
any event, the submitted issue relating to the categorization of the right
to purchase granted to petitioners under the MOA is legal in character.
The next issue that presents itself is whether petitioners
breached their warranties under the MOA when they failed to disclose
the Lancer claim. The trial court declared they did not; the appellate
court found otherwise.
Ayala Corporation summarizes the clauses of the MOA which
petitioners allegedly breached when they failed to disclose the Lancer
claim:
a) Clause 7.1.1. that Conduit shall not be obligated to anyone except to
GP Construction for P38,766.04, and for advances made by Daniel
Vazquez;
b) Clause 7.1.2. that except as reflected in the audited financial
statements Conduit had no other liabilities whether accrued, absolute,
contingent or otherwise;
c) Clause 7.2. that there is no basis for any assertion against Conduit of
any liability of any value not reflected or reserved in the financial
statements, and those disclosed to Ayala;
d) Clause 7.6.3. that Conduit is not threatened with any legal action or
other proceedings; and
e) Clause 7.6.4. that Conduit had not breached any term, condition, or
covenant of any instrument or agreement to which it is a party or by
which it is bound.[16]
The Court is convinced that petitioners did not violate the
foregoing warranties.
The exchanges of communication between the parties indicate
that petitioners substantially apprised Ayala Corporation of the Lancer
claim or the possibility thereof during the period of negotiations for the
sale of Conduit.
In a letter[17] dated March 5, 1984, petitioner Daniel Vazquez
reminded Ayala Corporations Mr. Adolfo Duarte (Mr. Duarte) that prior
to the completion of the sale of Conduit, Ayala Corporation asked for
and was given information that GP Construction sub-contracted,
presumably to Lancer, a greater percentage of the project than it was
allowed. Petitioners gave this information to Ayala Corporation
because the latter intimated a desire to break the contract of Conduit
with GP. Ayala Corporation did not deny this. In fact, Mr. Duartes
letter[18] dated March 6, 1984 indicates that Ayala Corporation had
knowledge of the Lancer subcontract prior to its acquisition of Conduit.
Ayala Corporation even admitted that it tried to explorelegal basis to
discontinue the contract of Conduit with GP but found this not feasible
when information surfaced about the tacit consent of Conduit to the
sub-contracts of GP with Lancer.
At the latest, Ayala Corporation came to know of the Lancer
claim before the date of Closing of the MOA. Lancers letter[19] dated
April 30, 1981 informing Ayala Corporation of its unsettled claim with
GP Construction was received by Ayala Corporation on May 4, 1981,
well before the Closing[20] which occurred four (4) weeks after the date
of signing of the MOA on April 23, 1981, or on May 23, 1981.
The full text of the pertinent clauses of the MOA quoted
hereunder likewise indicate that certain matters pertaining to the
liabilities of Conduit were disclosed by petitioners to Ayala Corporation
although the specifics thereof were no longer included in the MOA:
7.1.1 The said Audited Financial Statements shall show that on the day
of Closing, the Company shall own the Remaining Property, free from
all liens and encumbrances and that the Company shall have no
obligation to any party except for billings payable to GP Construction &
Development Corporation and advances made by Daniel Vazquez for
which BUYER shall be responsible in accordance with Paragraph 2 of
this Agreement.
7.1.2 Except to the extent reflected or reserved in the Audited
Financial Statements of the Company as of Closing, and those
disclosed to BUYER, the Company as of the date hereof, has no
liabilities of any nature whether accrued, absolute, contingent or
otherwise, including, without limitation, tax liabilities due or to become
due and whether incurred in respect of or measured in respect of the
Companys income prior to Closing or arising out of transactions or
state of facts existing prior thereto.
7.2 SELLERS do not know or have no reasonable ground to know of
any basis for any assertion against the Company as at Closing of any
liability of any nature and in any amount not fully reflected or reserved
against such Audited Financial Statements referred to above, and
those disclosed to BUYER.
xxx xxx xxx
7.6.3 Except as otherwise disclosed to the BUYER in writing on or
before the Closing, the Company is not engaged in or a party to, or to
the best of the knowledge of the SELLERS, threatened with, any legal
action or other proceedings before any court or administrative body,
nor do the SELLERS know or have reasonable grounds to know of any
basis for any such action or proceeding or of any governmental
investigation relative to the Company.
7.6.4 To the knowledge of the SELLERS, no default or breach exists in
the due performance and observance by the Company of any term,
covenant or condition of any instrument or agreement to which the
Company is a party or by which it is bound, and no condition exists
which, with notice or lapse of time or both, will constitute such default or
breach.[21] [Emphasis supplied]
Hence, petitioners warranty that Conduit is not engaged in, a
party to, or threatened with any legal action or proceeding is qualified
by Ayala Corporations actual knowledge of the Lancer claim which was
disclosed to Ayala Corporation before the Closing.
At any rate, Ayala Corporation bound itself to pay all billings
payable to GP Construction and the advances made by petitioner
Daniel Vazquez. Specifically, under paragraph 2 of the MOA referred to
in paragraph 7.1.1, Ayala Corporation undertook responsibility for the
payment of all billings of the contractor GP Construction &
Development Corporation after the first billing and any payments made
by the company and/or SELLERS shall be reimbursed by BUYER on
closing which advances to date is P1,159,012.87.[22]
The billings knowingly assumed by Ayala Corporation
necessarily include the Lancer claim for which GP Construction is liable.
Proof of this is Ayala Corporations letter[23] to GP Construction dated
before Closing on May 4, 1981, informing the latter of Ayala
Corporations receipt of the Lancer claim embodied in the letter dated
April 30, 1981, acknowledging that it is taking over the contractual
responsibilities of Conduit, and requesting copies of all sub-contracts
affecting the Conduit property. The pertinent excerpts of the letter read:
In this connection, we wish to inform you that this morning we received
a letter from Mr. Maximo D. Del Rosario, President of Lancer General
Builders Corporation apprising us of the existence of subcontracts that
they have with your corporation. They have also furnished us with a
copy of their letter to you dated 30 April 1981.
Since we are taking over the contractual responsibilities of Conduit
Development, Inc., we believe that it is necessary, at this point in time,
that you furnish us with copies of all your subcontracts affecting the
property of Conduit, not only with Lancer General Builders Corporation,
but all subcontracts with other parties as well[24]
Quite tellingly, Ayala Corporation even attached to its Pre-Trial
Brief[25] dated July 9, 1992 a copy of the letter[26] dated May 28, 1981 of
GP Constructions counsel addressed to Conduit furnishing the latter
with copies of all sub-contract agreements entered into by GP
Construction. Since it was addressed to Conduit, it can be presumed
that it was the latter which gave Ayala Corporation a copy of the letter
thereby disclosing to the latter the existence of the Lancer sub-contract.
The ineluctable conclusion is that petitioners did not violate their
warranties under the MOA. The Lancer sub-contract and claim were
substantially disclosed to Ayala Corporation before the Closing date of
the MOA. Ayala Corporation cannot disavow knowledge of the claim.
Moreover, while in its correspondence with petitioners, Ayala
Corporation did mention the filing of the Lancer suit as an obstacle to
its development of the property, it never actually brought up nor sought
redress for petitioners alleged breach of warranty for failure to disclose
the Lancer claim until it filed its Answer[27] dated February 17, 1992.
We now come to the correct interpretation of paragraph 5.7 of the
MOA. Does this paragraph express a commitment or a mere intent on
the part of Ayala Corporation to develop the property within three (3)
years from date thereof? Paragraph 5.7 provides:
5.7. The BUYER hereby commits that it will develop the Remaining
Property into a first class residential subdivision of the same class as its
New Alabang Subdivision, and that it intends to complete the first
phase under its amended development plan within three (3) years from
the date of this Agreement.[28]
Notably, while the first phrase of the paragraph uses the word
commits in reference to the development of the Remaining Property
into a first class residential subdivision, the second phrase uses the
word intends in relation to the development of the first phase of the
property within three (3) years from the date of the MOA. The variance
in wording is significant. While commit[29] connotes a pledge to do
something, intend[30] merely signifies a design or proposition.
Atty. Leopoldo Francisco, former Vice President of Ayala
Corporations legal division who assisted in drafting the MOA, testified:
COURT
You only ask what do you mean by that intent. Just
answer on that point.
ATTY. BLANCO
Dont talk about standard.
WITNESS
A Well, the word intent here, your Honor, was used to
emphasize the tentative character of the period of
development because it will be noted that the
sentence refers to and I quote to complete the first
phase under its amended development plan within
three (3) years from the date of this agreement, at
the time of the execution of this agreement, your
Honor. That amended development plan was not yet
in existence because the buyer had manifested to
the seller that the buyer could amend the subdivision
plan originally belonging to the seller to conform with
its own standard of development and second, your
Honor, (interrupted)[31]
It is thus unmistakable that this paragraph merely expresses an
intention on Ayala Corporations part to complete the first phase under
its amended development plan within three (3) years from the
execution of the MOA. Indeed, this paragraph is so plainly worded that
to misunderstand its import is deplorable.
More focal to the resolution of the instant case is paragraph 5.7s
clear reference to the first phase of Ayala Corporations amended
development plan as the subject of the three (3)-year intended
timeframe for development. Even petitioner Daniel Vazquez admitted
on cross-examination that the paragraph refers not to Conduits but to
Ayala Corporations development plan which was yet to be formulated
when the MOA was executed:
Q: Now, turning to Section 5.7 of this Memorandum of
Agreement, it is stated as follows: The Buyer hereby
commits that to develop the remaining property into
a first class residential subdivision of the same class
as New Alabang Subdivision, and that they intend to
complete the first phase under its amended
development plan within three years from the date of
this agreement.
Now, my question to you, Dr. Vasquez is that there is
no dispute that the amended development plan here
is the amended development plan of Ayala?
A: Yes, sir.
Q: In other words, it is not Exhibit D-5 which is the original
plan of Conduit?
A: No, it is not.
Q: This Exhibit D-5 was the plan that was being followed
by GP Construction in 1981?
A: Yes, sir.
Q: And point of fact during your direct examination as of
the date of the agreement, this amended
development plan was still to be formulated by
Ayala?
A: Yes, sir.[32]
As correctly held by the appellate court, this admission is crucial
because while the subject lots to be sold to petitioners were in the first
phase of the Conduit development plan, they were in the third or last
phase of the Ayala Corporation development plan. Hence, even
assuming that paragraph 5.7 expresses a commitment on the part of
Ayala Corporation to develop the first phase of its amended
development plan within three (3) years from the execution of the MOA,
there was no parallel commitment made as to the timeframe for the
development of the third phase where the subject lots are located.
Lest it be forgotten, the point of this petition is the alleged failure
of Ayala Corporation to offer the subject lots for sale to petitioners
within three (3) years from the execution of the MOA. It is not that Ayala
Corporation committed or intended to develop the first phase of its
amended development plan within three (3) years. Whether it did or did
not is actually beside the point since the subject lots are not located in
the first phase anyway.
We now come to the issue of default or delay in the fulfillment of
the obligation.
Article 1169 of the Civil Code provides:
Art. 1169. Those obliged to deliver or to do something incur in delay
from the time the obligee judicially or extrajudicially demands from
them the fulfillment of their obligation.
However, the demand by the creditor shall not be necessary in order
that delay may exist:
(1) When the obligation or the law expressly so declares; or
(2) When from the nature and the circumstances of the obligation it
appears that the designation of the time when the thing is to be
delivered or the service is to be rendered was a controlling motive for
the establishment of the contract; or
(3) When demand would be useless, as when the obligor has rendered
it beyond his power to perform.
In reciprocal obligations, neither party incurs in delay if the other does
not comply or is not ready to comply in a proper manner with what is
incumbent upon him. From the moment one of the parties fulfills his
obligation, delay by the other begins.
In order that the debtor may be in default it is necessary that the
following requisites be present: (1) that the obligation be demandable
and already liquidated; (2) that the debtor delays performance; and (3)
that the creditor requires the performance judicially or extrajudicially.[33]
Under Article 1193 of the Civil Code, obligations for whose
fulfillment a day certain has been fixed shall be demandable only when
that day comes. However, no such day certain was fixed in the MOA.
Petitioners, therefore, cannot demand performance after the three (3)
year period fixed by the MOA for the development of the first phase of
the property since this is not the same period contemplated for the
development of the subject lots. Since the MOA does not specify a
period for the development of the subject lots, petitioners should have
petitioned the court to fix the period in accordance with Article
1197[34] of the Civil Code. As no such action was filed by petitioners,
their complaint for specific performance was premature, the obligation
not being demandable at that point. Accordingly, Ayala Corporation
cannot likewise be said to have delayed performance of the obligation.
Even assuming that the MOA imposes an obligation on Ayala
Corporation to develop the subject lots within three (3) years from date
thereof, Ayala Corporation could still not be held to have been in delay
since no demand was made by petitioners for the performance of its
obligation.
As found by the appellate court, petitioners letters which dealt
with the three (3)-year timetable were all dated prior to April 23, 1984,
the date when the period was supposed to expire. In other words, the
letters were sent before the obligation could become legally
demandable. Moreover, the letters were mere reminders and not
categorical demands to perform. More importantly, petitioners waived
the three (3)-year period as evidenced by their agent, Engr. Eduardo
Turlas letter to the effect that petitioners agreed that the three (3)-year
period should be counted from the termination of the case filed by
Lancer. The letter reads in part:
I. Completion of Phase I
As per the memorandum of Agreement also dated April 23, 1981, it
was undertaken by your goodselves to complete the development of
Phase I within three (3) years. Dr. & Mrs. Vazquez were made to
understand that you were unable to accomplish this because of legal
problems with the previous contractor. These legal problems were
resolved as of February 19, 1987, and Dr. & Mrs. Vazquez therefore
expect that the development of Phase I will be completed by February
19, 1990, three years from the settlement of the legal problems with the
previous contractor. The reason for this is, as you know, that
security-wise, Dr. & Mrs. Vazquez have been advised not to construct
their residence till the surrounding area (which is Phase I) is developed
and occupied. They have been anxious to build their residence for quite
some time now, and would like to receive assurance from your
goodselves regarding this, in compliance with the agreement.
II. Option on the adjoining lots
We have already written your goodselves regarding the intention of Dr.
& Mrs. Vazquez to exercise their option to purchase the two lots on
each side (a total of 4 lots) adjacent to their Retained Area. They are
concerned that although over a year has elapsed since the settlement
of the legal problems, you have not presented them with the size,
configuration, etc. of these lots. They would appreciate being provided
with these at your earliest convenience.[35]
Manifestly, this letter expresses not only petitioners
acknowledgement that the delay in the development of Phase I was
due to the legal problems with GP Construction, but also their
acquiescence to the completion of the development of Phase I at the
much later date of February 19, 1990. More importantly, by no stretch
of semantic interpretation can it be construed as a categorical demand
on Ayala Corporation to offer the subject lots for sale to petitioners as
the letter merely articulates petitioners desire to exercise their option to
purchase the subject lots and concern over the fact that they have not
been provided with the specifications of these lots.
The letters of petitioners children, Juan Miguel and Victoria
Vazquez, dated January 23, 1984[36] and February 18, 1984[37] can also
not be considered categorical demands on Ayala Corporation to
develop the first phase of the property within the three (3)-year period
much less to offer the subject lots for sale to petitioners. The letter
dated January 23, 1984 reads in part:
You will understand our interest in the completion of the roads to our
property, since we cannot develop it till you have constructed the same.
Allow us to remind you of our Memorandum of Agreement, as per
which you committed to develop the roads to our property as per the
original plans of the company, and that
1. The back portion should have been developed before the front
portion which has not been the case.
2. The whole project front and back portions be completed by 1984. [38]
The letter dated February 18, 1984 is similarly worded. It states:
In this regard, we would like to remind you of Articles 5.7 and 5.9 of our
Memorandum of Agreement which states respectively: [39]
Even petitioner Daniel Vazquez letter[40] dated March 5, 1984
does not make out a categorical demand for Ayala Corporation to offer
the subject lots for sale on or before April 23, 1984. The letter reads in
part:
and that we expect from your goodselves compliance with our
Memorandum of Agreement, and a definite date as to when the road to
our property and the development of Phase I will be completed.[41]
At best, petitioners letters can only be construed as mere
reminders which cannot be considered demands for performance
because it must appear that the tolerance or benevolence of the
creditor must have ended.[42]
The petition finally asks us to determine whether paragraph 5.15
of the MOA can properly be construed as an option contract or a right
of first refusal. Paragraph 5.15 states:
5.15 The BUYER agrees to give the SELLERS first option to purchase
four developed lots next to the Retained Area at the prevailing market
price at the time of the purchase.[43]
The Court has clearly distinguished between an option contract
and a right of first refusal. An option is a preparatory contract in which
one party grants to another, for a fixed period and at a determined price,
the privilege to buy or sell, or to decide whether or not to enter into a
principal contract. It binds the party who has given the option not to
enter into the principal contract with any other person during the period
designated, and within that period, to enter into such contract with the
one to whom the option was granted, if the latter should decide to use
the option. It is a separate and distinct contract from that which the
parties may enter into upon the consummation of the option. It must be
supported by consideration.[44]
In a right of first refusal, on the other hand, while the object might
be made determinate, the exercise of the right would be dependent not
only on the grantors eventual intention to enter into a binding juridical
relation with another but also on terms, including the price, that are yet
to be firmed up.[45]
Applied to the instant case, paragraph 5.15 is obviously a mere
right of first refusal and not an option contract. Although the paragraph
has a definite object, i.e., the sale of subject lots, the period within
which they will be offered for sale to petitioners and, necessarily, the
price for which the subject lots will be sold are not specified. The
phrase at the prevailing market price at the time of the purchase
connotes that there is no definite period within which Ayala Corporation
is bound to reserve the subject lots for petitioners to exercise their
privilege to purchase. Neither is there a fixed or determinable price at
which the subject lots will be offered for sale. The price is considered
certain if it may be determined with reference to another thing certain or
if the determination thereof is left to the judgment of a specified person
or persons.[46]
Further, paragraph 5.15 was inserted into the MOA to give
petitioners the first crack to buy the subject lots at the price which Ayala
Corporation would be willing to accept when it offers the subject lots for
sale. It is not supported by an independent consideration. As such it
is not governed by Articles 1324 and 1479 of the Civil Code, viz:
Art. 1324. When the offeror has allowed the offeree a certain period to
accept, the offer may be withdrawn at any time before acceptance by
communicating such withdrawal, except when the option is founded
upon a consideration, as something paid or promised.
Art. 1479. A promise to buy and sell a determinate thing for a price
certain is reciprocally demandable.
An accepted unilateral promise to buy or to sell a determinate thing for
a price certain is binding upon the promissor if the promise is supported
by a consideration distinct from the price.
Consequently, the offer may be withdrawn anytime by communicating
the withdrawal to the other party.[47]
In this case, Ayala Corporation offered the subject lots for sale to
petitioners at the price of P6,500.00/square meter, the prevailing
market price for the property when the offer was made on June 18,
1990.[48] Insisting on paying for the lots at the prevailing market price in
1984 of P460.00/square meter, petitioners rejected the offer. Ayala
Corporation reduced the price to P5,000.00/square meter but again,
petitioners rejected the offer and instead made a counter-offer in the
amount of P2,000.00/square meter.[49] Ayala Corporation rejected
petitioners counter-offer. With this rejection, petitioners lost their right to
purchase the subject lots.
It cannot, therefore, be said that Ayala Corporation breached
petitioners right of first refusal and should be compelled by an action for
specific performance to sell the subject lots to petitioners at the
prevailing market price in 1984.
WHEREFORE, the instant petition is DENIED. No
pronouncement as to costs.
SO ORDERED.
Puno, (Chairman), Austria-Martinez, Callejo,
Sr., and Chico-Nazario, JJ., concur.
 for the purchase of corrugated carton boxes, specifically designed for
petitioners business of exporting fresh bananas, at US$1.10 each. The
agreement was not reduced into writing. To get the production
underway, petitioner deposited, on March 31, 1998, US$40,150.00 in
respondents US Dollar Savings Account with Westmont Bank, as full
payment for the ordered boxes.

