G.R. No.
98450 July 21, 1993 Philippine Peso vis-a-vis, the US Dollars,
THE PHILIPPINE MANPOWER SERVICES, INC.,
ADAWLIAH UNIVERSAL ELECTRONICS and AFISCO
INSURANCE CORPORATION, petitioners,
vs.
NATIONAL LABOR RELATIONS COMMISSION and
ARTHUR P. PANGAN, respondents.
Agcaoili Law Offices for petitioners.
Melencio D. Fabros, Jr. for private respondent.
ROMERO, J.:
On August 10, 1990, the Philippine Overseas
Employment Administration (POEA) rendered a
decision in POEA Cases No. (L) 88-07-595 entitled
Arthur Pangan v. Philippine Manpower Services, Inc.
and Adawliah Universal Electronics and Afisco
Insurance Corporation, disposing as follows:
WHEREFORE, premises considered,
judgment is hereby rendered ordering
respondent Philippine Manpower
Services Corporation, jointly and
severally with its principal Adawliah
Universal Electronics, to pay complainant
Arthur F. Pangan the following amounts:
1. ELEVEN THOUSAND FIVE HUNDRED
FIFTY U.S. DOLLARS (US$11,550.),
representing his salaries for the
unexpired portion of his contract of
employment; and
2. FIVE PERCENT (5%) of the total award
as and by way of attorney's fees.
All other claims of complainant as well as
respondent's counterclaims are hereby
dismissed for lack of merit.
Payment of the above awards shall be
made in Philippine Currency at the
prevailing rate of exchange at the time of
payment.
1
SO ORDERED.
Petitioners herein appealed said POEA decision
before public respondent National Labor Relations
Commission (NLRC). The NLRC, in its Resolution of
March 4, 1991, modified the decision of the POEA
but only insofar as it corrected the POEA on the
proper rate of exchange to be applied in converting
the award of US$11,550.00 to its equivalent in
Philippine currency. It thus held:
However, while we are convinced that
because Pangan was illegally dismissed,
he should be paid the salaries
corresponding to the unexpired portion
of his contract, we believe that because
of the erratic devaluation of the
The POEA, however, found Pangan's complaint
simple fairness dictates that the
payment of the awards in the Philippine
Currency should not be "at the rate of
exchange at the time of payment," as
mandated by the POEA, but rather at the
rate of exchange prevailing at the time
the complainant's cause of action
accrued or at the time he was illegally
dismissed on 21 July 1988.2
Consequently, said resolution disposed as follows:
WHEREFORE, subject to the
modification abovestated, the
decision appealed from
should be, as it is hereby,
AFFIRMED.
SO ORDERED.3
A motion for reconsideration of NLRC's Resolution
of March 4, 1991 was denied in its Resolution of
April 24, 1991.
As a final recourse, petitioners filed the instant
petition for annulment of the NLRC's Resolutions of
March 4, 1991 and April 24, 1991.
The alleged dismissal without cause of private
respondent Arthur F. Pangan by his employer
Adawliah Union Electronics and Afisco Insurance
Corporation (Adawliah, for short) based in Alkhobar,
Saudi Arabia, spawned the present controversy.
Pangan filed with the POEA, a case for illegal
dismissal, underpayment of overtime pay,
separation pay, actual damages representing his
salaries for the unexpired portion of his contract of
employment, and exemplary damages of
US$10,000.00 plus attorney's fees. His complaint
alleged that he entered into a two-year contract of
employment with Adawliah, as a data entry clerk
technician for US$550.00 a month, commencing on
April 30, 1988. He complained that he rendered
overtime work of fourteen (14) hours last May 1988
and another twenty-four (24) hours in June 1988
without having received any compensation
therefor; worse, he has ordered to work as
programmer in addition to his work as data entry
clerk technician without any offer to
correspondingly increase his salary; that Pangan's
demand for salary adjustment irked Mr. Ahmed
Yosul, Administrative Manager of Adawliah, who
thus ordered Pangan's termination on grounds of
incompetence. Pangan was consequently compelled
to accept payment of only US389.00 dollars,
covering his services for July 1-21. All other claims
were waived by him after he was threatened to be
jailed.
Petitioner Philippine Manpower Services, Inc.
(Philman) denied Pangan's allegations in his
complaint. Philman justified Pangan's termination
as a valid exercise by his employer Adawliah, of its
management prerogative to fire employees who
proved to be incompetent while still under
probation. It thus prayed for the dismissal of the
instant case.
meritorious. Though it recognized the management
prerogative to select its employees, it nevertheless
ruled that the exercise thereof is not without any
qualification. The POEA explained that probationary
employees can only be dismissed for just cause duly
proved. In the case at bar, it found that there was
no justified dismissal of complainant Pangan for
failure of Adawliah to substantiate its claim of his
unsatisfactory performance. General averments on
Pangan's incompetence do not constitute just cause
to warrant his termination.
Philman and Adawliah were thus ordered to pay in
solidum, the equivalent in Philippine currency of
US$11,550.00 representing Pangan's salary for the
unexpired portion of his contract and attorney's
fees amounting to five percent (5%) of said award.
The POEA further ruled that in paying the above
award in Philippine currency, the conversion rate to
be used shall be that prevailing at the time of
payment.
Philman and Adawliah sought a reversal of said
POEA ruling by appealing before the National Labor
Relations Commission (NLRC). As aforementioned,
the NLRC affirmed, with modification, the POEA
ruling appealed from, in its Resolution of March 4,
1991.
Philman and Adawliah moved for reconsideration of
the Resolution of March 4, 1991 but were denied by
the NLRC for lack of merit.
Consequently, the instant petition was filed by
Philman and Adawliah claiming that:
I
With grave abuse of discretion, the Honorable
Commission (Second Division) together with POEA
Administrator Jose N. Sarmiento brushed aside
petitioners-appellants submission that complainant-
appellee was lawfully dismissed in accordance with
his contract of employment and in consonance with
previous POEA and NLRC rulings applicable to the
case at bar.
II
With grave abuse of discretion, the Honorable
Commission (Second Division) disregarded
appellant's contention based on Article 281 of the
Labor Code of the Philippines, that workers on
probation or trial acquire only transitional rights to
the fulfillment of their employment contracts and
therefore the complainant-appellee cannot lawfully
be entitled to payment of salary for the period of 21
months after failing to qualify as a regular employee
during his three months' trial period.
III
The Honorable Commission (Second Division)
gravely erred in holding that appellee's dismissal is
sustained by the Supreme Court ruling in Manila
Hotel vs. NLRC, 141 SCRA 169.
IV
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With grave abuse of discretion, the Honorable
Commission (Second Division) affirmed the findings
of the POEA Administrator to the effect that the
dismissal of the complainant-appellee was
capricious.4
Philman and Adawliah insist that during the
probationary period, the employer is acting within
his rights in dismissing his employee who failed to
meet the qualification standard for continued
employment. Moreover, they aver that Pangan's
inability to satisfy the standards set by Adawliah
amounts to incompetence which is a just cause for
termination of his services pursuant to the first
paragraph of the contract of employment executed
between Adawliah and Pangan, to wit:
If during the first three (3) months
(probation period) of employment, the
EMPLOYER find the EMPLOYEE to be
incompetent or incapable of performing
the type of work for which he was hired,
then the EMPLOYER may discharge the
EMPLOYEE for cause with no obligation
on the part of the EMPLOYER except for
payment of accrued pay up to the time
of termination. The payment of economy
class air transportation back to the point
of hire shall be for the account of
EMPLOYEE.5
On the basis of the foregoing, they argued that the
determination of whether Pangan is capable of
performing the duties of Data Entry Clerk
Technician rests solely with Adawliah, his employer,
who is in the best position to observe Pangan's
performance during the probationary period. There
is thus no necessity, contrary to the views of the
POEA and NLRC, to cite specific incidents of
Pangan's incompetence in order to prove the
legality of the dismissal.
Philman and Adawliah further maintained that as a
result of Pangan's failure to qualify as a regular
employee, he did not acquire any rights whatsoever
to work out the full term of his employment
contract. Accordingly, they concluded that Pangan is
not entitled to an award equivalent to the
unexpired portion of his two-year employment
contract.
In his Comment to the petition, the Solicitor General
considers petitioners' arguments as untenable. He
contends that, notwithstanding Pangan's
probationary status, he nonetheless enjoys the
constitutional protection on security of tenure
unless just cause exists to justify his termination. He
further stressed that the prerogative of
management to dismiss Pangan must be exercised
without abuse of discretion. The absence of
sufficient evidence to substantiate Pangan's
dismissal and the lack of specific acts or instances to
show Pangan's lackluster performance negates the
claim of Adawliah that the dismissal was a rightful
exercise of such prerogative. Due to the gross
violation of Pangan's security of tenure, the Solicitor
General opined that he is entitled to an award
equivalent to his salary for the unexpired portion of
his two-year employment contract.
The petition should be dismissed. Jurisprudence is
rich in cases guaranteeing the security of tenure,
limited though it may be, of probationary
employees.6 Except for just cause as provided by
law or under the employment contract, a
probationary employee cannot be
terminated.7 Petitioners do not view Pangan's
termination as a violation of these legal precepts.
Rather, they consider his incompetence as a just
cause, sufficient to constitute the basis of his
dismissal under the contract.
At first blush, petitioners' position may seem sound,
it appearing that their contract, which is the law
between them, contains a stipulation that the
employer has the discretion to dismiss its
employees for incompetence. However, where the
dismissed employee, Pangan in this instance,
challenges his dismissal as illegal, predicating his
claim on the absence of a just cause, the correct
issue is not so much Adawliah's discretion to
terminate as the existence of Pangan's alleged
incompetence as ground for his termination. Hence,
the POEA and NLRC did not commit grave abuse of
discretion in requiring petitioners to present proof
of the alleged incompetence of Pangan. Thus, it has
been held that:
It is a basic principle in the dismissal of
employees that the burden of proof rests
upon the employer to show that the
dismissal of the employee is for a just
cause, and failure to do so would
necessarily mean that the dismissal is
not justified [Polymedic General Hospital
v. NLRC, G.R. No. 64190, January 31,
1985, 134 SCRA 420; Asphalt and
Cement Pavers, Inc. v. Leogardo, et al.,
G.R. No. 74563, June 20, 1988.] Should
the employer fail in discharging this duty,
the dismissal of the employee cannot be
sustained. This is consonant with the
constitutional guarantee of security of
tenure, as implemented in what is now
Sec. 279 of the Labor Code, as
amended.8
This same principle applies to probationary
employees allegedly terminated without cause
during their limited tenure. Thus in Euro-Linea
Philippines Inc. v. NLRC, et al.,9 this Court dismissed
the petition on the ground that:
Petitioner not only failed to
present sufficient evidence to
substantiate the cause of
private respondent's
dismissal, but likewise failed
to cite particular acts or
instances to show the latter's
poor performance.
Similarly, no convincing proof establishing Pangan's
alleged incompetence was presented. The POEA
and NLRC, therefore, correctly declared the
dismissal to be illegal. Pangan's dismissal without
cause during the probationary period constitutes a
violation of his Constitutional right to security of
tenure. The Constitution, which is built into all
contracts entered into in the Philippines and
governed by Philippines law when it provides in Art.
XIII,
Sec 3 10 that "they shall be entitled to security of
tenure . . ." did not distinguish between
probationary and regular employees. Consequently,
Pangan deserves the disputed award of the POEA,
entitling him to an amount representing his salary
for the unexpired portion of his employment
contract. It was erroneous for petitioners to
question the award as improper, theorizing that he
is not entitled to sum equivalent to his salary for the
unexpired portion of the contract, he being merely
a probationary employee who has not acquired a
vested right to demand fulfillment of his
employment contract.
Apparently, petitioners have misread the statutory
grant of security of tenure to probationary
employees. Under Article 281 of the Labor Code, 11 a
probationary employee may be terminated on two
grounds: (a) for just cause or (b) when he fails to
qualify as a regular employee in accordance with
reasonable standards made known by the employer
to the employee at the time of his engagement.
Since as established in the case at bar, petitioners
were unable to prove either ground as a basis for
terminating Pangan's employment, no reason exists
to sever the employment relationship between
Adawliah and Pangan. Otherwise stated, absent the
grounds for termination of a probationary
employee, he is entitled to continued employment
even beyond the probationary period. Accordingly,
had not Pangan been compelled to return to the
Philippines, he could have demanded enforcement
of the employment contract. In the case
of Skillword Management and Marketing Corp., et
al. v. NLRC, et al., 12 we similarly unheld a POEA
ruling awarding private respondents therein
$6,900.00 or its equivalent in Philippine currency at
the time of actual payment covering complainant's
salary for the unexpired portion of twenty-three
months due to unjust dismissal as a probationary
employee.
In the case of Republic Resources and Development
Corporation v. Court of Appeals, 13 reiterating our
decision in Kalalo v. Luz, 14 with regard to obligations
incurred after enactment of RA No. 529 15 on June
16, 1950, we also held that the rate of exchange to
be applied should be that prevailing at the time of
payment.
As a consequence of our affirmance of the POEA
award, we find incorrect the NLRC Resolution of
March 4, 1991 to the effect that the proper rate of
exchange to be applied in converting the award of
US$11,550.00 to its equivalent in Philippine
currency is that prevailing at the time complainant's
cause of action accrued and not at the time of
actual payment as ruled by the POEA.
WHEREFORE, finding no grave abuse of discretion
on the part of public respondents, the petition is
DISMISSED. The decision of the POEA dated August
10, 1991 is hereby AFFIRMED in toto and the
Resolution of the NLRC dated March 4, 1991 is
MODIFIED, insofar as the proper rate of exchange to
be applied in converting the award of US$11,550.00
in Philippine currency is that prevailing at the time
of actual payment.
SO ORDERED.
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 G.R. No. 168646               January 12, 2011
LUZON DEVELOPMENT BANK, Petitioner,
vs.
ANGELES CATHERINE ENRIQUEZ, Respondent.
x - - - - - - - - - - - - - - - - - - - - - - -x
G.R. No. 168666
DELTA DEVELOPMENT and MANAGEMENT
SERVICES, INC., Petitioner,
vs.
ANGELES CATHERINE ENRIQUEZ and LUZON
DEVELOPMENT BANK, Respondents.
DECISION
DEL CASTILLO, J.:
The protection afforded to a subdivision lot buyer
under Presidential Decree (PD) No. 957 or The
Subdivision and Condominium Buyer’s Protective
Decree will not be defeated by someone who is not
an innocent purchaser for value. The lofty
aspirations of PD 957 should be read in every
provision of the statute, in every contract that
undermines its objects, in every transaction which
threatens its fruition. "For a statute derives its
vitality from the purpose for which it is enacted and
to construe it in a manner that disregards or defeats
such purpose is to nullify or destroy the law." 1
These cases involve the separate appeals of Luzon
Development Bank2 (BANK) and Delta Development
and Management Services, Inc.3 (DELTA) from the
November 30, 2004 Decision of the Court of
Appeals (CA), as well as its June 22, 2005 Resolution
in CA-G.R. SP No. 81280. The dispositive portion of
the assailed Decision reads:
WHEREFORE, premises considered, the Decision
dated June 17, 2003 and Resolution dated
November 24, 2003 are AFFIRMED with
[m]odification in so far as Delta Development and
Management Services, Inc. is liable and directed to
pay petitioner Luzon Development Bank the value
of the subject lot subject matter of the Contract to
Sell between Delta Development and Management
Services, Inc. and the private respondent [Catherine
Angeles Enriquez].
SO ORDERED.4
Factual Antecedents
The BANK is a domestic financial corporation that
extends loans to subdivision developers/owners.5
Petitioner DELTA is a domestic corporation engaged
in the business of developing and selling real estate
properties, particularly Delta Homes I in Cavite.
DELTA is owned by Ricardo De Leon (De Leon), 6 who
is the registered owner of a parcel of land covered
by Transfer Certificate of Title (TCT) No. T-
6371837 of the Registry of Deeds of the Province of
Cavite, which corresponds to Lot 4 of Delta Homes I.
Said Lot 4 is the subject matter of these cases.
On July 3, 1995, De Leon and his spouse obtained a
₱4 million loan from the BANK for the express
purpose of developing Delta Homes I.8 To secure the
loan, the spouses De Leon executed in favor of the
BANK a real estate mortgage (REM) on several of
their properties,9 including Lot 4. Subsequently, this
REM was amended10 by increasing the amount of
the secured loan from ₱4 million to ₱8 million. Both
the REM and the amendment were annotated on
TCT No. T-637183.11
DELTA then obtained a Certificate of
Registration12 and a License to Sell13 from the
Housing and Land Use Regulatory Board (HLURB).
Sometime in 1997, DELTA executed a Contract to
Sell with respondent Angeles Catherine Enriquez
(Enriquez)14 over the house and lot in Lot 4 for the
purchase price of ₱614,950.00. Enriquez made a
downpayment of ₱114,950.00. The Contract to Sell
contained the following provisions:
That the vendee/s offered to buy and the Owner
agreed to sell the above-described property subject
to the following terms and conditions to wit:
xxxx
6. That the (sic) warning shall be served upon the
Vendee/s for failure to pay x x x Provided, however,
that for failure to pay three (3) successive monthly
installment payments, the Owner may consider this
Contract to Sell null and void ab initio without
further proceedings or court action and all
payments shall be forfeited in favor of the Owner as
liquidated damages and expenses for
documentations. x x x
That upon full payment of the total consideration if
payable in cash, the Owner shall execute a final
deed of sale in favor of the Vendee/s. However, if
the term of the contract is for a certain period of
time, only upon full payment of the total
consideration that a final deed of sale shall be
executed by the Owner in favor of the Vendee/s.15
When DELTA defaulted on its loan obligation, the
BANK, instead of foreclosing the REM, agreed to a
dation in payment or a dacion en pago. The Deed of
Assignment in Payment of Debt was executed on
September 30, 1998 and stated that DELTA "assigns,
transfers, and conveys and sets over [to] the
assignee that real estate with the building and
improvements existing thereon x x x in payment of
the total obligation owing to [the Bank] x x
x."16 Unknown to Enriquez, among the properties
assigned to the BANK was the house and lot of Lot
4,17 which is the subject of her Contract to Sell with
DELTA. The records do not bear out and the parties
are silent on whether the BANK was able to transfer
title to its name. It appears, however, that the
dacion en pago was not annotated on the TCT of Lot
4.18
On November 18, 1999, Enriquez filed a complaint
against DELTA and the BANK before the Region IV
Office of the HLURB19 alleging that DELTA violated
the terms of its License to Sell by: (a) selling the
house and lots for a price exceeding that prescribed
in Batas Pambansa (BP) Bilang 220; 20 and (b) failing
to get a clearance for the mortgage from the
HLURB. Enriquez sought a full refund of the
₱301,063.42 that she had already paid to DELTA,
award of damages, and the imposition of
administrative fines on DELTA and the BANK.
In his June 1, 2000 Decision, 21 HLURB Arbiter Atty.
Raymundo A. Foronda upheld the validity of the
purchase price, but ordered DELTA to accept
payment of the balance of ₱108,013.36 from
Enriquez, and (upon such payment) to deliver to
Enriquez the title to the house and lot free from
liens and encumbrances. The dispositive portion
reads:
WHEREFORE, premises considered, a decision is
hereby rendered as follows:
1. Ordering [DELTA] to accept
complainant[’]s payments in the amount
of ₱108,013.36 representing her balance
based on the maximum selling price of
₱375,000.00;
2. Upon full payment, ordering Delta to
deliver the title in favor of the
complainant free from any liens and
encumbrances;
3. Ordering [DELTA] to pay complainant
the amount of ₱50,000.00 as and by way
of moral damages;
4. Ordering [DELTA] to pay complainant
the amount of ₱50,000.00 as and by way
of exemplary damages;
5. Ordering [DELTA] to pay complainant
₱10,000.00 as costs of suit; and
6. Respondent DELTA to pay
administrative fine of ₱10,000.00[22] for
violation of Section 18 of P.D. 957 [23] and
another ₱10,000.00 for violation of
Section 22 of P.D. 957.[24
SO ORDERED.25
DELTA appealed the arbiter’s Decision to the HLURB
Board of Commissioners.26 DELTA questioned the
imposition of an administrative fine for its alleged
violation of Section 18 of PD 957. It argued that
clearance was not required for mortgages that were
constituted on a subdivision project prior to
registration. According to DELTA, it did not violate
the terms of its license because it did not obtain a
new mortgage over the subdivision project. It
likewise assailed the award of moral and exemplary
damages to Enriquez on the ground that the latter
has no cause of action.27
Ruling of the Board of Commissioners (Board)28
The Board held that all developers should obtain a
clearance for mortgage from the HLURB, regardless
of the date when the mortgage was secured,
because the law does not distinguish. Having
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violated this legal requirement, DELTA was held
liable to pay the administrative fine.
The Board upheld the validity of the contract to sell
between DELTA and Enriquez despite the alleged
violation of the price ceilings in BP 220. The Board
held that DELTA and Enriquez were presumed to
have had a meeting of the minds on the object of
the sale and the purchase price. Absent any
circumstance vitiating Enriquez’consent, she was
presumed to have willingly and voluntarily agreed
to the higher purchase price; hence, she was bound
by the terms of the contract.
The Board, however, deleted the arbiter’s award of
damages to Enriquez on the ground that the latter
was not free from liability herself, given that she
was remiss in her monthly amortizations to DELTA.
The dispositive portion of the Board’s Decision
reads:
Wherefore, in view of the foregoing, the Office
below’s decision dated June 01, 2000 is hereby
modified to read as follows:
1. Ordering [Enriquez] to pay [DELTA] the
amount due from the time she
suspended payment up to filing of the
complaint with 12% interest thereon per
annum; thereafter the provisions of the
Contract to Sell shall apply until full
payment is made;
2. Ordering [DELTA] to pay an
[a]dministrative [f]ine of ₱10,000.00 for
violation of its license to sell and for
violation of Section 18 of P.D. 957.
29
SO ORDERED. Quezon City.
Enriquez moved for a reconsideration of the Board’s
Decision30 upholding the contractual purchase price.
She maintained that the price for Lot 4 should not
exceed the price ceiling provided in BP 220.31lawph!l
Finding Enriquez’s arguments as having already
been passed upon in the decision, the Board denied
reconsideration. The board, however, modified its
decision, with respect to the period for the
imposition of interest payments. The Board’s
resolution32 reads:
WHEREFORE, premises considered, to [sic] directive
No. 1 of the dispositive portion of the decision of
our decision [sic] is MODIFIED as follows:
1. Ordering complainant to pay
respondent DELTA the amount due from
the time she suspended (sic) at 12%
interest per annum, reckoned from
finality of this decision[,] thereafter the
provisions of the Contract to Sell shall
apply until full payment is made.
In all other respects, the decision is AFFIRMED.
SO ORDERED.33
Both Enriquez and the BANK appealed to the Office Both DELTA50 and the BANK51 moved for a
of the President (OP). 34 The BANK disagreed with reconsideration of the CA’s Decision, but both were
the ruling upholding Enriquez’s Contract to Sell; and denied.52
insisted on its ownership over Lot 4. It argued that it
has become impossible for DELTA to comply with
Hence, these separate petitions of the BANK and
the terms of the contract to sell and to deliver Lot
DELTA.
4’s title to Enriquez given that DELTA had already
relinquished all its rights to Lot 4 in favor of the
BANK35 via the dation in payment. Petitioner Delta’s arguments53
Meanwhile, Enriquez insisted that the Board erred DELTA assails the CA Decision for holding that
in not applying the ceiling price as prescribed in BP DELTA conveyed its ownership over Lot 4 to
220.36 Enriquez via the Contract to Sell. DELTA points out
that the Contract to Sell contained a condition that
ownership shall only be transferred to Enriquez
Ruling of the Office of the President37
upon the latter’s full payment of the purchase price
to DELTA. Since Enriquez has yet to comply with this
The OP adopted by reference the findings of fact suspensive condition, ownership is retained by
and conclusions of law of the HLURB Decisions, DELTA.54 As the owner of Lot 4, DELTA had every
which it affirmed in toto. right to enter into a dation in payment to extinguish
its loan obligation to the BANK. The BANK’s
acceptance of the assignment, without any
Enriquez filed a motion for reconsideration, insisting
reservation or exception, resulted in the
that she was entitled to a reduction of the purchase
extinguishment of the entire loan obligation; hence,
price, in order to conform to the provisions of BP
DELTA has no more obligation to pay the value of
220.38 The motion was denied for lack of merit.39
Enriquez’s house and lot to the BANK.55
Only the BANK appealed the OP’s Decision to the
DELTA prays for the reinstatement of the OP
CA.40 The BANK reiterated that DELTA can no longer
Decision.
deliver Lot 4 to Enriquez because DELTA had sold
the same to the BANK by virtue of the dacion en
pago.41 As an alternative argument, in case the The BANK’s arguments56
appellate court should find that DELTA retained
ownership over Lot 4 and could convey the same to
Echoing the argument of DELTA, the BANK argues
Enriquez, the BANK prayed that its REM over Lot 4
that the Contract to Sell did not involve a
be respected such that DELTA would have to
conveyance of DELTA’s ownership over Lot 4 to
redeem it first before it could convey the same to
Enriquez. The Contract to Sell expressly provides
Enriquez in accordance with Section 2542 of PD
that DELTA retained ownership over Lot 4 until
957.43
Enriquez paid the full purchase price. Since Enriquez
has not yet made such full payment, DELTA retained
The BANK likewise sought an award of exemplary ownership over Lot 4 and could validly convey the
damages and attorney’s fees in its favor because of same to the BANK via dacion en pago.57
the baseless suit filed by Enriquez against it.44
Should the dacion en pago over Lot 4 be invalidated
Ruling of the Court of Appeals45 and the property ordered to be delivered to
Enriquez, the BANK contends that DELTA should pay
the corresponding value of Lot 4 to the BANK. It
The CA ruled against the validity of the dacion en
maintains that the loan obligation extinguished by
pago executed in favor of the BANK on the ground
the dacion en pago only extends to the value of the
that DELTA had earlier relinquished its ownership
properties delivered; if Lot 4 cannot be delivered to
over Lot 4 in favor of Enriquez via the Contract to
the BANK, then the loan obligation of DELTA
Sell.46
remains to the extent of Lot 4’s value.58
Since the dacion en pago is invalid with respect to
The BANK prays to be declared the rightful owner of
Lot 4, the appellate court held that DELTA remained
the subject house and lot and asks for an award of
indebted to the BANK to the extent of Lot 4’s value.
exemplary damages and attorney’s fees.
Thus, the CA ordered DELTA to pay the
corresponding value of Lot 4 to the BANK.47
Enriquez’s waiver
The CA also rejected the BANK’s argument that,
before DELTA can deliver the title to Lot 4 to Enriquez did not file comments59 or memoranda in
Enriquez, DELTA should first redeem the mortgaged both cases; instead, she manifested that she will
property from the BANK. The CA held that the BANK just await the outcome of the case.60
does not have a first lien on Lot 4 because its real
estate mortgage over the same had already been
Issues
extinguished by the dacion en pago. Without a
mortgage, the BANK cannot require DELTA to
redeem Lot 4 prior to delivery of title to Enriquez.48 The following are the issues raised by the two
petitions:
The CA denied the BANK’s prayer for the award of
exemplary damages and attorney’s fees for lack of 1. Whether the Contract to Sell conveys
factual and legal basis.49 ownership;
12th Wave
 2. Whether the dacion en pago
extinguished the loan obligation, such
that DELTA has no more obligations to
the BANK;
3. Whether the BANK is entitled to
damages and attorney’s fees for being
compelled to litigate; and
4. What is the effect of Enriquez’s failure
to appeal the OP’s Decision regarding
her obligation to pay the balance on the
purchase price.
Our Ruling
Mortgage contract void
As the HLURB Arbiter and Board of Commissioners
both found, DELTA violated Section 18 of PD 957 in
mortgaging the properties in Delta Homes I
(including Lot 4) to the BANK without prior
clearance from the HLURB. This point need not be
belabored since the parties have chosen not to
appeal the administrative fine imposed on DELTA
for violation of Section 18.
This violation of Section 18 renders the mortgage
executed by DELTA void. We have held before that
"a mortgage contract executed in breach of Section
18 of [PD 957] is null and void." 61 Considering that
"PD 957 aims to protect innocent subdivision lot
and condominium unit buyers against fraudulent
real estate practices," we have construed Section 18
thereof as "prohibitory and acts committed contrary
to it are void."62
Because of the nullity of the mortgage, neither
DELTA nor the BANK could assert any right arising
therefrom. The BANK’s loan of ₱8 million to DELTA
has effectively become unsecured due to the nullity
of the mortgage. The said loan, however, was
eventually settled by the two contracting parties via
a dation in payment. In the appealed Decision, the
CA invalidated this dation in payment on the ground
that DELTA, by previously entering into a Contract
to Sell, had already conveyed its ownership over Lot
4 to Enriquez and could no longer convey the same
to the BANK. This is error, prescinding from a wrong
understanding of the nature of a contract to sell.
Contract to sell does not transfer ownership
