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THIRD DIVISION

[G.R. No. 157480. May 6, 2005]

PRYCE CORPORATION (formerly PRYCE PROPERTIES CORPORATION), petitioner,vs. PHILIPPINE AMUSEMENT AND GAMING CORPORATION, respondent.

D E C I S I O N

PANGANIBAN, J.:

In legal contemplation, the termination of a contract is not equivalent toits rescission . When an agreement is terminated, it is deemed valid at inception. Prior to

termination, the contract binds the parties, who are thus obliged to observe itsprovisions. However, when it is rescinded, it is deemed inexistent, and the parties are returnedto their status quo ante. Hence, there is mutual restitution of benefits received. Theconsequences of termination may be anticipated and provided for by the contract. As long asthe terms of the contract are not contrary to law, morals, good customs, public order or publicpolicy, they shall be respected by courts. The judiciary is not authorized to make or modifycontracts; neither may it rescue parties from disadvantageous stipulations. Courts, however,are empowered to reduce iniquitous or unconscionable liquidated damages, indemnities andpenalties agreed upon by the parties.

The Case

Before us is a Petition for Review [1] under Rule 45 of the Rules of Court, assailing the May22, 2002 Decisio n[2] of the Court of Appeals (CA) in CA-GR CV No. 51629 and its March 4, 2003Resolution [3] denying petitioners Motion for Reconsideration. The assailed Decision disposedthus:

WHEREFORE , in view of the foregoing, judgment is hereby rendered as follows: (1) In CivilCase No. 93-68266, the appealed decision[,] is AFFIRMED with MODIFICATION[,] ordering[Respondent] Philippine Amusement and Gaming Corporation to pay [Petitioner] PryceProperties Corporation the total amount of P687,289.50 as actual damages representing theaccrued rentals for the quarter September to November 1993 with interest and penalty at therate of two percent (2%) per month from date of filing of the complaint until the amount shallhave been fully paid, and the sum of P 50,000.00 as attorneys fees; (2) In Civil Case No. 93 -68337, the appealed decision is REVERSED and SET ASIDE and a new judgment is renderedordering [Petitioner] Pryce Properties Corporation to reimburse [Respondent] Philippine

Amusement and Gaming Corporation the amount of P687,289.50 representing the advancedrental deposits, which amount may be compensated by [Petitioner] Pryce PropertiesCorporation with its award in Civil Case No. 93-68266 in the equal amount of P 687,289.50. [4]
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The Facts

According to the CA, the facts are as follows:

Sometime in the first half of 1992, representatives from Pryce Properties Corporation (PPC forbrevity) made representations with the Philippine Amusement and Gaming Corporation(PAGCOR) on the possibility of setting up a casino in Pryce Plaza Hotel in Cagayan de OroCity. [A] series of negotiations followed. PAGCOR representatives went to Cagayan de Oro Cityto determine the pulse of the people whether the presence of a casino would be welcomed bythe residents. Some local government officials showed keen interest in the casino operationand expressed the view that possible problems were surmountable. Their negotiationsculminated with PPCs counter -letter proposal dated October 14, 1992.

On November 11, 1992, the parties executed a Contract of Lease x x x involving the ballroomof the Hotel for a period of three (3) years starting December 1, 1992 and until November 30,1995. On November 13, 1992, they executed an addendum to the contract x x x which

included a lease of an additional 1000 square meters of the hotel grounds as living quarters andplayground of the casino personnel. PAGCOR advertised the start of their casino operations onDecember 18, 1992.

Way back in 1990, the Sangguniang Panlungsod of Cagayan de Oro City passed Resolution No.2295 x x x dated November 19, 1990 declaring as a matter of policy to prohibit and/or not toallow the establishment of a gambling casino in Cagayan de Oro City. Resolution No. 2673 x xx dated October 19, 1992 (or a month before the contract of lease was executed) wassubsequently passed reiterating with vigor and vehemence the policy of the City underResolution No. 2295, series of 1990, banning casinos in Cagayan de Oro City. On December 7,1992, the Sangguniang Panlungsod of Cagayan de Oro City enacted Ordinance No. 3353 x x xprohibiting the issuance of business permits and canceling existing business permits to anyestablishment for using, or allowing to be used, its premises or any portion thereof for theoperation of a casino.

In the afternoon of Dece mber 18, 1992 and just hours before the actual formal opening ofcasino operations, a public rally in front of the hotel was staged by some local officials,residents and religious leaders. Barricades were placed [which] prevented some casinopersonnel and hotel guests from entering and exiting from the Hotel. PAGCOR was constrainedto suspend casino operations because of the rally. An agreement between PPC and PAGCOR,on one hand, and representatives of the rallyists, on the other, eventually ended the rally onthe 20 th of December, 1992.

On January 4, 1993, Ordinance No. 3375 -93 x x x was passed by the Sangguniang Panlungsodof Cagayan de Oro City, prohibiting the operation of casinos and providing for penalty forviolation thereof. On January 7, 1993, PPC filed a Petition for Prohibition with PreliminaryInjunction x x x against then public respondent Cagayan de Oro City and/or Mayor Pablo P.Magtajas x x x before the Court of Appeals, docketed as CA G.R. SP No. 29851 praying interalia , for the declaration of unconstitutionality of Ordinance No. 3353. PAGCOR intervened insaid petition and further assailed Ordinance No. 4475-93 as being violative of the non-


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impairment of contracts and equal protection clauses. On March 31, 1993, the Court of Appealspromulgated its decision x x x, the dispositive portion of which reads:

IN VIEW OF ALL THE FOREGOING, Ordinance No. 3353 and Ordinance No. 3375 -93 are herebyDECLARED UNCONSTITUTIONAL and VOID and the respondents and all other persons actingunder their authority and in their behalf are PERMANENTLY ENJOINED from enforcing thoseordinances.

SO ORDERED.

Aggrieved by the decision, then public respondents Cagayan de Oro City, et al. elevated thecase to the Supreme Court in G.R. No. 111097, where, in an En Banc Decision dated July 20,1994 x x x, the Supreme Court denied the petition and affirmed the decision of the Court of

Appeals.

In the meantime, PAGCOR resumed casino operations on July 15, 1993, against which,however, another public rally was held. Casino operations continued for some time, but werelater on indefinitely suspended due to the incessant demonstrations. Per verbal advice x x xfrom the Office of the President of the Philippines, PAGCOR decided to stop its casinooperations in Cagayan de Oro City. PAGCOR stopped its casino operations in the hotel prior toSeptember, 1993. In two Statements of Account dated September 1, 1993 x x x, PPC apprisedPAGCOR of its outstanding account for the quarter September 1 to November 30, 1993. PPCsent PAGCOR another Letter dated September 3, 1993 x x x as a follow- up to the parties earlierconference. PPC sent PAGCOR another Letter dated September 15, 1993 x x x stating its Boardof Directors decision to collect the full rentals in case of pre -termination of the lease.

PAGCOR sent PPC a letter dated September 20, 1993 x x x [stating] that it was not amenableto the payment of the full rentals citing as reasons unforeseen legal and other circumstances

which prevented it from complying with its obligations. PAGCOR further stated that it had noother alternative but to pre-terminate the lease agreement due to the relentless and vehementopposition to their casino operations. In a letter dated October 12, 1993 x x x, PAGCOR askedPPC to refund the total of P1,437,582.25 representing the reimbursable rental deposits andexpenses for the permanent improvement of the Hotels parking lot. In a letter datedNovember 5, 1993 x x x, PAGCOR formally demanded from PPC the payment of its claim forreimbursement.