Despite such payment, petitioner did not receive any boxes from
respondent. On January 3, 2001, petitioner wrote a demand letter for
reimbursement of the amount paid.[3] On February 19, 2001,
respondent replied that the boxes had been completed as early as April
3, 1998 and that petitioner failed to pick them up from the formers
Republic of the Philippines warehouse 30 days from completion, as agreed upon. Respondent
Supreme Court mentioned that petitioner even placed an additional order of 24,000
Manila boxes, out of which, 14,000 had been manufactured without any
advanced payment from petitioner. Respondent then demanded
petitioner to remove the boxes from the factory and to pay the balance
SECOND DIVISION of US$15,400.00 for the additional boxes and P132,000.00 as storage
fee.

On August 17, 2001, petitioner filed a Complaint for sum of money and
damages against respondent. The Complaint averred that the parties
agreed that the boxes will be delivered within 30 days from payment
SOLAR HARVEST, INC., G.R. No. 176868
but respondent failed to manufacture and deliver the boxes within such
Petitioner, time. It further alleged
Present:

6. That repeated follow-up was made by the

CARPIO, J., plaintiff for the immediate production of the
ordered boxes, but every time, defendant [would]
Chairperson, only show samples of boxes and ma[k]e repeated
promises to deliver the said ordered boxes.
NACHURA,
- versus - 7. That because of the failure of the defendant to
PERALTA, deliver the ordered boxes, plaintiff ha[d] to cancel
the same and demand payment and/or refund from
ABAD, and the defendant but the latter refused to pay and/or
refund the US$40,150.00 payment made by the
MENDOZA, JJ. former for the ordered boxes.[4]

In its Answer with Counterclaim,[5] respondent insisted that, as early as

April 3, 1998, it had already completed production of the 36,500 boxes,
contrary to petitioners allegation. According to respondent, petitioner, in
DAVAO CORRUGATED CARTON fact, made an additional order of 24,000 boxes, out of which, 14,000
CORPORATION, Promulgated: had been completed without waiting for petitioners payment.
Respondent stated that petitioner was to pick up the boxes at the
Responde
factory as agreed upon, but petitioner failed to do so. Respondent
nt.
July 26, 2010 averred that, on October 8, 1998, petitioners representative, Bobby
Que (Que), went to the factory and saw that the boxes were ready for
pick up. On February 20, 1999, Que visited the factory again and
supposedly advised respondent to sell the boxes as rejects to recoup
x------------------------------------------------------------------------------------x the cost of the unpaid 14,000 boxes, because petitioners transaction to
ship bananas to China did not materialize. Respondent claimed that
the boxes were occupying warehouse space and that petitioner should
be made to pay storage fee at P60.00 per square meter for every
month from April 1998. As counterclaim, respondent prayed that
judgment be rendered ordering petitioner to pay $15,400.00, plus
DECISION interest, moral and exemplary damages, attorneys fees, and costs of
the suit.

In reply, petitioner denied that it made a second order of 24,000 boxes

NACHURA, J.:
Petitioner seeks a review of the Court of Appeals (CA) Decision[1] dated
September 21, 2006 and Resolution[2] dated February 23, 2007, which
denied petitioners motion for reconsideration. The assailed Decision
denied petitioners claim for reimbursement for the amount it paid to
respondent for the manufacture of corrugated carton boxes.
and that respondent already completed the initial order of 36,500
boxes and 14,000 boxes out of the secondorder. It maintained that
respondent only manufactured a sample of the ordered boxes and that
respondent could not have produced 14,000 boxes without the required
pre-payments.[6]

The case arose from the following antecedents:
In the first quarter of 1998, petitioner, Solar Harvest, Inc., entered into
an agreement with respondent, Davao Corrugated Carton Corporation,
During trial, petitioner presented Que as its sole witness. Que testified
that he ordered the boxes from respondent and deposited the money in
respondents account.[7] He specifically stated that, when he visited
respondents factory, he saw that the boxes had no print of petitioners
logo.[8] A few months later, he followed-up the order and was told that
the company had full production, and thus, was promised that
production of the order would be rushed. He told respondent that it
should indeed rush production because the need for the boxes was
urgent. Thereafter, he asked his partner, Alfred Ong, to cancel the
order because it was already late for them to meet their commitment to
ship the bananas to China.[9] On cross-examination, Que further
testified that China Zero Food, the Chinese company that ordered the
bananas, was sending a ship to Davao to get the bananas, but since
there were no cartons, the ship could not proceed. He said that, at that
time, bananas from Tagum Agricultural Development Corporation
(TADECO) were already there. He denied that petitioner made an
additional order of 24,000 boxes. He explained that it took three years
to refer the matter to counsel because respondent promised to pay. [10]
For respondent, Bienvenido Estanislao (Estanislao) testified that he
met Que in Davao in October 1998 to inspect the boxes and that the
latter got samples of them. In February 2000, they inspected the boxes
again and Que got more samples. Estanislao said that petitioner did
not pick up the boxes because the ship did not arrive. [11] Jaime Tan
(Tan), president of respondent, also testified that his company finished
production of the 36,500 boxes on April 3, 1998 and that petitioner
made a second order of 24,000 boxes. He said that the agreement was
for respondent to produce the boxes and for petitioner to pick them up
from the warehouse.[12] He also said that the reason why petitioner did
not pick up the boxes was that the ship that was to carry the bananas
did not arrive.[13] According to him, during the last visit of Que and
Estanislao, he asked them to withdraw the boxes immediately because
they were occupying a big space in his plant, but they, instead, told him
to sell the cartons as rejects. He was able to sell 5,000 boxes at P20.00
each for a total of P100,000.00. They then told him to apply the said
amount to the unpaid balance.
In its March 2, 2004 Decision, the Regional Trial Court (RTC) ruled that
respondent did not commit any breach of faith that would justify
rescission of the contract and the consequent reimbursement of the
amount paid by petitioner. The RTC said that respondent was able to
produce the ordered boxes but petitioner failed to obtain possession
thereof because its ship did not arrive. It thus dismissed the complaint
and respondents counterclaims, disposing as follows:
WHEREFORE, premises considered, judgment is
hereby rendered in favor of defendant and against
the plaintiff and, accordingly, plaintiffs complaint is
hereby ordered DISMISSED without
pronouncement as to cost. Defendants
counterclaims are similarly dismissed for lack of
merit.
SO ORDERED.[14]
Petitioner filed a notice of appeal with the CA.
On September 21, 2006, the CA denied the appeal for lack of
merit.[15] The appellate court held that petitioner failed to discharge its
burden of proving what it claimed to be the parties agreement with
respect to the delivery of the boxes. According to the CA, it was
unthinkable that, over a period of more than two years, petitioner did
not even demand for the delivery of the boxes. The CA added that even
assuming that the agreement was for respondent to deliver the boxes,
respondent would not be liable for breach of contract as petitioner had
not yet demanded from it the delivery of the boxes.[16]
Petitioner moved for reconsideration,[17] but the motion was denied by
the CA in its Resolution of February 23, 2007.[18]
In this petition, petitioner insists that respondent did not completely
manufacture the boxes and that it was respondent which was obliged
to deliver the boxes to TADECO.
We find no reversible error in the assailed Decision that would justify
the grant of this petition.
Petitioners claim for reimbursement is actually one for rescission (or
resolution) of contract under Article 1191 of the Civil Code, which
reads:
Art. 1191. The power to rescind obligations is
implied in reciprocal ones, in case one of the
obligors should not comply with what is incumbent
upon him.
The injured party may choose between the
fulfillment and the rescission of the obligation, with
the payment of damages in either case. He may
also seek rescission, even after he has chosen
fulfillment, if the latter should become impossible.
The court shall decree the rescission claimed,
unless there be just cause authorizing the fixing of
a period.
This is understood to be without prejudice to the
rights of third persons who have acquired the thing,
in accordance with Articles 1385 and 1388 and the
Mortgage Law.
The right to rescind a contract arises once the other party
defaults in the performance of his obligation. In determining when
default occurs, Art. 1191 should be taken in conjunction with Art. 1169
of the same law, which provides:
Art. 1169. Those obliged to deliver or to do
something incur in delay from the time the obligee
judicially or extrajudicially demands from them the
fulfillment of their obligation.
However, the demand by the creditor shall not be
necessary in order that delay may exist:
(1) When the obligation or the
law expressly so declares; or
(2) When from the nature and
the circumstances of the obligation it
appears that the designation of the time
when the thing is to be delivered or the
service is to be rendered was a
controlling motive for the establishment
of the contract; or
(3) When demand would be
useless, as when the obligor has
rendered it beyond his power to perform.
In reciprocal obligations, neither party incurs in
delay if the other does not comply or is not ready to
comply in a proper manner with what is incumbent
upon him. From the moment one of the parties
fulfills his obligation, delay by the other begins.
In reciprocal obligations, as in a contract of sale, the general rule is that
the fulfillment of the parties respective obligations should be
simultaneous. Hence, no demand is generally necessary because,
once a party fulfills his obligation and the other party does not fulfill his,
the latter automatically incurs in delay. But when different dates for
performance of the obligations are fixed, the default for each obligation
must be determined by the rules given in the first paragraph of the
present article,[19] that is, the other party would incur in delay only from
the moment the other party demands fulfillment of the formers Q. No, my question is, you went to Davao City and
obligation. Thus, even in reciprocal obligations, if the period for the placed your order there?
fulfillment of the obligation is fixed, demand upon the obligee is still
necessary before the obligor can be considered in default and before a A. I made a phone call.
cause of action for rescission will accrue.

