G.R. No. L-29155 May 13, 1970

UNIVERSAL FOOD CORPORATION, petitioner, vs. THE COURT OF APPEALS, MAGDALO V. FRANCISCO, SR., and VICTORIANO N. FRANCISCO, respondents.CASTRO, J.:

Petition for certiorari by the Universal Food Corporation against the decision of the Court of Appeals of February 13, 1968 in CA-G.R. 31430-R (Magdalo V. Francisco, Sr. and Victoriano V. Francisco, plaintiffs-appellants vs. Universal Food Corporation, defendant-appellee), the dispositive portion of which reads as follows: "WHEREFORE the appealed decision is hereby reversed; the BILL OF ASSIGNMENT marked Exhibit A is hereby rescinded, and defendant is hereby ordered to return to plaintiff Magdalo V. Francisco, Sr., his Mafran sauce trademark and formula subject-matter of Exhibit A, and to pay him his monthly salary of P300.00 from December 1, 1960, until the return to him of said trademark and formula, plus attorney's fees in the amount of P500.00, with costs against defendant." 1

On February 14, 1961 Magdalo V. Francisco, Sr. and Victoriano V. Francisco filed with the Court of First Instance of Manila, against, the Universal Food Corporation, an action for rescission of a contract entitled "Bill of Assignment." The plaintiffs prayed the court to adjudge the defendant as without any right to the use of the Mafran trademark and formula, and order the latter to restore to them the said right of user; to order the defendant to pay Magdalo V. Francisco, Sr. his unpaid salary from December 1, 1960, as well as damages in the sum of P40,000, and to pay the costs of suit. 1

On February 28, the defendant filed its answer containing admissions and denials. Paragraph 3 thereof "admits the allegations contained in paragraph 3 of plaintiffs' complaint." The answer further alleged that the defendant had complied with all the terms and conditions of the Bill of Assignment and, consequently, the plaintiffs are not entitled to rescission thereof; that the plaintiff Magdalo V. Francisco, Sr. was not dismissed from the service as permanent chief chemist of the corporation as he is still its chief chemist; and, by way of special defenses, that the aforesaid plaintiff is estopped from questioning 1) the contents and due execution of the Bill of Assignment, 2) the corporate acts of the petitioner, particularly the resolution adopted by its board of directors at the special meeting held on October 14, 1960, to suspend operations to avoid further losses due to increase in the prices of raw materials, since the same plaintiff was present when that resolution was adopted and even took part in the consideration thereof, 3) the actuations of its president and general manager in enforcing and implementing the said resolution, 4) the fact that the same plaintiff was negligent in the performance of his duties as chief chemist of the corporation, and 5) the further fact that the said plaintiff was delinquent in the payment of his subscribed shares of stock with the corporation. The defendant corporation prayed for the dismissal of the complaint, and asked for P750 as attorney's fees and P5,000 in exemplary or corrective damages.

On June 25, 1962 the lower court dismissed the plaintiffs' complaint as well as the defendant's claim for damages and attorney's fees, with costs against the former, who promptly appealed to the Court of Appeals. On February 13, 1969 the appellate court rendered the judgment now the subject of the present recourse.

The Court of Appeals arrived at the following "uncontroverted" findings of fact:

That as far back as 1938, plaintiff Magdalo V. Francisco, Sr. discovered or invented a formula for the manufacture of a food seasoning (sauce) derived from banana fruits popularly known as MAFRAN sauce; that the manufacture of this product was used in commercial scale in 1942, and in the same year plaintiff registered his trademark in his name as owner and inventor with the Bureau of Patents; that due to lack of sufficient capital to finance the expansion of the business, in 1960, said plaintiff secured the financial assistance of Tirso T. Reyes who, after a series of negotiations, formed with others defendant Universal Food Corporation eventually leading to the execution on May 11, 1960 of the aforequoted "Bill of Assignment" (Exhibit A or 1).

Conformably with the terms and conditions of Exh. A, plaintiff Magdalo V. Francisco, Sr. was appointed Chief Chemist with a salary of P300.00 a month, and plaintiff Victoriano V. Francisco was appointed auditor and superintendent with a salary of P250.00 a month. Since the start of the operation of defendant corporation, plaintiff Magdalo V. Francisco, Sr., when preparing the secret materials inside the laboratory, never allowed anyone, not even his own son, or the President and General Manager Tirso T. Reyes, of defendant, to enter the laboratory in order to keep the formula secret to himself. However, said plaintiff expressed a willingness to give the formula to defendant provided that the same should be placed or kept inside a safe to be opened only when he is already incapacitated to perform his duties as Chief Chemist, but defendant never acquired a safe for that purpose. On July 26, 1960, President and General Manager Tirso T. Reyes wrote plaintiff requesting him to permit one or two members of his family to observe the preparation of the 'Mafran Sauce' (Exhibit C), but said request was denied by plaintiff. In spite of such denial, Tirso T. Reyes did not compel or force plaintiff to accede to said request. Thereafter, however, due to the alleged scarcity and high prices of raw materials, on November 28, 1960, Secretary-Treasurer Ciriaco L. de Guzman of defendant issued a Memorandum (Exhibit B), duly approved by the President and General Manager Tirso T. Reyes that only Supervisor Ricardo Francisco should be retained in the factory and that the salary of plaintiff Magdalo V. Francisco, Sr., should be stopped for the time being until the corporation should resume its operation. Some five (5) days later, that is, on December 3, 1960, President and General Manager Tirso T. Reyes, issued a memorandom to Victoriano Francisco ordering him to report to the factory and produce "Mafran Sauce" at the rate of not less than 100 cases a day so as to cope with the orders of the corporation's various distributors and dealers, and with instructions to take only the necessary daily employees without employing permanent employees (Exhibit B). Again, on December 6, 1961, another memorandum was issued by the same President and General Manager instructing the Assistant Chief Chemist Ricardo Francisco, to recall all daily employees who are connected in the production of Mafran Sauce and also some additional daily employees for the production of Porky Pops (Exhibit B-1). On December 29, 1960, another memorandum was issued by the President and General Manager instructing Ricardo Francisco, as Chief Chemist, and Porfirio Zarraga, as Acting Superintendent, to produce Mafran Sauce and Porky Pops in full swing starting January 2, 1961 with further instructions to hire daily laborers in order to cope with the full blast protection (Exhibit S-2). Plaintiff Magdalo V. Francisco, Sr. received his salary as Chief Chemist in the amount of P300.00 a month only until his services were terminated on November 30, 1960. On January 9 and 16, 1961, defendant, acting thru its President and General Manager, authorized Porfirio Zarraga and Paula de Bacula to look for a buyer of the corporation including its trademarks, formula and assets at a price of not less than P300,000.00 (Exhibits D and D-1). Due to these successive memoranda, without plaintiff Magdalo V. Francisco, Sr. being recalled back to work, the latter filed the present action

on February 14, 1961. About a month afterwards, in a letter dated March 20, 1961, defendant, thru its President and General Manager, requested said plaintiff to report for duty (Exhibit 3), but the latter declined the request because the present action was already filed in court (Exhibit J).

1. The petitioner's first contention is that the respondents are not entitled to rescission. It is argued that under article 1191 of the new Civil Code, the right to rescind a reciprocal obligation is not absolute and can be demanded only if one is ready, willing and able to comply with his own obligation and the other is not; that under article 1169 of the same Code, 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; that in this case the trial court found that the respondents not only have failed to show that the petitioner has been guilty of default in performing its contractual obligations, "but the record sufficiently reveals the fact that it was the plaintiff Magdalo V. Francisco who had been remiss in the compliance of his contractual obligation to cede and transfer to the defendant the formula for Mafran sauce;" that even the respondent Court of Appeals found that as "observed by the lower court, 'the record is replete with the various attempt made by the defendant (herein petitioner) to secure the said formula from Magdalo V. Francisco to no avail; and that upon the foregoing findings, the respondent Court of Appeals unjustly concluded that the private respondents are entitled to rescind the Bill of Assignment.

The threshold question is whether by virtue of the terms of the Bill of Assignment the respondent Magdalo V. Francisco, Sr. ceded and transferred to the petitioner corporation the formula for Mafran sauce. 2

The Bill of Assignment sets forth the following terms and conditions:

THAT the Party of the First Part [Magdalo V. Francisco, Sr.] is the sole and exclusive owner of the MAFRAN trade-mark and the formula for MAFRAN SAUCE;

THAT for and in consideration of the royalty of TWO (2%) PER CENTUM of the net annual profit which the PARTY OF THE Second Part [Universal Food Corporation] may realize by and/or out of its production of MAFRAN SAUCE and other food products and from other business which the Party of the Second Part may engage in as defined in its Articles of Incorporation, and which its Board of Directors shall determine and declare, said Party of the First Part hereby assign, transfer, and convey all its property rights and interest over said Mafran trademark and formula for MAFRAN SAUCE unto the Party of the Second Part;

THAT the payment for the royalty of TWO (2%) PER CENTUM of the annual net profit which the Party of the Second Part obligates itself to pay unto the Party of the First Part as founder and as owner of the MAFRAN trademark and formula for MAFRAN SAUCE, shall be paid at every end of the Fiscal Year after the proper accounting and inventories has been undertaken by the Party of the Second Part and after a competent auditor designated by the Board of Directors shall have duly examined and audited its books of accounts and shall have certified as to the correctness of its Financial Statement;

THAT it is hereby understood that the Party of the First Part, to improve the quality of the products of the Party of the First Part and to increase its production, shall endeavor or undertake such research, study, experiments and testing, to invent or cause to invent additional formula or formulas, the property rights and interest thereon shall likewise be assigned, transferred, and conveyed unto the Party of the Second Part in consideration of the foregoing premises, covenants and stipulations:

THAT in the operation and management of the Party of the First Part, the Party of the First Part shall be entitled to the following Participation:

(a) THAT Dr. MAGDALO V. FRANCISCO shall be appointed Second Vice-President and Chief Chemist of the Party of the Second Part, which appointments are permanent in character and Mr. VICTORIANO V. FRANCISCO shall be appointed Auditor thereof and in the event that the Treasurer or any officer who may have the custody of the funds, assets and other properties of the Party of the Second Part comes from the Party of the First Part, then the Auditor shall not be appointed from the latter; furthermore should the Auditor be appointed from the Party representing the majority shares of the Party of the Second Part, then the Treasurer shall be appointed from the Party of the First Part;

(b) THAT in case of death or other disabilities they should become incapacitated to discharge the duties of their respective position, then, their shares or assigns and who may have necessary qualifications shall be preferred to succeed them;

(c) That the Party of the First Part shall always be entitled to at least two (2) membership in the Board of Directors of the Party of the Second Part;

(d) THAT in the manufacture of MAFRAN SAUCE and other food products by the Party of the Second Part, the Chief Chemist shall have and shall exercise absolute control and supervision over the laboratory assistants and personnel and in the purchase and safekeeping of the Chemicals and other mixtures used in the preparation of said products;

THAT this assignment, transfer and conveyance is absolute and irrevocable in no case shall the PARTY OF THE First Part ask, demand or sue for the surrender of its rights and interest over said MAFRAN trademark and mafran formula, except when a dissolution of the Party of the Second Part, voluntary or otherwise, eventually arises, in which case then the property rights and interests over said trademark and formula shall automatically revert the Party of the First Part.