On November 15, 1993 x x x, PPC filed a case for sum of money in the Regional Trial Court ofManila docketed as Civil Case No. 93-68266. On November 19, 1993, PAGCOR also filed a casefor sum of money in the Regional Trial Court of Manila docketed as Civil Case No. 93-68337.

In a letter dated November 25, 1993, PPC informed PAGCOR that it was terminating thecontract of lease due to PAGCORs continuing breach of the contract and further stated that itwas exercising its rights under the contract of lease pursuant to Article 20 (a) and (c) thereof.

On February 2, 1994, PPC filed a supplemental complaint x x x in Civil Case No. 93 -68266,which the trial court admitted in an Order dated February 11, 1994. In an Order dated April 27,1994, Civil Case No. 93-68377 was ordered consolidated with Civil Case No. 93-68266. These


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cases were jointly tried by the court a quo. On August 17, 1995, the court a quo promulgatedits decision. Both parties appealed. [5]

In its appeal, PPC faulted the trial court for the following reasons: 1) failure of the court toaward actual and moral damages; 2) the 50 percent reduction of the amount PPC was claiming;and 3) the courts ru ling that the 2 percent penalty was to be imposed from the date of thepromulgation of the Decision, not from the date stipulated in the Contract.

On the other hand, PAGCOR criticized the trial court for the latters failure to rule that theContract of Lease had already been terminated as early as September 21, 1993, or at the latest,on October 14, 1993, when PPC received PAGCORs letter dated October 12, 1993. The gamingcorporation added that the trial court erred in 1) failing to consider that PPC was entitled toavail itself of the provisions of Article XX only when PPC was the party terminating the Contract;2) not finding that there were valid, justifiable and good reasons for terminating the Contract;and 3) dismissing the Complaint of PAGCOR in Civil Case No. 93-68337 for lack of merit, andnot finding PPC liable for the reimbursement of PAGCORS cash deposits and of the value ofimprovements.

Ruling of the Court of Appeals

First , on the appeal of PAGCOR, the CA ruled that the PAGCORS preterminati on of theContract of Lease was unjustified. The appellate court explained that public demonstrationsand rallies could not be considered as fortuitous events that would exempt the gamingcorporation from complying with the latters contractual obligation s. Therefore, the Contractcontinued to be effective until PPC elected to terminate it on November 25, 1993.

Regarding the contentions of PPC, the CA held that under Article 1659 of the Civil Code,PPC had the right to ask for (1) rescission of the Contract and indemnification fordamages; or (2) only indemnification plus the continuation of the Contract. These two remedieswere alternative, not cumulative, ruled the CA.

As PAGCOR had admitted its failure to pay the rentals for September to November 1993,PPC correctly exercised the option to terminate the lease agreement. Previously, the Contractremained effective, and PPC could collect the accrued rentals. However, from the time itterminated the Contract on November 25, 1993, PPC could no longer demand payment of theremaining rentals as part of actual damages, the CA added.

Denying the claim for moral damages, the CA pointed out the failure of PPC to show thatPAGCOR had acted in gross or evident bad faith in failing to pay the rentals from September toNovember 1993. Such failure was shown especially by the fact that PPC still had in hand three

(3) months advance rental deposits of PAGCOR. The former could have simply applied thisdeposit to the unpaid rentals, as provided in the Contract. Neither did PPC adequately showthat its reputation had been besmirched or the hotels goodwill eroded by the establishment ofthe casino and the public protests.

Finally, as to the claimed reimbursement for parking lot improvement, the CA held thatPAGCOR had not presented official receipts to prove the latters alleged expenses. Theappellate court, however, upheld the trial courts award to PPC of P50,000 attorneys fees.
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Hence this Petition .[6]

Issues

In their Memorandum, petitioner raised the following issues:

MAIN ISSUE:

Did the Honorable Court of Appeals commit x x x grave and reversible error by holding thatPryce was not entitled to future rentals or lease payments for the unexpired period of theContract of Lease between Pryce and PAGCOR?

Sub-Issues:

1. Were the provisions of Sections 20(a) and 20(c) of the Contract of Lease relative to the

right of PRYCE to terminate the Contract for cause and to moreover collect rentals fromPAGCOR corresponding to the remaining term of the lease valid and binding?

2. Did not Article 1659 of the Civil Code supersede Sections 20(a) and 20(c) of the Contract,PRYCE having rescinded the Contract of Lease?

3. Do the case of Rios, et al. vs. Jacinto Palma Enterprises, et al . and the other cases citedby PAGCOR support its position that PRYCE was not entitled to future rentals?

4. Would the collection by PRYCE of future rentals not give rise to unjust enrichment?

5. Could we not have harmonized Article 1659 of the Civil Code and Article 20 of theContract of Lease?

6. Is it not a basic rule that the law, i.e. Article 1659, is deemed written in contracts,particularly in the PRYCE-PAGCOR Contr act of Lease? [7]

The Courts Ruling

The Petition is partly meritorious.

Main Issue:Collection of Remaining Rentals

PPC anchors its right to collect future rentals upon the provisions of the Contract. Likewise,it argues that termination , as defined under the Contract, is different from the remedyof rescission prescribed under Article 1659 of the Civil Code. On the other hand, PAGCOR
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contends, as the CA ruled, that Article 1659 of the Civil Code governs; hence, PPC is allegedlyno longer entitled to future rentals, because it chose to rescind the Contract.

Contract Provisions

Clear and Binding

Article 1159 of the Civil Code provides that obligations arising from c ontracts have theforce of law between the contracting parties and should be complied with in good faith. [8] Indeference to the rights of the parties, the law [9] allows them to enter into stipulations, clauses,terms and conditions they may deem convenient; that is, as long as these are not contrary tolaw, morals, good customs, public order or public policy. Likewise, it is settled that if the termsof the contract clearly express the intention of the contracting parties, the literal meaning of thestipulations would be controlling .[10]

In this case, Article XX of the parties Contract of Lease provides in part as follows:

XX. BREACH OR DEFAULT

a) The LESSEE agrees that all the terms, conditions and/or covenants herein contained shallbe deemed essential conditions of this contract, and in the event of default or breach of any ofsuch terms, conditions and/or covenants , or should the LESSEE become bankrupt, or insolvent,or compounds with his creditors, the LESSOR shall have the right to terminate and cancel thiscontract by giving them fifteen (15 days) prior notice delivered at the leased premises or postedon the main door thereof. Upon such termination or cancellation, the LESSOR may forthwithlock the premises and exclude the LESSEE therefrom, forcefully or otherwise, without incurringany civil or criminal liability. During the fifteen (15) days notice, the LESSEE may prevent thetermination of lease by curing the events or causes of termination or cancellation of the lease.

b) x x x x x x x x x

c) Moreover, the LESSEE shall be fully liable to the LESSOR for the rentals corresponding tothe remaining term of the lease as well as for any and all damages , actual or consequentialresulting from such default and termination of this contract.

d) x x x x x x x x x. (Italics supplied)

The above provisions leave no doubt that the parties have covenanted 1) to give PPC theright to terminate and cancel the Contract in the event of a default or breach by the lessee; and

2) to make PAGCOR fully liable for rentals for the remaining term of the lease, despite theexercise of such right to terminate. Plainly, the parties have voluntarily bound themselves torequire strict compliance with the provisions of the Contract by stipulating that a default orbreach, among others, shall give the lessee the termination option, coupled with the lessorsliability for rentals for the remaining term of the lease.