Evident from the records and even from the allegations in the complaint
was the lack of demand by petitioner upon respondent to fulfill its Q. You made a phone call to Mr. Tan?
obligation to manufacture and deliver the boxes. The Complaint only
alleged that petitioner made a follow-up upon respondent, which, A. The first time, the first call to Mr. Alf[re]d Ong.
however, would not qualify as a demand for the fulfillment of the Alfred Ong has a contact with Mr. Tan.
obligation. Petitioners witness also testified that they made a follow-up
of the boxes, but not a demand. Note is taken of the fact that, with
respect to their claim for reimbursement, the Complaint alleged and the Q. So, your first statement that you were the one
witness testified that a demand letter was sent to respondent. Without a who placed the order is not true?
previous demand for the fulfillment of the obligation, petitioner would
not have a cause of action for rescission against respondent as the A. Thats true. The Solar Harvest made a contact
latter would not yet be considered in breach of its contractual with Mr. Tan and I deposited the money
obligation. in the bank.
Even assuming that a demand had been previously made before filing
the present case, petitioners claim for reimbursement would still fail, as
the circumstances would show that respondent was not guilty of breach Q. You said a while ago [t]hat you were the one
of contract. who called Mr. Tan and placed the order
for 36,500 boxes, isnt it?
The existence of a breach of contract is a factual matter not usually
reviewed in a petition for review under Rule 45.[20] The Court, in A. First time it was Mr. Alfred Ong.
petitions for review, limits its inquiry only to questions of law. After all, it
is not a trier of facts, and findings of fact made by the trial court,
especially when reiterated by the CA, must be given great respect if not
considered as final.[21] In dealing with this petition, we will not veer away Q. It was Mr. Ong who placed the order[,] not you?
from this doctrine and will thus sustain the factual findings of the CA,
which we find to be adequately supported by the evidence on record. A. Yes, sir.[24]

As correctly observed by the CA, aside from the pictures of the finished
boxes and the production report thereof, there is ample showing that
the boxes had already been manufactured by respondent. There is the
testimony of Estanislao who accompanied Que to the factory, attesting
that, during their first visit to the company, they saw the pile of
petitioners boxes and Que took samples thereof. Que, petitioners
witness, himself confirmed this incident. He testified that Tan pointed
the boxes to him and that he got a sample and saw that it was
blank. Ques absolute assertion that the boxes were not manufactured
is, therefore, implausible and suspicious.
Q. Is it not a fact that the cartons were ordered
through Mr. Bienvenido Estanislao?
A. Yes, sir.[25]
Moreover, assuming that respondent was obliged to deliver
the boxes, it could not have complied with such obligation. Que,
insisting that the boxes had not been manufactured, admitted that he
did not give respondent the authority to deliver the boxes to TADECO:

In fact, we note that respondents counsel manifested in court, during Q. Did you give authority to Mr. Tan to deliver
trial, that his client was willing to shoulder expenses for a these boxes to TADECO?
representative of the court to visit the plant and see the boxes.[22] Had it
been true that the boxes were not yet completed, respondent would not A. No, sir. As I have said, before the delivery, we
have been so bold as to challenge the court to conduct an ocular must have to check the carton, the
inspection of their warehouse. Even in its Comment to this petition, quantity and quality. But I have not seen
respondent prays that petitioner be ordered to remove the boxes from a single carton.
its factory site,[23] which could only mean that the boxes are, up to the
present, still in respondents premises.

Q. Are you trying to impress upon the [c]ourt that it

is only after the boxes are completed,
We also believe that the agreement between the parties was for will you give authority to Mr. Tan to
petitioner to pick up the boxes from respondents warehouse, contrary deliver the boxes to TADECO[?]
to petitioners allegation. Thus, it was due to petitioners fault that the
boxes were not delivered to TADECO. A. Sir, because when I checked the plant, I have
not seen any carton. I asked Mr. Tan to
rush the carton but not[26]
Petitioner had the burden to prove that the agreement was, in fact, for
respondent to deliver the boxes within 30 days from payment, as
alleged in the Complaint. Its sole witness, Que, was not even Q. Did you give any authority for Mr. Tan to deliver
competent to testify on the terms of the agreement and, therefore, we these boxes to TADECO?
cannot give much credence to his testimony. It appeared from the
testimony of Que that he did not personally place the order with Tan, A. Because I have not seen any of my carton.
thus:

Q. You dont have any authority yet given to Mr.

Tan?
 A. None, your Honor.[27]
Surely, without such authority, TADECO would not have allowed
respondent to deposit the boxes within its premises.
In sum, the Court finds that petitioner failed to establish a cause of
action for rescission, the evidence having shown that respondent did
not commit any breach of its contractual obligation. As previously
stated, the subject boxes are still within respondents premises. To put
a rest to this dispute, we therefore relieve respondent from the burden
of having to keep the boxes within its premises and, consequently, give
it the right to dispose of them, after petitioner is given a period of time
within which to remove them from the premises.
WHEREFORE, premises considered, the petition is DENIED. The
Court of Appeals Decision dated September 21, 2006 and Resolution
dated February 23, 2007 are AFFIRMED. In addition, petitioner is
given a period of 30 days from notice within which to cause the
removal of the 36,500
boxes from respondents warehouse. After the lapse of said period
and petitioner fails to effect such removal, respondent shall have the
right to dispose of the boxes in any manner it may deem fit.
SO ORDERED.
ANTONIO EDUARDO B. NACHURA
Associate Justice
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 160758 January 15, 2014
DEVELOPMENT BANK OF THE PHILIPPINES, Petitioner,
vs.
GUARIÑA AGRICULTURAL AND REALTY DEVELOPMENT
CORPORATION, Respondent.
DECISION
BERSAMIN, J.:
The foreclosure of a mortgage prior to the mortgagor's default on the
principal obligation is premature, and should be undone for being void
and ineffectual. The mortgagee who has been meanwhile given
possession of the mortgaged property by virtue of a writ of possession
issued to it as the purchaser at the foreclosure sale may be required to
restore the possession of the property to the mortgagor and to pay
reasonable rent for the use of the property during the intervening
period.
The Case
In this appeal, Development Bank of the Philippines (DBP) seeks the
reversal of the adverse decision promulgated on March 26, 2003 in
C.A.-G.R. CV No. 59491,1 whereby the Court of Appeals (CA) upheld
the judgment rendered on January 6, 19982 by the Regional Trial Court,
Branch 25, in Iloilo City (RTC) annulling the extra-judicial foreclosure of
the real estate and chattel mortgages at the instance of DBP because
the debtor-mortgagor, Guariña Agricultural and Realty Development
Corporation (Guariña Corporation), had not yet defaulted on its
obligations in favor of DBP.
Antecedents
In July 1976, Guariña Corporation applied for a loan from DBP to
finance the development of its resort complex situated in Trapiche,
Oton, Iloilo. The loan, in the amount of ₱3,387,000.00, was approved
on August 5, 1976.3Guariña Corporation executed a promissory note
that would be due on November 3, 1988.4 On October 5, 1976, Guariña
Corporation executed a real estate mortgage over several real
properties in favor of DBP as security for the repayment of the loan. On
May 17, 1977, Guariña Corporation executed a chattel mortgage over
the personal properties existing at the resort complex and those yet to
be acquired out of the proceeds of the loan, also to secure the
performance of the obligation.5 Prior to the release of the loan, DBP
required Guariña Corporation to put up a cash equity of ₱1,470,951.00
for the construction of the buildings and other improvements on the
resort complex.
The loan was released in several instalments, and Guariña Corporation
used the proceeds to defray the cost of additional improvements in the
resort complex. In all, the amount released totalled ₱3,003,617.49,
from which DBP withheld ₱148,102.98 as interest.6
Guariña Corporation demanded the release of the balance of the loan,
but DBP refused. Instead, DBP directly paid some suppliers of Guariña
Corporation over the latter's objection. DBP found upon inspection of
the resort project, its developments and improvements that Guariña
Corporation had not completed the construction works. 7 In a letter
dated February 27, 1978,8 and a telegram dated June 9, 1978,9 DBP
thus demanded that Guariña Corporation expedite the completion of
the project, and warned that it would initiate foreclosure proceedings
should Guariña Corporation not do so.10
Unsatisfied with the non-action and objection of Guariña Corporation,
DBP initiated extrajudicial foreclosure proceedings. A notice of
foreclosure sale was sent to Guariña Corporation. The notice was
eventually published, leading the clients and patrons of Guariña
Corporation to think that its business operation had slowed down, and
that its resort had already closed.11
On January 6, 1979, Guariña Corporation sued DBP in the RTC to
demand specific performance of the latter's obligations under the loan
agreement, and to stop the foreclosure of the mortgages (Civil Case No.
12707).12However, DBP moved for the dismissal of the complaint,
stating that the mortgaged properties had already been sold to satisfy
the obligation of Guariña Corporation at a public auction held on
January 15, 1979 at the Costa Mario Resort Beach Resort in Oton,
Iloilo.13 Due to this, Guariña Corporation amended the complaint on
February 6, 197914 to seek the nullification of the foreclosure
proceedings and the cancellation of the certificate of sale. DBP filed its
answer on December 17, 1979,15 and trial followed upon the
termination of the pre-trial without any agreement being reached by the
parties.16
In the meantime, DBP applied for the issuance of a writ of possession III
by the RTC. At first, the RTC denied the application but later granted it
upon DBP's motion for reconsideration. Aggrieved, Guariña
THE TRIAL COURT ERRED IN HOLDING THE
Corporation assailed the granting of the application before the CA on
SALES OF THE MORTGAGED PROPERTIES TO
certiorari (C.A.-G.R. No. 12670-SP entitled Guariña Agricultural and
DBP AS INVALID UNDER ARTICLES 2113 AND
Realty Development Corporation v. Development Bank of the
2141 OF THE CIVIL CODE.
Philippines). After the CA dismissed the petition for certiorari, DBP
sought the implementation of the order for the issuance of the writ of
possession. Over Guariña Corporation's opposition, the RTC issued IV
the writ of possession on June 16, 1982.17
THE TRIAL COURT GRAVELY ERRED AND
Judgment of the RTC COMMITTED [REVERSIBLE] ERROR IN
ORDERING DBP TO RETURN TO PLAINTIFF
THE ACTUAL POSSESSION AND ENJOYMENT
On January 6, 1998, the RTC rendered its judgment in Civil Case No.
OF ALL THE FORECLOSED PROPERTIES AND
12707, disposing as follows:
TO PAY PLAINTIFF REASONABLE RENTAL
FOR THE USE OF THE FORECLOSED BEACH
WHEREFORE, premises considered, the court hereby resolves that RESORT.
the extra-judicial sales of the mortgaged properties of the plaintiff by
the Office of the Provincial Sheriff of Iloilo on January 15, 1979 are null
V
and void, so with the consequent issuance of certificates of sale to the
defendant of said properties, the registration thereof with the Registry
of Deeds and the issuance of the transfer certificates of title involving THE TRIAL COURT ERRED IN AWARDING
the real property in its name. ATTORNEY'S FEES AGAINST DBP WHICH
MERELY EXERCISED ITS RIGHTS UNDER THE
MORTGAGE CONTRACT.19
It is also resolved that defendant give back to the plaintiff or its
representative the actual possession and enjoyment of all the
properties foreclosed and possessed by it. To pay the plaintiff the In its decision promulgated on March 26, 2003, 20 however, the CA
reasonable rental for the use of its beach resort during the period sustained the RTC's judgment but deleted the award of attorney's fees,
starting from the time it (defendant) took over its occupation and use up decreeing:
to the time possession is actually restored to the plaintiff.
WHEREFORE, in view of the foregoing, the Decision dated January 6,
And, on the part of the plaintiff, to pay the defendant the loan it obtained 1998, rendered by the Regional Trial Court of Iloilo City, Branch 25 in
as soon as it takes possession and management of the beach resort Civil Case No. 12707 for Specific Performance with Preliminary
and resume its business operation. Injunction is hereby AFFIRMED with MODIFICATION, in that the award
for attorney's fees is deleted.
Furthermore, defendant is ordered to pay plaintiff's attorney's fee of
₱50,000.00. SO ORDERED.21

So ORDERED.18 DBP timely filed a motion for reconsideration, but the CA denied its
motion on October 9, 2003.
Decision of the CA
Hence, this appeal by DBP.
On appeal (C.A.-G.R. CV No. 59491), DBP challenged the judgment of
the RTC, and insisted that: Issues

I DBP submits the following issues for consideration, namely:

THE TRIAL COURT ERRED AND COMMITTED WHETHER OR NOT THE DECISION OF THE COURT OF APPEALS
REVERSIBLE ERROR IN DECLARING DBP'S DATED MARCH 26, 2003 AND ITS RESOLUTION DATED OCTOBER
FORECLOSURE OF THE MORTGAGED 9, DENYING PETITIONER'S MOTION FOR RECONSIDERATION
PROPERTIES AS INVALID AND UNCALLED WERE ISSUED IN ACCORDANCE WITH LAW, PREVAILING
FOR. JURISPRUDENTIAL DECISION AND SUPPORTED BY EVIDENCE;

