oblicon cases second assignment sans chavez

EN BANC

[G.R. No. L-4811. July 31, 1953.]

CHARLES F. WOODHOUSE, plaintiff-appellant, vs. FORTUNATO F. HALILI, defendant-appellant.

Tañada, Pelaez & Teehankee for defendant and appellant.

Gibbs, Gibbs, Chuidian & Quasha for plaintiff and appellant.

SYLLABUS

1. EVIDENCE; PAROL EVIDENCE RULE; INTEGRATION OF JURAL ACTS. — Plaintiff entered into a

written agreement with the defendant to the effect that they shall organize a partnership for the

bottling and distribution of soft drinks, plaintiff to act as industrial partner or manager, and the

defendant a capitalist furnishing the capital necessary therefor. The defendant claims that his consent to

the agreement was secured by the representation of plaintiff that he was the owner, or was about to

become owner, of an exclusive bottling franchise, which representation was false. The fraud and false

representation is sought to be proven by means, among others, of the drafts of the agreement prior to

the final one, which drafts are presumed to have already been integrated into the final agreement. Are

those prior drafts excluded from the prohibition of the parol evidence rule? Held: The purpose of

considering the drafts is not to vary, alter, or modify the agreement, but to discover the intent of the

parties thereto and the circumstances surrounding the execution of the contract. The issue of fact is, did

plaintiff represent to defendant that he had an exclusive franchise? Certainly, his acts or statements

prior to the agreement are essential and relevant to the determination of said issue. The act or

statement of the plaintiff was not sought to be introduced to change or alter the terms of the

agreement, but to prove how he induced the defendant to enter into it - to prove the representations or

inducements, or fraud, with which or by which he secured the other party's consent thereto. These are

expressly excluded from the parol evidence rule. (Bough and Bough vs. Cantiveros and Hanopol, 40 Phil.,

209; Port Banga Lumber Co., vs. Export & Import Lumber Co., 26 Phil., 602; 3 Moran 221, 1952 rev. ed.)

Fraud and false representation are an incident to the creation of a jural act, not to its integration, and

are not governed by the rules on integration. Where parties prohibited from proving said

representations or inducements, on the ground that the agreement had already been entered into, it

would be impossible to prove misrepresentation or fraud. The parol evidence rule expressly allows the

evidence to be introduced when the validity of an instrument is put in issue by the pleadings (sec. 22-a

of Rule 123).

2. ID.; INTERPRETATION OF DOCUMENTS. — AS plaintiff knew what defendant believed about his

(plaintiff's exclusive franchise, as he induced him to that belief, plaintiff may not be allowed to deny that

defendant was induced by that belief (sec. 63 of Rule 123).

3. FRAUD; FALSE REPRESENTATION; DOLO CAUSANTE AND DOLO INCIDENTE; IT IS THE FORMER

THAT VITIATES CONSENT. — Fraud is manifested in illimitable number of degrees or gradations — from

the innocent praises of a salesman about the excellence of his wares to those malicious machinations

and representations that the law punishes as a crime. In consequence, article 1270 of the Spanish Civil

Code distinguishes two kinds of (civil) fraud, the causal fraud which may be a ground for the annulment

of a contract, and the incidental deceit which only renders the party who employs it liable for damages.

In order that fraud may vitiate consent, it must be the causal (dolo causante), not merely the incidental

(dolo incidente), inducement to the making of the contract (art. 1270, Span. Civ. Code; Hill vs. Veloso, 31

Phil., 160). In the case at bar, inasmuch as the principal consideration, the main cause that induced

defendant to enter into the partnership agreement with plaintiff, was the ability of plaintiff to get the

exclusive franchise to bottle and distribute for the defendant or for the partnership, the false

representation made by the plaintiff was not the casual consideration, or the principal inducement, that

led the defendant to enter into the partnership agreement.

4. ID.; ID.; ID.; DAMAGES FOR DOLO INCIDENTE; PARTNERSHIP. — While the representation that

plaintiff had the exclusive franchise did not vitiate defendant' consent to the contract, it was used by

plaintiff to get from defendant a share of 30 per cent of the net profits; in other words, by pretending

that he had the exclusive franchise and promising to transfer it to defendant, he obtained the consent of

the latter to give him (plaintiff) a big slice in the net profits. This is the dolo incidente defined in article

1270 of the Spanish Civil Code, because it was used to get the other party's consent to a big share in the

profits, an incidental matter in the agreement. (8 Manresa, 602.)

5. CONTRACTS AND OBLIGATIONS; CONSENT, NOT VITIATED BY DOLO INCIDENTE; PARTNERSHIP;

AGREEMENT TO FORM PARTNERSHIP, CANNOT BE ENFORCED. — Having arrived at the conclusion that

the agreement to organize a partnership may not be declared null and void, may the agreement be

carried out or executed? Held: Under the Spanish Civil Code, the defendant has an obligation to do, not

to give. The law recognizes the individual's freedom or liberty to do an act he has promised to do, or not

to do it, as he pleases. This is a very personal act (acto personalisimo) of which courts may not compel

compliance, as it is considered as an act of violence to do so. (29 as it is considered as an act of violence

to do so. (19 Scaevola, 428, 431-432.)

6. FALSE REPRESENTATION; DAMAGES FOR DOLO INCIDENTE. — Plaintiff is entitled under the

terms of the agreement to 30 per cent of the net profits of the business. Against this amount of

damages, the damage the defendant suffered by plaintiff's misrepresentation that he had the exclusive

franchise, must be set off. (Art. 1101, Span. Civ. Code.) When the defendant learned, in Los Angeles,

California, that plaintiff did not have the exclusive franchise which he pretended he had and which he

had agreed to transfer to the partnership, his spontaneous reaction was to reduce the plaintiff's share

from 30 per cent to 15 per cent only, to which reduction plaintiff appears to have readily given his

assent. Held: By the misrepresentation of the plaintiff, he obtained a very high percentage (30%) of

share in the profits. Upon learning of the misrepresentation, defendant reduced plaintiff's share to 15

per cent, to which defendant assented. The court can do no better than follow such appraisal of the

damages as the parties themselves had adopted.

D E C I S I O N

LABRADOR, J p:

On November 29, 1947, the plaintiff entered into a written agreement, Exhibit A, with the defendant,

the most important provisions of which are (1) that they shall organize a partnership for the bottling and

distribution of Mission soft drinks, plaintiff to act as industrial partner or manager, and the defendant as

a capitalist, furnishing the capital necessary therefor; (2) that the defendant was to decide matters of

general policy regarding the business, while the plaintiff was to attend to the operation and

development of the bottling plant; (3) that the plaintiff was to secure the Mission Soft Drinks franchise

for and in behalf of the proposed partnership; and (4) that the plaintiff was to receive 30 per cent of the

net profits of the business. The above agreement was arrived at after various conferences and

consultations by and between them, with the assistance of their respective attorneys. Prior to entering

into this agreement, plaintiff had informed the Mission Dry Corporation of Los Angeles, California, U. S.

A., manufacturers of the bases and ingredients of the beverages bearing its name, that he had

interested a prominent financier (defendant herein) in the business, who was willing to invest half a

million dollars in the bottling and distribution of the said beverages, and requested, in order that he may

close the deal with him, that the right to bottle and distribute be granted him for a limited time under

the condition that it will finally be transferred to the corporation (Exhibit H). Pursuant to this request,

plaintiff was given "a thirty days' option on exclusive bottling and distribution rights for the Philippines"

(Exhibit H). Formal negotiations between plaintiff and defendant began at a meeting on November 27,

1947, at the Manila Hotel, with their lawyers attending. Before this meeting plaintiff's lawyer had

prepared a draft of the agreement, Exhibit II or OO, but this was not satisfactory because a partnership,

instead of a corporation, was desired. Defendant's lawyer prepared after the meeting his own draft,

Exhibit HH. This last draft appears to be the main basis of the agreement, Exhibit A.

The contract was finally signed by plaintiff on December 3, 1947. Plaintiff did not like to go to the United

States without the agreement being first signed. On that day plaintiff and defendant went to the United

States, and on December 10, 1947, a franchise agreement (Exhibit V) was entered into between the

Mission Dry Corporation and Fortunato F. Halili and/or Charles F. Woodhouse, granting defendant the

exclusive right, license, and authority to produce, bottle, distribute, and sell Mission beverages in the

Philippines. The plaintiff and the defendant thereafter returned to the Philippines. Plaintiff reported for

duty in January, 1948, but operations were not begun until the first week of February, 1948. In January

plaintiff was given as advance, on account of profits, the sum of P2,000, besides the use of a car; in

February, 1948, also P2,000, and in March only P1,000. The car was withdrawn from plaintiff on March

9, 1948.

When the bottling plant was already in operation, plaintiff demanded of defendant that the partnership

papers be executed. At first defendant excused himself, saying there was no hurry. Then he promised to

do so after the sales of the products had been increased to P50,000. As nothing definite was

forthcoming, after this condition was attained, and as defendant refused to give further allowances to

plaintiff, the latter caused his attorneys to take up the matter with defendant with a view to a possible

settlement. As none could be arrived at, the present action was instituted.

In his complaint plaintiff asks for the execution of the contract of partnership, an accounting of the

profits, and a share thereof of 30 per cent, as well as damages in the amount of P200,000. In his answer

defendant alleges by way of defense (1) that defendant's consent to the agreement, Exhibit A, was

secured by the representation of plaintiff that he was the owner, or was about to become owner of an

exclusive bottling franchise, which representation was false, and that plaintiff did not secure the

franchise, but was given to defendant himself; (2) that defendant did not fail to carry out his

undertakings, bus that it was plaintiff who failed; (3) that plaintiff agreed to contribute the exclusive

franchise to the partnership, but plaintiff failed to do so. He also presented a counterclaim for P200,000

as damages. On these issues the parties went to trial, and thereafter the Court of First Instance

rendered judgment ordering defendant to render an accounting of the profits of the bottling and

distribution business, subject of the action, and to pay plaintiff 15 per cent thereof. It held that the

execution of the contract of partnership could not be enforced upon the parties, but it also held that the

defense of fraud was not proved. Against this judgment both parties have appealed.

The most important question of fact to be determined is whether defendant had falsely represented

that he had an exclusive franchise to bottle Mission beverages, and whether this false representation or

fraud, if it existed, annuls the agreement to form the partnership. The trial court found that it is

improbable that defendant was never shown the letter, Exhibit J, granting plaintiff the option; that

defendant would not have gone to the United States without knowing what authority plaintiff had; that

the drafts of the contract prior to the final one can not be considered for the purpose of determining the

issue, as they are presumed to have been already integrated into the final agreement; that fraud is

never presumed and must be proved; that the parties were represented by attorneys, and that if any

party thereto got the worse part of the bargain, this fact alone would not invalidate the agreement. On

this appeal the defendant, as appellant, insists that plaintiff did represent to the defendant that he had

an exclusive franchise, when as a matter of fact, at the time of its execution, he no longer had it as the

same had expired, and that, therefore, the consent of the defendant to the contract was vitiated by

fraud and it is, consequently, null and void.

Our study of the record and a consideration of all the surrounding circumstances lead us to believe that

defendant's contention is not without merit. Plaintiff's attorney, Mr. Laurea, testified that Woodhouse

presented himself as being the exclusive grantee of a franchise, thus:

"A. I don't recall any discussion about that matter. I took along with me the file of the office with

regards to this matter. I notice from the first draft of the document which I prepared which calls for the

organization of a corporation, that the manager, that is, Mr. Woodhouse, is represented as being the

exclusive grantee of a franchise from the Mission Dry Corporation. . . . "(t.s.n., p. 518)

As a matter of fact, the first draft that Mr. Laurea prepared, which was made before the Manila Hotel

conference on November 27th, expressly states that plaintiff had the exclusive franchise. Thus, the first

paragraph states:

'Whereas, the manager is the exclusive grantee of a franchise from the Mission Dry Corporation San

Francisco, California, for the bottling of Mission products and their sale to the public throughout the

Philippines;

xxx xxx xxx

"3. That the manager, upon the organization of the said corporation, shall forthwith transfer to the

said corporation his exclusive right to bottle Mission products and to sell them throughout the

Philippines."

xxx xxx xxx

(Exhibit II; emphasis ours)

The trial court did not consider this draft on the principle of integration of jural acts. We find that the

principle invoked is inapplicable, since the purpose of considering the prior draft is not to vary, alter, or

modify the agreement, but to discover the intent of the parties thereto and the circumstances

surrounding the execution of the contract. The issue of fact is: Did plaintiff represent to defendant that

he had an exclusive franchise? Certainly, his acts or statements prior to the agreement are essential and

relevant to the determination of said issue. The act or statement of the plaintiff was not sought to be

introduced to change or alter the terms of the agreement, but to prove how he induced the defendant

to enter into it — to prove the representations or inducements, or fraud, with which or by which he

secured the other party's consent thereto. These are expressly excluded from the parol evidence rule.

(Bough and Bough vs. Cantiveros and Hanopol, 40 Phil., 209; Port Banga Lumber Co. vs. Export & Import

Lumber Co., 26 Phil., 602; III Moran 221, 1952 rev. ed.) Fraud and false representation are an incident to

the creation of a jural act, not to its integration, and are not governed by the rules on integration. Were

parties prohibited from proving said representations or inducements, on the ground that the agreement

had already been entered into, it would be impossible to prove misrepresentation or fraud.

Furthermore, the parol evidence rule expressly allows the evidence to be introduced when the validity

of an instrument is put in issue by the pleadings (section 22, par. (a), Rule 123, Rules of Court), as in this

case.

That plaintiff did make the representation can also be easily gleaned from his own letters and his own

testimony. In his letter to Mission Dry Corporation, Exhibit H, he said:

". . . He told me to come back to him when I was able to speak with authority so that we could come to

terms as far as he and I were concerned. That is the reason why the cable was sent. Without this

authority, I am in a poor bargaining position. . . .

"I would propose that you grant me the exclusive bottling and distributing rights for a limited period of

time, during which I may consummate my plans. . . .. "

By virtue of this letter the option on exclusive bottling was given to the plaintiff on October 14, 1947.

(See Exhibit J.) If this option for an exclusive franchise was intended by plaintiff as an instrument with

which to bargain with defendant and close the deal with him, he must have used his said option for the

above-indicated purpose, especially as it appears that he was able to secure, through its use, what he

wanted.

Plaintiff's own version of the preliminary conversation he had with defendant is to the effect that when

plaintiff called on the latter, the latter answered, "Well, come back to me when you have the authority

to operate. I am definitely interested in the bottling business." (t.s.n., pp. 60-61). When after the

elections of 1949 plaintiff went to see the defendant (and at the time he had already the option), he

must have exultantly told defendant that he had the authority already. It is improbable and incredible

for him to have disclosed the fact that he had only an option to the exclusive franchise, which was to last

thirty days only, and still more improbable for him to have disclosed that, at the time of the signing of

the formal agreement, his option had already expired. Had he done so, he would have destroyed all his

bargaining power and authority, and in all probability lost the deal itself.

The trial court reasoned, and the plaintiff on this appeal argues, that plaintiff only undertook in the

agreement "to secure the Mission Dry franchise for and in behalf of the proposed partnership." The

existence of this provision in the final agreement does not militate against plaintiff having represented

that he had the exclusive franchise; it rather strengthens belief that he did actually make the

representation. How could plaintiff assure defendant that he would get the franchise for the latter if he

had not actually obtained it for himself? Defendant would not have gone into the business unless the

franchise was raised in his name, or at least in the name of the partnership. Plaintiff assured defendant

he could get the franchise. Thus, in the draft prepared by defendant's attorney, Exhibit HH, the above

provision is inserted, with the difference that instead of securing the franchise for the defendant,

plaintiff was to secure it for the partnership. To show that the insertion of the above provision does not

eliminate the probability of plaintiff representing himself as the exclusive grantee of the franchise, the

final agreement contains in its third paragraph the following:

". . . and the manager is ready and willing to allow the capitalists to use the exclusive franchise . . . .

and in paragraph 11 it also expressly states:

"1. In the event of dissolution or termination of the partnership, . . . the franchise from Mission Dry

Corporation shall be reassigned to the manager."

These statements confirm the conclusion that defendant believed, or was made to believe, the plaintiff

was the grantee of an exclusive franchise. Thus it is that it was also agreed upon that the franchise was

to be transferred to the name of the partnership, and that, upon its dissolution or termination, the same

shall be reassigned to the plaintiff.

Again, the immediate reaction of defendant, when in California he learned that plaintiff did not have the

exclusive franchise, was to reduce, as he himself testified, plaintiff's participation in the net profits to

one half of that agreed upon. He could not have had such a feeling had not plaintiff actually made him

believe that he (plaintiff) was the exclusive grantee of the franchise.

The learned trial judge reasons in his decision that the assistance of counsel in the making of the

contract made fraud improbable. Not necessarily, because the alleged representation took place before

the conferences were had; in other words, plaintiff had already represented to defendant, and the latter

had already believed in, the existence of plaintiff's exclusive franchise before the formal negotiations,

and they were assisted by their lawyers only when said formal negotiations actually took place.

Furthermore, plaintiff's attorney testified that plaintiff had said that he had the exclusive franchise; and

defendant's lawyer testified that plaintiff explained to him, upon being asked for the franchise, that he

had left the papers evidencing it. (t. s. n., p. 266.)

We conclude from all the foregoing that plaintiff did actually represent to defendant that he was the

holder of the exclusive franchise. The defendant was made to believe, and he actually believed, that

plaintiff had the exclusive franchise. Defendant would not perhaps have gone to California and incurred

expenses for the trip, unless he believed that plaintiff did have that exclusive privilege, and that the

latter would be able to get the same from the Mission Dry Corporation itself. Plaintiff knew what

defendant believed about his (plaintiff's) exclusive franchise, as he induced him to that belief, and he

may not be allowed to deny that defendant was induced by that belief. (IX Wigmore, sec. 2423; Sec. 65,

Rule 123, Rules of Court.)

We now come to the legal aspect of the false representation. Does it amount to a fraud that would

vitiate the contract? It must be noted that fraud is manifested in illimitable number of degrees or

gradations, from the innocent praises of a salesman about the excellence of his wares to those malicious

machinations and representations that the law punishes as a crime. In consequence, article 1270 of the

Spanish Civil Code distinguishes two kinds of (civil) fraud, the causal fraud, which may be a ground for

the annulment of a contract, and the incidental deceit, which only renders the party who employs it

liable for damages. This Court has held that in order that fraud may vitiate consent, it must be the causal

(dolo causante), not merely the incidental (dolo incidente), inducement to the making of the contract.

(Article 1270, Spanish Civil Code; Hill vs. Veloso, 31 Phil. 160.) The record abounds with circumstances

indicative of the fact that the principal consideration, the main cause that induced defendant to enter

into the partnership agreement with plaintiff, was the ability of plaintiff to get the exclusive franchise to

bottle and distribute for the defendant or for the partnership. The original draft prepared by

defendant's counsel was to the effect that plaintiff obligated himself to secure a franchise for the

defendant. Correction appears in this same original draft, but the change is made not as to the said

obligation but as to the grantee. In the corrected draft the word "capitalist" (grantee) is changed to

"partnership." The contract in its final form retains the substituted term "partnership." The defendant

was, therefore, led to the belief that plaintiff had the exclusive franchise, but that the same was to be

secured for or transferred to the partnership. The plaintiff no longer had the exclusive franchise, or the

option thereto, at the time the contract was perfected. But while he had already lost his option thereto

(when the contract was entered into), the principal obligation that he assumed or undertook was to

secure said franchise for the partnership, as the bottler and distributor for the Mission Dry Corporation.

We declare, therefore, that if he was guilty of a false representation, this was not the causal

consideration, or the principal inducement, that led plaintiff to enter into the partnership agreement.

But, on the other hand, this supposed ownership of an exclusive franchise was actually the

consideration or price plaintiff gave in exchange for the share of 30 per cent granted him in the net

profits of the partnership business. Defendant agreed to give plaintiff 30 per cent share in the net profits

because he was transferring his exclusive franchise to the partnership. Thus, in the draft prepared by

plaintiff's lawyer, Exhibit II, the following provision exists:

"3. That the MANAGER, upon the organization of the said corporation, shall forthwith transfer to

the said corporation his exclusive right to bottle Mission products and to sell them throughout the

Philippines. As a consideration for such transfer, the CAPITALIST shall transfer to the Manager full paid

non-assessable shares of the said corporation . . . twenty-five per centum of the capital stock of the said

corporation." (Par. 3, Exhibit II; emphasis ours.)

Plaintiff had never been a bottler or a chemist; he never had experience in the production or

distribution of beverages. As a matter of fact, when the bottling plant was being built, all that he

suggested was about the toilet facilities for the laborers.

We conclude from the above that while the representation that plaintiff had the exclusive franchise did

not vitiate defendant's consent to the contract, it was used by plaintiff to get from defendant a share of

30 per cent of the net profits; in other words, by pretending that he had the exclusive franchise and

promising to transfer it to defendant, he obtained the consent of the latter to give him (plaintiff) a big

slice in the net profits. This is the dolo incidente defined in article 1270 of the Spanish Civil Code,

because it was used to get the other party's consent to a big share in the profits, an incidental matter in

the agreement.

"El dolo incidental no es el que puede producirse en el cumplimiento del contrato sino que significa

aqui, el que concurriendo en el consentimiento, o precediendolo, no influyo para arrancar por si solo el

consentimiento ni en la totalidad de la obligacion, sino en algun extremo o accidente de esta, dando

lugar tan solo a una accion para reclamar indemnizacion de perjuicios." (8 Manresa 602.)

Having arrived at the conclusion that the agreement may not be declared null and void, the question

that next comes before us is, May the agreement be carried out or executed? We find no merit in the

claim of plaintiff that the partnership was already a fiat accompli from the time of the operation of the

plant, as it is evident from the very language of the agreement that the parties intended that the

execution of the agreement to form a partnership was to be carried out at a later date. They expressly

agreed that they shall form a partnership. (Par. No. 1, Exhibit A.) As a matter of fact, from the time that

the franchise from the Mission Dry Corporation was obtained in California, plaintiff himself had been

demanding that defendant comply with the agreement. And plaintiff's present action seeks the

enforcement of this agreement. Plaintiff's claim, therefore, is both inconsistent with their intention and

incompatible with his own conduct and suit.

As the trial court correctly concluded, the defendant may not be compelled against his will to carry out

the agreement nor execute the partnership papers. Under the Spanish Civil Code, the defendant has an

obligation to do, not to give. The law recognizes the individual's freedom or liberty to do an act he has

promised to do, or not to do it, as he pleases. It falls within what Spanish commentators call a very

personal act (acto personalisimo), of which courts may not compel compliance, as it is considered an act

of violence to do so.

"Efectos de las obligaciones consistentes en hechos personalisimo. Tratamos de la ejecucion de las

obligaciones de hacer en el solo caso de su incumplimiento por parte del deudor, y sean los hechos

personalisimos, ya se hallen en la facultad de un tercero; porque el complimiento espontaneo de las

mismas esta regido por los preceptos relativos al pago, y en nada les afectan las disposiciones del art.

1.098.

"Esto supuesto, la primera dificultad del asunto consiste en resolver si el deudor puede ser precisado a

realizar el hecho y por que medios.

"Se tiene por corriente entre los autores, y se traslada generalmente sin observacion el principio

romano nemo potest precise cogi ad factum. Los que perciben la posibilidad de la destruccion de este

principio, añaden que, aun cuando se pudiera obligar al deudor, no deberia hacerse, porque esto

constituiria una violencia, y no es la violencia modo propio de cumplir las obligaciones (Bigot, Rolland,

etc.). El maestro Antonio Gomez opinaba lo mismo cuando decia que obligar por la violencia seria

infringir la libertad e imponer una especie de esclavitud."

xxx xxx xxx

"En efecto; las obligaciones contractuales no se acomodan bien con el empleo de la fuerza fisica, no ya

precisamente porque se constituya de este modo una especie de esclavitud, segun el dicho de Antonio

Gomez, sino porque se supone que el acreedor tuvo en cuenta el caracter personalisimo del hecho

ofrecido, y calculo sobre la posibilidad de que por alguna razon no se realizase. Repugna, ademas, a la

conciencia social el empleo de la fuerza publica, mediante coaccion sobre las pesonas, en las relaciones

puramente particulares; porque la evolucion de las ideas ha ido poniendo mas de relieve cada dia el

respeto a la personalidad humana, y no se admite bien la violencia sobre el indivicuo la cual tiene

caracter visiblemente penal, sino por motivos que interesen a la colectividad de ciudadanos. Es, pues,

posible y licita esta violencia cuando se trata de las obligaciones que hemos llamado ex lege, que afectan

al orden social y a la entidad de Estado, y aparecen impuestas sin consideracion a las conveniencias

particulares, y sin que por este motivo puedan tampoco ser modificadas; pero no debe serlo cuando la

obligacion reviste un interes puramente particular, como sucede en las contractuales, y cuando, por

consecuencia, pareceria salirse el Estado de su esfera propia, entrado a dirimir, con apoyo de la fuerza

colectiva, las diferencias producidas entre los ciudadanos. (19 Scaevola 428, 431- 432.)"

The last question for us to decide is that of damages, damages that plaintiff is entitled to receive

because of defendant's refusal to form the partnership, and damages that defendant is also entitled to

collect because of the falsity of plaintiff's representation. (Article 1101, Spanish Civil Code.) Under article

1106 of the Spanish Civil Code the measure of damages is the actual loss suffered and the profits

reasonably expected to be received, embraced in the terms daño emergente and lucro cesante. Plaintiff

is entitled under the terms of the agreement to 30 per cent of the net profits of the business. Against

this amount of damages, we must set off the damage defendant suffered by plaintiff's

misrepresentation that he had the exclusive franchise, by which misrepresentation he obtained a very

high percentage of share in the profits. We can do no better than follow the appraisal that the parties

themselves had adopted.

When defendant learned in Los Angeles that plaintiff did not have the exclusive franchise which he

pretended he had and which he had agreed to transfer to the partnership, his spontaneous reaction was

to reduce plaintiff's share from 30 per cent to 15 per cent only, to which reduction defendant appears to

have readily given his assent. It was under this understanding, which amounts to a virtual modification

of the contract, that the bottling plant was established and plaintiff worked as Manager for the first

three months. If the contract may not be considered modified as to plaintiff's share in the profits, by the

decision of defendant to reduce the same to one-half and the assent thereto of plaintiff, then we may

consider the said amount as a fair estimate of the damages plaintiff is entitled to under the principle

enunciated in the case of Varadero de Manila vs. Insular Lumber Co., 46 Phil. 176. Defendant's decision

to reduce plaintiff's share and plaintiff's consent thereto amount to an admission on the part of each of

the reasonableness of this amount as plaintiff's share. This same amount was fixed by the trial court.

The agreement contains the stipulation that upon the termination of the partnership, defendant was to

convey the franchise back to plaintiff (Par. 11, Exhibit A). The judgment of the trial court does not fix the

period within which these damages shall be paid to plaintiff. In view of paragraph 11 of Exhibit A, we

declare that plaintiff's share of 15 per cent of the net profits shall continue to be paid while defendant

uses the franchise from the Mission Dry Corporation.

With the modification above indicated, the judgment appealed from is hereby affirmed. Without costs.

Paras, C.J., Pablo, Bengzon, Tuason, Montemayor, Reyes, Jugo and Bautista Angelo, JJ., concur.

SECOND DIVISION

[G.R. No. 108253. February 23, 1994.]

LYDIA L. GERALDEZ, petitioner, vs. HON. COURT OF APPEALS and KENSTAR TRAVEL CORPORATION,

respondents.

D E C I S I O N

REGALADO, J p:

Our tourism industry is not only big business; it is a revenue support of the nation's economy. It has

become a matter of public interest as to call for its promotion and regulation on a cabinet level. We

have special laws and policies for visiting tourists, but such protective concern has not been equally

extended to Filipino tourists going abroad. Thus, with the limited judicial relief available within the

ambit of present laws, our tourists often prefer to forget their grievances against local tour operators

who fail to deliver on their undertakings. This case illustrates the recourse of one such tourist who

refused to forget.

An action for damages by reason of contractual breach was filed by petitioner Lydia L. Geraldez against

private respondent Kenstar Travel Corporation, docketed as Civil Case No. Q-90-4649 of the Regional

Trial Court of Quezon City, Branch 80. 1 After the parties failed to arrive at an amicable settlement, trial

on the merits ensued.

Culling from the records thereof, we find that sometime in October, 1989, Petitioner came to know

about private respondent from numerous advertisements in newspapers of general circulation

regarding tours in Europe. She then contacted private respondent by phone and the latter sent its

representative, Alberto Vito Cruz, who gave her the brochure for the tour and later discussed its

highlights. The European tours offered were classified into four, and petitioner chose the classification

denominated as "VOLARE 3" covering a 22-day tour of Europe for $2,990.00. She paid the total

equivalent amount of P190,000.00 charged by private respondent for her and her sister, Dolores. prLL

Petitioner claimed that, during the tour, she was very uneasy and disappointed when it turned out that,

contrary to what was stated in the brochure, there was no European tour manager for their group of

tourists, the hotels in which she and the group were billeted were not first-class, the UGC Leather

Factory which was specifically added as a highlight of the tour was not visited, and the Filipino lady tour

guide by private respondent was a first timer, that is, she was performing her duties and responsibilities

as such for the first time. 2

In said action before the Regional Trial Court of Quezon City, petitioner likewise moved for the issuance

of a writ of preliminary attachment against private respondent on the ground that it committed fraud in

contracting an obligation, as contemplated in Section 1 (d), Rule 57 of the Rules of Court, to which no

opposition by the latter appears on the record. This was granted by the court a quo 3 but the

preliminary attachment was subsequently lifted upon the filing by private respondent of a counterbond

amounting to P990,000.00. 4

During the pendency of said civil case for damages, petitioner also filed other complaints before the

Department of Tourism in DOT Case No. 90-121 and the Securities and Exchange Commission in PED

Case No. 90-3738, 5 wherein, according to petitioner, herein private respondent was meted out a fine of

P10,000.00 by the Commission and P5,000.00 by the Department, 6 which facts are not disputed by

private respondent in its comment on the present petition.

On July 9, 1991, the court a quo rendered its decision 7 ordering private respondent to pay petitioner

P500.000.00 as moral damages, P200,000.00 as nominal damages, P300,000.00 as exemplary damages,

P50,000.00 as and for attorney's fees, and the costs of the suit. 8 On appeal, respondent court 9

deleted the award for moral and exemplary damages, and reduced the awards for nominal damages and

attorney's fees to P30,000.00 and P10,000.00, respectively. 10

Hence, the instant petition from which, after sifting through the blades of contentions alternately thrust

and parried in the exchanges of the parties, the pivotal issue that emerges is whether or not private

respondent acted in bad faith or with gross negligence in discharging its obligations under the contract.

Both the respondent court and the court a quo agree that private respondent failed to comply faithfully

with its commitments under the Volare 3 tour program, more particularly in not providing the members

of the tour group with a European tour manager whose duty, inter alia, was to explain the points of

interest of and familiarize the tour group with the places they would visit in Europe, and in assigning

instead a first timer Filipino tour guide, in the person of Rowena Zapanta, 11 to perform that role which

definitely requires experience and knowledge of such places. It is likewise undisputed that while the

group was able to pay a visit to the site of the UGC Leather Factory, they were brought there at a very

late hour such that the factory was already closed and they were unable to make purchases at

supposedly discounted prices. 12 As to the first-class hotels, however, while the court a quo found that

the hotels were not fist-class, respondent court believed otherwise, or that, at least, there was

substantial compliance with such a representation.

While clearly there was therefore a violation of the rights of petitioner under the aforementioned

circumstances, respondent court, contrary to the findings of the trial court, ruled that no malice or bad

faith could be imputed to private respondent, hence there is no justification for the award of moral and

exemplary damages. Furthermore, it held that while petitioner is entitled to nominal damages, the

amount awarded by the trial court was unconscionable since petitioner did not suffer actual or

substantial damage from the breach of contract, 13 hence its reduction of such award as hereinbefore

stated. LibLex

After thorough and painstaking scrutiny of the case records of both the trial and appellate courts, we are

satisfactorily convinced, and so hold, that private respondent did commit fraudulent misrepresentations

amounting to bad faith, to the prejudice of petitioner and the members of the tour group.

By providing the Volare 3 tourist group, of which petitioner was a member, with an inexperienced and a

first timer tour escort, private respondent manifested its indifference to the convenience, satisfaction

and peace of mind of its clients during the trip, despite its express commitment to provide such facilities

under the Volare 3 Tour Program which had the grandiose slogan "Let your heart sing." 14

Evidently, an inexperienced tour escort, who admittedly had not even theretofore been to Europe, 15

cannot effectively acquaint the tourists with the interesting areas in the cities and places included in the

program, or to promptly render necessary assistance, especially where the latter are complete strangers

thereto, like witnesses Luz Sui Haw and her husband who went to Europe for their honeymoon. 16

We agree with petitioner that the selection of Zapanta as the group's tour guide was deliberate and

conscious choice on the part of private respondent in order to afford her an on-the-job training and

equip her with the proper opportunities so as to later qualify her as an "experienced" tour guide and

eventually be an asset of respondent corporation. 17 Unfortunately, this resulted in a virtual project

experimentation with petitioner and the members of the tour as the unwitting participants.

We are, therefore, one with respondent court in faulting private respondent's choice of Zapanta as a

qualified tour guide for the Volare 3 tour package. It brooks no argument that to be true to its

undertakings, private respondent should have selected an experienced European tour guide, or it could

have allowed Zapanta to go merely as an understudy under the guidance, control and supervision of an

experienced and competent European or Filipino tour guide, 18 who could give her the desired

training. LexLib

Moreover, a tour guide is supposed to attend to the routinary needs of the tourists, not only when the

latter ask for the assistance but at the moment such need becomes apparent. In other words, the tour

guide, especially by reason of her experience in previous tours, must be able to anticipate the possible

needs and problems of the tourists instead of waiting for them to bring it to her attention. While this is

stating the obvious, it is her duty to see to it that basic personal necessities such as soap, towels and

other daily amenities are provided by the hotels. It is also expected of her to see to it that the tourists

are provided with sanitary surroundings and to actively arrange for medical attention in case of

accidents, as what befell petitioner's sister and wherein the siblings had to practically fend for

themselves since, after merely calling for an ambulance, Zapanta left with the other tour participants. 19

Zapanta fell far short of the performance expected by the tour group, her testimony in open court being

revelatory of her inexperience even on the basic function of a tour guide, to wit:

"Q Now, are you aware that there were times that the tourists under the 'Volare 3' were not

provided with soap and towels?

A They did not tell me that but I was able to ask them later on but then nobody is complaining."

20

The inability of the group to visit the leather factory is likewise reflective of the neglect and ineptness of

Zapanta in attentively following the itinerary of the day. This incompetence must necessarily be traced

to the lack of due diligence on the part of private respondent in the selection of its employees. It is true

that among the thirty-two destinations, which included twenty-three cities and special visits to nine

tourist spots, this was the only place that was not visited. 21 It must be noted, however, that the visit to

the UGC Leather Factory was one of the highlights 22 of the Volare 3 program which even had to be

specifically inserted in the itinerary, hence it was incumbent upon the organizers of the tour to take

special efforts to ensure the same. Besides, Petitioner did expect much from the visit to that factory

since it was represented by private respondent that quality leather goods could be bought there at

lower prices. 23

Private respondent represents Zapanta's act of making daily overseas calls to Manila as an exercise of

prudence and diligence on the latter's part as a tour guide. 24 It further claims that these calls were

needed so that it could monitor the progress of the tour and respond to any problem immediately. 25

We are not persuaded. The truth of the matter is that Zapanta, as an inexperienced trainee-on-the-job,

was required to make these calls to private respondent for the latter to gauge her ability in coping with

her first assignment and to provide instructions to her. 26

Clearly, therefore, private respondent's choice of Zapanta as the tour guide is a manifest disregard of its

specific assurance to the tour group, resulting in agitation and anxiety on their part, and which

deliberate omission is contrary to the elementary rules of good faith and fair play. It is extremely

doubtful if any group of Filipino tourists would knowingly agree to be used in effect as guinea pigs in an

employees' training program of a travel agency, to be conducted in unfamiliar European countries with

their diverse cultures, lifestyles and languages. LexLib

On the matter of the European tour manager, private respondent's advertisement in its tour contract

declares and represents as follows:

"FILIPINO TOUR ESCORT!

He will accompany you throughout Europe. He speaks your language, shares your culture and feels your

excitement.

He won't be alone because you will also be accompanied by a . . .

EUROPEAN TOUR MANAGER!

You get the best of both worlds. Having done so many tours in the past with people like you, he knows

your sentiments, too. So knowledgeable about Europe, there is hardly a question he can't answer." 27

Private respondent contends that the term "European Tour Manager" does not refer to an individual but

to an organization, allegedly the Kuoni Travel of Switzerland which supposedly prepared the itinerary for

its "Volare Europe Tour," negotiated with all the hotels in Europe, selected tourist spots and historical

places to visit, and appointed experienced local tour guides for the tour group. 28

We regret this unseemly quibbling which perforce cannot be allowed to pass judicial muster.

A cursory reading of said advertisement will readily reveal the express representation that the

contemplated European tour manager is a natural person, and not a juridical one as private respondent

asserts. A corporate entity could not possibly accompany the members of the tour group to places in

Europe; neither can it answer questions from the tourist during the tour. Of course, it is absurd that if a

tourist would want to know how he could possibly go to the nearest store or supermarket, he would still

have to call Kuoni Travel of Switzerland. LexLib

Furthermore, both lower courts observed, and we uphold their observations, that indeed private

respondent had the obligation to provide the tour group not only with a European tour manager, but

also with local European tour guides. The latter, parenthetically, were likewise never made available. 29

Zapanta claims that she was accompanied by a European local tour guide in most of the major cities in

Europe. We entertain serious doubts on, and accordingly reject, this pretension for she could not even

remember the name of said European tour guide. 30 If such a guide really existed, it is incredible why

she could not even identify the former when she testified a year later, despite the length of their

sojourn and the duration of their association.

As to why the word "he" was used in the aforequoted advertisement, private respondent maintains that

the pronoun "he" also includes the word "it," as where it is used as a "nominative case form in general

statements (as in statutes) to include females, fictitious persons (as corporations)." 31 We are

constrained to reject this submission as patently strained and untenable. As already demonstrated, it is

incredible that the word "he" was used by private respondent to denote an artificial or corporate being.

From its advertisement, it is beyond cavil that the import of the word "he" is a natural and not a juridical

person. There is no need for further interpretation when the wordings are clear. The meaning that will

determine the legal effect of a contract is that which is arrived at by objective standards; one is bound,

not by what he subjectively intends, but by what he leads others reasonably to think he intends. 32

In an obvious but hopeless attempt to arrive at a possible justification, private respondent further

contends that it explained the concept of a European tour manager to its clients at the pre-departure

briefing, which petitioner did not attend. 33 Significantly, however, private respondent failed to present

even one member of the tour group to substantiate its claim. It is a basic rule of evidence that a party

must prove his own affirmative allegations. 34 Besides, if it was really its intention to provide a juridical

European tour manager, it could not have kept on promising its tourists during the tour that a European

tour manager would come, 35 supposedly to join and assist them. LLjur

Veering to another line of defense, private respondent seeks sanctuary in the delimitation of its

responsibility as printed on the face of its brochure on the Volare 3 program, to wit:

"RESPONSIBILITIES: KENSTAR TRAVEL CORPORATION, YOUR TRAVEL AGENT, THEIR EMPLOYEES OR SUB-

AGENTS SHALL BE RESPONSIBLE ONLY FOR BOOKING AND MAKING ARRANGEMENTS AS YOUR AGENTS.

Kenstar Travel Corporation, your Travel Agent, their employees or sub-agents assume no responsibility

or liability arising out of or in connection with the services or lack of services, of any train, vessel, other

conveyance or station whatsoever in the performance of their duty to the passengers or guests, neither

will they be responsible for any act, error or omission, or of any damages, injury, loss, accident, delay or

irregularity which may be occasioned by reason (of) or any defect in . . . lodging place or any facilities. . .

. (Emphasis by private respondent.) 36

While, generally, the terms of a contract result from the mutual formulation thereof by the parties

thereto, it is of common knowledge that there are certain contracts almost all the provisions of which

have been drafted by only one party, usually a corporation. Such contracts are called contracts of

adhesion, because the only participation of the party is the affixing of his signature or his "adhesion"

thereto. 37 In situations like these, when a party imposes upon another a ready-made form of contract,

38 and the other is reduced to the alternative of taking it or leaving it, giving no room for negotiation

and depriving the latter of the opportunity to bargain on equal footing, a contract of adhesion results.

While it is true that an adhesion contract is not necessarily void, it must nevertheless be construed

strictly against the one who drafted the same. 39 This is especially true where the stipulations are

printed in fine letters and are hardly legible, as is the case of the tour contract 40 involved in the

present controversy.

Yet, even assuming arguendo that the contractual limitation aforequoted is enforceable, private

respondent still cannot be exculpated for the reason that responsibility arising from fraudulent acts, as

in the instant case, cannot be stipulated against by reason of public policy. Consequently, for the

foregoing reasons, private respondent cannot rely on its defense of "substantial compliance" with the

contract.

Private respondent submits likewise that the tour was satisfactory, considering that only petitioner, out

of eighteen participants in the Volare 3 Tour Program, actually complained. 41 We cannot accept this

argument. Section 28, Rule 130 of the Rules of Court declares that the rights of a party cannot be

prejudiced by an act, declaration, or omission of another, a statutory adaptation of the first branch of

the hornbook rule of res inter alios acta 42 which we do not have to belabor here.