Both parties are correct in arguing that the Contract
to Sell executed by DELTA in favor of Enriquez did
not transfer ownership over Lot 4 to Enriquez. A
contract to sell is one where the prospective seller
reserves the transfer of title to the prospective
buyer until the happening of an event, such as full
payment of the purchase price. What the seller
obliges himself to do is to sell the subject property
only when the entire amount of the purchase price
has already been delivered to him. "In other words,
the full payment of the purchase price partakes of a
suspensive condition, the non-fulfillment of which
prevents the obligation to sell from arising and thus,
ownership is retained by the prospective seller
without further remedies by the prospective
buyer."63 It does not, by itself, transfer ownership to
the buyer.64
In the instant case, there is nothing in the provisions
of the contract entered into by DELTA and Enriquez
that would exempt it from the general definition of
a contract to sell. The terms thereof provide for the
reservation of DELTA’s ownership until full payment
of the purchase price; such that DELTA even
reserved the right to unilaterally void the contract
should Enriquez fail to pay three successive monthly
amortizations.
Since the Contract to Sell did not transfer ownership
of Lot 4 to Enriquez, said ownership remained with
DELTA. DELTA could then validly transfer such
ownership (as it did) to another person (the BANK).
However, the transferee BANK is bound by the
Contract to Sell and has to respect Enriquez’s rights
thereunder. This is because the Contract to Sell,
involving a subdivision lot, is covered and protected
by PD 957. One of the protections afforded by PD
957 to buyers such as Enriquez is the right to have
her contract to sell registered with the Register of
Deeds in order to make it binding on third parties.
Thus, Section 17 of PD 957 provides:
Section 17. Registration. All contracts to sell, deeds
of sale, and other similar instruments relative to the
sale or conveyance of the subdivision lots and
condominium units, whether or not the purchase
price is paid in full, shall be registered by the seller
in the Office of the Register of Deeds of the
province or city where the property is situated.
x x x x (Emphasis supplied.)
The purpose of registration is to protect the buyers
from any future unscrupulous transactions involving
the object of the sale or contract to sell, whether
the purchase price therefor has been fully paid or
not. Registration of the sale or contract to sell
makes it binding on third parties; it serves as a
notice to the whole world that the property is
subject to the prior right of the buyer of the
property (under a contract to sell or an absolute
sale), and anyone who wishes to deal with the said
property will be held bound by such prior right.
While DELTA, in the instant case, failed to register
Enriquez’s Contract to Sell with the Register of
Deeds, this failure will not prejudice Enriquez or
relieve the BANK from its obligation to respect
Enriquez’s Contract to Sell. Despite the non-
registration, the BANK cannot be considered, under
the circumstances, an innocent purchaser for value
of Lot 4 when it accepted the latter (together with
other assigned properties) as payment for DELTA’s
obligation. The BANK was well aware that the
assigned properties, including Lot 4, were
subdivision lots and therefore within the purview of
PD 957. It knew that the loaned amounts were to be
used for the development of DELTA’s subdivision
project, for this was indicated in the corresponding
promissory notes. The technical description of Lot 4
indicates its location, which can easily be
determined as included within the subdivision
development. Under these circumstances, the BANK
knew or should have known of the possibility and
risk that the assigned properties were already
covered by existing contracts to sell in favor of
subdivision lot buyers. As observed by the Court in
another case involving a bank regarding a
subdivision lot that was already subject of a
contract to sell with a third party:
[The Bank] should have considered that it was
dealing with a property subject of a real estate
development project. A reasonable person,
particularly a financial institution x x x, should have
been aware that, to finance the project, funds other
than those obtained from the loan could have been
used to serve the purpose, albeit partially. Hence,
there was a need to verify whether any part of the
property was already intended to be the subject of
any other contract involving buyers or potential
buyers. In granting the loan, [the Bank] should not
have been content merely with a clean title,
considering the presence of circumstances
indicating the need for a thorough investigation of
the existence of buyers x x x. Wanting in care and
prudence, the [Bank] cannot be deemed to be an
innocent mortgagee. x x x65
Further, as an entity engaged in the banking
business, the BANK is required to observe more care
and prudence when dealing with registered
properties. The Court cannot accept that the BANK
was unaware of the Contract to Sell existing in favor
of Enriquez. In Keppel Bank Philippines, Inc. v.
Adao,66 we held that a bank dealing with a property
that is already subject of a contract to sell and is
protected by the provisions of PD 957, is bound by
the contract to sell (even if the contract to sell in
that case was not registered). In the Court’s words:
It is true that persons dealing with registered
property can rely solely on the certificate of title
and need not go beyond it. However, x x x, this rule
does not apply to banks. Banks are required to
exercise more care and prudence than private
individuals in dealing even with registered
properties for their business is affected with public
interest. As master of its business, petitioner should
have sent its representatives to check the assigned
properties before signing the compromise
agreement and it would have discovered that
respondent was already occupying one of the
condominium units and that a contract to sell
existed between [the vendee] and [the developer].
In our view, petitioner was not a purchaser in good
faith and we are constrained to rule that petitioner
is bound by the contract to sell.67
Bound by the terms of the Contract to Sell, the
BANK is obliged to respect the same and honor the
payments already made by Enriquez for the
purchase price of Lot 4. Thus, the BANK can only
collect the balance of the purchase price from
Enriquez and has the obligation, upon full payment,
to deliver to Enriquez a clean title over the subject
property.68
Dacion en pago extinguished the loan obligation
The BANK then posits that, if title to Lot 4 is ordered
delivered to Enriquez, DELTA has the obligation to
pay the BANK the corresponding value of Lot 4.
According to the BANK, the dation in payment
extinguished the loan only to the extent of the value
of the thing delivered. Since Lot 4 would have no
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value to the BANK if it will be delivered to Enriquez,
DELTA would remain indebted to that extent.
We are not persuaded. Like in all contracts, the
intention of the parties to the dation in payment is
paramount and controlling. The contractual
intention determines whether the property subject
of the dation will be considered as the full
equivalent of the debt and will therefore serve as
full satisfaction for the debt. "The dation in payment
extinguishes the obligation to the extent of the
value of the thing delivered, either as agreed upon
by the parties or as may be proved, unless the
parties by agreement, express or implied, or by
their silence, consider the thing as equivalent to the
obligation, in which case the obligation is totally
extinguished."69
In the case at bar, the Dacion en Pago executed by
DELTA and the BANK indicates a clear intention by
the parties that the assigned properties would serve
as full payment for DELTA’s entire obligation:
KNOW ALL MEN BY THESE PRESENTS:
This instrument, made and executed by and
between:
xxxx
THAT, the ASSIGNOR acknowledges to be justly
indebted to the ASSIGNEE in the sum of ELEVEN
MILLION EIGHT HUNDRED SEVENTY-EIGHT
THOUSAND EIGHT HUNDRED PESOS
(₱11,878,800.00), Philippine Currency as of August
25, 1998. Therefore, by virtue of this instrument,
ASSIGNOR hereby ASSIGNS, TRANSFERS, and
CONVEYS AND SETS OVER [TO] the ASSIGNEE that
real estate with the building and improvements
existing thereon, more particularly described as
follows:
xxxx
of which the ASSIGNOR is the registered owner
being evidenced by TCT No. x x x issued by the
Registry of Deeds of Trece Martires City.
THAT, the ASSIGNEE does hereby accept this
ASSIGNMENT IN PAYMENT OF THE TOTAL
OBLIGATION owing to him by the ASSIGNOR as
above-stated;70
Without any reservation or condition, the Dacion
stated that the assigned properties served as full
payment of DELTA’s "total obligation" to the BANK.
The BANK accepted said properties as equivalent of
the loaned amount and as full satisfaction of
DELTA’s debt. The BANK cannot complain if, as it
turned out, some of those assigned properties (such
as Lot 4) are covered by existing contracts to sell. As
noted earlier, the BANK knew that the assigned
properties were subdivision lots and covered by PD
957. It was aware of the nature of DELTA’s business,
of the location of the assigned properties within
DELTA’s subdivision development, and the
possibility that some of the properties may be
subjects of existing contracts to sell which enjoy
protection under PD 957. Banks dealing with
subdivision properties are expected to conduct a
thorough due diligence review to discover the
status of the properties they deal with. It may thus
be said that the BANK, in accepting the assigned
properties as full payment of DELTA’s "total
obligation," has assumed the risk that some of the
assigned properties (such as Lot 4) are covered by
contracts to sell which it is bound to honor under
PD 957.
A dacion en pago is governed by the law of
sales.71 Contracts of sale come with warranties,
either express (if explicitly stipulated by the parties)
or implied (under Article 1547 et seq. of the Civil
Code). In this case, however, the BANK does not
even point to any breach of warranty by DELTA in
connection with the Dation in Payment. To be sure,
the Dation in Payment has no express warranties
relating to existing contracts to sell over the
assigned properties. As to the implied warranty in
case of eviction, it is waivable 72 and cannot be
invoked if the buyer knew of the risks or danger of
eviction and assumed its consequences. 73 As we
have noted earlier, the BANK, in accepting the
assigned properties as full payment of DELTA’s
"total obligation," has assumed the risk that some
of the assigned properties are covered by contracts
to sell which must be honored under PD 957.
Award of damages
There is nothing on record that warrants the award
of exemplary damages74 as well as attorney’s
fees75 in favor of the BANK.
Balance to be paid by Enriquez
As already mentioned, the Contract to Sell in favor
of Enriquez must be respected by the
BANK.1avvphi1 Upon Enriquez’s full payment of the
balance of the purchase price, the BANK is bound to
deliver the title over Lot 4 to her. As to the amount
of the balance which Enriquez must pay, we adopt
the OP’s ruling thereon which sustained the amount
stipulated in the Contract to Sell. We will not review
Enriquez’s initial claims about the supposed
violation of the price ceiling in BP 220, since this
issue was no longer pursued by the parties, not
even by Enriquez, who chose not to file the required
pleadings76 before the Court. The parties were
informed in the Court’s September 5, 2007
Resolution that issues that are not included in their
memoranda shall be deemed waived or abandoned.
Since Enriquez did not file a memorandum in either
petition, she is deemed to have waived the said
issue.
WHEREFORE, premises considered, the appealed
November 30, 2004 Decision of the Court of
Appeals, as well as its June 22, 2005 Resolution in
CA-G.R. SP No. 81280 are hereby AFFIRMED with
the MODIFICATIONS that Delta Development and
Management Services, Inc. is NOT LIABLE TO PAY
Luzon Development Bank the value of the subject
lot; and respondent Angeles Catherine Enriquez is
ordered to PAY the balance of the purchase price
and the interests accruing thereon, as decreed by
the Court of Appeals, to the Luzon Development
Bank, instead of Delta Development and
Management Services, Inc., within thirty (30) days
from finality of this Decision. The Luzon
Development Bank is ordered to DELIVER a CLEAN
TITLE to Angeles Catherine Enriquez upon the
latter’s full payment of the balance of the purchase
price and the accrued interests.
SO ORDERED.
G.R. No. 182128               February 19, 2014
PHILIPPINE NATIONAL BANK, Petitioner,
vs.
TERESITA TAN DEE, ANTIPOLO PROPERTIES, INC.,
(now PRIME EAST PROPERTIES, INC.) and AFP-
RSBS, INC., Respondents.
DECISION
REYES, J.:
This is a Petition for Review 1 under Rule 45 of the
Rules of Court, assailing the Decision 2 dated August
13, 2007 and Resolution 3 dated March 13, 2008
rendered by the Court of Appeals (CA) in CA-G.R. SP
No. 86033, which affirmed the Decision 4 dated
August 4, 2004 of the Office of the President (OP) in
O.P. Case No. 04-D-182 (HLURB Case No. REM-A-
030724-0186).
Facts of the Case
Some time in July 1994, respondent Teresita Tan
Dee (Dee) bought from respondent Prime East
Properties Inc.5 (PEPI) on an installment basis a
residential lot located in Binangonan, Rizal, with an
area of 204 square meters6 and covered by Transfer
Certificate of Title (TCT) No. 619608. Subsequently,
PEPI assigned its rights over a 213,093-sq m
property on August 1996 to respondent Armed
Forces of the Philippines-Retirement and Separation
Benefits System, Inc. (AFP-RSBS), which included the
property purchased by Dee.
Thereafter, or on September 10, 1996, PEPI
obtained a ₱205,000,000.00 loan from petitioner
Philippine National Bank (petitioner), secured by a
mortgage over several properties, including Dee’s
property. The mortgage was cleared by the Housing
and Land Use Regulatory Board (HLURB) on
September 18, 1996.7
After Dee’s full payment of the purchase price, a
deed of sale was executed by respondents PEPI and
AFP-RSBS on July 1998 in Dee’s favor. Consequently,
Dee sought from the petitioner the delivery of the
owner’s duplicate title over the property, to no
avail. Thus, she filed with the HLURB a complaint for
specific performance to compel delivery of TCT No.
619608 by the petitioner, PEPI and AFP-RSBS,
among others. In its Decision 8 dated May 21, 2003,
the HLURB ruled in favor of Dee and disposed as
follows:
WHEREFORE, premises considered, judgment is
hereby rendered as follows:
1. Directing [the petitioner] to cancel/release the
mortgage on Lot 12, Block 21-A, Village East
Executive Homes covered by Transfer Certificate of
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Title No. -619608-(TCT No. -619608-), and
accordingly, surrender/release the title thereof to
[Dee];
2. Immediately upon receipt by [Dee] of the owner’s
duplicate of Transfer Certificate of Title No.
-619608- (TCT No. -619608-), respondents PEPI and
AFP-RSBS are hereby ordered to deliver the title of
the subject lot in the name of [Dee] free from all
liens and encumbrances;
3. Directing respondents PEPI and AFP-RSBS to pay
[the petitioner] the redemption value of Lot 12,
Block 21-A, Village East Executive Homes covered by
Transfer Certificate of Title No. -619608- (TCT No.
-619608-) as agreed upon by them in their Real
Estate Mortgage within six (6) months from the
time the owner’s duplicate of Transfer Certificate of
Title No. -619608- (TCT No. -619608-) is actually
surrendered and released by [the petitioner] to
[Dee];
4. In the alternative, in case of legal and physical
impossibility on the part of [PEPI, AFP-RSBS, and the
petitioner] to comply and perform their respective
obligation/s, as above-mentioned, respondents PEPI
and AFP-RSBS are hereby ordered to jointly and
severally pay to [Dee] the amount of FIVE HUNDRED
TWENTY THOUSAND PESOS ([P]520,000.00) plus
twelve percent (12%) interest to be computed from
the filing of complaint on April 24, 2002 until fully
paid; and
5. Ordering [PEPI, AFP-RSBS, and the petitioner] to
pay jointly and severally [Dee] the following sums:
a) The amount of TWENTY FIVE THOUSAND PESOS
([P]25,000.00) as attorney’s fees;
b) The cost of litigation[;] and
c) An administrative fine of TEN THOUSAND PESOS
([P]10,000.00) payable to this Office fifteen (15)
days upon receipt of this decision, for violation of
Section 18 in relation to Section 38 of PD 957.
SO ORDERED.9
The HLURB decision was affirmed by its Board of
Commissioners per Decision dated March 15, 2004,
with modification as to the rate of interest.10
On appeal, the Board of Commissioners’ decision
was affirmed by the OP in its Decision dated August
4, 2004, with modification as to the monetary
award.11
Hence, the petitioner filed a petition for review with
the CA, which, in turn, issued the assailed Decision
dated August 13, 2007, affirming the OP decision.
The dispositive portion of the decision reads:
WHEREFORE, in view of the foregoing, the petition
is DENIED. The Decision dated August 4, 2004
rendered by the Office of the President in O. P. Case
No. 04-D-182 (HLURB Case No. REM-A-030724-
0186) is hereby AFFIRMED.
SO ORDERED.12
Its motion for reconsideration having been denied
by the CA in the Resolution dated March 13, 2008,
the petitioner filed the present petition for review
on the following grounds:
I. THE HONORABLE COURT OF APPEALS
ERRED IN ORDERING OUTRIGHT RELEASE
OF TCT NO. 619608 DESPITE PNB’S DULY
REGISTERED AND HLURB[-] APPROVED
MORTGAGE ON TCT NO. 619608.
II. THE HONORABLE COURT OF APPEALS
ERRED IN ORDERING CANCELLATION OF
MORTGAGE/RELEASE OF TITLE IN FAVOR
OF RESPONDENT DEE DESPITE THE LACK
OF PAYMENT OR SETTLEMENT BY THE
MORTGAGOR (API/PEPI and AFP-RSBS)
OF ITS EXISTING LOAN OBLIGATION TO
PNB, OR THE PRIOR EXERCISE OF RIGHT
OF REDEMPTION BY THE MORTGAGOR
AS MANDATED BY SECTION 25 OF PD
957 OR DIRECT PAYMENT MADE BY
RESPONDENT DEE TO PNB PURSUANT TO
THE DEED OF UNDERTAKING WHICH
WOULD WARRANT RELEASE OF THE
SAME.13
The petitioner claims that it has a valid mortgage
over Dee’s property, which was part of the property
mortgaged by PEPI to it to secure its loan obligation,
and that Dee and PEPI are bound by such mortgage.
The petitioner also argues that it is not privy to the
transactions between the subdivision project buyers
and PEPI, and has no obligation to perform any of
their respective undertakings under their contract.14
The petitioner also maintains that Presidential
Decree (P.D.) No. 95715 cannot nullify the subsisting
agreement between it and PEPI, and that the
petitioner’s rights over the mortgaged properties
are protected by Act 313516. If at all, the petitioner
can be compelled to release or cancel the mortgage
only after the provisions of P.D. No. 957 on
redemption of the mortgage by the
owner/developer (Section 25) are complied with.
The petitioner also objects to the denomination by
the CA of the provisions in the Affidavit of
Undertaking as stipulations pour autrui,17 arguing
that the release of the title was conditioned on
Dee’s direct payment to it.18
Respondent AFP-RSBS, meanwhile, contends that it
cannot be compelled to pay or settle the obligation
under the mortgage contract between PEPI and the
petitioner as it is merely an investor in the
subdivision project and is not privy to the
mortgage.19
Respondent PEPI, on the other hand, claims that the
title over the subject property is one of the
properties due for release by the petitioner as it has
already been the subject of a Memorandum of
Agreement and dacion en pago entered into
between them.20 The agreement was reached after
PEPI filed a petition for rehabilitation, and
contained the stipulation that the petitioner agreed
to release the mortgage lien on fully paid
mortgaged properties upon the issuance of the
certificates of title over the dacioned properties.21
For her part, respondent Dee adopts the arguments
of the CA in support of her prayer for the denial of
the petition for review.22
Ruling of the Court
The petition must be DENIED.
The petitioner is correct in arguing that it is not
obliged to perform any of the undertaking of
respondent PEPI and AFP-RSBS in its transactions
with Dee because it is not a privy thereto. The basic
principle of relativity of contracts is that contracts
can only bind the parties who entered into it, 23 and
cannot favor or prejudice a third person, even if he
is aware of such contract and has acted with
knowledge thereof.24 "Where there is no privity of
contract, there is likewise no obligation or liability to
speak about."25
The petitioner, however, is not being tasked to
undertake the obligations of PEPI and AFP-
RSBS.1avvphi1 In this case, there are two phases
involved in the transactions between respondents
PEPI and Dee – the first phase is the contract to sell,
which eventually became the second phase, the
absolute sale, after Dee’s full payment of the
purchase price. In a contract of sale, the parties’
obligations are plain and simple. The law obliges the
vendor to transfer the ownership of and to deliver
the thing that is the object of sale. 26 On the other
hand, the principal obligation of a vendee is to pay
the full purchase price at the agreed time. 27 Based
on the final contract of sale between them, the
obligation of PEPI, as owners and vendors of Lot 12,
Block 21-A, Village East Executive Homes, is to
transfer the ownership of and to deliver Lot 12,
Block 21-A to Dee, who, in turn, shall pay, and has in
fact paid, the full purchase price of the property.
There is nothing in the decision of the HLURB, as
affirmed by the OP and the CA, which shows that
the petitioner is being ordered to assume the
obligation of any of the respondents. There is also
nothing in the HLURB decision, which validates the
petitioner’s claim that the mortgage has been
nullified. The order of cancellation/release of the
mortgage is simply a consequence of Dee’s full
payment of the purchase price, as mandated by
Section 25 of P.D. No. 957, to wit:
Sec. 25. Issuance of Title. The owner or developer
shall deliver the title of the lot or unit to the buyer
upon full payment of the lot or unit. No fee, except
those required for the registration of the deed of
sale in the Registry of Deeds, shall be collected for
the issuance of such title. In the event a mortgage
over the lot or unit is outstanding at the time of the
issuance of the title to the buyer, the owner or
developer shall redeem the mortgage or the
corresponding portion thereof within six months
from such issuance in order that the title over any
fully paid lot or unit may be secured and delivered
to the buyer in accordance herewith.
It must be stressed that the mortgage contract
between PEPI and the petitioner is merely an
accessory contract to the principal three-year loan
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takeout from the petitioner by PEPI for its
expansion project. It need not be belaboured that
"[a] mortgage is an accessory undertaking to secure
the fulfillment of a principal obligation,"28 and it
does not affect the ownership of the property as it
is nothing more than a lien thereon serving as
security for a debt.29
Note that at the time PEPI mortgaged the property
to the petitioner, the prevailing contract between
respondents PEPI and Dee was still the Contract to
Sell, as Dee was yet to fully pay the purchase price
of the property. On this point, PEPI was acting fully
well within its right when it mortgaged the property
to the petitioner, for in a contract to sell, ownership
is retained by the seller and is not to pass until full
payment of the purchase price.30 In other words, at
the time of the mortgage, PEPI was still the owner
of the property. Thus, in China Banking Corporation
v. Spouses Lozada, 31 the Court affirmed the right of
the owner/developer to mortgage the property
subject of development, to wit: "[P.D.] No. 957
cannot totally prevent the owner or developer from
mortgaging the subdivision lot or condominium unit
when the title thereto still resides in the owner or
developer awaiting the full payment of the purchase
price by the installment buyer."32 Moreover, the
mortgage bore the clearance of the HLURB, in
compliance with Section 18 of P.D. No. 957, which
provides that "[n]o mortgage on any unit or lot shall
be made by the owner or developer without prior
written approval of the [HLURB]."
Nevertheless, despite the apparent validity of the
mortgage between the petitioner and PEPI, the
former is still bound to respect the transactions
between respondents PEPI and Dee. The petitioner
was well aware that the properties mortgaged by
PEPI were also the subject of existing contracts to
sell with other buyers. While it may be that the
petitioner is protected by Act No. 3135, as
amended, it cannot claim any superior right as
against the installment buyers. This is because the
contract between the respondents is protected by
P.D. No. 957, a social justice measure enacted
primarily to protect innocent lot buyers.33 Thus, in
Luzon Development Bank v. Enriquez, 34 the Court
reiterated the rule that a bank dealing with a
property that is already subject of a contract to sell
and is protected by the provisions of P.D. No. 957, is
bound by the contract to sell.35
However, the transferee BANK is bound by the
Contract to Sell and has to respect Enriquez’s rights
thereunder. This is because the Contract to Sell,
involving a subdivision lot, is covered and protected
by PD 957.
x x x.
xxxx
x x x Under these circumstances, the BANK knew or
should have known of the possibility and risk that
the assigned properties were already covered by
existing contracts to sell in favor of subdivision lot
buyers. As observed by the Court in another case
involving a bank regarding a subdivision lot that was
already subject of a contract to sell with a third
party:
"[The Bank] should have considered that it was thing as equivalent to the obligation, in which case
dealing with a property subject of a real estate the obligation is totally extinguished.43
development project. A reasonable person,
particularly a financial institution x x x, should have
There is nothing on record showing that the
been aware that, to finance the project, funds other
Memorandum of Agreement has been nullified or is
than those obtained from the loan could have been
the subject of pending litigation; hence, it carries
used to serve the purpose, albeit partially. Hence,
with it the presumption of validity. 44 Consequently,
there was a need to verify whether any part of the
the execution of the dation in payment effectively
property was already intended to be the subject of
extinguished respondent PEPI’s loan obligation to
any other contract involving buyers or potential
the petitioner insofar as it covers the value of the
buyers. In granting the loan, [the Bank] should not
property purchased by Dee. This negates the
have been content merely with a clean title,
petitioner’s claim that PEPI must first redeem the
considering the presence of circumstances
property before it can cancel or release the
indicating the need for a thorough investigation of
mortgage. As it now stands, the petitioner already
the existence of buyers x x x. Wanting in care and
stepped into the shoes of PEPI and there is no more
prudence, the [Bank] cannot be deemed to be an
reason for the petitioner to refuse the cancellation
innocent mortgagee. x x x"36 (Citation omitted)
or release of the mortgage, for, as stated by the
Court in Luzon Development Bank, in accepting the
More so in this case where the contract to sell has assigned properties as payment of the obligation,
already ripened into a contract of absolute "[the bank] has assumed the risk that some of the
sale.1âwphi1 assigned properties are covered by contracts to sell
which must be honored under PD 957."45 Whatever
claims the petitioner has against PEPI and AFP-RSBS,
Moreover, PEPI brought to the attention of the
monetary or otherwise, should not prejudice the
Court the subsequent execution of a Memorandum
rights and interests of Dee over the property, which
of Agreement dated November 22, 2006 by PEPI
she has already fully paid for.
and the petitioner. Said agreement was executed
pursuant to an Order dated February 23, 2004 by
the Regional Trial Court (RTC) of Makati City, Branch As between these small lot buyers and the gigantic
142, in SP No. 02-1219, a petition for Rehabilitation financial institutions which the developers deal
under the Interim Rules of Procedure on Corporate with, it is obvious that the law—as an instrument of
Rehabilitation filed by PEPI. The RTC order approved social justice—must favor the weak.46 (Emphasis
PEPI’s modified Rehabilitation Plan, which included omitted)
the settlement of the latter’s unpaid obligations to
its creditors by way of dacion of real properties. In
Finally, the Court will not dwell on the arguments of
said order, the RTC also incorporated certain
AFP-RSBS given the finding of the OP that "[b]y its
measures that were not included in PEPI’s plan, one
non-payment of the appeal fee, AFP-RSBS is
of which is that "[t]itles to the lots which have been
deemed to have abandoned its appeal and accepts
fully paid shall be released to the purchasers within
the decision of the HLURB."47 As such, the HLURB
90 days after the dacion to the secured creditors
decision had long been final and executory as
has been completed."37 Consequently, the
regards AFP-RSBS and can no longer be altered or
agreement stipulated that as partial settlement of
modified.48
PEPI’s obligation with the petitioner, the former
absolutely and irrevocably conveys by way of
"dacion en pago" the properties listed WHEREFORE, the petition for review is DENIED for
therein,38 which included the lot purchased by Dee. lack of merit. Consequently, the Decision dated
The petitioner also committed to – August 13, 2007 and Resolution dated March 13,
2008 of the Court of Appeals in CA-G.R. SP No.
86033 are AFFIRMED.
[R]elease its mortgage lien on fully paid Mortgaged
Properties upon issuance of the certificates of title
Petitioner Philippine National Bank and respondents
over the Dacioned Properties in the name of the
Prime East Properties Inc. and Armed Forces of the
[petitioner]. The request for release of a Mortgaged
Property shall be accompanied with: (i) proof of full Philippines-Retirement and Separation Benefits
payment by the buyer, together with a certificate of System, Inc. are hereby ENJOINED to strictly comply
full payment issued by the Borrower x x x. The with the Housing and Land Use Regulatory Board
[petitioner] hereby undertakes to cause the transfer Decision dated May 21, 2003, as modified by its
of the certificates of title over the Dacioned Board of Commissioners Decision dated March 15,
Properties and the release of the Mortgaged 2004 and Office of the President Decision dated
Properties with reasonable dispatch.39 August 4, 2004.
Dacion en pago or dation in payment is the delivery SO ORDERED.
and transmission of ownership of a thing by the
debtor to the creditor as an accepted equivalent of
the performance of the obligation. 40 It is a mode of
extinguishing an existing obligation41 and partakes
the nature of sale as the creditor is really buying the
thing or property of the debtor, the payment for
which is to be charged against the debtor’s
debt.42 Dation in payment extinguishes the
obligation to the extent of the value of the thing
delivered, either as agreed upon by the parties or as
may be proved, unless the parties by agreement –
express or implied, or by their silence – consider the
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SPOUSES TEOFILO ERCILLO and TERESITA ERCILLO,
Petitioners, vs.  COURT OF APPEALS and SPOUSES
LUTGARDA CIFRA and BENJAMIN CIFRA, SR.,
represented by their son and attorney-in-fact,
BENJAMIN CIFRA, JR., and HON. JOSE P. CASTRO,
Respondents.
 