Certain provisions of the Bill of Assignment would seem to support the petitioner's position that the respondent patentee, Magdalo V. Francisco, Sr. ceded and transferred to the petitioner corporation the formula for Mafran sauce. Thus, the last part of the second paragraph recites that the respondent patentee "assign, transfer and convey all its property rights and interest over said Mafran trademark and formula for MAFRAN SAUCE unto the Party of the Second Part," and the last paragraph states that such "assignment, transfer and conveyance is absolute and irrevocable (and) in no case shall the PARTY OF THE First Part ask, demand or sue for the surrender of its rights and interest over said MAFRAN trademark and mafran formula."

However, a perceptive analysis of the entire instrument and the language employed therein 3 would lead one to the conclusion that what was actually ceded and transferred was only the use of the Mafran sauce formula. This was the precise intention of the parties, 4 as we shall presently show.

Firstly, one of the principal considerations of the Bill of Assignment is the payment of "royalty of TWO (2%) PER CENTUM of the net annual profit" which the petitioner corporation may realize by and/or out of its production of Mafran sauce and other food products, etc. The word "royalty," when employed in connection with a license under a patent, means the compensation paid for the use of a patented invention.

'Royalty,' when used in connection with a license under a patent, means the compensation paid by the licensee to the licensor for the use of the licensor's patented invention." (Hazeltine Corporation vs. Zenith Radio Corporation, 100 F. 2d 10, 16.) 5

Secondly, in order to preserve the secrecy of the Mafran formula and to prevent its unauthorized proliferation, it is provided in paragraph 5-(a) of the Bill that the respondent patentee was to be appointed "chief chemist ... permanent in character," and that in case of his "death or other disabilities," then his "heirs or assigns who may have necessary qualifications shall be preferred to succeed" him as such chief chemist. It is further provided in paragraph 5-(d) that the same respondent shall have and shall exercise absolute control and supervision over the laboratory assistants and personnel and over the purchase and safekeeping of the chemicals and other mixtures used in the preparation of the said product. All these provisions of the Bill of Assignment clearly show that the intention of the respondent patentee at the time of its execution was to part, not with the formula for Mafran sauce, but only its use, to preserve the monopoly and to effectively prohibit anyone from availing of the invention. 6

Thirdly, pursuant to the last paragraph of the Bill, should dissolution of the Petitioner corporation eventually take place, "the property rights and interests over said trademark and formula shall automatically revert to the respondent patentee. This must be so, because there could be no reversion of the trademark and formula in this case, if, as contended by the petitioner, the respondent patentee assigned, ceded and transferred the trademark and formula — and not merely the right to use it — for then such assignment passes the property in such patent right to the petitioner corporation to which it is ceded, which, on the corporation becoming insolvent, will become part of the property in the hands of the receiver thereof. 7

Fourthly, it is alleged in paragraph 3 of the respondents' complaint that what was ceded and transferred by virtue of the Bill of Assignment is the "use of the formula" (and not the formula itself). This incontrovertible fact is admitted without equivocation in paragraph 3 of the petitioner's answer. Hence, it does "not require proof and cannot be contradicted." 8 The last part of paragraph 3 of the complaint and paragraph 3 of the answer are reproduced below for ready reference:

3. — ... and due to these privileges, the plaintiff in return assigned to said corporation his interest and rights over the said trademark and formula so that the defendant corporation could use the formula in the preparation and manufacture of the mafran sauce, and the trade name for the marketing of said project, as appearing in said contract ....

3. — Defendant admits the allegations contained in paragraph 3 of plaintiff's complaint.

Fifthly, the facts of the case compellingly demonstrate continued possession of the Mafran sauce formula by the respondent patentee.

Finally, our conclusion is fortified by the admonition of the Civil Code that a conveyance should be interpreted to effect "the least transmission of right," 9 and is there a better example of least transmission of rights than allowing or permitting only the use, without transfer of ownership, of the formula for Mafran sauce.

The foregoing reasons support the conclusion of the Court of Appeals 10 that what was actually ceded and transferred by the respondent patentee Magdalo V. Francisco, Sr. in favor of the petitioner corporation was only the use of the formula. Properly speaking, the Bill of Assignment vested in the petitioner corporation no title to the formula. Without basis, therefore, is the observation of the lower court that the respondent patentee "had been remiss in the compliance of his contractual obligation to cede and transfer to the defendant the formula for Mafran sauce."

2. The next fundamental question for resolution is whether the respondent Magdalo V. Francisco, Sr. was dismissed from his position as chief chemist of the corporation without justifiable cause, and in violation of paragraph 5-(a) of the Bill of Assignment which in part provides that his appointment is "permanent in character."

The petitioner submits that there is nothing in the successive memoranda issued by the corporate officers of the petitioner, marked exhibits B, B-1 and B-2, from which can be implied that the respondent patentee was being dismissed from his position as chief chemist of the corporation. The fact, continues the petitioner, is that at a special meeting of the board of directors of the corporation held on October 14, 1960, when the board decided to suspend operations of the factory for two to four months and to retain only a skeletal force to avoid further losses, the two private respondents were present, and the respondent patentee was even designated as the acting superintendent, and assigned the mission of explaining to the personnel of the factory why the corporation was stopping operations temporarily and laying off personnel. The petitioner further submits that exhibit B indicates that the salary of the respondent patentee would not be paid only during the time that the petitioner corporation was idle, and that he could draw his salary as soon as the corporation resumed operations. The clear import of this exhibit was allegedly entirely disregarded by the respondent Court of Appeals, which concluded that since the petitioner resumed partial production of Mafran sauce without notifying the said respondent formally, the latter had been dismissed as chief chemist, without considering that the petitioner had to resume partial operations only to fill its pending orders, and that the respondents were duly notified of that decision, that is, that exhibit B-1 was addressed to Ricardo Francisco, and this was made known to the respondent Victoriano V. Francisco. Besides, the records will show that the respondent patentee had knowledge of the resumption of production by the corporation, but in spite of such knowledge he did not report for work.

The petitioner further submits that if the respondent patentee really had unqualified interest in propagating the product he claimed he so dearly loved, certainly he would not have waited for a formal notification but would have immediately reported for work, considering that he was then and still is a member of the corporation's board of directors, and insofar as the petitioner is concerned, he is still its chief chemist; and because Ricardo Francisco is a son of the respondent patentee to whom had been entrusted the performance of the duties of chief chemist, while the respondent Victoriano V. Francisco is his brother, the respondent patentee could not feign ignorance of the resumption of operations.

The petitioner finally submits that although exhibit B-2 is addressed to Ricardo Francisco, and is dated December 29, 1960, the records will show that the petitioner was set to resume full capacity production only sometime in March or April, 1961, and the respondent patentee cannot deny that in the very same month when the petitioner was set to resume full production, he received a copy of the resolution of its board of directors, directing him to report immediately for duty; that exhibit H, of a later vintage as it is dated February 1, 1961, clearly shows that Ricardo Francisco was merely the acting chemist, and this was the situation on February 1, 1961, thirteen days before the filing of the present action for rescission. The designation of Ricardo Francisco as the chief chemist carried no weight because the president and general manager of the corporation had no power to make the designation without the consent of the corporation's board of directors. The fact of the matter is that although the respondent Magdalo V. Francisco, Sr. was not mentioned in exhibit H as chief chemist, this same exhibit clearly indicates that Ricardo Francisco was merely the acting chemist as he was the one assisting his father.

In our view, the foregoing submissions cannot outweigh the uncontroverted facts. On November 28, 1960 the secretary-treasurer of the corporation issued a memorandum (exh. B), duly approved by its president and general manager, directing that only Ricardo Francisco be retained in the factory and that the salary of respondent patentee, as chief chemist, be stopped for the time being until the corporation resumed operations. This measure was taken allegedly because of the scarcity and high prices of raw materials. Five days later, however, or on December 3, the president and general manager issued a memorandum (exh. B-1) ordering the respondent Victoria V. Francisco to report to the factory and to produce Mafran sauce at the rate of no less than 100 cases a day to cope with the orders of the various distributors and dealers of the corporation, and instructing him to take only the necessary daily employees without employing permanent ones. Then on December 6, the same president and general manager issued yet another memorandum (exh. B-2), instructing Ricardo Francisco, as assistant chief chemist, to recall all daily employees connected with the production of Mafran sauce and to hire additional daily employees for the production of Porky Pops. Twenty-three days afterwards, or on December 29, the same president and general manager issued still another memorandum (exh. S-2), directing "Ricardo Francisco, as Chief Chemist" and Porfirio Zarraga, as acting superintendent, to produce Mafran sauce and, Porky Pops in full swing, starting January 2, 1961, with the further instruction to hire daily laborers in order to cope with the full blast production. And finally, at the hearing held on October 24, 1961, the same president and general manager admitted that "I consider that the two months we paid him (referring to respondent Magdalo V. Francisco, Sr.) is the separation pay."

The facts narrated in the preceding paragraph were the prevailing milieu on February 14, 1961 when the complaint for rescission of the Bill of Assignment was filed. They clearly prove that the petitioner, acting through its corporate officers, 11 schemed and maneuvered to ease out, separate and dismiss the said respondent from the service as permanent chief chemist, in flagrant violation of paragraph 5-(a) and (b) of the Bill of Assignment. The fact that a month after the institution of the action for rescission, the petitioner corporation, thru its president and general manager, requested the respondent patentee to report for duty (exh. 3), is of no consequence. As the Court of Appeals correctly observed, such request was a "recall to placate said plaintiff."

3. We now come to the question of rescission of the Bill of Assignment. In this connection, we quote for ready reference the following articles of the new Civil Code governing rescission of contracts:

ART. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in either case. He may also seek rescission even after he has chosen fulfillment, if the latter should become impossible.

The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.

This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance with articles 1385 and 1388 of the Mortgage Law.

ART. 1383. The action for rescission is subsidiary; it cannot be instituted except when the party suffering damage has no other legal means to obtain reparation for the same.

ART. 1384. Rescission shall be only to the extent necessary to cover the damages caused.

At the moment, we shall concern ourselves with the first two paragraphs of article 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him. The injured party may choose between fulfillment and rescission of the obligation, with payment of damages in either case.

In this case before us, there is no controversy that the provisions of the Bill of Assignment are reciprocal in nature. The petitioner corporation violated the Bill of Assignment, specifically paragraph 5-(a) and (b), by terminating the services of the respondent patentee Magdalo V. Francisco, Sr., without lawful and justifiable cause.

Upon the factual milieu, is rescission of the Bill of Assignment proper?

The general rule is that rescission of a contract will not be permitted for a slight or casual breach, but only for such substantial and fundamental breach as would defeat the very object of the parties in making the agreement. 12 The question of whether a breach of a contract is substantial depends upon the attendant circumstances. 13 The petitioner contends that rescission of the Bill of Assignment should be denied, because under article 1383, rescission is a subsidiary remedy which cannot be instituted except when the party suffering damage has no other legal means to obtain reparation for the same. However, in this case the dismissal of the respondent patentee Magdalo V. Francisco, Sr. as the permanent chief chemist of the corporation is a fundamental and substantial breach of the Bill of Assignment. He was dismissed without any fault or negligence on his part. Thus, apart from the legal principle that the option — to demand performance or ask for rescission of a contract — belongs to the injured party, 14 the fact remains that the respondents-appellees had no alternative but to file the present action for rescission and damages. It is to be emphasized that the respondent patentee would not have agreed to the other terms of the Bill of Assignment were it not for the basic commitment of the petitioner corporation to appoint him as its Second Vice-President and Chief Chemist on a permanent basis; that in the manufacture of Mafran sauce and other food products he would have "absolute control and supervision over the laboratory assistants and personnel and in the purchase and safeguarding of said products;" and that only by all these measures could the respondent patentee preserve effectively the secrecy of the formula, prevent its proliferation, enjoy its monopoly, and, in the process afford and secure for himself a lifetime job and steady income. The salient provisions of the Bill of Assignment, namely, the transfer to the corporation of only the use of the formula; the appointment of the respondent patentee as Second Vice-President and chief chemist on a permanent status; the obligation of the said respondent patentee to continue research on the patent to improve the quality of the products of the corporation; the need of absolute control and supervision over the laboratory assistants and personnel and in the purchase and safekeeping of the chemicals and other mixtures used in the preparation of said product — all these provisions of the Bill of Assignment are so interdependent that violation of one would result in virtual nullification of the rest.