Besides, it is a commonly known fact that there are tourists who, although the tour was far from what

the tour operator undertook under the contract, choose to remain silent and forego recourse to a suit

just to avoid the expenses, hassle and rancor of litigation, and not because the tour was in accord with

what was promised. One does not relish adding to the bitter memory of a misadventure the

unpleasantness of another extended confrontation. Furthermore, contrary to private respondent's

assertion, not only petitioner but two other members of the tour group. Luz Sui Haw and Ercilla Ampil,

confirmed petitioner's complaints when they testified as witnesses for her as plaintiff in the court

below. 43

Private respondent likewise committed a grave misrepresentation when it assured in its Volare 3 tour

package that the hotels it had chosen would provide the tourists complete amenities and were

conveniently located along the way for the daily itineraries. 44 It turned out that some of the hotels

were not sufficiently equipped with even the basic facilities and were at a distance from the cities

covered by the projected tour. Petitioner testified on her disgust with the conditions and locations of

the hotels, thus: prcd

"Q And that these bathrooms ha(ve) bath tub(s) and hot and cold shower(s)?

A Not all, sir.

Q Did they also provide soap and towels?

A Not all, sir, some (had) no toilet paper. 45

Q Which one?

A The 2 stars, the 3 stars and some 4 stars (sic) hotels.

Q What I am saying . . .

A You are asking a question? I am answering you. 2 stars, 3 stars and some 4 stars (sic) hotels, no

soap, toilet paper and (the) bowl stinks. . . .

xxx xxx xxx

Q And that except for the fact that some of these four star hotels were outside the city they

provided you with the comfort?

A Not all, sir.

Q Can you mention some which did not provide you that comfort?

A For example, if Ramada Hotel Venezia is in Quezon City, our hotel is in Meycauayan. And if

Florence or Ferenze is in Manila, our hotel is in Muntinlupa. 46

xxx xxx xxx

A One more hotel, sir, in Barcelona, Hotel Saint Jacques is also outside the city. Suppose Barcelona

is in Quezon City, our hotel is in Marilao. We looked for this hotel inside the city of Barcelona for three

(3) hours. We wasted our time looking for almost all the hotels and places where to eat. That is the kind

of tour that you have." 47

Luz Sui Haw, who availed of the Volare 3 tour package with her husband for their honeymoon, shared

the sentiments of petitioner and testified as follows:

Q . . . Will you kindly tell us why the hotels where you stayed are not considered first class hotels?

LLpr

A Because the hotels where we went, sir, (are) far from the City and the materials used are not

first class and at times there were no towels and soap. And the two (2) hotels in Nevers and Florence the

conditions (are) very worse (sic). 48

Q Considering that you are honeymooners together with your husband, what (were) your feelings

when you found out that the condition were not fulfilled by the defendant?

A I would like to be very honest. I got sick when I reached Florence and half of my body got itch

(sic). I think for a honeymooner I would like to emphasize that we should enjoy that day of our life and it

seems my feet kept on itching because of the condition of the hotel. And I was so dissatisfied because

the European Tour Manager was not around there (were) beautiful promises. They kept on telling us

that a European Tour Manager will come over; until our Paris tour was ended there was no European

tour manager. 49

xxx xxx xxx

Q You will file an action against the defendant because there was a disruption of your happiness,

in your honeymoon, is that correct?

A That is one of my causes of (sic) coming up here. Secondly, I was very dissatisfied (with) the

condition. Thirdly, that Volare 89 it says it will let your heart sing. That is not true. There was no

European tour (manager) and the highlights of the tour (were) very poor. The hotels were worse (sic)

hotels. 50

Q All the conditions of the hotels as you . . .

A Not all but as stated in the brochure that it is first class hotel. The first class hotels state that all

things are beautiful and it is neat and clean with complete amenities and I encountered the Luxembourg

hotel which is quite very dilapidated because of the flooring when you step on the side 'kumikiring' and

the cabinets (are) antiques and as honeymooners we don't want to be disturbed or seen. 51

xxx xxx xxx

Q None of these are first class hotels?

A Yes, sir.

Q So, for example Ramada Hotel Venezia which according to Miss Geraldez is first class hotel is not

first class hotel?

A Yes, sir.

Q You share the opinion of Miss Geraldez?

A Yes, sir.

Q The same is true with Grand Hotel Palatino which is not a first class hotel?

A Yes, sir.

Q And Hotel Delta Florence is not first class hotel?

A That is how I got my itch, sir. Seven (7) days of itch.

Q How about Hotel Saint-Jacquez, Paris?

A It is far from the city. It is not first class hotel.

Q So with Hotel Le Prieure Du Coeur de Jesus neither a first class hotel?

A Yes, sir.

Q Hotel De Nevers is not a first class hotel?

A Yes, sir.

Q Hotel Roc Blanc Andorra is not a first class hotel?

A Yes, sir.

Q Saint Just Hotel, Barcelona is not a first class hotel?

A Yes, sir.

Q Hotel Pullman Nice neither is not a first class hotel?

A Yes, sir.

Q Hotel Prinz Eugen and Austrotel are not first class hotels?

A Yes, sir." 52

Private respondent cannot escape responsibility by seeking refuge under the listing of first-class hotels

in publications like the "Official Hotel and Resort Guide" and "Worldwide Hotel Guide." 53 Kuoni Travel,

its tour operator, 54 which prepared the hotel listings, is a European-based travel agency 55 and, as

such, could have easily verified the matter of first-class accommodations. Nor can it logically claim that

the first-class hotels in Europe may not necessarily be the first-class hotels here in the Philippines. 56 It

is reasonable for petitioner to assume that the promised first-class hotels are equivalent to what are

considered first-class hotels in Manila. Even assuming arguendo that there is indeed a difference in

classifications, it cannot be gainsaid that a first-class hotel could at the very least provide basic

necessities and sanitary accommodations. We are accordingly not at all impressed by private

respondent's attempts to trivialize the complaints thereon by petitioner and her companions. cdphil

In a last ditch effort to justify its choice of the hotels, private respondent contends that it merely

provided such "first class" hotels which were commensurate to the tourists' budget, or which were,

under the given circumstances, the "best for their money." It postulated that it could not have offered

better hostelry when the consideration paid for hotel accommodations by the tour participants was only

so much, 57 and the tour price of $2,990.00 covers a European tour for 22 days inclusive of lower room

rates and meals. 58 This is implausible, self-serving and borders on sophistry.

The fact that the tourists were to pay a supposedly lower amount, such that private respondent

allegedly retained hardly enough as reasonable profit, 59 does not justify a substandard form of service

in return. It was private respondent, in the first place, which fixed the charges for the package tour and

determined the services that could be availed of corresponding to such price. Hence, it cannot now be

heard to complain that it only made a putative marginal profit out of the transaction. If it could not

provide the tour participants with first-class lodgings on the basis of the amount that they paid, it could

and should have instead increased the price to enable it to arrange for the promised first-class

accommodations.

On the foregoing considerations, respondent court erred in deleting the award for moral and exemplary

damages. Moral damages may be awarded in breaches of contract where the obligor acted fraudulently

or in bad faith. 60 From the facts earlier narrated, private respondent can be faulted with fraud in the

inducement, which is employed by a party to a contract in securing the consent of the other. llcd

This fraud or dolo which is present or employed at the time of birth or perfection of a contract may

either be dolo causante or dolo incidente. The first, or causal fraud referred to in Article 1338, are those

deceptions or misrepresentations of a serious character employed by one party and without which the

other party would not have entered into the contract. Dolo incidente, or incidental fraud which is

referred to in Article 1344, are those which are not serious in character and without which the other

party would still have entered into the contract. 61 Dolo causante determines or is the essential cause of

the consent, while dolo incidente refers only to some particular or accident of the obligations. 62 The

effects of dolo causante are the nullity of the contract and the indemnification of damages, 63 and dolo

incidente also obliges the person employing it to pay damages. 64

In either case, whether private respondent has committed dolo causante or dolo incidente by making

misrepresentations in its contracts with petitioner and other members of the tour group, which

deceptions became patent in the light of after-events when, contrary to its representations, it employed

an inexperienced tour guide, housed the tourist group in substandard hotels, and reneged on its

promise of a European tour manager and the visit to the leather factory, it is indubitably liable for

damages to petitioner.

In the belief that an experienced tour escort and a European tour manager would accompany them,

with the concomitant reassuring and comforting thought of having security and assistance readily at

hand, petitioner was induced to join the Volare 3 tourists, instead of travelling alone. 65 She likewise

suffered serious anxiety and distress when the group was unable to visit the leather factory and when

she did not receive first-class accommodations in their lodgings which were misrepresented as first-class

hotels. These, to our mind, justify the award for moral damages, which are in the category of an award

designed to compensate the claimant for that injury which she had suffered, and not as a penalty on the

wrongdoer, 66 we believe that an award of P100,000.00 is sufficient and reasonable. cdphil

When moral damages are awarded, especially for fraudulent conduct, exemplary damages may also be

decreed. Exemplary damages are imposed by way of example or correction for the public good, in

addition to moral, temperate, liquidated or compensatory damages. According to the Code Commission,

exemplary damages are required by public policy, for wanton acts must be suppressed. 67 An award,

therefore, of P50,000.00 is called for to deter travel agencies from resorting to advertisements and

enticements with the intention of realizing considerable profit at the expense of the public, without

ensuring compliance with their express commitments. While, under the present state of the law,

extraordinary diligence is not required in travel or tour contracts, such as that in the case at bar, the

travel agency acting as tour operator must nevertheless be held to strict accounting for contracted

services, considering the public interest in tourism, whether in the local or in the international scene.

Consequently, we have to likewise reject the theory of private respondent that the promise it made in

the tour brochure may be regarded only as "commendatory trade talk." 68

With regard to the honorarium for counsel as an item of damages, since we are awarding moral and

exemplary damages, 69 and considering the legal importance of the instant litigation and the efforts of

counsel evident from the records of three levels of the judicial hierarchy, we favorably consider the

amount of P20,000.00 therefor.

WHEREFORE, premises considered, the decision of respondent Court of Appeals is hereby SET ASIDE,

and another one rendered, ordering private respondent Kenstar Travel Corporation to pay petitioner

Lydia L. Geraldez the sums of P100,000.00 by way of moral damages, P50,000.00 as exemplary damages,

and P20,000.00 as and for attorney's fees, with costs against private respondent. The award for nominal

damages is hereby deleted. llcd

SO ORDERED.

Padilla, Nocon and Puno, JJ ., concur.

Narvasa, C .J ., took no part.

Footnotes

1. Original Record, 1.

2. Ibid., 90.

3. Ibid., 124.

4. Ibid., 152.

5. Exhibits 6-CC-1, 6-DD-1, Folder of Exhibits for Defendant Kenstar Travel Corporation.

6. Rollo, 27.

7. Original Record, 256; per Judge Benigno T. Dayaw.

8. Ibid., 271.

9. Justice Regina G. Ordoñez-Benitez as ponente, with Justices Gloria C. Paras and Eduardo G.

Montenegro concurring.

10. Rollo, CA-G.R. CV No. 34961, Decision, 10.

11. Ibid., 5; Original Record, 264.

12. Ibid., 6.

13. Ibid., 8-10.

14. Original Record, 183, Exhibit 8.

15. TSN, December 14, 1990, 27.

16. TSN, November 15, 1990, 15.

17. Petition, 10; Rollo, 20.


19. TSN, December 14, 1990, 31.

20. Ibid., id., 29.

21. Memorandum for Private Respondent, 31; Rollo, 132.

22. Original Record, 183, Exhibit 8.

23. Ibid., 25.


25. Id., 19; ibid., 120.

26. TSN, December 14, 1990, 31.

27. Supra., Fn. 22.

28. Memorandum for Private Respondent, 21-24; Rollo, 122-125.


30. TSN, December 14, 1990, 28.


32. U.S.-Bach vs. Friden Calculating Mach. Co., C.C.A. Ohio 155 F. 2d 361, 365.


34. Section 1, Rule 131, Rules of Court.

35. TSN, November 15, 1990, 16.

36. Original Record, 183, Exhibit 8-A; Memorandum for Private Respondent, 11; Rollo, 112.

37. BPI Credit Corp. vs. Court of Appeals, et al., G.R. No. 96755, December 4, 1991, 204 SCRA 601.

38. Ong Yiu vs. Court of Appeals, et al., L-40597, June 29, 1979, 91 SCRA 223.

39. Saludo, Jr. vs. Court of Appeals, et al., G.R. No. 95536, March 23, 1992, 207 SCRA 498; see also

Art. 1377, Civil Code.

40. Original Record, 183, Exhibit 8-A.


42. This specific fact of the rule more fully states: Res inter alios acta aliis neque nole potest.

43. TSN, November 15, 1990, 10-27; 37-52.

44. Original Record, 183, Exhibit A.

45. TSN, October 12, 1990, 20.

46. Ibid., id., 21-22.

47. Ibid., id., 22-23.

48. Ibid., November 15, 1990, 10.

49. Ibid., id., 16-17.

50. Ibid., id., 19-20.

51. Ibid., id., 25-26.

52. Ibid., id., 26-27.

53. Memorandum for Private Respondents, 27; Rollo, 128.

54. TSN, March 22, 1991, 22.

55. Supra., Fn. 53.

56. See TSN, December 14, 1990, 22.


58. Id., 28-31; ibid., 129-132.

59. Ibid., 29; id., 130.

60. Article 2220, Civil Code.

61. Jurado, Comments and Jurisprudence on Obligations and Contracts, 1987 ed., 438.

62. Tolentino, Commentaries and Jurisprudence on the Civil Code of the Philippines, Vol. IV, 1986

ed., 509.

63. Op cit., 510.


65. TSN, October 12, 1990, 14.

66. Simex International (Manila), Inc. vs. Court of Appeals, et al., G.R. No. 88013, March 19, 1990,

183 SCRA 360.

67. De Guzman vs. National Labor Relations Commission, et al., G.R. No. 90856, July 23, 1992, 211

SCRA 723.


69. Article 2208(1), Civil Code.

FIRST DIVISION

[G.R. No. 150843. March 14, 2003.]

CATHAY PACIFIC AIRWAYS, LTD., petitioner, vs. SPOUSES DANIEL VAZQUEZ and MARIA LUISA MADRIGAL

VAZQUEZ, respondents.

Quasha Ancheta Peña Nolasco for petitioner.

Candelaria Candelaria & Candelaria Law Firm and Bello Gozon Elma Parel Asuncion & Lucila for private

respondents.

SYNOPSIS

Respondents-spouses Dr. Daniel Earnshaw Vazquez and Maria Luisa Madrigal Vazquez are frequent

flyers of petitioner Cathay Pacific Airways, Ltd., and are Gold Card members of its Marco Polo Club. The

Vazquezes, together with their maid and two friends, Pacita Cruz and Josefina Vergel de Dios, went to

Hongkong for pleasure and business. For their return flight to Manila, they were booked on Cathay's

Flight CX-905 Business Class Section. When boarding time was announced, a ground attendant

approached Dr. Vazquez and told him that the Vazquezes' accommodations were upgraded to First

Class. Dr. Vazquez refused the upgrade, reasoning that it would not look nice for them as hosts to travel

in First Class and their guests, in the Business Class; and moreover, they were going to discuss business

matters during the flight. Dr. Vazquez continued to refuse, so the ground stewardess told them that if

they would not avail themselves of the privilege, they would not be allowed to take the flight.

Eventually, after talking to his two friends, Dr. Vazquez gave in. Upon their return to Manila, the

Vazquezes instituted before the Regional Trial Court of Makati City an action for damages against

Cathay. In its answer, Cathay alleged that it is a practice among commercial airlines to upgrade

passengers to the next better class of accommodation, whenever an opportunity arises, such as when a

certain section is fully booked. Priority in upgrading is given to its frequent flyers, who are considered

favored passengers, like the Vazquezes. The trial court found for the Vazquezes and awarded them

damages. On appeal by the petitioner, the Court of Appeals deleted the award for exemplary damages;

and it reduced the awards for moral and nominal damages for each of the Vazquezes to P250,000 and

P50,000, respectively, and the attorney's fees and litigation expenses to P50,000 for both of them.

Hence this petition. ASaTCE

The Supreme Court partly granted the petition. According to the Court, the Vazquezes should have been

consulted first whether they wanted to avail themselves of the privilege or would consent to a change of

seat accommodation before their seat assignments were given to other passengers. Normally, one

would appreciate and accept an upgrading, for it would mean a better accommodation. But, whatever

their reason was and however odd it might be, the Vazquezes had every right to decline the upgrade

and insist on the Business Class accommodation they had booked for and which was designated in their

boarding passes. They clearly waived their priority or preference when they asked that other passengers

be given the upgrade. It should not have been imposed on them over their vehement objection. By

insisting on the upgrade, Cathay breached its contract of carriage with the Vazquezes. The Court,

however, was not convinced that the upgrading or the breach of contract was attended by fraud or bad

faith. The Vazquezes were not induced to agree to the upgrading through insidious words or deceitful

machination or through willful concealment of material facts. The attendant was honest in telling them

that their seats were already given to other passengers and the Business Class Section was fully booked.

The attendant might have failed to consider the remedy of offering the First. Class seats to other

passengers. But, the Court found no bad faith in her failure to do so, even if that amounted to an

exercise of poor judgment. The Court set aside and deleted the award of moral damages and attorney's

fees and reduced the award for nominal damages to P5,000.

SYLLABUS

1. CIVIL LAW; CONTRACTS; BREACH OF CONTRACT; DEFINED. — A contract is a meeting of minds

between two persons whereby one agrees to give something or render some service to another for a

consideration. There is no contract unless the following requisites concur: (1) consent of the contracting

parties; (2) an object certain which is the subject of the contract; and (3) the cause of the obligation

which is established. Undoubtedly, a contract of carriage existed between Cathay and the Vazquezes.

They voluntarily and freely gave their consent to an agreement whose object was the transportation of

the Vazquezes from Manila to Hong Kong and back to Manila, with seats in the Business Class Section of

the aircraft, and whose cause or consideration was the fare paid by the Vazquezes to Cathay. The only

problem is the legal effect of the upgrading of the seat accommodation of the Vazquezes. Did it

constitute a breach of contract? Breach of contract is defined as the "failure without legal reason to

comply with the terms of a contract." It is also defined as the "[f]ailure, without legal excuse, to perform

any promise which forms the whole or part of the contract." acIASE

2. ID.; ID.; ID.; BY INSISTING ON THE UPGRADE, PETITIONER BREACHED ITS CONTRACT OF

CARRIAGE WITH THE RESPONDENTS. — The contract between the parties was for Cathay to transport

the Vazquezes to Manila on a Business Class accommodation in Flight CX-905. After checking-in their

luggage at the Kai Tak Airport in Hong Kong, the Vazquezes were given boarding cards indicating their

seat assignments in the Business Class Section. However, during the boarding time, when the Vazquezes

presented their boarding passes, they were informed that they had a seat change from Business Class to

First Class. It turned out that the Business Class was overbooked in that there were more passengers

than the number of seats. Thus, the seat assignments of the Vazquezes were given to waitlisted

passengers, and the Vazquezes, being members of the Marco Polo Club, were upgraded from Business

Class to First Class. We note that in all their pleadings, the Vazquezes never denied that they were

members of Cathay's Marco Polo Club. They knew that as members of the Club, they had priority for

upgrading of their seat accommodation at no extra cost when an opportunity arises. But, just like other

privileges, such priority could be waived. The Vazquezes should have been consulted first whether they

wanted to avail themselves of the privilege or would consent to a change of seat accommodation before

their seat assignments were given to other passengers. Normally, one would appreciate and accept an

upgrading, for it would mean a better accommodation. But, whatever their reason was and however

odd it might be, the Vazquezes had every right to decline the upgrade and insist on the Business Class

accommodation they had booked for and which was designated in their boarding passes. They clearly

waived their priority or preference when they asked that other passengers be given the upgrade. It

should not have been imposed on them over their vehement objection. By insisting on the upgrade,

Cathay breached its contract of carriage with the Vazquezes.

3. ID.; ID.; NO PROOF OF FRAUD OR BAD FAITH ON THE PART OF PETITIONER AIRLINE'S EMPLOYEE.

— Bad faith and fraud are allegations of fact that demand clear and convincing proof. They are serious

accusations that can be so conveniently and casually invoked, and that is why they are never presumed.

They amount to mere slogans or mudslinging unless convincingly substantiated by whoever is alleging

them. Fraud has been defined to include an inducement through insidious machination. Insidious

machination refers to a deceitful scheme or plot with an evil or devious purpose. Deceit exists where the

party, with intent to deceive, conceals or omits to state material facts and, by reason of such omission

or concealment, the other party was induced to give consent that would not otherwise have been given.

Bad faith does not simply connote bad judgment or negligence; it imports a dishonest purpose or some

moral obliquity and conscious doing of a wrong, a breach of a known duty through some motive or

interest or ill will that partakes of the nature of fraud. We find no persuasive proof of fraud or bad faith

in this case. The Vazquezes were not induced to agree to the upgrading through insidious words or

deceitful machination or through willful concealment of material facts. Upon boarding, Ms. Chiu told the

Vazquezes that their accommodations were upgraded to First Class in view of their being Gold Card

members of Cathay's Marco Polo Club. She was honest in telling them that their seats were already

given to other passengers and the Business Class Section was fully booked. Ms. Chiu might have failed to

consider the remedy of offering the First Class seats to other passengers. But, we find no bad faith in her

failure to do so, even if that amounted to an exercise of poor judgment. Neither was the transfer of the

Vazquezes effected for some evil or devious purpose. As testified to by Mr. Robson, the First Class

Section is better than the Business Class Section in terms of comfort, quality of food, and service from

the cabin crew; thus, the difference in fare between the First Class and Business Class at that time was

$250. Needless to state, an upgrading is for the better condition and, definitely, for the benefit of the

passenger.

4. CIVIL LAW; DAMAGES; MORAL DAMAGES; NOT APPLICABLE IN CASE AT BAR; AIRLINE NOT

SHOWN TO HAVE ACTED FRAUDULENTLY OR IN BAD FAITH. — Moral damages include physical suffering,

mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social

humiliation, and similar injury. Although incapable of pecuniary computation, moral damages may be

recovered if they are the proximate result of the defendant's wrongful act or omission. Thus, case law

establishes the following requisites for the award of moral damages: (1) there must be an injury clearly

sustained by the claimant, whether physical, mental or psychological; (2) there must be a culpable act or

omission factually established; (3) the wrongful act or omission of the defendant is the proximate cause

of the injury sustained by the claimant; and (4) the award for damages is predicated on any of the cases

stated in Article 2219 of the Civil Code. Moral damages predicated upon a breach of contract of carriage

may only be recoverable in instances where the carrier is guilty of fraud or bad faith or where the

mishap resulted in the death of a passenger. Where in breaching the contract of carriage the airline is

not shown to have acted fraudulently or in bad faith, liability for damages is limited to the natural and

probable consequences of the breach of the obligation which the parties had foreseen or could have

reasonably foreseen. In such a case the liability does not include moral and exemplary damages. In this

case, we have ruled that the breach of contract of carriage, which consisted in the involuntary upgrading

of the Vazquezes' seat accommodation, was not attended by fraud or bad faith. The Court of Appeals'

award of moral damages has, therefore, no leg to stand on. aESICD

5. ID.; ID.; EXEMPLARY DAMAGES; REQUISITE THAT THE ACT OF THE OFFENDER WAS

ACCOMPANIED BY BAD FAITH OR DONE IN WANTON, FRAUDULENT OR MALEVOLENT MANNER, ABSENT

IN CASE AT BAR. — The deletion of the award for exemplary damages by the Court of Appeals is correct.

It is a requisite in the grant of exemplary damages that the act of the offender must be accompanied by

bad faith or done in wanton, fraudulent or malevolent manner. Such requisite is absent in this case.

Moreover, to be entitled thereto the claimant must first establish his right to moral, temperate, or

compensatory damages. Since the Vazquezes are not entitled to any of these damages, the award for

exemplary damages has no legal basis. And where the awards for moral and exemplary damages are

eliminated, so must the award for attorney's fees.

6. ID.; ID.; NOMINAL DAMAGES; REDUCED. — The most that can be adjudged in favor of the

Vazquezes for Cathay's breach of contract is an award for nominal damages under Article 2221 of the

Civil Code. Worth noting is the fact that in Cathay's Memorandum filed with this Court, it prayed only for

the deletion of the award for moral damages. It deferred to the Court of Appeals' discretion in awarding

nominal damages; thus: As far as the award of nominal damages is concerned, petitioner respectfully

defers to the Honorable Court of Appeals' discretion. Aware as it is that somehow, due to the resistance

of respondents-spouses to the normally-appreciated gesture of petitioner to upgrade their

accommodations, petitioner may have disturbed the respondents-spouses' wish to be with their

companions (who traveled to Hong Kong with them) at the Business Class on their flight to Manila.

Petitioner regrets that in its desire to provide the respondents-spouses with additional amenities for the

one and one-half (1 1/2) hour flight to Manila, unintended tension ensued. Nonetheless, considering,

that the breach was intended to give more benefit and advantage to the Vazquezes by upgrading their

Business Class accommodation to First Class because of their valued status as Marco Polo members, we

reduce the award for nominal damages to P5,000. EIAaDC

D E C I S I O N

DAVIDE, JR., C.J p:

Is an involuntary upgrading of an airline passenger's accommodation from one class to a more superior

class at no extra cost a breach of contract of carriage that would entitle the passenger to an award of

damages? This is a novel question that has to be resolved in this case. CTEDSI

The facts in this case, as found by the Court of Appeals and adopted by petitioner Cathay Pacific

Airways, Ltd., (hereinafter Cathay) are as follows:

Cathay is a common carrier engaged in the business of transporting passengers and goods by air. Among

the many routes it services is the Manila-Hongkong-Manila course. As part of its marketing strategy,

Cathay accords its frequent flyers membership in its Marco Polo Club. The members enjoy several

privileges, such as priority for upgrading of booking without any extra charge whenever an opportunity

arises. Thus, a frequent flyer booked in the Business Class has priority for upgrading to First Class if the

Business Class Section is fully booked.

Respondents-spouses Dr. Daniel Earnshaw Vazquez and Maria Luisa Madrigal Vazquez are frequent

flyers of Cathay and are Gold Card members of its Marco Polo Club. On 24 September 1996, the

Vazquezes, together with their maid and two friends Pacita Cruz and Josefina Vergel de Dios, went to

Hongkong for pleasure and business.

For their return flight to Manila on 28 September 1996, they were booked on Cathay's Flight CX-905,

with departure time at 9:20 p.m. Two hours before their time of departure, the Vazquezes and their

companions checked in their luggage at Cathay's check-in counter at Kai Tak Airport and were given

their respective boarding passes, to wit, Business Class boarding passes for the Vazquezes and their two

friends, and Economy Class for their maid. They then proceeded to the Business Class passenger lounge.

When boarding time was announced, the Vazquezes and their two friends went to Departure Gate No.

28, which was designated for Business Class passengers. Dr. Vazquez presented his boarding pass to the

ground stewardess, who in turn inserted it into an electronic machine reader or computer at the gate.

The ground stewardess was assisted by a ground attendant by the name of Clara Lai Han Chiu. When

Ms. Chiu glanced at the computer monitor, she saw a message that there was a "seat change" from

Business Class to First Class for the Vazquezes.

Ms. Chiu approached Dr. Vazquez and told him that the Vazquezes' accommodations were upgraded to

First Class. Dr. Vazquez refused the upgrade, reasoning that it would not look nice for them as hosts to

travel in First Class and their guests, in the Business Class; and moreover, they were going to discuss

business matters during the flight. He also told Ms. Chiu that she could have other passengers instead

transferred to the First Class Section. Taken aback by the refusal for upgrading, Ms. Chiu consulted her

supervisor, who told her to handle the situation and convince the Vazquezes to accept the upgrading.

Ms. Chiu informed the latter that the Business Class was fully booked, and that since they were Marco

Polo Club members they had the priority to be upgraded to the First Class. Dr. Vazquez continued to

refuse, so Ms. Chiu told them that if they would not avail themselves of the privilege, they would not be

allowed to take the flight. Eventually, after talking to his two friends, Dr. Vazquez gave in. He and Mrs.

Vazquez then proceeded to the First Class Cabin.

Upon their return to Manila, the Vazquezes, in a letter of 2 October 1996 addressed to Cathay's Country

Manager, demanded that they be indemnified in the amount of P1million for the "humiliation and

embarrassment" caused by its employees. They also demanded "a written apology from the

management of Cathay, preferably a responsible person with a rank of no less than the Country

Manager, as well as the apology from Ms. Chiu" within fifteen days from receipt of the letter. IEAHca

In his reply of 14 October 1996, Mr. Larry Yuen, the assistant to Cathay's Country Manager Argus Guy

Robson, informed the Vazquezes that Cathay would investigate the incident and get back to them within

a week's time.

On 8 November 1996, after Cathay's failure to give them any feedback within its self-imposed deadline,

the Vazquezes instituted before the Regional Trial Court of Makati City an action for damages against

Cathay, praying for the payment to each of them the amounts of P250,000 as temperate damages;

P500,000 as moral damages; P500,000 as exemplary or corrective damages; and P250,000 as attorney's

fees.

In their complaint, the Vazquezes alleged that when they informed Ms. Chiu that they preferred to stay

in Business Class, Ms. Chiu "obstinately, uncompromisingly and in a loud, discourteous and harsh voice

threatened" that they could not board and leave with the flight unless they go to First Class, since the

Business Class was overbooked. Ms. Chiu's loud and stringent shouting annoyed, embarrassed, and

humiliated them because the incident was witnessed by all the other passengers waiting for boarding.

They also claimed that they were unjustifiably delayed to board the plane, and when they were finally

permitted to get into the aircraft, the forward storage compartment was already full. A flight stewardess

instructed Dr. Vazquez to put his roll-on luggage in the overhead storage compartment. Because he was

not assisted by any of the crew in putting up his luggage, his bilateral carpal tunnel syndrome was

aggravated, causing him extreme pain on his arm and wrist. The Vazquezes also averred that they

"belong to the uppermost and absolutely top elite of both Philippine Society and the Philippine financial

community, [and that] they were among the wealthiest persons in the Philippine[s]."

In its answer, Cathay alleged that it is a practice among commercial airlines to upgrade passengers to

the next better class of accommodation, whenever an opportunity arises, such as when a certain section

is fully booked. Priority in upgrading is given to its frequent flyers, who are considered favored

passengers like the Vazquezes. Thus, when the Business Class Section of Flight CX-905 was fully booked,

Cathay's computer sorted out the names of favored passengers for involuntary upgrading to First Class.

When Ms. Chiu informed the Vazquezes that they were upgraded to First Class, Dr. Vazquez refused. He

then stood at the entrance of the boarding apron, blocking the queue of passengers from boarding the

plane, which inconvenienced other passengers. He shouted that it was impossible for him and his wife

to be upgraded without his two friends who were traveling with them. Because of Dr. Vazquez's

outburst, Ms. Chiu thought of upgrading the traveling companions of the Vazquezes. But when she

checked the computer, she learned that the Vazquezes' companions did not have priority for upgrading.

She then tried to book the Vazquezes again to their original seats. However, since the Business Class

Section was already fully booked, she politely informed Dr. Vazquez of such fact and explained that the

upgrading was in recognition of their status as Cathay's valued passengers. Finally, after talking to their

guests, the Vazquezes eventually decided to take the First Class accommodation.

Cathay also asserted that its employees at the Hong Kong airport acted in good faith in dealing with the

Vazquezes; none of them shouted, humiliated, embarrassed, or committed any act of disrespect against

them (the Vazquezes). Assuming that there was indeed a breach of contractual obligation, Cathay acted

in good faith, which negates any basis for their claim for temperate, moral, and exemplary damages and

attorney's fees. Hence, it prayed for the dismissal of the complaint and for payment of P100,000 for

exemplary damages and P300,000 as attorney's fees and litigation expenses.

During the trial, Dr. Vazquez testified to support the allegations in the complaint. His testimony was

corroborated by his two friends who were with him at the time of the incident, namely, Pacita G. Cruz

and Josefina Vergel de Dios. TacADE

For its part, Cathay presented documentary evidence and the testimonies of Mr. Yuen; Ms. Chiu; Norma

Barrientos, Comptroller of its retained counsel; and Mr. Robson. Yuen and Robson testified on Cathay's

policy of upgrading the seat accommodation of its Marco Polo Club members when an opportunity

arises. The upgrading of the Vazquezes to First Class was done in good faith; in fact, the First Class

Section is definitely much better than the Business Class in terms of comfort, quality of food, and service

from the cabin crew. They also testified that overbooking is a widely accepted practice in the airline

industry and is in accordance with the International Air Transport Association (IATA) regulations. Airlines

overbook because a lot of passengers do not show up for their flight. With respect to Flight CX-905,

there was no overall overbooking to a degree that a passenger was bumped off or downgraded. Yuen

and Robson also stated that the demand letter of the Vazquezes was immediately acted upon. Reports

were gathered from their office in Hong Kong and immediately forwarded to their counsel Atty. Remollo

for legal advice. However, Atty. Remollo begged off because his services were likewise retained by the

Vazquezes; nonetheless, he undertook to solve the problem in behalf of Cathay. But nothing happened

until Cathay received a copy of the complaint in this case. For her part, Ms. Chiu denied that she shouted

or used foul or impolite language against the Vazquezes. Ms. Barrientos testified on the amount of

attorney's fees and other litigation expenses, such as those for the taking of the depositions of Yuen and

Chiu.

In its decision 1 of 19 October 1998, the trial court found for the Vazquezes and decreed as follows:

SEcITC

WHEREFORE, finding preponderance of evidence to sustain the instant complaint, judgment is hereby

rendered in favor of plaintiffs Vazquez spouses and against defendant Cathay Pacific Airways, Ltd.,

ordering the latter to pay each plaintiff the following:

a) Nominal damages in the amount of P100,000.00 for each plaintiff;

b) Moral damages in the amount of P2,000,000.00 for each plaintiff;

c) Exemplary damages in the amount of P5,000,000.00 for each plaintiff;

d) Attorney's fees and expenses of litigation in the amount of P1,000,000.00 for each plaintiff; and

e) Costs of suit.

SO ORDERED.

According to the trial court, Cathay offers various classes of seats from which passengers are allowed to

choose regardless of their reasons or motives, whether it be due to budgetary constraints or whim. The

choice imposes a clear obligation on Cathay to transport the passengers in the class chosen by them.

The carrier cannot, without exposing itself to liability, force a passenger to involuntarily change his

choice. The upgrading of the Vazquezes' accommodation over and above their vehement objections was

due to the overbooking of the Business Class. It was a pretext to pack as many passengers as possible

into the plane to maximize Cathay's revenues. Cathay's actuations in this case displayed deceit, gross

negligence, and bad faith, which entitled the Vazquezes to awards for damages.

On appeal by the petitioners, the Court of Appeals, in its decision of 24 July 2001, 2 deleted the award

for exemplary damages; and it reduced the awards for moral and nominal damages for each of the

Vazquezes to P250,000 and P50,000, respectively, and the attorney's fees and litigation expenses to

P50,000 for both of them.

The Court of Appeals ratiocinated that by upgrading the Vazquezes to First Class, Cathay novated the

contract of carriage without the former's consent. There was a breach of contract not because Cathay

overbooked the Business Class Section of Flight CX-905 but because the latter pushed through with the

upgrading despite the objections of the Vazquezes. acIHDA

However, the Court of Appeals was not convinced that Ms. Chiu shouted at, or meant to be

discourteous to, Dr. Vazquez, although it might seemed that way to the latter, who was a member of the

elite in Philippine society and was not therefore used to being harangued by anybody. Ms. Chiu was a

Hong Kong Chinese whose fractured Chinese was difficult to understand and whose manner of speaking

might sound harsh or shrill to Filipinos because of cultural differences. But the Court of Appeals did not

find her to have acted with deliberate malice, deceit, gross negligence, or bad faith. If at all, she was

negligent in not offering the First Class accommodations to other passengers. Neither can the flight

stewardess in the First Class Cabin be said to have been in bad faith when she failed to assist Dr.

Vazquez in lifting his baggage into the overhead storage bin. There is no proof that he asked for help and

was refused even after saying that he was suffering from "bilateral carpal tunnel syndrome." Anent the

delay of Yuen in responding to the demand letter of the Vazquezes, the Court of Appeals found it to

have been sufficiently explained.

The Vazquezes and Cathay separately filed motions for a reconsideration of the decision, both of which

were denied by the Court of Appeals.

Cathay seasonably filed with us this petition in this case. Cathay maintains that the award for moral

damages has no basis, since the Court of Appeals found that there was no "wanton, fraudulent, reckless

and oppressive" display of manners on the part of its personnel; and that the breach of contract was not

attended by fraud, malice, or bad faith. If any damage had been suffered by the Vazquezes, it was

damnum absque injuria, which is damage without injury, damage or injury inflicted without injustice,

loss or damage without violation of a legal right, or a wrong done to a man for which the law provides

no remedy. Cathay also invokes our decision in United Airlines, Inc. v. Court of Appeals 3 where we

recognized that, in accordance with the Civil Aeronautics Board's Economic Regulation No. 7, as

amended, an overbooking that does not exceed ten percent cannot be considered deliberate and done

in bad faith. We thus deleted in that case the awards for moral and exemplary damages, as well as

attorney's fees, for lack of proof of overbooking exceeding ten percent or of bad faith on the part of the

airline carrier. IcTCHD

On the other hand, the Vazquezes assert that the Court of Appeals was correct in granting awards for

moral and nominal damages and attorney's fees in view of the breach of contract committed by Cathay

for transferring them from the Business Class to First Class Section without prior notice or consent and

over their vigorous objection. They likewise argue that the issuance of passenger tickets more than the

seating capacity of each section of the plane is in itself fraudulent, malicious and tainted with bad faith.

The key issues for our consideration are whether (1) by upgrading the seat accommodation of the

Vazquezes from Business Class to First Class Cathay breached its contract of carriage with the

Vazquezes; (2) the upgrading was tainted with fraud or bad faith; and (3) the Vazquezes are entitled to

damages.

We resolve the first issue in the affirmative.

A contract is a meeting of minds between two persons whereby one agrees to give something or render

some service to another for a consideration. There is no contract unless the following requisites concur:

(1) consent of the contracting parties; (2) an object certain which is the subject of the contract; and (3)

the cause of the obligation which is established. 4 Undoubtedly, a contract of carriage existed between

Cathay and the Vazquezes. They voluntarily and freely gave their consent to an agreement whose object

was the transportation of the Vazquezes from Manila to Hong Kong and back to Manila, with seats in

the Business Class Section of the aircraft, and whose cause or consideration was the fare paid by the

Vazquezes to Cathay. CAIaDT

The only problem is the legal effect of the upgrading of the seat accommodation of the Vazquezes. Did it

constitute a breach of contract?

Breach of contract is defined as the "failure without legal reason to comply with the terms of a

contract." 5 It is also defined as the "[f]ailure, without legal excuse, to perform any promise which forms

the whole or part of the contract." 6

In previous cases, the breach of contract of carriage consisted in either the bumping off of a passenger

with confirmed reservation or the downgrading of a passenger's seat accommodation from one class to

a lower class. In this case, what happened was the reverse. The contract between the parties was for

Cathay to transport the Vazquezes to Manila on a Business Class accommodation in Flight CX-905. After

checking-in their luggage at the Kai Tak Airport in Hong Kong, the Vazquezes were given boarding cards

indicating their seat assignments in the Business Class Section. However, during the boarding time,

when the Vazquezes presented their boarding passes, they were informed that they had a seat change

from Business Class to First Class. It turned out that the Business Class was overbooked in that there

were more passengers than the number of seats. Thus, the seat assignments of the Vazquezes were

given to waitlisted passengers, and the Vazquezes, being members of the Marco Polo Club, were

upgraded from Business Class to First Class.

We note that in all their pleadings, the Vazquezes never denied that they were members of Cathay's

Marco Polo Club. They knew that as members of the Club, they had priority for upgrading of their seat

accommodation at no extra cost when an opportunity arises. But, just like other privileges, such priority

could be waived. The Vazquezes should have been consulted first whether they wanted to avail

themselves of the privilege or would consent to a change of seat accommodation before their seat

assignments were given to other passengers. Normally, one would appreciate and accept an upgrading,

for it would mean a better accommodation. But, whatever their reason was and however odd it might

be, the Vazquezes had every right to decline the upgrade and insist on the Business Class

accommodation they had booked for and which was designated in their boarding passes. They clearly

waived their priority or preference when they asked that other passengers be given the upgrade. It

should not have been imposed on them over their vehement objection. By insisting on the upgrade,

Cathay breached its contract of carriage with the Vazquezes.

We are not, however, convinced that the upgrading or the breach of contract was attended by fraud or

bad faith. Thus, we resolve the second issue in the negative. ITScHa

Bad faith and fraud are allegations of fact that demand clear and convincing proof. They are serious

accusations that can be so conveniently and casually invoked, and that is why they are never presumed.

They amount to mere slogans or mudslinging unless convincingly substantiated by whoever is alleging

them.

Fraud has been defined to include an inducement through insidious machination. Insidious machination

refers to a deceitful scheme or plot with an evil or devious purpose. Deceit exists where the party, with

intent to deceive, conceals or omits to state material facts and, by reason of such omission or

concealment, the other party was induced to give consent that would not otherwise have been given. 7

Bad faith does not simply connote bad judgment or negligence; it imports a dishonest purpose or some

moral obliquity and conscious doing of a wrong, a breach of a known duty through some motive or

interest or ill will that partakes of the nature of fraud. 8

We find no persuasive proof of fraud or bad faith in this case. The Vazquezes were not induced to agree

to the upgrading through insidious words or deceitful machination or through willful concealment of

material facts. Upon boarding, Ms. Chiu told the Vazquezes that their accommodations were upgraded

to First Class in view of their being Gold Card members of Cathay's Marco Polo Club. She was honest in

telling them that their seats were already given to other passengers and the Business Class Section was

fully booked. Ms. Chiu might have failed to consider the remedy of offering the First Class seats to other

passengers. But, we find no bad faith in her failure to do so, even if that amounted to an exercise of

poor judgment.