II WHETHER OR NOT THE HONORABLE COURT OF APPEALS

ADHERED TO THE USUAL COURSE OF JUDICIAL PROCEEDINGS
IN DECIDING C.A.-G.R. CV NO. 59491 AND THEREFORE IN
THE TRIAL COURT GRIEVOUSLY ERRED IN
ACCORDANCE WITH THE "LAW OF THE CASE DOCTRINE."22
HOLDING THE GROUNDS INVOKED BY DBP
TO JUSTIFY FORECLOSURE AS "NOT
SUFFICIENT." ON THE CONTRARY, THE Ruling
MORTGAGE WAS FORECLOSED BY EXPRESS
AUTHORITY OF PARAGRAPH NO. 4 OF THE The appeal lacks merit.
MORTGAGE CONTRACT AND SECTION 2 OF
P.D. 385 IN ADDITION TO THE QUESTIONED
PAR. NO. 26 PRINTED AT THE BACK OF THE 1.
FIRST PAGE OF THE MORTGAGE CONRACT. Findings of the CA were supported by the
evidence as well as by law and jurisprudence
DBP submits that the loan had been granted under its supervised credit
financing scheme for the development of a beach resort, and the
releases of the proceeds would be subject to conditions that included
the verification of the progress of works in the project to forestall
diversion of the loan proceeds; and that under Stipulation No. 26 of the
mortgage contract, further loan releases would be terminated and the
account would be considered due and demandable in the event of a
deviation from the purpose of the loan,23 including the failure to put up
the required equity and the diversion of the loan proceeds to other
purposes.24 It assails the declaration by the CA that Guariña
Corporation had not yet been in default in its obligations despite
violations of the terms of the mortgage contract securing the
promissory note.
Guariña Corporation counters that it did not violate the terms of the
promissory note and the mortgage contracts because DBP had fully
collected the interest notwithstanding that the principal obligation did
not yet fall due and become demandable.25
The submissions of DBP lack merit and substance.
The agreement between DBP and Guariña Corporation was a loan.
Under the law, a loan requires the delivery of money or any other
consumable object by one party to another who acquires ownership
thereof, on the condition that the same amount or quality shall be
paid.26 Loan is a reciprocal obligation, as it arises from the same cause
where one party is the creditor, and the other the debtor. 27 The
obligation of one party in a reciprocal obligation is dependent upon the
obligation of the other, and the performance should ideally be
simultaneous. This means that in a loan, the creditor should release the
full loan amount and the debtor repays it when it becomes due and
demandable.28
In its assailed decision, the CA found and held thusly:
xxxx
x x x It is undisputed that appellee obtained a loan from appellant, and
as security, executed real estate and chattel mortgages. However, it
was never established that appellee was already in default. Appellant,
in a telegram to the appellee reminded the latter to make good on its
construction works, otherwise, it would foreclose the mortgage it
executed. It did not mention that appellee was already in default. The
records show that appellant did not make any demand for payment of
the promissory note. It appears that the basis of the foreclosure was
not a default on the loan but appellee's failure to complete the project in
accordance with appellant's standards. In fact, appellant refused to
release the remaining balance of the approved loan after it found that
the improvements introduced by appellee were below appellant's
expectations.
The loan agreement between the parties is a reciprocal obligation.
Appellant in the instant case bound itself to grant appellee the loan
amount of ₱3,387,000.00 condition on appellee's payment of the
amount when it falls due. Furthermore, the loan was evidenced by the
promissory note which was secured by real estate mortgage over
several properties and additional chattel mortgage. Reciprocal
obligations are those which arise from the same cause, and in which
each party is a debtor and a creditor of the other, such that the
obligation of one is dependent upon the obligation of the other (Areola
vs. Court of Appeals, 236 SCRA 643). They are to be performed
simultaneously such that the performance of one is conditioned upon
the simultaneous fulfilment of the other (Jaime Ong vs. Court of
Appeals, 310 SCRA 1). The promise of appellee to pay the loan upon
due date as well as to execute sufficient security for said loan by way of
mortgage gave rise to a reciprocal obligation on the part of appellant to
release the entire approved loan amount. Thus, appellees are entitled
to receive the total loan amount as agreed upon and not an incomplete
amount.
The appellant did not release the total amount of the approved loan.
Appellant therefore could not have made a demand for payment of the
loan since it had yet to fulfil its own obligation. Moreover, the fact that
appellee was not yet in default rendered the foreclosure proceedings
premature and improper.
The properties which stood as security for the loan were foreclosed
without any demand having been made on the principal obligation. For
an obligation to become due, there must generally be a demand.
Default generally begins from the moment the creditor demands the
performance of the obligation. Without such demand, judicial or
extrajudicial, the effects of default will not arise (Namarco vs.
Federation of United Namarco Distributors, Inc., 49 SCRA 238; Borje
vs. CFI of Misamis Occidental, 88 SCRA 576).
xxxx
Appellant also admitted in its brief that it indeed failed to release the full
amount of the approved loan. As a consequence, the real estate
mortgage of appellee becomes unenforceable, as it cannot be entirely
foreclosed to satisfy appellee's total debt to appellant (Central Bank of
the Philippines vs. Court of Appeals, 139 SCRA 46).
Since the foreclosure proceedings were premature and unenforceable,
it only follows that appellee is still entitled to possession of the
foreclosed properties. However, appellant took possession of the same
by virtue of a writ of possession issued in its favor during the pendency
of the case. Thus, the trial court correctly ruled when it ordered
appellant to return actual possession of the subject properties to
appellee or its representative and to pay appellee reasonable rents.
However, the award for attorney's fees is deleted. As a rule, the award
of attorney's fees is the exception rather than the rule and counsel's
fees are not to be awarded every time a party wins a suit. Attorney's
fees cannot be recovered as part of damages because of the policy
that no premium should be placed on the right to litigate (Pimentel vs.
Court of Appeals, et al., 307 SCRA 38).29
xxxx
We uphold the CA.
To start with, considering that the CA thereby affirmed the factual
findings of the RTC, the Court is bound to uphold such findings, for it is
axiomatic that the trial court's factual findings as affirmed by the CA are
binding on appeal due to the Court not being a trier of facts.
Secondly, by its failure to release the proceeds of the loan in their
entirety, DBP had no right yet to exact on Guariña Corporation the
latter's compliance with its own obligation under the loan. Indeed, if a
party in a reciprocal contract like a loan does not perform its obligation,
the other party cannot be obliged to perform what is expected of it while
the other's obligation remains unfulfilled.30 In other words, the latter
party does not incur delay.31
Still, DBP called upon Guariña Corporation to make good on the
construction works pursuant to the acceleration clause written in the
mortgage contract (i.e., Stipulation No. 26),32 or else it would foreclose
the mortgages.
DBP's actuations were legally unfounded. It is true that loans are often
secured by a mortgage constituted on real or personal property to
protect the creditor's interest in case of the default of the debtor. By its
nature, however, a mortgage remains an accessory contract
dependent on the principal obligation,33 such that enforcement of the
mortgage contract will depend on whether or not there has been a
violation of the principal obligation. While a creditor and a debtor could
regulate the order in which they should comply with their reciprocal
obligations, it is presupposed that in a loan the lender should perform
its obligation - the release of the full loan amount - before it could
demand that the borrower repay the loaned amount. In other words,
Guariña Corporation would not incur in delay before DBP fully
performed its reciprocal obligation.34
Considering that it had yet to release the entire proceeds of the loan,
DBP could not yet make an effective demand for payment upon
Guariña Corporation to perform its obligation under the loan. According
to Development Bank of the Philippines v. Licuanan,35 it would only be
when a demand to pay had been made and was subsequently refused
that a borrower could be considered in default, and the lender could
obtain the right to collect the debt or to foreclose the
mortgage.1âwphi1 Hence, Guariña Corporation would not be in default
without the demand.
Assuming that DBP could already exact from the latter its compliance
with the loan agreement, the letter dated February 27, 1978 that DBP
sent would still not be regarded as a demand to render Guariña
Corporation in default under the principal contract because DBP was
only thereby requesting the latter "to put up the deficiency in the value
of improvements."36
Under the circumstances, DBP's foreclosure of the mortgage and the
sale of the mortgaged properties at its instance were premature, and,
therefore, void and ineffectual.37
Being a banking institution, DBP owed it to Guariña Corporation to
exercise the highest degree of diligence, as well as to observe the high
standards of integrity and performance in all its transactions because
its business was imbued with public interest.38 The high standards were
also necessary to ensure public confidence in the banking system, for,
according to Philippine National Bank v. Pike: 39 "The stability of banks
largely depends on the confidence of the people in the honesty and
efficiency of banks." Thus, DBP had to act with great care in applying
the stipulations of its agreement with Guariña Corporation, lest it
erodes such public confidence. Yet, DBP failed in its duty to exercise
the highest degree of diligence by prematurely foreclosing the
mortgages and unwarrantedly causing the foreclosure sale of the
mortgaged properties despite Guariña Corporation not being yet in
default. DBP wrongly relied on Stipulation No. 26 as its basis to
accelerate the obligation of Guariña Corporation, for the stipulation was
relevant to an Omnibus Agricultural Loan, to Guariña Corporation's
loan which was intended for a project other than agricultural in nature.
Even so, Guariña Corporation did not elevate the actionability of DBP's
negligence to the CA, and did not also appeal the CA's deletion of the
award of attorney's fees allowed by the RTC.1âwphi1 With the decision
of the CA consequently becoming final and immutable as to Guariña
Corporation, we will not delve any further on DBP's actionable
actuations.
2.
The doctrine of law of the case
did not apply herein
DBP insists that the decision of the CA in C.A.-G.R. No. 12670-SP
already constituted the law of the case. Hence, the CA could not decide
the appeal in C.A.-G.R. CV No. 59491 differently.
Guariña Corporation counters that the ruling in C.A.-G.R. No.
12670-SP did not constitute the law of the case because C.A.-G.R. No.
12670-SP concerned the issue of possession by DBP as the winning
bidder in the foreclosure sale, and had no bearing whatsoever to the
legal issues presented in C.A.-G.R. CV No. 59491.
Law of the case has been defined as the opinion delivered on a former
appeal, and means, more specifically, that whatever is once irrevocably
established as the controlling legal rule of decision between the same
parties in the same case continues to be the law of the case, whether
correct on general principles or not, so long as the facts on which such
decision was predicated continue to be the facts of the case before the
court.40
The concept of law of the case is well explained in Mangold v.
Bacon,41 an American case, thusly:
The general rule, nakedly and boldly put, is that legal conclusions
announced on a first appeal, whether on the general law or the law as
applied to the concrete facts, not only prescribe the duty and limit the
power of the trial court to strict obedience and conformity thereto, but
they become and remain the law of the case in all other steps below or
above on subsequent appeal. The rule is grounded on convenience,
experience, and reason. Without the rule there would be no end to
criticism, reagitation, reexamination, and reformulation. In short, there
would be endless litigation. It would be intolerable if parties litigants
were allowed to speculate on changes in the personnel of a court, or on
the chance of our rewriting propositions once gravely ruled on solemn
argument and handed down as the law of a given case. An itch to
reopen questions foreclosed on a first appeal would result in the
foolishness of the inquisitive youth who pulled up his corn to see how it
grew. Courts are allowed, if they so choose, to act like ordinary
sensible persons. The administration of justice is a practical affair. The
rule is a practical and a good one of frequent and beneficial use.
The doctrine of law of the case simply means, therefore, that when an
appellate court has once declared the law in a case, its declaration
continues to be the law of that case even on a subsequent appeal,
notwithstanding that the rule thus laid down may have been reversed in
other cases.42 For practical considerations, indeed, once the appellate
court has issued a pronouncement on a point that was presented to it
with full opportunity to be heard having been accorded to the parties,
the pronouncement should be regarded as the law of the case and
should not be reopened on remand of the case to determine other
issues of the case, like damages.43 But the law of the case, as the
name implies, concerns only legal questions or issues thereby
adjudicated in the former appeal.
The foregoing understanding of the concept of the law of the case
exposes DBP's insistence to be unwarranted.
To start with, the ex parte proceeding on DBP's application for the
issuance of the writ of possession was entirely independent from the
judicial demand for specific performance herein. In fact, C.A.-G.R. No.
12670-SP, being the interlocutory appeal concerning the issuance of
the writ of possession while the main case was pending, was not at all
intertwined with any legal issue properly raised and litigated in
C.A.-G.R. CV No. 59491, which was the appeal to determine whether
or not DBP's foreclosure was valid and effectual. And, secondly, the
ruling in C.A.-G.R. No. 12670-SP did not settle any question of law
involved herein because this case for specific performance was not a
continuation of C.A.-G.R. No. 12670-SP (which was limited to the
propriety of the issuance of the writ of possession in favor of DBP), and
vice versa.
3.
Guarifia Corporation is legally entitled to the
restoration of the possession of the resort complex
and payment of reasonable rentals by DBP
Having found and pronounced that the extrajudicial foreclosure by DBP
was premature, and that the ensuing foreclosure sale was void and
ineffectual, the Court affirms the order for the restoration of possession
to Guarifia Corporation and the payment of reasonable rentals for the
use of the resort. The CA properly held that the premature and invalid
foreclosure had unjustly dispossessed Guarifia Corporation of its
properties. Consequently, the restoration of possession and the
payment of reasonable rentals were in accordance with Article 561 of
the Civil Code, which expressly states that one who recovers,
according to law, possession unjustly lost shall be deemed for all
purposes which may redound to his benefit to have enjoyed it without
interruption.

WHEREFORE, the Court AFFIRMS the decision promulgated on

March 26, 2003; and ORDERS the petitioner to pay the costs of suit.

SO ORDERED.