4. The petitioner further contends that it was error for the Court of Appeals to hold that the respondent patentee is entitled to payment of his monthly salary of P300 from December 1, 1960, until the return to him of the Mafran trademark and formula, arguing that under articles 1191, the right to specific performance is not conjunctive with the right to rescind a reciprocal contract; that a plaintiff cannot ask for both remedies; that the appellate court awarded the respondents both remedies as it held that the respondents are entitled to rescind the Bill of Assignment and also that the respondent patentee is entitled to his salary aforesaid; that this is a gross error of law, when it is considered that such holding would make the petitioner liable to pay respondent patentee's salary from December 1, 1960 to "kingdom come," as the said holding requires the petitioner to make payment until it returns the formula which, the appellate court itself found, the corporation never had; that, moreover, the fact is that the said respondent patentee refused to go back to work, notwithstanding the call for him to return — which negates his right to be paid his back salaries for services which he had not rendered; and that if the said respondent is entitled to be paid any back salary, the same should be computed only from December 1, 1960 to March 31, 1961, for on March 20, 1961 the petitioner had already formally called him back to work.

The above contention is without merit. Reading once more the Bill of Assignment in its entirety and the particular provisions in their proper setting, we hold that the contract placed the use of the formula for Mafran sauce with the petitioner, subject to defined limitations. One of the considerations for the transfer of the use thereof was the undertaking on the part of the petitioner corporation to employ the respondent patentee as the Second Vice-President and Chief Chemist on a permanent status, at a monthly salary of P300, unless "death or other disabilities supervened. Under these circumstances, the petitioner corporation could not escape liability to pay the private respondent patentee his agreed monthly salary, as long as the use, as well as the right to use, the formula for Mafran sauce remained with the corporation.

5. The petitioner finally contends that the Court of Appeals erred in ordering the corporation to return to the respondents the trademark and formula for Mafran sauce, when both the decision of the appellate court and that of the lower court state that the corporation is not aware nor is in possession of the formula for Mafran sauce, and the respondent patentee admittedly never gave the same to the corporation. According to the petitioner these findings would render it impossible to carry out the order to return the formula to the respondent patentee. The petitioner's predicament is understandable. Article 1385 of the new Civil Code provides that rescission creates the obligation to return the things which were the object of the contract. But that as it may, it is a logical inference from the appellate court's decision that what was meant to be returned to the respondent patentee is not the formula itself, but only its use and the right to such use. Thus, the respondents in their complaint for rescission specifically and particularly pray, among others, that the petitioner corporation be adjudged as "without any right to use said trademark and formula."

ACCORDINGLY, conformably with the observations we have above made, the judgment of the Court of Appeals is modified to read as follows: "Wherefore the appealed decision is reversed. The Bill of Assignment (Exhibit A) is hereby rescinded, and the defendant corporation is ordered to return and restore to the plaintiff Magdalo V. Francisco, Sr. the right to the use of his Mafran sauce trademark and formula, subject-matter of the Bill of Assignment, and to this end the defendant corporation and all its assigns and successors are hereby permanently enjoined, effective immediately, from using in any manner the said Mafran sauce trademark and formula. The defendant corporation shall also pay to Magdalo V. Francisco, Sr. his monthly salary of P300 from December 1, 1960, until the date of finality of this judgment, inclusive, the total amount due to him to earn legal interest from the date of the finality of this judgment until it shall have been fully paid, plus attorney's fees in the amount of P500, with costs against the defendant corporation." As thus modified, the said judgment is affirmed, with costs against the petitioner corporation.

Concepcion, C.J., Dizon, Makalintal, Zaldivar, Fernando, Barredo and Villamor, JJ., concur.

Teehankee J., took no part.

Separate Opinions

REYES, J.B.L., J., concurring: I concur with the opinion penned by Mr. Justice Fred Ruiz Castro, but I would like to add that the argument of petitioner, that the rescission demanded by the respondent-appellee, Magdalo Francisco, should be denied because under Article 1383 of the Civil Code of the Philippines rescission can not be demanded except when the party suffering damage has no other legal means to obtain reparation, is predicated on a failure to distinguish between a rescission for breach of contract under Article 1191 of the Civil Code and a rescission by reason

of lesion or economic prejudice, under Article 1381, et seq. The rescission on account of breach of stipulations is not predicated on injury to economic interests of the party plaintiff but on the breach of faith by the defendant, that violates the reciprocity between the parties. It is not a subsidiary action, and Article 1191 may be scanned without disclosing anywhere that the action for rescission thereunder is subordinated to anything other than the culpable breach of his obligations by the defendant. This rescission is in principal action retaliatory in character, it being unjust that a party be held bound to fulfill his promises when the other violates his. As expressed in the old Latin aphorism: "Non servanti fidem, non est fides servanda." Hence, the reparation of damages for the breach is purely secondary.

On the contrary, in the rescission by reason of lesion or economic prejudice, the cause of action is subordinated to the existence of that prejudice, because it is the raison d'etre as well as the measure of the right to rescind. Hence, where the defendant makes good the damages caused, the action cannot be maintained or continued, as expressly provided in Articles 1383 and 1384. But the operation of these two articles is limited to the cases of rescission for lesion enumerated in Article 1381 of the Civil Code of the Philippines, and does not, apply to cases under Article 1191.

It is probable that the petitioner's confusion arose from the defective technique of the new Code that terms both instances as rescission without distinctions between them; unlike the previous Spanish Civil Code of 1889, that differentiated "resolution" for breach of stipulations from "rescission" by reason of lesion or damage. 1 But the terminological vagueness does not justify confusing one case with the other, considering the patent difference in causes and results of either action.

Separate Opinions

REYES, J.B.L., J., concurring: I concur with the opinion penned by Mr. Justice Fred Ruiz Castro, but I would like to add that the argument of petitioner, that the rescission demanded by the respondent-appellee, Magdalo Francisco, should be denied because under Article 1383 of the Civil Code of the Philippines rescission can not be demanded except when the party suffering damage has no other legal means to obtain reparation, is predicated on a failure to distinguish between a rescission for breach of contract under Article 1191 of the Civil Code and a rescission by reason of lesion or economic prejudice, under Article 1381, et seq. The rescission on account of breach of stipulations is not predicated on injury to economic interests of the party plaintiff but on the breach of faith by the defendant, that violates the reciprocity between the parties. It is not a subsidiary action, and Article 1191 may be scanned without disclosing anywhere that the action for rescission thereunder is subordinated to anything other than the culpable breach of his obligations by the defendant. This rescission is in principal action retaliatory in character, it being unjust that a party be held bound to fulfill his promises when the other violates his. As expressed in the old Latin aphorism: "Non servanti fidem, non est fides servanda." Hence, the reparation of damages for the breach is purely secondary.

On the contrary, in the rescission by reason of lesion or economic prejudice, the cause of action is subordinated to the existence of that prejudice, because it is the raison d'etre as well as the measure of the right to rescind. Hence, where the defendant makes good the damages caused, the action cannot be maintained or continued, as expressly provided in Articles 1383 and 1384. But the operation of these two articles is limited to the cases of rescission for lesion enumerated in Article 1381 of the Civil Code of the Philippines, and does not, apply to cases under Article 1191.

It is probable that the petitioner's confusion arose from the defective technique of the new Code that terms both instances as rescission without distinctions between them; unlike the previous Spanish Civil Code of 1889, that differentiated "resolution" for breach of stipulations from "rescission" by reason of lesion or damage. 1 But the terminological vagueness does not justify confusing one case with the other, considering the patent difference in causes and results of either action.

SECOND DIVISION

[G.R. No. 139523. May 26, 2005]

SPS. FELIPE AND LETICIA CANNU, Petitioners, vs. SPS. GIL AND FERNANDINA GALANG AND NATIONAL HOME MORTGAGE FINANCE CORPORATION, Respondents.

CHICO-NAZARIO, J.:

Before Us is a Petition for Review on Certiorari which seeks to set aside the decision[1] of the Court of Appeals dated 30 September 1998 which affirmed with modification the decision of Branch 135 of the Regional Trial Court (RTC) of Makati City, dismissing the complaint for Specific Performance and Damages filed by petitioners, and its Resolution[2]dated 22 July 1999 denying petitioners' motion for reconsideration.

A complaint[3] for Specific Performance and Damages was filed by petitioners-spouses Felipe and Leticia Cannu against respondents-spouses Gil and Fernandina Galang and the National Home Mortgage Finance Corporation (NHMFC) before Branch 135 of the RTC of Makati, on 24 June 1993. The case was docketed as Civil Case No. 93-2069.

The facts that gave rise to the aforesaid complaint are as follows:

Respondents-spouses Gil and Fernandina Galang obtained a loan from Fortune Savings & Loan Association for P173,800.00 to purchase a house and lot located at Pulang Lupa, Las Pias, with an area of 150 square meters covered by Transfer Certificate of Title (TCT) No. T-8505 in the names of respondents-spouses. To secure payment, a real estate mortgage was constituted on the said house and lot in favor of Fortune Savings & Loan Association. In early 1990, NHMFC purchased the mortgage loan of respondents-spouses from Fortune Savings & Loan Association for P173,800.00.

Respondent Fernandina Galang authorized[4] her attorney-in-fact, Adelina R. Timbang, to sell the subject house and lot.

Petitioner Leticia Cannu agreed to buy the property for P120,000.00 and to assume the balance of the mortgage obligations with the NHMFC and with CERF Realty[5] (the Developer of the property).

Of the P120,000.00, the following payments were made by petitioners:

Date Amount Paid

July 19, 1990 P40,000.00[6]

March 13, 1991 15,000.00[7]

April 6, 1991 15,000.00[8]

November 28, 1991 5,000.00[9]

Total P75,000.00

Thus, leaving a balance of P45,000.00.

A Deed of Sale with Assumption of Mortgage Obligation[10] dated 20 August 1990 was made and entered into by and between spouses Fernandina and Gil Galang (vendors) and spouses Leticia and Felipe Cannu (vendees) over the house and lot in question which contains, inter alia, the following:

NOW, THEREFORE, for and in consideration of the sum of TWO HUNDRED FIFTY THOUSAND PESOS (P250,000.00), Philippine Currency, receipt of which is hereby acknowledged by the Vendors and the assumption of the mortgage obligation, the Vendors hereby sell, cede and transfer unto the Vendees, their heirs, assigns and successor in interest the above-described property together with the existing improvement thereon.

It is a special condition of this contract that the Vendees shall assume and continue with the payment of the amortization with the National Home Mortgage Finance Corporation Inc. in the outstanding balance of P_______________, as of __________ and shall comply with and abide by the terms and conditions of the mortgage document dated Feb. 27, 1989 and identified as Doc. No. 82, Page 18, Book VII, S. of 1989 of Notary Public for Quezon City Marites Sto. Tomas Alonzo, as if the Vendees are the original signatories.