Neither was the transfer of the Vazquezes effected for some evil or devious purpose. As testified to by

Mr. Robson, the First Class Section is better than the Business Class Section in terms of comfort, quality

of food, and service from the cabin crew; thus, the difference in fare between the First Class and

Business Class at that time was $250. 9 Needless to state, an upgrading is for the better condition and,

definitely, for the benefit of the passenger. EcICDT

We are not persuaded by the Vazquezes' argument that the overbooking of the Business Class Section

constituted bad faith on the part of Cathay. Section 3 of the Economic Regulation No. 7 of the Civil

Aeronautics Board, as amended, provides:

Sec 3. Scope. — This regulation shall apply to every Philippine and foreign air carrier with respect to its

operation of flights or portions of flights originating from or terminating at, or serving a point within the

territory of the Republic of the Philippines insofar as it denies boarding to a passenger on a flight, or

portion of a flight inside or outside the Philippines, for which he holds confirmed reserved space.

Furthermore, this Regulation is designed to cover only honest mistakes on the part of the carriers and

excludes deliberate and willful acts of non-accommodation. Provided, however, that overbooking not

exceeding 10% of the seating capacity of the aircraft shall not be considered as a deliberate and willful

act of non-accommodation.

It is clear from this section that an overbooking that does not exceed ten percent is not considered

deliberate and therefore does not amount to bad faith. 10 Here, while there was admittedly an

overbooking of the Business Class, there was no evidence of overbooking of the plane beyond ten

percent, and no passenger was ever bumped off or was refused to board the aircraft.

Now we come to the third issue on damages.

The Court of Appeals awarded each of the Vazquezes moral damages in the amount of P250,000. Article

2220 of the Civil Code provides:

Article 2220. Willful injury to property may be a legal ground for awarding moral damages if the court

should find that, under the circumstances, such damages are justly due. The same rule applies to

breaches of contract where the defendant acted fraudulently or in bad faith.

Moral damages include physical suffering, mental anguish, fright, serious anxiety, besmirched

reputation, wounded feelings, moral shock, social humiliation, and similar injury. Although incapable of

pecuniary computation, moral damages may be recovered if they are the proximate result of the

defendant's wrongful act or omission. 11 Thus, case law establishes the following requisites for the

award of moral damages: (1) there must be an injury clearly sustained by the claimant, whether

physical, mental or psychological; (2) there must be a culpable act or omission factually established; (3)

the wrongful act or omission of the defendant is the proximate cause of the injury sustained by the

claimant; and (4) the award for damages is predicated on any of the cases stated in Article 2219 of the

Civil Code. 12

Moral damages predicated upon a breach of contract of carriage may only be recoverable in instances

where the carrier is guilty of fraud or bad faith or where the mishap resulted in the death of a

passenger. 13 Where in breaching the contract of carriage the airline is not shown to have acted

fraudulently or in bad faith, liability for damages is limited to the natural and probable consequences of

the breach of the obligation which the parties had foreseen or could have reasonably foreseen. In such a

case the liability does not include moral and exemplary damages. 14

In this case, we have ruled that the breach of contract of carriage, which consisted in the involuntary

upgrading of the Vazquezes' seat accommodation, was not attended by fraud or bad faith. The Court of

Appeals' award of moral damages has, therefore, no leg to stand on. cSDHEC

The deletion of the award for exemplary damages by the Court of Appeals is correct. It is a requisite in

the grant of exemplary damages that the act of the offender must be accompanied by bad faith or done

in wanton, fraudulent or malevolent manner. 15 Such requisite is absent in this case. Moreover, to be

entitled thereto the claimant must first establish his right to moral, temperate, or compensatory

damages. 16 Since the Vazquezes are not entitled to any of these damages, the award for exemplary

damages has no legal basis. And where the awards for moral and exemplary damages are eliminated, so

must the award for attorney's fees. 17

The most that can be adjudged in favor of the Vazquezes for Cathay's breach of contract is an award for

nominal damages under Article 2221 of the Civil Code, which reads as follows:

Article 2221 of the Civil Code provides:

Article 2221. Nominal damages are adjudicated in order that a right of the plaintiff, which has been

violated or invaded by the defendant, may be vindicated or recognized, and not for the purpose of

indemnifying the plaintiff for any loss suffered by him.

Worth noting is the fact that in Cathay's Memorandum filed with this Court, it prayed only for the

deletion of the award for moral damages. It deferred to the Court of Appeals' discretion in awarding

nominal damages; thus:

As far as the award of nominal damages is concerned, petitioner respectfully defers to the Honorable

Court of Appeals' discretion. Aware as it is that somehow, due to the resistance of respondents-spouses

to the normally-appreciated gesture of petitioner to upgrade their accommodations, petitioner may

have disturbed the respondents-spouses' wish to be with their companions (who traveled to Hong Kong

with them) at the Business Class on their flight to Manila. Petitioner regrets that in its desire to provide

the respondents-spouses with additional amenities for the one and one-half (1 1/2) hour flight to

Manila, unintended tension ensued. 18

Nonetheless, considering, that the breach was intended to give more benefit and advantage to the

Vazquezes by upgrading their Business Class accommodation to First Class because of their valued status

as Marco Polo members, we reduce the award for nominal damages to P5,000. cTSDAH

Before writing finis to this decision, we find it well-worth to quote the apt observation of the Court of

Appeals regarding the awards adjudged by the trial court:

We are not amused but alarmed at the lower court's unbelievable alacrity, bordering on the scandalous,

to award excessive amounts as damages. In their complaint, appellees asked for P1 million as moral

damages but the lower court awarded P4 million; they asked for P500,000.00 as exemplary damages but

the lower court cavalierly awarded a whooping P10 million; they asked for P250,000.00 as attorney's

fees but were awarded P2 million; they did not ask for nominal damages but were awarded

P200,000.00. It is as if the lower court went on a rampage, and why it acted that way is beyond all tests

of reason. In fact the excessiveness of the total award invites the suspicion that it was the result of

"prejudice or corruption on the part of the trial court."

The presiding judge of the lower court is enjoined to hearken to the Supreme Court's admonition in

Singson vs. CA (282 SCRA 149 [1997]), where it said:

The well-entrenched principle is that the grant of moral damages depends upon the discretion of the

court based on the circumstances of each case. This discretion is limited by the principle that the

amount awarded should not be palpably and scandalously excessive as to indicate that it was the result

of prejudice or corruption on the part of the trial court . . .

and in Alitalia Airways vs. CA (187 SCRA 763 [1990], where it was held:

Nonetheless, we agree with the injunction expressed by the Court of Appeals that passengers must not

prey on international airlines for damage awards, like "trophies in a safari." After all neither the social

standing nor prestige of the passenger should determine the extent to which he would suffer because of

a wrong done, since the dignity affronted in the individual is a quality inherent in him and not conferred

by these social indicators. 19

We adopt as our own this observation of the Court of Appeals.

WHEREFORE, the instant petition is hereby partly GRANTED. The Decision of the Court of Appeals of 24

July 2001 in CA-G.R. CV No. 63339 is hereby MODIFIED, and as modified, the awards for moral damages

and attorney's fees are set aside and deleted, and the award for nominal damages is reduced to P5,000.

DSCIEa

No pronouncement on costs.

SO ORDERED.

Vitug, Carpio and Azcuna, JJ., concur.

Ynares-Santiago, J., is on leave.

Footnotes

1. Penned by Judge Escolastico O. Cruz, Jr.

2. Penned by Associate Justice Wenceslao I. Agnir, Jr., with Associate Justices Salvador J. Valdez,

Jr., and Juan Q. Enriquez, Jr., concurring.

3. 357 SCRA 99 [2001].

4. Article 1318, Civil Code; ABS-CBN Broadcasting Corp. v. Court of Appeals, 301 SCRA 572, 592 [

1999].

5. Webster's Third New International Dictionary 270 (1986).

6. Black's Law Dictionary 171 (5th ed.).

7. Strong v. Repide, 41 Phil. 947, 956 [1909].

8. Tan v. Northwest Airlines, Inc., 327 SCRA 263, 268 [2000]; Magat v. Court of Appeals, 337 SCRA

298, 307 [2000]; Morris v. Court of Appeals, 352 SCRA 428, 437 [2001]; Francisco v. Ferrer, 353 SCRA

261, 265 [2001].

9. TSN, 2 April 1988, 37-38; TSN, 17 April 1998, 37.

10. United Airlines, Inc. v. Court of Appeals, supra note 3.

11. Citytrust Banking Corporation v. Villanueva, 361 SCRA 446, 457 [2001].

12. Citytrust Banking Corporation v. Villanueva, supra; Francisco v. Ferrer, supra note 8, at 266.

13. Cathay Pacific Airways, Ltd. v. Court of Appeals, 219 SCRA 520, 524 [1993].

14. Id., 526; Tan v. Northwest Airlines, Inc., supra note 8; Morris v. Court of Appeals, supra note 8, at

436.

15. Morris v. Court of Appeals, supra note 8, at 436.


17. Orosa v. Court of Appeals, 329 SCRA 652, 665 [2000]; Morris v. Court of Appeals, supra note 8,

at 437-438.

18. Rollo, 262.

19. Rollo, 50-51.

EN BANC

[G.R. No. 34840. September 23, 1931.]

NARCISO GUTIERREZ, plaintiff-appellee, vs. BONIFACIO GUTIERREZ, MARIA V. DE GUTIERREZ, MANUEL

GUTIERREZ, ABELARDO VELASCO, and SATURNINO CORTEZ, defendants-appellants.

L. D. Lockwood, for appellants Velasco and Cortez.

San Agustin & Roxas, for other appellants.

Ramon Diokno, for appellee.

SYLLABUS

1. DAMAGES; MASTER AND SERVANT; MOTOR VEHICLES; LIABILITY OF HEAD OF HOUSE FOR ACTS

OF DRIVER WHO IS HIS MINOR CHILD. — The head of a house, the owner of an automobile, who

maintains it for the general use of his family, is liable for its negligent operation by one of his children,

whom he designates or permits to run it, where the car is occupied and being used at the time of the

injury for the pleasure of other members of the owner's family than the child driving it.

2. ID.; ID.; ID.; ID.; CASE AT BAR. — One G, a passenger in a truck, recovers damages in the amount

of P5,000 from the owner of a private automobile not in the car, the machine being operated by a son

18 years of age, with other members of the family accommodated therein, and from the chauffeur and

owner of the truck which collided with the private automobile on a bridge, causing physical injuries to G

as a result of the automobile accident.

D E C I S I O N

MALCOLM, J p:

This is an action brought by the plaintiff in the Court of First Instance of Manila against the five

defendants, to recover damages in the amount of P10,000, for physical injuries suffered as a result of an

automobile accident. On judgment being rendered as prayed for by the plaintiff, both sets of defendants

appealed.

On February 2, 1930, a passenger truck and an automobile of private ownership collided while

attempting to pass each other on the Talon bridge on the Manila South Road in the municipality of Las

Pinas, Province of Rizal. The truck was driven by the chauffeur Abelardo Velasco, and was owned by

Saturnino Cortez. The automobile was being operated by Bonifacio Gutierrez, a lad 18 years of age, and

was owned by Bonifacio's father and mother, Mr. and Mrs. Manuel Gutierrez. At the time of the

collision, the father was not in the car, but the mother, together with several other members of the

Gutierrez family, seven in all, were accommodated therein. A passenger in the autobus, by the name of

Narciso Gutierrez, was en route from San Pablo, Laguna, to Manila. The collision between the bus and

the automobile resulted in Narciso Gutierrez suffering a fractured right leg which required medical

attendance for a considerable period of time, and which even at the date of the trial appears not to

have healed properly.

It is conceded that the collision was caused by negligence pure and simple. The difference between the

parties is that, while the plaintiff blames both sets of defendants, the owner of the passenger truck

blames the automobile, and the owner of the automobile, in turn, blames the truck. We have given

close attention to these highly debatable points, and having done so, a majority of the court are of the

opinion that the findings of the trial judge on all controversial questions of fact find sufficient support in

the record, and so should be maintained. With this general statement set down, we turn to consider the

respective legal obligations of the defendants.

In amplification of so much of the above pronouncement as concerns the Gutierrez family, it may be

explained that the youth Bonifacio was an incompetent chauffeur, that he was driving at an excessive

rate of speed, and that, on approaching the bridge and the truck, he lost his head and so contributed by

his negligence to the accident. The guaranty given by the father at the time the son was granted a

license to operate motor vehicles made the father responsible for the acts of his son. Based on these

facts, pursuant to the provisions of article 1903 of the Civil Code, the father alone and not the minor or

the mother, would be liable for the damages caused by the minor.

We are here dealing with the civil law liability of parties for obligations which arise from fault or

negligence. At the same time, we believe that, as has been done in other cases, we can take cognizance

of the common law rule on the same subject. In the United States, it is uniformly held that the head of a

house, the owner of an automobile, who maintains it for the general use of his family is liable for its

negligent operation by one of his children, whom he designates or permits to run it, where the car is

occupied and being used at the time of the injury for the pleasure of other members of the owner's

family than the child driving it. The theory of the law is that the running of the machine by a child to

carry other members of the family is within the scope of the owner's business, so that he is liable for the

negligence of the child because of the relationship of master and servant. (Huddy On Automobiles, 6th

ed., sec. 660; Missell vs. Hayes [1914], 91 Alt., 322.)

The liability of Saturnino Cortez, the owner of the truck, and of his chauffeur Abelardo Velasco rests on a

different basis, namely, that of contract which, we think, has been sufficiently demonstrated by the

allegations of the complaint, not controverted, and the evidence. The reason for this conclusion reaches

to the findings of the trial court concerning the position of the truck on the bridge, the speed in

operating the machine, and the lack of care employed by the chauffeur. While these facts are not as

clearly evidenced as are those which convict the other defendant, we nevertheless hesitate to disregard

the points emphasized by the trial judge. In its broader aspects, the case is one of two drivers

approaching a narrow bridge from opposite directions, with neither being willing to slow up and give the

right of way to the other, with the inevitable result of a collision and an accident.

The defendants Velasco and Cortez further contend that there existed contributory negligence on the

part of the plaintiff, consisting principally of his keeping his foot outside the truck, which occasioned his

injury. In this connection, it is sufficient to state that, aside from the fact that the defense of

contributory negligence was not pleaded, the evidence bearing out this theory of the case is

contradictory in the extreme and leads us far afield into speculative matters.

The last subject for consideration relates to the amount of the award. The appellee suggests that the

amount could justly be raised to P16,517, but naturally is not serious in asking for this sum, since no

appeal was taken by him from the judgment. The other parties unit in challenging the award of P10,000,

as excessive. All facts considered, including actual expenditures and damages for the injury to the leg of

the plaintiff, which may cause him permanent lameness, in connection with other adjudications of this

court, lead us to conclude that a total sum for the plaintiff of P5,000 would be fair and reasonable. The

difficulty in approximating the damages by monetary compensation is well elucidated by the divergence

of opinion among the members of the court, three of whom have inclined to the view that P3,000 would

be amply sufficient, while a fourth member has argued that P7,500 would be none too much.

In consonance with the foregoing rulings, the judgment appealed from will be modified, and the plaintiff

will have judgment in his favor against the defendants Manuel Gutierrez, Abelardo Velasco, and

Saturnino Cortez, jointly and severally, for the sum of P5,000, and the costs of both instances.

Avancena, C.J., Johnson, Street, Villamor, Ostrand, Romualdez and Imperial, JJ., concur.

Villa-Real, J., I vote for an indemnity of P7,500.

FIRST DIVISION

[G.R. No. 48930. February 23, 1944.]

ANTONIO VAZQUEZ, petitioner, vs. FRANCISCO DE BORJA, respondent.

[G.R. No. 48931. February 23, 1944.]

FRANCISCO DE BORJA, petitioner, vs. ANTONIO VAZQUEZ, respondent.

SYLLABUS

1. CORPORATIONS; OFFICERS' PERSONAL LIABILITY ON CONTRACTS. — It is well known that a

corporation is an artificial being invested by law with a personality of its own, separate and distinct from

that of its stockholders and from that of its officers who manage and run its affairs. The mere fact that

its personality is owing to a legal fiction and that it necessarily has to act thru its agents, does not make

the latter personally liable on a contract duly entered into, or for an act lawfully performed, by them for

and in its behalf. The legal fiction by which the personality of a corporation is created is a practical

reality and necessity. Without it no corporate entities may exist and no corporate business may be

transacted. Such legal fiction may be disregarded only when an attempt is made to use it as a cloak to

hide an unlawful or fraudulent purpose. No such thing has been alleged or proven in this case. It has not

been alleged nor even intimated that Vazquez personally benefited by the contract of sale in question

and that he is merely invoking the legal fiction to avoid personal liability. Neither is it contended that he

entered into said contract for the corporation in bad faith and with intent to defraud the plaintiff. We

find no legal and factual basis upon which to hold him liable on the contract either principally or

subsidiarily.

2. ID.; ID.; NEGLIGENCE. — The trial court found him guilty of negligence in the performance of the

contract and held him personally liable on that account. On the other hand, the Court of Appeals found

that he "no solamente obro con negligencia, sino interviniendo culpa de su parte, por lo que de acuerdo

con los arts. 1102, 1103 y 1902 del Codigo Civil, el debe ser responsable subsidiariamente del pago de la

cantidad objeto de la demanda." We think both the trial court and the Court of Appeals erred in law in

so holding. They have manifestly failed to distinguish a contractual from an extracontractual obligation,

or an obligation arising from contract from an obligation arising from culpa aquiliana. The fault and

negligence referred to in articles 1101-1104 of the Civil Code are those incidental to the fulfillment or

nonfulfillment of a contractual obligation; while the fault or negligence referred to in article 1902 is the

culpa aquiliana of the civil law, homologous but not identical to tort of the common law, which gives rise

to an obligation independently of any contract. (Cf. Manila R. R. Co. vs. Cia. Trasatlantica, 38 Phil., 875,

887-890; Cangco vs. Manila R. R. Co., 38 Phil., 768.) The fact that the corporation, acting thru Vazquez as

its manager, was guilty of negligence in the fulfillment of the contract, did not make Vazquez principally

or even subsidiarily liable for such negligence. Since it was the corporation's contract, its nonfulfillment,

whether due to negligence or fault or to any other cause, made the corporation and not its agent liable.

3. ID.; ID.; ID. — On the other hand, independently of the contract Vazquez by his fault or

negligence caused damage to the plaintiff, he would be liable to the latter under article 1902 of the Civil

Code. But then the plaintiff's cause of action should be based on culpa aquiliana and not on the contract

alleged in his complaint herein; and Vazquez' liability would be principal and not merely subsidiary, as

the Court of Appeals has erroneously held.

4. ID.; ID.; ID.; NO CAUSE OF ACTION BASED ON "CULPA AQUILIANA" ALLEGED IN COMPLAINT OR

LITIGATED IN TRIAL COURT; NO JURISDICTION OVER THE ISSUE. — No such cause of action was alleged

in the complaint or tried by express or implied consent of the parties by virtue of section 4 of Rule 17.

Hence the trial court had no jurisdiction over the issue and could not adjudicate upon it. (Reyes vs. Diaz,

G. R. No. 48754.) Consequently it was error for the Court of Appeals to remand the case to the trial

court to try and decide such issue.

D E C I S I O N

OZAETA, J p:

This action was commenced in the Court of First Instance of Manila by Francisco de Borja against

Antonio Vazquez and Fernando Busuego to recover from them jointly and severally the total sum of

P4,702.70 upon three alleged causes of action, to wit: First, that in or about the month of January, 1932,

the defendants jointly and severally obligated themselves to sell to the plaintiff 4,000 cavans of palay at

P2.10 per cavan, to be delivered during the month of February, 1932, the said defendants having

subsequently received from the plaintiff in virtue of said agreement the sum of P8,400; that the

defendants delivered to the plaintiff during the months of February, March, and April, 1932, only 2,488

cavans of palay of the value of P5,224.80 and refused to deliver the balance of 1,512 cavans of the value

of P3,175.20 notwithstanding repeated demands. Second, that because of defendants' refusal to deliver

to the plaintiff the said 1,512 cavans of palay within the period above mentioned, the plaintiff suffered

damages in the sum of P1,000. And, third, that on account of the agreement above mentioned the

plaintiff delivered to the defendants 4,000 empty sacks, of which they returned to the plaintiff only

2,490 and refused to deliver to the plaintiff the balance of 1,510 sacks or to pay their value amounting

to P377.50; and that on account of such refusal the plaintiff suffered damages in the sum of P150.

The defendant Antonio Vazquez answered the complaint, denying having entered into the contract

mentioned in the first cause of action in his own individual and personal capacity, either solely or

together with his codefendant Fernando Busuego, and alleging that the agreement for the purchase of

4,000 cavans of palay and the payment of the price of P8,400 were made by the plaintiff with and to the

Natividad-Vazquez Sabani Development Co., Inc., a corporation organized and existing under the laws of

the Philippines, of which the defendant Antonio Vazquez was the acting manager at the time the

transaction took place. By way of counterclaim, the said defendant alleged that he suffered damages in

the sum of P1,000 on account of the filing of this action against him by the plaintiff with full knowledge

that the said defendant had nothing to do whatever with any and all of the transactions mentioned in

the complaint in his own individual and personal capacity.

The trial court rendered judgment ordering the defendant Antonio Vazquez to pay to the plaintiff the

sum of P3,175.20 plus the sum of P377.50, with legal interest on both sums, and absolving the

defendant Fernando Busuego (treasurer of the corporation) from the complaint and the plaintiff from

the defendant Antonio Vazquez' counterclaim. Upon appeal to the Court of Appeals, the latter modified

that judgment by reducing it to the total sum of P3,314.78, with legal interest thereon and the costs. But

by a subsequent resolution upon the defendant's motion for reconsideration, the Court of Appeals set

aside its judgment and ordered that the case be remanded to the court of origin for further proceedings.

The defendant Vazquez, not being agreeable to that result, filed the present petition for certiorari (G.R.

No. 48930) to review and reverse the judgment of the Court of Appeals; and the plaintiff Francisco de

Borja, excepting to the resolution of the Court of Appeals whereby its original judgment was set aside

and the case was ordered remanded to the court of origin for further proceedings, filed a cross-petition

for certiorari (G.R. No. 48931) to maintain the original judgment of the Court of Appeals.

The original decision of the Court of Appeals and its subsequent resolutions on reconsideration read as

follows:

Original Google Translated

"Es hecho no controvertido que el 25 de Febrero de 1932, el demandado-apelante vendio al demandante 4,000 cavanes de palay al precio de P2.10 el cavan, de los cuales, dicho demandante solamente recibio 2,583 cavanes; y que asimismo recibio para su envase 4,000 sacos vacios. Esta probado que de dichos 4,000 sacos vacios solamente se entregaron, 2,583 quedando en poder del demandado el resto, y cuyo valor es el de P0.24 cada uno. Presentada la demanda contra los demandados Antonio Vazquez y Fernando Busuego para el pago de la cantidad de P4,702.70, con sus intereses legales desde el 1.0 de marzo de 1932 hasta su completeo pago y las costas, el Juzgado de Primera Instancia de Manila fallo el asunto condenando a Antonio Vazquez a pagar al demandante la cantidad de P3,175.20, mas la cantidad de P377.50, con sus intereses legales, absolviendo al demandado Fernando Busuego de la demanda y al demandante de la reconvencion de los demandados, sin especial pronunciamiento en cuanto a las costas. De dicha decision apelo el demandado Antonio Vazquez, apuntando como principal error el de que el habia sido condenado personalmente, y no la corporacion por el representada. "Segun la preponderancia de las pruebas, la venta hecha por Antonio Vazquez a favor de Francisco de Borja de los 4,000 cavanes de palay fue en su

"It is undisputed that the February 25, 1932, defendant sold the plaintiff-appellant 4.000 cavans of palay at P2.10 price of the dig, of which the plaintiff only received 2.583 cavans, and also received for 4.000 container empty bags. It is proven that such gaps only 4.000 bags were delivered, 2.583 defendant remained in the hands of the rest, and whose value is to P0.24 each. filed the suit against the defendants Antonio Vazquez and Fernando Busuego for payment of the amount of P4, 702.70 with legal interest from March 1932 1.0 completeo until payment and costs, the Court of First Instance of Manila Case ruling condemning Antonio Vazquez to pay the claimant the amount of P3, 175.20, but the amount of P377.50, with legal interest, acquitting the defendant Fernando Busuego demand and the plaintiff of the counterclaim of the defendants, without special pronouncement as to costs. In that decision the defendant appealed Antonio Vazquez, pointing as the main mistake that the person had been convicted, not by the represented corporation. "According to the preponderance of the evidence, the sale made by Antonio Vazquez in favor of Francisco de Borja of 4.000 cavans of palay was in his capacity as Acting Chairman and Manager of the corporation Sabani Natividad Vazquez Development Co., Inc. So it of Exh. 1, which is the carbon copy of the receipt issued by the defendant

capacidad de Presidente interino y Manager de la corporacion Natividad-Vazquez Sabani Development Co., Inc. Asi resulta del Exh. 1, que es la copia al carbon del recibo otorgado por el demandado Vazquez, y cuyo original lo habia perdido el demandante, segun el. Asi tambien consta en los libros de la corporacion arriba mencionada, puesto que en los mismos se ha asentado tanto la entrada de los P8,400, precio del palay, como su envio al gobierno en pago de los alquileres de la Hacienda Sabani. Asi mismo lo admitio Francisco de Borja al abogado Sr. Jacinto Tomacruz, posterior presidente de la corporacion sucesora en el arrendamiento de la Sabani Estate, cuando el solicito sus buenos oficios para el cobro del precio del palay no entregado. Asi igualmente lo declaro el que hizo entrega de parte del palay a Borja, Felipe Veneracion, cuyo testimonio no ha sido refutado. Y asi se deduce de la misma demanda, cuando se incluyo en ella a Fernando Busuego, tesorero de la Natividad-Vazquez Sabani Development Co., Inc. "Siendo esto asi, la principal responsable debe ser la Natividad- Vazquez Sabani Development Co., Inc., que quedo insolvente y dejo de existir. El Juez sentenciador declaro, sin embargo, al demandado Vazquez responsable del pago de la cantidad reclamada por su negligencia al vender los referidos 4,000 cavanes de palay sin averiguar antes si o no dicha cantidad existia en las bodegas de la corporacion. "Resulta del Exh. 8 que despues de la venta de los 4,000 cavanes de palay a Francisco de Borja, el mismo demandado vendio a Kwong Ah Phoy 1,500 cavanes al precio de P2.00 el cavan, y decimos 'despues' porque esta ultima venta aparece asentada despues de la primera. Segun esto, el apelante no solamente obro con negligencia, sino interviniendo culpa de su parte, por lo que de acuerdo con los arts. 1102, 1103 y 1902 del Codigo Civil, el debe ser responsable subsidiariamente del pago de la cantidad objeto de la demanda. "En meritos de todo lo expuesto, se confirma la decision apelada con la modificacion de que el apelante debe pagar al apelado la suma de P2,975.70 como valor de los 1,417 cavanes de palay que dejo de entregar al demandante, mas la suma de P339.08 como importe de los 1,417 sacos

Vazquez, and it had lost the original of the applicant, he said. So also recorded in the books of the corporation mentioned above, since the same has been established both the entry of the P8, 400, price of rice, as the government sent the payment of the tax holiday Sabani. So he admitted himself to the lawyer Francisco de Borja Mr. Jacinto Tomacruz, then president of the successor corporation Sabani leasing the Estate, when he requested his good offices to collect the price of rice not delivered. So I declare also which he gave from the rice to Borja, Felipe Veneracion, whose testimony was not refuted. And so follows the same demand when it was included Fernando Busuego, treasurer of the Nativity-Vazquez Sabani Development Co., Inc. "This being the main culprit must be the Nativity-Vazquez Sabani Development Co., Inc., which is insolvent and ceased to exist. The sentencing judge stated, however, the defendant Vazquez responsible for paying the amount claimed by negligence in selling such cavans of palay 4.000 without finding out whether or not before this amount existed in the cellars of the corporation. "It's Exh. 8 that after the sale of 4.000 cavans of palay to Francisco de Borja, the same defendant sold to Ah Kwong Phoya 1.500 P2.00 price cavans the dig, and say 'later' because the last sale appears seated after the first. According to this, the appellant not only acted with negligence, but because of his speaking part, so that according to Art. 1102, 1103 and 1902 of the Civil Code, the alternative should be responsible for payment of the quantity of demand. "In all the above merits, confirming the decision appealed to the modification that the appellant must pay the appellee the sum of P2, 975.70 as the value of 1.417 cavans of palay that stopped provide to the complainant, but the amount of P339 .08 1.417 as the amount of empty bags, which I leave to return at the rate of P0.24 jacket, total P3, 314.78 with legal interest from the filing of the claim and the costs of both instances. " "Having the motion for reconsideration of our decision dated October 13, 1942, and alleged therein that when the appellant sold the 1,500 cavans of palay to Phoya Ah, the corporation still had very existence of the grain, and not being said

vacios, que dejo de devolver, a razon de P0.24 el saco, total P3,314.78, con sus intereses legales desde la interposicion de la demanda y las costas de ambas instancias." "Vista la mocion de reconsideracion de nuestra decision de fecha 13 de Octubre de 1942, y alegandose en la misma que cuando el apelante vendio los 1,500 cavanes de palay a Ah Phoy, la corporacion todavia tenia bastante existencia de dicho grano, y no estando dicho extremo suficientemente discutido y probado, y pudiendo variar el resultado del asunto, dejamos sin efecto nuestra citada decision, y ordenamos la devolucion de la causa al Juzgado de origen para que reciba pruebas al efecto y dicte despues la decision correspondiente."

end sufficiently discussed and tested, and can vary the outcome of the case, we cited our decision void and ordered the return of the original case to court to receive evidence to this effect issued after the decision. "

"Upon consideration of the motion of the attorney for the plaintiff-appellee in case CA-G.R. No. 8676,

Francisco de Borja vs. Antonio Vazquez et al., praying, for the reasons therein given, that the resolution

of December 22, 1942, be reconsidered: Considering that said resolution remanding the case to the

lower court is for the benefit of the plaintiff-appellee to afford him opportunity to refute the contention

of the defendant-appellant Antonio Vazquez, motion denied."

The action is on a contract, and the only issue pleaded and tried is whether the plaintiff entered into the

contract with the defendant Antonio Vazquez in his personal capacity or as manager of the Natividad-

Vazquez Sabani Development Co., Inc. The Court of Appeals found that according to the preponderance

of the evidence "the sale made by Antonio Vazquez in favor of Francisco de Borja of 4,000 cavans of

palay was in his capacity as acting president and manager of the corporation Natividad-Vazquez Sabani

Development Co., Inc." That finding of fact is final and, it resolving the only issue involved, should be

determinative of the result.

The Court of Appeals doubly erred in ordering that the cause be remanded to the court of origin for

further trial to determine whether the corporation had sufficient stock of palay at the time appellant

sold 1,500 cavans of palay to Kwong Ah Phoy. First, if that point was material to the issue, it should have

been proven during the trial; and the statement of the court that it had not been sufficiently discussed

and proven was no justification for ordering a new trial, which, by the way, neither party had solicited

but against which, on the contrary, both parties now vehemently protest. Second, the point is, in any

event, beside the issue, and this we shall now discuss in connection with the original judgment of the

Court of Appeals which the plaintiff cross-petitioner seeks to maintain.

The action being on a contract, and it appearing from the preponderance of the evidence that the party

liable on the contract is the Natividad-Vazquez Sabani Development Co., Inc., which is not a party

herein, the complaint should have been dismissed. Counsel for the plaintiff, in his brief as respondent,

argues that altho by the preponderance of the evidence the trial court and the Court of Appeals found

that Vazquez celebrated the contract in his capacity as acting president of the corporation and altho it

was the latter, thru Vazquez, with which the plaintiff had contracted and which, thru Vazquez, had

received the sum of P8,400 from Borja, and altho that was true from the point of view of a legal fiction,

"ello no impide que tambien sea verdad lo alegado en la demanda de que la persona de Vazquez fue la

que contrato con Borja y que la misma persona de Vazquez fue quien recibio la suma de P8,400." But

such argument is invalid and insufficient to show that the president of the corporation is personally

liable on the contract duly and lawfully entered into by him in its behalf.

It is well known that a corporation is an artificial being invested by law with a personality of its own,

separate and distinct from that of its stockholders and from that of its officers who manage and run its

affairs. The mere fact that its personality is owing to a legal fiction and that it necessarily has to act thru

its agents, does not make the latter personally liable on a contract duly entered into, or for an act

lawfully performed, by them for and in its behalf. The legal fiction by which the personality of a

corporation is created is a practical reality and necessity. Without it no corporate entities may exist and

no corporate business may be transacted. Such legal fiction may be disregarded only when an attempt is

made to use it as a cloak to hide an unlawful or fraudulent purpose. No such thing has been alleged or

proven in this case. It has not been alleged nor even intimated that Vazquez personally benefited by the

contract of sale in question and that he is merely invoking the legal fiction to avoid personal liability.

Neither is it contended that he entered into said contract for the corporation in bad faith and with

intent to defraud the plaintiff. We find no legal and factual basis upon which to hold him liable on the

contract either principally or subsidiarily.

The trial court found him guilty of negligence in the performance of the contract and held him

personally liable on that account. On the other hand, the Court of Appeals found that he "no solamente

obro con negligencia, sino interviniendo culpa de su parte, por lo que de acuerdo con los arts. 1102,

1103 y 1902 del Codigo Civil, el debe ser responsable subsidiariamente del pago de la cantidad objeto de

la demanda." We think both the trial court and the Court of Appeals erred in law in so holding. They

have manifestly failed to distinguish a contractual from an extracontractual obligation, or an obligation

arising from contract from an obligation arising from culpa aquiliana. The fault and negligence referred

to in articles 1101-1104 of the Civil Code are those incidental to the fulfillment or nonfulfillment of a

contractual obligation; while the fault or negligence referred to in article 1902 is the culpa aquiliana of

the civil law, homologous but not identical to tort of the common law, which gives rise to an obligation

independently of any contract. (Cf. Manila R. R. Co. vs. Cia. Trasatlantica, 38 Phil., 875, 887-890; Cangco

vs. Manila R. R. Co., 38 Phil., 768.) The fact that the corporation, acting thru Vazquez as its manager, was

guilty of negligence in the fulfillment of the contract, did not make Vazquez principally or even

subsidiarily liable for such negligence. Since it was the corporation's contract, its nonfulfillment, whether

due to negligence or fault or to any other cause, made the corporation and not its agent liable.

On the other hand, if independently of the contract Vazquez by his fault or negligence caused damage to

the plaintiff, he would be liable to the latter under article 1902 of the Civil Code. But then the plaintiff's

cause of action should be based on culpa aquiliana and not on the contract alleged in his complaint

herein; and Vazquez' liability would be principal and not merely subsidiary, as the Court of Appeals has

erroneously held. No such cause of action was alleged in the complaint or tried by express or implied

consent of the parties by virtue of section 4 of Rule 17. Hence the trial court had no jurisdiction over the

issue and could not adjudicate upon it. (Reyes vs. Diaz, G. R. No. 48754.) Consequently it was error for

the Court of Appeals to remand the case to the trial court to try and decide such issue.

It only remains for us to consider petitioner's second assignment of error referring to the lower courts'

refusal to entertain his counterclaim for damages against the respondent Borja arising from the bringing

of this action. The lower courts having sustained plaintiff's action, they naturally could not have

entertained defendant's counterclaim for damages on account of the bringing of the action. The finding

of the Court of Appeals that according to the preponderance of the evidence the defendant Vazquez

celebrated the contract not in his personal capacity but as acting president and manager of the

corporation, does not warrant his contention that the suit against him is malicious and tortious; and

since we have to decide defendant's counterclaim upon the facts found by the Court of Appeals, we find

no sufficient basis upon which to sustain said counterclaim. Indeed, we feel that as a matter of moral

justice we ought to state here that the indignant attitude adopted by the defendant towards the

plaintiff for having brought this action against him is in our estimation not wholly right. Altho from the

legal point of view he was not personally liable for the fulfillment of the contract entered into by him on

behalf of the corporation of which he was the acting president and manager, we think it was his moral

duty towards the party with whom he contracted in said capacity to see to it that the corporation

represented by him fulfilled the contract by delivering the palay it had sold, the price of which it had

already received. Recreant to such duty as a moral person, he has no legitimate cause for indignation.

We feel that under the circumstances he not only has no cause of action against the plaintiff for

damages but is not even entitled to costs.

The judgment of the Court of Appeals is reversed, and the complaint is hereby dismissed, without any

finding as to costs.

Yulo, C.J., Moran, Horrilleno, and Bocobo, JJ., concur.

Separate Opinions

PARAS, J., dissenting:

Upon the facts of this case as expressly or impliedly admitted in the majority opinion, the plaintiff is

entitled to a judgment against the defendant. The latter, as acting president and manager of Natividad-

Vazquez Sabani Development Co., Inc., and with full knowledge of the then insolvent status of his

company, agreed to sell to the plaintiff 4,000 cavans of palay. Notwithstanding the receipt from the

plaintiff of the full purchase price, the defendant delivered only 2,488 cavans and failed and refused to

deliver the remaining 1,512 cavans and a quantity of empty sacks, or their value. Such failure resulted,

according to the Court of First Instance of Manila and the Court of Appeals, from his fault or negligence.

It is true that the cause of action made out by the complaint is technically based on a contract between

the plaintiff and Natividad- Vazquez Sabani Development Co., Inc., which is not a party to this case.

Nevertheless, inasmuch as it was proven at the trial that the defendant was guilty of fault in that he

prevented the performance of the plaintiff's contract and also of negligence bordering on fraud which

caused damage to the plaintiff, the error of procedure should not be a hindrance to the rendition of a

decision in accordance with the evidence actually introduced by the parties, especially when in such a

situation we may order the necessary amendment of the pleadings, or even consider them

correspondingly amended.

As already stated, the corporation of which the defendant was acting president and manager was, at the

time he made the sale to the plaintiff, known to him to be insolvent. As a matter of fact, said

corporation was soon thereafter dissolved. There is admitted damage on the part of the plaintiff, proven

to have been inflicted by reason of the fault or negligence of the defendant. In the interest of simple

justice and to avoid multiplicity of suits I am therefore impelled to consider the present action as one

based on fault or negligence and to sentence the defendant accordingly. Otherwise, he would be

allowed to profit by his own wrong under the protective cover of the corporate existence of the

company he represented. It cannot be pretended that any advantage under the sale inured to the

benefit of Natividad-Vazquez Sabani Development Co., Inc., and not of the defendant personally, since

the latter undoubtedly owned a considerable part of its capital.

Republic of the Philippines

SUPREME COURT

Manila

FIRST DIVISION

G.R. No. 77648 August 7, 1989

CETUS DEVELOPMENT, INC., petitioner,

vs.

COURT OF APPEALS and ONG TENG, respondents.

G.R. No. 77647 August 7, 1989


vs.

COURT OF APPEALS and EDERLINA NAVALTA, respondents.

G.R. No. 77649 August 7, 1989


vs.

COURT OF APPEALS and JOSE LIWANAG, respondents.

G.R. No. 77650 August 7, 1989


vs.

COURT OF APPEALS and LEANDRO CANLAS, respondents.

G.R. No. 77651 August 7, 1989


vs.

COURT OF APPEALS and VICTORIA SUDARIO respondents.

G.R. No.77652 August 7, 1989


vs.

COURT OF APPEALS and FLORA NAGBUYA respondents.

MEDIALDEA, J.:

This is a petition for review on certiorari of the decision dated January 30, 1987 of the Court of Appeals

in CA-GR Nos. SP-07945-50 entitled, "Cetus Development, Inc., Petitioner vs. Hon. Conrado T. Limcaoco,

Presiding Judge, Regional Trial Court of Manila, Branch Ederlina Navalta, et. al., respondents.

The following facts appear in the records:

The private respondents, Ederlina Navalta, Ong Teng, Jose Liwanag, Leandro Canlas, Victoria Sudario,

and Flora Nagbuya were the lessees of the premises located at No. 512 Quezon Boulevard, Quiapo,

Manila, originally owned by the Susana Realty. These individual verbal leases were on a month-to month

basis at the following rates: Ederlina Navalta at the rate of P80.50; Ong Teng at the rate of P96.10; Jose

Liwanag at the rate of P40.35; Leandro Canlas at the rate of P80.55; Victoria Sudario at the rate of

P50.45 and Flora Nagbuya at the rate of P80.55. The payments of the rentals were paid by the lessees to

a collector of the Susana Realty who went to the premises monthly.

Sometime in March, 1984, the Susana Realty sold the leased premises to the petitioner, Cetus

Development, Inc., a corporation duly organized and existing under the laws of the Philippines. From

April to June, 1984, the private respondents continued to pay their monthly rentals to a collector sent by

the petitioner. In the succeeding months of July, August and September 1984, the respondents failed to

pay their monthly individual rentals as no collector came.

On October 9, 1984, the petitioner sent a letter to each of the private respondents demanding that they

vacate the subject premises and to pay the back rentals for the months of July, August and September,

1984, within fifteen (15) days from the receipt thereof. Immediately upon the receipt of the said

demand letters on October 10, 1984, the private respondents paid their respective arrearages in rent

which were accepted by the petitioner subject to the unilateral condition that the acceptance was

without prejudice to the filing of an ejectment suit. Subsequent monthly rental payments were likewise

accepted by the petitioner under the same condition.

For failure of the private respondents to vacate the premises as demanded in the letter dated October 9,

1984, the petitioner filed with the Metropolitan Trial Court of Manila complaints for ejectment against

the manner, as follows: (1) 105972-CV, against Ederlina Navalta (2) 105973-CV, against Jose Liwanag; (3)

105974-CV, against Flora Nagbuya; (4) 105975-CV, against Leandro Canlas; (5) 105976-CV, against

Victoria Sudario and (6) 105977-CV, against Ong Teng.