LUCAS P. BERSAMIN
Associate Justice

THIRD DIVISION

G.R. No. 183486, February 24, 2016

THE HONGKONG & SHANGHAI BANKING CORPORATION,

LIMITED, Petitioner, v. NATIONAL STEEL CORPORATION AND
 CITYTRUST BANKING CORPORATION (NOW BANK OF THE
PHILIPPINE ISLANDS), Respondents.
DECISION
JARDELEZA, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of
Court. Petitioner The Hongkong & Shanghai Banking Corporation,
Limited (HSBC) filed this petition to assail the Decision of the Court of
Appeals (CA) dated November 19, 2007 (Assailed Decision) which
reversed the ruling of the Regional Trial Court, Branch 62 of Makati City
(RTC Makati) and its Resolution denying HSBC's Motion for
Reconsideration dated June 23, 2008 (Assailed Resolution).
The Facts
Respondent National Steel Corporation (NSC) entered into an Export
Sales Contract (the Contract) with Klockner East Asia Limited
(Klockner) on October 12, 1993.1 NSC sold 1,200 metric tons of prime
cold rolled coils to Klockner under FOB ST Iligan terms. In accordance
with the requirements in the Contract, Klockner applied for an
irrevocable letter of credit with HSBC in favor of NSC as the beneficiary
in the amount of US$468,000. On October 22, 1993, HSBC issued an
irrevocable and onsight letter of credit no. HKH 239409 (the Letter of
Credit) in favor of NSC.2 The Letter of Credit stated that it is governed
by the International Chamber of Commerce Uniform Customs and
Practice for Documentary Credits, Publication No. 400 (UCP 400).
Under UCP 400, HSBC as the issuing bank, has the obligation to
immediately pay NSC upon presentment of the documents listed in the
Letter of Credit.3 These documents are: (1) one original commercial
invoice; (2) one packing list; (3) one non-negotiable copy of clean on
board ocean bill of lading made out to order, blank endorsed marked
'freight collect and notify applicant;' (4) copy of Mill Test Certificate
made out 'to whom it may concern;' (5) copy of beneficiary's telex to
applicant (Telex No. 86660 Klock HX) advising shipment details
including D/C No., shipping marks, name of vessel, port of shipment,
port of destination, bill of lading date, sailing and ETA dates,
description of goods, size, weight, number of packages and value of
goods latest two days after shipment date; and (6) beneficiary's
certificate certifying that (a) one set of non-negotiable copies of
documents (being those listed above) have been faxed to applicant
(FAX No. 5294987) latest two days after shipment date; and (b) one set
of documents including one copy each of invoice and packing list, 3/3
original bills of lading plus one non-negotiable copy and three original
Mill Test Certificates have been sent to applicant by air courier service
latest two days after shipment date.4
The Letter of Credit was amended twice to reflect changes in the terms
of delivery. On November 2, 1993, the Letter of Credit was first
amended to change the delivery terms from FOB ST Iligan to FOB ST
Manila and to increase the amount to US$488,400. 5 It was
subsequently amended on November 18, 1993 to extend the expiry
and shipment date to December 8, 1993.6 On November 21, 1993,
NSC, through Emerald Forwarding Corporation, loaded and shipped
the cargo of prime cold rolled coils on board MV Sea Dragon under
China Ocean Shipping Company Bill of Lading No. HKG 266001. The
cargo arrived in Hongkong on November 25, 1993.7
NSC coursed the collection of its payment from Klockner through City
Trust Banking Corporation (City Trust). NSC had earlier obtained a
loan from City Trust secured by the proceeds of the Letter of Credit
issued by HSBC.8
On November 29, 1993, City Trust sent a collection order (Collection
Order) to HSBC respecting the collection of payment from Klockner.
The Collection Order instructed as follows: (1) deliver documents
against payment; (2) cable advice of non-payment with reason; (3)
cable advice payment; and (4) remit proceeds via TELEX.9 The
Collection Order also contained the following statement: "Subject to
Uniform Rules for the Collection of Commercial Paper Publication No.
322."10 Further, the Collection Order stated that proceeds should be
remitted to Standard Chartered Bank of Australia, Ltd., Offshore
Branch Manila (SCB-M) which was, in turn, in charge of remitting the
amount to City Trust.11 On the same date, City Trust also presented to
HSBC the following documents: (1) Letter of Credit; (2) Bill of Lading; (3)
Commercial Invoice; (4) Packing List; (5) Mill Test Certificate; (6) NSC's
TELEX to Klockner on shipping details; (7) Beneficiary's Certificate of
facsimile transmittal of documents; (8) Beneficiary's Certificate of air
courier transmittal of documents; and (9) DHL Receipt No. 669988911
and Certificate of Origin.12
On December 2, 1993, LISBC sent a cablegram to City Trust
acknowledging receipt of the Collection Order. It also stated that the
documents will be presented to "the drawee against payment subject to
UCP 322 [Uniform Rules for Collection (URC) 322] as
instructed..."13 SCB-M then sent a cablegram to ITSBC requesting the
latter to urgently remit the proceeds to its account. It further asked that
LISBC inform it "if unable to pay"14 and of the "reasons
thereof."15 Neither CityTrust nor SCB-M objected to LISBC's statement
that the collection will be handled under the Uniform Rules for
Collection (URC 322).
On December 7, 1993, HSBC responded to SCB-M and sent a
cablegram where it repeated that "this bill is being handled subject to
[URC] 322 as instructed by [the] collecting bank."16 It also informed
SCB-M that it has referred the matter to Klockner for payment and that
it will revert upon the receipt of the amount.17 On December 8, 1993,
the Letter of Credit expired.18
On December 10, 1993, HSBC sent another cablegram to SCB-M
advising it that Klockner had refused payment. It then informed SCB-M
that it intends to return the documents to NSC with all the banking
charges for its account.19 In a cablegram dated December 14, 1993,
CityTrust requested HSBC to inform it of Klockner's reason for refusing
payment so that it may refer the matter to NSC. 20 HSBC did not
respond and City Trust thus sent a follow-up cablegram to HSBC on
December 17, 1993. In this cablegram, City Trust insisted that a
demand for payment must be made from Kloclaier since the documents
"were found in compliance with LC terms and conditions." 21 HSBC
replied on the same day stating that in accordance with CityTrust's
instruction in its Collection Order, HSBC treated the transaction as a
matter under URC 322. Thus, it demanded payment from Klockner
which unfortunately refused payment for unspecified reasons. It then
noted that under URC 322, Kloclaier has no duty to provide a reason
for the refusal. Hence, HSBC requested for further instructions as to
whether it should continue to press for payment or return the
documents.22 City Trust responded that as advised by its client, HSBC
should continue to press for payment.23
Klockner continued to refuse payment and HSBC notified City Trust in
a cablegram dated January 7, 1994, that should Kloclaier still refuse to
accept the bill by January 12, 1994, it will return the full set of
documents to City Trust with all the charges for the account of the
drawer.24
Meanwhile, on January 12, 1994, City Trust sent a letter to NSC stating
that it executed NSC's instructions "to send, ON COLLECTION BASIS,
the export documents..."25 City Trust also explained that its act of
sending the export documents on collection basis has been its usual
practice in response to NSC's instructions in its transactions. 26
NSC responded to this in a letter dated January 18, 1994.27 NSC
expressed its disagreement with CityTrust's contention that it sent the
export documents to HSBC on collection basis. It highlighted that it
"negotiated with City Trust the export documents pertaining to LC No.
HKH 239409 of HSBC and it was City Trust, which wrongfully treated
the negotiation, as 'on collection basis.'"28 NSC further claimed that City
Trust used its own mistake as an excuse against payment under the
Letter of Credit. Thus, NSC argued that City Trust remains liable under
the Letter of Credit. It also stated that it presumes that City Trust has
preserved whatever right of reimbursement it may have against
HSBC.29
On January 13, 1994, CityTrust notified HSBC that it should continue to
press for payment and to hold on to the document until further notice. 30
However, Klockner persisted in its refusal to pay. Thus, on February 17,
1994, HSBC returned the documents to CityTrust.31 In a letter
accompanying the returned documents, HSBC stated that it considered
itself discharged of its duty under the transaction. It also asked for
payment of handling charges.32 In response, CityTrust sent a
cablegram to HSBC dated February 21, 1994 stating that it is "no
longer possible for beneficiary to wait for you to get paid by
applicant."33 It explained that since the documents required under the
Letter of Credit have been properly sent to HSBC, Citytrust demanded
payment from it. CityTrust also stated, for the first time in all of its
correspondence with HSBC, that "re your previous telexes, ICC
Publication No. 322 is not applicable."34 FISBC responded in
cablegram dated February 28, 1994.35 It insisted that CityTrust sent
documents which clearly stated that the collection was being made
under URC 322. Thus, in accordance with its instructions, HSBC, in the
next three months, demanded payment from Klockner which the latter
eventually refused. Flence, FISBC stated that it opted to return the
documents. It then informed CityTrust that it considered the transaction
closed save for the latter's obligation to pay the handling charges.36
Disagreeing with HSBC's position, CityTrust sent a cablegram dated
March 9, 1994.37 It insisted that HSBC should pay it in accordance with
the terms of the Letter of Credit which it issued on October 22, 1993.
Under the Letter of Credit, FISBC undertook to reimburse the
presenting bank under "ICC 400 upon the presentment of all necessary
documents."38 CityTrust also stated that the reference to URC 322 in its
Collection Order was merely in fine print. The Collection Order itself
was only pro-forma. CityTrust emphasized that the reference to URC
322 has been "obviously superseded by our specific instructions to
'deliver documents against payment/cable advice non-payment with
reason/cable advice payment/remit proceeds via telex' which was
typed in on said form."39 CityTrust also claimed that the controlling
document is the Letter of Credit and not the mere fine print on the
Collection Order.40 FISBC replied on March 10, 1994.41 It argued that
CityTrust clearly instructed it to collect payment under URC 322, thus,
CityTrust can no longer claim a contrary position three months after it
made its request. FISBC repeated that the transaction is closed except
for City Trust's obligation to pay for the expenses which HSBC
incurred.42
Meanwhile, on March 3, 1994, NSC sent a letter to HSBC where it, for
the first time, demanded payment under the Letter of Credit.43 On
March 11, 1994, the NSC sent another letter to LISBC through the
Office of the Corporate Counsel which served as its final demand.
These demands were made after approximately four months from the
expiration of the Letter of Credit.
Unable to collect from HSBC, NSC filed a complaint against it for
collection of sum of money (Complaint)44 docketed as Civil Case No.
94-2122 (Collection Case) of the RTC Makati. In its Complaint, NSC
alleged that it coursed the collection of the Letter of Credit through
CityTrust. However, notwithstanding CityTrust's complete presentation
of the documents in accordance with the requirements in the Letter of
Credit, HSBC unreasonably refused to pay its obligation in the amount
of US$485, 767.93.45
HSBC filed its Answer46 on January 6, 1995. HSBC denied any liability
under the Letter of Credit. It argued in its Answer that CityTrust
modified the obligation when it stated in its Collection Order that the
transaction is subject to URC 322 and not under UCP 400.47 It also filed
a Motion to Admit Attached Third-Party Complaint48 against CityTrust
on November 21, 1995.49 It claimed that CityTrust instructed it to collect
payment under URC 322 and never raised that it intended to collect
under the Letter of Credit.50 HSBC prayed that in the event that the
court finds it liable to NSC, CityTrust should be subrogated in its place
and be made directly liable to NSC.51 The RTC Makati granted the
motion and admitted the third party complaint. CityTrust filed its
Answer52 on January 8, 1996. CityTrust denied that it modified the
obligation. It argued that as a mere agent, it cannot modify the terms of
the Letter of Credit without the consent of all the parties.53 Further, it
explained that the supposed instruction that the transaction is subject
to URC 322 was merely in fine print in a pro forma document and was
superimposed and pasted over by a large pink sticker with different
remittance instructions.54
After a full-blown trial,55 the RTC Makati rendered a decision (RTC
Decision) dated February 23, 2000.56It found that IiSBC is not liable to
pay NSC the amount stated in the Letter of Credit. It ruled that the
applicable law is URC 322 as it was the law which CityTrust intended to
apply to the transaction. Under URC 322, HSBC has no liability to pay
when Klockner refused payment. The dispositive portion states -
WHEREFORE, premises considered, judgment is
hereby rendered as follows:
1. Plaintiffs Complaint against HSBC
is DISMISSED; and, HSBC's Counterclaims
against NSC are DENIED.
2. Ordering Third-Party Defendant CityTrust to pay
Third-Party Plaintiff HSBC the following:
chanRoblesvirtualLawlibrary
2.1 US$771.21 as actual and
consequential damages; and
2.2 P100,000 as attorney's
fees.
3. No pronouncement as to costs.
SO ORDERED.57
NSC and CityTrust appealed the RTC Decision before the CA. In its
Assailed Decision dated November 19, 2007,58 the CA reversed the
RTC Makati. The CA found that it is UCP 400 and not URC 322 which
governs the transaction. According to the CA, the terms of the Letter of
Credit clearly stated that UCP 400 shall apply. Further, the CA
explained that even if the Letter of Credit did not state that UCP 400
governs, it nevertheless finds application as this Court has consistently
recognized it under Philippine jurisdiction. Thus, applying UCP 400 and
principles concerning letters of credit, the CA explained that the
obligation of the issuing bank is to pay the seller or beneficiary of the
credit once the draft and the required documents are properly
presented. Under the independence principle, the issuing bank's
obligation to pay under the letter of credit is separate from the
compliance of the parties in the main contract. The dispositive portion
held -
WHEREFORE, in view of the foregoing, the
assailed decision is hereby REVERSED and SET
ASIDE. HSBC is ordered to pay its obligation
under the irrevocable letter of credit in the amount
of US$485,767.93 to NSC with legal interest of six
percent (6%) per annum from the filing of the
complaint until the amount is fully paid, plus
attorney's fees equivalent to 10% of the principal.
Costs against appellee HSBC.
SO ORDERED.59
HSBC filed a Motion for Reconsideration of the Assailed Decision
which the CA denied in its Assailed Resolution dated June 23, 2008.60
Hence, HSBC filed this Petition for Review on Certiorari61 before this
Court, seeking a reversal of the CA's Assailed Decision and Resolution.
In its petition, HSBC contends that CityTrust's order to collect under
URC 322 did not modify nor contradict the Letter of Credit. In fact, it is
customary practice in commercial transactions for entities to collect
under URC 322 even if there is an underlying letter of credit. Further,
City Trust acted as an agent of NSC in collecting payment and as such,
it had the authority to instruct HSBC to proceed under URC 322 and
not under UCP 400. Having clearly and expressly instructed HSBC to
collect under URC 322 and having fully intended the transaction to
proceed under such rule as shown by the series of correspondence
between City Trust and HSBC, City Trust is estopped from now
claiming that the collection was made under UCP 400 in accordance
with the Letter of Credit.
NSC, on the other hand, claims that ITSBC's obligation to pay is clear
from the terms of the Letter of Credit and under UCP 400. It asserts
that the applicable rule is UCP 400 and HSBC has no basis to argue
that CityTrust's presentment of the documents allowed LISBC to vary
the terms of their agreement.62
The Issues
The central question in this case is who among the parties bears the
liability to pay the amount stated in the Letter of Credit. This requires a
determination of which between UCP 400 and URC 322 governs the
transaction. The obligations of the parties under the proper applicable
rule will, in turn, determine their liability.
The Ruling of the Court
We uphold the CA.
The nature of a letter of credit
A letter of credit is a commercial instrument developed to address the
unique needs of certain commercial transactions. It is recognized in our
jurisdiction and is sanctioned under Article 56763 of the Code of
Commerce and in numerous jurisprudence defining a letter of credit,
the principles relating to it, and the obligations of parties arising from it.
In Bank of America, NT & SA v. Court of Appeals,64 this Court defined a
letter of credit as "...a financial device developed by merchants as a
convenient and relatively safe mode of dealing with sales of goods to
satisfy the seemingly irreconcilable interests of a seller, who refuses to
part with his goods before he is paid, and a buyer, who wants to have
control of the goods before paying."65 Through a letter of credit, a buyer
obtains the credit of a third party, usually a bank, to provide assurance
of payment.66 This, in turn, convinces a seller to part with his or her
goods even before he or she is paid, as he or she is insured by the third
party that he or she will be paid as soon as he or she presents the
documents agreed upon.67
A letter of credit generally arises out of a separate contract requiring
the assurance of payment of a third party. In a transaction involving a
letter of credit, there are usually three transactions and three parties.
The first transaction, which constitutes the underlying transaction in a
letter of credit, is a contract of sale between the buyer and the seller.
The contract may require that the buyer obtain a letter of credit from a
third party acceptable to the seller. The obligations of the parties under
this contract are governed by our law on sales.
The second transaction is the issuance of a letter of credit between the
buyer and the issuing bank. The buyer requests the issuing bank to
issue a letter of credit naming the seller as the beneficiary. In this
transaction, the issuing bank undertakes to pay the seller upon
presentation of the documents identified in the letter of credit. The
buyer, on the other hand, obliges himself or herself to reimburse the
issuing bank for the payment made. In addition, this transaction may
also include a fee for the issuing bank's services.68 This transaction
constitutes an obligation on the part of the issuing bank to perform a
service in consideration of the buyer's payment. The obligations of the
parties and their remedies in cases of breach are governed by the letter
of credit itself and by our general law on obligations, as our civil law
finds suppletory application in commercial documents.69
The third transaction takes place between the seller and the issuing
bank. The issuing bank issues the letter of credit for the benefit of the
seller. The seller may agree to ship the goods to the buyer even before
actual payment provided that the issuing bank informs him or her that a
letter of credit has been issued for his or her benefit. This means that
the seller can draw drafts from the issuing bank upon presentation of
certain documents identified in the letter of credit. The relationship
between the issuing bank and the seller is not strictly contractual since
there is no privity of contract nor meeting of the minds between
them.70 It also does not constitute a stipulation pour autrui in favor of
the seller since the issuing bank must honor the drafts drawn against
the letter of credit regardless of any defect in the underlying
contract.71 Neither can it be considered as an assignment by the buyer
to the seller-beneficiary as the buyer himself cannot draw on the
letter.72 From its inception, only the seller can demand payment under
the letter of credit. It is also not a contract of suretyship or guaranty
since it involves primary liability in the event of default.73 Nevertheless,
while the relationship between the seller-beneficiary and the issuing
bank is not strictly contractual, strict payment under the terms of a letter
of credit is an enforceable right.74 This enforceable right finds two legal
underpinnings. First, letters of credit, as will be further explained, are
governed by recognized international norms which dictate strict
compliance with its terms. Second, the issuing bank has an existing
agreement with the buyer to pay the seller upon proper presentation of
documents. Thus, as the law on obligations applies even in commercial
documents,75 the issuing bank has a duty to the buyer to honor in good
faith its obligation under their agreement. As will be seen in the
succeeding discussion, this transaction is also governed by
international customs which this Court has recognized in this
jurisdiction.76
In simpler terms, the various transactions that give rise to a letter of
credit proceed as follows: Once the seller ships the goods, he or she
obtains the documents required under the letter of credit. He or she
shall then present these documents to the issuing bank which must
then pay the amount identified under the letter of credit after it
ascertains that the documents are complete. The issuing bank then
holds on to these documents which the buyer needs in order to claim
the goods shipped. The buyer reimburses the issuing bank for its