Petitioners immediately took possession and occupied the house and lot.

Petitioners made the following payments to the NHMFC:

Date Amount Receipt No.

July 9, 1990 P 14,312.47 D-503986[11]

March 12, 1991 8,000.00 D-729478[12]

February 4, 1992 10,000.00 D-999127[13]

March 31, 1993 6,000.00 E-563749[14]

April 19, 1993 10,000.00 E-582432[15]

April 27, 1993 7,000.00 E-618326[16]

  P 55,312.47  

Petitioners paid the 'equity or second mortgage to CERF Realty.[17]chanroblesvirtuallawlibrary

Despite requests from Adelina R. Timbang and Fernandina Galang to pay the balance of P45,000.00 or in the alternative to vacate the property in question, petitioners refused to do so.

In a letter[18] dated 29 March 1993, petitioner Leticia Cannu informed Mr. Fermin T. Arzaga, Vice President, Fund Management Group of the NHMFC, that the ownership rights over the land covered by TCT No. T-8505 in the names of respondents-spouses had been ceded and transferred to her and her husband per Deed of Sale with Assumption of Mortgage, and that they were obligated to assume the mortgage and pay the remaining unpaid loan balance. Petitioners' formal assumption of mortgage was not approved by the NHMFC.[19]chanroblesvirtuallawlibrary

Because the Cannus failed to fully comply with their obligations, respondent Fernandina Galang, on 21 May 1993, paid P233,957.64 as full payment of her remaining mortgage loan with NHMFC.[20]chanroblesvirtuallawlibrary

Petitioners opposed the release of TCT No. T-8505 in favor of respondents-spouses insisting that the subject property had already been sold to them. Consequently, the NHMFC held in abeyance the release of said TCT.

Thereupon, a Complaint for Specific Performance and Damages was filed asking, among other things, that petitioners (plaintiffs therein) be declared the owners of the property involved subject to reimbursements of the amount made by respondents-spouses (defendants therein) in preterminating the mortgage loan with NHMFC.

Respondent NHMFC filed its Answer.[21] It claimed that petitioners have no cause of action against it because they have not submitted the formal requirements to be considered assignees and successors-in-interest of the property under litigation.

In their Answer,[22] respondents-spouses alleged that because of petitioners-spouses' failure to fully pay the consideration and to update the monthly amortizations with the NHMFC, they paid in full the existing obligations with NHMFC as an initial step in the rescission and annulment of the Deed of Sale with Assumption of Mortgage. In their counterclaim, they maintain that the acts of petitioners in not fully complying with their obligations give rise to rescission of the Deed of Sale with Assumption of Mortgage with the corresponding damages.

After trial, the lower court rendered its decision ratiocinating:

On the basis of the evidence on record, testimonial and documentary, this Court is of the view that plaintiffs have no cause of action either against the spouses Galang or the NHMFC. Plaintiffs have admitted on record they failed to pay the amount of P45,000.00 the balance due to the Galangs in consideration of the Deed of Sale With Assumption of Mortgage Obligation (Exhs. 'C and '3'). Consequently, this is a breach of contract and evidently a failure to comply with obligation arising from contracts. . . In this case, NHMFC has not been duly informed due to lack of formal requirements to acknowledge plaintiffs as legal assignees, or legitimate tranferees and, therefore, successors-in-interest to the property, plaintiffs should have no legal personality to claim any right to the same property.[23]chanroblesvirtuallawlibrary

The decretal portion of the decision reads:

Premises considered, the foregoing complaint has not been proven even by preponderance of evidence, and, as such, plaintiffs have no cause of action against the defendants herein. The above-entitled case is ordered dismissed for lack of merit.

Judgment is hereby rendered by way of counterclaim, in favor of defendants and against plaintiffs, to wit:

1. Ordering the Deed of Sale With Assumption of Mortgage Obligation (Exhs. 'C and '3') rescinded and hereby declared the same as nullified without prejudice for defendants-spouses Galang to return the partial payments made by plaintiffs; and the plaintiffs are ordered, on the other hand, to return the physical and legal possession of the subject property to spouses Galang by way of mutual restitution;

2. To pay defendants spouses Galang and NHMFC, each the amount of P10,000.00 as litigation expenses, jointly and severally;

3. To pay attorney's fees to defendants in the amount of P20,000.00, jointly and severally; and

4. The costs of suit.

5. No moral and exemplary damages awarded.[24]chanroblesvirtuallawlibrary

A Motion for Reconsideration[25] was filed, but same was denied. Petitioners appealed the decision of the RTC to the Court of Appeals. On 30 September 1998, the Court of Appeals disposed of the appeal as follows:

Obligations arising from contract have the force of law between the contracting parties and should be complied in good faith. The terms of a written contract are binding on the parties thereto.

Plaintiffs-appellants therefore are under obligation to pay defendants-appellees spouses Galang the sum of P250,000.00, and to assume the mortgage.

Records show that upon the execution of the Contract of Sale or on July 19, 1990 plaintiffs-appellants paid defendants-appellees spouses Galang the amount of only P40,000.00.

The next payment was made by plaintiffs-appellants on March 13, 1991 or eight (8) months after the execution of the contract. Plaintiffs-appellants paid the amount of P5,000.00.

The next payment was made on April 6, 1991 for P15,000.00 and on November 28, 1991, for another P15,000.00.

From 1991 until the present, no other payments were made by plaintiffs-appellants to defendants-appellees spouses Galang.

Out of the P250,000.00 purchase price which was supposed to be paid on the day of the execution of contract in July, 1990 plaintiffs-appellants have paid, in the span of eight (8) years, from 1990 to present, the amount of only

P75,000.00. Plaintiffs-appellants should have paid the P250,000.00 at the time of the execution of contract in 1990. Eight (8) years have already lapsed and plaintiffs-appellants have not yet complied with their obligation.

We consider this breach to be substantial.

The tender made by plaintiffs-appellants after the filing of this case, of the Managerial Check in the amount of P278,957.00 dated January 24, 1994 cannot be considered as an effective mode of payment.

Performance or payment may be effected not by tender of payment alone but by both tender and consignation. It is consignation which is essential in order to extinguish plaintiffs-appellants obligation to pay the balance of the purchase price.

In addition, plaintiffs-appellants failed to comply with their obligation to pay the monthly amortizations due on the mortgage.

In the span of three (3) years from 1990 to 1993, plaintiffs-appellants made only six payments. The payments made by plaintiffs-appellants are not even sufficient to answer for the arrearages, interests and penalty charges.

On account of these circumstances, the rescission of the Contract of Sale is warranted and justified.

WHEREFORE, foregoing considered, the appealed decision is hereby AFFIRMED with modification. Defendants-appellees spouses Galang are hereby ordered to return the partial payments made by plaintiff-appellants in the amount of P135,000.00.

No pronouncement as to cost.[26]chanroblesvirtuallawlibrary

The motion for reconsideration[27] filed by petitioners was denied by the Court of Appeals in a Resolution[28] dated 22 July 1999.

Hence, this Petition for Certiorari.

Petitioners raise the following assignment of errors:

1. THE HONORABLE COURT OF APPEALS ERRED WHEN IT HELD THAT PETITIONERS' BREACH OF THE OBLIGATION WAS SUBSTANTIAL.

2. THE HONORABLE COURT OF APPEALS ERRED WHEN IN EFFECT IT HELD THAT THERE WAS NO SUBSTANTIAL COMPLIANCE WITH THE OBLIGATION TO PAY THE MONTHLY AMORTIZATION WITH NHMFC.

3. THE HONORABLE COURT OF APPEALS ERRED WHEN IT FAILED TO CONSIDER THE OTHER FACTS AND CIRCUMSTANCES THAT MILITATE AGAINST RESCISSION.

4. THE HONORABLE COURT OF APPEALS ERRED WHEN IT FAILED TO CONSIDER THAT THE ACTION FOR RESCISSION IS SUBSIDIARY.[29]chanroblesvirtuallawlibrary

Before discussing the errors allegedly committed by the Court of Appeals, it must be stated a priori that the latter made a misappreciation of evidence regarding the consideration of the property in litigation when it relied solely on the Deed of Sale with Assumption of Mortgage executed by the respondents-spouses Galang and petitioners-spouses Cannu.

As above-quoted, the consideration for the house and lot stated in the Deed of Sale with Assumption of Mortgage is P250,000.00, plus the assumption of the balance of the mortgage loan with NHMFC. However, after going over the record of the case, more particularly the Answer of respondents-spouses, the evidence shows the consideration therefor is P120,000.00, plus the payment of the outstanding loan mortgage with NHMFC, and of the 'equity or second mortgage with CERF Realty (Developer of the property).[30]chanroblesvirtuallawlibrary

Nowhere in the complaint and answer of the petitioners-spouses Cannu and respondents-spouses Galang shows that the consideration is 'P250,000.00. In fact, what is clear is that of the P120,000.00 to be paid to the latter, only P75,000.00 was paid to Adelina Timbang, the spouses Galang's attorney-in-fact. This debunks the provision in the Deed of Sale with Assumption of Mortgage that the amount of P250,000.00 has been received by petitioners.

Inasmuch as the Deed of Sale with Assumption of Mortgage failed to express the true intent and agreement of the parties regarding its consideration, the same should not be fully relied upon. The foregoing facts lead us to hold that the case on hand falls within one of the recognized exceptions to the parole evidence rule. Under the Rules of Court, a party may present evidence to modify, explain or add to the terms of the written agreement if he puts in issue in his pleading, among others, its failure to express the true intent and agreement of the parties thereto.[31]chanroblesvirtuallawlibrary

In the case at bar, when respondents-spouses enumerated in their Answer the terms and conditions for the sale of the property under litigation, which is different from that stated in the Deed of Sale with Assumption with Mortgage, they already put in issue the matter of consideration. Since there is a difference as to what the true consideration is, this Court has admitted evidence aliunde to explain such inconsistency. Thus, the Court has looked into the pleadings and testimonies of the parties to thresh out the discrepancy and to clarify the intent of the parties.

As regards the computation[32] of petitioners as to the breakdown of the P250,000.00 consideration, we find the same to be self-serving and unsupported by evidence.

On the first assigned error, petitioners argue that the Court erred when it ruled that their breach of the obligation was substantial.

Settled is the rule that rescission or, more accurately, resolution,[33] of a party to an obligation under Article 1191[34] is predicated on a breach of faith by the other party that violates the reciprocity between them.[35] Article 1191 reads:

Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible.

The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.

Rescission will not be permitted for a slight or casual breach of the contract. Rescission may be had only for such breaches that are substantial and fundamental as to defeat the object of the parties in making the agreement. [36] The question of whether a breach of contract is substantial depends upon the attending circumstances[37] and not merely on the percentage of the amount not paid.

In the case at bar, we find petitioners' failure to pay the remaining balance of P45,000.00 to be substantial. Even assuming arguendo that only said amount was left out of the supposed consideration of P250,000.00, or eighteen (18%) percent thereof, this percentage is still substantial. Taken together with the fact that the last payment made was on 28 November 1991, eighteen months before the respondent Fernandina Galang paid the outstanding balance of the mortgage loan with NHMFC, the intention of petitioners to renege on their obligation is utterly clear.