DECISION
MEDIALDEA, J.:
 
This is a petition for review of the decision of the
Court of Appeals in CA-G.R. No. SP-10524 which
affirmed the decision of the then Court of First
Instance of Rizal, Quezon City, Branch IX affirming
the judgment of the City Court of Quezon City.
The facts of the case are as follows:
Private respondents spouses Benjamin Cifra and
Lutgarda Cifra leased an apartment building located
at 11-C Purdue Street, Cubao, Quezon City, to
herein petitioners spouses Teofilo Ercillo and
Teresita Ercillo at a monthly rental of P140.00
payable within the first five (5) days of the month at
the residence of private respondents.
On November 23, 1976, private respondents filed
an action for unlawful detainer with the City Court
of Quezon City. It was alleged in the complaint that
the petitioners failed to pay the rentals for the
month of August, 1976 up to the filing of the
complaint; that private respondents demanded
from petitioners payment of the accrued rentals
and the surrender of the possession of the leased
premises to them before the complaint was filed
and that the petitioners neither paid the accrued
rentals nor surrendered the possession of the
leased premises.
Petitioners, on the other hand, alleged that they
never defaulted in the payment of their rentals; that
private respondents refused to accept their
payments; that they deposited the payments with
the Family Savings Bank, Account No. 419022473, in
the name of Mrs. Teresita Ercillo or Mrs. Lutgarda
Cifra and that the petitioners were advised by the
former of the said deposit.: nad
Sometime also in November, 1976, the private
respondents filed a complaint against the
petitioners with the Office of the Civil Relations
(OCR), Philippine Constabulary at Camp Crame,
Quezon City. The petitioners then withdrew the
rentals deposited with the Family Savings Bank and
deposited the money and the accruing rentals with
the OCR. When the action for ejectment was
pending with the City Court, the petitioners
deposited the rentals with the said court.
After trial, the City Court rendered a decision in
favor of private respondents, the dispositive portion
of the decision provides:
"WHEREFORE, . . . this Court finds the material
allegations in the complaint filed in this case to be
duly proved with convincing and satisfactory
evidence and rendered judgment in favor of
plaintiffs and against defendants spouses TEOFILO
ERCILLO and TERESITA ERCILLO, as follows:
"1. Ordering defendants and all persons claiming
rights under them to vacate the premises located at
11-C Purdue Street, Cubao Quezon City and restore
the peaceful possession thereof to plaintiffs;
"2. Ordering defendants, jointly and severally, to
pay plaintiffs the sum of P1,680.00 representing
accrued monthly rentals for the period August, 1976
to July, 1977 at P144.00 a month;
"3. Ordering defendants, jointly and severally, to
pay plaintiffs the further sum of P144.00 a month
commencing on August 1, 1977 and every month
thereafter until they and all persons claiming rights
under them finally vacate the premises and restore
the peaceful possession thereof to plaintiffs;
"4. Ordering defendants jointly and severally, to pay
the sum of P1,500.00, as and for attorney's fees;
and
"5. Ordering defendants, jointly and severally, to
pay the cost of the suit.
"The counter-claim interposed by the defendants is
hereby dismissed for lack of merit.
"SO ORDERED." (pp. 14-15, Rollo).
On appeal to the then Court of First Instance of
Rizal, Seventh Judicial District, Quezon City, the
decision of the City Court was affirmed in toto.
The petitioners filed a petition for review with
respondent Court of Appeals which dismissed the
petition for lack of merit in a decision promulgated
on September 6, 1980 (pp. 14-18, Rollo). The
decision of the Court of Appeals stated:
"Since the consignation of the accrued rentals with
the Court was made only during the pendency of
the ejectment case, although they (petitioners) had
effected deposits with the Office of the Civil
Relations, which office as opined by the trial court,
"is not a judicial authority," such act could not have
and did not have the effect of discharging
petitioners' obligation in the payment of
rentals.chanrobles virtual law library
"Thus, no judicial consignation having been made in
accordance with Art. 1256, 1257 and 1258 of the
New Civil Code;
"WHEREFORE, for lack of merit the instant petition
for review is hereby DISMISSED.
"SO ORDERED." (p. 18, Rollo)
On December 1, 1980, petitioners filed the instant
petition with this Court.
The petitioners contend that respondent Court of
Appeals committed a legal error when it ruled that
the deposit of the rentals with the bank did not
release the petitioners from their obligation to pay
the rentals and that LOI 768 which took effect only
on November 16, 1978 cannot apply to this case
which was filed on November 23, 1976.
The petition is devoid of merit.
The issue to be resolved in this case is whether or
not the private respondents had a valid ground for
ejecting petitioners.
The ground raised by private respondents in
ejecting petitioners from the leased premises is the
latter's failure to pay rents due. There is no question
that this is one of the grounds by which a lessor may
judicially eject the lessee under Article 1673 of the
New Civil Code. Further, Section 2, Rule 70 of the
Rules of Court requires that a lessor or his legal
representative shall bring an action against a lessee
for failure to pay rent due only after the lessee shall
have failed to pay such rent for a period of fifteen
days after a written demand therefor had been
made. Private respondents assert that there was no
payment of the rent due within the fifteen (15) day
period prescribed by the rules nor even after the
lapse of the fifteen (15) day period after a written
demand to pay and to vacate was made on
petitioners.
The petitioners, for their part, assert that their
obligation to pay rent had been extinguished in view
of their consignation of the rent due with the bank
after the private respondents refused to accept
them.
The law on tender of payment and consignation as a
mode of extinguishing an obligation is covered by
Article 1256, Article 1257 and Article 1258 of the
New Civil Code.
"Art. 1256. If the creditor to whom tender of
payment has been made refuses without just cause
to accept it, the debtor shall be released from
responsibility by the consignation of the thing or
sum due.
"x  x  x
"Art. 1257. In order that the consignation of the
thing due may release the obligor, it must first be
announced to the persons interested in the
fulfillment of the obligation.
"The consignation shall be ineffectual if it is not
made strictly in consonance with the provisions
which regulate payment.
"Art. 1258. Consignation shall be made by
depositing the things due at the disposal of judicial
authority before whom the tender of payment shall
be proved, in a proper case, and the announcement
of the consignation in other cases.
"The consignation having been made, the interested
parties shall also be notified thereof."
It is the requirement under Article 1258 which had
not been strictly complied with by petitioners. What
the law requires is the deposit of the thing due at
the disposal of judicial authority before whom the
tender of payment shall be proved, in a proper case.
The deposit of the rentals with the bank is not the
consignation contemplated by law. Depositing the
rentals in the bank does not place such rental at the
disposal of the judicial authority.chanrobles virtual
law library
Petitioners argue further that since the case is still
pending, the full legal effect of P.D. 20 together with
its implementing Instructions, LOI 768, should be
made to apply in this case.
P.D. 20, issued on October 12, 1972, amended
Republic Act No. 6359 regulating rentals for
dwelling units. It was not until November 16, 1978
when Letter of Instruction No. 768 was issued
implementing P.D. 20. It provided, among others:
"3. The following shall not constitute grounds for
judicial ejectment of lessees:
"a) That the lessee has failed to pay any increased
rental not mutually agreed upon; provided, that in
case of refusal of the lessor to accept payment of
the rent previously agreed upon, the lessee shall
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either consignate the amount in court or deposit
the said amount in a bank for the account of the
lessor."
Petitioners seek shelter under this provision.
However, it should be noted that LOI 768 which
allows the deposit of accrued rentals in a bank as an
alternative to consignation in court of rental
payments which the lessor refuses to accept, was
issued only on November 16, 1978. The action for
ejectment, on the other hand was filed on
November 23, 1976 or some two (2) years before
the issuance of LOI 768 when the law in effect then
was Article 1257 of the New Civil Code. Clearly, the
private respondents had, at the time of the
institution of the complaint, a valid ground for
ejecting petitioners.
ACCORDINGLY, the petition is DENIED for lack of
merit.
SO ORDERED.
G.R. No. 172346               July 24, 2013
SPOUSES NAMEAL and LOURDES
BONROSTRO, Petitioners,
vs.
SPOUSES JUAN and CONSTANCIA
LUNA, Respondents.
DECISION
DEL CASTILLO, J.:
Questioned in this case is the Court of Appeals' (CA)
disquisition on the matter of interest.
Petitioners spouses Nameal and Lourdes Bonrostro
(spouses Bonrostro) assail through this Petition for
Review on Certiorari1 the April 15, 2005 Decision2 of
the CA in CA-G.R. CV No. 56414 which affirmed with
modifications the April 4, 1997 Decision 3 of the
Regional Trial Court (RTC) of Quezon City, Branch
104 in Civil Case No. Q-94-18895. They likewise
question the CA April17, 2006 Resolution 4 denying
their motion for partial reconsideration.
Factual Antecedents
In 1992, respondent Constancia Luna (Constancia),
as buyer, entered into a Contract to Sell 5 with Bliss
Development Corporation (Bliss) involving a house
and lot identified as Lot 19, Block 26 of New Capitol
Estates in Diliman, Quezon City. Barely a year after,
Constancia, this time as the seller, entered into
another Contract to Sell6 with petitioner Lourdes
Bonrostro (Lourdes) concerning the same property
under the following terms and conditions:
1. The stipulated price of ₱1,250,000.00
shall be paid by the VENDEE to the
VENDOR in the following manner:
(a) ₱200,000.00 upon signing
x x x the Contract To Sell,
(b) ₱300,000.00 payable on or
before April 30, 1993,
(c) ₱330,000.00 payable on or
before July 31, 1993,
(d) ₱417,000.00 payable to
the New Capitol Estate, for 15
years at ₱6,867.12 a month,
2. x x x In the event the VENDEE fails to
pay the second installment on time, the
VENDEE will pay starting May 1, 1993 a
2% interest on the ₱300,000.00 monthly.
Likewise, in the event the VENDEE fails
to pay the amount of ₱630,000.00 on
the stipulated time, this CONTRACT TO
SELL shall likewise be deemed cancelled
and rescinded and x x x 5% of the total
contract price of ₱1,250,000.00 shall be
deemed forfeited in favor of the
VENDOR. Unpaid monthly amortization
shall likewise be deducted from the
initial down payment in favor of the
VENDOR.7
Immediately after the execution of the said second
contract, the spouses Bonrostro took possession of
the property. However, except for the ₱200,000.00
down payment, Lourdes failed to pay any of the
stipulated subsequent amortization payments.
Ruling of the Regional Trial Court
On January 11, 1994, Constancia and her husband,
respondent Juan Luna (spouses Luna), filed before
the RTC a Complaint8 for Rescission of Contract and
Damages against the spouses Bonrostro praying for
the rescission of the contract, delivery of possession
of the subject property, payment by the latter of
their unpaid obligation, and awards of actual, moral
and exemplary damages, litigation expenses and
attorney’s fees.
In their Answer with Compulsory Counterclaim, 9 the
spouses Bonrostro averred that they were willing to
pay their total balance of ₱630,000.00 to the
spouses Luna after they sought from them a 60-day
extension to pay the same.10 However, during the
time that they were ready to pay the said amount in
the last week of October 1993, Constancia and her
lawyer, Atty. Arlene Carbon (Atty. Carbon), did not
show up at their rendezvous. On November 24,
1993, Lourdes sent Atty. Carbon a letter11 expressing
her desire to pay the balance, but received no
response from the latter. Claiming that they are still
willing to settle their obligation, the spouses
Bonrostro prayed that the court fix the period
within which they can pay the spouses Luna.
The spouses Bonrostro likewise belied that they
were not paying the monthly amortization to New
Capitol Estates and asserted that on November 18,
1993, they paid Bliss, the developer of New Capitol
Estates, the amount of ₱46,303.44. Later during
trial, Lourdes testified that Constancia instructed
Bliss not to accept amortization payments from
anyone as evidenced by her March 4, 1993
letter12 to Bliss.
On April 4, 1997, the RTC rendered its
Decision13 focusing on the sole issue of whether the
spouses Bonrostro’s delay in their payment of the
installments constitutes a substantial breach of their
obligation under the contract warranting rescission.
The RTC ruled that the delay could not be
considered a substantial breach considering that
Lourdes (1) requested for an extension within which
to pay; (2) was willing and ready to pay as early as
the last week of October 1993 and even wrote Atty.
Carbon about this on November 24, 1993; (3) gave
Constancia a down payment of ₱200,000.00; and,
(4) made payment to Bliss.
The dispositive portion of the said Decision reads:
WHEREFORE, in view of the foregoing, judgment is
hereby rendered as follows:
1.) Declaring the Contract to Sell
executed by the plaintiff Constancia and
defendant Lourdes with respect to the
house and lot located at Blk. 26, Lot 19,
New Capitol Estates, Diliman, Quezon
City to be in force and effect. And that
Lourdes Bonrostro must remain in the
possession of the premises.
2.) Ordering the defendants to pay
plaintiffs within 60 days from receipt of
this decision the sum of ₱300,000.00
plus an interest of 2% per month from
April 1993 to November 1993.
3.) Ordering the defendants to pay
plaintiffs within sixty (60) days from
receipt of this decision the sum of
₱330,000.00 plus an interest of 2% per
month from July 1993 to November
1993.
4.) Ordering the defendants to reimburse
plaintiffs the sum of ₱214,492.62 which
plaintiffs paid to Bliss Development
Corporation.
No pronouncement as to Cost.
SO ORDERED.14
As their Motion for Reconsideration15 was likewise
denied in an Order16 dated July 15, 1997, the
spouses Luna appealed to the CA.17
Ruling of the Court of Appeals
In its Decision 18 of April 15, 2005, the CA concluded
that since the contract entered into by and between
the parties is a Contract to Sell, rescission is not the
proper remedy. Moreover, the subject contract
being specifically a contract to sell a real property
on installment basis, it is governed by Republic Act
No. 655219 or the Maceda Law, Section 4 of which
states:
Sec. 4. In case where less than two years of
installment were paid, the seller shall give the buyer
a grace period of not less than sixty days from the
date the installment became due.
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If the buyer fails to pay the installments due at the
expiration of the grace period, the seller may cancel
the contract after thirty days from receipt by the
buyer of the notice of cancellation or the demand
for rescission of the contract by a notarial act.
(Emphases supplied)
The CA held that while the spouses Luna sent the
spouses Bonrostro letters20 rescinding the contract
for non-payment of the sum of ₱630,000.00, the
same could not be considered as valid and effective
cancellation under the Maceda Law since they were
made within the 60-day grace period and were not
notarized. The CA concluded that there being no
cancellation effected in accordance with the
procedure prescribed by law, the contract therefore
remains valid and subsisting.
The CA also affirmed the RTC’s finding that Lourdes
was ready to pay her obligation on November 24,
1993.
However, the CA modified the RTC Decision with
respect to interest, viz:
Nevertheless, there is a need to modify the
appealed decision insofar as (i) the interest imposed
on the sum of ₱300,000.00 is only for the period
April 1993 to November 1993; (ii) the interest
imposed on the sum of ₱330,000.00 is 2% per
month and is only for the period July 1993 to
November 1993; (iii) it does not impose interest on
the amount of ₱214,492.62 which was paid by
Constancia to BLISS in behalf of Lourdes x x x
The rule is that ‘no interest shall be due unless it has
been expressly stipulated in writing’ (Art. 1956, Civil
Code). However, the contract does not provide for
interest in case of default in payment of the sum of
₱330,000.00 to Constancia and the monthly
amortizations to BLISS.
Considering that Lourdes had incurred x x x delay in
the performance of her obligations, she should pay
(i) interest at the rate of 2% per month on the sum
of ₱300,000.00 from May 1, 1993 until fully paid
and (ii) interest at the legal rate on the amounts of
₱330,000.00 and ₱214,492.62 from the date of
default (August 1, 1993 and April 4, 1997 date of
the appealed decision, respectively) until the same
are fully paid x x x21
Hence, the dispositive portion of the said Decision:
WHEREFORE, the appealed decision is AFFIRMED
with the MODIFICATIONS that paragraphs 2, 3, and
4 of its dispositive portion shall now read:
2.) Ordering the defendants to pay
plaintiffs the sum of ₱300,000.00 plus
interest thereon at the rate of 2% per
month from May 1, 1993 until fully paid;
3.) Ordering the defendants to pay
plaintiffs the sum of ₱330,000.00 plus
interest thereon at the legal rate from
August 1, 1993 until fully paid; and
4.) Ordering the defendants to reimburse
plaintiffs the sum of ₱214,492.62, which
plaintiffs paid to Bliss Development
Corporation, plus interest thereon at the
legal rate from filing of the complaint
until fully reimbursed.
SO ORDERED.22
The spouses Luna no longer assailed the ruling. On
the other hand, the spouses Bonrostro filed a Partial
Motion for Reconsideration23 questioning the
above-mentioned modifications. The CA, however,
denied for lack of merit the said motion in a
Resolution24 dated April 17, 2006.
Hence, this Petition for Review on Certiorari.
Issue
The basic issue in this case is whether the CA
correctly modified the RTC Decision with respect to
interests.
The Parties’ Arguments
As may be recalled, the RTC under paragraphs 2 and
3 of the dispositive portion of its Decision ordered
the spouses Bonrostro to pay the spouses Luna the
sums of ₱300,000.00 plus interest of 2% per month
from April 1993 to November 1993 and
₱330,000.00 plus interest of 2% per month from
July 1993 to November 1993, respectively. The CA
modified these by reckoning the payment of the 2%
interest on the ₱300,000.00 from May 1, 1993 until
fully paid and by imposing interest at the legal rate
on the ₱330,000.00 reckoned from August 1, 1993
until fully paid.
The spouses Bonrostro harp on the factual finding
of the RTC, as affirmed by the CA, that Lourdes was
willing and ready to pay her obligation as evidenced
by her November 24, 1993 letter to Atty. Carbon.
They also assert that the sending of the said letter
constitutes a valid tender of payment on their part.
Hence, they argue that they should not be assessed
any interest subsequent to the date of the said
letter. Neither should they be ordered to pay
interest on the amount of ₱214,492.62 which
covers the amortizations paid by the spouses Luna
to Bliss. They point out that it was Constancia who
prevented them from fulfilling their obligation to
pay the amortizations when she instructed Bliss not
to accept payment from them.25
The spouses Luna, on the other hand, aver that the
November 24, 1993 letter of Lourdes is not
equivalent to tender of payment since the mere
sending of a letter expressing the intention to pay,
without the accompanying payment, cannot be
considered a valid tender of payment. Also, if the
spouses Bonrostro were really willing and ready to
pay at that time and assuming that the spouses
Luna indeed refused to accept payment, the former
should have resorted to consignation. Anent the
payment of amortization, the spouses Luna explain
that under the parties’ Contract to Sell, Lourdes was
to assume Constancia’s balance to Bliss by paying
the monthly amortization in order to avoid the
cancellation of the earlier Contract to Sell entered
into by Constancia with Bliss.26 However, since
Lourdes was remiss in paying the same, the spouses
Luna were constrained to pay the amortization.
They thus assert that reimbursement to them of the
said amount with interest is proper considering that
by reason of such payment, the spouses Bonrostro
were spared from the interests and penalties which
would have been imposed by Bliss if the
amortizations remained unpaid.
Our Ruling
The Petition lacks merit.
The spouses Bonrostro’s reliance on the RTC’s
factual finding that Lourdes was willing and ready to
pay on November 24, 1993 is misplaced.
As mentioned, the RTC in resolving the Complaint
focused on the sole issue of whether the failure of
spouses Bonrostro to pay the installments of
₱300,000.00 on April 30, 1993 and ₱330,000.00 on
July 31, 1993 is a substantial breach of their
obligation under the contract as to warrant the
rescission of the same.27 The said court ratiocinated,
viz:
After careful evaluation of the evidence testimonial
and documentary, the Court believes that the
defendants’ delay in the payment of the two
installments is not so substantial as to warrant
rescission of contract. Although, the defendant
failed to pay the two installments in due time, she
was able to communicate with the plaintiffs through
letters requesting for an extension of two months
within which to pay the installments. In fact, on
November 24, 1993 defendant informed Atty.
Arlene Carbon that she was ready to pay the
installments and the money is ready for pick-up.
However, plaintiff did not bother to get or pick-up
the money without any valid reason. It would be
very prejudicial on the part of the defendant if the
contract to sell be rescinded considering that she
made a downpayment of ₱200,000.00 and made
partial amortization to the Bliss Development
Corporation. In fact, the defendant testified that she
is willing and ready to pay the balance including the
interest on November 24, 1993.
The Court is of the opinion that the delay in the
payment of the balance of the purchase price of the
house and lot is not so substantial as to warrant the
rescission of the contract to sell. The question of
whether a breach of contract is substantial depends
upon the attendant circumstance. x x x28
Clearly, the RTC arrived at the above-quoted
conclusion based on its mistaken premise that
rescission is applicable to the case. Hence, its
determination of whether there was substantial
breach. As may be recalled, however, the CA, in its
assailed Decision, found the contract between the
parties as a contract to sell, specifically of a real
property on installment basis, and as such
categorically declared rescission to be not the
proper remedy. This is considering that in a contract
to sell, payment of the price is a positive suspensive
condition, failure of which is not a breach of
contract warranting rescission under Article
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119129 of the Civil Code but rather just an event that
prevents the supposed seller from being bound to
convey title to the supposed buyer.30 Also, and as
correctly ruled by the CA, Article 1191 cannot be
applied to sales of real property on installment since
they are governed by the Maceda Law.31
There being no breach to speak of in case of non-
payment of the purchase price in a contract to sell,
as in this case, the RTC’s factual finding that Lourdes
was willing and able to pay her obligation – a
conclusion arrived at in connection with the said
court’s determination of whether the non-payment
of the purchase price in accordance with the terms
of the contract was a substantial breach warranting
rescission – therefore loses significance. The
spouses Bonrostro’s reliance on the said factual
finding is thus misplaced. They cannot invoke their
readiness and willingness to pay their obligation on
November 24, 1993 as an excuse from being made
liable for interest beyond the said date.
The spouses Bonrostro are liable for interest on the
installments due from the date of default until fully
paid.
The spouses Bonrostro assert that Lourdes’ letter of
November 24, 1993 amounts to tender of payment
of the remaining balance amounting to
₱630,000.00. Accordingly, thenceforth, accrual of
interest should be suspended.
Tender of payment "is the manifestation by the
debtor of a desire to comply with or pay an
obligation. If refused without just cause, the tender
of payment will discharge the debtor of the
obligation to pay but only after a valid consignation
of the sum due shall have been made with the
proper court."32 "Consignation is the deposit of the
proper amount with a judicial authority in
accordance with rules prescribed by law, after the
tender of payment has been refused or because of
circumstances which render direct payment to the
creditor impossible or inadvisable."33
"Tender of payment, without more, produces no
effect."34 "To have the effect of payment and the
consequent extinguishment of the obligation to pay,
the law requires the companion acts of tender of
payment and consignation."35
As to the effect of tender of payment on interest,
noted civilist Arturo M. Tolentino explained as
follows:
When a tender of payment is made in such a form
that the creditor could have immediately realized
payment if he had accepted the tender, followed by
a prompt attempt of the debtor to deposit the
means of payment in court by way of consignation,
the accrual of interest on the obligation will be
suspended from the date of such tender. But when
the tender of payment is not accompanied by the
means of payment, and the debtor did not take any
immediate step to make a consignation, then
interest is not suspended from the time of such
tender. x x x x36 (Emphasis supplied)
Here, the subject letter merely states Lourdes’
willingness and readiness to pay but it was not
accompanied by payment. She claimed that she
made numerous telephone calls to Atty. Carbon
reminding the latter to collect her payment, but,
neither said lawyer nor Constancia came to collect
the payment. After that, the spouses Bonrostro took
no further steps to effect payment. They did not
resort to consignation of the payment with the
proper court despite knowledge that under the
contract, non-payment of the installments on the
agreed date would make them liable for interest
thereon. The spouses Bonrostro erroneously
assumed that their notice to pay would excuse
them from paying interest. Their claimed tender of
payment did not produce any effect whatsoever
because it was not accompanied by actual payment
or followed by consignation. Hence, it did not