In their respective answers, the six (6) private respondents interposed a common defense. They claimed

that since the occupancy of the premises they paid their monthly rental regularly through a collector of

the lessor; that their non-payment of the rentals for the months of July, August and September, 1984,

was due to the failure of the petitioner (as the new owner) to send its collector; that they were at a loss

as to where they should pay their rentals; that sometime later, one of the respondents called the office

of the petitioner to inquire as to where they would make such payments and he was told that a collector

would be sent to receive the same; that no collector was ever sent by the petitioner; and that instead

they received a uniform demand letter dated October 9, 1984.

The private respondents, thru counsel, later filed a motion for consolidation of the six cases and as a

result thereof, the said cases were consolidated in the Metropolitan Trial Court of Manila, Branch XII,

presided over by Judge Eduardo S. Quintos, Jr. On June 4, 1985, the trial court rendered its decision

dismissing the six cases, a pertinent portion of which reads, as follows:

The records of this case show that at the time of the filing of this complaint, the rentals had all been

paid. Hence, the plaintiff cannot eject the defendants from the leased premises, because at the time

these cases were instituted, there are no rentals in arrears.

The acceptance of the back rental by the plaintiff before the filing of the complaint, as in these case, the

alleged rental arrearages were paid immediately after receipt of the demand letter, removes its cause of

action in an unlawful detainer case, even if the acceptance was without prejudice.

x x x.

Furthermore, the court has observed that the account involved which constitutes the rentals of the

tenants are relatively small to which the ejectment may not lie on grounds of equity and for

humanitarian reasons.

Defendants' counterclaim for litigation expenses has no legal and factual basis for assessing the same

against plaintiff.

WHEREFORE, judgment is hereby rendered dismissing these cases, without pronouncement as to costs.

Defendants' counterclaim is likewise dismissed.

SO ORDERED. (pp. 32-33, Rollo, G.R. No. 77647)

Not satisfied with the decision of the Metropolitan Trial Court, the petitioner appealed to the Regional

Trial Court of Manila and the same was assigned to Branch IX thereof presided over by Judge Conrado T.

Limcaoco (now Associate Justice of the Court of Appeals).lâwphî1.ñèt In its decision dated November 19,

1985, the Regional Trial Court dismissed the appeal for lack of merit.

In due time, a petition for review of the decision of the Regional Trial Court was filed by the petitioner

with the Court of Appeals. Said petition was dismissed on January 30, 1987, for lack of merit.

Aggrieved by the decision of the Court of Appeals, petitioner now comes to Us in this petition, assigning

the following errors:

ASSIGNMENT OF ERRORS

I

RESPONDENT COURT OF APPEALS COMMITTED A GRAVE ABUSE OF DISCRETION, AMOUNTING TO LACK

OF JURISDICTION, WHEN IT ERRED IN HOLDING THAT THE CAUSE OF ACTION FOR UNLAWFUL DETAINER

IN THESE CASES DID NOT EXIST WHEN THE COMPLAINTS WERE FILED BECAUSE PRIVATE RESPONDENTS

TENDERED, AND PETITIONER ACCEPTED, THE PAYMENT OF THE THREE (3) MONTHS RENTAL IN ARREARS

WITHIN THE FIFTEEN (15) DAY PERIOD FROM PRIVATE RESPONDENTS' RECEIPT OF PETITIONER'S

DEMAND LETTERS TO VACATE THE SUBJECT PREMISES AND TO PAY THE RENTALS IN ARREARS.

II

RESPONDENT COURT OF APPEALS COMMITTED A GRAVEABUSE OF DISCRETION, AMOUNTING TO LACK

OF JURISDICTION COMMITTED A GRAVE WHEN IT ERRED IN AFFIRMING THE DISMISSAL OF THE

COMPLAINTS IN THESE CASES NOTWITHSTANDING THE EXISTENCE OF VALID GROUNDS FOR THE

JUDICIAL EJECTMENT OF PRIVATE RESPONDENT.

III

RESPONDENT COURT OF APPEALS COMMITTED A GRAVE ABUSE OF DISCRETION, AMOUNTING TO LACK

OF JURISDICTION, WHEN IT ERRED IN HOLDING THAT THESE CASES ARE CLASSIC EXAMPLES TO

CIRCUMVENT THE RENT CONTROL LAW. (pp. 164-165, Rollo, G.R. No. 77647)

The Court of Appeals defined the basic issue in this case as follows: whether or not there exists a cause

of action when the complaints for unlawful detainer were filed considering the fact that upon demand

by petitioner from private respondents for payment of their back rentals, the latter immediately

tendered payment which was accepted by petitioner.

In holding that there was no cause of action, the respondent Court relied on Section 2, Rule 70 of the

Rules of Court, which provides:

Sec. 2. Landlord to proceed against tenant only after demand. — No landlord or his legal representative

or assign, shall be such action against a tenant for failure to pay rent due or to comply with the

conditions of his lease, unless the tenant shall have failed to pay such rent or comply with such

conditions for a period of fifteen (15) days or five (5) days in case of building, after demand therefor,

made upon qqqm personally, or by serving written notice of such demand upon the person found on the

premises, or by posting such notice on the premises if no persons be found thereon.

It interpreted the said provision as follows:

.....the right to bring an action of ejectment or unlawful detainer must be counted from the time the

defendants failed to pay rent after the demand therefor. It is not the failure per se to pay rent as agreed

in the contract, but the failure to pay the rent after a demand therefor is made, that entitles the lessor

to bring an action for unlawful detainer. In other words, the demand contemplated by the above-quoted

provision is not a demand to vacate, but a demand made by the landlord upon his tenant for the latter

to pay the rent due if the tenant fails to comply with the said demand with the period provided, his

possession becomes unlawful and the landlord may then bring the action for ejectment. (p. 28, , G.R.

No. 77647)

We hold that the demand required and contemplated in Section 2, aforequoted, is a jurisdictional

requirement for the purpose of bringing an unlawful detainer suit for failure to pay rent or comply with

the conditions of lease. It partakes of an extrajudicial remedy that must be pursued before resorting for

judicial action so much so that when there is full compliance with the demand, there arises no necessity

for court action.

As to whether this demand is merely a demand to pay rent or comply with the conditions of the lease or

also a demand to vacate, the answer can be gleaned from said Section 2. This section presupposes the

existence of a cause of action for unlawful detainer as it speaks of "failure to pay rent due or comply

with the conditions of the lease." The existence of said cause of action gives the lessor the right under

Article 1659 of the New Civil Code to ask for the rescission of the contract of lease and indemnification

for damages, or only the latter, allowing the contract to remain in force. Accordingly, if the option

chosen is for specific performance, then the demand referred to is obviously to pay rent or to comply

with the conditions of the lease violated. However, if rescission is the option chosen, the demand must

be for the lessee to pay rents or to comply with the conditions of the lease and to vacate. Accordingly,

the rule that has been followed in our jurisprudence where rescission is clearly the option taken, is that

both demands to pay rent and to vacate are necessary to make a lessee a deforciant in order that an

ejectment suit may be filed (Casilan et al. vs. Tomassi, L-16574, February 28,1964, 10 SCRA 261; Rickards

vs. Gonzales, 109 Phil. 423, Dikit vs. Icasiano, 89 Phil. 44).lâwphî1.ñèt

Thus, for the purpose of bringing an ejectment suit, two requisites must concur, namely: (1) there must

be failure to pay rent or comply with the conditions of the lease and (2) there must be demand both to

pay or to comply and vacate within the periods specified in Section 2, Rule 70, namely 15 days in case of

lands and 5 days in case of buildings. The first requisite refers to the existence of the cause of action for

unlawful detainer while the second refers to the jurisdictional requirement of demand in order that said

cause of action may be pursued.

It is very clear that in the case at bar, no cause of action for ejectment has accrued. There was no failure

yet on the part of private respondents to pay rents for three consecutive months. As the terms of the

individual verbal leases which were on a month-to-month basis were not alleged and proved, the

general rule on necessity of demand applies, to wit: there is default in the fulfillment of an obligation

when the creditor demands payment at the maturity of the obligation or at anytime thereafter. This is

explicit in Article 1169, New Civil Code which provides that "(t)hose obliged to deliver or to do

something incur in delay from the time the obligee judicially or extrajudicially demands from them the

fulfillment of their obligation." Petitioner has not shown that its case falls on any of the following

exceptions where demand is not required: (a) when the obligation or the law so declares; (b) when from

the nature and circumstances of the obligation it can be inferred that time is of the essence of the

contract; and (c) when demand would be useless, as when the obligor has rendered it beyond his power

to perform.

The demand required in Article 1169 of the Civil Code may be in any form, provided that it can be

proved. The proof of this demand lies upon the creditor. Without such demand, oral or written, the

effects of default do not arise. This demand is different from the demand required under Section 2, Rule

70, which is merely a jurisdictional requirement before an existing cause of action may be pursued.

The facts on record fail to show proof that petitioner demanded the payment of the rentals when the

obligation matured. Coupled with the fact that no collector was sent as previously done in the past, the

private respondents cannot be held guilty of mora solvendi or delay in the payment of rentals. Thus,

when petitioner first demanded the payment of the 3-month arrearages and private respondents lost no

time in making tender and payment, which petitioner accepted, no cause of action for ejectment

accrued. Hence, its demand to vacate was premature as it was an exercise of a non-existing right to

rescind.

In contradistinction, where the right of rescission exists, payment of the arrearages in rental after the

demand to pay and to vacate under Section 2, Rule 70 does not extinguish the cause of action for

ejectment as the lessor is not only entitled to recover the unpaid rents but also to eject the lessee.

Petitioner correctly argues that acceptance of tendered payment does not constitute a waiver of the

cause of action for ejectment especially when accepted with the written condition that it was "without

prejudice to the filing of an ejectment suit". Indeed, it is illogical or ridiculous not to accept the tender of

payment of rentals merely to preserve the right to file an action for unlawful detainer. However, this line

of argument presupposes that a cause of action for ejectment has already accrued, which is not true in

the instant case.

Petitioner likewise claims that its failure to send a collector to collect the rentals cannot be considered a

valid defense for the reason that sending a collector is not one of the obligations of the lessor under

Article 1654. While it is true that a lessor is not obligated to send a collector, it has been duly established

that it has been customary for private respondents to pay the rentals through a collector. Besides Article

1257, New Civil Code provides that where no agreement has been designated for the payment of the

rentals, the place of payment is at the domicile of the defendants. Hence, it could not be said that they

were in default in the payment of their rentals as the delay in paying the same was not imputable to

them. Rather, it was attributable to petitioner's omission or neglect to collect.

Petitioner also argues that neither is its refused to accept the rentals a defense for non-payment as

Article 1256 provides that "[i]f the creditor to whom the 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 due." It bears emphasis that in this case there was no unjustified refusal on the part of

petitioner or non-acceptance without reason that would constitute mora accipiendi and warrant

consignation. There was simply lack of demand for payment of the rentals.

In sum, We hold that respondent Court of Appeals did not commit grave abuse of discretion amounting

to lack of jurisdiction in its conclusion affirming the trial court's decision dismissing petitioner's

complaint for lack of cause of action. We do not agree, however, with the reasons relied upon.

ACCORDINGLY, the petition for review on certiorari is hereby DENIED for lack of merit and the decision

dated January 30, 1987 of respondent Court of Appeals is hereby AFFIRMED.

SO ORDERED.

Narvasa, Cruz, Gancayco and Griño-Aquino JJ., concur.


SUPREME COURT

Manila

SECOND DIVISION

G.R. No. 108129 September 23, 1999

AEROSPACE CHEMICAL INDUSTRIES, INC., petitioner,

vs.

COURT OF APPEALS, PHILIPPINE PHOSPHATE FERTILIZER, CORP., respondents.

QUISUMBING, J.:

This petition for review assails the Decision 1 dated August 19, 1992, of the Court of Appeals, which set

aside the judgment of the Regional Trial Court of Pasig, Branch 151. The case stemmed from a complaint

filed by the buyer (herein petitioner) against the seller (private respondent) for alleged breach of

contract. Although petitioner prevailed in the trial court, the appellate court reversed and instead found

petitioner guilty of delay and therefore liable for damages, as follows:

WHEREFORE, the Decision of the court a quo is SET ASIDE and a new one rendered, dismissing the

complaint with costs against the plaintiff (herein petitioner) and, on the counterclaim, ordering the

plaintiff Aerospace Chemical Industries, Inc. to pay the defendant, Philippine Phosphate Fertilizer

Corporation the sum of P324,516.63 representing the balance of the maintenance cost and tank rental

charges incurred by the defendant for the failure of the plaintiff to haul the rest of the rest of the

sulfuric acid on the designated date.

Costs against plaintiff-appellee. 2

As gleaned from the records, the following are the antecedents:

On June 27, 1986, petitioner Aerospace Industries, Inc. (Aerospace) purchased five hundred (500) metric

tons of sulfuric acid from private respondent Philippine Phosphate Fertilizer Corporation (Philphos). The

contract 3 was in letter-form as follows:

27 June 1986

AEROSPACE INDUSTRIES INC.

203 E. Fernandez St.

San Juan, Metro Manila

Attention: Mr. Melecio Hernandez

Manager

Subject : Sulfuric Acid Shipment

Gentlemen:

This is to confirm our agreement to supply your Sulfuric Acid requirement under the following terms and

conditions:

A. Commodity : Sulfuric Acid in Bulk

B. Concentration : 98-99% H2SO4

C. Quantity : 500 MT-100 MT Ex-Basay

400 MT Ex-Sangi

D. Price : US$ 50.00/MT-FOB Cotcot,

Basay, Negros Or.

US$ 54.00/MT-FOB Sangi, Cebu

E. Payment : Cash in Philippine currency

payable to Philippine Phosphate

Fertilizer Corp. (MAKATI) at

PCIB selling rate at the time of

payment at least five (5) days prior

to shipment date.

F. Shipping Conditions

1. Laycan : July

2. Load port : Cotcot, Basay, Negros Or. and

Atlas Pier, Sangi, Cebu

xxx xxx xxx

11. Other terms and Conditions: To be mutually agreed upon.

Very truly yours,

Philippine Phosphate Fertilizer Corp.

Signed: Herman J. Rustia

Sr. Manager, Materials & Logistics

CONFORME:

AEROSPACE INDUSTRIES, INC.

Signed: Mr. Melecio Hernandez

Manager

Initially set beginning July 1986, the agreement provided that the buyer shall pay its purchases in

equivalent Philippine currency value, five days prior to the shipment date. Petitioner as buyer

committed to secure the means of transport to pick-up the purchases from private respondent's

loadports. Per agreement, one hundred metric tons (100 MT) of sulfuric acid should be taken from

Basay, Negros Oriental storage tank, while the remaining four hundred metric tons (400 MT) should be

retrieved from Sangi, Cebu.

On August 6, 1986, private respondent sent an advisory letter 4 to petitioner to withdraw the sulfuric

acid purchased at Basay because private respondent had been incurring incremental expense of two

thousand (P2,000.00) pesos for each day of delay in shipment.

On October 3, 1986, petitioner paid five hundred fifty-three thousand, two hundred eighty

(P553,280.00) pesos for 500 MT of sulfuric acid.

On November 19, 1986, petitioner chartered M/T Sultan Kayumanggi, owned by Ace Bulk Head Services.

The vessel was assigned to carry the agreed volumes of freight from designated loading areas. M/T

Kayumanggi withdrew only 70.009 MT of sulfuric acid from Basay because said vessel heavily tilted on

its port side. Consequently, the master of the ship stopped further loading. Thereafter, the vessel

underwent repairs.

In a demand letter 5 dated December 12, 1986, private respondent asked petitioner to retrieve the

remaining sulfuric acid in Basay tanks so that said tanks could be emptied on or before December 15,

1986. Private respondent said that it would charge petitioner the storage and consequential costs for

the Basay tanks, including all other incremental expenses due to loading delay, if petitioner failed to

comply.

On December 18, 1986, M/T Sultan Kayumanggi docked at Sangi, Cebu, but withdrew only 157.51 MT of

sulfuric acid. Again, the vessel tilted. Further loading was aborted. Two survey reports conducted by the

Societe Generale de Surveillance (SGS) Far East Limited, dated December 17, 1986 and January 2, 1987,

attested to these occurrences.

Later, on a date not specified in the record, M/T Sultan Kayumanggi sank with a total of 227.51 MT of

sulfuric acid on board.1âwphi1.nêt

Petitioner chartered another vessel, M/T Don Victor, with a capacity of approximately 500 MT. 6 On

January 26 and March 20, 1987, Melecio Hernandez, acting for the petitioner, addressed letters to

private respondent, concerning additional orders of sulfuric acid to replace its sunken purchases, which

letters are hereunder excerpted:

January 26, 1987

xxx xxx xxx

We recently charter another vessel M/T DON VICTOR who will be authorized by us to lift the balance

approximately 272.49 MT.

We request your goodselves to grant us for another Purchase Order with quantity of 227.51 MT and we

are willing to pay the additional order at the prevailing market price, provided the lifting of the total 500

MT be centered/confined to only one safe berth which is Atlas Pier, Sangi, Cebu. 7

March 20, 1987

This refers to the remaining balance of the above product quantity which were not loaded to the

authorized cargo vessel, M/T Sultan Kayumanggi at your load port — Sangi, Toledo City.

Please be advised that we will be getting the above product quantity within the month of April 1987 and

we are arranging for a 500 MT Sulfuric Acid inclusive of which the remaining balance: 272.49 MT an

additional product quantity thereof of 227.51 MT. 8

Petitioner's letter 9 dated May 15, 1987, reiterated the same request to private respondent.

On January 25, 1988, petitioner's counsel, Atty. Pedro T. Santos, Jr., sent a demand letter 10 to private

respondent for the delivery of the 272.49 MT of sulfuric acid paid by his client, or the return of the

purchase price of three hundred seven thousand five hundred thirty (P307,530.00) pesos. Private

respondent in reply, 11 on March 8, 1988, instructed petitioner to lift the remaining 30 MT of sulfuric

acid from Basay, or pay maintenance and storage expenses commencing August 1, 1986.

On July 6, 1988, petitioner wrote another letter, insisting on picking up its purchases consisting of

272.49 MT and an additional of 227.51 MT of sulfuric acid. According to petitioner it had paid the

chartered vessel for the full capacity of 500 MT, stating that:

With regard to our balance of sulfuric acid — product at your shore tank/plant for 272.49 metric ton

that was left by M/T Sultana Kayumanggi due to her sinking, we request for an additional quantity of

227.51 metric ton of sulfuric acid, 98% concentration.

The additional quantity is requested in order to complete the shipment, as the chartered vessel

schedule to lift the high grade sulfuric acid product is contracted for her full capacity/load which is 500

metric tons more or less.

We are willing to pay the additional quantity — 227.51 metric tons high grade sulfuric acid in the

prevailing price of the said product. 12

xxx xxx xxx

By telephone, petitioner requested private respondent's Shipping Manager, Gil Belen, to get its

additional order of 227.51 MT of sulfuric acid at Isabel, Leyte. 13 Belen relayed the information to his

associate, Herman Rustia, the Senior Manager for Imports and International Sales of private respondent.

In a letter dated July 22, 1988, Rustia replied:

Subject: Sulfuric Acid Ex-Isabel

Gentlemen:

Confirming earlier telcon with our Mr. G.B. Belen, we regret to inform you that we cannot accommodate

your request to lift Sulfuric Acid ex-Isabel due to Pyrite limitation and delayed arrival of imported

Sulfuric Acid from Japan. 14

On July 25, 1988, petitioner's counsel wrote to private respondent another demand letter for the

delivery of the purchases remaining, or suffer tedious legal action his client would commence.

On May 4, 1989, petitioner filed a complaint for specific performance and/or damages before the

Regional Trial Court of Pasig, Branch 151. Private respondent filed its answer with counterclaim, stating

that it was the petitioner who was remiss in the performance of its obligation in arranging the shipping

requirements of its purchases and, as a consequence, should pay damages as computed below:

Advanced Payment by Aerospace (Oct. 3, 1986) P553,280.00

Less Shipments

70.009 MT sulfuric acid P72,830.36

151.51 MT sulfuric acid 176,966.27 (249,796.63)

—————— ——————

Balance P303,483.37

Less Charges

Basay Maintenance Expense

from Aug. 15 to Dec. 15, 1986

(P2,000.00/day x 122 days) P244,000.00

Sangi — Tank Rental

from Aug. 15, 1986 to Aug. 15, 1987

(P32,000.00/mo. x 12 mos.) 384,000.00 (628,000.00)

—————— ——————

Receivable/Counterclaim (P324,516.63)

===========

Trial ensued and after due proceedings, judgment was rendered by the trial court in petitioner's favor,

disposing as follows:

WHEREFORE, judgment is hereby rendered in favor of plaintiff and against defendant, directing the

latter to pay the former the following sums:

1. P306,060.77 — representing the value of the undelivered 272.49 metric tons of sulfuric acid plaintiff

paid to defendant;

2. P91,818.23 — representing unrealized profits, both items with 12% interest per annum from May 4,

1989, when the complaint was filed until fully paid;

3. P30,000.00 — as exemplary damages; and

4. P30,000.00 — as attorney's fees and litigation expenses, both last items also with 12% interest per

annum from date hereof until fully paid.

Defendant's counterclaims are hereby dismissed for lack of merit.

Costs against defendant. 15

In finding for the petitioner, the trial court held that the petitioner was absolved in its obligation to pick-

up the remaining sulfuric acid because its failure was due to force majeure. According to the trial court,

it was private respondent who committed a breach of contract when it failed to accommodate the

additional order of the petitioner, to replace those that sank in the sea, thus:

To begin with, even if we assume that it is incumbent upon the plaintiff to "lift" the sulfuric acid it

ordered from defendant, the fact that force majeure intervened when the vessel which was previouly

(sic) listing, but which the parties, including a representative of the defendant, did not mind, sunk, has

the effect of absolving plaintiff from "lifting" the sulfuric acid at the designated load port. But even

assuming the plaintiff cannot be held entirely blameless, the allegation that plaintiff agreed to a

payment of a 2,000-peso incremental expenses per day to defendant for delayed "lifting has not been

proven." . . .

Also, if it were true that plaintiff is indebted to defendant, why did defendant accept a second additional

order after the transaction in litigation? Why also, did defendant not send plaintiff statements of

account until after 3 years?

All these convince the Court that indeed, defendant must return what plaintiff has paid it for the goods

which the latter did not actually receive. 16

On appeal by private respondent, the Court of Appeals reversed the decision of the trial court, as

follows:

Based on the facts of this case as hereinabove set forth, it is clear that the plaintiff had the obligation to

withdraw the full amount of 500 MT of sulfuric acid from the defendant's loadport at Basay and Sangi on

or before August 15, 1986. As early as August 6, 1986 it had been accordingly warned by the defendant

that any delay in the hauling of the commodity would mean expenses on the part of the defendant

amounting to P2,000.00 a day. The plaintiff sent its vessel, the "M/T Sultan Kayumanggi", only on

November 19, 1987. The vessel, however; was not capable of loading the entire 500 MT and in fact, with

its load of only 227.519 MT, it sank.

Contrary to the position of the trial court, the sinking of the "M/T Sultan Kayumanggi" did not absolve

the plaintiff from its obligation to lift the rest of the 272.481 MT of sulfuric acid at the agreed time. It

was the plaintiff's duty to charter another vessel for the purpose. It did contract for the services of a

new vessel, the "M/T Don Victor", but did not want to lift the balance of 272.481 MT only but insisted

that its additional order of 227.51 MT be also given by the defendant to complete 500 MT. apparently so

that the vessel may be availed of in its full capacity.

xxx xxx xxx

We find no basis for the decision of the trial court to make the defendant liable to the plaintiff not only

for the cost of the sulfuric acid, which the plaintiff itself failed to haul, but also for unrealized profits as

well as exemplary damages and attorney's fees. 17

Respondent Court of Appeals found the petitioner guilty of delay and negligence in the performance of

its obligation. It dismissed the complaint of petitioner and ordered it to pay damages representing the

counterclaim of private respondent.

The motion for reconsideration filed by petitioner was denied by respondent court in its Resolution

dated December 21, 1992, for lack of merit.

Petitioner now comes before us, assigning the following errors:

I.

RESPONDENT COURT OF APPEALS ERRED IN NOT HOLDING PRIVATE RESPONDENT TO HAVE

COMMITTED A BREACH OF CONTRACT WHEN IT IS NOT DISPUTED THAT PETITIONER PAID IN FULL THE

VALUE OF 500 MT OF SULFURIC ACID TO PRIVATE RESPONDENT BUT THE LATTER WAS ABLE TO DELIVER

TO PETITIONER ONLY 227.51 M.T.

II.

RESPONDENT COURT OF APPEALS GRAVELY ERRED IN HOLDING PETITIONER LIABLE FOR DAMAGES TO

PRIVATE RESPONDENT ON THE BASIS OF A XEROX COPY OF AN ALLEGED AGREEMENT TO HOLD

PETITIONER LIABLE FOR DAMAGES FOR THE DELAY WHEN PRIVATE RESPONDENT FAILED TO PRODUCE

THE ORIGINAL IN CONTRAVENTION OF THE RULES ON EVIDENCE.

III.

RESPONDENT COURT OF APPEALS ERRED IN FAILING TO CONSIDER THE UNDISPUTED FACTS THAT

PETITIONER'S PAYMENT FOR THE GOODS WAS RECEIVED BY PRIVATE RESPONDENT WITHOUT ANY

QUALIFICATION AND THAT PRIVATE RESPONDENT ENTERED INTO ANOTHER CONTRACT TO SUPPLY

PETITIONER 227.519 MT OF SULFURIC ACID IN ADDITION TO THE UNDELIVERED BALANCE AS PROOF

THAT ANY DELAY OF PETITIONER WAS DEEMED WAIVED BY SAID ACTS OF RESPONDENT.

IV.

RESPONDENT COURT OF APPEALS ERRED IN NOT CONSIDERING THE LAW THAT WHEN THE SALE

INVOLVES FUNGIBLE GOODS AS IN THIS CASE THE EXPENSES FOR STORAGE AND MAINTENANCE ARE

FOR THE ACCOUNT OF THE SELLER (ARTICLE 1504 CIVIL CODE).

V.

RESPONDENT COURT OF APPEALS ERRED IN FAILING TO RENDER JUDGMENT FOR PETITIONER

AFFIRMING THE DECISION OF THE TRIAL COURT.

From the assigned errors, we synthesize the pertinent issues raised by the petitioner as follows:

1. Did the respondent court err in holding that the petitioner committed breach of contract, considering

that:

a) the petitioner allegedly paid the full value of its purchases, yet received only a portion of said

purchases?

b) petitioner and private respondent allegedly had also agreed for the purchase and supply of an

additional 227.519 MT of sulfuric acid, hence prior delay, if any, had been waived?

2. Did the respondent court err in awarding damages to private respondent?

3. Should expenses for the storage and preservation of the purchased fungible goods, namely sulfuric

acid, be on seller's account pursuant to Article 1504 of the Civil Code?

To resolve these issues, petitioner urges us to review factual findings of respondent court and its

conclusion that the petitioner was guilty of delay in the performance of its obligation. According to

petitioner, that conclusion is contrary to the factual evidence. It adds that respondent court disregarded

the rule that findings of the trial court are given weight, with the highest degree of respect. Claiming

that respondent court's findings conflict with those of the trial court, petitioner prays that the trial

court's findings be upheld over those of the appellate court.

Petitioner argues that it paid the purchase price of sulfuric acid, five (5) days prior to the withdrawal

thereof, or on October 3, 1986, hence, it had complied with the primary condition set in the sales

contract. Petitioner claims its failure to pick-up the remaining purchases on time was due to a storm, a

force majeure, which sank the vessel. It thus claims exemption from liability to pay damages. Petitioner

also contends that it was actually the private respondent's shipping officer, who advised petitioner to

buy the additional 227.51 MT of sulfuric acid, so as to fully utilize the capacity of the vessel it chartered.

Petitioner insists that when its ship was ready to pick-up the remaining balance of 272.49 MT of sulfuric

acid, private respondent could not comply with the contract commitment due to "pyrite limitation."

While we agree with petitioner that when the findings of the Court of Appeals are contrary to those of

the trial court, 18 this Court may review those findings, we find the appellate court's conclusion that

petitioner violated the subject contract amply supported by preponderant evidence. Petitioner's claim

was predicated merely on the allegations of its employee, Melecio Hernandez, that the storm or force

majeure caused the petitioner's delay and failure to lift the cargo of sulfuric acid at the designated

loadports. In contrast, the appellate court discounted Hernandez' assertions. For on record, the storm

was not the proximate cause of petitioner's failure to transport its purchases on time. The survey report

submitted by a third party surveyor, SGS Far East Limited, revealed that the vessel, which was unstable,

was incapable of carrying the full load of sulfuric acid. Note that there was a premature termination of

loading in Basay, Negros Oriental. The vessel had to undergo several repairs before continuing its voyage

to pick-up the balance of cargo at Sangi, Cebu. Despite repairs, the vessel still failed to carry the whole

lot of 500 MT of sulfuric acid due to ship defects like listing to one side. Its unfortunate sinking was not

due to force majeure. It sunk because it was, based on SGS survey report, unstable and unseaworthy.

Witness surveyor Eugenio Rabe's incident report, dated December 13, 1986 in Basay, Negros Oriental,

elucidated this point:

Loading was started at 1500hrs. November 19. At 1600Hrs. November 20, loading operation was

temporarily stopped by the vessel's master due to ships stability was heavily tilted to port side, ship's

had tried to transfer the loaded acid to stbdside but failed to do so, due to their auxiliary pump on board

does not work out for acid.

xxx xxx xxx

Note. Attending surveyor arrived BMC Basay on November 22, due to delayed advice of said vessel

Declared quantity loaded onboard based on data's provided by PHILPHOS representative.

On November 26, two representative of shipping company arrived Basay to assist the situation, at

1300Hrs repairing and/or welding of tank number 5 started at 1000Hrs November 27, repairing and/or

welding was suspended due to the explosion of tank no. 5. Explosion ripped about two feet of the

double bottom tank.

November 27 up to date no progress of said vessel. 19

While at Sangi, Cebu, the vessel's condition (listing) did not improve as the survey report therein noted:

Declared quantity loaded on board was based on shore tank withdrawal due to ship's incomplete tank

calibration table. Barge displacement cannot be applied due to ship was listing to Stboard side which has

been loaded with rocks to control her stability. 20

These two vital pieces of information were totally ignored by trial court. The appellate court correctly

took these into account, significantly. As to the weather condition in Basay, the appellate court accepted

surveyor Rabe's testimony, thus:

Q. Now, Mr. Witness, what was the weather condition then at Basay, Negros Oriental during the loading

operation of sulfuric acid on board the Sultana Kayumanggi?

A. Fair, sir. 21

Since the third party surveyor was neither petitioner's nor private respondent's employee, his

professional report should carry more weight than that of Melecio Hernandez, an employee of

petitioner. Petitioner, as the buyer, was obligated under the contract to undertake the shipping

requirements of the cargo from the private respondent's loadports to the petitioner's designated

warehouse. It was petitioner which chartered M/T Sultan Kayumanggi. The vessel was petitioner's

agent. When it failed to comply with the necessary loading conditions of sulfuric acid, it was incumbent

upon petitioner to immediately replace M/T Sultan Kayumanggi with another seaworthy vessel.

However, despite repeated demands, petitioner did not comply seasonably.

Additionally, petitioner claims that private respondent's employee, Gil Belen, had recommended to

petitioner to fully utilize the vessel, hence petitioner's request for additional order to complete the

vessel's 500 MT capacity. This claim has no probative pertinence nor solid basis. A party who asserts that

a contract of sale has been changed or modified has the burden of proving the change or modification

by clear and convincing evidence. 22 Repeated requests and additional orders were contained in

petitioner's letters to private respondent. In contrast, Belen's alleged action was only verbal; it was not

substantiated at all during the trial. Note that, using the vessel to full capacity could redound to

petitioner's advantage, not the other party's. If additional orders were at the instance of private

respondent, the same must be properly proved together with its relevance to the question of delay.

Settled is the principle in law that proof of verbal agreements offered to vary the terms of written

agreements is inadmissible, under the parol evidence rule. 23 Belen's purported recommendation could

not be taken at face value and, obviously, cannot excuse petitioner's default.

Respondent court found petitioner's default unjustified, and on this conclusion we agree:

It is not true that the defendant was not in a position to deliver the 272.481 MT which was the balance

of the original 500 MT purchased by the plaintiff. The whole lot of 500 MT was ready for lifting as early

as August 15, 1986. What the defendant could not sell to the plaintiff was the additional 227.51 MT

which said plaintiff was ordering, for the reason that the defendant was short of the supply needed. The

defendant, however, had no obligation to agree to this additional order and may not be faulted for its

inability to meet the said additional requirements of the plaintiff. And the defendant's incapacity to

agree to the delivery of another 227.51 MT is not a legal justification for the plaintiffs refusal to lift the

remaining 272.481.

It is clear from the plaintiff's letters to the defendant that it wanted to send the "M/T Don Victor" only if

the defendant would confirm that it was ready to deliver 500 MT. Because the defendant could not sell

another 227.51 MT to the plaintiff, the latter did not send a new vessel to pick up the balance of the 500

MT originally contracted for by the parties. This, inspite the representations made by the defendant for

the hauling thereof as scheduled and its reminders that any expenses for the delay would be for the

account of the plaintiff. 24

We are therefore constrained to declare that the respondent court did not err when it absolved private

respondent from any breach of contract.

Our next inquiry is whether damages have been properly awarded against petitioner for its unjustified

delay in the performance of its obligation under the contract. Where there has been breach of contract

by the buyer, the seller has a right of action for damages. Following this rule, a cause of action of the

seller for damages may arise where the buyer refuses to remove the goods, such that buyer has to

remove them. 25 Article 1170 of the Civil Code provides:

Those who in the performance of their obligations are guilty of fraud, negligence, or delay and those

who in any manner contravene the tenor thereof, are liable for damages.

Delay begins from the time the obligee judicially or extrajudicially demands from the obligor the

performance of the obligation. 26 Art. 1169 states:

Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially

or extrajudicially demands from them the fulfillment of their obligation.

In order that the debtor may be in default, it is necessary that the following requisites be present: (1)

that the obligation be demandable and already liquidated; (2) that the debtor delays performance; and

(3) that the creditor requires the performance judicially or extrajudicially. 27

In the present case, private respondent required petitioner to ship out or lift the sulfuric acid as agreed,

otherwise petitioner would be charged for the consequential damages owing to any delay. As stated in

private respondent's letter to petitioner, dated December 12, 1986:

Subject: M/T "KAYUMANGGI"

Gentlemen:

This is to reiterate our telephone advice and our letter HJR-8612-031 dated 2 December 1986 regarding

your sulfuric acid vessel, M/T "KAYUMANGGI".

As we have, in various instances, advised you, our Basay wharf will have to be vacated 15th December

1986 as we are expecting the arrival of our chartered vessel purportedly to haul our equipments and all

other remaining assets in Basay. This includes our sulfuric acid tanks. We regret, therefore, that if these

tanks are not emptied on or before the 15th of December, we either have to charge you for the tanks

waiting time at Basay and its consequential costs (i.e. chartering of another vessel for its second pick-up

at Basay, handling, etc.) as well as all other incremental costs on account of the protracted loading

delay. 28 (Emphasis supplied)

Indeed the above demand, which was unheeded, justifies the finding of delay. But when did such delay

begin? The above letter constitutes private respondent's extrajudicial demand for the petitioner to fulfill

its obligation, and its dateline is significant. Given its date, however, we cannot sustain the finding of the

respondent court that petitioner's delay started on August 6, 1986. The Court of Appeals had relied on

private respondent's earlier letter to petitioner of that date for computing the commencement of delay.

But as averred by petitioner, said letter of August 6th is not a categorical demand. What it showed was a

mere statement of fact, that "[F]for your information any delay in Sulfuric Acid withdrawal shall cost us

incremental expenses of P2,000.00 per day." Noteworthy, private respondent accepted the full payment

by petitioner for purchases on October 3, 1986, without qualification, long after the August 6th letter. In

contrast to the August 6th letter, that of December 12th was a categorical demand.

Records reveal that a tanker ship had to pick-up sulfuric acid in Basay, then proceed to get the remaining

stocks in Sangi, Cebu. A period of three days appears to us reasonable for a vessel to travel between

Basay and Sangi. Logically, the computation of damages arising from the shipping delay would then have

to be from December 15, 1986, given said reasonable period after the December 12th letter. More

important, private respondent was forced to vacate Basay wharf only on December 15th. Its Basay

expenses incurred before December 15, 1986, were necessary and regular business expenses for which

the petitioner should not be obliged to pay.

Note that private respondent extended its lease agreement for Sangi, Cebu storage tank until August 31,

1987, solely for petitioner's sulfuric acid. It stands to reason that petitioner should reimburse private

respondent's rental expenses of P32,000 monthly, commencing December 15, 1986, up to August 31,

1987, the period of the extended lease. Note further that there is nothing on record refuting the amount

of expenses abovecited. Private respondent presented in court two supporting documents: first, the

lease agreement pertaining to the equipment, and second a letter dated June 15, 1987, sent by Atlas

Fertilizer Corporation to private respondent representing the rental charges incurred. Private

respondent is entitled to recover the payment for these charges. It should be reimbursed the amount of

two hundred seventy two thousand

(P272,000.00) 29 pesos, corresponding to the total amount of rentals from December 15, 1986 to August

31, 1987 of the Sangi, Cebu storage tank.

Finally, we note also that petitioner tries to exempt itself from paying rental expenses and other

damages by arguing that expenses for the preservation of fungible goods must be assumed by the seller.

Rental expenses of storing sulfuric acid should be at private respondent's account until ownership is

transferred, according to petitioner. However, the general rule that before delivery, the risk of loss is

borne by the seller who is still the owner, is not applicable in this case because petitioner had incurred

delay in the performance of its obligation. Article 1504 of the Civil Code clearly states:

Unless otherwise agreed, the goods remain at the seller's risk until the ownership therein is transferred

to the buyer, but when the ownership therein is transferred to the buyer the goods are at the buyer's

risk whether actual delivery has been made or not, except that:

xxx xxx xxx

(2) Where actual delivery has been delayed through the fault of either the buyer or seller the goods are

at the risk of the party at fault. (emphasis supplied)

On this score, we quote with approval the findings of the appellate court, thus:

. . . The defendant [herein private respondent] was not remiss in reminding the plaintiff that it would

have to bear the said expenses for failure to lift the commodity for an unreasonable length of time.

But even assuming that the plaintiff did not consent to be so bound, the provisions of Civil Code come in

to make it liable for the damages sought by the defendant.

Art. 1170 of the Civil Code provides:

Those who in the performance of their obligations are guilty of fraud, negligence, or delay and those

who in any manner contravene the tenor thereof, are liable for damages.

Certainly, the plaintiff [herein petitioner] was guilty of negligence and delay in the performance of its

obligation to lift the sulfuric acid on August 15, 1986 and had contravened the tenor of its letter-

contract with the defendant. 30

As pointed out earlier, petitioner is guilty of delay, after private respondent made the necessary

extrajudicial demand by requiring petitioner to lift the cargo at its designated loadports. When

petitioner failed to comply with its obligations under the contract it became liable for its shortcomings.

Petitioner is indubitably liable for proven damages.

Considering, however, that petitioner made an advance payment for the unlifted sulfuric acid in the

amount of three hundred three thousand, four hundred eighty three pesos and thirty seven centavos

(P303,483.37), it is proper to set-off this amount against the rental expenses initially paid by private

respondent. It is worth noting that the adjustment and allowance of private respondent's counterclaim

or set-off in the present action, rather than by another independent action, is encouraged by the law.

Such practice serves to avoid circuitry of action, multiplicity of suits, inconvenience, expense, and

unwarranted consumption of the court's time. 31 The trend of judicial decisions is toward a liberal

extension of the right to avail of counterclaims or set-offs. 32 The rules on counterclaims are designed to

achieve the disposition of a whole controversy involving the conflicting claims of interested parties at

one time and in one action, provided all parties can be brought before the court and the matter decided

without prejudicing the right of any party. 33 Set-off in this case is proper and reasonable. It involves

deducting P272,000.00 (rentals) from P303,483.37 (advance payment), which will leave the amount of

P31,483.37 refundable to petitioner.

WHEREFORE, the petition is hereby DENIED. The assailed decision of the Court of Appeals in CA G.R. CV

No. 33802 is AFFIRMED, with MODIFICATION that the amount of damages awarded in favor of private

respondent is REDUCED to Two hundred seventy two thousand pesos (P272,000.00). It is also ORDERED

that said amount of damages be OFFSET against petitioner's advance payment of Three hundred three

thousand four hundred eighty three pesos and thirty-seven centavos (P303,483.37) representing the

price of the 272.481 MT of sulfuric acid not lifted. Lastly, it is ORDERED that the excess amount of thirty

one thousand, four hundred eighty three pesos and thirty seven centavos (P31,483.37) be RETURNED

soonest by private respondent to herein petitioner.1âwphi1.nêt

Costs against the petitioner.

SO ORDERED.

Bellosillo, Mendoza and Buena, JJ., concur.

Footnotes

1 Rollo, pp. 36-45, Penned by Justice Associate Justice Salome A. Montoya, concurred in by Justices Jose

C. Campos and Serafin V.C. Guingona, of the Special Fifth Division of the Court of Appeals.

2 Rollo p. 44.

3 Records, pp. 5-6.

4 Id. at 136.

5 Id. at 137.

6 TSN, September 1, 1989, pp. 28-29.

7 Records, pp. 47-48. Emphasis ours.

8 Id. at 49.

9 Id. at 50.

10 Id. at 41.

11 Id. at 138.

12 Id. at 40.

13 Id. at 65, Affidavit of Gil B. Belen.

14 Id. at 46.

15 Rollo, p. 51.

16 Id. at 52-53.

17 Id. at 41-42.

18 Mijares vs. CA, 271 SCRA 558, 566 (1997), citing Cuizon vs. Court of Appeals, 260 SCRA 645, (1996);

Floro vs. Llenado, 244 SCRA 713 (1995).