For sure, these stipulations are valid and are not contrary to law, morals, good customs,public order or public policy. Neither is there anything objectionable about the inclusion in theContract of mandatory provisions concerning the rights and obligations of the parties .[11] Being
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the primary law between the parties, it governs the adjudication of their rights andobligations. A court has no alternative but to enforce the contractual stipulations in the mannerthey have been agreed upon and written .[12] It is well to recall that courts, be they trial orappellate, have no power to make or modify contracts .[13] Neither can they save parties fromdisadvantageous provisions.

Termination or Rescission?

Well-taken is petitioners insistence that it had the right to ask for termination plus the fullpayment of future rentals under the provisions of the Contract, rather than just rescission under

Article 1659 of the Civil Code. This Court is not unmindful of the factthat termination and rescission are terms that have been used loosely and interchangeably inthe past. But distinctions ought to be made, especially in this controversy, in which the termsmean differently and lead to equally different consequences.

The term rescission is f ound in 1) Article 1191 [14] of the Civil Code, the general provisionon rescission of reciprocal obligations; 2) Article 1659 , [15] which authorizes rescission as analternative remedy, insofar as the rights and obligations of the lessor and the lessee incontracts of lease are concerned; and 3) Article 1380 [16] with regard to the rescission ofcontracts.

In his Concurring Opinion in Universal Food Corporation v. CA , [17] Justice J. B. L. Reyesdifferentiated rescission under Article 1191 from that under Article 1381 et seq . as follows:

x x x. The rescission on account of breach of stipulations is not predicated on injury toeconomic interests of the party plaintiff but on the breach of faith by the defendant, thatviolates the reciprocity between the parties. It is not a subsidiary action, and Article 1191 maybe scanned without disclosing anywhere that the action for rescission thereunder issubordinated to anything other than the culpable breach of his obligations to thedefendant. This rescission is a principal action retaliatory in character, it being unjust that aparty be held bound to fulfill his promises when the other violates his. As expressed in the oldLatin aphorism: Non servanti fidem, non est fides servanda. Hence, the reparation of damagesfor the breach is purely secondary.

On the contrary, in rescission by reason of lesion or economic prejudice, the cause of action issubo rdinated to the existence of that prejudice, because it is the raison detre as well as themeasure of the right to rescind. x x x. [18]

Relevantly, it has been pointed out that resolution was originally used in Article 1124 of the

old Civil Code, and that the term became the basis for rescission under Article 1191 (and,conformably, also Article 1659) .[19]

Now, as to the distinction between termination (or cancellation ) and rescission (moreproperly, resolution ), Huibonhoa v. CA [20] held that, where the action prayed for the payment ofrental arrearages, the aggrieved party actually sought the partial enforcement of a leasecontract. Thus, the remedy was not rescission, but termination or cancellation, of thecontract. The Court explained:
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x x x. By the allegations of the complaint, the Gojoccos aim was to cancel or terminate thecontract because they sought its partial enforcement in praying for rental arrearages. There is adistinction in law between cancellation of a contract and its rescission. To rescind is to declare acontract void in its inception and to put an end to it as though it never were. It is not merely toterminate it and release parties from further obligations to each other but to abrogate it fromthe beginning and restore the parties to relative positions which they would have occupied hadno contract ever been made .

x x x. The termination or cancellation of a contract would necessarily entail enforcement of itsterms prior to the declaration of its cancellation in the same way that before a lessee is ejectedunder a lease contract, he has to fulfill his obligations thereunder that had accrued prior to hisejectment . However, termination of a contract need not undergo judicial intervention. x xx. [21] (Italics supplied)

Rescission has likewise been defined as the unmaking of a contract, or its undoing fromthe beginning, and not merely its termination. Rescission may be effected by both parties bymutual agreement; or unilaterally by one of them declaring a rescission of contract without theconsent of the other, if a legally sufficient ground exists or if a decree of rescission is applied forbefore the courts .[22] On the other hand, termination refers to an end in time or existence; aclose, cessation or conclusion. With respect to a lease or contract, it means an ending, usuallybefore the end of the anticipated term of such lease or contract, that may be effected bymutual agreement or by one party exercising one of its remedies as a consequence of thedefault of the other .[23]

Thus, mutual restitution is required in a rescission (or resolution), in order to bring back theparties to their original situation prior to the inception of the contract . [24] Applying this principleto this case, it means that PPC would re-acquire possession of the leased premises, andPAGCOR would get back the rentals it paid the former for the use of the hotel space.

In contrast, the parties in a case of termination are not restored to their original situation;neither is the contract treated as if it never existed. Prior to its termination, the parties areobliged to comply with their contractual obligations. Only after the contract has been cancelledwill they be released from their obligations.

In this case, the actions and pleadings of petitioner show that it never intendedto rescind the Lease Contract from the beginning. This fact was evident when it first sought tocollect the accrued rentals from September to November 1993 because, as previously stated, itactually demanded the enforcement of the Lease Contract prior to termination. Any intent torescind was not shown, even when it abrogated the Contract on November 25, 1993, becausesuch abrogation was not the rescission provided for under Article 1659.

Future Rentals

As to the remaining sub-issue of future rentals, Rios v. Jacint o [25] is inapplicable, becausethe remedy resorted to by the lessors in that case was rescission, not termination. The rightsand obligations of the parties in Rios were governed by Article 1659 of the Civil Code; hence,the Court held that the damages to which the lessor was entitled could not have extended tothe lessees liability for future rentals.
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Upon the other hand, future rentals cannot be claimed as compensation for the use orenjoyment of anothers property after the termination of a contract. We stress that byabrogating the Contract in the present case, PPC released PAGCOR from the latters futureobligations, which included the payment of rentals. To grant that right to the former is tounjustly enrich it at the latters expense.

However, it appears that Section XX (c) was intended to be a penalty clause. That fact ismanifest from a reading of the mandatory provision under subparagraph (a) in conjunction withsubparagraph (c) of the Contract. A penal clause is an accessory obligation which the partiesattach to a principal obligation for the purpose of insuring the performance thereof by imposingon the debtor a special prestation (generally consisting in the payment of a sum of money) incase the obligation is not fulfilled or is irregularly or inadequately fulfilled. [26]

Quite common in lease contracts, this clause functions to strengthen the coercive force ofthe obligation and to provide, in effect, for what could be the liquidated damages resulting froma breach .[27] There is nothing immoral or illegal in such indemnity/penalty clause, absent anyshowing that it was forced upon or fraudulently foisted on the obligor . [28]

In obligations with a penal clause, the general rule is that the penalty serves as a substitutefor the indemnity for damages and the payment of interests in case of noncompliance; that is, ifthere is no stipulation to the contrary , [29] in which case proof of actual damages is notnecessary for the penalty to be demanded .[30] There are exceptions to the aforementioned rule,however, as enumerated in paragraph 1 of Article 1226 of the Civil Code: 1) when there is astipulation to the contrary, 2) when the obligor is sued for refusal to pay the agreed penalty,and 3) when the obligor is guilty of fraud. In these cases, the purpose of the penalty isobviously to punish the obligor for the breach. Hence, the obligee can recover from the formernot only the penalty, but also other damages resulting from the nonfulfillment of the principalobligation. [31]

In the present case, the first exception applies because Article XX (c) provides that, aside

from the payment of the rentals corresponding to the remaining term of the lease, the lesseeshall also be liable for any and all damages, actual or consequential, resulting from suchdefault and termination of this contract. Having entered into the Contract voluntarily and withfull knowledge of its provisions, PAGCOR must be held bound to its obligations. It cannot evadefurther liability for liquidated damages.