suspend the running of interest. The spouses
Bonrostro are therefore liable for interest on the
subject installments from the date of default until
full payment of the sums of ₱300,000.00 and
₱330,000.00.
The spouses Bonrostro are likewise liable for
interest on the amount paid by the spouses Luna to
Bliss as amortization.
The spouses Bonrostro want to be relieved from
paying interest on the amount of ₱214,492.62
which the spouses Luna paid to Bliss as
amortizations by asserting that they were
prevented by the latter from fulfilling such
obligation. They invoke Art. 1186 of the Civil Code
which provides that "the condition shall be deemed
fulfilled when the obligor voluntarily prevents its
fulfillment."
However, the Court finds Art. 1186 inapplicable to
this case. The said provision explicitly speaks of a
situation where it is the obligor who voluntarily
prevents fulfillment of the condition. Here,
Constancia is not the obligor but the obligee.
Moreover, even if this significant detail is to be
ignored, the mere intention to prevent the
happening of the condition or the mere placing of
ineffective obstacles to its compliance, without
actually preventing fulfillment is not sufficient for
the application of Art. 1186.37 Two requisites must
concur for its application, to wit: (1) intent to
prevent fulfillment of the condition; and, (2) actual
prevention of compliance.38
In this case, while it is undisputed that Constancia
indeed instructed Bliss on March 4, 1994 not to
accept payment from anyone but her, there is
nothing on record to show that Bliss heeded the
instruction of Constancia as to actually prevent the
spouses Bonrostro from making payments to Bliss.
There is no showing that subsequent to the said
letter, the spouses Bonrostro attempted to make
payment to and was refused by Bliss. Neither was
there a witness presented to prove that Bliss indeed
gave effect to the instruction contained in
Constancia’s letter. While Bliss’ Project
Development Officer, Mr. Ariel Cordero, testified
during trial, nothing could be gathered from his
testimony regarding this except for the fact that
Bliss received the said letter.39 In view of these, the
spouses Luna could not be said to have placed an
effective obstacle as to actually prevent the spouses
Bonrostro from making amortization payments to
Bliss.
On the other hand, there are telling circumstances
which militate against the spouses Bonrostro’s
claimed keenness to comply with their obligation to
pay the monthly amortization. After the execution
of the contract in January 1993, they immediately
took possession of the property but failed to make
amortization payments. It was only after seven
months or on November 18, 1993 that they made
payments to Bliss in the amount of
₱46,303.44.40 Whether the same covers previous
unpaid amortizations is also not clear as the receipt
does not indicate the same41 and per Statement of
Account42 as of March 8, 1994 issued by Bliss, the
unpaid monthly amortizations for February to
November 1993 in the total amount of ₱78,271.69
remained outstanding. There was also no payment
made of the amortizations due on December 4,
1993 and January 4, 199443 before the filing of the
Complaint on January 11, 1994.
On the part of the spouses Luna, it is
understandable that they paid the amortizations
due.1âwphi1 The assumption of payment of the
monthly amortization to Bliss was made part of the
obligations of the spouses Bonrostro under their
contract with the spouses Luna precisely to avoid
the cancellation of the earlier contract entered into
by Constancia with Bliss. But as the spouses
Bonrostro failed in this obligation, the spouses Luna
were constrained to pay Bliss to avoid the adverse
effect of such failure. This act of the spouses Luna
proved to be even more beneficial to the spouses
Bonrostro as the cancellation of the Contract to Sell
between Constancia and Bliss would result in the
cancellation of the subsequent Contract to Sell
between Constancia and Lourdes. Also, the spouses
Bonrostro were relieved from paying the penalties
that would have been imposed by Bliss if the
monthly amortizations covered by the said payment
remained unpaid. The Statements of
Account44 issued by Bliss clearly state that each
monthly amortization is due on or before the fourth
day of every month and a penalty equivalent to
1/10th of 1% per day of delay shall be imposed for
all payments made after due date. That translates
to 3% monthly or 36% per annum rate of interest,
three times higher than the 12% per annum rate of
interest correctly imposed by the CA.
Hence, the resulting situation is that the spouses
Luna are constrained to part with their money while
the spouses Bonrostro, despite being remiss in their
obligation to pay the monthly amortization, are
relieved from paying higher penalties at the
expense of the former. This is aside from the fact
that the spouses Bonrostro are in continued
possession of the subject property and are enjoying
the beneficial use thereof. Under the circumstances
and considering that the spouses Bonrostro are
obviously in delay in complying with their obligation
to pay the amortizations due from February 1993 to
January 1995 for which the spouses Luna paid
₱214,492.62,45 the CA correctly ordered the
reimbursement to the latter of the said amount
with interest. "Delay in the performance of an
obligation is looked upon with disfavor because,
when a party to a contract incurs delay, the other
party who performs his part of the contract suffers
damages thereby."46 As discussed, the spouses Luna
obviously suffered damages brought about by the
failure of the spouses Bonrostro to comply with
their obligation on time. "And, sans elaboration of
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the matter at hand, damages take the form of
interest x x x."47
Under Article 2209 of the Civil Code, "if the
obligation consists in the payment of a sum of
money, and the debtor incurs in delay, the
indemnity for damages, there being no stipulation
to the contrary, shall be the payment of the interest
agreed upon, and in the absence of stipulation, the
legal interest x x x." There being no stipulation on
interest in case of delay in the payment of
amortization, the CA thus correctly imposed interest
at the legal rate which is now 12% per annum.
WHEREFORE, the Petition for Review on Certiorari is
DENIED and the assailed Decision dated April 15,
2005 and the Resolution dated April 17, 2006 of the
Court of Appeals in CA-G.R. CV No. 56414 are
AFFIRMED.
SO ORDERED.
G.R. No. L-80800 April 12, 1989
IMELDA, LEONARDO, FIDELINO, JOSEFINA, ANITA,
AZUCENA, and SISA, all surnamed
SYJUCO, petitioners,
vs.
COURT OF APPEALS and FILIPINAS
BANK, respondents.
Manuel B. Dulay for petitioners.
Vicente G. Ericta & Associates for Filipinas Bank.
PARAS, J.:
Under consideration is a petition for review on
certiorari, seeking the reversal of the Decision *
(dated 23 July 1987) and Amended Decision and
Resolution * (dated 18 November 1987) of the
respondent Court of Appeals' (CA) Eighth Division,
the dispositive portions of which respectively state:
Re-Decision
WHEREFORE, judgment is hereby and
now modified as follows:
1. Petitioner is ordered to pay monthly
rentals only from the period January 1 to
June 30, 1984 in the amount of
P25,000.00 or P150,000.00;
2. Eugenio Trinidad and Kalayaan
Development & Industrial Corporation
and all persons claiming rights under
them are ordered to vacate the sub-
leased premises and surrender
possession thereof to private
respondents and to pay the latter the
sum of P150,000.00 representing
reasonable rental value of the same
premises from July to December 1984 at
the rate of P25,000.00 and thereafter the
same amount of P25,000.00 a month
until the premises are finally vacated and
possession restored to private
respondents;
3. The private respondents are ordered
to pay petitioner P50,000.00 in
attorney's fees;
4. The decisions of the respondent courts
inconsistent with this decision are
hereby set aside and the orders, writs
and processes issued pursuant thereto
are permanently enjoined;
5. This case hereby and now remanded
to the Regional Trial Court for
proceedings consonant with this
Decision; and
6. No costs. (pp. 39-40, Rollo)
Re Amended Decision and Resolution
WHEREFORE, with the modification that
the rental to be paid by petitioner be
P30,000.00 a month, for the period from
January to June 1984 or P180,000.00 for
six (6) months amending the questioned
Decision adjudging the reduced amount
of P25,000.00, as contained in par. 1 of
the dispositive portion; and likewise that
the reasonable rentals to be paid by
Eugenio Trinidad and Kalayaan
Development & Industrial Corporation
and all persons claiming right under
them be P30,000.00 a month until the
premises are finally vacated and
possession restored to private
respondents, the Decision sought to be
reconsidered is affirmed. (p. 58, Rollo)
Previously, the Pilipinas Bank had filed with Us a
petition to prohibit the enforcement pending
appeal of the Regional Trial Court's (RTC's) decision
and on appeal by certiorari from the decision of the
then Intermediate Appellate Court denying its
petition for review of the said RTC's decision. We
consolidated and, later, remanded both petitions to
respondent CA for further proceedings on the
merits, hence, the above rulings.
The facts found by the trial court, and adopted by
the CA, are as follows:
On September 29, 963 the petitioner
Pilipinas Bank, formerly Filipinas
Manufacturers Bank and Trust Company,
leased from the plaintiffs (now private
respondents) 1,387 (should be, 1,384)
square meters of land commencing from
January 1, 1963 and ending on
December 31, 1983 as per written
contract Exhibit 'A'.
Paragraph 6 of the Contract of Lease
allows the petitioner, as lessee, to "sub-
lease any part or portion of the premises
or the whole portion thereof without
obtaining the consent of the lessors
thereto."
On April 1, 1977, the petitioner sub-
leased to Eugenio Trinidad, President of
Kalayaan Development and Industrial
Corporation, a portion of 965 square
meters with a term that is coterminous
with the original lease contract and
therefore ending also on December 31,
1983 which contract of sublease was
likewise covered by a written contract
(Exhibit 10). The contract of sublease
was subject to the same terms and
conditions as of the original contract of
lease.'
Sections 3 and 6 of the Contract of Sub-
lease prohibited the sublessee Eugenio
Trinidad from further subleasing the
property subleased to him by the
petitioner.
Sections 3 and 6 of the Contract of Sub-
lease provide:
3. That the SUB-LESSEE hereby expressly
agrees and warrants that the leased
premises shall be used by him exclusively
for the Caloocan City Food and Fruit
Terminal store or market and that the
SUB-LESSEE is hereby prohibited from
using said premises for any other
purpose without the prior consent of the
SUB-LESSOR.
6. That the SUB-LESSEE shall not directly
or indirectly sub-lease, assign, transfer,
convey, mortgage or in any way
encumber its right to sublease over the
premises or any portion thereof under
any circumstances whatsoever any
contract made in violation of this clause
shall be null and void. It is expressly
understood and agreed by the herein
parties that the personal character of the
SUB-LESSEE as hereinbelow represented
and the nature of occupancy of the
leased premises as above restricted,
constitute and are special considerations
and inducement for the granting of the
sublease by the SUB-LESSOR;
consequently, any violation, direct or
indirect of any of the stipulations hereof
shall automatically and unequivocally
terminate this contract of lease effective
from the time such violation occurs.
Inspire of the prohibition to sublease and
in violation thereof, Eugenio Trinidad
"constructed stalls/stores thereon and
leased the same to 12 persons who
conducted their individual business."
On February 10, 1984, after the
expiration of the lease on December 31,
1983, private respondents filed an action
for unlawful detainer, against the
petitioner, as sole defendant, before the
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 MTC, Caloocan City, which was docketed
as Civil Case No. 16193.
The petitioner, as defendant, filed an
answer, which in the language of the
decision of the MTC "did not oppose the
ejectment as it affirmed the expiration of
the lease contract on December 31, 1983
but opposed the increased rentals being
demanded by the plaintiffs after the
expiration of the lease contending that
the demanded increase is
unconscionable and unreasonable."
On July 6,1984, six months after the
expiration of the lease and five months
after the filing of the complaint,
defendant bank' surrendered the
premises it occupied by surrendering to
the court the key to the bank structure.
(pp. 32-43, Rollo)
Meanwhile, Pilipinas Bank filed an ejectment case
against Eugenio Trinidad and Kalayaan Industrial
Development Corporation (Kalayaan, for short) on
26 September 1984 with the same MTC, docketed
as Civil Case No. 16617, after the latter court denied
its Motion to Admit Third Party Complaint in Civil
Case No. 16193, the original ejectment suit. These
two cases were subsequently consolidated.
However, upon motion of the defendants therein,
Civil Case No. 16617 was dismissed without
prejudice to whatever liability said defendants may
have in the original ejectment suit. The respondent
CA narrates further:
The MTC, on December 27, 1984,
rendered a decision the dispositive
portion of which reads:
WHEREFORE for reasons given, judgment
is hereby rendered for the plaintiffs,
ordering defendant Pilipinas Bank to pay
the former the sum of P180,000.00
representing the reasonable rental value
of the subject premises from January 1,
1984 to June 30, 1984 at the rate of
P30,000.00 a month.
Judgment is likewise rendered against
Eugenio Trinidad and Kalayaan
Development and Industrial Corporation
and all persons claiming right under
them to vacate the subleased premises
and surrender Possession thereof to the
plaintiffs, and to pay the latter the sum
of P180,000.00 representing reasonable
rental value of the subject premises from
July 1984 to December 1984 at the rate
of P30,000.00 a month up to and until
the subleased premises is finally vacated
and possession surrendered to the
plaintiffs.
The Pilipinas Bank and Kalayaan
Development and Industrial Corporation
are likewise ordered to pay, pro rata, the
sum of P10,000.00 as and for attorney's
fees plus costs of the suit.
Both petitioner and private respondents
appealed from this Decision.
On January 11, 1985, Eugenio Trinidad
who was not a party in Civil Case No.
16193 filed a motion for reconsideration
assailing the portion of the decision
making him liable to pay a monthly
rental on the ground that the sublessee
is not a party to the case and is not in
physical or material possession of the
leased premises after the expiration of
the contract of lease on December 31,
1983. Thus, according to petitioner,
when they vacated the premises on July
6, 1984, the only occupants of the
premises in question were the
stallholders or vendors with whom
neither the petitioner nor the private
respondents had any privity of contract.
In addition, petitioner observed, both
the MTC and private respondents'
counsel referred to the stallholders as
squatters, citing the transcript of the
hearing of March 27, 1984.
The motion for reconsideration of
Eugenio Trinidad has not been resolved
to the present.
On October 29,1985, the RTC in Civil
Case No. 11728 modified the MTC
decision in Civil Case No. 16193 on
appeal, as follows:
WHEREFORE, premises considered,
judgment is hereby rendered modifying
the decision of the trial court as follows:
1. Ordering the defendant and all
persons claiming rights under it,
including Kalayaan Development
Corporation, to vacate the premises
subject of this case covered by TCT No.
4856 of the Registry of Deeds of
Caloocan City and surrender the peaceful
possession thereof to the plaintiffs;
2. Ordering the defendant to pay
plaintiffs the sum of P30,000.00 a month
as fair rental value of the subject
premises from January 1, 1984 until the
same shall have been fully vacated. In
case of default of said defendant,
ordering the sublessee, Eugenio Trinidad
and/or Kalayaan Development Corp.,
subsidiarily liable to pay plaintiffs the
said fair rental value until the premises
shall have likewise been fully vacated;
3. Ordering defendant to pay P10,000.00
as and for attorney's fees; and
4. The costs of suit.
(pp. 34-36, Rollo)
In this present petition, the Syjucos assign the
following errors committed by the CA:
I. That the respondent Court erred in
applying Articles 1665, 1651 and 1266 of
the Civil Code;
II. That the respondent Court erred in
basing its judgment on misapprehension
of facts that private respondent has
completely vacated the premises leased
consisting of 1,387 sq.m.;
III. The respondent Court erred in
applying Article 1652 and Article 1651 of
the Civil Code;
IV. That the respondent Court erred in
basing its judgment on misapprehension
of facts that sublessees, Trinidad and
Kalayaan Development Corporation were
parties in the ejectment case in the
Metropolitan Trial Court docketed as
Civil Case No. 16193 entitled, "Syjuco et
al. v. Pilipinas Bank.".
V. The respondent Court erred in
ordering herein petitioners to pay
respondents attorney's fees in the
amount of P50,000.00. (p. 11, Rollo)
After considering the facts and the arguments
raised by the parties, We are constrained to dismiss
the petition.
1. At the outset, there is no doubt that
the lessee in a contract of lease is
obliged to return the thing subject of
said contract upon the expiration of the
period agreed upon. Article 1665 of the
Civil Code expressly requires that the
thing leased be returned. And it stands
to reason and the spirit of the law that,
as a general rule, not only a portion of
the thing leased be returned but the
whole of it. Additionally the law
mandates that the thing leased be
returned in the same condition.
This leads us to the question of whether or not
Pilipinas Bank is deemed to have performed its
obligation to return the property to the Syjucos, the
lessors-owners. The answer is in the affirmative. It
must be borne in mind that from the start, the
contract of sub-lease between the sub-lessee and
the present occupants is null and void. In point is
the contract of sublease between Pilipinas Bank as
sub-lessor and Eugenio Trinidad and Kalayaan,
Sections 3 and 6 of which provide:
3. That the SUBLESSEE hereby expressly
agrees and warrants that the leased
premises shall be used by him exclusively
for the Caloocan City Food and Fruit
Terminal store or market and that the
SUBLESSEE is hereby strictly prohibited
from using said premises for any other
purpose without the prior consent of the
SUBLESSOR.
xxxxx
12th Wave
 6. That the SUB-LESSEE shall not directly
or indirectly sublease, assign, transfer,
convey, mortgage or in any way
encumber its right to sublease over the
premises or any portion thereof under
any circumstances whatsoever; any
contract made in violation of this clause
shall be null and void. It is expressly
understood and agreed by the herein
parties that the personal character of the
SUB-LESSEE as hereinbelow represented
and the nature of occupancy of the
leased premises as above restricted,
constitute and are special considerations
and inducement for the granting of the
sublease by the SUBLESSOR;
consequently, any violation, direct or
indirect of any of the stipulations hereon
shall automatically and unequivocably
terminate this contract of lease effective
from the time such violation occurs. (pp.
33-34, Rollo)
It is well entrenched in this jurisdiction that the
contract is the law between the parties thereof
(Phil. American General Insurance v. Mutuc, 61
SCRA 22; Herrera v. Petrophil Corporation, 146
SCRA 360) provided nothing therein is contrary to
law, morals, good customs, public policy, or public
order (Lagunsad v. Soto, 92 SCRA 476). In the light
of the clear and express provisions of the
abovequoted contract, there is no doubt that the
contract entered into by Mr. Trinidad further sub-
leasing a portion of the premises to the present
occupants, is null and void.
Considering the above, the present occupants
cannot exactly be said to be claiming rights under
Pilipinas Bank, such claim of right merely being
apparent. The nullity of the occupants contract of
sub-lease with Mr. Trinidad completely negates any
juridical relation between Pilipinas Bank and said
occupants. Such nullity leads us to conclude that the
present occupants did so occupy the premises
under their own name and responsibility; thus,
properly labelled "squatters" by the respondent CA
(see Amended Decision, p. 53, Rollo). Likewise, in
view of the further sub- leasing of the premises to
the present occupants, Mr. Trinidad and Kalayaan
ceased to be sub-lessees of Pilipinas Bank by virtue
of the automatic termination of said contract of
sub-lease pursuant to Section 6 thereof (supra). As
correctly found by the respondent CA:
.... Eugenio Trinidad and Kalayaan
Development Corporation cannot be
accurately considered as claiming rights
which emanated from the original lessor-
lessee relationship between the
petitioner Bank and the private
respondents. It has been clearly
established that such relationship has
been tarnished by the violation
committed by the sublessee in further
subletting the premises to the squatters.
(Amended Decision, p. 53, Rollo)
Hence, when Pilipinas Bank surrendered the key to
the premises it physically occupied, it is deemed to
have completely returned the premises leased to it.
The obligation then to evict the occupants in the
premises could not be attributed to Pilipinas Bank
since any juridical relation between the Bank and
the occupants no longer exists and that the original
contract of lease had already been terminated by
virtue of said bank's withdrawal from the property.
As correctly ruled by the MTC in dismissing the
ejectment suit filed by Pilipinas Bank against Mr.
Trinidad, Kalayaan, and the occupants:
Upon the termination or expiration of
the lease contract between the Syjucos
and Pilipinas Bank on December 31,
1983, the latter has been dispossessed of
any legal right to eject the defendant
Kalayaan because there is no more
contract between them to speak of. The
authority of the plaintiff bank springs
from their sublease contract which
already expired. It now devolves upon
the Syjucos, the landowner, to do the
ejecting of the defendant, but since the
former has already filed an ejectment
suit against the Pilipinas Bank, as the
original lessee, there is no more need to
file another suit against the sublessee
Kalayaan because "a judgment of
eviction against the tenant binds and is
enforceable against his sublessee
although the latter was not made a party
to the case." (Gozon v. Dela Rosa, 77
Phil. 919; Ng Sui Tan v. Amparo, 80 Phil.
921; Go King v. Geronimo, 81 Phil. 445)
(MTC Order, p. 116, Rollo)
Clearly then, in the light of the foregoing discussion,
the present occupants did occupy the premises in
question in their own capacity. They cannot be said
to have a claim of right springing from the Pilipinas
Bank as original lessee because the lease agreement
between Mr. Trinidad (as president of Kalayaan)
and the present occupants is null and void, it being
contrary to the contract of sub-lease. Likewise, the
said contract of sub-lease having been automatically
ended when Mr. Trinidad further sub-leased the
premises to the occupants, no true claim of right to
possess the said premises may be ascribed to said
occupants as emanating from Pilipinas Bank. As
such, the latter cannot be considered the proper
party to oust said occupants within the meaning of
Section 1, Rule 70 of the Rules of Court.
If anybody is to blame for the Syjucos inability to
possess the premises occupied, it should be Mr.
Trinidad and the occupants themselves for having
gone against the contract of sublease between the
former and Pilipinas Bank. Contrary to the Syjucos
claim, fault cannot be imputed to Pilipinas Bank in
sub-leasing part of the property to Mr. Trinidad as
president of Kalayaan precisely because the Syjucos
themselves allowed subletting in the original
contract of lease. As found by the respondent CA,
"paragraph 6 of the contract of lease allows the
petitioner, as lessee, to sublease any part or portion
of the premises or the whole portion thereof
without obtaining the consent of the lessors
thereto." (p. 33, Rollo). On the contrary, Pilipinas
Bank even acted in herein petitioners' favor in
providing for Sections 3 and 6 in the contract of sub-
lease (supra).
In connection with the question on the applicability
of Articles 1266 and 1651 of the Civil Code in
relation to Article 1665, We rule that, under the
circumstances, it should be resolved in the negative.
Article 1266 cannot validly apply to the present case
since it makes express reference to obligations to do
(or personal obligations). This being so, it may not
be invoked in exempting Pilipinas Bank (as lessee)
from returning the whole property to the owners
thereof for such obligation to return is in the nature
of an obligation to give (or a real obligation), in
which case Article 1262, not Article 1266, applies.
Nevertheless, for reasons already discussed above,
Pilipinas is deemed to have fully satisfied its
obligation to return the whole property leased.
Similarly, Article 1651 cannot be correctly read with
Article 1665 in the latter's application to the case at
bar concerning the propriety of requiring the sub-
lessees (i.e., Mr. Trinidad and Kalayaan) to pay rents
directly to the lessors, Syjucos. Article 1651 clearly
and expressly refers to the use and preservation of
the thing leased and not to the matter of payment
of rents. This is so precisely because it is Article
1652 which outlines the sub-lessee's liability for
rents.
2. In their second assigned
error, the Syjucos assail the
respondent CA's finding that
Pilipinas Bank had
"completely vacated" (see pp.
49, 52, Rollo) the premises,
such being a misapprehension
of the facts. They clarify that
Pilipinas Bank surrendered
only a portion of the entire
1,387 square meters subject
of the lease contract, about
965 square meters of which
are still occupied by the sub-
lessees of Mr. Trinidad. On
the other hand, Pilipinas Bank
insists that it has indeed
vacated the place completely,
having physically and actually
withdrawn from the
premises. We find no cogent
reason for Us to deviate from
the said finding of fact.
As we had said earlier, Pilipinas Bank actually and
physically withdrew from the premises. It has
packed up all its properties and delivered the key to
the building it occupied to the trial court. the fact
that the sub-lessees of Mr. Trinidad remain in
possession of a larger portion of the property does
not change the truth that Pilipinas Bank has
completely left the same and that it has performed
its obligation to return the property leased. This is
because the occupants cannot be properly
considered as claiming rights from Pilipinas Bank, as
already discussed above. They possess the bigger
portion of the property in their own name; Pilipinas
Bank is not privy to the fact of their possession.