Citing Massive Construction, Inc. v. Intermediate Appellate Court,[38] petitioners ask that they be granted additional time to complete their obligation. Under the facts of the case, to give petitioners additional time to comply with their obligation will be putting premium on their blatant non-compliance of their obligation. They had all the time to do what was required of them (i.e., pay the P45,000.00 balance and to properly assume the mortgage loan with the NHMFC), but still they failed to comply. Despite demands for them to pay the balance, no payments were made.[39]chanroblesvirtuallawlibrary

The fact that petitioners tendered a Manager's Check to respondents-spouses Galang in the amount of P278,957.00 seven months after the filing of this case is of no moment. Tender of payment does not by itself produce legal payment, unless it is completed by consignation.[40] Their failure to fulfill their obligation gave the respondents-spouses Galang the right to rescission.

Anent the second assigned error, we find that petitioners were not religious in paying the amortization with the NHMFC. As admitted by them, in the span of three years from 1990 to 1993, their payments covered only thirty months.[41] This, indeed, constitutes another breach or violation of the Deed of Sale with Assumption of Mortgage. On top of this, there was no formal assumption of the mortgage obligation with NHMFC because of the lack of approval by the NHMFC[42] on account of petitioners' non-submission of requirements in order to be considered as assignees/successors-in-interest over the property covered by the mortgage obligation.[43]chanroblesvirtuallawlibrary

On the third assigned error, petitioners claim there was no clear evidence to show that respondents-spouses Galang demanded from them a strict and/or faithful compliance of the Deed of Sale with Assumption of Mortgage.

We do not agree.

There is sufficient evidence showing that demands were made from petitioners to comply with their obligation. Adelina R. Timbang, attorney-in-fact of respondents-spouses, per instruction of respondent Fernandina Galang, made constant follow-ups after the last payment made on 28 November 1991, but petitioners did not pay.[44] Respondent Fernandina Galang stated in her Answer[45] that upon her arrival from America in October 1992, she demanded from petitioners the complete compliance of their obligation by paying the full amount of the consideration (P120,000.00) or in the alternative to vacate the property in question, but still, petitioners refused to fulfill their obligations under the Deed of Sale with Assumption of Mortgage. Sometime in March 1993, due to the fact that full payment has not been paid and that the monthly amortizations with the NHMFC have not been fully updated, she made her intentions clear with petitioner Leticia Cannu that she will rescind or annul the Deed of Sale with Assumption of Mortgage.

We likewise rule that there was no waiver on the part of petitioners to demand the rescission of the Deed of Sale with Assumption of Mortgage. The fact that respondents-spouses accepted, through their attorney-in-fact, payments in installments does not constitute waiver on their part to exercise their right to rescind the Deed of Sale with Assumption of Mortgage. Adelina Timbang merely accepted the installment payments as an accommodation to petitioners since they kept on promising they would pay. However, after the lapse of considerable time (18 months from last payment) and the purchase price was not yet fully paid, respondents-spouses exercised their right of rescission when they paid the outstanding balance of the mortgage loan with NHMFC. It was only after petitioners stopped paying that respondents-spouses moved to exercise their right of rescission.

Petitioners cite the case of Angeles v. Calasanz[46] to support their claim that respondents-spouses waived their right to rescind. We cannot apply this case since it is not on all fours with the case before us. First, in Angeles, the breach was only slight and casual which is not true in the case before us. Second, in Angeles, the buyer had already paid more than the principal obligation, while in the instant case, the buyers (petitioners) did not pay P45,000.00 of the P120,000.00 they were obligated to pay.

We find petitioners' statement that there is no evidence of prejudice or damage to justify rescission in favor of respondents-spouses to be unfounded. The damage suffered by respondents-spouses is the effect of petitioners' failure to fully comply with their obligation, that is, their failure to pay the remaining P45,000.00 and to update the

amortizations on the mortgage loan with the NHMFC. Petitioners have in their possession the property under litigation. Having parted with their house and lot, respondents-spouses should be fully compensated for it, not only monetarily, but also as to the terms and conditions agreed upon by the parties. This did not happen in the case before us.

Citing Seva v. Berwin & Co., Inc.,[47] petitioners argue that no rescission should be decreed because there is no evidence on record that respondent Fernandina Galang is ready, willing and able to comply with her own obligation to restore to them the total payments they made. They added that no allegation to that effect is contained in respondents-spouses' Answer.

We find this argument to be misleading.

First, the facts obtaining in Seva case do not fall squarely with the case on hand. In the former, the failure of one party to perform his obligation was the fault of the other party, while in the case on hand, failure on the part of petitioners to perform their obligation was due to their own fault.

Second, what is stated in the book of Justice Edgardo L. Paras is [i]t (referring to the right to rescind or resolve) can be demanded only if the plaintiff is ready, willing and able to comply with his own obligation, and the other is not. In other words, if one party has complied or fulfilled his obligation, and the other has not, then the former can exercise his right to rescind. In this case, respondents-spouses complied with their obligation when they gave the possession of the property in question to petitioners. Thus, they have the right to ask for the rescission of the Deed of Sale with Assumption of Mortgage.

On the fourth assigned error, petitioners, relying on Article 1383 of the Civil Code, maintain that the Court of Appeals erred when it failed to consider that the action for rescission is subsidiary.

Their reliance on Article 1383 is misplaced.

The subsidiary character of the action for rescission applies to contracts enumerated in Articles 1381[48] of the Civil Code. The contract involved in the case before us is not one of those mentioned therein. The provision that applies in the case at bar is Article 1191.

In the concurring opinion of Justice Jose B.L. Reyes in Universal Food Corp. v. Court of Appeals,[49] rescission under Article 1191 was distinguished from rescission under Article 1381. Justice J.B.L. Reyes said:

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

On the contrary, in the rescission by reason of lesion or economic prejudice, the cause of action is subordinated to the existence of that prejudice, because it is the raison d 'tre as well as the measure of the right to rescind. Hence, where the defendant makes good the damages caused, the action cannot be maintained or continued, as expressly provided in Articles 1383 and 1384. But the operation of these two articles is limited to the cases of rescission for lesion enumerated in Article 1381 of the Civil Code of the Philippines, and does not apply to cases under Article 1191.

From the foregoing, it is clear that rescission (resolution in the Old Civil Code) under Article 1191 is a principal action, while rescission under Article 1383 is a subsidiary action. The former is based on breach by the other party that violates the reciprocity between the parties, while the latter is not.

In the case at bar, the reciprocity between the parties was violated when petitioners failed to fully pay the balance of P45,000.00 to respondents-spouses and their failure to update their amortizations with the NHMFC.

Petitioners maintain that inasmuch as respondents-spouses Galang were not granted the right to unilaterally rescind the sale under the Deed of Sale with Assumption of Mortgage, they should have first asked the court for the rescission thereof before they fully paid the outstanding balance of the mortgage loan with the NHMFC. They claim that such payment is a unilateral act of rescission which violates existing jurisprudence.

In Tan v. Court of Appeals,[50] this court said:

. . . [T]he power to rescind obligations is implied in reciprocal ones in case one of the obligors should not comply with what is incumbent upon him is clear from a reading of the Civil Code provisions. However, it is equally settled that, in the absence of a stipulation to the contrary, this power must be invoked judicially; it cannot be exercised solely on a party's own judgment that the other has committed a breach of the obligation. Where there is nothing in the contract empowering the petitioner to rescind it without resort to the courts, the petitioner's action in unilaterally terminating the contract in this case is unjustified.

It is evident that the contract under consideration does not contain a provision authorizing its extrajudicial rescission in case one of the parties fails to comply with what is incumbent upon him. This being the case, respondents-spouses should have asked for judicial intervention to obtain a judicial declaration of rescission. Be that as it may, and considering that respondents-spouses' Answer (with affirmative defenses) with Counterclaim seeks for the rescission of the Deed of Sale with Assumption of Mortgage, it behooves the court to settle the matter once and for all than to have the case re-litigated again on an issue already heard on the merits and which this court has already taken cognizance

of. Having found that petitioners seriously breached the contract, we, therefore, declare the same is rescinded in favor of respondents-spouses.

As a consequence of the rescission or, more accurately, resolution of the Deed of Sale with Assumption of Mortgage, it is the duty of the court to require the parties to surrender whatever they may have received from the other. The parties should be restored to their original situation.[51]chanroblesvirtuallawlibrary

The record shows petitioners paid respondents-spouses the amount of P75,000.00 out of the P120,000.00 agreed upon. They also made payments to NHMFC amounting to P55,312.47. As to the petitioners' alleged payment to CERF Realty of P46,616.70, except for petitioner Leticia Cannu's bare allegation, we find the same not to be supported by competent evidence. As a general rule, one who pleads payment has the burden of proving it.[52] However, since it has been admitted in respondents-spouses' Answer that petitioners shall assume the second mortgage with CERF Realty in the amount of P35,000.00, and that Adelina Timbang, respondents-spouses' very own witness, testified[53] that same has been paid, it is but proper to return this amount to petitioners. The three amounts total P165,312.47 -- the sum to be returned to petitioners.

WHEREFORE, premises considered, the decision of the Court of Appeals is hereby AFFIRMED with MODIFICATION. Spouses Gil and Fernandina Galang are hereby ordered to return the partial payments made by petitioners in the amount of P165,312.47. With costs. SO ORDERED.

[G.R. No. 144476 : February 1, 2002]

ONG YONG, JUANITA TAN ONG, WILSON T. ONG, ANNA L. ONG, WILLIAM T. ONG, WILLIE T. ONG, And JULIE ONG ALONZO, Petitioners, v. DAVID S. TIU, CELY Y. TIU, MOLY YU GAW, BELEN SEE YU, D. TERENCE Y. TIU, JOHN YU, LOURDES C. TIU, INTRALAND RESOURCES DEVELOPMENT CORP., MASAGANA TELAMART, INC., REGISTER OF DEEDS OF PASAY CITY, And the SECURITIES AND EXCHANGE COMMISSION, Respondents.

[G.R. No. 144629 : February 1, 2002]

DAVID S. TIU, CELY Y. TIU, MOLY YU GAW, BELEN SEE YU, D. TERENCE Y. TIU, JOHN YU, LOURDES C. TIU, And INTRALAND RESOURCES DEVELOPMENT CORP., petitioners, vs. ONG YONG, JUANITA TAN ONG, WILSON T. ONG, ANNA L. ONG, WILLIAM T. ONG, WILLIE T. ONG And JULIA ONG ALONZO, Respondents.

BUENA, J.:

Consolidated Petitions for Review of 1.) the Decision of the Court of Appeals[1] in CA-G.R. SP No. 49056 dated October 5, 1999, which affirmed with modifications the Order dated September 11, 1998, issued by the SEC En Banc in SEC Case No. 598 and 601, confirming the rescission of the Pre-Subscription Agreement; and 2.) the Resolution of the Court of Appeals dated August 17, 2000 which denied the motions for reconsideration filed by the private parties herein, except Masagana Telamart, Inc.

The antecedent facts of the case, as summarized by the Court of Appeals are as follows:

"As one traverses Taft Avenue in Pasay City, one will see the Masagana Citimall, a commercial complex owned and managed by the First Landlink Asia Development Corporation (FLADC) (p. 127, 520 and 211, Rollo). It was not long ago when this commercial complex, then unfinished, was threatened with incompletion when its owner found it in financial distress in the amount of P190,000,000.00 for being indebted to the Philippine National Bank (PNB), (pp. 520 and 212, Rollo). That was in 1994 (Ibid.)

"FLADC was then fully owned by the Tiu Group composed of David S. Tiu, Cely Y. Tiu, Moly Yu Gaw, Belen See Yu, D. Terence Y. Tiu, John Yu and Lourdes C. Tiu (p. 211, Rollo). In order to recover from its floundering finances, the Ong Group composed of Ong Yong, Juanita Tan Ong, Wilson T. Ong, Anna L. Ong, William T. Ong and Julie Ong Alonzo, were invited by the Tius to invest in FLADC (pp. 211 and 520, Rollo). Hence, the execution of a Pre-Subscription Agreement by and between the Tiu and Ong Groups on August 15, 1994 (pp. 211-216, Rollo).