Reduction of Penalty

In certain cases, a stipulated penalty may nevertheless be equitably reduced by thecourts .[32] This power is explicitly sanctioned by Articles 1229 and 2227 of the Civil Code, which

we quote:

Art. 1229. The judge shall equitably reduce the penalty when the principal obligation hasbeen partly or irregularly complied with by the debtor. Even if there has been no performance,the penalty may also be reduced by the courts if it is iniquitous or unconscionable.

Art. 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall beequitably reduced if they are iniquitous or unconscionable.
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The question of whether a penalty is reasonable or iniquitous is addressed to the sounddiscretion of the courts. To be considered in fixing the amount of penalty are factors such as --but not limited to -- the type, extent and purpose of the penalty; the nature of the obligation;the mode of the breach and its consequences; the supervening realities; the standing andrelationship of the parties; and the like .[33]

In this case, PAGCORs breach was occasioned by events that, although not fortuitous inlaw, were in fact real and pressing. From the CAs fact ual findings, which are not contested byeither party, we find that PAGCOR conducted a series of negotiations and consultations beforeentering into the Contract. It did so not only with the PPC, but also with local governmentofficials, who assured it that the problems were surmountable. Likewise, PAGCOR took pains tocontest the ordinance s[34] before the courts, which consequently declared themunconstitutional. On top of these developments, the gaming corporation was advised by theOffice of the President to stop the games in Cagayan de Oro City, prompting the former tocease operations prior to September 1993.

Also worth mentioning is the CAs finding that PAGCORs casino operations had to besuspended for days on end since their start in December 1992; and indefinitely from July 15,

1993, upon the advice of the Office of President, until the formal cessation of operations inSeptember 1993. Needless to say, these interruptions and stoppages meant that PAGCORsuffered a tremendous loss of expected revenues, not to mention the fact that it had fullyoperated under the Contract only for a limited time.

While petitioners right to a stipulated penalty is affirmed, we consider the claim for futurerentals to the tune of P7,037,835.40 to be highly iniquitous. The amount should be equitablyreduced. Under the circumstances , the advanced rental deposits in the sum of P687,289.50should be sufficient penalty for respo ndents breach.

WHEREFORE , the Petition is GRANTEDin part. The assailed Decision and Resolution arehereby MODIFIED to include the payment of penalty. Accordingly, respondent is ordered to pay

petitioner the additional amount of P687,289.50 as penalty, which may be set off or appliedagainst the formers advanced rental deposits. Meanwhile, the CAs award to petitioner ofactual damages representing the accrued rentals for September to November 1993 -- withinterest and penalty at the rate of two percent (2%) per month, from the date of filing of theComplaint until the amount shall have been fully paid -- as well as the P50,000 award forattorneys fees, is AFFIRMED . No costs.

SO ORDERED.
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Republic of the PhilippinesSUPREME COURT

Manila

FIRST DIVISION

G.R. No. L-50076 September 14, 1990

NORBERTO QUISUMBING, SR., and GUNTHER LOEFFLER petitioners,vs.COURT OF APPEALS and PHILIPPINE AIR LINES, INC., respondents.

N.J. Quisumbing & Associates for petitioners

Siguion Reyna, Montecillo & Ongsiako for private respondent.

NARVASA, J.:

Having met with no success in the Court of First Instance of Rizal and in the Court of Appeals,the petitioners are now in this Court in a third and final attempt to recover from the Philippine

Airlines, Inc. (hereafter, simply PAL) the value of jewelry, other valuables and money takenfrom them by four (4) armed robbers on board one of the latter's airplanes while on a flightfrom Mactan City to Manila, as well as moral and exemplary damages, attorney's fees andexpenses of litigation.

The petitioners accept the correctness of the basic facts adopted by the Court of Appeals from

the judgment of the Court of First Instance, to wit:1

1. . . . Norberto Quisumbing, Sr. and Gunther Leoffler were among the of ...(PAL's) Fokker 'Friendship' PIC-536 plane in its flight of November 6,1968 whichleft Mactan City at about 7:30 in the evening with Manila for its destination.

2. After the plane had taken off, Florencio O. Villarin, a Senior NBI Agent whowas also a passenger of the said plane, noticed a certain 'Zaldy,' a suspect in thekilling of Judge Valdez, seated at the front seat near the door leading to thecockpit of the plane. A check by Villarin with the passenger's ticket in thepossession of flight Stewardess Annie Bontigao, who was seated at the last seatright row, revealed that 'Zaldy' had used the name 'Cardente,' one of his aliasesknown to Villarin. Villarin also came to know from the stewardess that 'Zaldy' hadthree companions on board the plane."

3. Villarin then scribbled a note addressed to the pilot of the plane requesting thelatter to contact NBI duty agents in Manila for the said agents to ask the Directorof the NBI to send about six NBI agents to meet the plane because the suspectin the killing of Judge Valdez was on board (Exh. 'G'). The said note was handedby Villarin to the stewardess who in tum gave the same to the pilot.


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4. After receiving the note, which was about 15 minutes after take off, the pilotof the plane, Capt. Luis Bonnevie, Jr., came out of the cockpit and sat beside

Villarin at the rear portion of the plane and explained that he could not send themessage because it would be heard by all ground aircraft stations. Villarin,however, told the pilot of the danger of commission of violent acts on board theplane by the notorious 'Zaldy' and his three companions.

5. While the pilot and Villarin were talking, 'Zaldy' and one of his companionswalked to the rear and stood behind them. Capt. Bonnevie then stood up andwent back to the cockpit. 'Zaldy' and his companions returned to their seats, butafter a few minutes they moved back to the rear throwing ugly looks at Villarinwho, sensing danger, stood up and went back to his original seat across the aisleon the second to the last seat near the window. 'Zaldy and his companionlikewise went back to their respective seats in front.

6. Soon thereafter an exchange of gunshots ensued between Villarin and 'Zaldy'and the latter's companions. 'Zaldy' announced to the passengers and the pilotsin the cockpit that it was a hold-up and ordered the pilot not to send any SOS.The hold-uppers divested passengers of their belongings.

7. Specifically, ... Norberto Quisumbing, Sr. was divested of jewelries and cash inthe total amount of P18,650.00 out of which recoveries were made amounting toP4,550.00. . . Gunther Leoffler was divested of a wrist watch, cash and a walletin the total of P1,700.00. As a result of the incident ... Quisumbing, Sr.sufferedshock, because a gun had been pointed at him by one of the holduppers.