Hence, Pilipinas Bank is not responsible for the acts
of the present occupants in entering the premises
although they claim an apparent right from the
former.
3. Anent the third and fourth assigned
errors, the Syjucos essentially take
exception to the respondent CA's ruling
making Mr. Trinidad and Kalayaan and all
persons claiming rights under them
12th Wave
 primarily liable for rents from July 1984,
when Pilipinas Bank left the premises,
until the same are finally vacated and
possession restored to the Syjucos. They
argue that Article 1651 of the Civil Code
does not find application under the
circumstances and maintain that Article
1652 should be solely applied. They also
assail the CA's finding that Mr. Trinidad
and Kalayaan were parties in the
ejectment case before the trial court. On
the other hand, Pilipinas Bank similarly
contends that Article 1652 is inapplicable
since it assumes the existence of a lease
contract between the parties as well as a
contract of sub-lease with Mr. Trinidad
and Kalayaan from July 1984. It also
maintains that Mr. Trinidad and Kalayaan
are deemed parties to the ejectment
case. It is Our considered view that the
respondent CA correctly held the sub-
lessees primarily liable.
As regard the application of either Article 1651 or
1652 of the Civil Code, We rule that neither can be
properly invoked under the circumstances. As
correctly noted by the Syjucos, and as We have
mentioned earlier, Article 1651 refers to the
sublessee's liability to the lessor for acts relating to
the use and preservation of the property leased. It
may not be resorted to in determining the sub-
lessee's liability for rent since Article 1652
specifically governs that aspect. However, Article
1652 cannot also be applied in determining Pilipinas
Bank's liability for rents from July 1984 onwards
precisely because no contract of lease existed from
that time. The original contract of lease expired on
December 31, 1983. From then on, as correctly
pointed out by Pilipinas Bank on pages 17 to 18 of
its Motion to Dismiss, the lease was renewed from
month to month pursuant to Articles 1670 and 1687
of the Civil Code until it was finally terminated on
July 6, 1984 when said Bank left the place. Ergo, the
respondent CA did not commit any error in
requiring Pilipinas Bank to pay rents only for the
time the latter occupied the premises. Obviously
then, it should be Mr. Trinidad and Kalayaan and all
persons claiming rights under them who should be
liable to pay rents to the Syjucos from the time
Pilipinas Bank abandoned the premises.
With regard to the question of whether or not Mr.
Trinidad and Kalayaan are parties to the ejectment
case filed by the Syjucos against Pilipinas Bank, We
hold that they indeed are. Going back to the facts,
the Syjucos filed an ejectment case with the MTC on
February 10, 1984 docketed as Civil Case No. 16193.
After Pilipinas Bank's Motion to Admit Third Party
complaint against Mr. Trinidad and Kalayaan was
denied, the said Bank filed an ejectment suit against
the latter on September 26, 1984 (see Complaint, p.
107, Rollo) and the same was docketed as Civil Case
No. 16617. On Motion of Pilipinas Bank, the MTC
ordered the consolidation of Civil Case No. 16617
with Civil Case No. 16193, the original ejectment
suit (see p. 177, Rollo). Thereafter, on motion of Mr.
Trinidad and Kalayaan, Civil Case No. 16617 was
dismissed on November 15, 1984 with the following
reservation made by the MTC:
This is, however, without
prejudice to whatever liability
the defendant herein as sub-
lessee, may have in the case
filed by the property owner
against the Pilipinas Bank
since the eviction of the latter
binds the defendant. (MTC
Order p. 117, Rollo)
While the MTC dismissed Civil Case No. 16617 on
the ground that Pilipinas Bank "has been
dispossessed of any legal right to eject the
defendant Kalayaan because there is no more
contract between them to speak of" (MTC Decision,
p. 116, Rollo), it recognized the impending liability
of the defendants therein. Thus, from the above-
quoted pronouncement, it is clear that the MTC did
not totally relinquish its jurisdiction over Mr.
Trinidad and Kalayaan, enabling it to hold the latter
primarily liable for rents from July 1983. Besides,
when a lessee's right to remain terminates, the right
of a sub-lessees to continue in possession ceases to
exist, being privies of the lessee.
4. Coming now to the question of
Attorney's fees, We are inclined to
uphold the CA's finding when it said:
Finally, movants assail the award of
attorney's fees to the petitioner bank. No
cogent reason has been advanced by
movants to warrant a reversal of the
same. We need not point out here that
this case emanated from the MTC; that
certiorari was filed in the RTC, and later
on an appeal of the MTC Decision was
lodged in the RTC and so on and so forth.
In fact, this controversy has come full
circle to the IAC, to the Supreme Court
and back to this Court. In the
Metropolitan Trial Court, private
respondents were apparently unsatisfied
by the said Court's Decision, which, for
all appearances, already; completely and
satisfactorily adjudicated private
respondents' claim and cause of action
by ordering ejectment even if the
petitioner Bank had long been out of the
leased premises, by ordering full
restitution of the premises, by ordering a
money judgment favorable to private
respondents, with payment of attorney's
fees, and by rendering judgment against
the sublessee and all persons claiming
rights under him. Yet, private
respondents, assisted by counsel,
persevered and prolonged litigation in
the process, by lodging an appeal on
their insistence that the sub-lessees are
not parties in the case. (p. 57, Rollo)
WHEREFORE, the petition is hereby DENIED and the
Orders of the respondent Court of Appeals are
AFFIRMED.
SO ORDERED.
G.R. No. 116896 May 5, 1997
PHILIPPINE NATIONAL CONSTRUCTION
CORPORATION, petitioner,
vs.
COURT OF APPEALS, MA. TERESA S. RAYMUNDO-
ABARRA, JOSE S. RAYMUNDO, ANTONIO S.
RAYMUNDO, RENE S. RAYMUNDO, and AMADOR
S. RAYMUNDO, respondents.
DAVIDE, JR., J.:
This petition for review on certiorari has its roots in
Civil Case No. 53444, which was sparked by
petitioner's refusal to pay the rentals as stipulated
in the contract of lease 1 on an undivided portion of
30,000 square meters of a parcel of land owned by
private respondents.
The lease contract, executed on 18 November 1985,
reads in part as follows:
1. TERM OF LEASE — This lease shall be
for a period of five (5) years,
commencing on the date of issuance of
the industrial clearance by the Ministry
of Human Settlements, renewable for a
like or other period at the option of the
LESSEE under the same terms and
conditions.
2. RATE OF RENT — LESSEE shall pay to
the LESSOR rent at the monthly rate of
TWENTY THOUSAND PESOS
(P20,000.00), Philippine Currency, in the
manner set forth in Paragraph 3 below.
This rate shall be increased yearly by Five
Percent (5%) based on the agreed
monthly rate of P20,000.00 as
follows:3. TERMS OF PAYMENT — The
rent stipulated in Paragraph 2 above
shall be paid yearly in advance by the
LESSEE. The first annual rent in the
amount of TWO HUNDRED FORTY
THOUSAND PESOS (P240,000.00),
Philippine currency, shall be due and
payable upon the execution of this
Agreement and the succeeding annual
rents shall be payable every twelve (12)
months thereafter during the effectivity
of this Agreement.
4. USE OF LEASED PROPERTY — It is
understood that the Property shall be
used by the LESSEE as the site, grounds
and premises of a rock crushing plant
and field office, sleeping quarters and
canteen/mess hall. The LESSORS hereby
grant to the LESSEE the right to erect on
the Leased Property such structure(s)
and/or improvement(s) necessary for or
incidental to the LESSEE's purposes.
xxx xxx xxx
11. TERMINATION OF LEASE — This
Agreement may be terminated by
mutual agreement of the parties. Upon
the termination or expiration of the
period of lease without the same being
12th Wave
 renewed, the LESSEE shall vacate the
Leased Property at its expense.
On 7 January 1986, petitioner obtained from the
Ministry of Human Settlements a Temporary Use
Permit 2 for the proposed rock crushing project. The
permit was to be valid for two years unless sooner
revoked by the Ministry.
On 16 January 1986, private respondents wrote
petitioner requesting payment of the first annual
rental in the amount of P240,000 which was due
and payable upon the execution of the contract.
They also assured the latter that they had already
stopped considering the proposals of other
aggregates plants to lease the property because of
the existing contract with petitioner. 3
In its reply-letter, petitioner argued that under
paragraph 1 of the lease contract, payment of rental
would commence on the date of the issuance of an
industrial clearance by the Ministry of Human
Settlements, and not from the date of signing of the
contract. It then expressed its intention to
terminate the contract, as it had decided to cancel
or discontinue with the rock crushing project "due
to financial, as well as technical, difficulties." 4
Private respondents refused to accede to
petitioner's request for the pretermination of the
lease contract. They insisted on the performance of
petitioner's obligation and reiterated their demand
for the payment of the first annual rental. 5
Petitioner objected to private respondents' claim
and argued that it was "only obligated to pay . . . the
amount of P20,000.00 as rental payments for the
one-month period of lease, counted from 07
January 1986 when the Industrial Permit was issued
by the Ministry of Human Settlements up to 07
February 1986 when the Notice of Termination was
served" 6 on private respondents.
On 19 May 1986, private respondents instituted
with the Regional Trial Court of Pasig an action
against petitioner for Specific Performance with
Damages. 7 The case was docketed as Civil Case No.
53444 at Branch 160 of the said court. After the
filing by petitioner of its Answer with Counterclaim,
the case was set for trial on the merits.
What transpired next was summarized by the trial
court in this wise:
Plaintiffs rested their case on September
7, 1987 (p. 87 rec.). Defendant asked for
postponement of the reception of its
evidence scheduled on August 10, 1988
and as prayed for, was reset to August
25, 1988 (p. 91 rec.) Counsel for
defendant again asked for
postponement, through representative,
as he was presently indisposed. The case
was reset, intransferable to September
15 and 26, 1988 (p. 94 rec.) On
September 2, 1988, the office of the
Government Corporate Counsel entered
its appearance for defendant (p. 95, rec.)
and the original counsel later withdrew
his appearance. On September 15, 1988
the Government Corporate Counsel
asked for postponement, represented by
Atty. Elpidio de Vega, and with his
conformity in open court, the hearing
was reset, intransferable to September
26 and October 17, 1988, (p. 98, rec.) On
September 26, 1988 during the hearing,
defendant's counsel filed a motion for
postponement (urgent) as he had "sore
eyes", a medical certificate attached.
Counsel for plaintiffs objected to the
postponement and the court considered
the evidence of the government
terminated or waived. The case was
deemed submitted for decision upon the
filing of the memorandum. Plaintiffs filed
their memorandum on October 26, 1988.
(p. 111, rec.).
On October 18, 1988 in the meantime,
the defendant filed a motion for
reconsideration of the order of the court
on September 26, 1988 (p. 107, rec.) The
motion was not asked to be set for
hearing (p. 110 rec.) There was also no
proof of notice and service to counsel for
plaintiff . The court in the interest of
justice set the hearing on the motion on
November 29, 1988. (p. 120, rec.) but
despite notice, again defendant's
counsel was absent (p. 120-A, dorsal
side, rec.) without reason. The court
reset the motion to December 16, 1988,
in the interest of justice. The motion for
reconsideration was denied by the court.
A second motion for reconsideration was
filed and counsel set for hearing the
motion on January 19, 1989. During the
hearing, counsel for the government was
absent. The motion was deemed
abandoned but the court at any rate,
after a review of the incidents and the
grounds relied upon in the earlier motion
of defendant, found no reason to disturb
its previous order. 8
On 12 April 1989, the trial court rendered a decision
ordering petitioner to pay private respondents the
amount of P492,000 which represented the rentals
for two years, with legal interest from 7 January
1986 until the amount was fully paid, plus attorney's
fees in the amount of P20,000 and costs. 9
Petitioner then appealed to the Court of Appeals
alleging that the trial court erred in ordering it to
pay private respondent the amount of P492,000
and in denying it the right to be heard.
Upon the affirmance of the trial court's
decision 10 and the denial of its motion for
reconsideration, petitioner came to this Court
ascribing to respondent Court of Appeals the same
alleged errors and reiterating their arguments.
First. Petitioner invites the attention of this Court to
paragraph 1 of the lease contract, which reads:
"This lease shall be for a period of five (5) years,
commencing on the date of issuance of the
industrial clearance by the Ministry of Human
Settlements. . . ." It then submits that the issuance
of an industrial clearance is a suspensive condition
without which the rights under the contract would
not be acquired. The Temporary Use Permit is not
the industrial clearance referred to in the contract;
for the said permit requires that a clearance from
the National Production Control Commission be first
secured, and besides, there is a finding in the permit
that the proposed project does not conform to the
Zoning Ordinance of Rodriguez, (formerly
Montalban), Rizal, where the leased property is
located. Without the industrial clearance the lease
contract could not become effective and petitioner
could not be compelled to perform its obligation
under the contract.
Petitioner is now estopped from claiming that the
Temporary Use Permit was not the industrial
clearance contemplated in the contract. In its letter
dated 24 April 1986, petitioner states:
We wish to reiterate PNCC
Management's previous stand
that it is only obligated to pay
your clients the amount of
P20,000.00 as rental
payments for the one-month
period of the lease, counted
from 07 January 1986 when
the Industrial Permit was
issued by the Ministry of
Human Settlements up to 07
February 1986 when the
Notice of Termination was
served on your
clients. 11 (Emphasis
Supplied).
The "Industrial Permit" mentioned in the
said letter could only refer to the
Temporary Use Permit issued by the
Ministry of Human Settlements on 7
January 1986. And it can be gleaned
from this letter that petitioner has
considered the permit as industrial
clearance; otherwise, petitioner could
have simply told private respondents
that its obligation to pay rentals has not
yet arisen because the Temporary Use
Permit is not the industrial clearance
contemplated by them. Instead,
petitioner recognized its obligation to
pay rentals counted from the date the
permit was issued.
Also worth noting is petitioner's earlier letter, thus:
[P]lease be advised of PNCC
Management's decision to cancel or
discontinue with the rock crushing
project due to financial as well as
technical difficulties. In view thereof, we
would like to terminate our Lease
Contract dated 18 November, 1985.
Should you agree to the mutual
termination of our Lease Contract, kindly
indicate your conformity hereto by
affixing your signature on the space
provided below. May we likewise
request Messrs. Rene, Jose and Antonio,
all surnamed Raymundo and Mrs.
Socorro A. Raymundo as Attorney-in-Fact
12th Wave
 of Amador S. Raymundo to sign on the
spaces indicated below. 12
It can be deduced from this letter that the
suspensive condition — issuance of industrial
clearance — has already been fulfilled and that the
lease contract has become operative. Otherwise,
petitioner did not have to solicit the conformity of
private respondents to the termination of the
contract for the simple reason that no juridical
relation was created because of the non- fulfillment
of the condition.
Moreover, the reason of petitioner in discontinuing
with its project and in consequently cancelling the
lease contract was "financial as well as technical
difficulties," not the alleged insufficiency of the
Temporary Use Permit.
Second. Invoking Article 1266 and the principle
of rebus sic stantibus, petitioner asserts that it
should be released from the obligatory force of the
contract of lease because the purpose of the
contract did not materialize due to unforeseen
events and causes beyond its control, i.e., due to
the abrupt change in political climate after the EDSA
Revolution and financial difficulties.
It is a fundamental rule that contracts, once
perfected, bind both contracting parties, and
obligations arising therefrom have the force of law
between the parties and should be complied with in
good faith. 13 But the law recognizes exceptions to
the principle of the obligatory force of contracts.
One exception is laid down in Article 1266 of the
Civil Code, which reads: "The debtor in obligations
to do shall also be released when the prestation
becomes legally or physically impossible without the
fault of the obligor."
Petitioner cannot, however, successfully take refuge
in the said article, since it is applicable only to
obligations "to do," and not to obligations "to
give." 14 An obligation "to do" includes all kinds of
work or service; while an obligation "to give" is a
prestation which consists in the delivery of a
movable or an immovable thing in order to create a
real right, or for the use of the recipient, or for its
simple possession, or in order to return it to its
owner. 15
The obligation to pay rentals 16 or deliver the thing
in a contract of
lease 17 falls within the prestation "to give"; hence, it
is not covered within the scope of Article 1266. At
any rate, the unforeseen event and causes
mentioned by petitioner are not the legal or
physical impossibilities contemplated in the said
article. Besides, petitioner failed to state specifically
the circumstances brought about by "the abrupt
change in the political climate in the country"
except the alleged prevailing uncertainties in
government policies on infrastructure projects.
The principle of rebus sic stantibus 18 neither fits in
with the facts of the case. Under this theory, the
parties stipulate in the light of certain prevailing
conditions, and once these conditions cease to
exist, the contract also ceases to exist. 19 This theory
is said to be the basis of Article 1267 of the Civil
Code, which provides:
Art. 1267. When the service
has become so difficult as to
be manifestly beyond the
contemplation of the parties,
the obligor may also be
released therefrom, in whole
or in part.
This article, which enunciates the doctrine of
unforeseen events, is not, however, an absolute
application of the principle of rebus sic stantibus,
which would endanger the security of contractual
relations. The parties to the contract must be
presumed to have assumed the risks of unfavorable
developments. It is therefore only in absolutely
exceptional changes of circumstances that equity
demands assistance for the debtor. 20
In this case, petitioner wants this Court to believe
that the abrupt change in the political climate of the
country after the EDSA Revolution and its poor
financial condition "rendered the performance of
the lease contract impractical and inimical to the
corporate survival of the petitioner."
This Court cannot subscribe to this argument. As
pointed out by private respondents: 21
It is a matter of record that petitioner
PNCC entered into a contract with
private respondents on November 18,
1985. Prior thereto, it is of judicial notice
that after the assassination of Senator
Aquino on August 21, 1983, the country
has experienced political upheavals,
turmoils, almost daily mass
demonstrations, unprecedented,
inflation, peace and order deterioration,
the Aquino trial and many other things
that brought about the hatred of people
even against crony corporations. On
November 3, 1985, Pres. Marcos, being
interviewed live on U.S. television
announced that there would be a snap
election scheduled for February 7, 1986.
On November 18, 1985, notwithstanding
the above, petitioner PNCC entered into
the contract of lease with private
respondents with open eyes of the
deteriorating conditions of the country.
Anent petitioner's alleged poor financial condition,
the same will neither release petitioner from the
binding effect of the contract of lease. As held
in Central Bank v. Court of Appeals, 22 cited by
private respondents, mere pecuniary inability to
fulfill an engagement does not discharge a
contractual obligation, nor does it constitute a
defense to an action for specific performance.
With regard to the non-materialization of
petitioner's particular purpose in entering into the
contract of lease, i.e., to use the leased premises as
a site of a rock crushing plant, the same will not
invalidate the contract. The cause or essential
purpose in a contract of lease is the use or
enjoyment of a thing. 23 As a general principle, the
motive or particular purpose of a party in entering
into a contract does not affect the validity nor
existence of the contract; an exception is when the
realization of such motive or particular purpose has
been made a condition upon which the contract is
made to depend. 24 The exception does not apply
here.
Third. According to petitioner, the award of
P492,000.00 representing the rent for two years is
excessive, considering that it did not benefit from
the property. Besides, the temporary permit,
conformably with the express provision therein, was
deemed automatically revoked for failure of
petitioner to use the same within one year from the
issuance thereof. Hence, the rent payable should
only be for one year.
Petitioner cannot be heard to complain that the
award is excessive. The temporary permit was valid
for two years but was automatically revoked
because of its non-use within one year from its
issuance. The non-use of the permit and the non-
entry into the property subject of the lease contract
were both imputable to petitioner and cannot,
therefore, be taken advantage of in order to evade
or lessen petitioner's monetary obligation. The
damage or prejudice to private respondents is
beyond dispute. They unquestionably suffered
pecuniary losses because of their inability to use the
leased premises. Thus, in accordance with Article
1659 of the Civil Code, 25 they are entitled to
indemnification for damages; and the award of
P492,000.00 is fair and just under the circumstances
of the case.
Finally, petitioner submits that the trial court
gravely abused its discretion in denying petitioner
the right to be heard.
We disagree. The trial court was in fact liberal in
granting several postponements 26 to petitioner
before it deemed terminated and waived the
presentation of evidence in petitioner's behalf.
It must be recalled that private respondents rested
their case on 7 September 1987 yet. 27 Almost a year
after, or on 10 August 1988 when it was petitioner's
turn to present evidence, petitioner's counsel asked
for postponement of the hearing to 25 August 1988
due to conflict of schedules, 28 and this was
granted. 29 At the rescheduled hearing, petitioner's
counsel, through a representative, moved anew for
postponement, as he was allegedly
indisposed. 30 The case was then reset
"intransferable" to September 15 and 26,
1988. 31 On 2 September 1988, the Office of the
Government Corporate Counsel, through Atty.
Elpidio J. Vega, entered its appearance for the
petitioner, 32 and later the original counsel withdrew
his appearance. 33 On 15 September 1988, Atty.
Vega requested for postponement to enable him to
go over the records of the case. 34 With his
conformity, the hearing was reset "intransferable"
to September 26 and October 17, 1988. 35 In the
morning of 26 September 1988, the court received
Atty. Vega's Urgent Motion for Postponement on
the ground that he was afflicted with conjunctivitis
or sore eyes. 36 This time, private respondents
objected; and upon their motion, the court deemed
12th Wave
terminated and waived the presentation of
evidence for the petitioner. 37 Nevertheless, before
the court considered the case submitted for
decision, it required the parties to submit their
respective memoranda within thirty days. 38 But
petitioner failed to comply.
Likewise, the court was liberal with respect to
petitioner's motion for reconsideration.
Notwithstanding the lack of request for hearing and
proof of notice and service to private respondents,
the court set the hearing of the said motion on 29
November 1988. 39 Upon the denial of the said
motion for lack of merit, 40 petitioner filed a second
motion for reconsideration. But during the hearing
of the motion on a date selected by him, Atty. Vega
was absent for no reason at all, despite due
notice. 41
From the foregoing narration of procedural
antecedents, it cannot be said that petitioner was
deprived of its day in court. The essence of due
process is simply an opportunity to he heard. 42 To
be heard does not only mean oral arguments in
court; one may be heard also through pleadings.
Where opportunity to be heard, either through oral
arguments or pleadings, is accorded, there is no
denial of procedural due process. 43
WHEREFORE, the instant petition is DENIED and the
challenge decision of the Court of Appeals is
AFFIRMED in toto.
No pronouncements as to costs.
SO ORDERED.
G.R. No. 107112 February 24, 1994
NAGA TELEPHONE CO., INC. (NATELCO) AND
LUCIANO M. MAGGAY, petitioners,
vs.
THE COURT OF APPEALS AND CAMARINES SUR II
ELECTRIC COOPERATIVE, INC. (CASURECO
II), respondents.
Ernesto P. Pangalangan for petitioners.
Luis General, Jr. for private respondent.
NOCON, J.:
The case of Reyes v. Caltex (Philippines),
Inc.1 enunciated the doctrine that where a person
by his contract charges himself with an obligation
possible to be performed, he must perform it,
unless its performance is rendered impossible by
the act of God, by the law, or by the other party, it
being the rule that in case the party desires to be
excused from performance in the event of
contingencies arising thereto, it is his duty to
provide the basis therefor in his contract.
With the enactment of the New Civil Code, a new
provision was included therein, namely, Article 1267
which provides:
When the service has become
so difficult as to be manifestly
beyond the contemplation of
the parties, the obligor may
also be released therefrom, in
whole or in part.
In the report of the Code Commission, the rationale
behind this innovation was explained, thus:
The general rule is that
impossibility of performance
releases the obligor.
However, it is submitted that
when the service has become
so difficult as to be manifestly
beyond the contemplation of
the parties, the court should
be authorized to release the
obligor in whole or in part.
The intention of the parties
should govern and if it
appears that the service turns