"By the Pre-Subscription Agreement, both parties agreed to maintain equal shareholdings in FLADC with the Ongs investing cash while the Tius contributing property (pp. 213-214, Rollo). Specifically, the Ongs were to subscribe to 1 million shares of FLADC at a par value of P100.00 per share while the Tius were to subscribe to 549,800 shares more of FLADC at a par value of P100.00 per share over and above their previous subscription of 450,200 shares in order to complete a subscription of 1 million shares (Ibid.). Commensurate to their proposed subscriptions, the Ongs were to pay P100,000,000.00 in cash (p.213, Rollo), while the Tius were to contribute the following properties by way of separate Deeds of Assignments:

1. A four-storey building described in Transfer Certificate of Title No. 15587 registered in the name of Intraland Resources and Development Corporation (a corporation wholly owned by the Tius) and valued at P20,000,000.00;

"2. A 1,902.30 square meter parcel of land covered by Transfer Certificate of Title No. 15587 in the name of Masagana Telamart, Inc. (also a corporation owned by the Tius) and valued at P30,000,000.00; and

"3. A 151 square meter parcel of land adjacent to the properties covered by Transfer Certificate of Title Nos. 132493 and 132494 and valued at P4,980,000.00 (pp. 212 and 214, Rollo).

Also for purposes of equality, the parties agreed that 6 directors of FLADC were to be nominated from the Ong Group, while 5 directors thereof were to be nominated from the Tiu Group (p. 213, Rollo). It was also agreed that the positions of President and Secretary of FLADC shall be held by the Ongs, while the positions of Vice-President and Treasurer thereof shall be held by the Tius (Ibid.).

"In order to liquidate FLADC's outstanding P190,000,000.00 loan from the PNB, the parties to the Pre-Subscription Agreement proposed payment thereof with the P100,000,000.00 cash to be invested by the Ongs to FLADC and with the available funds of FLADC derived from:

1. Reimbursement of costs of improvements received from tenants on the spaces leased to them;

2. Receipts from reservations to lease; and

3. Receipts for deposit or advance rentals from tenants (pp. 213-214, Rollo).

"In order to comply with the Pre-Subscription Agreement, the necessary increase in capital stock of FLADC was applied for and duly approved (pp. 184-187, Rollo). The Ongs subscribed to 1 million shares thereof at a par value of P100.00 per share, or P100,000,000.00 (p. 185, Rollo). Intraland Resources and Development Corporation executed the requisite Deed of Assignment over a 4-storey building it owned in favor of FLADC and was duly credited with 200,000 shares therefor in FLADC (Ibid; pp. 837-838, Rollo).

"Masagana Telamart, Inc. executed a Deed of Assignment over the 1,902.30 square meter property in favor of FLADC and delivered the owner's copy of the transfer certificate of title of the same as well as the possession thereof to the latter (pp. 221-226, Rollo). Title over the 151 square meter property was also transferred in the name of FLADC (pp. 1062-1063, Rollo).

"FLADC's articles of incorporation were also duly amended increasing the number of its directors from seven (7) to eleven (11), six (6) of which were nominated by the Ong Group, while the rest were nominated by the Tiu Group (pp. 188-189, Rollo). Later, Wilson T. Ong and Juanita Tan Ong were elected President and Secretary, respectively, while David S. Tiu and Cely Yao Tiu were elected Vice-President and Treasurer, respectively (pp. 191-192, Rollo)

"The P190,000,000.00 loan from the PNB was also settled, but not quite in accord with the provisions of the Pre-Subscription Agreement (pp.437-441, Rollo). In lieu of the FLADC funds which were supposed to be used as partial payment for said loan per Pre-Subscription Agreement, the Ongs had to pay P70,000,000.00 more aside from their P100,000,000.00 subscription payment, and the Tius had to advance P20,000,000.00 in cash, which amount was loaned to them by the former (Ibid.).

"The controversy between the two parties arose when the Ongs refused to credit the number of FLADC shares in the name of Masagana Telamart, Inc. commensurate to its 1,902.30 square meter property contribution; also when they refused to credit the number of FLADC shares in favor of the Tius commensurate to their 151 square meter property contribution; and when David S. Tiu and Cely Y. Tiu were proscribed from assuming and performing their duties as Vice-President and Treasurer, respectively of FLADC (pp. 132-136, Rollo). These became the basis of the Tius' unilateral rescission of the Pre-Subscription Agreement on February 23, 1996 (p. 867, rollo)."[2]

On February 27, 1996, the Tius sought the Securities and Exchange Commission (SEC) confirmation of their rescission of the Pre-Subscription Agreement. Their complaint was docketed as SEC Case No. 02-96-5269.

On May 19, 1997, after the Tiu Group, Masagana Telamart, Inc., Intraland Resources and Development Corporation, the Ong Group and FLADC were heard on their respective claims regarding the propriety of the Pre-Subscription Agreement's rescission, SEC Hearing Officer Rolando G. Andaya, Jr., rendered a decision thereon confirming the rescission as follows:

"WHEREFORE, judgment is hereby rendered confirming the rescission of the Pre-Subscription Agreement, and consequently ordering:

(a) The cancellation of the 1,000,000 shares subscription of the individual defendants in FLADC;

(b) FLADC to pay the amount of P170,000,000.00 to the individual defendants representing the return of their contribution for 1,000,000 shares of FLADC;

(c) The plaintiffs to submit with the Securities and Exchange Commission amended articles of incorporation of FLADC to conform with this decision;

(d) The defendants to surrender to the plaintiffs TCT Nos. 132493, 132494, 134066 (formerly 15587), 135325 and 134204 and any other title or deed in the name of FLADC, failing in which said titles are declared void;

(e) The Register of Deeds to issue new certificates of titles in favor of the plaintiffs and to cancel the annotation of the Pre-Subscription Agreement dated 15 August 1994 on TCT No. 134066 (formerly 15587).

(f) The individual defendants, individually and collectively, their agents and representatives, to desist from exercising or performing any and all acts pertaining to stockholder, director or officer of FLADC or in any manner intervene in the management and affairs of FLADC;

(g) The individual defendants, jointly and severally, to return to FLADC interest payment in the amount of P8,866,669.00 and all interest payments as well as any payments on principal received from the P70,000,000.00 inexistent loan, plus the legal rate of interest thereon from the date of their receipt of such payment, until fully paid;

(h) The plaintiff David Tiu to pay individual defendants the sum of P20,000,000.00 representing his loan from said defendants plus legal interest from the date of receipt of such amount.

SO ORDERED.[3]

On motion of the Ong Group, the aforequoted decision was later partially reconsidered in an omnibus order issued by SEC Hearing Officer Manolito S. Soller on November 24, 1997, the decretal portion of which in part reads:

"WHEREFORE, premises considered, judgment is hereby rendered as follows:

1. The Decision of this Commission dated May 19, 1997 is partially reconsidered only insofar as the investment amounting to P70 million which is hereby declared not as premium on capital stock but a liability of FLADC or advances of the defendants made in favor of FLADC, and that the interest paid on account thereof is hereby declared legal and valid;

SO ORDERED.[4]

Both the Ong and Tiu Groups appealed the aforequoted Omnibus Order to the SEC en banc. Their respective appeals were docketed as SEC Case Nos. 598 and 601. On September 11, 1998, the SEC en banc issued an order, the decretal portion of which reads:

"WHEREFORE, judgment is hereby rendered CONFIRMING the omnibus Order dated 24 November 1997 insofar as it confirms the rescission of the Pre-Subscription Agreement and REVERSING the same insofar as it held that the seventy million (P70 M) paid by the Ong Group over and above the par value of the one million (1,000,000) shares of stocks of FLADC which they had subscribed as loan and not premium.

Accordingly,

1. The subscription contract entered into by the Ong group and the corporation is hereby declared rescinded, the latter is ordered to cancel the one million (1,000,000) shares subscription of the Ong Group in FLADC, and FLADC shall return the amount of one hundred and seventy million pesos (P170 M) to the Ong Group;

2. The Tiu Group shall pay the twenty million pesos (P20 M) to the Ong group which was loaned to them by the latter;

3. The Ong Group, individually and collectively, their agents and representatives, are hereby ordered to desist from exercising or performing any and all acts pertaining to stockholders, directors or officers of FLADC or in any manner intervening in the management and affairs of FLADC;

4. The Ong Group, jointly and severally, are hereby ordered to return to FLADC the interest payment on the seventy million pesos (P70 M) in the amount of eight million and eight hundred sixty-six thousand, and six hundred sixty-nine pesos (P8,866,669.00) and all additional interest payments thereafter, as well as any payments on the principal received for the seventy million pesos (P70M) inexistent loan.

"No pronouncement as to cost and damages.

"SO ORDERED."[5]

From the said Order of the SEC En Banc, the Ongs appealed to the Court of Appeals, by way of a petition for review under Rule 43 of the 1997 Rules of Civil Procedure.

On October 5, 1999, the Court of Appeals issued the Decision subject of these petitions for review, the decretal portion of which reads:

"WHEREFORE, the Order dated September 11, 1998 issued by the Securities and Exchange Commission En Banc in SEC AC CASE NOS. 598 and 601 confirming the rescission of the Pre-Subscription Agreement dated August 15, 1994 is hereby AFFIRMED, subject to the following MODIFICATIONS:

"1. The Ong and Tiu Groups are ordered to liquidate First Landlink Asia Development Corporation in accordance with the following cash and property contributions of the parties therein.

a. Ong Group - P100,000,000.00 cash contribution for one (1) million shares in First Landlink Asia Development Corporation at a par value of P100.00 per share;

b. Tiu Group:

1.) P45,020,000.00 original cash contribution for 450,200 shares in First Landlink Asia Development Corporation at a par value of P100.00 per share;

2.) A four-storey building described in Transfer Certificate of Title No. 15587 in the name of Intraland Resources and Development Corporation valued at P20,000,000.00 for 200,000 shares in First Landlink Asia Development Corporation at a par value of P100.00 per share.

3.) A 1,902.30 square meter parcel of land covered by Transfer Certificate of Title No. 15587 in the name of Masagana Telamart, Inc. valued at P30,000,000.00 for 300,000 shares in First Landlink Asia Development Corporation at a par value of P100.00 per share.

2. Whatever remains of the assets of the First Landlink Asia Development Corporation and the management thereof is hereby ordered transferred to the Tiu Group.

3. First Landlink Asia Development Corporation is hereby ordered to pay the amount of P70,000,000.00 that was advanced to it by the Ong Group upon the finality of this decision. Should the former incur in delay in the payment thereof, it shall pay the legal interest thereon pursuant to Article 2209 of the New Civil Code.

4. The Tius are hereby ordered to pay the amount of P20,000,000.00 loaned them by the Ongs upon the finality of this decision. Should the former incur in delay in the payment thereof, it shall pay the legal interest thereon pursuant to Article 2209 of the New Civil Code.