8. Upon landing at the Manila International Airport. 'Zaldy' and his threecompanions succeeded in escaping.

Demands were thereafter made on PAL by Quisumbing and Loeffler "to indemnify ... (them) ontheir aforesaid loss, but ... (PAL) refused ... (averring that) it is not liable to (them) in law or infact." 2

Contending that the "aforesaid loss is a result of breach of ... (PAL's) contractual obligation tocarry ... (them) and their belongings and effects to their Manila destination without loss ordamage, and constitutes a serious dereliction of ... (PAL's) legal duty to exercise extraordinarydiligence in the vigilance over the same." , Quisumbing and Loeffler brought suit against PAL inthe Court of First Instance of Rizal, as stated in this opinion's opening paragraph, to recover thevalue of the property lost by them to the robbers as well as moral and exemplary damages,attorney's fees and expenses of litigation. 3 The plaintiffs declared that their suit was instituted"... pursuant to Civil Code articles 1754, 998, 2000 and 2001 and on the ground that in relationto said Civil Code article 2001 the complained-of act of the armed robbers is not a forcemajeure , as the 'use of arms' or 'irresistible force' was not taken advantage of by said armedrobbers in gaining entrance to defendant's ill-fated plane in questions. And, with respect to saidCivil Code article 1998, it is not essential that the lost effects and belongings of plaintiffs wereactually delivered to defendant's plane personnel or that the latter were notified thereof (De losSantos v. Tamn Khey, [CA] 58 O.G. 7693)." 4


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PAL filed answer denying liability, alleging inter alia that the robbery during the flight and afterthe aircraft was forcibly landed at the Manila Airport did indeed constitute force majeure , andneither of the plaintiffs had notified PAL "or its crew or employees that they were in possessionof cash, German marks and valuable jewelries and watches" or surrendered said items to "thecrew or personnel on board the aircraft." 5

After trial, the Court of First Instance rendered judgment 'dismissing plaintiffs' complaint withcosts against ... (them)." 6 The Court opined that since the plaintiffs "did not notify defendantor its employees that they were in possession of the cash, jewelries, and the wallet they arenow claiming," the very provision of law invoked by them, Article 1998 of the Civil Code, deniesthem any recourse against PAL. The Court also pointed out that-

... while it is true that the use of gems was not taken advantage of by therobbers in gaining entrance to defendant's ill-fated plane, the armed robbery thattook place constitutes force majeure for which defendant is not liable becausethe robbers were able to gain entrance to the plane with the guns they usedalready in their possession, which fact could not have been prevented noravoided by the defendant since it was not authorized to search its passengers forfirearms and deadly weapons as shown in Exhibits '6', '7', '8,' and '8-A.' As itsrobbery constitutes force majeure , defendant is not liable.

The plaintiffs appealed to the Court of Appeals. 7 The Court affirmed the trial court's judgment. 8 It rejected the argument that "the use of arms or ... irresistible force" referred to in Article 2001 constitutes force majeure only if resorted to gain entry into the airplane, and not ifit attends "the robbery itself." The Court ruled that under the facts, "the highjacking-robberywas force majeure," observing that

... hijackers do not board an airplane through a blatant display of firepower and

violent fury. Firearms, hand-grenades, dynamite, and explosives are introducedinto the airplane surreptitiously and with the utmost cunning and stealth,although there is an occasional use of innocent hostages who will be coldlymurdered unless a plane is given to the hijackers' complete disposal. Theobjective of modern-day hijackers is to display the irresistible force amounting toforce majeure only when it is most effective and that is when the jetliner iswinging its way at Himalayan altitudes and ill-advised heroics by either crew orpassengers would send the multi-million peso airplane and the priceless lives ofall its occupants into certain death and destruction. ...

The Appellate Court also ruled that in light of the evidence PAL could not be faulted for want ofdiligence, particularly for failing "to take positive measures to implement Civil Aeronautics

Administration regulations prohibiting civilians from carrying firearms on board aircrafts;" andthat "the absence of coded transmissions, the amateurish behaviour of the pilot in dealing withthe NBI agent, the allegedly open cockpit door, and the failure to return to Mactan, in the lightof the circumstances of the case ..., were not negligent acts sufficient to overcome the forcemajeure nature of the armed robbery." In fact, the Court went on to says, 9

... it is illusive to assume that had these precautions been taken, the hijacking orthe robbery would not have succeeded. The mandatory use of the most


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sophisticated electronic detection devices and magnetometers, the imposition ofsevere penalties, the development of screening procedures, the compilation ofhijacker behavioural profiles, the assignment of sky marshals, and the weight ofoutraged world opinion may have minimized hijackings but all these have provedineffective against truly determined hijackers. World experience shows that if agroup of armed hijackers want to take over a plane in flight, they can elude thelatest combined government and airline industry measures. And as our ownexperience in Zamboanga City illustrates, the use of force to overcome hijackers,results in the death and injury of innocent passengers and crew members. Weare not in the least bit suggesting that the Philippine Airlines should not doeverything humanly possible to protect passengers from hijackers' acts. Wemerely state that where the defendant has faithfully complied with therequirements of government agencies and adhered to the established proceduresand precautions of the airline industry at any particular time, its failure to takecertain steps that a passenger in hindsight believes should have been taken isnot the negligence or misconduct which mingles with force majeure as an activeand cooperative cause.

Under the circumstance of the instant case, the acts of the airline and its crewcannot be faulted as negligence. The hijackers had already shown theirwillingness to kill. One passenger was in fact killed and another survived gunshotwounds. The lives of the rest of the passengers and crew were more importantthan their properties. Cooperation with the hijackers until they released theirhostages at the runway end near the South Superhighway was dictated by thecircumstances.

Insisting that the evidence demonstrates negligence on the part of the PAL crew "occurringbefore and exposing them to hijacking," Quisumbing and Loeffler have come up to this Court

praying that the judgments of the trial Court and the Court of Appeals be reversed and anotherrendered in their favor. Once again, the issue will be resolved against them.

A careful analysis of the record in relation to the memoranda and other pleadings of the parties,convinces this Court of the correctness of the essential conclusion of both the trial and appellatecourts that the evidence does indeed fail to prove any want of diligence on the part of PAL, orthat, more specifically, it had failed to comply with applicable regulations or universallyaccepted and observed procedures to preclude hijacking; and that the particular acts singledout by the petitioners as supposedly demonstrative of negligence were, in the light of thecircumstances of the case, not in truth negligent acts "sufficient to overcome the force majeurenature of the armed robbery." The Court quite agrees, too, with the Appellate Tribunal's wryobservation that PAL's "failure to take certain steps that a passenger in hindsight believesshould have been taken is not the negligence or misconduct which mingles with force majeureas an active and cooperative cause."

No success can therefore attend petitioners' appeal, not only because they wish to have areview and modification of factual conclusions of the Court of Appeals, which established anduniformly observed axiom proscribes, 10 but also because those factual conclusions have in thisCourt's view been correctly drawn from the proofs on record.


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WHEREFORE, the petition is DENIED and the appealed Decision of the Court of Appeals is AFFIRMED, with costs against petitioners.

SO ORDERED.


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THIRD DIVISION

[G.R. No. 153535. July 28, 2005]

SOLIDBANK CORPORATION, petitioner, vs . MINDANAO FERROALLOY CORPORATION,Spouses JONG-WON HONG and SOO-OK KIM HONG , *TERESITA CU, andRICARDO P. GUEVARA and Spouse , ** respondents .

D E C I S I O N

PANGANIBAN, J.:

To justify an award for moral and exemplary damages under Articles 19 to 21 of the CivilCode (on human relations), the claimants must establish the other partys malice or bad faith byclear and convincing evidence.