out to be so difficult as to
have been beyond their
contemplation, it would be
doing violence to that
intention to hold their
contemplation, it would be
doing violence to that
intention to hold the obligor
still responsible.2
In other words, fair and square consideration
underscores the legal precept therein.
Naga Telephone Co., Inc. remonstrates mainly
against the application by the Court of Appeals of
Article 1267 in favor of Camarines Sur II Electric
Cooperative, Inc. in the case before us. Stated
differently, the former insists that the complaint
should have been dismissed for failure to state a
cause of action.
The antecedent facts, as narrated by respondent
Court of Appeals are, as follows:
Petitioner Naga Telephone Co., Inc. (NATELCO) is a
telephone company rendering local as well as long
distance telephone service in Naga City while
private respondent Camarines Sur II Electric
Cooperative, Inc. (CASURECO II) is a private
corporation established for the purpose of
operating an electric power service in the same city.
On November 1, 1977, the parties entered into a
contract (Exh. "A") for the use by petitioners in the
operation of its telephone service the electric light
posts of private respondent in Naga City. In
consideration therefor, petitioners agreed to install,
free of charge, ten (10) telephone connections for
the use by private respondent in the following
places:
(a) 3 units — The Main Office
of (private respondent);
(b) 2 Units — The Warehouse
of (private respondent);
(c) 1 Unit — The Sub-Station
of (private respondent) at
Concepcion Pequeña;
(d) 1 Unit — The Residence of
(private respondent's)
President;
(e) 1 Unit — The Residence of
(private respondent's) Acting
General Manager; &
(f) 2 Units — To be
determined by the General
Manager.3
Said contract also provided:
(a) That the term or period of
this contract shall be as long
as the party of the first part
has need for the electric light
posts of the party of the
second part it being
understood that this contract
shall terminate when for any
reason whatsoever, the party
of the second part is forced to
stop, abandoned [sic] its
operation as a public service
and it becomes necessary to
remove the electric lightpost;
(sic)4
It was prepared by or with the assistance of the
other petitioner, Atty. Luciano M. Maggay, then a
member of the Board of Directors of private
respondent and at the same time the legal counsel
of petitioner.
After the contract had been enforced for over ten
(10) years, private respondent filed on January 2,
1989 with the Regional Trial Court of Naga City (Br.
28) C.C. No. 89-1642 against petitioners for
reformation of the contract with damages, on the
ground that it is too one-sided in favor of
petitioners; that it is not in conformity with the
guidelines of the National Electrification
Administration (NEA) which direct that the
reasonable compensation for the use of the posts is
P10.00 per post, per month; that after eleven (11)
years of petitioners' use of the posts, the telephone
cables strung by them thereon have become much
heavier with the increase in the volume of their
subscribers, worsened by the fact that their linemen
bore holes through the posts at which points those
posts were broken during typhoons; that a post now
costs as much as P2,630.00; so that justice and
equity demand that the contract be reformed to
abolish the inequities thereon.
As second cause of action, private respondent
alleged that starting with the year 1981, petitioners
have used 319 posts in the towns of Pili, Canaman,
Magarao and Milaor, Camarines Sur, all outside
Naga City, without any contract with it; that at the
rate of P10.00 per post, petitioners should pay
private respondent for the use thereof the total
amount of P267,960.00 from 1981 up to the filing of
its complaint; and that petitioners had refused to
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pay private respondent said amount despite
demands.
And as third cause of action, private respondent
complained about the poor servicing by petitioners
of the ten (10) telephone units which had caused it
great inconvenience and damages to the tune of not
less than P100,000.00
In petitioners' answer to the first cause of action,
they averred that it should be dismissed because (1)
it does not sufficiently state a cause of action for
reformation of contract; (2) it is barred by
prescription, the same having been filed more than
ten (10) years after the execution of the contract;
and (3) it is barred by estoppel, since private
respondent seeks to enforce the contract in the
same action. Petitioners further alleged that their
utilization of private respondent's posts could not
have caused their deterioration because they have
already been in use for eleven (11) years; and that
the value of their expenses for the ten (10)
telephone lines long enjoyed by private respondent
free of charge are far in excess of the amounts
claimed by the latter for the use of the posts, so
that if there was any inequity, it was suffered by
them.
Regarding the second cause of action, petitioners
claimed that private respondent had asked for
telephone lines in areas outside Naga City for which
its posts were used by them; and that if petitioners
had refused to comply with private respondent's
demands for payment for the use of the posts
outside Naga City, it was probably because what is
due to them from private respondent is more than
its claim against them.
And with respect to the third cause of action,
petitioners claimed, inter alia, that their telephone
service had been categorized by the National
Telecommunication Corporation (NTC) as "very
high" and of "superior quality."
During the trial, private respondent presented the
following witnesses:
(1) Dioscoro Ragragio, one of the two officials who
signed the contract in its behalf, declared that it was
petitioner Maggay who prepared the contract; that
the understanding between private respondent and
petitioners was that the latter would only use the
posts in Naga City because at that time, petitioners'
capability was very limited and they had no
expectation of expansion because of legal squabbles
within the company; that private respondent
agreed to allow petitioners to use its posts in Naga
City because there were many subscribers therein
who could not be served by them because of lack of
facilities; and that while the telephone lines strung
to the posts were very light in 1977, said posts have
become heavily loaded in 1989.
(2) Engr. Antonio Borja, Chief of private
respondent's Line Operation and Maintenance
Department, declared that the posts being used by
petitioners totalled 1,403 as of April 17, 1989, 192
of which were in the towns of Pili, Canaman, and
Magarao, all outside Naga City (Exhs. "B" and "B-1");
that petitioners' cables strung to the posts in 1989
are much bigger than those in November, 1977;
that in 1987, almost 100 posts were destroyed by
typhoon Sisang: around 20 posts were located
between Naga City and the town of Pili while the
posts in barangay Concepcion, Naga City were
broken at the middle which had been bored by
petitioner's linemen to enable them to string bigger
telephone lines; that while the cost per post in 1977
was only from P700.00 to P1,000.00, their costs in
1989 went up from P1,500.00 to P2,000.00,
depending on the size; that some lines that were
strung to the posts did not follow the minimum
vertical clearance required by the National Building
Code, so that there were cases in 1988 where,
because of the low clearance of the cables, passing
trucks would accidentally touch said cables causing
the posts to fall and resulting in brown-outs until
the electric lines were repaired.
(3) Dario Bernardez, Project Supervisor and Acting
General Manager of private respondent and
Manager of Region V of NEA, declared that
according to NEA guidelines in 1985 (Exh. "C"), for
the use by private telephone systems of electric
cooperatives' posts, they should pay a minimum
monthly rental of P4.00 per post, and considering
the escalation of prices since 1985, electric
cooperatives have been charging from P10.00 to
P15.00 per post, which is what petitioners should
pay for the use of the posts.
(4) Engineer Antonio Macandog, Department Head
of the Office of Services of private respondent,
testified on the poor service rendered by
petitioner's telephone lines, like the telephone in
their Complaints Section which was usually out of
order such that they could not respond to the calls
of their customers. In case of disruption of their
telephone lines, it would take two to three hours for
petitioners to reactivate them notwithstanding their
calls on the emergency line.
(5) Finally, Atty. Luis General, Jr., private
respondent's counsel, testified that the Board of
Directors asked him to study the contract sometime
during the latter part of 1982 or in 1983, as it had
appeared very disadvantageous to private
respondent. Notwithstanding his recommendation
for the filing of a court action to reform the
contract, the former general managers of private
respondent wanted to adopt a soft approach with
petitioners about the matter until the term of
General Manager Henry Pascual who, after failing to
settle the matter amicably with petitioners, finally
agreed for him to file the present action for
reformation of contract.
On the other hand, petitioner Maggay testified to
the following effect:
(1) It is true that he was a member of the Board of
Directors of private respondent and at the same
time the lawyer of petitioner when the contract was
executed, but Atty. Gaudioso Tena, who was also a
member of the Board of Directors of private
respondent, was the one who saw to it that the
contract was fair to both parties.
(2) With regard to the first cause of action:
(a) Private respondent has the right under the
contract to use ten (10) telephone units of
petitioners for as long as it wishes without paying
anything therefor except for long distance calls
through PLDT out of which the latter get only 10%
of the charges.
(b) In most cases, only drop wires and not
telephone cables have been strung to the posts,
which posts have remained erect up to the present;
(c) Petitioner's linemen have strung only small
messenger wires to many of the posts and they
need only small holes to pass through; and
(d) Documents existing in the NTC show that the
stringing of petitioners' cables in Naga City are
according to standard and comparable to those of
PLDT. The accidents mentioned by private
respondent involved trucks that were either
overloaded or had loads that protruded upwards,
causing them to hit the cables.
(3) Concerning the second cause of action, the
intention of the parties when they entered into the
contract was that the coverage thereof would
include the whole area serviced by petitioners
because at that time, they already had subscribers
outside Naga City. Private respondent, in fact, had
asked for telephone connections outside Naga City
for its officers and employees residing there in
addition to the ten (10) telephone units mentioned
in the contract. Petitioners have not been charging
private respondent for the installation, transfers
and re-connections of said telephones so that
naturally, they use the posts for those telephone
lines.
(4) With respect to the third cause of action, the
NTC has found petitioners' cable installations to be
in accordance with engineering standards and
practice and comparable to the best in the country.
On the basis of the foregoing countervailing
evidence of the parties, the trial court found, as
regards private respondent's first cause of action,
that while the contract appeared to be fair to both
parties when it was entered into by them during the
first year of private respondent's operation and
when its Board of Directors did not yet have any
experience in that business, it had become
disadvantageous and unfair to private respondent
because of subsequent events and conditions,
particularly the increase in the volume of the
subscribers of petitioners for more than ten (10)
years without the corresponding increase in the
number of telephone connections to private
respondent free of charge. The trial court concluded
that while in an action for reformation of contract, it
cannot make another contract for the parties, it can,
however, for reasons of justice and equity, order
that the contract be reformed to abolish the
inequities therein. Thus, said court ruled that the
contract should be reformed by ordering petitioners
to pay private respondent compensation for the use
of their posts in Naga City, while private respondent
should also be ordered to pay the monthly bills for
the use of the telephones also in Naga City. And
taking into consideration the guidelines of the NEA
on the rental of posts by telephone companies and
the increase in the costs of such posts, the trial
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court opined that a monthly rental of P10.00 for
each post of private respondent used by petitioners
is reasonable, which rental it should pay from the
filing of the complaint in this case on January 2,
1989. And in like manner, private respondent
should pay petitioners from the same date its
monthly bills for the use and transfers of its
telephones in Naga City at the same rate that the
public are paying.
On private respondent's second cause of action, the
trial court found that the contract does not mention
anything about the use by petitioners of private
respondent's posts outside Naga City. Therefore,
the trial court held that for reason of equity, the
contract should be reformed by including therein
the provision that for the use of private
respondent's posts outside Naga City, petitioners
should pay a monthly rental of P10.00 per post, the
payment to start on the date this case was filed, or
on January 2, 1989, and private respondent should
also pay petitioners the monthly dues on its
telephone connections located outside Naga City
beginning January, 1989.
And with respect to private respondent's third
cause of action, the trial court found the claim not
sufficiently proved.
Thus, the following decretal portion of the trial
court's decision dated July 20, 1990:
WHEREFORE, in view of all the foregoing,
decision is hereby rendered ordering the
reformation of the agreement (Exh. A);
ordering the defendants to pay plaintiff's
electric poles in Naga City and in the
towns of Milaor, Canaman, Magarao and
Pili, Camarines Sur and in other places
where defendant NATELCO uses
plaintiff's electric poles, the sum of TEN
(P10.00) PESOS per plaintiff's pole, per
month beginning January, 1989 and
ordering also the plaintiff to pay
defendant NATELCO the monthly dues of
all its telephones including those
installed at the residence of its officers,
namely; Engr. Joventino Cruz, Engr.
Antonio Borja, Engr. Antonio Macandog,
Mr. Jesus Opiana and Atty. Luis General,
Jr. beginning January, 1989. Plaintiff's
claim for attorney's fees and expenses of
litigation and defendants' counterclaim
are both hereby ordered dismissed.
Without pronouncement as to costs.
Disagreeing with the foregoing judgment,
petitioners appealed to respondent Court of
Appeals. In the decision dated May 28, 1992,
respondent court affirmed the decision of the trial
court,5 but based on different grounds to wit: (1)
that Article 1267 of the New Civil Code is applicable
and (2) that the contract was subject to a
potestative condition which rendered said condition
void. The motion for reconsideration was denied in
the resolution dated September 10, 1992.6 Hence,
the present petition.
Petitioners assign the following pertinent errors
committed by respondent court:
1) in making a contract for the
parties by invoking Article
1267 of the New Civil Code;
2) in ruling that prescription
of the action for reformation
of the contract in this case
commenced from the time it
became disadvantageous to
private respondent; and
3) in ruling that the contract
was subject to a potestative
condition in favor of
petitioners.
Petitioners assert earnestly that Article 1267 of the
New Civil Code is not applicable primarily because
the contract does not involve the rendition of
service or a personal prestation and it is not for
future service with future unusual change. Instead,
the ruling in the case of Occeña, et al. v. Jabson,
etc., et al.,7 which interpreted the article, should be
followed in resolving this case. Besides, said article
was never raised by the parties in their pleadings
and was never the subject of trial and evidence.
In applying Article 1267, respondent court
rationalized:
We agree with appellant that in order
that an action for reformation of
contract would lie and may prosper,
there must be sufficient allegations as
well as proof that the contract in
question failed to express the true
intention of the parties due to error or
mistake, accident, or fraud. Indeed, in
embodying the equitable remedy of
reformation of instruments in the New
Civil Code, the Code Commission gave its
reasons as follows:
Equity dictates the reformation of an
instrument in order that the true
intention of the contracting parties may
be expressed. The courts by the
reformation do not attempt to make a
new contract for the parties, but to make
the instrument express their real
agreement. The rationale of the doctrine
is that it would be unjust and inequitable
to allow the enforcement of a written
instrument which does not reflect or
disclose the real meeting of the minds of
the parties. The rigor of the legalistic rule
that a written instrument should be the
final and inflexible criterion and measure
of the rights and obligations of the
contracting parties is thus tempered to
forestall the effects of mistake, fraud,
inequitable conduct, or accident. (pp. 55-
56, Report of Code Commission)
Thus, Articles 1359, 1361, 1362, 1363 and 1364 of
the New Civil Code provide in essence that where
through mistake or accident on the part of either or
both of the parties or mistake or fraud on the part
of the clerk or typist who prepared the instrument,
the true intention of the parties is not expressed
therein, then the instrument may be reformed at
the instance of either party if there was mutual
mistake on their part, or by the injured party if only
he was mistaken.
Here, plaintiff-appellee did not allege in its
complaint, nor does its evidence prove, that there
was a mistake on its part or mutual mistake on the
part of both parties when they entered into the
agreement Exh. "A", and that because of this
mistake, said agreement failed to express their true
intention. Rather, plaintiff's evidence shows that
said agreement was prepared by Atty. Luciano
Maggay, then a member of plaintiff's Board of
Directors and its legal counsel at that time, who was
also the legal counsel for defendant-appellant, so
that as legal counsel for both companies and
presumably with the interests of both companies in
mind when he prepared the aforesaid agreement,
Atty. Maggay must have considered the same fair
and equitable to both sides, and this was affirmed
by the lower court when it found said contract to
have been fair to both parties at the time of its
execution. In fact, there were no complaints on the
part of both sides at the time of and after the
execution of said contract, and according to 73-year
old Justino de Jesus, Vice President and General
manager of appellant at the time who signed the
agreement Exh. "A" in its behalf and who was one of
the witnesses for the plaintiff (sic), both parties
complied with said contract "from the very
beginning" (p. 5, tsn, April 17, 1989).
That the aforesaid contract has become inequitous
or unfavorable or disadvantageous to the plaintiff
with the expansion of the business of appellant and
the increase in the volume of its subscribers in Naga
City and environs through the years, necessitating
the stringing of more and bigger telephone cable
wires by appellant to plaintiff's electric posts
without a corresponding increase in the ten (10)
telephone connections given by appellant to
plaintiff free of charge in the agreement Exh. "A" as
consideration for its use of the latter's electric posts
in Naga City, appear, however, undisputed from the
totality of the evidence on record and the lower
court so found. And it was for this reason that in the
later (sic) part of 1982 or 1983 (or five or six years
after the subject agreement was entered into by the
parties), plaintiff's Board of Directors already asked
Atty. Luis General who had become their legal
counsel in 1982, to study said agreement which
they believed had become disadvantageous to their
company and to make the proper recommendation,
which study Atty. General did, and thereafter, he
already recommended to the Board the filing of a
court action to reform said contract, but no action
was taken on Atty. General's recommendation
because the former general managers of plaintiff
wanted to adopt a soft approach in discussing the
matter with appellant, until, during the term of
General Manager Henry Pascual, the latter, after
failing to settle the problem with Atty. Luciano
Maggay who had become the president and general
manager of appellant, already agreed for Atty.
General's filing of the present action. The fact that
said contract has become inequitous or
disadvantageous to plaintiff as the years went by
did not, however, give plaintiff a cause of action for
reformation of said contract, for the reasons already
pointed out earlier. But this does not mean that
plaintiff is completely without a remedy, for we
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believe that the allegations of its complaint herein
and the evidence it has presented sufficiently make
out a cause of action under Art. 1267 of the New
Civil Code for its release from the agreement in
question.
xxx xxx xxx
The understanding of the parties when they entered
into the Agreement Exh. "A" on November 1, 1977
and the prevailing circumstances and conditions at
the time, were described by Dioscoro Ragragio, the
President of plaintiff in 1977 and one of its two
officials who signed said agreement in its behalf, as
follows:
Our understanding at that
time is that we will allow
NATELCO to utilize the posts
of CASURECO II only in the
City of Naga because at that
time the capability of
NATELCO was very limited, as
a matter of fact we do [sic]
not expect to be able to
expand because of the legal
squabbles going on in the
NATELCO. So, even at that
time there were so many
subscribers in Naga City that
cannot be served by the
NATELCO, so as a mater of
public service we allowed
them to sue (sic) our posts
within the Naga City. (p. 8, tsn
April 3, 1989)
Ragragio also declared that while the telephone
wires strung to the electric posts of plaintiff were
very light and that very few telephone lines were
attached to the posts of CASURECO II in 1977, said
posts have become "heavily loaded" in 1989
(tsn, id.).
In truth, as also correctly found by the lower court,
despite the increase in the volume of appellant's
subscribers and the corresponding increase in the
telephone cables and wires strung by it to plaintiff's
electric posts in Naga City for the more 10 years
that the agreement Exh. "A" of the parties has been
in effect, there has been no corresponding increase
in the ten (10) telephone units connected by
appellant free of charge to plaintiff's offices and
other places chosen by plaintiff's general manager
which was the only consideration provided for in
said agreement for appellant's use of plaintiffs
electric posts. Not only that, appellant even started
using plaintiff's electric posts outside Naga City
although this was not provided for in the agreement
Exh. "A" as it extended and expanded its telephone
services to towns outside said city. Hence, while
very few of plaintiff's electric posts were being used
by appellant in 1977 and they were all in the City of
Naga, the number of plaintiff's electric posts that
appellant was using in 1989 had jumped to
1,403,192 of which are outside Naga City (Exh. "B").
Add to this the destruction of some of plaintiff's
poles during typhoons like the strong typhoon
Sisang in 1987 because of the heavy telephone
cables attached thereto, and the escalation of the
costs of electric poles from 1977 to 1989, and the
conclusion is indeed ineluctable that the agreement
Exh. "A" has already become too one-sided in favor
of appellant to the great disadvantage of plaintiff, in
short, the continued enforcement of said contract
has manifestly gone far beyond the contemplation
of plaintiff, so much so that it should now be
released therefrom under Art. 1267 of the New Civil
Code to avoid appellant's unjust enrichment at its
(plaintiff's) expense. As stated by Tolentino in his
commentaries on the Civil Code citing foreign civilist
Ruggiero, "equity demands a certain economic
equilibrium between the prestation and the
counter-prestation, and does not permit the
unlimited impoverishment of one party for the
benefit of the other by the excessive rigidity of the
principle of the obligatory force of contracts (IV
Tolentino, Civil Code of the Philippines, 1986 ed.,
pp. 247-248).
We therefore, find nothing wrong with the ruling of
the trial court, although based on a different and
wrong premise (i.e., reformation of contract), that
from the date of the filing of this case, appellant
must pay for the use of plaintiff's electric posts in
Naga City at the reasonable monthly rental of
P10.00 per post, while plaintiff should pay appellant
for the telephones in the same City that it was
formerly using free of charge under the terms of the
agreement Exh. "A" at the same rate being paid by
the general public. In affirming said ruling, we are
not making a new contract for the parties herein,
but we find it necessary to do so in order not to
disrupt the basic and essential services being
rendered by both parties herein to the public and to
avoid unjust enrichment by appellant at the
expense of plaintiff, said arrangement to continue
only until such time as said parties can re-negotiate
another agreement over the same
subject-matter covered by the agreement Exh. "A".
Once said agreement is reached and executed by
the parties, the aforesaid ruling of the lower court
and affirmed by us shall cease to exist and shall be
substituted and superseded by their new
agreement. . . ..8
Article 1267 speaks of "service" which has become
so difficult. Taking into consideration the rationale
behind this provision, 9 the term "service" should be
understood as referring to the "performance" of the
obligation. In the present case, the obligation of
private respondent consists in allowing petitioners
to use its posts in Naga City, which is the service
contemplated in said article. Furthermore, a bare
reading of this article reveals that it is not a
requirement thereunder that the contract be for
future service with future unusual change.
According to Senator Arturo M. Tolentino, 10 Article
1267 states in our law the doctrine of unforseen
events. This is said to be based on the discredited
theory of rebus sic stantibus in public international
law; under this theory, the parties stipulate in the
light of certain prevailing conditions, and once these
conditions cease to exist the contract also ceases to
exist. Considering practical needs and the demands