19 Records, p. 21.

20 Id. at 23.

21 TSN, December 20, 1989, p. 6.

22 77 Corpus Juris Secundum, Sales, Section 86, Evidence, p. 773.

23 Gerales vs. Court of Appeals, 218 SCRA 638, 648-649 (1993); citing Continental Airlines Inc. vs.

Santiago. 172 SCRA 490 (1989).

24 Rollo, p. 42.

25 78 Corpus Juris Secundum, Sales, Action for Damages, Section 462, Right of Action, p. 112.

26 SSS vs. Moonwalk Development and Housing Corporation, 221 SCRA 119, 127 (1993).

27 Id. at 128.

28 Records, p. 137.

29 P32,000 x 8.5 months.

30 Rollo, pp. 43-44.

31 Development Bank of the Philippines vs. Court of Appeals, 249 SCRA 331, 341 (1995).

32 Id., citing 20 Am. Jur. 2d, Counterclaim, 237-238.

33 Id., citing Kuenzel vs. Universal Carloading and Distributing Co., Inc. (1939) 29 F. Supp. 407.


SUPREME COURT

Manila

FIRST DIVISION

G.R. No. 153004 November 5, 2004

SANTOS VENTURA HOCORMA FOUNDATION, INC., petitioner,

vs.

ERNESTO V. SANTOS and RIVERLAND, INC., respondents.

D E C I S I O N

QUISUMBING, J.:

Subject of the present petition for review on certiorari is the Decision,1 dated January 30, 2002, as well

as the April 12, 2002, Resolution2 of the Court of Appeals in CA-G.R. CV No. 55122. The appellate court

reversed the Decision,3 dated October 4, 1996, of the Regional Trial Court of Makati City, Branch 148, in

Civil Case No. 95-811, and likewise denied petitioner's Motion for Reconsideration.

The facts of this case are undisputed.

Ernesto V. Santos and Santos Ventura Hocorma Foundation, Inc. (SVHFI) were the plaintiff and

defendant, respectively, in several civil cases filed in different courts in the Philippines. On October 26,

1990, the parties executed a Compromise Agreement4 which amicably ended all their pending

litigations. The pertinent portions of the Agreement read as follows:

1. Defendant Foundation shall pay Plaintiff Santos P14.5 Million in the following manner:

a. P1.5 Million immediately upon the execution of this agreement;

b. The balance of P13 Million shall be paid, whether in one lump sum or in installments, at the discretion

of the Foundation, within a period of not more than two (2) years from the execution of this agreement;

provided, however, that in the event that the Foundation does not pay the whole or any part of such

balance, the same shall be paid with the corresponding portion of the land or real properties subject of

the aforesaid cases and previously covered by the notices of lis pendens, under such terms and

conditions as to area, valuation, and location mutually acceptable to both parties; but in no case shall

the payment of such balance be later than two (2) years from the date of this agreement; otherwise,

payment of any unpaid portion shall only be in the form of land aforesaid;

2. Immediately upon the execution of this agreement (and [the] receipt of the P1.5 Million), plaintiff

Santos shall cause the dismissal with prejudice of Civil Cases Nos. 88-743, 1413OR, TC-1024, 45366 and

18166 and voluntarily withdraw the appeals in Civil Cases Nos. 4968 (C.A.-G.R. No. 26598) and 88-45366

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(C.A.-G.R. No. 24304) respectively and for the immediate lifting of the aforesaid various notices of lis

pendens on the real properties aforementioned (by signing herein attached corresponding documents,

for such lifting); provided, however, that in the event that defendant Foundation shall sell or dispose of

any of the lands previously subject of lis pendens, the proceeds of any such sale, or any part thereof as

may be required, shall be partially devoted to the payment of the Foundation's obligations under this

agreement as may still be subsisting and payable at the time of any such sale or sales;

. . .

5. Failure of compliance of any of the foregoing terms and conditions by either or both parties to this

agreement shall ipso facto and ipso jure automatically entitle the aggrieved party to a writ of execution

for the enforcement of this agreement. [Emphasis supplied]5

In compliance with the Compromise Agreement, respondent Santos moved for the dismissal of the

aforesaid civil cases. He also caused the lifting of the notices of lis pendens on the real properties

involved. For its part, petitioner SVHFI, paid P1.5 million to respondent Santos, leaving a balance of P13

million.

Subsequently, petitioner SVHFI sold to Development Exchange Livelihood Corporation two real

properties, which were previously subjects of lis pendens. Discovering the disposition made by the

petitioner, respondent Santos sent a letter to the petitioner demanding the payment of the remaining

P13 million, which was ignored by the latter. Meanwhile, on September 30, 1991, the Regional Trial

Court of Makati City, Branch 62, issued a Decision6 approving the compromise agreement.

On October 28, 1992, respondent Santos sent another letter to petitioner inquiring when it would pay

the balance of P13 million. There was no response from petitioner. Consequently, respondent Santos

applied with the Regional Trial Court of Makati City, Branch 62, for the issuance of a writ of execution of

its compromise judgment dated September 30, 1991. The RTC granted the writ. Thus, on March 10,

1993, the Sheriff levied on the real properties of petitioner, which were formerly subjects of the lis

pendens. Petitioner, however, filed numerous motions to block the enforcement of the said writ. The

challenge of the execution of the aforesaid compromise judgment even reached the Supreme Court. All

these efforts, however, were futile.

On November 22, 1994, petitioner's real properties located in Mabalacat, Pampanga were auctioned. In

the said auction, Riverland, Inc. was the highest bidder for P12 million and it was issued a Certificate of

Sale covering the real properties subject of the auction sale. Subsequently, another auction sale was

held on February 8, 1995, for the sale of real properties of petitioner in Bacolod City. Again, Riverland,

Inc. was the highest bidder. The Certificates of Sale issued for both properties provided for the right of

redemption within one year from the date of registration of the said properties.

On June 2, 1995, Santos and Riverland Inc. filed a Complaint for Declaratory Relief and Damages7

alleging that there was delay on the part of petitioner in paying the balance of P13 million. They further

alleged that under the Compromise Agreement, the obligation became due on October 26, 1992, but

payment of the remaining P12 million was effected only on November 22, 1994. Thus, respondents




prayed that petitioner be ordered to pay legal interest on the obligation, penalty, attorney's fees and

costs of litigation. Furthermore, they prayed that the aforesaid sales be declared final and not subject to

legal redemption.

In its Answer,8 petitioner countered that respondents have no cause of action against it since it had fully

paid its obligation to the latter. It further claimed that the alleged delay in the payment of the balance

was due to its valid exercise of its rights to protect its interests as provided under the Rules. Petitioner

counterclaimed for attorney's fees and exemplary damages.

On October 4, 1996, the trial court rendered a Decision9 dismissing herein respondents' complaint and

ordering them to pay attorney's fees and exemplary damages to petitioner. Respondents then appealed

to the Court of Appeals. The appellate court reversed the ruling of the trial court:

WHEREFORE, finding merit in the appeal, the appealed Decision is hereby REVERSED and judgment is

hereby rendered ordering appellee SVHFI to pay appellants Santos and Riverland, Inc.: (1) legal interest

on the principal amount of P13 million at the rate of 12% per annum from the date of demand on

October 28, 1992 up to the date of actual payment of the whole obligation; and (2) P20,000 as

attorney's fees and costs of suit.

SO ORDERED.

Hence this petition for review on certiorari where petitioner assigns the following issues:

I

WHETHER OR NOT THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR WHEN IT AWARDED LEGAL

INTEREST IN FAVOR OF THE RESPONDENTS, MR. SANTOS AND RIVERLAND, INC., NOTWITHSTANDING

THE FACT THAT NEITHER IN THE COMPROMISE AGREEMENT NOR IN THE COMPROMISE JUDGEMENT OF

HON. JUDGE DIOKNO PROVIDES FOR PAYMENT OF INTEREST TO THE RESPONDENT

II

WHETHER OF NOT THE COURT OF APPEALS ERRED IN AWARDING LEGAL IN[T]EREST IN FAVOR OF THE

RESPONDENTS, MR. SANTOS AND RIVERLAND, INC., NOTWITHSTANDING THE FACT THAT THE

OBLIGATION OF THE PETITIONER TO RESPONDENT SANTOS TO PAY A SUM OF MONEY HAD BEEN

CONVERTED TO AN OBLIGATION TO PAY IN KIND – DELIVERY OF REAL PROPERTIES OWNED BY THE

PETITIONER – WHICH HAD BEEN FULLY PERFORMED

III

WHETHER OR NOT RESPONDENTS ARE BARRED FROM DEMANDING PAYMENT OF INTEREST BY REASON

OF THE WAIVER PROVISION IN THE COMPROMISE AGREEMENT, WHICH BECAME THE LAW AMONG THE

PARTIES10

The only issue to be resolved is whether the respondents are entitled to legal interest.




Petitioner SVHFI alleges that where a compromise agreement or compromise judgment does not

provide for the payment of interest, the legal interest by way of penalty on account of fault or delay

shall not be due and payable, considering that the obligation or loan, on which the payment of legal

interest could be based, has been superseded by the compromise agreement.11 Furthermore, the

petitioner argues that the respondents are barred by res judicata from seeking legal interest on account

of the waiver clause in the duly approved compromise agreement.12 Article 4 of the compromise

agreement provides:

Plaintiff Santos waives and renounces any and all other claims that he and his family may have on the

defendant Foundation arising from and in connection with the aforesaid civil cases, and defendant

Foundation, on the other hand, also waives and renounces any and all claims that it may have against

plaintiff Santos in connection with such cases.13 [Emphasis supplied.]

Lastly, petitioner alleges that since the compromise agreement did not provide for a period within which

the obligation will become due and demandable, it is incumbent upon respondent Santos to ask for

judicial intervention for purposes of fixing the period. It is only when a fixed period exists that the legal

interests can be computed.

Respondents profer that their right to damages is based on delay in the payment of the obligation

provided in the Compromise Agreement. The Compromise Agreement provides that payment must be

made within the two-year period from its execution. This was approved by the trial court and became

the law governing their contract. Respondents posit that petitioner's failure to comply entitles them to

damages, by way of interest.14

The petition lacks merit.

A compromise is a contract whereby the parties, by making reciprocal concessions, avoid a litigation or

put an end to one already commenced.15 It is an agreement between two or more persons, who, for

preventing or putting an end to a lawsuit, adjust their difficulties by mutual consent in the manner

which they agree on, and which everyone of them prefers in the hope of gaining, balanced by the

danger of losing.16

The general rule is that a compromise has upon the parties the effect and authority of res judicata, with

respect to the matter definitely stated therein, or which by implication from its terms should be deemed

to have been included therein.17 This holds true even if the agreement has not been judicially

approved.18

In the case at bar, the Compromise Agreement was entered into by the parties on October 26, 1990.19 It

was judicially approved on September 30, 1991.20 Applying existing jurisprudence, the compromise

agreement as a consensual contract became binding between the parties upon its execution and not

upon its court approval. From the time a compromise is validly entered into, it becomes the source of

the rights and obligations of the parties thereto. The purpose of the compromise is precisely to replace

and terminate controverted claims.21












In accordance with the compromise agreement, the respondents asked for the dismissal of the pending

civil cases. The petitioner, on the other hand, paid the initial P1.5 million upon the execution of the

agreement. This act of the petitioner showed that it acknowledges that the agreement was immediately

executory and enforceable upon its execution.

As to the remaining P13 million, the terms and conditions of the compromise agreement are clear and

unambiguous. It provides:

. . .

b. The balance of P13 Million shall be paid, whether in one lump sum or in installments, at the discretion

of the Foundation, within a period of not more than two (2) years from the execution of this

agreement…22 [Emphasis supplied.]

. . .

The two-year period must be counted from October 26, 1990, the date of execution of the compromise

agreement, and not on the judicial approval of the compromise agreement on September 30, 1991.

When respondents wrote a demand letter to petitioner on October 28, 1992, the obligation was already

due and demandable. When the petitioner failed to pay its due obligation after the demand was made,

it incurred delay.

Article 1169 of the New Civil Code provides:

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

extrajudicially demands from them the fulfillment of their obligation. [Emphasis supplied]

Delay as used in this article is synonymous to default or mora which means delay in the fulfillment of

obligations. It is the non-fulfillment of the obligation with respect to time.23

In order for the debtor to be in default, it is necessary that the following requisites be present: (1) that

the obligation be demandable and already liquidated; (2) that the debtor delays performance; and (3)

that the creditor requires the performance judicially or extrajudicially.24

In the case at bar, the obligation was already due and demandable after the lapse of the two-year

period from the execution of the contract. The two-year period ended on October 26, 1992. When the

respondents gave a demand letter on October 28, 1992, to the petitioner, the obligation was already

due and demandable. Furthermore, the obligation is liquidated because the debtor knows precisely how

much he is to pay and when he is to pay it.

The second requisite is also present. Petitioner delayed in the performance. It was able to fully settle its

outstanding balance only on February 8, 1995, which is more than two years after the extra-judicial

demand. Moreover, it filed several motions and elevated adverse resolutions to the appellate court to

hinder the execution of a final and executory judgment, and further delay the fulfillment of its

obligation.




Third, the demand letter sent to the petitioner on October 28, 1992, was in accordance with an extra-

judicial demand contemplated by law.

Verily, the petitioner is liable for damages for the delay in the performance of its obligation. This is

provided for in Article 117025 of the New Civil Code.

When the debtor knows the amount and period when he is to pay, interest as damages is generally

allowed as a matter of right.26 The complaining party has been deprived of funds to which he is entitled

by virtue of their compromise agreement. The goal of compensation requires that the complainant be

compensated for the loss of use of those funds. This compensation is in the form of interest.27 In the

absence of agreement, the legal rate of interest shall prevail.28 The legal interest for loan as forbearance

of money is 12% per annum29 to be computed from default, i.e., from judicial or extrajudicial demand

under and subject to the provisions of Article 1169 of the Civil Code.30

WHEREFORE, the petition is DENIED for lack of merit. The Decision dated January 30, 2002 of the Court

of Appeals and its April 12, 2002 Resolution in CA-G.R. CV No. 55122 are AFFIRMED. Costs against

petitioner.

SO ORDERED.

Davide, Jr. C.J. (Chairman), Ynares-Santiago and Carpio, JJ., concur.

Azcuna, J., on leave.

Footnotes

1 Rollo, pp. 39-45. Penned by Associate Justice Hilarion L. Aquino, with Associate Justices Edgardo P.

Cruz, and Amelita G. Tolentino concurring. 2 Id. at 46. 3 Id. at 77-82. 4 Records, pp. 118-123. 5 Id. at 38-40. 6 Id. at 36-40. 7 Id. at 1-11. 8 Id. at 23-35. 9 Id. at 151-156. 10 Rollo, p. 218. 11 Id. at 219-220. 12 Id. at 221. 13 Records, pp. 39-40. 14 Rollo, p. 149. 15 New Civil Code, Art. 2028.







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16 Cebu International Finance Corp. v. Court of Appeals, G.R. No. 123031, 12 October 1999, 316 SCRA

488, 498-499 citing David v. Court of Appeals, G.R. No. 97240, 16 October 1992, 214 SCRA 644, 650. 17 Del Rosario v. Madayag, G.R. No. 118531, 28 August 1995, 247 SCRA 767, 771. 18 Mayuga v. Court of Appeals, No. L-46953, 28 September 1987, 154 SCRA 309, 320. 19 Records, pp. 118-123. 20 Id. at 36-40. 21 Landoil Resources Corporation v. Tensuan, No. L-77733, 20 December 1988, 168 SCRA 569, 578. 22 Records, pp. 38-39. 23 IV Arturo M. Tolentino, Civil Code of the Philippines, 101 (1987 ed.). 24 Id. at 102. 25 Art. 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay

and those who in any manner contravene the tenor thereof, are liable for damages. 26 II J. Cesar S. Sangco, Philippine Law on Torts and Damages 1085 (1993 ed.). 27 Ibid. 28 Quiros v. Tan-Guinlay, No. 1904, 3 March 1906, 5 Phil 675, 680. 29 Central Bank Circular No. 416, July 29, 1974. 30 Eastern Assurance and Surety Corporation v. Court of Appeals, G.R. No. 127135, 18 January 2000, 322

SCRA 73, 78.


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SUPREME COURT

Manila

SECOND DIVISION

G.R. No. 149734 November 19, 2004

DR. DANIEL VAZQUEZ and MA. LUIZA M. VAZQUEZ, petitioners,

vs.

AYALA CORPORATION, respondent.

D E C I S I O N

TINGA, J.:

The rise in value of four lots in one of the country's prime residential developments, Ayala Alabang

Village in Muntinlupa City, over a period of six (6) years only, represents big money. The huge price

difference lies at the heart of the present controversy. Petitioners insist that the lots should be sold to

them at 1984 prices while respondent maintains that the prevailing market price in 1990 should be the

selling price.

Dr. Daniel Vazquez and Ma. Luisa Vazquez1 filed this Petition for Review on Certiorari2 dated October 11,

2001 assailing the Decision3 of the Court of Appeals dated September 6, 2001 which reversed the

Decision4 of the Regional Trial Court (RTC) and dismissed their complaint for specific performance and

damages against Ayala Corporation.

Despite their disparate rulings, the RTC and the appellate court agree on the following antecedents:5

On April 23, 1981, spouses Daniel Vasquez and Ma. Luisa M. Vasquez (hereafter, Vasquez spouses)

entered into a Memorandum of Agreement (MOA) with Ayala Corporation (hereafter, AYALA) with

AYALA buying from the Vazquez spouses, all of the latter's shares of stock in Conduit Development, Inc.

(hereafter, Conduit). The main asset of Conduit was a 49.9 hectare property in Ayala Alabang,

Muntinlupa, which was then being developed by Conduit under a development plan where the land was

divided into Villages 1, 2 and 3 of the "Don Vicente Village." The development was then being

undertaken for Conduit by G.P. Construction and Development Corp. (hereafter, GP Construction).

Under the MOA, Ayala was to develop the entire property, less what was defined as the "Retained Area"

consisting of 18,736 square meters. This "Retained Area" was to be retained by the Vazquez spouses.

The area to be developed by Ayala was called the "Remaining Area". In this "Remaining Area" were 4

lots adjacent to the "Retained Area" and Ayala agreed to offer these lots for sale to the Vazquez spouses

at the prevailing price at the time of purchase. The relevant provisions of the MOA on this point are:






"5.7. The BUYER hereby commits that it will develop the 'Remaining Property' into a first class

residential subdivision of the same class as its New Alabang Subdivision, and that it intends to complete

the first phase under its amended development plan within three (3) years from the date of this

Agreement. x x x"

5.15. The BUYER agrees to give the SELLERS a first option to purchase four developed lots next to the

"Retained Area" at the prevailing market price at the time of the purchase."

The parties are agreed that the development plan referred to in paragraph 5.7 is not Conduit's

development plan, but Ayala's amended development plan which was still to be formulated as of the

time of the MOA. While in the Conduit plan, the 4 lots to be offered for sale to the Vasquez Spouses

were in the first phase thereof or Village 1, in the Ayala plan which was formulated a year later, it was in

the third phase, or Phase II-c.

Under the MOA, the Vasquez spouses made several express warranties, as follows:

"3.1. The SELLERS shall deliver to the BUYER:

xxx

3.1.2. The true and complete list, certified by the Secretary and Treasurer of the Company showing:

xxx

D. A list of all persons and/or entities with whom the Company has pending contracts, if any.

xxx

3.1.5. Audited financial statements of the Company as at Closing date.

4. Conditions Precedent

All obligations of the BUYER under this Agreement are subject to fulfillment prior to or at the Closing, of

the following conditions:

4.1. The representations and warranties by the SELLERS contained in this Agreement shall be true and

correct at the time of Closing as though such representations and warranties were made at such time;

and

xxx

6. Representation and Warranties by the SELLERS

The SELLERS jointly and severally represent and warrant to the BUYER that at the time of the execution

of this Agreement and at the Closing:

xxx

6.2.3. There are no actions, suits or proceedings pending, or to the knowledge of the SELLERS,

threatened against or affecting the SELLERS with respect to the Shares or the Property; and

7. Additional Warranties by the SELLERS

7.1. With respect to the Audited Financial Statements required to be submitted at Closing in accordance

with Par. 3.1.5 above, the SELLER jointly and severally warrant to the BUYER that:

7.1.1 The said Audited Financial Statements shall show that on the day of Closing, the Company shall

own the "Remaining Property", free from all liens and encumbrances and that the Company shall have

no obligation to any party except for billings payable to GP Construction & Development Corporation

and advances made by Daniel Vazquez for which BUYER shall be responsible in accordance with Par. 2 of

this Agreement.

7.1.2 Except to the extent reflected or reserved in the Audited Financial Statements of the Company as

of Closing, and those disclosed to BUYER, the Company as of the date thereof, has no liabilities of any

nature whether accrued, absolute, contingent or otherwise, including, without limitation, tax liabilities

due or to become due and whether incurred in respect of or measured in respect of the Company's

income prior to Closing or arising out of transactions or state of facts existing prior thereto.

7.2 SELLERS do not know or have no reasonable ground to know of any basis for any assertion against

the Company as at closing or any liability of any nature and in any amount not fully reflected or reserved

against such Audited Financial Statements referred to above, and those disclosed to BUYER.

xxx xxx xxx

7.6.3 Except as otherwise disclosed to the BUYER in writing on or before the Closing, the Company is not

engaged in or a party to, or to the best of the knowledge of the SELLERS, threatened with, any legal

action or other proceedings before any court or administrative body, nor do the SELLERS know or have

reasonable grounds to know of any basis for any such action or proceeding or of any governmental

investigation relative to the Company.

7.6.4 To the knowledge of the SELLERS, no default or breach exists in the due performance and

observance by the Company of any term, covenant or condition of any instrument or agreement to

which the company is a party or by which it is bound, and no condition exists which, with notice or lapse

of time or both, will constitute such default or breach."

After the execution of the MOA, Ayala caused the suspension of work on Village 1 of the Don Vicente

Project. Ayala then received a letter from one Maximo Del Rosario of Lancer General Builder

Corporation informing Ayala that he was claiming the amount of P1,509,558.80 as the subcontractor of

G.P. Construction...

G.P. Construction not being able to reach an amicable settlement with Lancer, on March 22, 1982,

Lancer sued G.P. Construction, Conduit and Ayala in the then Court of First Instance of Manila in Civil

Case No. 82-8598. G.P. Construction in turn filed a cross-claim against Ayala. G.P. Construction and

Lancer both tried to enjoin Ayala from undertaking the development of the property. The suit was

terminated only on February 19, 1987, when it was dismissed with prejudice after Ayala paid both

Lancer and GP Construction the total of P4,686,113.39.

Taking the position that Ayala was obligated to sell the 4 lots adjacent to the "Retained Area" within 3

years from the date of the MOA, the Vasquez spouses sent several "reminder" letters of the

approaching so-called deadline. However, no demand after April 23, 1984, was ever made by the

Vasquez spouses for Ayala to sell the 4 lots. On the contrary, one of the letters signed by their

authorized agent, Engr. Eduardo Turla, categorically stated that they expected "development of Phase 1

to be completed by February 19, 1990, three years from the settlement of the legal problems with the

previous contractor."

By early 1990 Ayala finished the development of the vicinity of the 4 lots to be offered for sale. The four

lots were then offered to be sold to the Vasquez spouses at the prevailing price in 1990. This was

rejected by the Vasquez spouses who wanted to pay at 1984 prices, thereby leading to the suit below.

After trial, the court a quo rendered its decision, the dispositive portion of which states:

"THEREFORE, judgment is hereby rendered in favor of plaintiffs and against defendant, ordering

defendant to sell to plaintiffs the relevant lots described in the Complaint in the Ayala Alabang Village at

the price of P460.00 per square meter amounting to P1,349,540.00; ordering defendant to reimburse to

plaintiffs attorney's fees in the sum of P200,000.00 and to pay the cost of the suit."

In its decision, the court a quo concluded that the Vasquez spouses were not obligated to disclose the

potential claims of GP Construction, Lancer and Del Rosario; Ayala's accountants should have opened

the records of Conduit to find out all claims; the warranty against suit is with respect to "the shares of

the Property" and the Lancer suit does not affect the shares of stock sold to Ayala; Ayala was obligated

to develop within 3 years; to say that Ayala was under no obligation to follow a time frame was to put

the Vasquezes at Ayala's mercy; Ayala did not develop because of a slump in the real estate market; the

MOA was drafted and prepared by the AYALA who should suffer its ambiguities; the option to purchase

the 4 lots is valid because it was supported by consideration as the option is incorporated in the MOA

where the parties had prestations to each other. [Emphasis supplied]

Ayala Corporation filed an appeal, alleging that the trial court erred in holding that petitioners did not

breach their warranties under the MOA6 dated April 23, 1981; that it was obliged to develop the land

where the four (4) lots subject of the option to purchase are located within three (3) years from the date

of the MOA; that it was in delay; and that the option to purchase was valid because it was incorporated

in the MOA and the consideration therefor was the commitment by Ayala Corporation to petitioners

embodied in the MOA.

As previously mentioned, the Court of Appeals reversed the RTC Decision. According to the appellate

court, Ayala Corporation was never informed beforehand of the existence of the Lancer claim. In fact,

Ayala Corporation got a copy of the Lancer subcontract only on May 29, 1981 from G.P. Construction's

lawyers. The Court of Appeals thus held that petitioners violated their warranties under the MOA when


they failed to disclose Lancer's claims. Hence, even conceding that Ayala Corporation was obliged to

develop and sell the four (4) lots in question within three (3) years from the date of the MOA, the

obligation was suspended during the pendency of the case filed by Lancer.

Interpreting the MOA's paragraph 5.7 above-quoted, the appellate court held that Ayala Corporation

committed to develop the first phase of its own amended development plan and not Conduit's

development plan. Nowhere does the MOA provide that Ayala Corporation shall follow Conduit's

development plan nor is Ayala Corporation prohibited from changing the sequence of the phases of the

property it will develop.

Anent the question of delay, the Court of Appeals ruled that there was no delay as petitioners never

made a demand for Ayala Corporation to sell the subject lots to them. According to the appellate court,

what petitioners sent were mere reminder letters the last of which was dated prior to April 23, 1984

when the obligation was not yet demandable. At any rate, the Court of Appeals found that petitioners in

fact waived the three (3)-year period when they sent a letter through their agent, Engr. Eduardo Turla,

stating that they "expect that the development of Phase I will be completed by 19 February 1990, three

years from the settlement of the legal problems with the previous contractor."7

The appellate court likewise ruled that paragraph 5.15 above-quoted is not an option contract but a

right of first refusal there being no separate consideration therefor. Since petitioners refused Ayala

Corporation's offer to sell the subject lots at the reduced 1990 price of P5,000.00 per square meter, they

have effectively waived their right to buy the same.

In the instant Petition, petitioners allege that the appellate court erred in ruling that they violated their

warranties under the MOA; that Ayala Corporation was not obliged to develop the "Remaining

Property" within three (3) years from the execution of the MOA; that Ayala was not in delay; and that

paragraph 5.15 of the MOA is a mere right of first refusal. Additionally, petitioners insist that the Court

should review the factual findings of the Court of Appeals as they are in conflict with those of the trial

court.

Ayala Corporation filed a Comment on the Petition8 dated March 26, 2002, contending that the petition

raises questions of fact and seeks a review of evidence which is within the domain of the Court of

Appeals. Ayala Corporation maintains that the subcontract between GP Construction, with whom

Conduit contracted for the development of the property under a Construction Contract dated October

10, 1980, and Lancer was not disclosed by petitioners during the negotiations. Neither was the liability

for Lancer's claim included in the Audited Financial Statements submitted by petitioners after the

signing of the MOA. These justify the conclusion that petitioners breached their warranties under the

afore-quoted paragraphs of the MOA. Since the Lancer suit ended only in February 1989, the three (3)-

year period within which Ayala Corporation committed to develop the property should only be counted

thence. Thus, when it offered the subject lots to petitioners in 1990, Ayala Corporation was not yet in

delay.

In response to petitioners' contention that there was no action or proceeding against them at the time

of the execution of the MOA on April 23, 1981, Ayala Corporation avers that the facts and circumstances



which gave rise to the Lancer claim were already extant then. Petitioners warranted that their

representations under the MOA shall be true and correct at the time of "Closing" which shall take place

within four (4) weeks from the signing of the MOA.9 Since the MOA was signed on April 23, 1981,

"Closing" was approximately the third week of May 1981. Hence, Lancer's claims, articulated in a letter

which Ayala Corporation received on May 4, 1981, are among the liabilities warranted against under

paragraph 7.1.2 of the MOA.

Moreover, Ayala Corporation asserts that the warranties under the MOA are not just against suits but

against all kinds of liabilities not reflected in the Audited Financial Statements. It cannot be faulted for

relying on the express warranty that except for billings payable to GP Construction and advances made

by petitioner Daniel Vazquez in the amount of P38,766.04, Conduit has no other liabilities. Hence,

petitioners cannot claim that Ayala Corporation should have examined and investigated the Audited

Financial Statements of Conduit and should now assume all its obligations and liabilities including the

Lancer suit and the cross-claim of GP Construction.

Furthermore, Ayala Corporation did not make a commitment to complete the development of the first

phase of the property within three (3) years from the execution of the MOA. The provision refers to a

mere declaration of intent to develop the first phase of its (Ayala Corporation's) own development plan

and not Conduit's. True to its intention, Ayala Corporation did complete the development of the first

phase (Phase II-A) of its amended development plan within three (3) years from the execution of the

MOA. However, it is not obliged to develop the third phase (Phase II-C) where the subject lots are

located within the same time frame because there is no contractual stipulation in the MOA therefor. It is

free to decide on its own the period for the development of Phase II-C. If petitioners wanted to impose

the same three (3)-year timetable upon the third phase of the amended development plan, they should

have filed a suit to fix the time table in accordance with Article 119710 of the Civil Code. Having failed to

do so, Ayala Corporation cannot be declared to have been in delay.

Ayala Corporation further contends that no demand was made on it for the performance of its alleged

obligation. The letter dated October 4, 1983 sent when petitioners were already aware of the Lancer

suit did not demand the delivery of the subject lots by April 23, 1984. Instead, it requested Ayala

Corporation to keep petitioners posted on the status of the case. Likewise, the letter dated March 4,

1984 was merely an inquiry as to the date when the development of Phase 1 will be completed. More

importantly, their letter dated June 27, 1988 through Engr. Eduardo Turla expressed petitioners'

expectation that Phase 1 will be completed by February 19, 1990.

Lastly, Ayala Corporation maintains that paragraph 5.15 of the MOA is a right of first refusal and not an

option contract.

Petitioners filed their Reply11 dated August 15, 2002 reiterating the arguments in their Petition and

contending further that they did not violate their warranties under the MOA because the case was filed

by Lancer only on April 1, 1982, eleven (11) months and eight (8) days after the signing of the MOA on

April 23, 1981. Ayala Corporation admitted that it received Lancer's claim before the "Closing" date. It




therefore had all the time to rescind the MOA. Not having done so, it can be concluded that Ayala

Corporation itself did not consider the matter a violation of petitioners' warranty.

Moreover, petitioners submitted the Audited Financial Statements of Conduit and allowed an

acquisition audit to be conducted by Ayala Corporation. Thus, the latter bought Conduit with "open

eyes."

Petitioners also maintain that they had no knowledge of the impending case against Conduit at the time

of the execution of the MOA. Further, the MOA makes Ayala Corporation liable for the payment of all

billings of GP Construction. Since Lancer's claim was actually a claim against GP Construction being its

sub-contractor, it is Ayala Corporation and not petitioners which is liable.

Likewise, petitioners aver that although Ayala Corporation may change the sequence of its development

plan, it is obliged under the MOA to develop the entire area where the subject lots are located in three

(3) years.

They also assert that demand was made on Ayala Corporation to comply with their obligation under the

MOA. Apart from their reminder letters dated January 24, February 18 and March 5, 1984, they also

sent a letter dated March 4, 1984 which they claim is a categorical demand for Ayala Corporation to

comply with the provisions of the MOA.

The parties were required to submit their respective memoranda in the Resolution12 dated November

18, 2002. In compliance with this directive, petitioners submitted their Memorandum13 dated February

14, 2003 on even date, while Ayala Corporation filed its Memorandum14 dated February 14, 2003 on

February 17, 2003.

We shall first dispose of the procedural question raised by the instant petition.

It is well-settled that the jurisdiction of this Court in cases brought to it from the Court of Appeals by

way of petition for review under Rule 45 is limited to reviewing or revising errors of law imputed to it, its

findings of fact being conclusive on this Court as a matter of general principle. However, since in the

instant case there is a conflict between the factual findings of the trial court and the appellate court,

particularly as regards the issues of breach of warranty, obligation to develop and incurrence of delay,

we have to consider the evidence on record and resolve such factual issues as an exception to the

general rule.15 In any event, the submitted issue relating to the categorization of the right to purchase

granted to petitioners under the MOA is legal in character.

The next issue that presents itself is whether petitioners breached their warranties under the MOA

when they failed to disclose the Lancer claim. The trial court declared they did not; the appellate court

found otherwise.

Ayala Corporation summarizes the clauses of the MOA which petitioners allegedly breached when they

failed to disclose the Lancer claim:





a) Clause 7.1.1. – that Conduit shall not be obligated to anyone except to GP Construction for

P38,766.04, and for advances made by Daniel Vazquez;

b) Clause 7.1.2. – that except as reflected in the audited financial statements Conduit had no other

liabilities whether accrued, absolute, contingent or otherwise;

c) Clause 7.2. – that there is no basis for any assertion against Conduit of any liability of any value not

reflected or reserved in the financial statements, and those disclosed to Ayala;

d) Clause 7.6.3. – that Conduit is not threatened with any legal action or other proceedings; and

e) Clause 7.6.4. – that Conduit had not breached any term, condition, or covenant of any instrument or

agreement to which it is a party or by which it is bound.16

The Court is convinced that petitioners did not violate the foregoing warranties.

The exchanges of communication between the parties indicate that petitioners substantially apprised

Ayala Corporation of the Lancer claim or the possibility thereof during the period of negotiations for the

sale of Conduit.

In a letter17 dated March 5, 1984, petitioner Daniel Vazquez reminded Ayala Corporation's Mr. Adolfo

Duarte (Mr. Duarte) that prior to the completion of the sale of Conduit, Ayala Corporation asked for and

was given information that GP Construction sub-contracted, presumably to Lancer, a greater percentage

of the project than it was allowed. Petitioners gave this information to Ayala Corporation because the

latter intimated a desire to "break the contract of Conduit with GP." Ayala Corporation did not deny this.

In fact, Mr. Duarte's letter18 dated March 6, 1984 indicates that Ayala Corporation had knowledge of the

Lancer subcontract prior to its acquisition of Conduit. Ayala Corporation even admitted that it "tried to

explore…legal basis to discontinue the contract of Conduit with GP" but found this "not feasible when

information surfaced about the tacit consent of Conduit to the sub-contracts of GP with Lancer."

At the latest, Ayala Corporation came to know of the Lancer claim before the date of Closing of the

MOA. Lancer's letter19 dated April 30, 1981 informing Ayala Corporation of its unsettled claim with GP

Construction was received by Ayala Corporation on May 4, 1981, well before the "Closing"20 which

occurred four (4) weeks after the date of signing of the MOA on April 23, 1981, or on May 23, 1981.

The full text of the pertinent clauses of the MOA quoted hereunder likewise indicate that certain

matters pertaining to the liabilities of Conduit were disclosed by petitioners to Ayala Corporation

although the specifics thereof were no longer included in the MOA:

7.1.1 The said Audited Financial Statements shall show that on the day of Closing, the Company shall

own the "Remaining Property", free from all liens and encumbrances and that the Company shall have

no obligation to any party except for billings payable to GP Construction & Development Corporation

and advances made by Daniel Vazquez for which BUYER shall be responsible in accordance with

Paragraph 2 of this Agreement.






7.1.2 Except to the extent reflected or reserved in the Audited Financial Statements of the Company as

of Closing, and those disclosed to BUYER, the Company as of the date hereof, has no liabilities of any

nature whether accrued, absolute, contingent or otherwise, including, without limitation, tax liabilities

due or to become due and whether incurred in respect of or measured in respect of the Company's

income prior to Closing or arising out of transactions or state of facts existing prior thereto.

7.2 SELLERS do not know or have no reasonable ground to know of any basis for any assertion against

the Company as at Closing of any liability of any nature and in any amount not fully reflected or reserved

against such Audited Financial Statements referred to above, and those disclosed to BUYER.

xxx xxx xxx

7.6.3 Except as otherwise disclosed to the BUYER in writing on or before the Closing, the Company is not

engaged in or a party to, or to the best of the knowledge of the SELLERS, threatened with, any legal

action or other proceedings before any court or administrative body, nor do the SELLERS know or have

reasonable grounds to know of any basis for any such action or proceeding or of any governmental

investigation relative to the Company.

7.6.4 To the knowledge of the SELLERS, no default or breach exists in the due performance and

observance by the Company of any term, covenant or condition of any instrument or agreement to

which the Company is a party or by which it is bound, and no condition exists which, with notice or lapse

of time or both, will constitute such default or breach."21 [Emphasis supplied]

Hence, petitioners' warranty that Conduit is not engaged in, a party to, or threatened with any legal

action or proceeding is qualified by Ayala Corporation's actual knowledge of the Lancer claim which was

disclosed to Ayala Corporation before the "Closing."

At any rate, Ayala Corporation bound itself to pay all billings payable to GP Construction and the

advances made by petitioner Daniel Vazquez. Specifically, under paragraph 2 of the MOA referred to in

paragraph 7.1.1, Ayala Corporation undertook responsibility "for the payment of all billings of the

contractor GP Construction & Development Corporation after the first billing and any payments made by

the company and/or SELLERS shall be reimbursed by BUYER on closing which advances to date is

P1,159,012.87."22

The billings knowingly assumed by Ayala Corporation necessarily include the Lancer claim for which GP

Construction is liable. Proof of this is Ayala Corporation's letter23 to GP Construction dated before

"Closing" on May 4, 1981, informing the latter of Ayala Corporation's receipt of the Lancer claim

embodied in the letter dated April 30, 1981, acknowledging that it is taking over the contractual

responsibilities of Conduit, and requesting copies of all sub-contracts affecting the Conduit property.

The pertinent excerpts of the letter read:

…

In this connection, we wish to inform you that this morning we received a letter from Mr. Maximo D. Del

Rosario, President of Lancer General Builders Corporation apprising us of the existence of subcontracts




that they have with your corporation. They have also furnished us with a copy of their letter to you

dated 30 April 1981.

Since we are taking over the contractual responsibilities of Conduit Development, Inc., we believe that it

is necessary, at this point in time, that you furnish us with copies of all your subcontracts affecting the

property of Conduit, not only with Lancer General Builders Corporation, but all subcontracts with other

parties as well…24

Quite tellingly, Ayala Corporation even attached to its Pre-Trial Brief25 dated July 9, 1992 a copy of the

letter26 dated May 28, 1981 of GP Construction's counsel addressed to Conduit furnishing the latter with

copies of all sub-contract agreements entered into by GP Construction. Since it was addressed to

Conduit, it can be presumed that it was the latter which gave Ayala Corporation a copy of the letter

thereby disclosing to the latter the existence of the Lancer sub-contract.

The ineluctable conclusion is that petitioners did not violate their warranties under the MOA. The Lancer

sub-contract and claim were substantially disclosed to Ayala Corporation before the "Closing" date of

the MOA. Ayala Corporation cannot disavow knowledge of the claim.

Moreover, while in its correspondence with petitioners, Ayala Corporation did mention the filing of the

Lancer suit as an obstacle to its development of the property, it never actually brought up nor sought

redress for petitioners' alleged breach of warranty for failure to disclose the Lancer claim until it filed its

Answer27 dated February 17, 1992.

We now come to the correct interpretation of paragraph 5.7 of the MOA. Does this paragraph express a

commitment or a mere intent on the part of Ayala Corporation to develop the property within three (3)

years from date thereof? Paragraph 5.7 provides:

5.7. The BUYER hereby commits that it will develop the 'Remaining Property' into a first class residential

subdivision of the same class as its New Alabang Subdivision, and that it intends to complete the first

phase under its amended development plan within three (3) years from the date of this Agreement….28

Notably, while the first phrase of the paragraph uses the word "commits" in reference to the

development of the "Remaining Property" into a first class residential subdivision, the second phrase

uses the word "intends" in relation to the development of the first phase of the property within three

(3) years from the date of the MOA. The variance in wording is significant. While "commit"29 connotes a

pledge to do something, "intend"30 merely signifies a design or proposition.

Atty. Leopoldo Francisco, former Vice President of Ayala Corporation's legal division who assisted in

drafting the MOA, testified:

COURT

You only ask what do you mean by that intent. Just answer on that point.

ATTY. BLANCO








Don't talk about standard.

WITNESS

A Well, the word intent here, your Honor, was used to emphasize the tentative character of the period

of development because it will be noted that the sentence refers to and I quote "to complete the first

phase under its amended development plan within three (3) years from the date of this agreement, at

the time of the execution of this agreement, your Honor." That amended development plan was not yet

in existence because the buyer had manifested to the seller that the buyer could amend the subdivision

plan originally belonging to the seller to conform with its own standard of development and second,

your Honor, (interrupted)31

It is thus unmistakable that this paragraph merely expresses an intention on Ayala Corporation's part to

complete the first phase under its amended development plan within three (3) years from the execution

of the MOA. Indeed, this paragraph is so plainly worded that to misunderstand its import is deplorable.