The Case

Before us is a Petition for Review [1] under Rule 45 of the Rules of Court, assailing theDecember 21, 2001 Decision [2] and the May 15, 2002 Resolution [3] of the Court of Appeals (CA)in CA-GR CV No. 67482. The CA disposed as follows:

IN THE LIGHT OF ALL THE FOREGOING , the appeal is DISMISSED . The Decisionappealed from is AFFIRMED . [4]

The assailed Resolution, on the other hand, denied petitioners Motion for Reconsideration.

The Facts

The CA narrated the antecedents as follows:

The Maria Cristina Chemical Industries (MCCI) and three (3) Korean corporations, namely, theSsangyong Corporation, the Pohang Iron and Steel Company and the Dongil Industries

Company, Ltd., decided to forge a joint venture and establish a corporation, under the name ofthe Mindanao Ferroalloy Corporation (Corporation for brevity) with principal offices in IliganCity. Ricardo P. Guevara was the President and Chairman of the Board of Directors of theCorporation. Jong-Won Hong, the General Manager of Ssangyong Corporation, was the Vice-President of the Corporation for Finance, Marketing and Administration. So was Teresita R.Cu. On November 26, 1990, the Board of Directors of the Corporation approved a Resolutionauthorizing its President and Chairman of the Board of Directors or Teresita R. Cu, acting
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together with Jong-Won Hong, to secure an omnibus line in the aggregate amountof P30,000,000.00 from the Solidbank x x x.

x x x x x x x x x

In the meantime, the Corporation started its operations sometime in April, 1991. Itsindebtedness ballooned to P200,453,686.69 compared to its assets of only P65,476,000.00. OnMay 21, 1991, the Corporation secured an ordinary time loan from the Solidbank in the amountof P3,200,000.00. Another ordinary time loan was granted by the Bank to the Corporation onMay 28, 1991, in the amount ofP1,800,000.00 or in the total amount of P5,000,000.00, due onJuly 15 and 26, 1991, respectively.

However, the Corporation and the Bank agreed to consolidate and, at the same time,restructure the two (2) loan availments, the same payable on September 20, 1991. TheCorporation executed Promissory Note No. 96-91-00865-6 in favor of the Bank evidencing itsloan in the amount of P5,160,000.00, payable on September 20, 1991. Teresita Cu and Jong-Won Hong affixed their signatures on the note. To secure the payment of the said loan, theCorporation, through Jong- Won Hong and Teresita Cu, executed a Deed of Assignment infavor of the Bank covering its rights, title and interest to the following:

The entire proceeds of drafts drawn under Irrevocable Letter of Credit No. M -S-041-2002080opened with The Mitsubishi Bank Ltd. Tokyo dated June 13, 1991 for the account ofSsangyong Japan Corporation, 7F. Matsuoka-Tamura-Cho Bldg., 22-10, 5-Chome, Shimbashi,Minato- Ku, Tokyo, Japan up to the extent of US$197,679.00

The Corporation likewise executed a Quedan , by way of additional security, under which theCorporation bound and obl iged to keep and hold, in trust for the Bank or its Order, Ferrosiliconfor US$197,679.00 . Jong-Won Hong and Teresita Cu affixed their signatures thereon for the

Corporation. The Corporation, also, through Jong- Won Hong and Teresita Cu, executed a TrustReceipt Agreement , by way of additional security for said loan, the Corporation undertaking tohold in trust, for the Bank, as its property, the following:

1. THE MITSUBISHI BANK LTD., Tokyo L/C No. M-S-041-2002080 for account ofSsangyong Japan Corporation, Tokyo, Japan for US$197,679.00 Ferrosilicon toexpire September 20, 1991.

2. SEC QUEDAN NO. 91-476 dated June 26, 1991 covering the following:

Ferrosilicon for US$197,679.00

However, shortly after the execution of the said deeds, the Corpo ration stopped itsoperations. The Corporation failed to pay its loan availments from the Bank inclusive of accruedinterest. On February 11, 1992, the Bank sent a letter to the Corporation demanding paymentof its loan availments inclusive of interests due. The Corporation failed to comply with thedemand of the Bank. On November 23, 1992, the Bank sent another letter to the [Corporation]demanding payment of its account which, by November 23, 1992, had amountedto P7,283,913.33. The Corporation again failed to comply with the demand of the Bank.


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On January 6, 1993, the Bank filed a complaint against the Corporation with the Regional TrialCourt of Makati City, entitled and docketed as Solidbank Corporation vs. Mindanao FerroalloyCorporation, Sps. Jong-Won Hong and the Sps. Teresita R. Cu, Civil Case No. 93-038 for Sumof Money with a plea for the issuance of a writ of preliminary attachment. x x x

x x x x x x x x x

Under its Amended Complaint, the Plaintiff alleged that it impleaded Ricardo Guevara and hiswife as Defendants because, [among others]:

Defendants JONG -WON HONG and TERESITA CU, are the Vice-Presidents of defendantcorporation, and also members of the companys Board of Direct ors. They are impleaded as

joint and solidary debtors of [petitioner] bank having signed the Promissory Note, Quedan, andTrust Receipt agreements with [petitioner], in this case.

x x x x x x x x x

[Petitioner] likewise filed a criminal complaint x x x entitled and docketed as SolidbankCorporation vs. Ricardo Guevara, Teresita R. Cu and Jong Won Hong x x x for Violation of P.D.115. On April 14, 1993, the investigating Prosecutor issued a Resolution finding no probablecause for violation of P.D. 115 against the Respondents as the goods covered by the quedan

were nonexistent:

x x x x x x x x x

In their Answer to the complaint [in the civil case], the Spouses Jong-Won Hong and Soo-okKim Hong alleged, inter alia, that [petitioner] had no cause of action against them as:

x x x the clean loan of P5.1 M obtained was a corporate undertaking of defendantMINFACO executed through its duly authorized representatives, Ms. Teresita R. Cu and Mr.Jong-Won Hong, both Vice Presidents then of MINFACO. x x x.

x x x x x x x x x

[On their part, respondents] Teresita Cu and Ricardo Guevara allege d that [petitioner] had nocause of action against them because: (a) Ricardo Guevara did not sign any of the documentsin favor of [petitioner]; (b) Teresita Cu signed the Promissory Note, Deed of Assignment ,

Trust Receipt and Quedan in blank and merely as representative and, hence, for and in behalfof the Defendant Corporation and, hence, was not personally liable to [petitioner].

In the interim, the Corporation filed, on June 20, 1994, a Petition , with the Regional TrialCourt of Iligan City, for Voluntary Insolvency x x x.

x x x x x x x x x

Appended to the Petition was a list of its creditors, including [petitioner], for the amountof P8,144,916.05. The Court issued an Order, on July 12, 1994, finding the Petition sufficient inform and substance x x x.


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x x x x x x x x x

In view of said development, the Court issued an Order, in Civil Case No. 93 -038, suspendingthe proceedings as against the Defendant Corporation but ordering the proceedings to proceedas against the individual defendants x x x.

x x x x x x x x x

On December 10, 1999, the Court rendered a Decision dismissing the complaint for lack ofcause of action of [petitioner] against the Spouses Jong-Won Hong, Teresita Cu and theSpouses Ricardo Guevara, x x x.

x x x x x x x x x

In dismissing the complaint against the individual [respondents], the Court a quo found anddeclared that [petitioner] failed to adduce a morsel of evidence to prove the personal liability ofthe said [respondents] for the claims of [petitioner] and that the latter impleaded the[respondents], in its complaint and amended complaint, solely to put more pressure on theDefendant Corporation to pay its obligations to [petitioner].