SO ORDERED.[6]

The Court of Appeals arrived at the said decision after finding that rescission and specific performance as provided in Art. 1191 of the New Civil Code, may alternatively be availed of in this case. The question is who between the contending parties may avail of the alternative remedies when both of them violated the provisions of the contract, their Pre-Subscription Agreement. The Court of Appeals also found that the Ongs were indeed preventing the Tius from assuming the duties and responsibilities of the position of Vice-President and Treasurer of FLADC. The Ongs also violated the Pre-subscription agreement when they did not credit to Masagana Telamart, Inc. the number of shares in FLADC commensurate to its property contribution (1,902.30 sq. m.), despite the execution by the Tius of the Deed of Assignment over said property. The Court of Appeals also stated that the records also reveal the following violations on the Tius' part: 1.) While there is, on record, a Deed of Assignment over the 151 sq. m. parcel of land in favor of FLADC, said Deed was not executed by the Tius in favor of FLADC but by the Lichaucos; and 2.) the Tius did not turn over to the Ong Group the entire amount of FLADC's funds in violation of the Pre-Subscription Agreement which stipulated that the former grants to the latter, the management and administration of the regular business of FLADC upon the agreement's execution. The Court of Appeals also found that the Tius were diverting rentals due to FLADC into their own MATTERCO account which rentals appear to have not been remitted to FLADC up to now. Considering the foregoing, the Court of Appeals concluded that the two groups can no longer work harmoniously together and deemed it proper to confirm the rescission and for the Ongs and the Tius to liquidate FLADC in accordance with their respective cash and property contribution. The Court of Appeals also resolved the question of the nature of the P70 M paid by the Ongs in excess of 1 million shares they acquired from FLADC, ruling that the same is an advance made by the Ongs in favor of FLADC, and not a premium or paid-in surplus on the actual value of 1 million shares, and that no interest thereon may be awarded as there is no evidence on record which shows that at the time the P70M was advanced to FLADC, the parties agreed that the same shall earn interest.

On August 17, 2000, the Court of Appeals issued a Resolution which denied the private parties' motions for reconsideration.

The Ong Group and the Tiu Group both filed their respective petitions for review subject of these consolidated cases.

Except for the fourth assigned error in the Ongs' petition (G.R. No. 144476) and sub-paragraphs (vi) and (vii) of the second assigned error in the Tius petition (G.R. No. 144629), which are well taken, We find both petitions to be without merit.

In their Petition, docketed as G.R. No. 144476, the Ongs raise the following assignment of errors:

I The Court of Appeals erred in ruling that the Pre-Subscription Agreement of the parties dated August 15, 1994 may be rescinded under Article 1191 of the New Civil Code.

a. Rescission is applicable only to reciprocal obligations and the Pre-Subscription Agreement does not provide for reciprocity; hence, the remedy of rescission is not available.

b. Rescission is not applicable when rights over the subject matter of the rescission have been acquired by third persons.

c. Rescission is only applicable in case of substantial and fundamental breach.

II The Court of Appeals erred in finding that the Ongs violated the Pre-Subscription Agreement in the following manner:

a. The Ongs prevented the Tius from assuming the duties and responsibilities of the Vice-President and Treasurer of FLADC by not providing them with adequate offices.

b. By not crediting Masagana Telamart, Inc. with 300,000 shares corresponding to the value of the 1,902.30 square meters property covered by TCT No. 15587.

III The Court of Appeals erred in confirming rescission of the Pre-Subscription Agreement dated August 15, 1994 and the liquidation of FLADC for practical reasons, and to prevent further squabbles and numerous litigations, reasons unknown in law.

IV The Court of Appeals erred in not awarding interest on the loan of respondent David S. Tiu from petitioner Ong Yong in the amount of P20 million and the P70 million advanced by the Ongs to FLADC.

V The Court of Appeals erred in not awarding costs and damages to the Ongs.

On the first issue, the Court of Appeals did not err in ruling that the "Pre-Subscription Agreement" of the parties dated August 15, 1994 may be rescinded under Article 1191 of the New Civil Code.

In paragraph (a) of the first assigned error, the Ongs allege that rescission is applicable only to reciprocal obligations and the "Pre-Subscription Agreement" does not provide for reciprocity, hence, the remedy of rescission is not available. The Ongs cited the case of Songcuan vs. IAC, (191 SCRA 28) to illustrate their point that "As in the Songcuan case, there are here two (2) separate and distinct obligations each independent of the other i.) the obligation to subscribe to, and to pay, 50% of the increased capital stock of FLADC; and ii.) the obligation to install the Ongs and the Tius as members of the Board of Directors and to certain corporate positions, but only after the Ongs and the Tius have subscribed each to 50% of the increased capital stock of FLADC."

In this petition, in lieu of Art. 1191,[7] the Ongs invoke Articles 1156 and 1159 of the New Civil Code which state

"Art. 1156. An obligation is a juridical necessity to give, to do or not to do.

"Art. 1159. Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith."

and that should there be any violation, those who failed to fulfill their obligations should be required to perform their obligations under the agreement.

Contrary to the Ongs' assertion, the Songcuan case does not apply squarely to this case. In the Songcuan case, this Court ruled that Art. 1191 to rescind the right of the Alviars to repurchase does not apply because their corresponding obligations can hardly be called reciprocal because the obligation of the Alviars to lease to Songcuan the subject premise arises only after the latter had reconveyed the realties to them. On the other hand, in the instant case, the obligations of the two (2) groups to pay 50% of the increased capital stock of FLADC and to install them as members of the Board of Directors and to certain corporate positions are simultaneous and arise upon the execution of the pre-subscription agreement.

The Ongs illustrate reciprocity in the following manner: In a contract of sale, the correlative duty of the obligation of the seller to deliver the property is the obligation of the buyer to pay the agreed price.[8]

In the case at bar, the correlative obligation of the Tius to let the Ongs have and exercise the functions of the positions of President and Secretary is the obligation of the Ongs to let the Tius have and exercise the functions of Vice-President and Treasurer. In this regard, the Court of Appeals aptly stated, and we quote:

"It cannot be denied that the Pre-Subscription Agreement contains reciprocal obligations owing to the fact that the parties thereto agreed to maintain parity not only in their shareholdings in FLADC but also with regard to their standing in FLADC (pp. 214, 662, 708-710, 715-716, 1914, Rollo). In fine, each party has the obligation to remain equal with the other on every matter pertaining to FLADC. Herein lies the reciprocity in the Pre-Subscription Agreement."[9]

Moreover, the Ongs are now estopped from denying the applicability of Art. 1191 to the present controversy. As correctly observed by the Court of Appeals in its Resolution dated August 17, 2000, which denied the Ongs' motion for reconsideration:

"Petitioners keep on harping for the Pre-Subscription Agreement's specific performance yet they also actually failed to give a legal basis therefor. Why then must they deny that the Tiu Group has a right to ask for rescission of their agreement per Article 1191 of the Civil Code (pp. 1141-1145, Rollo) when they themselves invoke the same law as basis for asking the specific performance of the same agreement (pp.1156-1159, Rollo)[10]

In paragraph (b) of the first assigned error, the Ongs allege that rescission is not applicable when "rights" over the subject matter of the rescission have been acquired by third persons. The Ongs refer to Arts. 1191 and 1385.[11]

The Ongs argue that the payment on subscription of P100 million by the Ongs is not to the Tius and the payment of P54.98 million by the Tius is not to the Ongs, but to FLADC, the corporation, which is distinct and separate from the Ongs and the Tius notwithstanding the fact that they may be the only stockholders. Pursuant to Arts. 1191 and 1385, continue the Ongs, the payment made by the two (2) groups have come to be legally owned and possessed by FLADC, the corporation, a third person, who did not act in bad faith. So that any alleged violation of the Pre-Subscription Agreement would have no consequence on the respective amounts paid by the two (2) groups on their subscription to FLADC, a third party.

We are not convinced.

The reliance of the Ongs on Article 1385 is misplaced. We agree with the Tius that the things which are the object of the Pre-Subscription Agreement one million shares of stock subscribed to by the Ong Group, the additional 549,800 shares subscribed to by the Tius, and the corporate positions mentioned above are not in the possession of third persons, but are in the possession of the parties to the Pre-Subscription Agreement. In any case, FLADC is not a third

person in relation to the Pre-Subscription Agreement though not named as a party. FLADC is deemed a party to the agreement by virtue of stipulations pour autrie clearly and deliberately conferring on it a favor or benefit which it subsequently accepted. (Art. 1311, Civil Code)[12] Such benefit was in the form of the payments made by the parties for their subscription to shares of stock in FLADC, which FLADC accepted.

In paragraph (c) of the first assigned error, the Ongs allege that rescission is only applicable in case of substantial and fundamental breach. The Ongs contend that the substantial and fundamental aspects of the Pre-Subscription Agreement between the two (2) groups are their commitment to subscribe to their respective numbers of shares and to pay corresponding amount thereof. The Ongs say that they have accomplished their part but not the Tius; and that their alleged breach of the agreement in their alleged failure to provide adequate offices to David Tiu as Vice-President and Cely Yao Tiu, as Treasurer, is hardly substantial and fundamental because stockholders become Vice-President or Treasurer of a corporation by election, not by virtue of office facilities he/she may have been provided.

The Ongs' contention is without merit. Suffice it to state that what makes a stockholder an officer of a corporation is not simply the fact of his election but, more important, his ability to perform the powers and functions of that office. As will be discussed in the next assigned error, the Ongs indeed prevented the Tius from exercising the powers and functions of their office. We rule, therefore, that such breach of the agreement on the part of the Ongs is substantial and fundamental.

On the second assigned error, the Court of Appeals did not err in finding that the Ongs violated the "Pre-Subscription Agreement" (a.) when it prevented the Tius from assuming the duties and responsibilities of the Vice-President and Treasurer of FLADC by not providing them with adequate offices, and (b.) when it did not credit Masagana with 300,000 shares corresponding to the value of its 1,902.30 sq. m. property contribution.

On paragraph (a), this Court takes exception to the phrase "by not providing them with adequate offices." This is not the only reason but only one of the reasons cited by the Court of Appeals in concluding that the Ongs violated the pre-subscription agreement when they prevented the Tius from assuming the duties and responsibilities of the Vice-President and Treasurer of FLADC. The discussion made by the Court of Appeals on this point is correct, very clear and enlightening, and we quote:

"A reading of the records, which to date comprises more than 2,100 pages, reveal that the Ongs were indeed preventing the Tius from assuming the duties and responsibilities of the position of Vice-President and Treasurer of FLADC. This is highlighted by the fact that the Ongs' attempt to provide David S. Tiu and Cely Y. Tiu with executive offices before the filing of the complaint a quo, was merely half-hearted as evidenced by the delay in providing for said offices despite repeated demands therefor (pp. 844-845, 862-868, 877-878, 895-896, 999-1000, Rollo), and by the need to pass a board resolution when none is necessary in order to provide executive offices for the FLADC President and his staff (pp. 936-937, Rollo). Another fact which shows that the Tius were being prevented from assuming their responsibilities is the criminal case for theft filed by the Ongs against David S. Tiu (pp. 856-859, Rollo). Why must there be a need for the Tius to act surreptitiously in order to have a copy of FLADC's records made if they were not actively being prevented from inspecting the same? Anyway, for all intents and purposes, the Ongs admit that they were preventing the Tius from assuming the responsibilities of Vice-President and Treasurer of FLADC. This was made via their reply to the Tiu's letter rescinding the Pre-Subscription Agreement, which in part reads:

'As to your contention that the ONG GROUP has failed to accord you, the elected Vice-President of FLADC, and your wife, the elected treasurer of FLADC, the powers vested in you by the by-laws, allow me to remind you that in accordance with the Pre-Subscription Agreement, the First Party (TIU GROUP) hereby grants to the Second Part (ONG GROUP) the management and administration of the regular business of the corporation upon the execution of this documents (sic). Notwithstanding this fact, the ONG GROUP has always made you a co-signatory to the bank accounts of the corporation; however, to the great prejudice and damage of the corporation you have, more often than not, either purposely delayed or refused to affix your signature to checks in payment for the valid obligations of the corporation. Moreover, from the start, the corporation has given your wife, who is the Treasurer of FLADC, a space in our office but she has seldom come to hold office there. Despite this, we have already acceded to your demand that your wife be given a room in lieu of the space provided for her. Furthermore, pursuant to the by-laws, both the Vice-President and the Treasurer are to perform duties which may be assigned to them by the Board of Directors and/or the President. (p. 2049, Rollo; underscoring supplied)'

"The Pre-Subscription Agreement provides that the position of Vice-President and Treasurer of FLADC shall be nominated from the Tiu Group (p. 213, Rollo). Despite the provision in the agreement turning over the management and administration of FLADC to the Ong Group (p. 215, Rollo), there is nothing in the agreement which states that the elected Vice-President and Treasurer of FLADC cannot or must not be allowed to assume the responsibilities of their respective office. From the tenor of the aforequoted reply to the Tius' letter of rescission, it is evident that the Ongs have reduced the positions of Vice-President and Treasurer of FLADC to mere figure heads."[13]

The Court of Appeals did not err in arriving at the same conclusion like the three (3) tribunals below (Hearing Officer Andaya, Hearing Officer Soller and the SEC En Banc), that the Ongs excluded the Tius from the corporation by preventing them from participating in its operation and financial affairs.