of equity and good faith, the disappearance of the
basis of a contract gives rise to a right to relief in
favor of the party prejudiced.
In a nutshell, private respondent in the Occeña case
filed a complaint against petitioner before the trial
court praying for modification of the terms and
conditions of the contract that they entered into by
fixing the proper shares that should pertain to them
out of the gross proceeds from the sales of
subdivided lots. We ordered the dismissal of the
complaint therein for failure to state a sufficient
cause of action. We rationalized that the Court of
Appeals misapplied Article 1267 because:
. . . respondent's complaint
seeks not release from the subdivision
contract but that the court "render
judgment modifying the terms and
conditions of the contract . . .
by fixing the proper shares that
should pertain to the herein parties out
of the gross proceeds from the sales of
subdivided lots of subject subdivision".
The cited article (Article 1267) does not
grant the courts (the) authority to
remake, modify or revise the contract or
to fix the division of shares between the
parties as contractually stipulated with
the force of law between the parties, so
as to substitute its own terms for those
covenanted by the parties themselves.
Respondent's complaint for modification
of contract manifestly has no basis in law
and therefore states no cause of action.
Under the particular allegations of
respondent's complaint and the
circumstances therein averred, the
courts cannot even in equity grant the
relief sought.11
The ruling in the Occeña case is not applicable
because we agree with respondent court that the
allegations in private respondent's complaint and
the evidence it has presented sufficiently made out
a cause of action under Article 1267. We, therefore,
release the parties from their correlative obligations
under the contract. However, our disposition of the
present controversy does not end here. We have to
take into account the possible consequences of
merely releasing the parties therefrom: petitioners
will remove the telephone wires/cables in the posts
of private respondent, resulting in disruption of
their service to the public; while private respondent,
in consonance with the contract12 will return all the
telephone units to petitioners, causing prejudice to
its business. We shall not allow such eventuality.
Rather, we require, as ordered by the trial court: 1)
petitioners to pay private respondent for the use of
its posts in Naga City and in the towns of Milaor,
Canaman, Magarao and Pili, Camarines Sur and in
other places where petitioners use private
respondent's posts, the sum of ten (P10.00) pesos
per post, per month, beginning January, 1989; and
2) private respondent to pay petitioner the monthly
dues of all its telephones at the same rate being
paid by the public beginning January, 1989. The
peculiar circumstances of the present case, as
distinguished further from the Occeña case,
necessitates exercise of our equity jurisdiction. 13 By
way of emphasis, we reiterate the rationalization of
respondent court that:
. . . In affirming said ruling, we
are not making a new
contract for the parties
herein, but we find it
necessary to do so in order
not to disrupt the basic and
essential services being
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 rendered by both parties
herein to the public and to
avoid unjust enrichment by
appellant at the expense of
plaintiff . . . .14
Petitioners' assertion that Article 1267 was never
raised by the parties in their pleadings and was
never the subject of trial and evidence has been
passed upon by respondent court in its well
reasoned resolution, which we hereunder quote as
our own:
First, we do not agree with defendant-
appellant that in applying Art. 1267 of
the New Civil Code to this case, we have
changed its theory and decided the same
on an issue not invoked by plaintiff in the
lower court. For basically, the main and
pivotal issue in this case is whether the
continued enforcement of the contract
Exh. "A" between the parties has,
through the years (since 1977), become
too inequitous or disadvantageous to the
plaintiff and too one-sided in favor of
defendant-appellant, so that a solution
must be found to relieve plaintiff from
the continued operation of said
agreement and to prevent defendant-
appellant from further unjustly enriching
itself at plaintiff's expense. It is indeed
unfortunate that defendant had turned
deaf ears to plaintiffs requests for
renegotiation, constraining the latter to
go to court. But although plaintiff
cannot, as we have held, correctly invoke
reformation of contract as a proper
remedy (there having been no showing
of a mistake or error in said contract on
the part of any of the parties so as to
result in its failure to express their true
intent), this does not mean that plaintiff
is absolutely without a remedy in order
to relieve itself from a contract that has
gone far beyond its contemplation and
has become so highly inequitous and
disadvantageous to it through the years
because of the expansion of defendant-
appellant's business and the increase in
the volume of its subscribers. And as it is
the duty of the Court to administer
justice, it must do so in this case in the
best way and manner it can in the light
of the proven facts and the law or laws
applicable thereto.
It is settled that when the trial court
decides a case in favor of a party on a
certain ground, the appellant court may
uphold the decision below upon some
other point which was ignored or
erroneously decided by the trial court
(Garcia Valdez v. Tuazon, 40 Phil. 943;
Relativo v. Castro, 76 Phil. 563; Carillo v.
Salak de Paz, 18 SCRA 467). Furthermore,
the appellate court has the discretion to
consider an unassigned error that is
closely related to an error properly
assigned (Paterno v. Jao Yan, 1 SCRA 631;
Hernandez v. Andal, 78 Phil. 196). It has
also been held that the Supreme Court
(and this Court as well) has the authority
to review matters, even if they are not
assigned as errors in the appeal, if it is
found that their consideration is
necessary in arriving at a just decision of
the case (Saura Import & Export Co., Inc.
v. Phil. International Surety Co. and PNB,
8 SCRA 143). For it is the material
allegations of fact in the complaint, not
the legal conclusion made therein or the
prayer, that determines the relief to
which the plaintiff is entitled, and the
plaintiff is entitled to as much relief as
the facts warrant although that relief is
not specifically prayed for in the
complaint (Rosales v. Reyes and
Ordoveza, 25 Phil. 495; Cabigao v. Lim,
50 Phil. 844; Baguioro v. Barrios, 77 Phil.
120). To quote an old but very
illuminating decision of our Supreme
Court through the pen of American jurist
Adam C. Carson:
"Under our system of pleading it is the
duty of the courts to grant the relief to
which the parties are shown to be
entitled by the allegations in their
pleadings and the facts proven at the
trial, and the mere fact that they
themselves misconstrue the legal effect
of the facts thus alleged and proven will
not prevent the court from placing the
just construction thereon and
adjudicating the issues accordingly."
(Alzua v. Johnson, 21 Phil. 308)
And in the fairly recent case of Caltex
Phil., Inc. v IAC, 176 SCRA 741, the
Honorable Supreme Court also held:
We rule that the respondent court did
not commit any error in taking
cognizance of the aforesaid issues,
although not raised before the trial
court. The presence of strong
consideration of substantial justice has
led this Court to relax the well-
entrenched rule that, except questions
on jurisdiction, no question will be
entertained on appeal unless it has been
raised in the court below and it is within
the issues made by the parties in their
pleadings (Cordero v. Cabral, L-36789,
July 25, 1983, 123 SCRA 532). . . .
We believe that the above authorities
suffice to show that this Court did not err
in applying Art. 1267 of the New Civil
Code to this case. Defendant-appellant
stresses that the applicability of said
provision is a question of fact, and that it
should have been given the opportunity
to present evidence on said question.
But defendant-appellant cannot honestly
and truthfully claim that it (did) not
(have) the opportunity to present
evidence on the issue of whether the
continued operation of the contract Exh.
"A" has now become too one-sided in its
favor and too inequitous, unfair, and
disadvantageous to plaintiff. As held in
our decision, the abundant and copious
evidence presented by both parties in
this case and summarized in said
decision established the following
essential and vital facts which led us to
apply Art. 1267 of the New Civil Code to
this case:
xxx xxx xxx 15
On the issue of prescription of private respondent's
action for reformation of contract, petitioners allege
that respondent court's ruling that the right of
action "arose only after said contract had already
become disadvantageous and unfair to it due to
subsequent events and conditions, which must be
sometime during the latter part of 1982 or in
1983 . . ." 16 is erroneous. In reformation of
contracts, what is reformed is not the contract
itself, but the instrument embodying the contract. It
follows that whether the contract is
disadvantageous or not is irrelevant to reformation
and therefore, cannot be an element in the
determination of the period for prescription of the
action to reform.
Article 1144 of the New Civil Code provides, inter
alia, that an action upon a written contract must be
brought within ten (10) years from the time the
right of action accrues. Clearly, the ten (10) year
period is to be reckoned from the time the right of
action accrues which is not necessarily the date of
execution of the contract. As correctly ruled by
respondent court, private respondent's right of
action arose "sometime during the latter part of
1982 or in 1983 when according to Atty. Luis
General, Jr. . . ., he was asked by (private
respondent's) Board of Directors to study said
contract as it already appeared disadvantageous to
(private respondent) (p. 31, tsn, May 8, 1989).
(Private respondent's) cause of action to ask for
reformation of said contract should thus be
considered to have arisen only in 1982 or 1983, and
from 1982 to January 2, 1989 when the complaint in
this case was filed, ten (10) years had not yet
elapsed." 17
Regarding the last issue, petitioners allege that
there is nothing purely potestative about the
prestations of either party because petitioner's
permission for free use of telephones is not made to
depend purely on their will, neither is private
respondent's permission for free use of its posts
dependent purely on its will.
Apart from applying Article 1267, respondent court
cited another legal remedy available to private
respondent under the allegations of its complaint
and the preponderant evidence presented by it:
. . . we believe that the provision in said agreement
—
(a) That the term or period of this contract shall
be as long as the party of the first part [herein
appellant] has need for the electric light posts of the
party of the second part [herein plaintiff] it being
understood that this contract shall terminate when
for any reason whatsoever, the party of the second
part is forced to stop, abandoned [sic] its operation
as a public service and it becomes necessary to
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remove the electric light post [sic]"; (Emphasis
supplied)
is invalid for being purely potestative on the part of
appellant as it leaves the continued effectivity of the
aforesaid agreement to the latter's sole and
exclusive will as long as plaintiff is in operation. A
similar provision in a contract of lease wherein the
parties agreed that the lessee could stay on the
leased premises "for as long as the defendant
needed the premises and can meet and pay said
increases" was recently held by the Supreme Court
in Lim v. C.A., 191 SCRA 150, citing the much earlier
case of Encarnacion v. Baldomar, 77 Phil. 470, as
invalid for being "a purely potestative condition
because it leaves the effectivity and enjoyment of
leasehold rights to the sole and exclusive will of the
lessee." Further held the High Court in the Lim case:
The continuance, effectivity and fulfillment of a
contract of lease cannot be made to depend
exclusively upon the free and uncontrolled choice of
the lessee between continuing the payment of the
rentals or not, completely depriving the owner of
any say in the matter. Mutuality does not obtain in
such a contract of lease of no equality exists
between the lessor and the lessee since the life of
the contract is dictated solely by the lessee.
The above can also be said of the agreement Exh.
"A" between the parties in this case. There is no
mutuality and equality between them under the
afore-quoted provision thereof since the life and
continuity of said agreement is made to depend as
long as appellant needs plaintiff's electric posts. And
this is precisely why, since 1977 when said
agreement was executed and up to 1989 when this
case was finally filed by plaintiff, it could do nothing
to be released from or terminate said agreement
notwithstanding that its continued effectivity has
become very disadvantageous and inequitous to it
due to the expansion and increase of appellant's
telephone services within Naga City and even
outside the same, without a corresponding increase
in the ten (10) telephone units being used by
plaintiff free of charge, as well as the bad and
inefficient service of said telephones to the
prejudice and inconvenience of plaintiff and its
customers. . . . 18
Petitioners' allegations must be upheld in this
regard. A potestative condition is a condition, the
fulfillment of which depends upon the sole will of
the debtor, in which case, the conditional obligation
is void. 19 Based on this definition, respondent
court's finding that the provision in the contract, to
wit:
(a) That the term or period of this contract shall be
as long as the party of the first part (petitioner) has
need for the electric light posts of the party of the
second part (private respondent) . . ..
is a potestative condition, is correct. However, it
must have overlooked the other conditions in the
same provision, to wit:
. . . it being understood that this contract shall
terminate when for any reason whatsoever, the
party of the second part (private respondent) is
forced to stop, abandoned (sic) its operation as a
public service and it becomes necessary to remove
the electric light post (sic);
which are casual conditions since they depend on
chance, hazard, or the will of a third person. 20 In
sum, the contract is subject to mixed conditions,
that is, they depend partly on the will of the debtor
and partly on chance, hazard or the will of a third
person, which do not invalidate the aforementioned
provision. 21 Nevertheless, in view of our discussions
under the first and second issues raised by
petitioners, there is no reason to set aside the
questioned decision and resolution of respondent
court.
WHEREFORE, the petition is hereby DENIED. The
decision of the Court of Appeals dated May 28,
1992 and its resolution dated September 10, 1992
are AFFIRMED.
SO ORDERED.
G.R. No. 183628               April 7, 2010
DANIEL T. SO, Petitioner,
vs.
FOOD FEST LAND, INC. Respondent
x - - - - - - - - - - - - - - - - - - - - - - -x
G.R. No. 183670
FOOD FEST LAND, INC., Petitioner,
vs.
DANIEL T. SO, Respondent.
DECISION
CARPIO MORALES, J.:
Food Fest Land Inc. (Food Fest) entered into a
September 14, 1999 Contract of Lease 1 with Daniel
T. So (So) over a commercial space in San Antonio
Village, Makati City for a period of three years
(1999-2002) on which Food Fest intended to
operate a Kentucky Fried Chicken carry out branch.
Before forging the lease contract, the parties
entered into a preliminary agreement dated July 1,
1999, the pertinent portion of which stated:
The lease shall not become binding upon us unless
and until the government agencies concerned shall
authorize, permit or license us to open and maintain
our business at the proposed Lease Premises. We
shall promptly make an application for permits,
licenses and authority for our business and shall
exercise due diligence to obtain it, provided,
however, that you shall assist us by submitting such
documents and papers and comply with such other
requirements as the governmental agencies may
impose. We shall give notice to you when the
permits, license and authorities have been
obtained. We shall also notify you if any of the
required permits, licenses and authorities shall not
be be (sic) given or granted within fifteen days (15)
from your conform (sic)hereto. In such case, the
agreement may be canceled and all rights and
obligations hereunder shall cease.2 (underscoring
supplied)
While Food Fest was able to secure the necessary
licenses and permits for the year 1999, it failed to
commence business operations. For the year 2000,
Food Fest’s application for renewal of barangay
business clearance was "held in abeyance until
further study of [its] kitchen facilities."31avvphi1
As the barangay business clearance is a prerequisite
to the processing of other permits, licenses and
authority by the city government, Food Fest was
unable to operate. Fearing further business losses,
Food Fest, by its claim, communicated its intent to
terminate the lease contract to So who, however,
did not accede and instead offered to help Food
Fest secure authorization from the barangay. On
So’s advice, Food Fest wrote requests addressed to
city officials for assistance to facilitate renewal.
In August 2000, Food Fest, for the second time,
purportedly informed So of its intent to terminate
the lease, and it in fact stopped paying rent.
So later sent a November 22, 2000 demand letter to
Food Fest for the payment of rental arrearages and
reiterated his offer to help it secure clearance from
the barangay. Thus So wrote: "With regard to
securing permits from the barangay & the City Hall,
[with] which I am trying to help you, some form of
representation, maybe not in cash, would definitely
help in forging a longer term relationship." 4 Food
Fest demurred to the offer.1avvphi1
By letter of March 26, 2001,5 So again demanded
payment of rentals from Food Fest from September
2000 to March 2001 amounting to ₱123,200.00.
Food Fest denied any liability, however, and started
to remove its fixtures and equipment from the
premises.
On April 2, 2001, So sent Food Fest a Final Notice of
Termination with demand to pay and to vacate.6
On April 26, 2001, So filed a complaint for
ejectment and damages against Food Fest before
the Metropolitan Trial Court (MeTC) of Makati City.
Branch 64 of the MeTC, by Decision of July 4,
2005,7 rendered judgment in favor of So, disposing
as follows:
WHEREFORE, premises considered, judgment is
hereby rendered in favor of the plaintiff and against
defendant, Food Fest Land, Inc., as follows:
a. Ordering the defendant to pay the
unpaid rentals from August 2000 until
March 2001 with penalties accrued
thereon. The security deposit in the sum
of Sixty Four Thousand Pesos
(Php64,000.00) is forfeited in favor of
the plaintiff;
b. Ordering the defendant to pay
liquidated damages in a sum equivalent
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 to 25% of the total sum due and
demandable;
c. Ordering the defendant to pay the
plaintiff a sum equivalent to 25% of the
total claim as and for attorney’s fees;
and
d. The costs of suit.
SO ORDERED.8
On appeal, Branch 143 of the Regional Trial Court
(RTC), by Decision of November 30,
2006,9 reversed the MeTC Decision, disposing as
follows:
WHEREFORE, premises considered, the judgment of
the lower court dated 04 July 2005 is hereby
REVERSED and SET ASIDE, ordering plaintiff Daniel T.
So to pay defendant Food Fest the amount of Thirty
Two Thousand Pesos (₱32,000.00) as
reimbursement for rentals paid for the months of
July and August 2000; Twenty Thousand Pesos
(₱20,000.00) as exemplary damages; Twenty
Thousand Pesos (₱20,000.00) as attorney’s fees and
costs of suit.
SO ORDERED.10
In reversing the MeTC, the RTC found that Food Fest
already vacated the leased premises before So filed
the complaint for ejectment; and whereas
possession is the only issue for resolution in an
ejectment case, So’s cause of action only pertained
to collection of the rental arrears.
As to So’s claim for payment of arrears, the RTC
noted that since the claim exceeded the
jurisdictional amount over which it can cognize, the
RTC, applying Sec. 8, Rule 40 of the Rules of
Court,11 treated the case as if it was originally filed
with it.
On the merits, the RTC held that Food Fest’s failure
to secure the authority to commence business
operations resulted in the termination of its
contractual obligations to So, including the
obligation to pay rent.
On petition for review, the Court of Appeals, by
Decision of April 18, 2008,12 upheld the RTC’s
jurisdiction over the complaint. It, however,
declared that Food Fest’s obligation to pay rent
was not extinguished upon its failure to secure
permits to operate. Thus, it disposed:
WHEREFORE, premises considered, the assailed
decision dated November 30, 2006 of the RTC,
Branch 143, Makati City is hereby REVERSED and
SET ASIDE, ordering respondent FFLI to pay
petitioner Daniel T. So the following:
1. Unpaid rentals from August 2000 until
March 31, 2001 with penalties accrued
thereon. The security deposit is forfeited
in favor of petitioner So;
2. Temperate damages in the amount of
P50,000.00;
3. P20,000.00 as attorney’s fees; and
4. Costs of suit.
SO ORDERED.13
The parties’ respective motions for reconsideration
having been denied, they filed their respective
petitions before this Court which, by Resolution of
October 6, 2008, resolved to consolidate G.R. No.
183628 (Daniel T. So vs. Food Fest Land, Inc.)
with G.R. No. 183670 (Food Fest Land, Inc. vs.
Daniel T. So).
So maintains that the MeTC had jurisdiction over his
complaint for ejectment. For, So contends, Food
Fest did not vacate the leased premises before his
filing (on April 26, 2001) of the complaint.
So admitted in his Complaint, however, that Food
Fest started pulling out equipment and other
machineries from the premises even before the
final notice was received by it on April 2, 2001.
13. In or the last few days of March 2001 ,
defendant FOOD FEST LAND, INC. started to remove
and pull out its equipment, appliances, fittings,
furnishings, movable articles and other accessories
and facilities that it had earlier placed and installed
in the leased premises, but due to its wanton lack of
care in doing so, so much damage and destruction
was caused to the leased premises, resulting in the
breakage of and damage to the concrete walls and
partition in the building as well as the steel gate
leading to the leased premises and other parts of
the building and its premises. 14 (emphasis and
underscoring supplied)
Two elements are paramount in possession – there
must be occupancy, apprehension or taking, and
there must be intent to possess. 15 In the present
case, given the immediately quoted allegation-
admission of So, intent to possess was not present
on Food Fest’s part.
In another vein, So claims that Food Fest did not
exercise care in removing the installations and
fixtures, thereby causing destruction to the
premises to thus entitle him to damages, as well as
to damages corresponding to unrealized profits
(lucrum cessans) to answer for the period during
which the unit was not rented out.
Unrealized profits fall under the category of actual
or compensatory damages. If there exists a basis for
a reasonable expectation that profits would have
continued to be generated had there been no
breach of contract, indemnification for damages
based on such expected profits is proper. This is,
however, subject to the rule that a party is entitled
to an adequate compensation only for such
pecuniary loss suffered by him as he has duly
proved.16
Other than the photographs evincing damage to the
premises, no evidence was proffered to show So’s
entitlement to unrealized profits. That the leased
unit was not subsequently leased is not solely
attributable to Food Fest. As borne by the records,
no renovation was undertaken by So for almost
three years following Food Fest’s vacation of the
premises in 2001. The quotations issued by
construction companies for purposes of renovation
were issued only in 2004.
So is not without recourse under the lease contract,
however. Thus the pertinent provisions of the lease
contract provide:
7. LIABILITY OF LESSEE FOR DAMAGES- LESSEE
hereby agrees that any damage to the leased
premises or its appurtenances caused by said
LESSEE or its agents, employees, customers, guests
or any other person without the fault of LESSOR
shall be LESSEE’s sole responsibility and liability,
which damage shall, upon demand by LESSOR be
repaired promptly at its expense.
16. TERMINATION OF THE LEASE- LESSEE agrees to
return and surrender the leased premises at the
expiration of the term of this lease in as good
condition as reasonable wear and tear will permit
and without delay whatsoever, devoid of all
occupants, furniture, machinery, equipment and
signages, articles and effects of any kind, other than
such alterations or improvements which cannot be
removed without damaging the leased premises.
23. PENALTY CLAUSE – Any and all accounts payable
by LESSEE under this Contract of Lease and other
charges which may be claimed against LESSEE, but
not paid by LESSEE to LESSOR within fifteen (15)
days from due date shall be subject to penalty
charges of ONE PERCENT (1%) per month from due
date until the account is paid in full.
23.1. Should LESSOR be compelled to seek judicial
relief against LESSEE the latter shall, in addition to
any other claim for damages pay as liquidated
damages to LESSOR an amount equivalent to
twenty-five percent (25%) of the amount due, but in
no case less than P500.00: and an attorney’s fee in
the amount equivalent to 25% of the amount
claimed but in no case less than P3,000.00 as well as
all expenses of litigation.17
Respecting So’s claim for renovation expenses, the
same must be denied absent proof as to the actual
cost of renovation. Only firm offers or quotations
from construction companies are in the records.
Following Article 2224 of the Civil Code, 18 however,
the appellate court’s award of temperate damages
is in order.
This Court notes that the appellate court did not
award liquidated damages in contravention of the
contract. As for the appellate court’s award of
₱20,000.00 as attorney’s fees, the contractual
stipulation should prevail.
As for Food Fest’s invocation of the principle
of rebus sic stantibus as enunciated in Article 1267
of the Civil Code to render the lease
contract functus officio, and consequently release it
from responsibility to pay rentals, the Court is not
persuaded. Article 1267 provides:
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Article 1267. When the service has become so
difficult as to be manifestly beyond the
contemplation of the parties, the obligor may also
be released therefrom, in whole or in part.
of the total sum due and demandable. In all other
respects, the decision is AFFIRMED.
SO ORDERED.