payment at which point the issuing bank releases the documents to the
buyer. The buyer is then able to present these documents in order to
claim the goods. At this point, all the transactions are completed. The
seller received payment for his or her performance of his obligation to
deliver the goods. The issuing bank is reimbursed for the payment it
made to the seller. The buyer received the goods purchased.
Owing to the complexity of these contracts, there may be a
correspondent bank which facilitates the ease of completing the
transactions. A correspondent bank may be a notifying bank, a
negotiating bank or a confirming bank depending on the nature of the
obligations assumed.77 A notifying bank undertakes to inform the
seller-beneficiary that a letter of credit exists. It may also have the duty
of transmitting the letter of credit. As its obligation is limited to this duty,
it assumes no liability to pay under the letter of credit.78 A negotiating
bank, on the other hand, purchases drafts at a discount from the
seller-beneficiary and presents them to the issuing bank for
payment.79 Prior to negotiation, a negotiating bank has no obligation. A
contractual relationship between the negotiating bank and the
seller-beneficiary arises only after the negotiating bank purchases or
discounts the drafts.80 Meanwhile, a confirming bank may honor the
letter of credit issued by another bank or confirms that the letter of
credit will be honored by the issuing bank.81 A confirming bank
essentially insures that the credit will be paid in accordance with the
terms of the letter of credit.82 It therefore assumes a direct obligation to
the seller-beneficiary.83
Parenthetically, when banks are involved in letters of credit
transactions, the standard of care imposed on banks engaged in
business imbued with public interest applies to them. Banks have the
duty to act with the highest degree of diligence in dealing with
clients.84 Thus, in dealing with the parties in a letter of credit, banks
must also observe this degree of care.
The value of letters of credit in commerce hinges on an important
aspect of such a commercial transaction. Through a letter of credit, a
seller-beneficiary is assured of payment regardless of the status of the
underlying transaction. International contracts of sales are perfected
and consummated because of the certainty that the seller will be paid
thus making him or her willing to part with the goods even prior to
actual receipt of the amount agreed upon. The legally demandable
obligation of an issuing bank to pay under the letter of credit, and the
enforceable right of the seller-beneficiary to demand payment, are
indispensable essentials for the system of letters of credit, if it is to
serve its purpose of facilitating commerce. Thus, a touchstone of any
law or custom governing letters of credit is an emphasis on the
imperative that issuing banks respect their obligation to pay, and that
seller-beneficiaries may reasonably expect payment, in accordance
with the terms of a letter of credit.
Rules applicable to letters of credit
Letters of credit are defined and their incidences regulated by Articles
567 to 57285 of the Code of Commerce. These provisions must be read
with Article 286 of the same code which states that acts of commerce
are governed by their provisions, by the usages and customs generally
observed in the particular place and, in the absence of both rules, by
civil law. In addition, Article 5087 also states that commercial contracts
shall be governed by the Code of Commerce and special laws and in
their absence, by general civil law.
The International Chamber of Commerce (ICC)88 drafted a set of rules
to govern transactions involving letters of credit. This set of rules is
known as the Uniform Customs and Practice for Documentary Credits
(UCP). Since its first issuance in 1933, the UCP has seen several
revisions, the latest of which was in 2007, known as the UCP 600.
However, for the period relevant to this case, the prevailing version is
the 1993 revision called the UCP 400. Throughout the years, the UCP
has grown to become the worldwide standard in transactions involving
letters of credit.89 It has enjoyed near universal application with an
estimated 95% of worldwide letters of credit issued subject to the
UCP.90
In Bank of the Philippine Islands v. De Reny Fabric Industries,
Inc.,91 this Court applied a provision from the UCP in resolving a case
pertaining to a letter of credit transaction. This Court explained that the
use of international custom in our jurisdiction is justified by Article 2 of
the Code of Commerce which provides that acts of commerce are
governed by, among others, usages and customs generally observed.
Further, in Feati Bank & Trust Company v. Court of Appeals,92 this
Court ruled that the UCP should be applied in cases where the letter of
credit expressly states that it is the governing rule.93 This Court also
held in Feati that the UCP applies even if it is not incorporated into the
letter of the credit.94 The application of the UCP in Bank of Philippine
Islands and in Feati was further affirmed in Metropolitan Waterworks
and Sewerage System v. Daway95 where this Court held that "[l]etters
of credit have long been and are still governed by the provisions of the
Uniform Customs and Practice for Documentary Credit[s] of the
International Chamber of Commerce."96 These precedents highlight the
binding nature of the UCP in our jurisdiction.
Thus, for the purpose of clarity, letters of credit are governed primarily
by their own provisions,97 by laws specifically applicable to them,98 and
by usage and custom.99 Consistent with our rulings in several
cases,100 usage and custom refers to UCP 400. When the particular
issues are not covered by the provisions of the letter of credit, by laws
specifically applicable to them and by UCP 400, our general civil law
finds suppletory application.101
Applying this set of laws and rules, this Court rules that HSBC is liable
under the provisions of the Letter of Credit, in accordance with usage
and custom as embodied in UCP 400, and under the provisions of
general civil law.
HSBC's Liability
The Letter of Credit categorically stated that it is subject to UCP 400, to
wit:
Except so far as otherwise expressly stated, this
documentary credit is subject to uniform Customs
and Practice for Documentary Credits (1983
Revision), International Chamber of Commerce
Publication No. 400.102
From the moment that HSBC agreed to the terms of the Letter of Credit
- which states that UCP 400 applies - its actions in connection with the
transaction automatically became bound by the rules set in UCP 400.
Even assuming that URC 322 is an international custom that has been
recognized in commerce, this does not change the fact that HSBC, as
the issuing bank of a letter of credit, undertook certain obligations
dictated by the terms of the Letter of Credit itself and by UCP 400.
In Feati, this Court applied UCP 400 even when there is no express
stipulation in the letter of credit that it governs the transaction.103 On the
strength of our ruling in Feati, we have the legal duty to apply UCP 400
in this case independent of the parties' agreement to be bound by it.
UCP 400 states that an irrevocable credit payable on sight, such as the
Letter of Credit in this case, constitutes a definite undertaking of the
issuing bank to pay, provided that the stipulated documents are
presented and that the terms and conditions of the credit are complied
with.104 Further, UCP 400 provides that an issuing bank has the
obligation to examine the documents with reasonable care.105Thus,
when City Trust forwarded the Letter of Credit with the attached
documents to LISBC, it had the duty to make a determination of
whether its obligation to pay arose by properly examining the
documents.
In its petition, HSBC argues that it is not UCP 400 but URC 322 that
should govern the transaction.106URC 322 is a set of norms compiled
by the ICC.107 It was drafted by international experts and has been
adopted by the ICC members. Owing to the status of the ICC and the
international representation of its membership, these rules have been
widely observed by businesses throughout the world. It prescribes the
collection procedures, technology, and standards for handling
collection transactions for banks.108Under the facts of this case, a bank
acting in accordance with the terms of URC 322 merely facilitates
collection. Its duty is to forward the letter of credit and the required
documents from the entity seeking payment to another entity which has
the duty to pay. The bank incurs no obligation other than as a collecting
agent. This is different in the case of an issuing bank acting in
accordance with UCP 400. In this case, the issuing bank has the duty
to pay the amount stated in the letter of credit upon due presentment.
HSBC claims that while UCP 400 applies to letters of credit, it is also
common for beneficiaries of such letters to seek collection under URC
322. HSBC further claims that URC 322 is an accepted custom in
commerce.109
HSBC's argument is without merit. We note that HSBC failed to present
evidence to prove that URC 322 constitutes custom and usage
recognized in commerce. Neither was there sufficient evidence to
prove that beneficiaries under a letter of credit commonly resort to
collection under URC 322 as a matter of industry practice. HSBC
claims that the testimony of its witness Mr. Lincoln MacMahon (Mr.
MacMahon) suffices for this purpose.110 However, Mr. MacMahon was
not presented as an expert witness capable of establishing the existing
banking and commercial practice relating to URC 322 and letters of
credit. Thus, this Court cannot hold that URC 322 and resort to it by
beneficiaries of letters of credit are customs that demand application in
this case.111
HSBC's position that URC 322 applies, thus allowing it, the issuing
bank, to disregard the Letter of Credit, and merely demand collection
from Klockner cannot be countenanced. Such an argument effectively
asks this Court to give imprimatur to a practice that undermines the
value and reliability of letters of credit in trade and commerce. The
entire system of letters of credit rely on the assurance that upon
presentment of the proper documents, the beneficiary has an
enforceable right and the issuing bank a demandable obligation, to pay
the amount agreed upon. Were a party to the transaction allowed to
simply set this aside by the mere invocation of another set of norms
related to commerce - one that is not established as a custom that is
entitled to recognition by this Court - the sanctity of letters of credit will
be jeopardized. To repeat, any law or custom governing letters of credit
should have, at its core, an emphasis on the imperative that issuing
banks respect their obligation to pay and that seller-beneficiaries may
reasonably expect payment in accordance with the terms of a letter of
credit. Thus, the CA correctly ruled, to wit:
At this juncture, it is significant to stress that an
irrevocable letter of credit cannot, during its lifetime,
be cancelled or modified without the express
permission of the beneficiary. Not even partial
payment of the obligation by the applicant-buyer
would amend or modify the obligation of the
issuing bank. The subsequent correspondences of
[CityTrust] to HSBC, thus, could not in any way
affect or amend the letter of credit, as it was not a
party thereto. As a notifying bank, it has nothing to
do with the contract between the issuing bank and
the buyer regarding the issuance of the letter of
credit.112 (Citations omitted)
The provisions in the Civil Code and our jurisprudence apply
suppletorily in this case.113 When a party knowingly and freely binds
himself or herself to perform an act, a juridical tie is created and he or
she becomes bound to fulfill his or her obligation. In this case, HSBC's
obligation arose from two sources. First, it has a contractual duty to
Klockner whereby it agreed to pay NSC upon due presentment of the
Letter of Credit and the attached documents. Second, it has an
obligation to NSC to honor the Letter of Credit. In complying with its
obligation, HSBC had the duty to perform all acts necessary. This
includes a proper examination of the documents presented to it and
making a judicious inquiry of whether City Trust, in behalf of NSC,
made a due presentment of the Letter of Credit.
Further, as a bank, HSBC has the duty to observe the highest
degree of diligence. In all of its transactions, it must exercise the
highest standard of care and must fulfill its obligations with utmost
fidelity to its clients. Thus, upon receipt of City Trust's Collection Order
with the Letter of Credit, HSBC had the obligation to carefully examine
the documents it received. Had it observed the standard of care
expected of it, HSBC would have discovered that the Letter of Credit is
the very same document which it issued upon the request of Klockner,
its client. Had LISBC taken the time to perform its duty with the highest
degree of diligence, it would have been alerted by the fact that the
documents presented to it corresponded with the documents stated in
the Letter of Credit, to which HSBC freely and knowingly agreed. HSBC
ought to have noticed the discrepancy between City Trust's request for
collection under URC 322 and the terms of the Letter of Credit.
Notwithstanding any statements by City Trust in the Collection Order as
to the applicable rules, FISBC had the independent duty of ascertaining
whether the presentment of the Letter of Credit and the attached
documents gave rise to an obligation which it had to Klockner (its client)
and NSC (the beneficiary). Regardless of any error that City Trust may
have committed, the standard of care expected of LISBC dictates that it
should have made a separate determination of the significance of the
presentment of the Letter of Credit and the attached documents. A
bank exercising the appropriate degree of diligence would have, at the
very least, inquired if NSC was seeking payment under the Letter of
Credit or merely seeking collection under URC 322. In failing to do so,
HSBC fell below the standard of care imposed upon it.
This Court therefore rules that CityTrust's presentment of the Letter of
Credit with the attached documents in behalf of NSC, constitutes due
presentment. Under the terms of the Letter of Credit, LISBC undertook
to pay the amount of US$485,767.93 upon presentment of the Letter of
Credit and the required documents.114 In accordance with this
agreement, NSC, through CityTrust, presented the Letter of Credit and
the following documents: (1) Letter of Credit; (2) Bill of Lading; (3)
Commercial Invoice; (4) Packing List; (5) Mill Test Certificate; (6) NSC's
TELEX to Klockner on shipping details; (7) Beneficiary's Certificate of
facsimile transmittal of documents; (8) Beneficiary's Certificate of air
courier transmittal of documents; and (9) DHL Receipt No. 669988911
and Certificate of Origin.115
In transactions where the letter of credit is payable on sight, as in this
case, the issuer must pay upon due presentment. This obligation is
imbued with the character of definiteness in that not even the defect or
breach in the underlying transaction will affect the issuing bank's
liability.116 This is the Independence Principle in the law on letters of
credit. Article 17 of UCP 400 explains that under this principle, an
issuing bank assumes no liability or responsibility "for the form,
sufficiency, accuracy, genuineness, falsification or legal effect of any
documents, or for the general and/or particular conditions stipulated in
the documents or superimposed thereon..." Thus, as long as the proper
documents are presented, the issuing bank has an obligation to pay
even if the buyer should later on refuse payment. Hence, Klockner's
refusal to pay carries no effect whatsoever on HSBC's obligation to pay
under the Letter of Credit. To allow HSBC to refuse to honor the Letter
of Credit simply because it could not collect first from Klockner is to
countenance a breach of the Independence Principle.
HSBC's persistent refusal to comply with its obligation notwithstanding
due presentment constitutes delay contemplated in Article 1169 of the
Civil Code.117 This provision states that a party to an obligation incurs in
delay from the time the other party makes a judicial or extrajudicial
demand for the fulfillment of the obligation. We rule that the due
presentment of the Letter of Credit and the attached documents is
tantamount to a demand. IISBC incurred in delay when it failed to fulfill
its obligation despite such a demand.
Under Article 1170 of the Civil Code,118 a party in delay is liable for
damages. The extent of these damages pertains to the pecuniary loss
duly proven.119 In this case, such damage refers to the losses which
NSC incurred in the amount of US$485,767.93 as stated in the Letter of
Credit. We also award interest as indemnity for the damages incurred
in the amount of six percent (6%) from the date of NSC's extrajudicial
demand.120 An interest in the amount of six percent (6%) is also
awarded from the time of the finality of this decision until full
payment.121
Having been remiss in its obligations under the applicable law, rules
and jurisprudence, HSBC only has itself to blame for its consequent
liability to NSC.
However, this Court finds that there is no basis for the CA's grant of
attorney's fees in favor of NSC. Article 2208 of the Civil
Code122 enumerates the grounds for the award of attorney's fees. This
Court has explained that the award of attorney's fees is an exception
rather than the rule.123 The winning party is not automatically entitled to
attorney's fees as there should be no premium on the right to
litigate.124While courts may exercise discretion in granting attorney's
fees, this Court has stressed that the grounds used as basis for its
award must approximate as closely as possible the enumeration in
Article 2208.125Its award must have sufficient factual and legal
justifications.126 This Court rules that none of the grounds stated in
Article 2208 are present in this case. NSC has not cited any specific
ground nor presented any particular fact to warrant the award of
attorney's fees.
CityTrust's Liability
When NSC obtained the services of CityTrust in collecting under the
Letter of Credit, it constituted CityTrust as its agent. Article 1868 of the
Civil Code states that a contract of agency exists when a person binds
himself or herself "to render some service or to do something in
representation or on behalf of another, with the consent or authority of
the latter." In this case, CityTrust bound itself to collect under the Letter
of Credit in behalf of NSC.
One of the obligations of an agent is to carry out the agency in
accordance with the instructions of the principal. In ascertaining NSC's
instructions to CityTrust, its letter dated January 18, 1994 is
determinative. In this letter, NSC clearly stated that it "negotiated with
CityTrust the export documents pertaining to LC No. HKH 239409 of
HSBC and it was CityTrust which wrongfully treated the negotiation as
'on collection basis.'"128 HSBC persistently communicated with
CityTrust and consistently repeated that it will proceed with collection
under URC 322. At no point did CityTrust correct HSBC or seek
clarification from NSC. In insisting upon its course of action, CityTrust
failed to act in accordance with the instructions given by NSC, its
principal. Nevertheless while this Court recognizes that CityTrust
committed a breach of its obligation to NSC, this carries no implications
on the clear liability of HSBC. As this Court already mentioned, HSBC
had a separate obligation that it failed to perform by reason of acts
independent of CityTrust's breach of its obligation under its contract of
agency. If CityTrust has incurred any liability, it is to its principal NSC.
However, NSC has not raised any claim against CityTrust at any point
in these proceedings. Thus, this Court cannot make any finding of
liability against City Trust in favor of NSC.chanrobleslaw
WHEREFORE, in view of the foregoing, the Assailed Decision dated
November 19, 2007 is AFFIRMED to the extent that it orders HSBC to
pay NSC the amount of US$485,767.93. HSBC is also liable to pay
legal interest of six percent (6%) per annum from the time of
extrajudicial demand. An interest of six percent (6%) is also awarded
from the time of the finality of this decision until the amount is fully paid.
We delete the award of attorney's fees. No pronouncement as to cost.
SO ORDERED.cralawlawlibrary
Velasco, Jr., (Chairperson), Peralta, Perez, and Reyes, JJ.,
concur.chanroblesvirtuallawlibrary
DECISION
LEONEN, J.:
For resolution are Petitions for Review on Certiorari1 assailing the
Decision2 dated January 13, 2015 and Resolution3 dated September 1,
2015 of the Court of Appeals Manila in CA-G.R. SP No. 135116.4 The
case stems from the enforcement of the Court of Appeals Decision
dated May 4, 2010, which attained finality on July 25, 2011.5
A Complaint for "illegal suspension, non-payment of salaries,
deprivation of medical benefits, life insurance and other benefits,
damages and attorney's fees"6 was filed by Victor S. Limlingan
(Limlingan) and Emmanuel A. Leyco (Leyco) against Asian Institute of
Management (AIM).7
In the Decision8 dated February 26, 2008, Labor Arbiter Napoleon M.
Menese declared that Limlingan and Leyco's suspension was illegal
and ordered AIM to pay the salaries and benefits withheld during the
suspension, as well as 10% of the amount for attorney's fees:
chanRoblesvirtualLawlibrary
WHEREFORE, all foregoing premises considered,
judgment is hereby rendered, declaring that the
one (1) year suspension of complainants VICTOR
S. LIMLINGAN and EMMANUEL A. LEYCO was
illegal. Accordingly, respondent ASIAN
INSTITUTE OF MANAGEMENT, INC. (AIM) is
hereby ordered to pay aforenamed complainants
their withheld salaries and other benefits resulting
from the said illegal suspension, plus Ten percent
(10%) thereof as and for Attorney's fees.
Respondent AIM is also ordered to delete from
complainants' employment record the aforesaid
penalty of suspension.