More focal to the resolution of the instant case is paragraph 5.7's clear reference to the first phase of

Ayala Corporation's amended development plan as the subject of the three (3)-year intended timeframe

for development. Even petitioner Daniel Vazquez admitted on cross-examination that the paragraph

refers not to Conduit's but to Ayala Corporation's development plan which was yet to be formulated

when the MOA was executed:

Q: Now, turning to Section 5.7 of this Memorandum of Agreement, it is stated as follows: "The Buyer

hereby commits that to develop the remaining property into a first class residential subdivision of the

same class as New Alabang Subdivision, and that they intend to complete the first phase under its

amended development plan within three years from the date of this agreement."

Now, my question to you, Dr. Vasquez is that there is no dispute that the amended development plan

here is the amended development plan of Ayala?

A: Yes, sir.

Q: In other words, it is not Exhibit "D-5" which is the original plan of Conduit?

A: No, it is not.

Q: This Exhibit "D-5" was the plan that was being followed by GP Construction in 1981?

A: Yes, sir.

Q: And point of fact during your direct examination as of the date of the agreement, this amended

development plan was still to be formulated by Ayala?

A: Yes, sir.32

As correctly held by the appellate court, this admission is crucial because while the subject lots to be

sold to petitioners were in the first phase of the Conduit development plan, they were in the third or last



phase of the Ayala Corporation development plan. Hence, even assuming that paragraph 5.7 expresses a

commitment on the part of Ayala Corporation to develop the first phase of its amended development

plan within three (3) years from the execution of the MOA, there was no parallel commitment made as

to the timeframe for the development of the third phase where the subject lots are located.

Lest it be forgotten, the point of this petition is the alleged failure of Ayala Corporation to offer the

subject lots for sale to petitioners within three (3) years from the execution of the MOA. It is not that

Ayala Corporation committed or intended to develop the first phase of its amended development plan

within three (3) years. Whether it did or did not is actually beside the point since the subject lots are not

located in the first phase anyway.

We now come to the issue of default or delay in the fulfillment of the obligation.


Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially

or extrajudicially demands from them the fulfillment of their obligation.

However, the demand by the creditor shall not be necessary in order that delay may exist:

(1) When the obligation or the law expressly so declares; or

(2) When from the nature and the circumstances of the obligation it appears that the designation of the

time when the thing is to be delivered or the service is to be rendered was a controlling motive for the

establishment of the contract; or

(3) When demand would be useless, as when the obligor has rendered it beyond his power to perform.

In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to

comply in a proper manner with what is incumbent upon him. From the moment one of the parties

fulfills his obligation, delay by the other begins.

In order that the debtor may be in default it is necessary that the following requisites be present: (1)

that the obligation be demandable and already liquidated; (2) that the debtor delays performance; and

(3) that the creditor requires the performance judicially or extrajudicially.33

Under Article 1193 of the Civil Code, obligations for whose fulfillment a day certain has been fixed shall

be demandable only when that day comes. However, no such day certain was fixed in the MOA.

Petitioners, therefore, cannot demand performance after the three (3) year period fixed by the MOA for

the development of the first phase of the property since this is not the same period contemplated for

the development of the subject lots. Since the MOA does not specify a period for the development of

the subject lots, petitioners should have petitioned the court to fix the period in accordance with Article

119734 of the Civil Code. As no such action was filed by petitioners, their complaint for specific

performance was premature, the obligation not being demandable at that point. Accordingly, Ayala

Corporation cannot likewise be said to have delayed performance of the obligation.



Even assuming that the MOA imposes an obligation on Ayala Corporation to develop the subject lots

within three (3) years from date thereof, Ayala Corporation could still not be held to have been in delay

since no demand was made by petitioners for the performance of its obligation.

As found by the appellate court, petitioners' letters which dealt with the three (3)-year timetable were

all dated prior to April 23, 1984, the date when the period was supposed to expire. In other words, the

letters were sent before the obligation could become legally demandable. Moreover, the letters were

mere reminders and not categorical demands to perform. More importantly, petitioners waived the

three (3)-year period as evidenced by their agent, Engr. Eduardo Turla's letter to the effect that

petitioners agreed that the three (3)-year period should be counted from the termination of the case

filed by Lancer. The letter reads in part:

I. Completion of Phase I

As per the memorandum of Agreement also dated April 23, 1981, it was undertaken by your goodselves

to complete the development of Phase I within three (3) years. Dr. & Mrs. Vazquez were made to

understand that you were unable to accomplish this because of legal problems with the previous

contractor. These legal problems were resolved as of February 19, 1987, and Dr. & Mrs. Vazquez

therefore expect that the development of Phase I will be completed by February 19, 1990, three years

from the settlement of the legal problems with the previous contractor. The reason for this is, as you

know, that security-wise, Dr. & Mrs. Vazquez have been advised not to construct their residence till the

surrounding area (which is Phase I) is developed and occupied. They have been anxious to build their

residence for quite some time now, and would like to receive assurance from your goodselves regarding

this, in compliance with the agreement.

II. Option on the adjoining lots

We have already written your goodselves regarding the intention of Dr. & Mrs. Vazquez to exercise their

option to purchase the two lots on each side (a total of 4 lots) adjacent to their "Retained Area". They

are concerned that although over a year has elapsed since the settlement of the legal problems, you

have not presented them with the size, configuration, etc. of these lots. They would appreciate being

provided with these at your earliest convenience.35

Manifestly, this letter expresses not only petitioners' acknowledgement that the delay in the

development of Phase I was due to the legal problems with GP Construction, but also their acquiescence

to the completion of the development of Phase I at the much later date of February 19, 1990. More

importantly, by no stretch of semantic interpretation can it be construed as a categorical demand on

Ayala Corporation to offer the subject lots for sale to petitioners as the letter merely articulates

petitioners' desire to exercise their option to purchase the subject lots and concern over the fact that

they have not been provided with the specifications of these lots.

The letters of petitioners' children, Juan Miguel and Victoria Vazquez, dated January 23, 198436 and

February 18, 198437 can also not be considered categorical demands on Ayala Corporation to develop




the first phase of the property within the three (3)-year period much less to offer the subject lots for

sale to petitioners. The letter dated January 23, 1984 reads in part:

You will understand our interest in the completion of the roads to our property, since we cannot

develop it till you have constructed the same. Allow us to remind you of our Memorandum of

Agreement, as per which you committed to develop the roads to our property "as per the original plans

of the company", and that

1. The back portion should have been developed before the front portion – which has not been the case.

2. The whole project – front and back portions be completed by 1984.38

The letter dated February 18, 1984 is similarly worded. It states:

In this regard, we would like to remind you of Articles 5.7 and 5.9 of our Memorandum of Agreement

which states respectively:…39

Even petitioner Daniel Vazquez' letter40 dated March 5, 1984 does not make out a categorical demand

for Ayala Corporation to offer the subject lots for sale on or before April 23, 1984. The letter reads in

part:

…and that we expect from your goodselves compliance with our Memorandum of Agreement, and a

definite date as to when the road to our property and the development of Phase I will be completed.41

At best, petitioners' letters can only be construed as mere reminders which cannot be considered

demands for performance because it must appear that the tolerance or benevolence of the creditor

must have ended.42

The petition finally asks us to determine whether paragraph 5.15 of the MOA can properly be construed

as an option contract or a right of first refusal. Paragraph 5.15 states:

5.15 The BUYER agrees to give the SELLERS first option to purchase four developed lots next to the

"Retained Area" at the prevailing market price at the time of the purchase.43

The Court has clearly distinguished between an option contract and a right of first refusal. An option is a

preparatory contract in which one party grants to another, for a fixed period and at a determined price,

the privilege to buy or sell, or to decide whether or not to enter into a principal contract. It binds the

party who has given the option not to enter into the principal contract with any other person during the

period designated, and within that period, to enter into such contract with the one to whom the option

was granted, if the latter should decide to use the option. It is a separate and distinct contract from that

which the parties may enter into upon the consummation of the option. It must be supported by

consideration.44

In a right of first refusal, on the other hand, while the object might be made determinate, the exercise of

the right would be dependent not only on the grantor's eventual intention to enter into a binding

juridical relation with another but also on terms, including the price, that are yet to be firmed up.45









Applied to the instant case, paragraph 5.15 is obviously a mere right of first refusal and not an option

contract. Although the paragraph has a definite object, i.e., the sale of subject lots, the period within

which they will be offered for sale to petitioners and, necessarily, the price for which the subject lots will

be sold are not specified. The phrase "at the prevailing market price at the time of the purchase"

connotes that there is no definite period within which Ayala Corporation is bound to reserve the subject

lots for petitioners to exercise their privilege to purchase. Neither is there a fixed or determinable price

at which the subject lots will be offered for sale. The price is considered certain if it may be determined

with reference to another thing certain or if the determination thereof is left to the judgment of a

specified person or persons.46

Further, paragraph 5.15 was inserted into the MOA to give petitioners the first crack to buy the subject

lots at the price which Ayala Corporation would be willing to accept when it offers the subject lots for

sale. It is not supported by an independent consideration. As such it is not governed by Articles 1324 and

1479 of the Civil Code, viz:

Art. 1324. When the offeror has allowed the offeree a certain period to accept, the offer may be

withdrawn at any time before acceptance by communicating such withdrawal, except when the option

is founded upon a consideration, as something paid or promised.

Art. 1479. A promise to buy and sell a determinate thing for a price certain is reciprocally demandable.

An accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding upon

the promissor if the promise is supported by a consideration distinct from the price.

Consequently, the "offer" may be withdrawn anytime by communicating the withdrawal to the other

party.47

In this case, Ayala Corporation offered the subject lots for sale to petitioners at the price of

P6,500.00/square meter, the prevailing market price for the property when the offer was made on June

18, 1990.48 Insisting on paying for the lots at the prevailing market price in 1984 of P460.00/square

meter, petitioners rejected the offer. Ayala Corporation reduced the price to P5,000.00/square meter

but again, petitioners rejected the offer and instead made a counter-offer in the amount of

P2,000.00/square meter.49 Ayala Corporation rejected petitioners' counter-offer. With this rejection,

petitioners lost their right to purchase the subject lots.

It cannot, therefore, be said that Ayala Corporation breached petitioners' right of first refusal and should

be compelled by an action for specific performance to sell the subject lots to petitioners at the

prevailing market price in 1984.

WHEREFORE, the instant petition is DENIED. No pronouncement as to costs.

SO ORDERED.

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





Footnotes

1 Alternatively spelled Vasquez. 2 Rollo, pp. 10-187 with Annexes. 3 Id. at 193-210; Penned by Associate Justice Perlita J. Tria-Tirona and concurred in by Associate Justices

Eugenio S. Labitoria and Eloy R. Bello, Jr. 4 Id. at 74-79; Dated September 11, 1995. 5 Id. at 193-198; Culled from the Decision of the Court of Appeals. 6 Id. at 50-62. 7 Id. at 206. 8 Id. at 240-289. 9 Id. at 53. 10 Art. 1197. If the obligation does not fix a period, but from its nature and the circumstances it can be

inferred that a period was intended, the courts may fix the duration thereof.

The courts shall also fix the duration of the period when it depends upon the will of the debtor.

In every case, the courts shall determine such period as may under the circumstances have been

probably contemplated by the parties. Once fixed by the courts, the period cannot be changed by them. 11 Supra, note 2 at 300-323. 12 Id. at 324-325. 13 Id. at 331-369. 14 Id. at 370-433. 15 Rosario v. Court of Appeals, 369 Phil. 729 (1999), citations omitted. 16 Supra, note 2 at 401-402. 17 RTC Records, pp. 60-61. 18 Id. at 90-91 19 Id. at 77. 20 Supra note 2 at 53. 21 Id. at 58-60. 22 Id. at 52-53. The full text of paragraph 2 reads:

2. Purchase Price and Mode of Payment

The Purchase Price shall be FIFTY-SIX MILLION SIX HUNDRED TWENTY THREE THOUSAND THREE

HUNDRED THIRTY EIGHT PESOS AND EIGHTY CENTAVOS (P56,623,338.80) and shall be paid at the

Closing by the BUYER by means of a manager's check(s) payable to Ma. Luisa M. Vazquez in her own

behalf and as representative of the other SELLERS, less the earnest money of EIGHT MILLION PESOS

(P8,000,000.00) herein paid as mentioned below; provided, however, that on or before the Closing,

SELLERS shall deliver to the BUYER duly executed letters of instruction from the other SELLERS

specifically authorizing Ma. Luisa M. Vazquez to receive on their own behalf their respective payments

by means of a manager's check for the entire Purchase Price stated in this Paragraph payable to

SELLERS. In addition to the foregoing, BUYER shall be responsible for the payment of all billings of the

contractor GP Construction & Development Corporation after the first billing and any payments made by
















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the company and/or SELLERS shall be reimbursed by BUYER on closing which advances to date is

P1,159,012.87.

Earnest money in the sum of EIGHT MILLION PESOS (P8,000,000.00), Philippine Currency, shall be paid

upon signing of this document. 23 Supra, note 17 at 78. 24 Ibid. 25 Supra, note 17 at 69-76. 26 Id. at 81-82. 27 Id. at 32-38. 28 Supra, note 2 at 55. 29 Black's Law Dictionary, Sixth Edition, p. 273. 30 Id. at 809. 31 TSN, November 18, 1993, pp. 35-36. 32 TSN, August 3, 1993, pp. 17-19. 33 4 A. Tolentino, Commentaries and Jurisprudence on the Civil Code of the Philippines, 102 (1991). 34 Supra note 10. 35 Supra, note 17 at 651. 36 Id. at 151. 37 Id. at 154. 38 Supra, note 36. 39 Supra, note 37. 40Supra, note 17 at 157-158. 41 Id. at 158. 42 A. Tolentino, op. cit. supra, note 33 citing 2 Castan 528 and 3 Valverde 104. 43 Supra, note 2 at 57. 44 Litonjua v. L&R Corporation, 385 Phil. 538 (2000); Carceller v. Court of Appeals, 362 Phil. 332 (1999);

Equatorial Realty Development, Inc. v. Mayfair Theater, Inc., 332 Phil. 525 (1996). 45 Ang Yu Asuncion v. Court of Appeals, G.R. No. 109125, December 2, 1994, 238 SCRA 602. 46 Art. 1469, Civil Code. 47 A. Tolentino, op. cit. supra, note 33 at 465. 48 Supra, note 2 at 63. 49 Id. at 209-210.

The testimony of petitioner Daniel Vazquez on direct examination reads:

Q Mr. Witness, at the last hearing which was interrupted by the brown-out, we were on Exhibit "L",

which I am handing to you, upon receipt of Exhibit "L" which is the June 18, 1990 letter of Ayala to you,

what did you do, if any?

A We contacted Ayala to tell them we wanted to exercise our option and that we were not agreeable

with the price they are mentioning here, sir.

Q Did you offer any price?

A Yes, sir, we offered them a price.

Q According to the complaint, the price in April 1984 could have been only P460.00 pesos per square

meter. Where did you get that price?























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A One of our secretaries, Mr. Eusebio, I believe, contacted the Ayala Corporation and that was the price

the Ayala Corporation was selling it at that time, sir.

Q Did the Ayala Corporation reduce this price for purposes of arriving in an agreeable or acceptable

offer?

A Yes, sir, we did.

Q How much did the Ayala Corporation dropped to?

A Ayala dropped, if I remember right, to I think P4,000.00 pesos, sir.

Q And how about you?

A We increased our price to P2,000.00 pesos based on the selling price of Ayala at that time converted

to dollars and reconverted to pesos at this later dates of 1991. (TSN dated April 20, 1993, pp. 3-5).


SUPREME COURT

Manila

EN BANC

G.R. No. L-32336 December 20, 1930

JULIO C. ABELLA, plaintiff-appellant,

vs.

GUILLERMO B. FRANCISCO, defendant-appellee.

Antonio T. Carrascoso, Jr. for appellant.

Camus and Delgado for appellee.

AVANCEÑA, C.J.:

Defendant Guillermo B. Francisco purchased from the Government on installments, lots 937 to 945 of

the Tala Estate in Novaliches, Caloocan, Rizal. He was in arrears for some of these installments. On the

31st of October, 1928, he signed the following document:

MANILA, October 31, 1928

Received from Mr. Julio C. Abella the amount of five hundred pesos (P500), payment on account of lots

Nos. 937, 938, 939, 940, 941, 942, 943, 924, and 945 of the Tala Estate, barrio of Novaliches, Caloocan,

Rizal, containing an area of about 221 hectares, at the rate of one hundred pesos (P100) per hectare, the

balance being due on or before the fifteenth day of December, 1928, extendible fifteen days thereafter.

(Sgd.) G. B. FRANCISCO — P500 — Phone 67125.

After having made this agreement, the plaintiff proposed the sale of these lots at a higher price to

George C. Sellner, collecting P10,000 on account thereof on December 29, 1928.

Besides the P500 which, according to the instrument quoted above, the plaintiff paid, he made another

payment of P415.31 on November 13, 1928, upon demand made by the defendant. On December 27th

of the same year, the defendant, being in the Province of Cebu, wrote to Roman Mabanta of this City of

Manila, attaching a power of attorney authorizing him to sign in behalf of the defendant all the

documents required by the Bureau of Lands for the transfer of the lots to the plaintiff. In that letter the

defendant instructed Roman Mabanta, in the event that the plaintiff failed to pay the remainder of the

selling price, to inform him that the option would be considered cancelled, and to return to him the

amount of P915.31 already delivered. On January 3, 1929, Mabanta notified the plaintiff that he had

received the power of attorney to sign the deed of conveyance of the lots to him, and that he was

willing to execute the proper deed of sale upon payment of the balance due. The plaintiff asked for a

few days' time, but Mabanta, following the instructions he had received from the defendant, only gave

him until the 5th of that month. The plaintiff did not pay the rest of the price on the 5th of January, but

on the 9th of the month attempted to do so; Mabanta, however, refused to accept it, and gave him to

understand that he regarded the contract as rescinded. On the same day, Mabanta returned by check

the sum of P915.31 which the plaintiff had paid.

The plaintiff brought this action to compel the defendant to execute the deed of sale of the lots in

question, upon receipt of the balance of the price, and asks that he be judicially declared the owner of

said lots and that the defendant be ordered to deliver them to him.

The court below absolved the defendant from the complaint, and the plaintiff appealed.

In rendering that judgment, the court relied on the fact that the plaintiff had failed to pay the price of

the lots within the stipulated time; and that since the contract between plaintiff and defendant was an

option for the purchase of the lots, time was an essential element in it.

It is to be noted that in the document signed by the defendant, the 15th of December was fixed as the

date, extendible for fifteen days, for the payment by the plaintiff of the balance of the selling price. It

has been admitted that the plaintiff did not offer to complete the payment until January 9, 1929. He

contends that Mabanta, as attorney-in-fact for the defendant in this transaction, granted him an

extension of time until the 9th of January. But Mabanta has stated that he only extended the time until

the 5th of that month. Mabanta's testimony on this point is corroborated by that of Paz Vicente and by

the plaintiff's own admission to Narciso Javier that his option to purchase those lots expired on January

5, 1929.

In holding that the period was an essential element of the transaction between plaintiff and defendant,

the trial court considered that the contract in question was an option for the purchase of the lots, and

that in an agreement of this nature the period is deemed essential. The opinion of the court is divided

upon the question of whether the agreement was an option or a sale, but even supposing it was a sale,

the court holds that time was an essential element in the transaction. The defendant wanted to sell

those lots to the plaintiff in order to pay off certain obligations which fell due in the month of December,

1928. The time fixed for the payment of the price was therefore essential for the defendant, and this

view is borne out by his letter to his representative Mabanta instructing him to consider the contract

rescinded if the price was not completed in time. In accordance with article 1124 of the Civil Code, the

defendant is entitled to resolve the contract for failure to pay the price within the time specified.

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

Johnson, Street, Malcolm, Villamor, Ostrand, Johns, Romualdez and Villa-Real, JJ., concur.

FIRST DIVISION

[G.R. No. L-8024. November 29, 1955.]

EUSEBIO DE LA CRUZ, plaintiff-appellee, vs. APOLONIO LEGASPI and CONCORDIA SAMPEROY,

defendants-appellants.

Jose A. Fornier for appellants.

Ramor Maza for appellee.

SYLLABUS

1. SALES; CONSIDERATION; NON-PAYMENT OF PRICE DOES NOT

CONVERT INTO "NUDUM PACTUM." — In the sale of real property, the subsequent non-payment of the

price at the time agreed upon does not convert the contract into one without cause or consideration: a

nudum pactum. The situation is rather one in which there is failure to pay the consideration, with its

resultant consequences.

2. ID.; ID.; ID.; VENDOR'S REMEDY. — The vendor's remedy in such a case

is generally to demand legal interest for the delay or to demand rescission in court.

3. ID.; ID.; ID.; AUTOMATIC RESCISSION; VENDEE MAY ENFORCE

CONTRACT BEFORE DEMAND FOR RESCISSION IS MADE UPON HIM. — Even if the contract of sale

expressly provides for "automatic rescission upon failure to pay the price" the vendee may enforce the

contract even after the expiration of the period but before demand for rescission has been made upon

him either by suit or by notarial act.

D E C I S I O N

BENGZON, J p:

In the Court of First Instance of Antique, in November, 1950, Eusebio de la Cruz sued Apolonio Legaspi

and his wife to compel delivery of the parcel of land they bad sold to him in December 1949. The

complaint alleged the execution of the contract, the terms thereof, the refusal of defendants to accept

payment of the purchase price of P450 which he had tendered, and undue retention of the realty.

The defendants, in their answer, admitted the sale and the price; but they alleged that before the

document (of sale) "was made, the plaintiff agreed to pay the defendants the amount of P450 right after

the document is executed that very day December 5, 1949, but after the document was signed and

ratified by the Notary Public and after the plaintiff has taken the original of the said document, the said

plaintiff refused to pay the sum of P450 which is the purchase price of the said land in question." They

asserted that for lack of consideration and for deceit, the document of sale should be annulled.

Plaintiff's next move was a petition for judgment on the pleadings, contending that the allegations of

the answer gave the defendants no excuse to retain the property, rejecting the price.

Joining the motion for judgment on the pleadings, the defendants maintained that the sale should be

annulled pursuant to their answer's allegations.

The Honorable F. Imperial Reyes, Judge, rendered judgment (a) ordering plaintiff to pay the price of

P450 to defendants; (b) ordering the latter to receive such price and immediately after such receipt, to

deliver possession of the property to plaintiff.

Having failed in a motion to reconsider, defendants appealed in due time. The seven errors assigned in

their printed brief, assail the correctness of the judgment, maintaining two principal propositions,

namely: (1) the trial judge erroneously disregarded their allegations, in their answer, of non-payment of

the price, as hereinbefore quoted; (2) such allegations which must be deemed admitted by plaintiff

when he moved for judgment on the pleadings — established a good defense, because the contract was

without consideration, and was resolved by plaintiff's failure to pay the price "right after the document

was executed."

As to the first proposition, the decision does not say so, but there is no reason to doubt that as

requested in the plaintiff's motion, His Honor considered the allegations made both in the complaint

and in the answer. However, he found that defendants' allegations constituted no defense. He read the

law correctly, as we shall forthwith explain.

On the second proposition, appellants rightly say that the Civil Code — not the New Civil Code —

regulates the transaction, which occurred in 1949. Yet they err in the assertion that as plaintiff failed to

pay the price after the execution of the document of sale as agreed previously, the contract became null

and void for lack of consideration. It cannot be denied that when the document was signed the cause or

consideration existed: P450. The document specifically said so; and such was undoubtedly the

agreement. Subsequent non- payment of the price at the time agreed upon did not convert the contract

into one without cause or consideration: a nudum pactum. (Levy vs. Johnson, 4 Phil. 650; Puato vs.

Mendoza, 64 Phil, 457.) The situation was rather one in which there is failure to pay the consideration,

with its resultant consequences. In other words, when after the notarization of the contract, plaintiff

failed to hand the money to defendants, as he previously promised, there was default on his part at

most, and defendants' right was to demand interest — legal interest — for the delay, pursuant to article

1501 (3) of the Civil Code (Villaruel vs. Tan King, 43 Phil. 251), or to demand rescission in court. (Escueta

vs. Pardo, 42 Off. Gaz. 2759; Cortes vs. Bibaño, 41 Phil. 298.) Such failure, however, did not ipso facto

resolve the contract, no stipulation to that effect having been alleged. (Cf. Warner Barnes & Co. vs. Inza,

43 Phil., 505.) Neither was there any agreement nor allegation that payment on time was essential. (Cf.

Abella vs. Francisco, 55 Phil., 447; Berg vs. Magdalena Estate, 92 Phil., 110.

Indeed, even if the contract of sale here in question had expressly provided for "automatic rescission

upon failure to pay the price," the trial judge could allow plaintiff to enforce the contract, as the

judgment does, in effect because defendants had not made a previous demand on him, by suit or

notarial act.

"In the sale of real property, even though it may have been stipulated that in default of the price within

the time agreed upon, the resolution of the contract shall take place ipso facto, the vendee may pay

even after the expiration of the period, at any time before demand has been made upon him either by

suit or by notarial act. After such demand has been made the judge cannot grant him further time." (Art.

1504 Civil Code.)

By the way, this previous demand, Manresa explains, is a demand for rescission. (Manresa Civil Code,

Vol. 10, p. 288, 2d Ed.; Villaruel vs. Tan King, 43 Phil. 251.)

The appealed judgment will therefore be affirmed, with costs against appellants. So ordered.

Paras, C. J., Padilla, Reyes, A., Jugo, Bautista Angelo Labrador, Concepcion and Reyes, J. B. L., JJ., concur.

EN BANC

[G.R. No. L-10394. December 13, 1958.]

CLAUDINA VDA. DE VILLARUEL, ET AL., plaintiffs-appellees, vs. MANILA MOTOR CO., INC. and ARTURO

COLMENARES, defendants-appellants.

Hilado & Hilado for appellees.

Ozaeta, Gibbs & Ozaeta for appellant company.

Jose L. Gamboa and Napoleon Garcia for appellant Arturo Colmenares.

SYLLABUS

1. INTERNATIONAL LAW; SEQUESTRATION OF PRIVATE PROPERTY BY BELLIGERENT OCCUPANT

RECOGNIZED; LESSOR OF SEIZED PROPERTY LIABLE FOR DISTURBANCE. — Under the generally accepted

principles of international law, which are made part of the law of the Philippines, a belligerent occupant

(like the Japanese) may legitimately billet or quarter its troops in privately owned land and buildings for

the duration of its military operations, or as military necessity should demand. Thus, when the Japanese

forces evicted appellant lessee company from the leased buildings and occupied the same as quarters

for its troops, the Japanese authorities acted pursuant to a right recognized by international and

domestic law. Its act of dispossession, therefore, did not constitute a mere act of trespass (perturbacion

de mero hecho) but a trespass under color of title (perturbacion de derecho) chargeable to the lessors

of the seized premises, since the belligerent occupant acted pursuant to a right that the law recognizes.

2. ID.; ID.; ID.; LIABILITY OF LESSEE FOR RENTS DURING OCCUPATION OF PROPERTY. — Such

dispossession, though not due to the fault of the lessors or lessee nevertheless deprived the lessee of

the enjoyment of the thing leased. Wherefore, the lessee's corresponding obligation to pay rentals

ceased during such deprivation.

3. ID.; ID.; ID.; IMPORTER REFUSAL TO ACCEPT RENTS PLACES LESSORS IN DEFAULT; LIABILITY FOR

SUPERVENING RISK. — Since the lessee was exempt from paying the rents for the period of its ouster,

the insistence of the lessors to collect the rentals corresponding to said period was unwarranted and

their refusal to accept the currant rents tendered by the lessee was unjustified. Such refusal places the

lessors in default (mora) and they must shoulder the subsequent accidental loss of the premises leased.

4. ID.; ID.; ID.; ID.; ID.; MORA OF LESSORS NOT CURED BY FAILURE OF LESSEE TO CONSIGN RENTS IN

COURT. — The mora of the lessors was not cured by the failure of the lessee to make the consignation

of the rejected payments, but the lessee remained obligated to pay the amounts tendered and not

consigned by it in court.

5. PLEADING AND PRACTICE; CHANGE IN THE RELIEF PRAYED DURING THE PENDENCY OF THE ACTION.

— A change in the relief prayed, brought about by circumstances occurring during the pendency of the

action, is not improper. This is justified under Section 2, Rule 17 of the Rules of Court (on amendments)

"to the end that the real matter in dispute and all matters in the action in dispute between the parties

may, as far as possible be completely determined in a single proceeding."

6. ID.; DISMISSAL WITHOUT PREJUDICE. — The dismissal of plaintiffs' two causes of action in the case at

bar was premised on the existence of the "Debt Moratorium" which suspended the enforcement of the

obligation up to a certain time. The reference thereto by the court amounted to a dismissal "without

prejudice", since in effect it ruled that the plaintiffs could not, at the time they sought it, enforce their

right of action against the defendants, but they must wait until the moratorium was lifted. In this way,

the court qualified its dismissal.

D E C I S I O N

REYES, J.B.L., J p:

Manila Motor Co., Inc., and Arturo Colmenares interpose this appeal against the decision of the Court of

First Instance of Negros Occidental, in its Civil Case No. 648, ordering the defendant Manila Motor Co.,

Inc. to pay to the plaintiffs Villaruel the sum of (a) P11,900 with legal interest from May 18, 1953, on

which date, the court below declared invalid the continued operation of the Debt Moratorium, under

the first cause of action; (b) P38,395 with legal interest from the date of filing of the original complaint

on April 26, 1947, on the second cause of action; and against both the Manila Motor Co., Inc. and its co-

defendant, Arturo Colmenares, the sum of P30,000 to be paid, jointly and severally, with respect to the

third cause of action.

On May 31, 1940, the plaintiffs Villaruel and the defendant Manila Motor Co., Inc. entered into a

contract (Exhibit "A") whereby, the former agreed to convey by way of lease to the latter the following

described premises;

(a) Five hundred (500) square meters of floor space of a building of strong materials for automobile

showroom, offices, and store room for automobile spare parts;

(b) Another building of strong materials for automobile repair shop; and

(c) A 5-bedroom house of strong materials for residence of the Bacolod Branch Manager of the

defendant company.

The term of the lease was five (5) years, to commence from the time that the building were delivered

and placed at the disposal of the lessee company, ready for immediate occupancy. The contract was

renewable for an additional period of five (5) years. The Manila Motor Company, in consideration of the

above covenants, agreed to pay to the lessors, or their duly authorized representative, a monthly rental

of Three Hundred (P300) pesos payable in advance before the fifth day of each month, and for the

residential house of its branch manager, a monthly rental not to exceed Fifty (P50) pesos "payable

separately by the Manager".

The leased premises were placed in the possession of the lessee on the 31st day of October, 1940, from

which date, the period of the lease started to run under their agreement.

This situation, the Manila Motor Co., Inc. and its branch manager enjoying the premises, and the lessors

receiving the corresponding rentals as stipulated, continued until the invasion of 1941; and shortly after

the Japanese military occupation of the Provincial Capital of Bacolod the enemy forces held and used

the properties leased as part of their quarters from June 1, 1942 to March 29, 1945, ousting the lessee

therefrom. No payment of rentals were made at any time during the said period.

Immediately upon the liberation of the said city in 1945, the American Forces occupied the same

buildings that were vacated by the Japanese, including those leased by the plaintiffs, until October 31,

1945. Monthly rentals were paid by the said occupants to the owners during the time that they were in

possession, as the same rate that the defendant company used to pay.

Thereafter, when the United States Army finally gave up the occupancy the premises, the Manila Motor

Co., Inc., through their branch manager, Rafael B. Grey, decided to exercise their option to renew the

contract for the additional period of five (5) years, and the parties agreed that the seven months

occupancy by the U. S. Army would not be counted as part of the new 5-year term. Simultaneously with

such renewal, the company sublet the same buildings, except that used for the residence of the branch

manager, to the other defendant, Arturo Colmenares.

However, before resuming the collection of rentals, Dr. Alfredo Villaruel, who was entrusted with the

same, consulted Atty. Luis Hilado on whether they (the lessors) had the right to collect, from the

defendant company, rentals corresponding to the time during which the Japanese military forces had

control over the leased premises. Upon being advised that they had such a right, Dr. Villaruel demanded

payment thereof, but the defendant company refused to pay. As a result, Dr. Villaruel gave notice

seeking the rescission of the contract of lease and the payment of rentals from June 1, 1942 to March

31, 1945 totalling P11,900. This was also rejected by the defendant company in its letter to Villaruel,

dated July 27, 1946.

Sometime on that same month of July, Rafael B. Grey offered to pay to Dr. Villaruel the sum of P350, for

which, tenderer requested a receipt that would state that it was in full payment for the said month. The

latter expressed willingness to accept the tendered amount provided, however, that his acceptance

should be understood to be without prejudice to their demand for the rescission of the contract, and for

increased rentals until their buildings were returned to them. Later, Dr. Villaruel indicated his willingness

to limit the condition of his acceptance to be that "neither the lessee nor the lessors admit the

contention of the other by the mere fact of payment". As no accord could still be reached between the

parties as to the context of the receipt, no payment was thereafter tendered until the end of November,

1946. On December 4, 1946 (the day after the defendant company notified Dr. Villaruel by telegram,

that it cancelled the power of attorney given to Grey, and that it now authorized Arturo Colmenares,

instead, to pay the rent of P350 each month), the Manila Motor Co., Inc. remitted to Dr. Villaruel by

letter, the sum of P350.90. For this payment, the latter issued a receipt stating that it was "without

prejudice" to their demand for rents in arrears and for the rescission of the contract of lease.

After it had become evident that the parties could not settle their case amicably, the lessors

commenced this action on April 26, 1947 with the Court of First Instance of Negros Occidental against

the appellants herein. During the pendency of the case, a fire originating from the projection room of

the City Theatre, into which Arturo Colmenares, (the sublessee) had converted the former repair shop of

the Manila Motor Co. Inc., completely razed the building, engulfing also the main building where

Colmenares had opened a soda fountain and refreshment parlor, and made partitions for store spaces

which he rented to other persons.

Because of the aforesaid occurrence, plaintiffs demanded reimbursement from the defendants, but

having been refused, they filed a supplemental complaint to include as their third cause of action, the

recovery of the value of the burned buildings.

Defendants filed their amended answer and also moved for the dismissal of the plaintiffs' first and

second causes of action invoking the Debt Moratorium that was then in force. The dismissal was granted

by the trial court on February 5, 1951, but hearing was set as regards the third cause of action.

On August 11, 1952, the defendant company filed a motion for summary judgment dismissing the

plaintiffs, third cause of action, to which plaintiffs registered objection coupled with a petition for

reconsideration of the order of the court dismissing the first and second causes of action. Pending the

resolution of this incident, plaintiffs, on October 2, 1953, called the court's attention to the decision in

the case of Rutter vs. Esteban (93 Phil., 68; 49 Off. Gaz. [5] 1807) invalidating the continued effectivity of

the Moratorium Law (R. A. 342). On November 25, 1953, the trial court denied the defendant company's

motion for summary judgment and set aside its previous order dismissing the first and second causes of

action. The case was accordingly heard and thereafter, judgment was rendered in plaintiffs' favor in the

terms set in the opening paragraph of this decision. Thereafter, the defendants regularly appealed to

this Court.

The defendants-appellants raise a number of procedural points. The first of these relates to their

contention that the supplemental complaint which included a third cause of action, should not have

been admitted, as it brought about a change in the original theory of the case and that it raised new

issues not theretofore considered. This argument cannot be sustained under the circumstances. This

action was inceptionally instituted for the rescission of the contract of lease and for the recovery of

unpaid rentals before and after liberation. When the leased buildings were destroyed, the plaintiffs-

lessors demanded from the defendants-lessees, instead, the value of the burned premises, basing their

right to do so on defendants' alleged default in the payment of post-liberation rentals (which was also

their basis in formerly seeking for rescission). This cannot be considered as already altering the theory of

the case which is merely a change in the relief prayed for, brought about by circumstances occurring

during the pendency of the action, and is not improper. (Southern Pacific Co. vs. Conway, 115 F. 2d 746;

Suburban Improvement Company vs. Scott Lumber Co., 87 A.L.R. 555, 59 F. 2d 711). The filing of the

supplemental complaint can well be justified also under section 2, Rule 17 of the Rules of Court (on

amendments) "to the end that the real matter in dispute and all matters in the action in dispute

between the parties may, as far as possible be completely determined in a single proceedings". It is to

be noted furthermore, that the admission or rejection of this kind of pleadings is within the sound

discretion of the court that will not be disturbed on appeal in the absence of abuse thereof (see Sec. 5,

Rule 17, Rules of Court), especially so, as in this case, where no substantial procedural prejudice is

caused to the adverse party.

It is urged that the dismissal of the first and second causes of action on February 5, 1951 had the effect

of a dismissal "with prejudice" as the court did not make any qualification in its dismissal order.

Appellants, apparently, lost sight of the fact that the dismissal was premised on the existence of the

"Debt Moratorium" which suspended the enforcement of the obligation up to a certain time. The

reference thereto by the lower court amounted to a dismissal "without prejudice", since in effect it

ruled that the plaintiffs could not, at the time they sought it, enforce their right of action against the

defendants, but plaintiffs must wait until the moratorium was lifted. In this way, the court qualified its

dismissal.

Taking up the case on its merits, it is readily seen that the key to the entire dispute is the question

whether the defendant-appellant Manila Motor Co., Inc. should be held liable for the rentals of the

premises leased corresponding to the lapse of time that they were occupied as quarters or barracks by

the invading Japanese army, and whether said appellant was placed in default by its refusal to comply

with the demand to pay such rents. For if the Motor Company was not so liable, then it never was in

default nor was it chargeable for the accidental lose of the buildings, nor for any damages except the

rental at the contract rate from its reoccupation of the premises leased until the same were accidentally

destroyed by fire on March 2, 1948.

The appellees contended, and the court below has held, that the ouster of the lessee company by the

Japanese occupation forces from 1942 until liberation, while operating to deprive the lessee of the

enjoyment of the thing leased, was, nevertheless, a mere act of trespass ("perturbacion de mero

hecho") that, under the Spanish Civil Code of 1889 (in force here until 1950), did not exempt the lessee

from the duty to pay rent. We find that contention and ruling erroneous and untenable.

The pertinent articles of the Civil Code of Spain of 1889 provide:

"ART. 1554. It shall be the duty of the lessor;

1. To deliver to the lessee the thing which is the subject matter of the contract;

2. To make thereon, during the lease, all repairs necessary in order to keep it in serviceable condition for

the purpose for which it was intended;

3. To maintain the lessee in the peaceful enjoyment of the lease during the entire term of the contract."

"ART. 1560. The lessor shall not be liable for any act of mere disturbance of a third person of the use of

the leased property; but the lessee shall have a direct action against the trespasser.

If the third person, be it the Government or a private individual, has acted in reliance upon a right, such

action shall not be deemed a mere act of disturbance." (Italics supplied)

Under the first paragraph of article 1560 the lessor does not answer for a mere act of trespass

(perturbacion de mero hecho) as distinguished from trespass under color of title (perturbacion de

derecho). As to what would constitute a mere act of trespass, this Court in the case of Goldstein vs.

Roces (34 Phil. 562), made this pronouncement:


"Si el hecho perturbador no va acompañado ni precedido de nada que revele una intencion propiamente juridica en el que lo realiza, de tal suerte que el arrendatario solo pueda apreciar el hecho material desnudo de toda forma o motivacion de derecho, entendemos que se trata de una perturbacion de mero hecho."

"If the disturbing fact is not accompanied or preceded by anything that reveals a proper legal intent in performing it, in such a way that the tenant can only see the bare material fact or any form of right motivation, we understand that this is a disturbance of an act. "

Upon the basis of the distinction thus established between the perturbacion de hecho and the

perturbacion de derecho, it is demonstrable that the ouster of the appellant by the Japanese occupying

forces belongs to the second class of disturbances, de derecho. For under the generally accepted

principles of international law (and it must be remembered that those principles are made by our

Constitution a part of the law of our nation) 1 a belligerent occupant (like the Japanese in 1942-1945)

may legitimately billet or quarter its troops in privately owned land and buildings for the duration of its

military operations, or as military necessity should demand. The well known writer Oppenheim,

discoursing on the laws of war on land, says upon this topic;

"Immovable private enemy property may under no circumstances or conditions be appropriated by an

invading belligerent. Should he confiscate and sell private land or buildings, the buyer would acquire no

right whatever to the property. Article 46 of the Hague Regulations expressly enacts that 'private

property may not be confiscated.' But confiscation differs from the temporary use of private land and

building for all kinds of purposes demanded by the necessities of war. What has been said above with

regard to utilization of public buildings applies equally to private buildings. If necessary, they may be

converted into hospitals, barracks, and stables without compensation for the proprietors, and they may

also be converted into fortifications. A humane belligerent will not drive the wretched inhabitants into

the street if he can help it. But under the pressure of necessity he may be obliged to do this, and he is

certainly not prohibited from doing it. (Italics supplied) (Oppenheim & Lauterpach, International Law,

Vol. II, p. 312, 1944 Ed.)

The view thus expressed is concurred in by other writers. Hyde (International Law, Vol. 3, p. 1893, 2nd

Rev. Ed.) quotes the U. S. War Department 1940 Rules of Land Warfare (Rule No. 324) to the effect that

—

"The measure of permissible devastation is found in the strict necessities of war. As an end in itself, as a

separate measure of war, devastation is not sanctioned by the law of war. There must be some

reasonably close connection between the destruction of property and the overcoming of the enemy's

army. Thus the rule requiring respect for private property is not violated through damage resulting from

operations, movements, or combats of the army; that is, real estate may be utilized for marches, camp

sites, construction of trenches, etc. Building may be used for shelter for troops, the sick and wounded,

for animals, for reconnaissance, cover defense, etc. Fences, woods, crops, buildings, etc., may be

demolished, cut down, and removed to clear a field of fire, to construct bridges, to furnish fuel if

imperatively needed for the army." (Emphasis supplied)

Reference may also be made to Rule 336:

"What may be requisitioned. — Practically everything may be requisitioned under this article (art. LII of

the regulations above quoted) that is necessary for the maintenance of the army and not of direct

military use, such as fuel, food, forage, clothing, tobacco, printing presses, type, leather, cloth, etc.