[Petitioner] x x x interposed an appeal, from the Decision of the Court a quo and posed, for x xx resolution, the issue of whether or not the individual [respondents], are jointly and severallyliable to [petitioner] for the loan availments of the [respondent] Corporation, inclusive ofaccrued interests and penalties.

In the meantime, on motion of [petiti oner], the Court set aside its Order, dated February 2,1995, suspending the proceedings as against the [respondent] Corporation. [Petitioner] filed a

Motion for Summary Judgment against the [respondent] Corporation. On February 28, 2000,

the Court ren dered a Summary Judgment against the [respondent] Corporation, the decretalportion of which reads as follows:

WHEREFORE, premises considered, this Court hereby resolves to give due course to the motionfor summary judgment filed by herein [petitioner]. Consequently, judgment is hereby renderedin favor of [Petitioner] SOLIDBANK CORPORATION and against [Respondent] MINDANAOFERROALLOY CORPORATION, ordering the latter to pay the former the amount of P7,086,686.70,representing the outstanding balance of the subject loan as of 24 September 1994, plusstipulated interest at the rate of 16% per annum to be computed from the aforesaid date untilfully paid together with an amount equivalent to 12% of the total amount due each year from24 September 1994 until fully paid. Lastly, said [respondent] is hereby ordered to pay[petitioner] the amount of P 25,000.00 to [petitioner] as reasonable attorneys fees as well ascost of litigation. [5]

In its appeal, petitioner argued that (1) it had adduced the requisite evidence to prove thesolidary liability of the individual respondents, and (2) it was not liable for their counterclaimsfor damages and attorneys fees.

Ruling of the Court of Appeals
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Affirming the RTC, the appellate court ruled that the individual respondents were notsolidarily liable with the Mindanao Ferroalloy Corporation, because they had acted merely asofficers of the corporation, which was the real party in interest. Respondent Guevara was noteven a signatory to the Promissory Note, the Trust Receipt Agreement, the Deed of Assignmentor the Quedan; he was merely authorized to represent Minfaco to negotiate with and secure theloans from the bank. On the other hand, the CA noted that Respondents Cu and Hong had notsigned the above documents as comakers, but as signatories in their representative capacitiesas officers of Minfaco.

Likewise, the CA held that the individual respondents were not liable to petitioner fordamages, simply because (1) they had not received the proceeds of the irrevocable Letter ofCredit, which was the subject of the Deed of Assignment; and (2) the goods subject of theTrust Receipt Agreement had been found to be nonexistent. The appellate court took judicialnotice of the practice of banks and financing institutions to investigate, examine and assess allproperties offered by borrowers as collaterals, in order to determine the feasibility andadvisability of granting loans. Before agreeing to the consolidation of Minfacos loans, itpresumed that petitioner had done its homework.

As to the award of damages to the individual respondents, the CA upheld the trial courtsfindings that it was clearly unfair on petitioners part to have impleaded the wives of Guevaraand Hong, because the women were not privy to any of the transactions between petitionerand Minfaco. Under Articles 19, 20 and 2229 of the Civil Code, such reckless and wanton act ofpressuring individual respondent s to settle the corporations obligations is a ground to awardmoral and exemplary damages, as well as attorneys fees.

Hence this Petition .[6]

Issues

In its Memorandum, petitioner raises the following issues:

A. Whether or not there is ample evidence on record to support the joint and solidaryliability of individual respondents with Mindanao Ferroalloy Corporation.

B. In the absence of joint and solidary liability[,] will the provision of Article 1208 in relationto Article 1207 of the New Civil Code providing for joint liability be applicable to the case at bar.

C. May bank practices be the proper subject of judicial notice under Sec. 1 [of] Rule 129 ofthe Rules of Court.

D. Whether or not there is evidence to sustain the claim that respondents were impleadedto apply pressure upon them to pay the obligations in lieu of MINFACO that is declaredinsolvent.

E. Whether or not there are sufficient bases for the award of various kinds of andsubstantial amounts in damages including payment for attorneys fees.
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their authority and in good faith .[11] The separate corporate personality is a shield against thepersonal liability of corporate officers, whose acts are properly attributed to the corporation . [12]

Tramat Mercantile v. Court of Appeal s [13] held thus:

Personal liability of a corporate director, trustee or officer along (although not necessarily) withthe corporation may so validly attach, as a rule, only when

1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith orgross negligence in directing its affairs, or (c) for conflict of interest, resulting in damages to thecorporation, its stockholders or other persons;

2. He consents to the issuance of watered stocks or who, having knowledge thereof,does not forthwith file with the corporate secretary his written objection thereto;

3. He agrees to hold himself personally and solidarily liable with the corporation; or

4. He is made, by a specific provision of law, to personally answer for his corporateaction.

Consistent with the foregoing principles, we sustain the CAs ruling that RespondentGuevara was not personally liable for the contracts. First , it is beyond cavil that he was dulyauthorized to act on behalf of the corporation; and that in negotiating the loans with petitioner,he did so in his official capacity. Second , no sufficient and specific evidence was presented toshow that he had acted in bad faith or gross negligence in that negotiation. Third , he did nothold himself personally and solidarily liable with the corporation. Neither is there any specificprovision of law making him personally answerable for the subject corporate acts.

On the other hand, Respondents Cu and Hong signed the Promissory Note without the

word by preceding their signatures, atop the designation Maker/Borrower and the printedname of the corporation, as follows:

__(Sgd) Cu/Hong__ (Maker/Borrower)

MINDANAO FERROALLOY

While their signatures appear without qualification, the inference that they signed in theirindividual capacities is negated by the following facts: 1) the name and the address of thecorporation appeared on the space provided for Maker/Borrower; 2) Respondents Cu andHong had only one set of signatures on the instrument, when there should have been two, ifindeed they had intended to be bound solidarily -- the first as representatives of thecorporation, and the second as themselves in their individual capacities; 3) they did not signunder the spaces provided for Co -maker, and neither were their addresses reflected there;and 4) at the back of the Promissory Note, they signed above the words AuthorizedRepr esentative.
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Solidary Liability Not Lightly Inferred

Moreover, it is axiomatic that solidary liability cannot be lightly inferred . [14] Under Article1207 of the Civil Code, there is a solidary liability only when the obligation expressly so states,or when the law or the nature of the obligation requires solidarity. Since solidary liability is notclearly expressed in the Promissory Note and is not required by law or the nature of theobligation in this case, no conclusion of solidary liability can be made.

Furthermore, nothing supports the alleged joint liability of the individual petitionersbecause, as correctly pointed out by the two lower courts, the evidence shows that there is onlyone debtor: the corporation. In a joint obligation, there must be at least two debtors, each ofwhom is liable only for a proportionate part of the debt; and the creditor is entitled only to aproportionate part of the credit .[15]

Moreover, it is rather late in the day to raise the alleged joint liability, as this matter hasnot been pleaded before the trial and the appellate courts. Before the lower courts, petitioner

anchored its claim solely on the alleged joint and several (or solidary) liability of the individualrespondents. Petitioner must be reminded that an issue cannot be raised for the first time onappeal, but seasonably in the proceedings before the trial court .[16]

So too, the Promissory Note in question is a negotiable instrument. Under Section 19 ofthe Negotiable Instruments Law, agents or representatives may sign for the principal. Theirauthority may be established, as in other cases of agency. Section 20 of the law provides thata person signing for and on behalf of a [disclosed] principal or in a represent ative capacity x xx is not liable on the instrument if he was duly authorized.