....

SO ORDERED.9ChanRoblesVirtualawlibrary

In its July 4, 2008 Resolution,10 the National Labor Relations

Commission modified the Labor Arbiter's Decision as follows:
chanRoblesvirtualLawlibrary

WHEREFORE, premises considered, the instant

appeal is hereby PARTIALLY GRANTED. The
decision of the Labor Arbiter is
hereby MODIFIED in finding
complainants-appellees suspension is valid for six
(6) months only. Consequently,
respondent-appellant ASIAN INSTITUTE OF
MANAGEMENT is hereby directed to pay the
complainants-appellees their salaries half (1/2)
year salary and the amount of P50,000.00 each as
indemnity in form of nominal damages for their
failure to observe complainants-appellees' right to
due process.

SECOND DIVISION SO ORDERED.11 (Emphasis in the original)

Limlingan and Leyco and AIM filed their respective motions for
G.R. No. 220481, February 17, 2016 reconsideration,12 which were denied in the National Labor Relations
Commission Resolution13 dated October 13, 2008:
VICTOR S. LIMLINGAN AND EMMANUEL A. chanRoblesvirtualLawlibrary
LEYCO, Petitioners, v. ASIAN INSTITUTE OF MANAGEMENT,
ACCORDINGLY, let both Motions for
INC., Respondent.
Reconsideration be, as they are
hereby, DENIED for lack of merit. The resolution
G.R. No. 220503
dated 04 July 2008 STANDS undisturbed.
ASIAN INSTITUTE OF MANAGEMENT, INC., Petitioner, v. VICTOR S.
No further motion of similar nature shall be
LIMLINGAN AND EMMANUEL A. LEYCO, Respondents.
entertained.

SO ORDERED.14 (Emphasis in the original)
Both parties appealed the Commission's Resolution to the Court of
Appeals through certiorari.15 On May 4, 2010, the Court of Appeals
promulgated the Decision16 modifying the findings of the National Labor
Relations Commission:
chanRoblesvirtualLawlibrary
WHEREFORE, the Petition is partially granted.
The Resolution, dated July 4, 2008, of the NLRC is
modified in that the penalty of suspension is
deleted and instead, the penalty of formal
reprimand is imposed on petitioners. Respondent
AIM is hereby directed to pay petitioners their
one-year salaries corresponding to the period
during which they were suspended and
Php50,000.00 each as indemnity in the form of
nominal damages for its failure to observe the
procedure laid down in the Policy Manual for
Faculty for disciplining faculty members for
dysfunctional behavior.
SO ORDERED.17 (Emphasis in the original)
The separate motions for reconsideration of Limlingan and Leyco and
of AIM were denied by the Court of Appeals.18
The parties filed their respective Petitions for Review before this
court.19 In the Resolution20 dated November 17, 2010, the Petitions
were consolidated, and AIM's Petition docketed as G.R. No. 193598
was denied.21 Thus:
chanRoblesvirtualLawlibrary
The Court, after a review of the records, further
resolves to DENY the petition for review on
certiorari in G.R. No. 193598 for failure to show
that a reversible error was committed by the CA in
its Decision dated 4 May 2010 and Resolution
dated 27 August 2010 in CA-G.R. SP No. 106714
when it held that respondents' acts of issuing and
disseminating the 27 February 2007 letter cannot
be considered as dysfunctional behaviour under
the Institute's Policy Manual for Faculty and
serious misconduct and willful breach of trust and
confidence under Article 282 of the Labor Code,
thus warranting the reduction of the penalty of
suspension to formal reprimand.22 (Emphasis in
the original)
On January 31, 2011, this court issued the Resolution23 likewise
denying Limlingan and Leyco's Petition:
chanRoblesvirtualLawlibrary
The Court, after a review of the records, resolves
to DENY the petition for review on certiorari in G.R.
No. 193586 for failure to show that a reversible
error was committed by the Court of Appeals in its
Decision dated 4 May 2010 and Resolution dated
27 August 2010 in CA-G.R. SP No. 106714
considering that petitioners failed to convince the
Court that no valid and compelling reasons existed
which excused the belated filing of respondents'
appeal before the National Labor Relations
Commission; and that their act of releasing the
subject demand letter and the manner by which
copies of the same were distributed merited the
imposition upon them of the penalty of a formal
reprimand.24(Emphasis in the original)
On March 28, 2011 and June 8, 2011, this court denied with finality the
separate motions for reconsideration of both parties. 25 The Court of
Appeals' May 4, 2010 Decision in CA-G.R. SP No. 106714 then
became final and executory on July 25, 2011.26
Limlingan and Leyco filed a Motion for Issuance of Writ of Execution
and a Motion for Re-computation of Monetary Award before the
National Labor Relations Commission.27 AIM filed a Manifestation
stating that it had already computed Limlingan and Leyco's monetary
award and tendered payment based on that computation.28 A
pre-execution conference was held on November 6, 2013; however,
"the parties failed to reach an agreement."29
On November 29, 2013, the Labor Arbiter issued an Order,30 which
reads:
chanRoblesvirtualLawlibrary
WHEREFORE, premises considered, this Labor
Arbiter hereby declares that the additional
computation submitted by complainants as stated
above is allowed, accepted, and to be added to the
computation submitted by the CEU thereby
respondent ASIAN INSTITUTE OF
MANAGEMENT, INC. (AIM) is ordered to pay
complainants, VICTOR S. LIMLINGAN and
EMMANUEL A. LEYCO the amount of
P3,034,586.45 and P1,984,765.19, respectively,
immediately, representing their unpaid salaries
and benefits, court order indemnification, and legal
interests as computed plus the ten (10%) percent
attorney's fees.
SO ORDERED.31 (Emphasis in the original)
The parties elevated the case to the National Labor Relations
Commission. The Commission allowed in Limlingan and Leyco's
computation their (a) salaries during the period of suspension; and (b)
book/medical allowance.32 However, the Commission reduced the
amounts awarded by the Labor Arbiter.33 It also allowed payment for
health insurance premiums, but only for those amounts supported by
documentary evidence.34 The Commission likewise found that there
was basis to impose legal interest at the rate of 12% per annum on the
monetary award counted from the date of finality of the Court of
Appeals Decision.35 It ruled that the award of attorney's fees had
attained finality as AIM did not appeal the issue before.36
The dispositive portion of the National Labor Relations Commission
Resolution37 provides:
chanRoblesvirtualLawlibrary
WHEREFORE, premises considered, the instant
petition is PARTIALLY GRANTED. The 29
November 2013 Order of Labor Arbiter Quintin B.
Cueto III is hereby MODIFIED as follows:
1. The award of 13th month pay is hereby
reduced to P94,502.40 (Limlingan) and
P50,199.77 (Leyco), respectively;
2. The award of P80,000.00 as health
insurance premium in favor of private
respondent Limlingan is reduced to
P19,520.80;
3. The Variable Compensation Faculty
Share in Executive Program Revenues
is reduced to P54,411.27 each.
4. The award of interest at the rate of 6%
per annum counted from the date of
their illegal suspension until the finality
of the Court of Appeals' Decision is
deleted.
 The rest of the Order stands.
The Computation and Examination Unit is directed
to compute private respondents' monetary awards
in accordance with this judgment.
SO ORDERED.38 (Emphasis in the original)
AIM filed before the Court of Appeals a Petition for Certiorari assailing
the National Labor Relations Commission Resolutions dated
December 27, 2013 and February 19, 2014.39
In the Decision dated January 13, 2015, the Court of Appeals partly
granted the Petition.40 The Court of Appeals modified the rate of
interest applicable to the award.41 The dispositive portion of the Court
of Appeals Decision reads:
chanRoblesvirtualLawlibrary
WHEREFORE, the present Petition is PARTLY
GRANTED. The assailed National Labor Relations
Commission Third Division's Resolutions dated
December 27, 2013 and February 19, 2014,
respectively, in LER Case No. 12-361-13 (NLRC
NCR Case No. 09-10148-07) are AFFIRMED with
the only MODIFICATION that the private
respondents are only entitled to the legal interests
at the rate of 6% per annum from the time the
Decision of the Court of Appeals (in CA-G.R. No.
106714, promulgated on May 4, 2010) became
final until full satisfaction thereof. We, however,
affirm in all other aspects.
SO ORDERED.42 (Emphasis in the original)
The Court of Appeals denied the parties separate motions for
reconsideration.43
For the second time, the parties come before this court, asking that we
resolve the remaining issues in this case. They assail the Court of
Appeals Decision dated January 13, 2015 and Resolution dated
September 1, 2015 in CA-G.R. SP No. 135116.
In G.R. No. 220481, Limlingan and Leyco raise the lone issue of
whether they are entitled to interest at the rate of 12% per annum
computed from the finality of the Court of Appeals' May 4, 2010
Decision (or on July 25, 2011) up to June 30, 2013, and 6% per annum
from July 1, 2013 until full satisfaction of the award.44
According to Limlingan and Leyco:
chanRoblesvirtualLawlibrary
[A] careful reading of the case of Nacar v. Gallery
Frames, et al. would show that the Honorable
Supreme Court computed the amount of legal
interests by applying the interest rate of 12% per
annum for the period beginning from the finality of
the Decision until 30 June 2013 and the legal
interest rate of 6% from 1 July 2013 until full
settlement of the monetary
award.45ChanRoblesVirtualawlibrary
Limlingan and Leyco argue that the Court of Appeals erred when it
ruled that they were only entitled to interest at the rate of 6% per annum
from the finality of the May 4, 2010 Decision of the Court of Appeals
until full satisfaction of the award.46
In G.R. No. 220503, AIM argues the following:
First, Leyco is not entitled to the award of health insurance premium in
the amount of P44,725.32.47 He is not entitled to the additional amount
of P5,550.00 allegedly incurred on September 2, 2007 for emergency
medical services.48 The suspension of Leyco's health insurance
coverage was justified as he was then suspended for the infraction he
committed against AIM.49
AIM argues that Limlingan and Leyco are only entitled to the amounts
of premium that were supposed to be withheld by AIM and remitted to
the health maintenance organization Philamcare.50 Instead, they are
only entitled to the premium of P9,760.40 multiplied by the number of
the beneficiary and his or her dependents.51 Leyco has three (3)
dependents — a wife and two children — and therefore, his premiums
should be computed as: P9,760.40 x 4 = P39,041.60.52
However, while suspended, Leyco requested that his Philamcare
subscription be reinstated and that the cost of the premium be charged
to his account.53 Leyco paid only P39,225.32, as evidenced by Official
Receipt No. 0156174-A.54
Second, Limlingan and Leyco are not entitled to legal interest from the
time the Court of Appeals' May 4, 2010 Decision became final until its
full satisfaction since AIM already tendered payment of the judgment
award.55
Moreover, AIM has sufficiently proven . . . that the contested amounts
were properly computed and are amply supported by
evidence.56 Limlingan and Leyco did not offer any basis for their
objection to the computation of the amounts.57 AIM argues that
Limlingan and Leyco's statements are merely self-serving and
inadmissible.58
AIM argues that Limlingan and Leyco contributed to the delay in the
satisfaction of the Court of Appeals May 4, 2010 Decision. 59 According
to AIM, "[t]o adjudge the Institute liable for legal interest when it is
respondents themselves who partly caused the delay in the satisfaction
of the Honorable Court of Appeals' Decision and Resolution is definitely
unjust and unconscionable."60
However, AIM argues that assuming it is liable for legal interest, "it
would be unjust to collect the entire amount from [it.]"61 Legal interest
should be collected only from the time of the finality of this court's
Decision, which affirmed the Court of Appeals' May 4, 2010 Decision,
up to the tender of payment on April 17, 2013.62
Third, Limlingan and Leyco are not entitled to attorney's fees since the
Court of Appeals Decision never granted them such award. 63
AIM claims that the award of attorney's fees was removed from the
Labor Arbiter's Decision when the National Labor Relations
Commission promulgated its Decision dated July 4, 2008 modifying the
award of the Labor Arbiter.64 There was also no award of attorney's
fees in the Court of Appeals' May 4, 2010 Decision.65 "[N]owhere in the
said Decisions can be found any award of attorney's fees. Indeed, '[a]n
award of attorney's fees without justification is a conclusion without a
premise, its basis being improperly left to speculation and conjecture'
[.]"66
In assailing the Court of Appeals Decision, AIM argues that "to allow
the inclusion of [such] . . . award would be to disregard the rule on strict
adherence to and the immutability of judgment."67
In the interest of finally settling the case between the parties, we
resolve the following issues:
First, whether Emmanuel A. Leyco is entitled to the award of health
insurance premiums in the amount of P44,725.32;
Second, whether the Court of Appeals erred in awarding legal interest
at the rate of 6% per annum from the date the Court of Appeals' May 4,
2010 Decision in CA-G.R. No. 106714 became final until its full
satisfaction; and
Lastly, whether Victor S. Limlingan and Emmanuel A. Leyco are
entitled to attorney's fees.
At the outset, we consolidate the Petitions as they involve the same
parties and interrelated issues. G.R. No. 220503 is consolidated with
G.R. No. 220481 to avoid conflicting decisions and to save time and
resources of this court. G.R. No. 220503 is referred to the
member-in-charge of G.R. No. 220481, the lower-numbered case.
As to the first substantive issue, we rule that the Court of Appeals did
not commit reversible error when it held that Leyco is entitled to the
amount of P44,725.32 for health insurance premiums.
That Limlingan and Leyco are entitled to the payment of health
insurance premiums is not contested. As to the amount due to Leyco,
all three tribunals — the Labor Arbiter, the National Labor Relations
Commission, and the Court of Appeals — found that Leyco had
sufficiently proven that he was entitled to P44,725.32.
That the amount respondents shall now pay has
greatly increased is a consequence that it cannot
avoid as it is the risk that it ran when it continued to
seek recourses against the Labor Arbiter's
decision.72ChanRoblesVirtualawlibrary
With regard to the proper rate of legal interest, Nacar laid down the
guidelines for the imposition of legal interest:
chanRoblesvirtualLawlibrary
To recapitulate and for future guidance, the
guidelines laid down in the case of Eastern
Shipping Lines are accordingly modified to
embody BSP-MB Circular No. 799, as follows:

As held by the Court of Appeals: I. When an obligation, regardless of its source, i.e.,
chanRoblesvirtualLawlibrary law, contracts, quasi- contracts, delicts or
quasi-delicts is breached, the contravenor can be
We are more convinced with the claims of Leyco held liable for damages. The provisions under Title
(which were contained in the December 27, 2013 XVIII on "Damages" of the Civil Code govern in
Resolution of the NLRC) that, apart from the determining the measure of recoverable damages.
P39,225.32 he had previously paid, he also spent
P5,500.00 for his emergency medical expenses on II. With regard particularly to an award of interest in
September 2, 2007. We find more in accord with the concept of actual and compensatory damages,
law his argument that he would not have been the rate of interest, as well as the accrual thereof,
forced to pay for the said additional expenses had is imposed, as follows:
the petitioner not suspended his coverage without
notice. Thusly, We find nothing irregular when the
NLRC, after a review of the pertinent documents
1. When the obligation is breached, and it
consists in the payment of a sum of
on Record, allowed the award of P44,725.32 to
money, i.e., a loan or forbearance of
Leyco.68ChanRoblesVirtualawlibrary
money, the interest due should be that
Issues as to the correct computation of monetary awards are questions which may have been stipulated in
of fact that is beyond the scope of this court's review under Rule 45 of writing. Furthermore, the interest due
the Rules of Court, considering that it "will require a re-examination and shall itself earn legal interest from the
calibration of the evidence on record."69 This court does not see any time it is judicially demanded. In the
reason to overturn the factual findings of the Labor Arbiter, the National absence of stipulation, the rate of
Labor Relations Commission, and the Court of Appeals with regard to interest shall be 6% per annum to be
this issue. It is settled that: computed from default, i.e., from judicial
chanRoblesvirtualLawlibrary or extrajudicial demand under and
subject to the provisions of Article 1169
the findings of facts and conclusion of the NLRC of the Civil Code.
are generally accorded not only great weight and
respect but even clothed with finality and deemed
binding on this Court as long as they are supported
2. When an obligation, not constituting a
loan or forbearance of money, is
by substantial evidence. This Court finds no basis
breached, an interest on the amount of
for deviating from said doctrine without any clear
damages awarded may be imposed at
showing that the findings of the Labor Arbiter, as
the discretion of the court at the rate of
affirmed by the NLRC, are bereft of substantiation.
6% per annum. No interest, however,
Particularly when passed upon and upheld by the
shall be adjudged on unliquidated claims
Court of Appeals, they are binding and conclusive
or damages, except when or until the
upon the Supreme Court and will not normally be
demand can be established with
disturbed.70 (Citations omitted)
reasonable certainty. Accordingly,
On the second issue, we rule in favor of Limlingan and Leyco and grant where the demand is established with
their Petition. reasonable certainty, the interest shall
begin to run from the time the claim is
Limlingan and Leyco pray for the modification of the assailed Decision made judicially or extrajudicially (Art.
in view of this court's Decision in Nacar v. Gallery Frames.71 In contrast, 1169, Civil Code), but when such
AIM claims that Limlingan and Leyco are not entitled to legal interest certainty cannot be so reasonably
since it has already tendered payment and the delay in the full established at the time the demand is
satisfaction of the award is Limlingan and Leyco's fault. Assuming that made, the interest shall begin to run only
this court finds it liable for legal interest, AIM prays that legal interest be from the date the judgment of the court
collected only from the time of the finality of this court's Decision, which is made (at which time the quantification
affirmed the Court Appeals' May 4, 2010 Decision, until AIM's tender of of damages may be deemed to have
payment on April 17, 2013. been reasonably ascertained). The
actual base for the computation of legal
We cannot accept AIM's arguments. The legal interest imposed is but a interest shall, in any case, be on the
consequence of AIM's participation in prolonging the proceedings amount finally adjudged.
between the parties:
chanRoblesvirtualLawlibrary 3. When the judgment of the court
awarding a sum of money becomes final
 and executory, the rate of legal interest, order to seek redress of his grievances, pursuant
whether the case falls under paragraph to Article 111 of the Labor Code and following our
1 or paragraph 2, above, shall be ruling in Exodus International Construction
6% per annum from such finality until its Corporation v. Biscocho, to wit:
satisfaction, this interim period being chanRoblesvirtualLawlibrary
deemed to be by then an equivalent to a
forbearance of credit. In Rutaquio v. National Labor
Relations Commission, this
Court held that:
And, in addition to the above, judgments that have chanRoblesvirtualLawlibrary
become final and executory prior to July 1, 2013,
shall not be disturbed and shall continue to be It is
implemented applying the rate of interest fixed settled
therein.73 (Emphasis in the original, citation that in
omitted) actions
for
On July 25, 2011, the Court of Appeals' May 4, 2010 Decision became recovery
final and executory and was recorded in the Book of Entries of of wages
Judgments.74 Prior to Nacar and Bangko Sentral ng Pilipinas Monetary or where
Board Resolution No. 796 dated May 16, 2013, the rate of legal interest an
was pegged at 12% per annum from finality of judgment until its employee
satisfaction, "this interim period being deemed to be by then an was
equivalent to a forbearance of credit."75 forced to
litigate
Similar to this case, Nacar was already in the execution stage and the and, thus,
resolution awarding backwages and separation pay had attained incur
finality prior to the issuance of Bangko Sentral ng Pilipinas Resolution. expenses
Applying the guidelines discussed above, this court in Nacar imposed to protect
the legal interest of 12% per annum of the total monetary awards, his rights
computed from finality of this court's 2002 resolution to June 30, 2013 and
and 6% per annum from July 1, 2013 until their full satisfaction. 76 interest,
the award
Based on Nacar and the above discussion, we grant Limlingan and of
Leyco's Petition as to the modification of the legal rate of interest. attorney's
Limlingan and Leyco are entitled to legal interest at the following rates: fees is
12% per annum computed from July 25, 2011, the date of the finality of legally
the Court of Appeals' May 4, 2010 Decision, up to June 30, 2013, and 6% and
per annum from July 1, 2013 until full satisfaction of the award. morally
justifiable
As to the third issue, we rule that the Court of Appeals did not commit .
reversible error when it affirmed the findings of the Labor Arbiter and
the National Labor Relations Commission that Limlingan and Leyco are In Producers Bank of the
entitled to attorney's fees. Philippines v. Court of
Appeals this Court ruled that:
The National Labor Relations Commission pointed out that the Labor chanRoblesvirtualLawlibrary
Arbiter's February 26, 2008 Decision awarded 10% attorney's fees to
Limlingan and Leyco.77 AIM, however, limited its appeals to the issues Attorney'
of illegal suspension, "reduction of the suspension period imposed and s fees
the award of nominal damages."78 may be
awarded
Affirming the National Labor Relations Commission, the Court of when a
Appeals held that: party is
chanRoblesvirtualLawlibrary compelle
d to
To be sure, since the attorney's fees matter was litigate or
not raised as an issue during the appeal, it follows to incur
that the aggrieved party had agreed to the same. expenses
Time and again, the doctrine of finality of judgment, to protect
which is grounded on fundamental considerations his
of public policy and sound practice, dictates that at interest
the risk of occasional error, the judgments of the by reason
courts must become final and executory at some of an
definite date set by law.79 (Citation omitted) unjustifie
d act of
The issue as to Limlingan and Leyco's entitlement to attorney's fees the other
already attained finality. Issues not raised on appeal cannot be party.
disturbed.80 Moreover, in Aliling v. Feliciano, et al.,81 this court
explained the reason for awarding attorney's fees: While in Lambert
chanRoblesvirtualLawlibrary Pawnbrokers and Jewelry
Corporation, the Court
Petitioner Aliling is also entitled to attorney's fees specifically ruled:
in the amount of ten percent (10%) of his total chanRoblesvirtualLawlibrary
monetary award, having been forced to litigate in
 However,
the award
of
attorney's
fee is
warrante
d
pursuant
to Article
111 of
the Labor
Code.
Ten (10%)
percent
of the
total
award is
usually
the
reasonab
le amount
of
attorney's
fees
awarded.
It is
settled
that
where an
employee
was
forced to
litigate
and, thus,
incur
expenses
to protect
his rights
and
interest,
the award
of
attorney's
fees is
legally
and
morally
justifiable
.82 (Emph
asis
supplied,
citations
omitted)

WHEREFORE, G.R. No. 220503 is CONSOLIDATED with G.R. No.

220481. The Petition for Review filed by Victor S. Limlingan and
Emmanuel A. Leyco docketed as G.R. No. 220481 is GRANTED. The
Petition for Review filed by Asian Institute of Management, Inc.
docketed as G.R. No. 220503 is DENIED for failing to show reversible
error on the part of the Court of Appeals. The Court of Appeals' January
13, 2015 Decision in CA-G.R. SP No. 135116 is AFFIRMED with
MODIFICATION in that Limlingan and Leyco are entitled to legal
interest at the rate of 12% per annum computed from the finality of the
Court of Appeals' May 4, 2010 Decision up to June 30, 2013, and at 6%
per annum from July 1, 2013 until full satisfaction of the award.

SO ORDERED.cralawlawlibrary

Carpio, (Chairperson), Del Castillo, and Mendoza, JJ., concur.

Brion, J., on leave.chanroblesvirtuallawlibrary