Billeting of troops for quarters and subsistence is also authorized." (Emphasis supplied)

And Forest and Tucker state:

"The belligerent occupant may destroy or appropriate public property which may have a hostile

purpose, as forts, arms, armories, etc. The occupying force may enjoy the income from the public

sources. Strictly private property should be inviolable, exce pt so for as the necessity of war requires

contrary action." (Forest and Tucker, International Law, 9th Ed., p. 277) (Emphasis supplied)

The distinction between confiscation and temporary sequestration of private property by a belligerent

occupant was also passed upon by this Court in Haw Pia vs. China Banking Corporation, 80 Phil. 604,

wherein the right of Japan to sequester or take temporary control over enemy private property in the

interest of its military effort was expressly recognized.

We are thus forced to conclude that in evicting the lessee, Manila Motor Co., Inc. from the leased

buildings and occupying the same as quarters for troops, the Japanese authorities acted pursuant to a

right recognized by international and domestic law. Its act of dispossession, therefore, did not constitute

perturbacion de hecho but a perturbacion de derecho for which the lessors Villaruel (and not the

appellants lessees) were liable (Art. 1560, su pra) and for the consequences of which said lessors must

respond, since the result of the disturbance was the deprivation of the lessee of the peaceful use and

enjoyment of the property leased. Wherefore, the latter's corresponding obligation to pay rentals

ceased during such deprivation.

The Supreme Court of Spain, in its Sentencia of 6 December 1944, squarely declared the resolutory

effect of the military sequestration of properties under lease upon the lessee's obligation to pay rent

(Jurisprudencia Civil, Segunda Serie, Tomo 8, pp. 583, 608):


"Considerando que para resolver acerca de la procedencia del presente recurso es preciso partir de las bases de hecho sentadas en la sentencia recurrida, y no impugnadas al amparo del número 7.° del articulo 1.692 de la Ley de Enjuiciamiento civil, es decir, de que hallandose vigente el

"Considering that to decide on the merits of this action is necessary to start from the basis in fact sitting on the judgment, and uncontested under 7. No. 1692 article of the Law of Civil Procedure, ie that in force on the lease agreement between plaintiff and defendant, in that no precise date,

contrato de arrendamiento celebrado entre actor y demandada, en fecha que no se precisa, entre los dias del 18 al 31 de julio de 1936, los locales objeto de dicho contrato de arrendamiento, y en los que no funcionaba de tiempo anterior la industria para cuyo ejercicio se arrendaron, fueron requisados por el Ejercito Nacional, con motivo de la guerra civil, para que se instalara en los mismos la Junta de Donativos al Ejercito del Sur, aun cundo en dicha incautacion, que se hizo a la propiedad de la finca, no se observaron las formalidades legales, a causa de las circunstancias extraordinarias por que a la sazon atravesaba Sevilla, hecho que no consta se hiciera saber por los arrendatarios demandados al actor, pero que fue notorio en aquella capital, donde residia el actor, que de el debio tener conocimiento. Se estima igualmente por la Sala que el hecho de que la industria no funcionara en el local no tuvo influencia alguna sobre su incautacion por el Ejercito." "Considerando que sobre tales bases de hecho es de desestimar el primer motivo del recurso: violacion de los articulos 1.254, 1.278 y 1.091 del Codigo civil, que sancionan, en terminos generales, la eficacia de los contratos, puesto que en el presente caso de los que se trata en definitiva es de determinar si por virtud de fuerza mayor, la requisa a que se hace referencia, ajena, por lo tanto, a culpa, asi del arrendatario como del arrendador, se vio aqúel privado del posible disfrute de la finca arrendada, y de si por virtud de esta circunstancia este o no exento de la obligacion de abonar la renta pactada durante el tiempo que subsistio la incautacion; y es indudable la afirmativa en cuanto al primer extremo, puesto que la sentencia recurrida establece que el hecho de que no funcionase la industria y estuvieran los locales cerrados no actuo como causa de la requisa de estos por el Ejercito." "Considerando que la sentencia recurrida, en cuanto no da lugar al pago de las rentas correspondientes al tiempo que duro la incautacion, lejos de infringir, por aplicacion indebida, el art. 1.568 del Codigo civil, se ajusta a la orientacion marcada en el mismo, puesto que este precepto legal dispone que el arrendatario tiene accion contra el tercero perturbador de mero hecho en la posesion de la finca arrendada,

between days 18 to July 31, 1936, the premises subject to such lease, and where no previous time worked industry to the exercise of which were leased, were requisitioned by the Army, because of the civil war, to be installed on the same Board Donations to Army South, even thrives on the seizure, which took ownership farm, no legal formalities were observed, because of the extraordinary circumstances at the time that passed through Seville, a fact that no evidence was made known by the tenants sued the actor, but was notable in that city, where resided the actor, that he should have knowledge. It is also estimated by the Board that the fact that the industry will not work on the premises had no influence on its seizure by the army." "Considering that on such a basis in fact to reject the first ground of appeal: violation of Articles 1,254, 1,278 and 1,091 of the Civil Code that punish, in general terms, the effectiveness of contracts, since in this case The ultimate question is whether by virtue of God, the requisition referred to, persons, therefore, to blame, so the lessee and the lessor, he was deprived of the possible enjoyment of the property leased, and whether by virtue of the fact that whether or not exempt from the obligation to pay the agreed rent for as long as the seizure persisted, and no doubt the affirmative as the first point, since the contested decision states that the fact that industry does not work premises were closed and not act as a cause of such requisition by the army." "Considering that the sentence appeal in that it does not result in payment of rent for the period of the seizure, far from infringing, by misapplication, art. 1568 of the Civil Code, is consistent with the orientation marked on the , since this legal provision provides that the tenant has against the third party merely disturbing the possession of the leased property, but not against management or against those who act under a law that corresponds to them, and here the disturbance I experience the landlord in his possession, as a result of the requisition can not be regarded as mere fact, according to that article, since the property was requisitioned by the military for war purposes, and it follows that the tenant had to endure material deprivation of

pero no contra la Administracion o contra los que obran en virtud de un derecho que les corresponde; y aqui la perturbacion que experimento el arrendador en su posesion, como consecuencia de la requisa, no puede calificarse como de mero hecho, conforme al citado articulo, puesto que la finca fue requisada por la autoridad militar para fines de guerra, de donde se sigue que el arrendatario tenia que soportar la privacion de su tenencia material a traves del arrendador, con quien ha de entenderse la requisa de la cosa arrendada."

tenure through the landlord, who has seen the seizure of the thing leased."

In addition, the text of Art. 1560, in its first paragraph (jam quot.) assumes that in case of mere

disturbance (perturbacion de mero hecho) "the lessee shall have a direct action against the trespasser."

This assumption evidently does not contemplate the case of dispossession of the lessee by a military

occupant, as pointed out by Mr. Chief Justice Paras in his dissenting opinion in Reyes vs. Caltex (Phil.)

Inc., 84 Phil. 669; for the reason that the lessee could not have a direct action against the military

occupant. It would be most unrealistic to expect that the occupation courts, placed under the authority

of the occupying belligerent, should entertain at the time a suit for forcible entry against the Japanese

army. The plaintiffs, their lawyers, and in all probability, the Judge and court personnel, would face

"severest penalties" for such defiance of the invader.

The present case is distinguishable from Lo Ching vs. Archbishop of Manila (81 Phil., 601) in that the act

of the Japanese military involved in the latter case clearly went beyond the limits set by the Hague

Conventions, in seizing the property and delivering it to another private party; and from Reyes vs. Caltex

(Phil.) Inc., 84 Phil. 654, in that the rights of the military occupant under international law were not

raised or put in issue in said case; and moreover, the lessee there, by failing to rescind the lease upon

seizure of the premises by the Japanese military, despite the stipulated power to do so, resumed

business and decided to hold unto the long term lease for the balance of its 20-year period, starting

from December 23, 1940. In the case before us, the occupation of the leased property by the Japanese

army covered the major portion of the five-year contractual period, without any option to rescind by the

lessee.

The lessor's position is not improved by regarding the military seizure of the property under lease as a

case of force majeure or fortuitous event. Ordinarily, a party may not be held responsible therefor,

despite the fact that it prevented compliance of its obligations. But lease being a contract that calls for

prestations that are both reciprocal and repetitive (tractum successivum), the obligations of either party

are not discharged at any given moment, but must be fulfilled all throughout the term of the contract.

As a result, any substantial failure by one party to fulfill its commitments at any time during the contract

period gives rise to a failure of consideration (causa) for the obligations of the other party and excuses

the latter from the correlative performance, because the causa in lease must exist not only at the

perfection but throughout the term of the contract. No lessee would agree to pay rent for premises he

could not enjoy. As expressed by Marcel Planiol (quoted in 4 Castan, Derecho Civil, 7th Edition, p. 264)

—


"Como la obligacion del arrendador es sucesiva y se renueva todos los dias, la subsistencia del arrendamiento se hace imposible cuando, por cualquier razon, el arrendador no puede ya procurar al arrendatario el disfrute de la cosa."

"As the landlord's obligation is successive and renewed every day, keep the lease becomes impossible when, for whatever reason, the landlord can no longer ensure the tenant's enjoyment of the thing."

This effect of the failure of reciprocity appears whether the failure is due to fault or to fortuitous event;

the only difference being that in case of fault, the other party is entitled to rescind the contract in toto,

and collect damages, while in casual non-performance it becomes entitled only to a suspension pro

tanto of its own commitments. This rule is recognized in par. 2 of Art. 1558, authorizing the lessee to

demand reduction of the rent in case of repairs depriving him of the possession of part of the property;

and in Art. 1575, enabling the lessee of rural property to demand reduction of the rent if more than one-

half of the fruits are lost by extraordinary fortuitous event. Of course, where it becomes immediately

apparent that the loss of possession or enjoyment will be permanent, as in the case of accidental

destruction of a leased building, the lease contract terminates.

Applying these principles, the Sentencia of December 1944, already adverted to, ruled as follows:


"Considerando que privado el arrendador, por tal hecho, del disfrute de esta, es manifiesta la imposibilidad en que se vio de cumplir la tercera de las obligaciones que el impone el articulo 1.554 del Codigo Civil, obligacion (la de mantener al arrendatario en el disfrute de la cosa arrendada) que ha de entenderse reciproca de la de pago de renta pactada, que impone al arrendatario el número primero del art. 1.555 de dicho Cuerpo legal, y por ello no puede ser exigida." "Considerando que, aunque no sean estrictamente aplicables al caso los articulos 1.124, 1.556 y 1.568, que se citan como infringidos por el recurrente, suponiendo que a ellos ha entendido referirse la Audiencia (lo que impediria, en todo caso, la estimacion del recurso por este motivo, ya que dichos articulos no se citan en la sentencia de instancia), es evidente que ellos proclaman la reciprocidad de las obligaciones entre arrendatario y arrendador, y en este sentido, tratandose de un incumplimiento inculpable de contrato, pueden servir, como tambien el 1.558, en cuanto preven la reduccion de rentas o posible restriccion del

"Whereas private landlord, for so doing, the enjoyment of this, it is evident the impossibility of meeting was the third of the obligations imposed by the Civil Code Article 1554, duty (to maintain the lessee in enjoyment of the leased) to be mutual understanding of the agreed rent payment, which requires the tenant the first number art. 1555 of the legal body, and therefore can not be required. " "Considering that, while not strictly applicable to the case of articles 1124, 1556 and 1568, cited as violated by the appellant, assuming that they have understood to refer the hearing (which would prevent, in any case, the estimation of the resource For this reason, as these items are not mentioned in the statement instance), it is evident that they proclaim the reciprocity of obligations between tenant and landlord, and in this sense, since they are blameless breach of contract, may serve as also the 1558, providing for a reduction in income or potential restriction of the contract when the tenant is deprived, for work done on the property leased, the benefit of this, the

contrato cuando el arrendatario se ve privado, por obras realizadas en la finca arrendada, del disfrute de este, de fundamento, con los demas preceptos invocados, a una extencion de renta mientras subsiste la imposibilidad de utilizar la cosa arrendada, sobre todo cuando los articulos 157 y 158 del Reglamento de Requisas de 13 de enero de 1921 estatuyen claramente que les requisas de edificio se hacen a la propiedad, y es el propietario el que puede pedir indemnizacion, uno de cuyos elementos es el precio del alquiler que le sea satisfecho por el inmueble incautado."

foundation, with the other provisions relied on, to an extension of income while there is still unable to use the leased thing, especially when the articles 157 and 158 of the Rules of Requisition 13 January 1921 requisitions estatuyen clear that they are building on the property and is the owner who may ask for compensation , one of whose elements is the price of rent will be paid by the property seized. "

We are aware that the rule in the common law is otherwise, due to its regarding a lease as a conveyance

to the lessee of a temporary estate or title to the leased property so that loss of possession due to war

or other fortuitous event leaves the tenant liable for the rent in the absence of stipulation. The

fundamental difference between the common law and the civil law concepts has been outlined by the

United States in Viterbo vs. Friedlander, 30 L. Ed. (U.S.) pp. 776, 778, in this wise:

"But as to the nature and effect of a lease for years, at a certain rent which the lessee agrees to pay, and

containing no express covenant on the part of the lessor, the two systems differ materially. The

common law regards such a lease as the grant of an estate for years, which the lessee takes a title in,

end is bound to pay the stipulated rent for, notwithstanding any injury by flood, fire or external

violence, at least unless the injury is such a destruction of the lend as to amount to an eviction; end by

that law the lessor is under no implied covenant to repair, or even that the premises shall be fit for the

purpose for which they are leased. Fowler vs. Bott, 6 Mass. 63; 3 Kent, Com. 465, 466; Broom, Legal

Maxims, 3d ed. 213, 214; Doupe vs. Genin, 45 N. Y. 119; Kingbury vs. Westfall, 61 N. Y. 356. Naumberg

vs. Young, 15 Vroom, 331; Bowe vs. Hunking, 135 Mass. 380; Manchester Warehouse Co. vs. Carr, L.R. 5

C.P.D. 507.

The civil law, on the other hand, regards a lease for years as a mere transfer of the use and enjoyment of

the property; and holds the landlord bound, without any express covenant, to keep it in repair and

otherwise fit for use and enjoyment for the purpose for which it is leased, even when the need of repair

or the unfitness is caused by an inevitable accident, and if he does not do so, the tenant may have the

lease annulled, or the rent abated. Dig. 19, 2, 9, 2; 19, 2, 15, 1, 2; 19, 2, 25, 2; 19, 2, 39; 2 Gomez, Variae

Resolutiones c. 3, secs. 1-3, 18, 19: Gregorio Lopes in 5 Partidas, tit. 8, 11. 8, 22; Domat, Droit Civil, pt. 1,

lib. 1, tit. 4, sec. 1, no. 1; sec. 3 nos. 1, 3, 6, Pothier, Contract de Louage, nos. 3, 6, 11, 22, 53, 103, 106,

139-155.

It is accordingly laid down in the Pandects, on the authority of Julian, 'If anyone has let an estate, that,

even if anything happens by vis major, he must make it good, he must stand by his contract,' si quis

fundum locaverit, ut, etiamsi quid vi majore accidisset, hoc ei praestaretur, pacto standum esse; Dig.

19, 2, 9, 2; and on the authority of Ulpian, that 'A lease does not change the ownership,' non solet

locatio dominium mutare; Dig. 19, 2, 39; and that the lessee has a right of action, if he cannot enjoy the

thing which he has hired, si re quam conduxit frui non liceat, whether because his possession, either of

the whole or of part of the field, is not made good, or a house, or stable or sheepfold, is not repaired;

and the landlord ought to warrant the tenant, dominum colono praestare debere, against every

irresistible force, omnim vim cui resisti non potest, such as floods, flocks of birds, or any like cause, or

invasion of enemies; and if the whole crop should be destroyed by a heavy rainfall, or the olives should

be spoiled by blight, or by extraordinary heat of the sun, solis fervore non assueto, it would be the loss

of the landlord, damnum domini futurum; and so if the field falls in by an earthquake, for there must be

made good to the tenant a field that he can enjoy, o portere enim agrum praestari conductori, ut frui

possit; but if any loss arises from defects in the thing itself, si qua tamen vitia ex i psa re oriantur, as if

wine turns sour, or standing corn is spoiled by worms or weeds, or if nothing extraordinary happens, si

vero nihil extra consuetudinem acciderit, it is the loss of the tenant, damnum coloni asse. Dig. 19, 2; 15,

1, 2." (Emphasis supplied)

In short, the law applies to leases the rule enunciated by the Canonists and the Bartolist School of Post

glossatorse, that "contractus qui tractum successivum habent et de pendentiam de futuro, sub

conditione rebus sic stantibus intelliguntur," they are understood entered subject to the condition that

things will remain as they are, without material change.

It is also worthy of note that the lessors, through Dr. Javier Villaruel, agreed after liberation to a renewal

of the contract of lease for another five years (from June 1, 1946 to May 31 of 1951) without making any

reservation regarding the alleged liability of the lessee company for the rentals corresponding to the

period of occupancy of the premises by the Japanese army, and without insisting that the non-payment

of such rental was a breach of the contract of lease. This passivity of the lessors strongly supports the

claim of the lessees that the rentals in question were verbally waived. The proffered explanation is that

the lessors could not refuse to renew the lease, because the privilege of renewal had been granted to

the lessees in the original contract. Such excuse is untenable: if the lessors deemed that the contract

had been breached by the lessee's non-payment of the occupation rents how could they admit the

lessee's right to renew a contract that the lessee itself had violated?

But this is not all. The lessors accepted payment of current rentals from October 1945 to June 1946. It

was only in July 1946 that they insisted upon collecting also the 1942-1945 rents, and refused to accept

further payments tendered by the lessee unless their right to collect the occupation rental was

recognized or reserved. After refusing the rents from July to November 1946, unless the lessee

recognized their right to occupation rentals, the appellees (lessors) demanded rescission of the contract

and a rental of P1,740 monthly in lieu of the stipulated P350 per month. (Exhibit "C").

This attitude of the lessors was doubly wrongful: first, because as already shown, the dispossession by

the Japanese army exempted the lessee from his obligation to pay rent for the period of its ouster; and

second, because even if the lessee had been liable for that rent, its collection in 1946 was barred by the

moratorium order, Executive Order No. 32, that remained in force until replaced by Rep. Act 342 in

1948. To apply the current rentals to the occupation obligations would amount to enforcing them

contrary to the moratorium decreed by the government.

Clearly, then, the lessor' insistence upon collecting the occupation rentals for 1942-1945 was

unwarranted in law. Hence, their refusal to accept the current rentals without qualification placed them

in default (mora creditoris or accipiendi) with the result that thereafter, they had to bear all supervening

risks of accidental injury or destruction of the leased premises. While not expressly declared by the Code

of 1889, this result is clearly inferable from the nature and effects of mora, and from Articles 1185, 1452

[par. 3] and 1589).

"ART. 1185. When the obligation to deliver a certain and determinate thing arises from the commission

of a crime or misdemeanor the obligor shall not be exempted from the payment of its value, whatever

the cause of its loss may have been, unless, having offered the thing to the person entitled 'to receive it,

the latter should have refused without reason to accept it."

"Art. 1452. . . .

If fungible things should be sold for a price fixed with relation to weight, number, or measure, they shall

not be at the purchaser's risk until they have been weighed, counted, or measured, unless the purchaser

should be in default."

"ART. 1589. If the person who contracted to do the work bound himself to furnish the materials, he shall

bear the loss in case of the destruction of the work before it is delivered, unless its acceptance has been

delayed by the default of the other party."

While there is a presumption that the loss of the thing leased is due to the fault of the lessee (Civil Code

of 1889, Art. 1563), it is noteworthy that the lessors have not invoked that presumption either here or in

the court below. On the contrary, the parties and the trial court have all proceeded and discussed the

issues taking for granted that the destruction of the leased buildings was purely fortuitous. We see no

reason for departing from that assumption and further prolonging this litigation.

That the lessee and sublessee did not consign or deposit in court the rentals tendered to and improperly

rejected by the lessors, did not render the debtor liable for default (mora solvendi) nor answerable for

fortuitous events because, as explained by the Supreme Court of Spain in its Sentencia of 5 June 1944 —

"Al exigir el art. 1176 del Codigo Civil la consignacion para liberar al deudor no quiere decir que

necesariamente haya de practicarse, y no baste el ofrecimiento de pago que de aquella no fuere

seguido, a efectos de exclusion ds las consecuencias de la mora solvendi." (8 Manresa, Comentarios, 5th

Ed., Vol. I, p. 136).

In other words, the only effect of the failure to consign the rentals in court was that the obligation to

pay them subsisted (P.N.B. vs. Relativo, 92 Phil., 203) and the lessee remained liable for the amount of

the unpaid contract rent, corresponding to the period from July to November, 1946; it being undisputed

that, from December 1946 up to March 2, 1948, when the commercial buildings were burned, the

defendants-appellants have paid the contract rentals at the rate of P350 per month. But the failure to

consign did not eradicate the default (mora) of the lessors nor the risk of loss that lay upon them. (3

Castan, Der. Civ., 8th Ed., p. 145; 4 Puig Peña, Der. Civ., part. 1, p. 234; Diaz Pairo, Teoria Gen. de las

Obligaciones [3rd Ed.], Vol. 1, pp. 192-193).

In view of the foregoing, we hold:

(a) That the dispossession of the lessee from the premises by the Japanese army of occupation was not

an act of mere trespass (perturbacion de mero hecho) but one de derecho chargeable to the lessors;

(b) That such dispossession, though not due to fault of lessors or lessee, nevertheless resulted in the

exemption of the lessee from its obligation to pay rent during the period that it was deprived of the

possession and enjoyment of the premises leased;

(c) That the insistence of the lessors to collect such rentals was unwarranted;

(d) That the lessors were not justified in refusing to accept the tender of current rentals unless the

lessee should recognize their right to the rents corresponding to the period that the lessee was not in

possession;

(e) That by their improper refusal to accept the current rents tendered by the lessee, the lessors

incurred in default (mora) and they must shoulder the subsequent accidental loss of the premises

leased;

(f) That the mora of the lessors was not cured by the failure of the lessee to make the consignation of

the rejected payments, but the lessee remained obligated to pay the amounts tendered and not

consigned by it in court.

Consequently, it was reversible error to sentence the appellants to pay P2,165 a month as reasonable

value of the occupation of the premises from July 1946, and the value of the destroyed buildings

amounting to P30,000.

Wherefore, the decision appealed from is modified in the sense that the appellant Manila Motor

Company should pay to the appellees Villaruel only the rents for the leased premises corresponding to

the period from July up to November 1946, at the rate of P350 a month, or a total of P1,750. Costs

against appellees in both instances. So ordered.

Paras, C.J., Bengzon, Padilla, Montemayor, Bautista Angelo, Labrador, Concepcion and Endencia, JJ.,

concur.

Footnotes

1. Art. 2. Sec. 3. — The Philippines renounces war as an instrument of national policy, and adopts the

generally accepted principles of international law as part of the law of the nation." (Constitution of

the Philippines) — Applied in Go Kim Chan vs. Valdez, 75 Phil. 113; Tubb vs. Griess, 78 Phil. 249;

Dizon vs. Commanding General, 81 Phil. 286.

SECOND DIVISION

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

CENTRAL BANK OF THE PHILIPPINES and ACTING DIRECTOR ANTONIO T. CASTRO, JR. OF THE

DEPARTMENT OF COMMERCIAL AND SAVINGS BANK, in his capacity as statutory receiver of Island

Savings Bank, petitioners, vs. THE HONORABLE COURT OF APPEALS and SULPICIO M. TOLENTINO,

respondents.

I. B. Regalado, Jr., Fabian S. Lombos and Marino E. Eslao for petitioners.

Antonio R. Tupaz for private respondent.

D E C I S I O N

MAKASIAR, C.J p:

This is a petition for review on certiorari to set aside as null and void the decision of the Court of

Appeals, in C.A.-G.R. No. 52253-R dated February 11, 1977, modifying the decision dated February 15,

1972 of the Court of First Instance of Agusan, which dismissed the petition of respondent Sulpicio M.

Tolentino for injunction, specific performance or rescission, and damages with preliminary injunction.

On April 28, 1965, Island Savings Bank, upon favorable recommendation of its legal department,

approved the loan application for P80,000.00 of Sulpicio M. Tolentino, who, as a security for the loan,

executed on the same day a real estate mortgage over his 100-hectare land located in Cubo, Las Nieves,

Agusan, and covered by TCT No. T-305, and which mortgage was annotated on the said title the next

day. The approved loan application called for a lump sum P80,000.00 loan, repayable in semi-annual

installments for a period of 3 years, with 12% annual interest. It was required that Sulpicio M. Tolentino

shall use the loan proceeds solely as an additional capital to develop his other property into a

subdivision.

On May 22, 1965, a mere P17,000.00 partial release of the P80,000.00 loan was made by the Bank; and

Sulpicio M. Tolentino and his wife Edita Tolentino signed a promissory note for P17,000.00 at 12%

annual interest, payable within 3 years from the date of execution of the contract at semi-annual

installments of P3,459.00 (p. 64, rec.), An advance interest for the P80,000.00 loan covering a 6-month

period amounting to P4,800.00 was deducted from the partial release of P17,000.00. But this pre-

deducted interest was refunded to Sulpicio M. Tolentino on July 23, 1965, after being informed by the

Bank that there was no fund yet available for the release of the P63,000.00 balance (p. 47, rec.). The

Bank, thru its vice-president and treasurer, promised repeatedly the release of the P63,000.00 balance

(p. 113, rec.).

On August 13, 1965, the Monetary Board of the Central Bank, after finding Island Savings Bank was

suffering liquidity problems, issued Resolution No. 1049, which provides:

"In view of the chronic reserve deficiencies of the Island Savings Bank against its deposit liabilities, the

Board, by unanimous vote, decided as follows:

"1) To prohibit the bank from making new loans and investments [except

investments in government securities] excluding extensions or renewals of already approved loans,

provided that such extensions or renewals shall be subject to review by the Superintendent of Banks,

who may impose such limitations as may be necessary to insure correction of the bank's deficiency as

soon as possible;

. . ." (p. 46, rec.).

On June 14, 1968, the Monetary Board, after finding that Island Savings Bank failed to put up the

required capital to restore its solvency, issued Resolution No. 967 which prohibited Island Savings Bank

from doing business in the Philippines and instructed the Acting Superintendent of Banks to take charge

of the assets of Island Savings Bank (pp. 48-49, rec.).

On August 1, 1968, Island Savings Bank, in view of non-payment of the P17,000.00 covered by the

promissory note, filed an application for the extra-judicial foreclosure of the real estate mortgage

covering the 100-hectare land of Sulpicio M. Tolentino; and the sheriff scheduled the auction for January

22, 1969.

On January 20, 1969, Sulpicio M. Tolentino filed a petition with the Court of First Instance of Agusan for

injunction, specific performance or rescission and damages with preliminary injunction, alleging that

since Island Savings Bank failed to deliver the P63,000.00 balance of the P80,000.00 loan, he is entitled

to specific performance by ordering Island Savings Bank to deliver the P63,000.00 with interest of 12%

per annum from April 28, 1965, and if said balance cannot be delivered, to rescind the real estate

mortgage (pp. 32-43, rec.).

On January 21, 1969, the trial court, upon the filing of a P5,000.00 surety bond, issued a temporary

restraining order enjoining the Island Savings Bank from continuing with the foreclosure of the mortgage

(pp. 86-87, rec.).

On January 29, 1969, the trial court admitted the answer in intervention praying for the dismissal of the

petition of Sulpicio M. Tolentino and the setting aside of the restraining order, filed by the Central Bank

and by the Acting Superintendent of Banks (pp. 65-76, rec.).

On February 15, 1972, the trial court, after trial on the merits, rendered its decision, finding

unmeritorious the petition of Sulpicio M. Tolentino, ordering him to pay Island Savings Bank the amount

of P17,000.00 plus legal interest and legal charges due thereon, and lifting the restraining order so that

the sheriff may proceed with the foreclosure (pp. 135-136, rec.).

On February 11, 1977, the Court of Appeals, on appeal by Sulpicio M. Tolentino, modified the Court of

First Instance decision by affirming the dismissal of Sulpicio M. Tolentino's petition for specific

performance, but it ruled that Island Savings Bank can neither foreclose the real estate mortgage nor

collect the P17,000.00 loan (pp. 30-31, rec.). prcd

Hence, this instant petition by the Central Bank.

The issues are:

1. Can the action of Sulpicio M. Tolentino for specific performance

prosper?

2. Is Sulpicio M. Tolentino liable to pay the P17,000.00 debt covered by

the promissory note?

3. If Sulpicio M. Tolentino's liability to pay the P17,000.00 subsists, can

his real estate mortgage be foreclosed to satisfy said amount?.

When Island Savings Bank and Sulpicio M. Tolentino entered into an P80,000.00 loan agreement on April

28, 1965, they undertook reciprocal obligations. In reciprocal obligations, the obligation or promise of

each party is the consideration for that of the other (Penaco vs. Ruaya, 110 SCRA 46 [1981]; Vda. de

Quirino vs. Pelarca, 29 SCRA 1 [1969]); and when one party has performed or is ready and willing to

perform his part of the contract, the other party who has not performed or is not ready and willing to

perform incurs in delay (Art. 1169 of the Civil Code). The promise of Sulpicio M. Tolentino to pay was the

consideration for the obligation of Island Savings Bank to furnish the P80,000.00 loan. When Sulpicio M.

Tolentino executed a real estate mortgage on April 28, 1965, he signified his willingness to pay the

P80,000.00 loan. From such date, the obligation of Island Savings Bank to furnish the P80,000.00 loan

accrued. Thus, the Bank's delay in furnishing the entire loan started on April 28, 1965, and lasted for a

period of 3 years or when the Monetary Board of the Central Bank issued Resolution No. 967 on June

14, 1968, which prohibited Island Savings Bank from doing further business. Such prohibition made it

legally impossible for Island Savings Bank to furnish the P63,000.00 balance of the P80,000.00 loan. The

power of the Monetary Board to take over insolvent banks for the protection of the public is recognized

by Section 29 of R.A. No. 265, which took effect on June 15, 1948, the validity of which is not in

question.

The Monetary Board Resolution No. 1049 issued on August 13, 1965 cannot interrupt the default of

Island Savings Bank in complying with its obligation of releasing the P63,000.00 balance because said

resolution merely prohibited the Bank from making new loans and investments, and nowhere did it

prohibit Island Savings Bank from releasing the balance of loan agreements previously contracted.

Besides, the mere pecuniary inability to fulfill an engagement does not discharge the obligation of the

contract, nor does it constitute any defense to a decree of specific performance (Gutierrez Repide vs.

Afzelins and Afzelins, 39 Phil. 190 [1918]). And, the mere fact of insolvency of a debtor is never an

excuse for the non-fulfillment of an obligation but instead it is taken as a breach of the contract by him

(Vol. 17A, 1974 ed., CJS p. 650). LexLib

The fact that Sulpicio M. Tolentino demanded and accepted the refund of the pre-deducted interest

amounting to P4,800.00 for the supposed P80,000.00 loan covering a 6-month period cannot be taken

as a waiver of his right to collect the P63,000.00 balance. The act of Island Savings Bank, in asking the

advance interest for 6 months on the supposed P80,000.00 loan, was improper considering that only

P17,000.00 out of the P80,000.00 loan was released. A person cannot be legally charged interest for a

non-existing debt. Thus, the receipt by Sulpicio M. Tolentino of the pre-deducted interest was an

exercise of his right to it, which right exist independently of his right to demand the completion of the

P80,000.00 loan. The exercise of one right does not affect, much less neutralize, the exercise of the

other.

The alleged discovery by Island Savings Bank of the over-valuation of the loan collateral cannot exempt

it from complying with its reciprocal obligation to furnish the entire P80,000.00 loan. This Court

previously ruled that bank officials and employees are expected to exercise caution and prudence in the

discharge of their functions (Rural Bank of Caloocan, Inc. vs. C.A., 104 SCRA 151 [1981]). It is the

obligation of the bank's officials and employees that before they approve the loan application of their

customers, they must investigate the existence and valuation of the properties being offered as a loan

security. The recent rush of events where collaterals for bank loans turn out to be non-existent or

grossly over-valued underscore the importance of this responsibility. The mere reliance by bank officials

and employees on their customer's representation regarding the loan collateral being offered as loan

security is a patent non-performance of this responsibility. If ever, bank officials and employees totally

rely on the representation of their customers as to the valuation of the loan collateral, the bank shall

bear the risk in case the collateral turn out to be over-valued. The representation made by the customer

is immaterial to the bank's responsibility to conduct its own investigation. Furthermore, the lower court,

on objections of Sulpicio M. Tolentino, had enjoined petitioners from presenting proof on the alleged

over-valuation because of their failure to raise the same in their pleadings (pp. 198-199, t.s.n., Sept. 15,

1971). The lower court's action is sanctioned by the Rules of Court, Section 2, Rule 9, which states that

"defenses and objections not pleaded either in a motion to dismiss or in the answer are deemed

waived." Petitioners, thus, cannot raise the same issue before the Supreme Court.

Since Island Savings Bank was in default in fulfilling its reciprocal obligation under their loan agreement,

Sulpicio M. Tolentino, under Article 1191 of the Civil Code, may choose between specific performance or

rescission with damages in either case. But since Island Savings Bank is now prohibited from doing

further business by Monetary Board Resolution No. 967, WE cannot grant specific performance in favor

of Sulpicio M. Tolentino.

Rescission is the only alternative remedy left. WE rule, however, that rescission is only for the

P63,000.00 balance of the P80,000.00 loan, because the bank is in default only insofar as such amount is

concerned, as there is no doubt that the bank failed to give the P63,000.00. As far as the partial release

of P17,000.00, which Sulpicio M. Tolentino accepted and executed a promissory note to cover it, the

bank was deemed to have complied with its reciprocal obligation to furnish a P17,000.00 loan. The

promissory note gave rise to Sulpicio M. Tolentino's reciprocal obligation to pay the P17,000.00 loan

when it falls due. His failure to pay the overdue amortizations under the promissory note made him a

party in default, hence not entitled to rescission (Article 1191 of the Civil Code). If there is a right to

rescind the promissory note, it shall belong to the aggrieved party, that is, Island Savings Bank. If

Tolentino had not signed a promissory note setting the date for payment of P17,000.00 within 3 years,

he would be entitled to ask for rescission of the entire loan because he cannot possibly be in default as

there was no date for him to perform his reciprocal obligation to pay.

Since both parties were in default in the performance of their respective reciprocal obligations, that is,

Island Savings Bank failed to comply with its obligation to furnish the entire loan and Sulpicio M.

Tolentino failed to comply with his obligation to pay his P17,000.00 debt within 3 years as stipulated,

they are both liable for damages. Cdpr

Article 1192 of the Civil Code provides that in case both parties have committed a breach of their

reciprocal obligations, the liability of the first infractor shall be equitably tempered by the courts. WE

rule that the liability of Island Savings Bank for damages in not furnishing the entire loan is offset by the

liability of Sulpicio M. Tolentino for damages, in the form of penalties and surcharges, for not paying his

overdue P17,000.00 debt. The liability of Sulpicio M. Tolentino for interest on his P17,000.00 debt shall

not be included in offsetting the liabilities of both parties. Since Sulpicio M. Tolentino derived some

benefit for his use of the P17,000.00, it is just that he should account for the interest thereon.

WE hold, however, that the real estate mortgage of Sulpicio M. Tolentino cannot be entirely foreclosed

to satisfy his P17,000.00 debt.

The consideration of the accessory contract of real estate mortgage is the same as that of the principal

contract (Banco de Oro vs. Bayuga, 93 SCRA 443 [1979]). For the debtor, the consideration of his

obligation to pay is the existence of a debt. Thus, in the accessory contract of real estate mortgage, the

consideration of the debtor in furnishing the mortgage is the existence of a valid, voidable, or

unenforceable debt (Art. 2086, in relation to Art. 2052, of the Civil Code).

The fact that when Sulpicio M. Tolentino executed his real estate mortgage, no consideration was then

in existence, as there was no debt yet because Island Savings Bank had not made any release on the

loan, does not make the real estate mortgage void for lack of consideration. It is not necessary that any

consideration should pass at the time of the execution of the contract of real mortgage (Bonnevie vs.

C.A., 125 SCRA 122 [1983]). It may either be a prior or subsequent matter. But when the consideration is

subsequent to the mortgage, the mortgage can take effect only when the debt secured by it is created

as a binding contract to pay (Parks vs. Sherman, Vol. 176 N.W. p. 583, cited in the 8th ed., Jones on

Mortgage, Vol. 2, pp. 5-6). And, when there is partial failure of consideration, the mortgage becomes

unenforceable to the extent of such failure (Dow, et al. vs. Poore, Vol. 172 N.E. p. 82, cited in Vol. 59,

1974 ed. CJS, p. 138). Where the indebtedness actually owing to the holder of the mortgage is less than

the sum named in the mortgage, the mortgage cannot be enforced for more than the actual sum due

(Metropolitan Life Ins. Co. vs. Peterson, Vol. 19, F(2d) p. 88, cited in 6th ed., Wiltsie on Mortgage, Vol. 1,

p. 180). LLpr

Since Island Savings Bank failed to furnish the P63,000.00 balance of the P80,000.00 loan, the real estate

mortgage of Sulpicio M. Tolentino became unenforceable to such extent. P63,000.00 is 78.75% of

P80,000.00, hence the real estate mortgage covering 100 hectares is unenforceable to the extent of

78.75 hectares. The mortgage covering the remainder of 21.25 hectares subsists as a security for the

P17,000.00 debt. 21.25 hectares is more than sufficient to secure a P17,000.00 debt.

The rule of indivisibility of a real estate mortgage provided for by Article 2089 of the Civil Code is

inapplicable to the facts of this case.

Article 2089 provides:

"A pledge or mortgage is indivisible even though the debt may be divided among the successors in

interest of the debtor or creditor.

"Therefore, the debtor's heirs who has paid a part of the debt can not ask for the proportionate

extinguishment of the pledge or mortgage as long as the debt is not completely satisfied.

"Neither can the creditor's heir who have received his share of the debt return the pledge or cancel the

mortgage, to the prejudice of other heirs who have not been paid."

The rule of indivisibility of the mortgage as outlined by Article 2089 above-quoted presupposes several

heirs of the debtor or creditor which does not obtain in this case. Hence, the rule of indivisibility of a

mortgage cannot apply.

WHEREFORE, THE DECISION OF THE COURT OF APPEALS DATED FEBRUARY 11, 1977 IS HEREBY

MODIFIED, AND

1. SULPICIO M. TOLENTINO IS HEREBY ORDERED TO PAY IN FAVOR OF

HEREIN PETITIONERS THE SUM OF P17,000.00, PLUS P41,210.00 REPRESENTING 12% INTEREST PER

ANNUM COVERING THE PERIOD FROM MAY 22, 1965 TO AUGUST 22, 1985, AND 12% INTEREST ON THE

TOTAL AMOUNT COUNTED' FROM AUGUST 22, 1985 UNTIL PAID;

2. IN CASE SULPICIO M. TOLENTINO FAILS TO PAY, HIS REAL ESTATE

MORTGAGE COVERING 21.25 HECTARES SHALL BE FORECLOSED TO SATISFY HIS TOTAL INDEBTEDNESS;

AND

3. THE REAL ESTATE MORTGAGE COVERING 78.75 HECTARES IS HEREBY

DECLARED UNENFORCEABLE AND IS HEREBY ORDERED RELEASED IN FAVOR OF SULPICIO M.

TOLENTINO.

NO COSTS. SO ORDERED.

Concepcion, Jr., Escolin, Cuevas and Alampay, JJ., concur.

Aquino (Chairman) and Abad Santos, JJ., took no part.

SECOND DIVISION

[G.R. No. 73867. February 29, 1988.]

TELEFAST COMMUNICATIONS/PHILIPPINE WIRELESS, INC., petitioner, vs. IGNACIO CASTRO, SR., SOFIA C.

CROUCH, IGNACIO CASTRO JR., AURORA CASTRO, SALVADOR CASTRO, MARIO CASTRO, CONRADO

CASTRO, ESMERALDA C. FLORO, AGERICO CASTRO, ROLANDO CASTRO, VIRGILIO CASTRO AND GLORIA

CASTRO, and HONORABLE INTERMEDIATE APPELLATE COURT, respondents.

SYLLABUS

1. CIVIL LAW; DAMAGES; PARTY WHO FAILED TO TRANSMIT TELEGRAM LIABLE THEREON. — In the case

at bar, petitioner and private respondent Sofia C. Crouch entered into a contract whereby, for a fee,

petitioner undertook to send said private respondent's message overseas by telegram. This, petitioner

did not do, despite performance by said private respondent of her obligation by paying the required

charges. Petitioner was therefore guilty of contravening its obligation to said private respondent and is

thus liable for damages under Articles 1170 and 2196 of the Civil Code.

2. ID.; MORAL DAMAGES; PARTY WHO SUFFERED EMOTIONAL SUFFERING ENTITLED THERETO. — We

find Art. 2217 of the Civil Code applicable to the case at bar. It states: "Moral damages include physical

suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral

shock, social humiliation, and similar injury. Though incapable of pecuniary computation, moral

damages may be recovered if they are the proximate results of the defendant's wrongful act or

omission." Here, petitioner's act or omission, which amounted to gross negligence, was precisely the

cause of the suffering private respondents had to undergo.

3. ID.; COMPENSATORY DAMAGES; AWARDED TO A PARTY WHO INCURRED TRAVEL EXPENSES TO

TESTIFY IN A COURT CASE. — We also sustain the trial court's award of P16,000.00 as compensatory

damages to Sofia C. Crouch representing the expenses she incurred when she came to the Philippines

from the United States to testify before the trial court. Had petitioner not been remiss in performing its

obligation, there would have been no need for this suit or for Mrs. Crouch's testimony.