The authority of Respondents Cu and Hong to sign for and on behalf of the corporation hasbeen amply established by the Resolution of Minfacos Board of Directors, stating that Atty.Ricardo P. Guevara (President and Chairman), or Ms. Teresita R. Cu (Vice President), actingtogether with Mr. Jong Won Hong (Vice President), be as they are hereby authorized for and inbehalf of the Corporation to: 1. Negotiate with and obtain from (petitioner) the extension of anomnibus line in the aggregate of P30 million x x x; and 2. Execute and deliver alldocumentation necessary to implement all of the foregoing. [17]

Further, the agreement involved here is a contract of adhesion, which was preparedentirely by one party and offered to the other on a take it or leave it basis. Following thegeneral rule, the contract must be read against petitioner, because it was the party thatprepared it ,[18] more so because a bank is held to high standards of care in the conduct of itsbusiness .[19]

In the totality of the circumstances, we hold that Respondents Cu and Hong clearly signed

the Note merely as representatives of Minfaco.

No Reason to Pierce the Corporate Veil

Under certain circumstances, courts may treat a corporation as a mere aggroupment ofpersons, to whom liability will directly attach. The distinct and separate corporate personality
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may be disregarded, inter alia, when the corporate identity is used to defeat publicconvenience, justify a wrong, protect a fraud, or defend a crime. Likewise, the corporate veilmay be pierced when the corporation acts as a mere alter ego or business conduit of a person,or when it is so organized and controlled and its affairs so conducted as to make it merely aninstrumentality, agency, conduit or adjunct of another corporation . [20] But to disregard theseparate juridical personality of a corporation, the wrongdoing must be clearly and convincinglyestablished; it cannot be presumed . [21]

Petitioner contends that the corporation was used to protect the fraud foisted upon it bythe individual respondents. It argues that the CA failed to consider the following badges offraud and evident bad faith: 1) the individual respondents misrepresented the corporation assolvent and financially capable of paying its loan; 2) they knew that prices of ferrosilicon weredeclining in the world market when they secured the loan in June 1991; 3) not a single centavowas paid for the loan; and 4) the corporation suspended its operations shortly after the loanwas granted .[22]

Fraud refers to all kinds of deception -- whether through insidious machination,manipulation, concealment or misrepresentation -- that would lead an ordinarily prudent person

into error after taking the circumstances into account . [23] In contracts, a fraud known as dolocausante or causal fraud [24] is basically a deception used by one party prior to or simultaneouswith the contract, in order to secure the consent of the other . [25] Needless to say, the deceitemployed must be serious. In contradistinction, only some particular or accident of theobligation is referred to by incidental fraud or dolo incidente , [26] or that which is not serious incharacter and without which the other party would have entered into the contract anyway . [27]

Fraud must be established by clear and convincing evidence; mere preponderance ofevidence is not adequate .[28] Bad faith, on the other hand, imports a dishonest purpose or somemoral obliquity and conscious doing of a wrong, not simply bad judgment or negligence . [29] It issynonymous with fraud, in that it involves a design to mislead or deceive another . [30]

Unfortunately, petitioner was unable to establish clearly and precisely how the allegedfraud was committed. It failed to establish that it was deceived into granting the loans becauseof respondents misrepresentations and/or insidious actions. Quite the contrary, circumstancesindicate the weakness of its submission.

First , petitioner does not deny that the P5 million loan represented the consolidation of twoloans ,[31] granted long before the bank required the individual respondents to execute thePromissory Note, Trust Receipt Agreement, Quedan or Deed of Assignment. Hence, no words,acts or machinations arising from any of those instruments could have been used by them priorto or simultaneous with the execution of the contract, or even as some accident or particular ofthe obligation.

Second , petitioner bank was in a position to verify for itself the solvency andtrustworthiness of respondent corporation. In fact, ordinary business prudence required it to doso before granting the multimillion loans. It is of common knowledge that, as a matter ofpractice, banks conduct exhaustive investigations of the financial standing of an applicantdebtor, as well as appraisals of collaterals offered as securities for loans to ensure their promptand satisfactory payment. To uphold petitioners cry of fraud when it failed to verify theexistence of the goods covered by the Trust Receipt Agreement and the Quedan is to condoneits negligence.
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Judicial Notice of Bank Practices

This point brings us to the alleged error of the appellate court in taking judicial notice ofthe practice of banks in conducting background checks on borrowers and sureties. While acourt is not mandated to take judicial notice of this practice under Section 1 of Rule 129 of theRules of Court, it nevertheless may do so under Section 2 of the same Rule. The latter Ruleprovides that a court, in its discretion, may take judicial notice of matters which are of publicknowledge, or ought to be known to judges because of their judicial functions.

Thus, the Court has taken judicial notice of the practices of banks and other financialinstitutions. Precisely, it has noted that it is their uniform practice, before approving a loan, toinvestigate, examine and assess would- be borrowers credit standing or real estate [32] offered assecurity for the loan applied for.

Second Issue: Award of Damages

The individual respondents were awarded moral and exemplary damages as well asattorneys fees under Articles 19 to 21 of the Civil Code , on the basic premise that the suit wasclearly malicious and intended merely to harass.

Article 19 of the Civil Code expresses the fundamental principle of law on human conductthat a person must, in the exercise of his rights and in the performance of his duties, act with

justice, give every one his due, and observe honesty and good faith. Under this basicpostulate, the exercise of a right, though legal by itself, must nonetheless be done inaccordance with the proper norm. When the right is exercised arbitrarily, unjustly or

excessively and results in damage to another, a legal wrong is committed for which thewrongdoer must be held responsible . [33]

To be liable under the abuse-of-rights principle, three elements must concur: a) a legalright or duty, b) its exercise in bad faith, and c) the sole intent of prejudicing or injuringanother .[34] Needless to say, absence of good faith [35] must be sufficiently established.

Article 20 makes [e]very person who, contr ary to law, willfully or negligently causesdamage to another liable for damages. Upon the other hand, held liable for damages under

Article 21 is one who willfully causes loss or injury to another in a manner that is contrary tomorals, good customs o r public policy.

For damages to be properly awarded under the above provisions, it is necessary todemonstrate by clear and convincing evidenc e [36] that the action instituted by petitioner wasclearly so unfounded and untenable as to amount to gross and evident bad faith . [37] To justifyan award of damages for malicious prosecution, one must prove two elements: malice orsinister design to vex or humiliate and want of probable cause .[38]

Petitioner was proven wrong in impleading Spouses Guevara and Hong. Beyond that fact,however, respondents have not established that the suit was so patently malicious as towarrant the award of damages under the Civil Codes Articles 19 to 21, which are grounded onmalice or bad faith .[39] With the presumption of law on the side of good faith, and in the
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27/62

Republic of the PhilippinesSUPREME COURT

Manila

THIRD DIVISION

G.R. No. 155173 Nov

oblicon cases 10-4 scra

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