This article, which enunciates the doctrine of

unforeseen events, is not, however, an absolute
application of the principle of rebus sic
stantibus, which would endanger the security of
contractual relations. The parties to the contract
must be presumed to have assumed the risks of
unfavorable developments. It is, therefore, only in
absolutely exceptional changes of circumstances
that equity demands assistance for the debtor.19

Food Fest claims that its failure to secure the

necessary business permits and licenses rendered
the impossibility and non-materialization of its
purpose in entering into the contract of lease, in
support of which it cites the earlier-quoted portion
of the preliminary agreement dated July 1, 1999 of
the parties.20

The cause or essential purpose in a contract of lease

is the use or enjoyment of a thing. 21 A party’s
motive or particular purpose in entering into a
contract does not affect the validity or existence of
the contract; an exception is when the realization of
such motive or particular purpose has been made a
condition upon which the contract is made to
depend. The exception does not apply here.

It is clear that the condition set forth in the

preliminary agreement pertains to the initial
application of Food Fest for the permits, licenses
and authority to operate. It should not be construed
to apply to Food Fest’s subsequent applications.
Consider the following qualification in the
preliminary agreement:

xxx We shall also notify you if any of the required

permits, licenses and authorities shall not be be (sic)
given or granted within fifteen days (15) from your
conform (sic) hereto. In such case, the agreement
may be canceled and all rights and obligations
hereunder shall cease.22 (underscoring supplied)

Food Fest was able to secure the permits, licenses

and authority to operate when the lease contract
was executed. Its failure to renew these permits,
licenses and authority for the succeeding year, does
not, however, suffice to declare the lease functus
officio, nor can it be construed as an unforeseen
event to warrant the application of Article 1267.

Contracts, once perfected, are binding between the

contracting parties. Obligations arising therefrom
have the force of law and should be complied with
in good faith. Food Fest cannot renege from the
obligations it has freely assumed when it signed the
lease contract.

WHEREFORE, the Court of Appeals Decision of April

18, 2008 is AFFIRMED with MODIFICATION.

Food Fest is ORDERED to pay So liquidated damages

in the amount equivalent to 25% of the total sum
due and demandable. Further, So is ORDERED to
pay attorney’s fees in the amount equivalent to 25%

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