4. ID.; EXEMPLARY DAMAGES; AWARDED TO A PARTY AS A WARNING TO ALL TELEGRAM COMPANIES.

— The award of exemplary damages by the trial court is likewise justified and, therefore, sustained in

the amount of P1,000.00 for each of the private respondents, as a warning to all telegram companies to

observe due diligence in transmitting the messages of their customers.

D E C I S I O N

PADILLA, J p:

Petition for review on certiorari of the decision * of the Intermediate Appellate Court, dated 11 February

1986, in AC-G.R. No. CV-70245, entitled "Ignacio Castro, Sr., et. al., Plaintiffs-Appellees, versus Telefast

Communications/Philippine Wireless, Inc., Defendant-Appellant."

The facts of the case are as follows:

On 2 November 1956, Consolacion Bravo-Castro, wife of plaintiff Ignacio Castro, Sr. and mother of the

other plaintiffs, passed away in Lingayen, Pangasinan. On the same day, her daughter Sofia C. Crouch,

who was then vacationing in the Philippines, addressed a telegram to plaintiff Ignacio Castro, Sr. at 685

Wanda, Scottsburg, Indiana, U.S.A., 47170 announcing Consolacion's death. The telegram was accepted

by the defendant in its Dagupan office, for transmission, after payment of the required fees or charges.

The telegram never reached its addressee. Consolacion was interred with only her daughter Sofia in

attendance. Neither the husband nor any of the other children of the deceased, then all residing in the

United States, returned for the burial.

When Sofia returned to the United States, she discovered that the wire she had caused the defendant to

send, had not been received. She and the other plaintiffs thereupon brought action for damages arising

from defendant's breach of contract. The case was filed in the Court of First Instance of Pangasinan and

docketed therein as Civil Case No. 15356. The only defense of the defendant was that it was unable to

transmit the telegram because of "technical and atmospheric factors beyond its control." 1 No evidence

appears on record that defendant ever made any attempt to advise the plaintiff Sofia C. Crouch as to

why it could not transmit the telegram.

The Court of First Instance of Pangasinan, after trial, ordered the defendant (now petitioner) to pay the

plaintiffs (now private respondents) damages, as follows, with interest at 6% per annum:

"1. Sofia C. Crouch, P31.92 and P16,000.00 as compensatory damages and P20,000.00 as moral

damages.

2. Ignacio Castro Sr., P20,000.00 as moral damages.

3. Ignacio Castro Jr., P20,000.00 as moral damages.

4. Aurora Castro, P10,000.00 moral damages.

5. Salvador Castro, P10,000.00 moral damages.

6. Mario Castro, P10,000.00 moral damages.

7. Conrado Castro, P10,000 moral damages.

8. Esmeralda C. Floro, P20,000.00 moral damages.

9. Agerico Castro, P10,000.00 moral damages.

10. Rolando Castro, P10,000.00 moral damages.

11. Virgilio Castro, P10,000.00 moral damages.

12. Gloria Castro, P10,000.00 moral damages.

Defendant is also ordered to pay P5,000.00 attorney's fees, exemplary damages in the amount of

P1,000.00 to each of the plaintiffs and costs." 2

On appeal by petitioner, the Intermediate Appellate Court affirmed the trial court's decision but

eliminated the award of P16,000.00 as compensatory damages to Sofia C. Crouch and the award of

P1,000.00 to each of the private respondents as exemplary damages. The award of P20,000.00 as moral

damages to each of Sofia C. Crouch, Ignacio Castro, Jr. and Esmeralda C. Floro was also reduced to

P10,000.00 for each. 3

Petitioner appeals from the judgment of the appellate court, contending that the award of moral

damages should be eliminated as defendant's negligent act was not motivated by "fraud, malice or

recklessness."

In other words, under petitioner's theory, it can only be held liable for P31.92, the fee or charges paid by

Sofia C. Crouch for the telegram that was never sent to the addressee thereof.

Petitioner's contention is without merit.

Art. 1170 of the Civil Code provides that "those who in the performance of their obligations are guilty of

fraud, negligence or delay, and those who in any manner contravene the tenor thereof, are liable for

damages." Art. 2176 also provides that "whoever by act or omission causes damage to another, there

being fault or negligence, is obliged to pay for the damage done."

In the case at bar, petitioner and private respondent Sofia C. Crouch entered into a contract whereby,

for a fee, petitioner undertook to send said private respondent's message overseas by telegram. This,

petitioner did not do, despite performance by said private respondent of her obligation by paying the

required charges. Petitioner was therefore guilty of contravening its obligation to said private

respondent and is thus liable for damages.

This liability is not limited to actual or quantified damages. To sustain petitioner's contrary position in

this regard would result in an inequitous situation where petitioner will only be held liable for the actual

cost of a telegram fixed thirty (30) years ago.

We find Art. 2217 of the Civil Code applicable to the case at bar. It states: "Moral damages include

physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings,

moral shock, social humiliation, and similar injury. Though incapable of pecuniary computation, moral

damages may be recovered if they are the proximate results of the defendant's wrongful act or

omission." (Emphasis supplied).

Here, petitioner's act or omission, which amounted to gross negligence, was precisely the cause of the

suffering private respondents had to undergo.

As the appellate court properly observed:

"[Who] can seriously dispute the shock, the mental anguish and the sorrow that the overseas children

must have suffered upon learning of the death of their mother after she had already been interred,

without being given the opportunity to even make a choice on whether they wanted to pay her their last

respects? There is no doubt that these emotional sufferings were proximately caused by appellant's

omission and substantive law provides for the justification for the award of moral damages." 4

We also sustain the trial court's award of P16,000.00 as compensatory damages to Sofia C. Crouch

representing the expenses she incurred when she came to the Philippines from the United States to

testify before the trial court. Had petitioner not been remiss in performing its obligation, there would

have been no need for this suit or for Mrs. Crouch's testimony.

The award of exemplary damages by the trial court is likewise justified and, therefore, sustained in the

amount of P1,000.00 for each of the private respondents, as a warning to all telegram companies to

observe due diligence in transmitting the messages of their customers.

WHEREFORE, the petition is DENIED. The decision appealed from is modified so that petitioner is held

liable to private respondents in the following amounts:

(1) P10,000.00 as moral damages, to each of private respondents;

(2) P1,000.00 as exemplary damages, to each of private respondents;

(3) P16,000.00 as compensatory damages, to private respondent Sofia C. Crouch;

(4) P5,000.00 as attorney's fees; and

(5) Costs of suit.

SO ORDERED.

Yap, Paras and Sarmiento, JJ., concur.

Separate Opinion

MELENCIO-HERRERA, J., concurring:

I concur. In addition to compensatory and exemplary damages, moral damages are recoverable in

actions for breach of contract, as in this case, where the breach has been wanton and reckless,

tantamount to bad faith.

Footnotes

* Penned by Justice Serafin E. Camilon, with the concurrence of Justices Crisolito Pascual, Jose C.

Campos, Jr. and Desiderio P. Jurado.

1. Rollo at 8.

2. Rollo at 9-10.

3. Rollo at 14.

4. Rollo at 13.

EN BANC

[G.R. No. L-15645. January 31, 1964.]

PAZ P. ARRIETA and VITALIADO ARRIETA, plaintiffs-appellees, vs. NATIONAL RICE AND CORN

CORPORATION, defendant-appellant, MANILA UNDERWRITERS INSURANCE CO., INC., defendant-

appellee.

Teehankee & Carreon for plaintiffs-appellees.

The Government Corporate Counsel for defendant-appellant.

Isidro A. Vera for defendant-appellee.

SYLLABUS

1. OBLIGATIONS AND CONTRACTS; LIABILITY FOR NON-PERFORMANCE; FAILURE TO PUT UP LETTER OF

CREDIT WITHIN AGREED PERIOD. — One who assumes a contractual obligation and fails to perform the

same on account of his inability to meet certain bank requirements, which inability he knew and was

aware of when he entered into the contract, should be held liable in damages for breach of contract.

2. OBLIGATIONS AND CONTRACTS; LIABILITY OF NON-PERFORMANCE. — Under Article 1170 of the Civil

Code, not only debtors guilty of fraud, negligence or default but also every debtor, in general, who fails

in the performance of his obligations is bound to indemnify for the losses and damages caused thereby.

3. ID.; ID.; MEANING OF PHRASE "IN ANY MANNER CONTRAVENE THE TENOR" OF THE OBLIGATION IN

ART. 1170, CIVIL CODE. — The phrase "in any manner contravene the tenor" of the obligation in Art.

1170, Civil Code, includes any illicit task which impairs the strict and faithful fulfillment of the obligation,

or every kind of defective performance.

4. ID.; ID.; WAIVER OF BREACH OF CONTRACT NOT PRESUMED. — Waivers are not presumed, but must

be clearly and convincingly shown, either by express stipulation or acts admitting of no other reasonable

explanation.

5. ID.; PAYMENT OF AWARD; PHILIPPINE CURRENCY. — In view of Republic Act 529 which specifically

requires the discharge of obligations only "in any coin or currency which at the time of payment is legal

tender for public and private debt", the award of damages in U.S. dollars made by the lower court in the

case at bar is modified by converting it into Philippine pesos at the rate of exchange prevailing at the

time the obligation was incurred or when the contract in question was executed.

D E C I S I O N

REGALA, J p:

This is an appeal of the defendant-appellant NARIC from the decision of the trial court dated February

20, 1958, awarding to the plaintiffs-appellees the amount of $286,000.00 as damages for breach of

contract and dismissing the counterclaim and third party complaint of the defendant-appellant NARIC.

In accordance with Section 13 of Republic Act No. 3452, "the National Rice and Corn Administration

(NARIC) is hereby abolished and all its assets, liabilities, functions, powers which are not inconsistent

with the provisions of this Act, and all personnel are transferred" to the Rice and Corn Administration

(RCA).

All references, therefore, to the NARIC in this decision must accordingly be adjusted and read as RCA

pursuant to the aforementioned law.

On May 19, 1952, plaintiff-appellee participated in the public bidding called by the NARIC for the supply

of 20,000 metric tons of Burmese rice. As her bid of $203.00 per metric ton was the lowest, she was

awarded the contract for the same. Accordingly, on July 1, 1952, plaintiff-appellee Paz P. Arrieta and the

appellant corporation entered into a Contract of Sale of Rice, under the terms of which the former

obligated herself to deliver to the latter 20,000 metric tons of Burmese Rice at $203.00 per metric ton,

CIF Manila. In turn, the defendant Corporation committed itself to pay for the imported rice "by means

of an irrevocable, confirmed and assignable letter of credit in U.S. currency in favor of the plaintiff-

appellee and/or supplier in Burma, immediately."

Despite the commitment to pay immediately "by means of an irrevocable, confirmed and assignable

Letter of Credit," however, it was only on July 30, 1952, or a full month from the execution of the

contract, that the defendant corporation, thru its general manager, took the first step to open a letter of

credit by forwarding to the Philippine National Bank its Application for Commercial Letter of Credit. The

application was accompanied by a transmittal letter, the relevant paragraphs of which read:

"In view of the fact that we do not have sufficient deposit with your institution with which to cover the

amount required to be deposited as a condition for the opening of letters of credit, we will appreciate it

if this application could be considered a special case.

"We understand that our supplier, Mrs. Paz P. Arrieta, has a deadline to meet which is August 4, 1952,

and in order to comply therewith, it is imperative that the L/C be opened prior to that date. We would

therefore request your full cooperation on this matter."

On the same day, July 30, 1952, Mrs. Paz P. Arrieta, thru counsel, advised the appellant corporation of

the extreme necessity for the immediate opening of the letter of credit since she had by then made a

tender to her supplier in Rangoon, Burma "equivalent to 5% of the F.O.B. price of 20,000 tons at $180.70

and in compliance with the regulations in Rangoon this 5% will be confiscated if the required letter of

credit is not received by them before August 4, 1952."

On August 4, 1952, the Philippine National Bank informed the appellant corporation that its application,

"for a letter of credit for $3,614,000.00 in favor of Thiri Setkya has been approved by the Board of

Directors with the condition that 50% marginal cash deposit be paid and that drafts are to be paid upon

presentment" (Exh. J-pl.; Exh. 10-def., p. 19, Folder of Exhibits) Furthermore, the Bank represented that

it "will hold your application in abeyance pending compliance with the above stated requirement."

As it turned out, however, the appellant corporation was not in any financial position to meet the

condition. As a matter of fact, in a letter dated August 2, 1952, the NARIC bluntly confessed to the

appellee its dilemma: "In this connection, please be advised that our application for the opening of the

letter of credit has been presented to the bank since July 30th but the latter requires that we first

deposit 50% of the value of the letter amounting to approximately $3,614,000.00 which we are not in a

position to meet." (Emphasis supplied. Exh. 9-Def.; Exh. 1-Pl., p. 18, Folder of Exhibits)

Consequently, the credit instrument applied for was opened only on September 8, 1952 "in favor of Thiri

Setkya, Rangoon, Burma, and/or assignee for $3,614,000.00," (which is more than two months from the

execution of the contract) the party named by the appellee as beneficiary of the letter of credit.

As a result of the delay, the allocation of appellee's supplier in Rangoon was cancelled and the 5%

deposit, amounting to 524,000 kyats or approximately P200,000.00 was forfeited. In this connection, it

must be made of record that although the Burmese authorities had set August 4, 1952 as the deadline

for the remittance of the required letter of credit, the cancellation of the allocation and the confiscation

of the 5% deposit were not effected until August 20, 1952, or, a full half month after the expiration of

the deadline. And yet, even with that 15-day grace, appellant corporation was unable to make good its

commitment to open the disputed letter of credit.

The appellee endeavored, but failed, to restore the cancelled Burmese rice allocation. When the futility

of reinstating the same became apparent, she offered to substitute Thailand rice instead to the

defendant NARIC, communicating at the same time that the offer was "a solution which should be

beneficial to the NARIC and to us at the same time." (Exh. Y-Pl.; Exh. 25—Def., p. 38, Folder of Exhibits)

This offer for substitution, however, was rejected by the appellant in a resolution dated November 15,

1952.

On the foregoing, the appellee sent a letter to the appellant, demanding compensation for the damages

caused her in the sum of $286,000.00, U.S. currency, representing unrealized profit. The demand having

been rejected, she instituted this case now on appeal.

At the instance of the NARIC, a counterclaim was filed and the Manila Underwriters Insurance Company

was brought to the suit as a third party defendant to hold it liable on the performance bond it executed

in favor of the plaintiff-appellees.

We find for the appellee.

It is clear upon the records that the sole and principal reason for the cancellation of the allocation

contracted by the appellee herein in Rangoon, Burma was the failure of the letter of credit to be opened

within the contemplated period. This failure must, therefore, be taken as the immediate cause for the

consequent damage which resulted. As it is then, the disposition of this case depends on a

determination of who was responsible for such failure. Stated differently, the issue is whether

appellant's failure to open immediately the letter of credit in dispute amounted to a breach of the

contract of July 1, 1952 for which it may be held liable in damages.

Appellant corporation disclaims responsibility for the delay in the opening of the letter of credit. On the

contrary, it insists that the fault lies with the appellee. Appellant contends that the disputed negotiable

instrument was not promptly secured because the appellee failed to seasonably furnish data necessary

and required for opening the same, namely, "(1) the amount of the letter of credit, (2) the person,

company or corporation in whose favor it is to be opened, and (3) the place and bank where it may be

negotiated." Appellant would have this Court believe, therefore, that had these information been

forthwith furnished it, there would have been no delay in securing the instrument.

Appellant's explanation has neither force nor merit. In the first place, the explanation reaches into an

area of the proceedings into which We are not at liberty to encroach. The explanation refers to a

question of fact. Nothing in the record suggests any arbitrary or abusive conduct on the part of the trial

judge in the formulation of the ruling. His conclusion on the matter is sufficiently borne out by the

evidence presented. We are denied, therefore, the prerogative to disturb that finding, consonant to the

time honored tradition of this Tribunal to hold trial judges better situated to make conclusions on

questions of fact. For the record, We quote hereunder the lower court's ruling on the point:

"The defense that the delay, if any in opening the letter of credit was due to the failure of plaintiff to

name the supplier, the amount and the bank is not tenable. Plaintiff stated in Court that these facts

were known to defendant even before the contract was executed because these facts were necessarily

revealed to the defendant before she could qualify as a bidder. She stated too that she had given the

necessary data immediately after the execution of Exh. "A" (the contract of July 1, 1952) to Mr. GABRIEL

BELMONTE, General Manager of the NARIC, both orally and in writing and that she also pressed for the

opening of the letter of credit on these occasions. These statements have not been controverted and

defendant NARIC, notwithstanding its previous intention to do so, failed to present Mr. Belmonte to

testify or refute this. . . ."

Secondly, from the correspondence and communications which form part of the record of this case, it is

clear that what singularly delayed the opening of the stipulated letter of credit and which, in turn,

caused the cancellation of the allocation in Burma, was the inability of the appellant corporation to

meet the condition imposed by the Bank for granting the same.

We do not think the appellant corporation can refute the fact that had it been able to put up the 50%

marginal cash deposit demanded by the bank, then the letter of credit would have been approved,

opened and released as early as August 4, 1952. The letter of the Philippine National Bank to the NARIC

was plain and explicit that as of the said date, appellant's "application for a letter of credit . . . has been

approved by the Board of Directors with the condition that 50% marginal cash deposit be paid and that

drafts are to be paid upon presentment." (Emphasis supplied)

The liability of the appellant, however, stems not alone from this failure or inability to satisfy the

requirements of the bank. Its culpability arises from its willful and deliberate assumption of contractual

obligations even as it was well aware of its financial incapacity to undertake the presentation. We base

this judgment upon the letter which accompanied the application filed by the appellant with the bank, a

part of which letter was quoted earlier in this decision. In the said accompanying correspondence,

appellant admitted and owned that it did "not have sufficient deposit with your institution (the PNB)

with which to cover the amount required to be deposited as a condition for the opening of letters of

credit. . . ."

A number of logical inferences may be drawn from the aforementioned admission. First, that the

appellant knew the bank requirements for opening letters of credit; second, that appellant also knew it

could not meet those requirements. When, therefore, despite this awareness that it was financially

incompetent to open a letter of credit immediately, appellant agreed in paragraph 8 of the contract to

pay immediately "by means of an irrevocable, confirmed and assignable letter of credit," it must be

similarly be held to have bound itself too answer far all and every consequences that would result from

the representation. As aptly observed by the trial court:

". . . Having called for bids for the importation of rice involving millions, $4,260,000.00 to be exact, it

should have ascertained its ability and capacity to comply with the inevitable requirements in cash to

pay for such importation. Having announced the bid, it must be deemed to have impliedly assured

suppliers of its capacity and facility to finance the importation within the required period, especially

since it had imposed on the supplier the 90-day period within which the shipment of the rice must be

brought into the Philippines. Having entered into the contract, it should have taken steps immediately to

arrange for the letter of credit for the large amount involved and inquired into the possibility of its

issuance."

In relation to the aforequoted observation of the trial court, We would like to make reference also to

Article 1170 of the Civil Code which provides:

"Those who in the performance of their obligation are guilty of fraud, negligence, or delay, and those

who in any manner contravene the tenor thereof, are liable in damages."

Under this provision, not only debtors guilty of fraud, negligence or default in the performance of

obligations are decreed liable: in general, every debtor who fails in the performance of his obligations is

bound to indemnify for the losses and damages caused thereby (De la Cruz v. Seminary of Manila, 18

Phil. 330; Municipality of Moncada v. Cajuigan, 21 Phil. 184; De la Cavada v. Diaz, 37 Phil. 982; Maluenda

& Co. v. Enriquez, 46 Phil. 916; Pasumil v. Chong, 49 Phil. 1003; Pando v. Gimenez, 54 Phil. 459; Acme

Films v. Theaters Supply, 63 Phil. 657.) The phrase "in any manner contravene the tenor" of the

obligation includes any illicit act which impairs the strict and faithful fulfillment of the obligation, or

every kind of defective performance. (IV Tolentino, Civil Code of the Philippines, citing authorities, p.

103)

The NARIC would also have this Court hold that the subsequent offer to substitute Thailand rice for the

originally contracted Burmese rice amounted to a waiver by the appellee of whatever rights she might

have derived from the breach of the contract. We disagree. Waivers are not presumed, but must be

clearly and convincingly shown, either by express stipulation or acts admitting no other reasonable

explanation. (Ramirez v. Court of Appeals, 98 Phil., 225; 52 O. G. 779). In the case at bar, no such intent

to waive has been established.

We have carefully examined and studied the oral and documentary evidence presented in this case and

upon which the lower court based its award. Under the contract, the NARIC bound itself to buy 20,000

metric tons of Burmese rice at "$203.00 U. S. Dollars per metric ton, all net shipped weight, and all in U.

S. currency, C.I.F. Manila. . . ." On the other hand, documentary and other evidence establish with equal

certainty that the plaintiff-appellee was able to secure the contracted commodity at the cost price of

$180.70 per metric ton from her supplier in Burma. Considering freights, insurance and charges incident

to its shipment here and the forfeiture of the 5% deposit, the award granted by the lower court is fair

and equitable. For a clearer view of the equity of the damages awarded, We reproduce below the

testimony of the appellee, adequately supported by the evidence and record:

"Q. Will you please tell the court, how much is the damage you suffered?

"A Because the selling price of my rice is $203.00 per metric ton, and the cost price of my rice is $180.00.

We had to pay also $6.25 for shipping and about $164 for insurance. So adding the cost of the rice, the

freight, the insurance, the total would be about $187.99 that would be $15.01 gross profit per metric

ton, multiply by 20,000 equals $300,200, that is my supposed profit if I went through with the contract."

The above testimony of the plaintiff was a general approximation of the actual figures involved in the

transaction. A precise and more exact demonstration of the equity of the award herein is provided by

Exhibit HH of the plaintiff and Exhibit 34 of the defendant, hereunder quoted so far as germane:

"It is equally of record of now that as shown in her request, dated July 29, 1959, and other

communications subsequent thereto for the opening by your corporation of the required letter of

credit, Mrs. Arrieta was supposed to pay her supplier in Burma at the rate of One Hundred Eighty Dollars

and Seventy Cents ($180.70) in U.S. Currency, per ton plus Eight Dollars ($8.00) in the same currency per

ton for shipping and other handling expenses, so that she is already assured of a net profit of Fourteen

Dollars and Thirty Cents ($14.30), U.S. Currency, per ton or a total of Two Hundred and Eighty Six

Thousand Dollars ($286,000.00), U.S. Currency, in the aforesaid transaction. . . ."

Lastly, herein appellant filed a counterclaim asserting that it has suffered, likewise by way of unrealized

profit, damages in the total sum of $406,000 from the failure of the projected contract to materialize.

This counterclaim was supported by a cost study made and submitted by the appellant itself and

wherein it was illustrated how indeed, had the importation pushed thru, NARIC would have realized in

profit the amount asserted in the counterclaim. And yet, the said amount of P406,000.00 was realizable

by the appellant despite a number of expenses which the appellee, under the contract, did not have to

incur. Thus, under the cost study submitted by the appellant, banking and unloading charges were to be

shouldered by it, including an Import License Fee of 2% and superintendence fee of $0.25 per metric

ton. If the NARIC stood to profit over P400,000.00 from the disputed transaction in spite of the above

extra expenditures from which the herein appellee was exempt, We are convinced of the fairness of the

judgment presently under appeal.

In the premises, however, a minor modification must be effected in the dispositive portion of the

decision appealed from insofar as it expresses the amount of damages in U.S. currency and not in

Philippine Peso. Republic Act 529 specifically requires the discharge of obligations only "in any coin or

currency which at the time of payment is legal tender for public and private debts." In view of that law,

therefore, the award should be converted into and expressed in Philippine Peso.

This brings us to a consideration of what rate of exchange should apply in the conversion here decreed.

Should it be at the time of the breach, at the time the obligation was incurred or at the rate of exchange

prevailing on the promulgation of this decision.

In the case of Engel v. Velasco & Co., 47 Phil. 115, We ruled that in an action for recovery of damages for

breach of contract, even if the obligation assumed by the defendant was to pay the plaintiff a sum of

money expressed in American currency, the indemnity to be allowed should be expressed in Philippine

currency at the rate of exchange at the time of the judgment rather than at the rate of exchange

prevailing on the date of defendant's breach. This ruling, however, can either be applied nor extended

to the case at bar for the same was laid down when there was no law against stipulating foreign

currencies in Philippine contracts. But now we have Republic Act No. 529 which expressly declares such

stipulations as contrary to public policy, void and of no effect. And, as We already pronounced in the

case of Eastboard Navigation, Ltd., v. Juan Ysmael & Co., Inc., G.R. No. L-9090, September 10, 1957, if

there is any agreement to pay an obligation in the currency other than Philippine legal tender, the same

is null and void as contrary to public policy (Republic Act 529), and the most that could be demanded is

to pay said obligation in Philippine currency "to be measured in the prevailing rate of exchange at the

time the obligation was incurred (Sec. 1, Idem.)"

UPON ALL THE FOREGOING, the decision appealed from is hereby affirmed, with the sole modification

that the award should be converted into the Philippine peso at the rate of exchange prevailing at the

time the obligation was incurred or on July 1, 1952 when the contract was executed. The appellee

insurance company, in the light of this judgment, is relieved of any liability under this suit. No

pronouncement as to costs.

Bengzon, C.J., Padilla, Concepcion, Paredes, Dizon, and Makalintal, JJ., concur.

Reyes, J.B.L., J., reserves his vote.

Barrera, J., took no part.

SECOND DIVISION

[G.R. No. L-37120. April 20, 1983.]

VICTORINO D. MAGAT, petitioner, vs. HON. LEO D. MEDIALDEA and SANTIAGO A. GUERRERO,

respondents.

Sinesio S. Vergara for petitioner.

Eladio B. Samson for respondents.

SYLLABUS

1. REMEDIAL LAW; ACTION; CAUSE OF ACTION; SUFFICIENCY THEREOF DETERMINED ON BASIS OF FACTS

ALLEGED IN THE COMPLAINT; REQUISITES; CASE AT BAR. — Both parties are in accord with the view that

when a motion to dismiss is based on the ground of lack of cause of action, the sufficiency of the cause

of action can only be determined on the basis of the facts alleged in the complaint; that the facts alleged

are deemed hypothetically admitted, including those which are fairly deducible therefrom; and that,

admitting the facts as alleged, whether or not the court can render a valid judgment against the

defendant upon said facts in accordance with the prayer in the complaint. After a thorough examination

of the complaint at bar, the Supreme Court finds the test of legal sufficiency of the cause of action

adequately satisfied. In a methodical and logical sequence, the complaint recites the circumstances that

led to the perfection of the contract entered into by the parties. It further avers that while petitioner

had fulfilled his part of the bargain (paragraph 8 of the Complaint), private respondent failed to comply

with his correlative obligation by refusing to open a letter of credit to cover payment of the goods

ordered by him (paragraphs 11 & 12 of the Complainant), and that consequently, petitioner suffered not

only loss of his expected profits, but moral and exemplary damages as well. From these allegations, the

essential elements of a cause of action are present, to wit: (1) the existence of a legal right of the

plaintiff; (2) a correlative duty of the defendant; and (3) an act or omission of the defendant in violation

of the plaintiff's right, with consequent injury or damage to the latter for which he may maintain an

action for recovery of damages or other appropriate relief. In fine, the Supreme Court holds that on the

basis of the facts alleged in the complaint, the Court could render a valid judgment in accordance with

the prayer thereof.

2. CIVIL LAW; DAMAGES; BREACH OF CONTRACT; LOSS SUFFERED BY VIRTUE THEREOF BECOMES REAL,

FIXED AND VESTED AT THE VERY MOMENT OF BREACH. — Indisputably, the parties, both businessman,

entered into the aforesaid contract with the evident intention of deriving some profits therefrom. Upon

breach of the contract by either of them, the other would necessarily suffer loss of his expected profits.

Since the loss comes into being at the very moment of breach, such loss is real, "fixed and vested'' and

therefore, recoverable under the law.

3. ID.; ID.; ARTICLE 11700 of N.C.C.; PROVIDES FOR RECOVERY OF DAMAGES; PHRASE "IN ANY MANNER

CONTRAVENE THE TENOR" CONSTRUED. — Article 1170 of the Civil Code provides: "Those who in the

performance of their obligation are guilty of fraud, negligence, or delay and those who in any manner

contravene the tenor thereof are liable for damages." The phrase "in any manner contravene the tenor"

of the obligation includes any illicit act or omission which impairs the strict and faithful fulfillment of the

obligation and every kind of defective performance.

4. ID.; ID.; EXTENT OF DAMAGES RECOVERABLE DEPENDS ON THE PRESENCE OR ABSENCE OF BAD FAITH

ATTENDANT IN THE BREACH. — The damages which the obligor is liable for includes not only the value

of the loss suffered by the obligee (daño emergente) but also the profits which the latter failed to obtain

(lucro cesante). If the obligor acted in good faith, he shall be liable for those damages that are the

natural and probable consequences of the breach of the obligation and which the parties have foreseen

or could have reasonably foreseen at the time the obligation was constituted; and in case of fraud, bad

faith, malice or wanton attitude, he shall be liable for all damages which may be reasonably attributed

to the non- performance of the obligation.

5. ID.; ID.; MORAL AND EXEMPLARY DAMAGES; RECOVERABLE IN CASES OF BAD FAITH. — The same is

true with respect to moral and exemplary damages. The applicable legal provisions on the matter,

Articles 2220 and 2232 of the Civil Code, allow the award of such damages in breaches of contract

where the defendant acted in bad faith. The Supreme Court finds that the complaint sufficiently alleges

bad faith on the part of the defendant.

D E C I S I O N

ESCOLIN, J p:

Put to test in this petition for review on certiorari is the sufficiency of the averments contained in the

complaint for alleged breach of contract filed by petitioner Victorino D. Magat against respondent

Santiago A. Guerrero in Civil Case No. 17827 of the Court of First Instance of Rizal, presided by

respondent Judge Leo D. Medialdea, now Deputy Judicial Administrator, which complaint was dismissed

for failure to state a cause of action. cdrep

The pertinent allegations in the complaint, subject of inquiry, are as follows: 1

"3. That sometime in September 1972, the defendant entered into a contract with the U.S. Navy

Exchange, Subic Bay, Philippines, for the operation of a fleet of taxicabs, each taxicab to be provided

with the necessary taximeter and a radio transceiver for receiving and sending of messages from mobile

taxicab to fixed base stations within the Naval Base at Subic Bay, Philippines;

"4. That Isidro Q. Aligada, acting as agent of the defendant herein conducted the necessary project

studies on how best the defendant may meet the requirements of his contract with the U.S. Navy

Exchange, Subic Bay, Philippines, and because of the experience of the plaintiff in connection with his

various contracts with the U.S. Navy, Subic Bay, Philippines, and his goodwill already established with

the Naval personnel of Subic Bay, Philippines, especially in providing the U.S. Navy with needed

materials or goods on time as specified by the U.S. Navy, be they of local origin or imported either from

the United States or from Japan, the said Isidro Q. Aligada approached the plaintiff herein in behalf of

the defendant and proposed to import from Japan thru the plaintiff herein or thru plaintiff's Japanese

business associates, all taximeters and radio transceivers needed by the defendant in connection with

his contract with the U.S. Navy Exchange, Subic Bay, Philippines;

"5. That the defendant herein and his aforesaid agent Isidro Q. Aligada were able to import from Japan

with the assistance of the plaintiff and his Japanese business associates the necessary taximeters for

defendant's taxicabs in partial fulfillment of defendant's commitments with the U.S. Navy Exchange,

Subic Bay, Philippines, the plaintiff's assistance in this matter having been given to the defendant gratis

et amore;

"6. That Isidro Q. Aligada, also acting as agent of the defendant, made representations with the plaintiff

herein to the effect that defendant desired to procure from Japan thru the plaintiff herein the needed

radio transceivers and to this end, Isidro Q. Aligada secured a firm offer in writing dated September 25,

1972, a copy of which is hereto attached marked as Annex 'A' and made an integral part of this

complaint, wherein the plaintiff quoted in his offer a total price of $77,620.59 [U.S. dollars] FOB

Yokohama, the goods or articles therein offered for sale by the plaintiff to the defendant to be delivered

sixty to ninety [60-90] days after receipt of advice from the defendant of the radio frequency assigned to

the defendant by the proper authorities;

"7. That the plaintiff received notice of the fact that the defendant accepted plaintiff's offer to sell to the

defendant the items specified in Annex 'A', as well as the terms and conditions of said offer, as shown by

the signed conformity of the defendant appearing on Annex 'A' which was duly delivered by the

defendant's agent to the plaintiff herein, whereupon all that the plaintiff had to do in the meantime was

to await advice from the defendant as to the radio frequency to be assigned by the proper authorities to

the defendant;

"8. That believing that the defendant would faithfully fulfill his contract with the plaintiff herein,

considering his signed conformity appearing in Annex 'A' hereof as well as the letter dated October 4,

1972, of his agent aforementioned which is attached hereto and marked as Annex 'B' and made an

integral part of this complaint, and in order that plaintiff's promised delivery would not be delayed, the

plaintiff herein took steps to advise the Japanese entity entrusted with the manufacture of the items

listed in Annex 'A' to the effect that the contract between the defendant herein and the plaintiff has

been perfected and that advice with regards to radio frequency would follow as soon as same is

received by the plaintiff from the defendant;

"9. That in his letter dated October 6, 1972, a copy of which is hereto attached marked as Annex 'C', the

defendant advised his aforementioned agent to the effect that the U.S. Navy provided him with the

radio frequency of 34.2 MHZ [Megahertz] and defendant requested his said agent to proceed with his

order placed with the plaintiff herein, which fact was duly communicated to the plaintiff by the

defendant's aforementioned agent;

"10. That by his letter dated October 7, 1972, addressed to the plaintiff by the defendant's agent, a copy

of which is hereto attached and marked as Annex 'D', defendant's agent qualified defendant's

instructions contained in his letter of October 6, 1972 [Annex 'C'] in the sense that plaintiff herein should

proceed to fulfill defendant's order only upon receipt by the plaintiff of the defendant's letter of credit;

"11. That it being normal business practice in case of foreign importation that the buyer opens a letter

of credit in favor of the foreign supplier before delivery of the goods sold, the plaintiff herein awaited

the opening of such a letter of credit by the defendant;

"12. That the defendant and his agent have repeatedly assured plaintiff herein of the defendant's

financial capabilities to pay for the goods ordered by him and in fact he accomplished the necessary

application for a letter of credit with his banker, but he subsequently instructed his banker not to give

due course to his application for a letter of credit and that for reasons only known to the defendant, he

fails and refuses to open the necessary letter of credit to cover payment of the goods ordered by him;

"13. That it has come to the knowledge of the plaintiff herein that the defendant has been operating his

taxicabs without the required radio transceivers and when the U.S. Navy Authorities of Subic Bay,

Philippines, were pressing defendant for compliance with his commitments with respect to the

installations of radio transceivers on his taxicabs, he impliedly laid the blame for the delay upon the

plaintiff herein, thus destroying the reputation of the plaintiff herein with the said Naval Authorities of

Subic Bay, Philippines, with whom plaintiff herein transacts business;

"14. That on March 27, 1973, plaintiff wrote a letter thru his counsel, copy attached marked as Annex

'E', to ascertain from the defendant as to whether it is his intention to fulfill his part of the agreement

with the plaintiff herein or whether he desired to have the contract between them definitely cancelled,

but defendant did not even have the courtesy to answer plaintiff's demand;

"15. That the defendant herein entered into a contract with the plaintiff herein as set forth in Annex 'A'

without the least intention of faithfully complying with his obligations thereunder, but he did so only in

order to obtain the concession from the U.S. Navy Exchange, Subic Bay, Philippines, of operating a fleet

of taxicabs inside the U.S. Naval Base to hi financial benefit and at the expense and prejudice of third

parties such as the plaintiff herein;

"16. That in view of the defendant's failure to fulfill his contractual obligations with the plaintiff herein,

the plaintiff will suffer the following damages:.

[a] As the radio transceivers ordered by the defendant are now in the hands of the plaintiff's Japanese

representative, the plaintiff will have to pay for them, thus he will have to suffer as total loss to him the

amount of P523,938.98 (converting the amount of $77,620.59 to pesos at the rate of P6.75 to the dollar)

as said radio transceivers were purposely made or manufactured solely for the use of the defendant

herein and cannot possibly be marketed by the plaintiff herein to the general public;

[b] The amount of P52,393.89 or 10% of the purchase price by way of loss of expected profits from the

transaction or contract between plaintiff and the defendant;

[c] Loss of confidence in him and goodwill of the plaintiff which will result in the impairment of his

business dealings with Japanese firms, thereby resulting also in loss of possible profits in the future

which plaintiff assess at no less than P200,000.00;

[d] That in view of the defendant's bad faith in inducing plaintiff to enter into the contract with him as

set forth hereinabove, defendant should be assessed by this Honorable Court in favor of the plaintiff the

sum of P200,000.00 as moral and exemplary damages;

[e] That in view of the defendant's fault and to protect his interests, plaintiff herein is constrained to

retain the services of counsel with whom he agreed to pay by way of attorney's fees the sum of

P50,000.00".

Respondent Guerrero filed a motion to dismiss said complaint for lack of cause of action, which ground

is propounded by respondent's counsel thus: 2

". . . it is clear that plaintiff was merely anticipating his loss or damage which might result from the

alleged failure of defendant to comply with the terms of the alleged contract. Hence, plaintiff's right of

recovery under his cause of action is premised not on any loss or damage which he is expecting to incur

in the near future. Plaintiff's right therefore under his cause of action is not yet fixed or vested.

"Inasmuch as there is no other allegation in the present Complaint wherein the same could be

maintained against defendant, the present Complaint should be dismissed for its failure to state a cause

of action against defendant".

The respondent judge, over petitioner's opposition, issued a minute order dismissing the complaint as

follow: 3

"Acting upon the 'Motion to Dismiss' filed by the defendant, through counsel, date June 7, 1973, as well

as the opposition thereto filed by the plaintiff, through counsel, dated June 14, 1973, for the reasons

therein alleged, this Court hereby grants said motion and, as prayed for, the complaint in the above-

entitled case is dismissed.

"SO ORDERED".

Both parties are in accord with the view that when a motion to dismiss is based on the ground of lack of

cause of action, the sufficiency of the case of action can only be determined on the basis of the facts

alleged in the complaint 4 ; that the facts alleged are deemed hypothetically admitted, including those

which are fairly deducible therefrom 5 ; and that, admitting the facts as alleged, whether or not the

Court can render a valid judgment against the defendant upon said facts in accordance with the prayer

in the complaint 6

After a thorough examination of the complaint at bar, We find the test of legal sufficiency of the cause

of action adequately satisfied. In a methodical and logical sequence, the complaint recites the

circumstances that led to the perfection of the contract entered into by the parties. It further avers that

while petitioner had fulfilled his part of the bargain [paragraph 8 of the Complaint], private respondent

failed to comply with his correlative obligation by refusing to open a letter of credit to cover payment of

the goods ordered by him [paragraphs 11 & 12 of the Complaint], and that consequently, petitioner

suffered not only loss of his expected profits, but moral and exemplary damages as well. From these

allegations, the essential elements of a cause of action are present, to wit: [1] the existence of a legal

right to the plaintiff; [2] a correlative duty of the defendant and [3] an act or omission of the defendant

in violation of the plaintiff's right, with consequent injury or damage to the latter for which he may

maintain an action for recovery of damages or other appropriate relief. 7

Indisputably, the parties, both businessmen, entered into the aforesaid contract with the evident

intention of deriving some profits therefrom. Upon breach of the contract by either of them, the other

would necessarily suffer loss of his expected profits. Since the loss comes into being at the very moment

of breach, such loss is real, "fixed and vested" and, therefore, recoverable under the law. LibLex


"Those who in the performance of their obligation are guilty of fraud, negligence, or delay, and those

who in any manner contravene the tenor thereof are liable for damages."

The phrase "in any manner contravene the tenor" of the obligation includes any illicit act or omission

which impairs the strict and faithful fulfillment of the obligation and every kind of defective

performance. 8

The damages which the obligor is liable for includes not only the value of the loss suffered by the obligee

[daño emergente] but also the profits which the latter failed to obtain [lucro cesante] 9 . If the obligor

acted in good faith, he shall be liable for those damages that are the natural and probable consequences

of the breach of the obligation and which the parties have foreseen or could have reasonably foreseen

at the time the obligation was constituted; and in case of fraud, bad faith, malice or wanton attitude, he

shall be liable for all damages which may be reasonably attributed to the nonperformance of the

obligation 10

The same is true with respect to moral and exemplary damages. The applicable legal provisions on the

matter, Articles 2220 and 2232 of the Civil Code, allow the award of such damages in breaches of

contract where the defendant acted in bad faith. To Our mind, the complaint sufficiently alleges bad

faith on the part of the defendant.

In fine, We hold that on the basis of the facts alleged in the complaint, the court could render a valid

judgment in accordance with the prayer thereof. LLphil

ACCORDINGLY, the questioned order of dismissal is hereby set aside and the case ordered remanded to

the court of origin for further proceedings. No costs.

SO ORDERED.

Makasiar (Chairman), Concepcion, Jr., Guerrero and Abad Santos, JJ., concur.

Aquino, J., is on leave.

De Castro, J., took no part.

Footnotes

1. Annex "A" of the petition.

2. Annex "B" of the petition.

3. Annex "D" of the petition.

4. Mindanao Realty Corp. vs Kintanar, 6 SCRA 894.

5. Mathay vs. Consolidated Bank & Trust Co., 58 SCRA 559.

6. La Suerte Cigar & Cigarette Factory vs. Central Azucarera de Danao, 23 SCRA 686.

7. Mathay vs. Consolidated Bank & Trust Co., supra.

8. Arrieta vs. National Rice & Corn Corp., 10 SCRA 79.



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