In paragraph (b) of the second assigned error, the Ongs maintain that their group cannot be faulted for not crediting Masagana with 300,000 shares corresponding to the value of its 1,902.30 sq. m. property contribution, because the Deed of Assignment over the said property executed by Masagana in favor of FLADC was patently incomplete (not dated, no instrumental witness signed the Deed and the Acknowledgement was not executed, because the Tius asked that the execution of the document be not completed) and that the necessary documentary stamp taxes, and capital gains and transfer taxes had not been paid, such that FLADC could not process with the SEC the application regarding the exchange of the said property for shares of stock in the corporation.

The issue boils down to the question of "Who has the obligation to pay the taxes incident to the assignment?"

We rule that FLADC, the assignee, has the obligation to pay the taxes incident to the assignment. The Court of Appeals did not err in holding that:

"xxx The provisions on this matter in the Pre-Subscription Agreement is clear that upon the execution of the Deed of Assignment thereon in favor of FLADC, Masagana Telamart, Inc. shall be credited with the number of shares in FLADC commensurate to the value thereof of P30,000,000.00 (see paragraphs 14-15, 17 of the Pre-Subscription Agreement, p. 214, Rollo). Since the Deed of Assignment over this property has already been executed in favor of FLADC, and the owner's duplicate of the title and possession thereof have already been delivered to FLADC (pp. 221-226, 563, Rollo), the Ongs should have credited 300,000 shares of FLADC at a par value of P100.00 per share in the name of Masagana Telamart, Inc. The transfer of the title to said property in FLADC's name is another matter which is governed by the Deed of Assignment itself and not the Pre-Subscription Agreement (pp. 221-222, Rollo)."[14]

The Deed of Assignment stipulates:

"The ASSIGNEE (FLADC) hereby accepts said assignment and assumes all the obligations of performing all the terms and conditions including but not limited to, the transfer of the said parcel of land in the name of First Landlink Asia Development Corporation within a reasonable time." (Emphasis supplied)

Said stipulation does not enumerate nor exclude any obligation on the part of the assignee for purposes of transferring the property in its name. Instead, the Deed stipulates in simple language "all the obligations of performing all the terms and conditions including, but not limited to, the transfer of the said parcel of land in the name of (FLADC)." It imposes no obligation at all on the part of the assignor for purposes of transferring the parcel of land in the name of FLADC.

In the interpretation of contracts, "if the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the liberal meaning of its stipulation shall control." (Art. 1370, Civil Code). Thus, the FLADC should shoulder all obligations, such as taxes, legal fees, notarial fees and expenses of registration, for the conveyance to be registered and the title to the property placed in the name of FLADC.

If the Ongs find ambiguity in the said stipulation in that the same allegedly does not provide that FLADC would pay for the taxes arising from the assignment, and that it should have been expressly provided in the deed of assignment, such alleged ambiguity can only be resolved against the Ongs for it was their lawyer, the late Atty. John Uy, who prepared the Deed of Assignment.[15] Where the provisions of a contract are ambiguous, such ambiguity must be construed against the party who drafted the same.[16]

At any rate, the intention of the parties could not have been to impose on Masagana the obligation to pay said taxes. As explained by the Tius in their Comment

"xxx for such imposition is not consistent with the fundamental concept of 'equality' on which the Pre-Subscription Agreement is based. If Masagana were to pay the taxes and other expenses for the transfer of its 1,902.30 sq. m. property contribution to FLADC, Masagana would, in effect, be paying more than P30 million, the agreed valuation of the said property contribution, for 300,000 shares of stock in FLADC. Thus, assuming the Ong Group's computation of Masagana's net gain on the assignment is correct, i.e., P14 million, and Masagana were to pay 35% of P14 million (P4.9 million) in taxes for such assignment, in addition to the amount of P570,690.00 in documentary stamp taxes, Masagana would be paying P35,470,690.00 for 300,000 shares of stock in FLADC, instead of only P30 million. This could not have been the intention of the parties."[17]

The Ongs presented as proof that the Tius acknowledged their liability for the payment of the taxes, the following letter-reply dated April 27, 1995 of Mr. David Tiu to Mr. Wilson T. Ong's request for him to remit payment for documentary stamp tax:

"With respect to your request for the remittance of P570,690.00 representing 1-1/2% of documentary stamps on the assignment of the land with an area of 1,902.30 sq. m. described in TCT No. 134066, we are willing to remit the same after our proposed meeting, together with Atty. John Uy and Atty. A. Santos regarding the possible tax liability which we have earlier discussed with you."[18]

The contents of the said letter were satisfactorily explained by Mr. Tiu as simply a diplomatic way of denying any tax liability on the transfer, precisely the reason behind the need for a meeting between the lawyers of the two (2) groups:

"Hearing Officer:

Okay, you may explain that.

A In this letter that I mentioned, April 27, this is only my diplomatic way of denying or telling the Ong Group that it is not part of our agreement that I will pay this amount. Because it's clearly written in the Deed of Assignment that it is the assignee (that) who will pay the documentary stamps and other taxes to be able to transfer the parcel of land in the name of FLADC. That is why it is a meeting with both our lawyers." (TSN, 15 April 1996, p. 34)

"Atty. Santos:

Q In that letter, you made mention of a meeting to be held between Atty. Santos and Atty. Uy. The Atty. Santos being referred there, is this Atty. Santos, this representation?

A Yes, Sir, you are the lawyer I'm referring. (TSN, 15 April 1996, pp. 43-44)[19]

Sub-paragraph (c) of the second assigned error, that the Tius, not the Ongs, violated the Pre-Subscription Agreement, shall be discussed together with the Tius' Assignment of Errors in G.R. No. 144629.

On the third assigned error, the Ongs allege that "the Court of Appeals erred in confirming rescission of the Pre-Subscription Agreement and the liquidation of FLADC 'for practical reasons,' and to prevent 'further squabbles and numerous litigations,' reasons unknown in law." Allegedly, it is an error for the Court of Appeals to order the transfer to the Tiu Group whatever remains of the assets of the FLADC and the management thereof, upon the return to each group of their respective cash and property contribution. The Ongs maintain that the two (2) groups' payment for the shares of stocks belong to the corporation, no longer to the Ongs or Tius; and even if the Ongs and Tius were the only stockholders, they do not have the authority to transfer cash or properties of FLADC to themselves, for that would be misappropriation. The Ongs further cite Sec. 122 of the Corporation Code to support their claim that the order of the Court of Appeals for the return of the parties' contribution (distribution of FLADC assets, in the words of the Ongs) is prohibited, thus:

"Sec. 122. Corporate Liquidation. - xxx

"Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall distribute any of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities."

The Ongs also question the order of the Court of Appeals to transfer to the Tius the Masagana Citimall (the asset which would remain after moving out cash and property to the Ongs and Tius), "the corporation's priceless jewel," when it was they who caused the venture to flourish because of their P190 million contribution and their management thereof.

We find the Ongs' contentions to be without merit.

The Tius counter, among others, that: "When the Ong Group invested their P170 million for 50% of the shares of FLADC, and loaned Mr. Tiu P20 million to enable FLADC to pay the P190 million PNB loan, the mall leasing business was already in place, and all the Ong Group had to do was continue the administration of the mall already started by the Tiu Group, and oversee the collection of rentals which were supposed to be remitted to the Treasurer, but which the Ong Group refused to do. For the Ong Group to disregard the valuable contributions of the Tiu Group and monopolize the credit for FLADC's success is plain arrogance."

As discussed in the first assigned error, the Court of Appeals correctly confirmed the rescission of the Pre-Subscription Agreement on the basis of Art. 1191 of the Civil Code. It could have relied on the said provision and nonetheless stood on valid ground. It, however, judiciously took into account the special circumstances of the case and further justified its decision confirming the rescission of the Pre-Subscription Agreement on the basis of its perception that the two groups "can no longer work harmoniously together" and that "to pit them together in the management of FLADC will only result to further squabbles and numerous litigation."

Moreover, what the Court of Appeals ordered was not corporate liquidation upon lawful dissolution under Sec. 122 of the Corporation Code, as cited by the Ong Group. The Court of Appeals clarified in its Resolution promulgated on August 17, 2000 that "in ordering liquidation, the Court does not mean its dissolution as provided in the Corporation Code."[20] The prohibition, therefore, under Section 122 against distribution of assets or properties of the corporation does not apply.

As a legal consequence of rescission, the order of the Court of Appeals to return the cash and property contribution of the parties is based on law, hence, cannot be considered an act of misappropriation. For how can the rescission of the Pre-Subscription Agreement be implemented without returning to the two groups whatever they delivered to the corporation in accordance with the Agreement?

With regard to the order of the Court of Appeals transferring to the Tiu Group whatever remains of the assets of FLADC and the management thereof, the same is but an inevitable consequence of the rescission of the Pre-Subscription Agreement. Restoration of the parties to status quo ante dictates that the building constructed on the two (2) existing lots of FLADC, the remaining asset of FLADC, be transferred to the Tiu Group. The status quo ante immediately prior to the execution of the Pre-Subscription Agreement was that the Tius, then wholly owning FLADC, had control and custody over this remaining asset.

On the fourth assignment of error, we find the same to be well taken. Indeed, the Court of Appeals erred in ruling that: "Since no period was stipulated for the return thereof (the P20 million loan extended to the Tius and the P70 million the Ongs advanced to FLADC), the Court resolves to fix the same upon the finality of this Decision (See Article 1197, Civil Code[21]). Failure of the Tius to pay the same upon the finality of this decision shall make them liable for legal interests thereon pursuant to Article 2209 of the New Civil Code."

We agree with the Ongs that since no period was stipulated for the return of the P20 million loan they extended to the Tius, the same should earn 12% interest per annum and the period of payment of interest thereon should reckon from the time of judicial (or extrajudicial) demand, which was, from April 23, 1996, when the Ongs filed their Answer, and not upon the finality of this Decision.

In Eastern Shipping Lines, Inc. vs. Court of Appeals[22] and affirmed in Gomez vs. Court of Appeals (Sept. 21, 2000, G.R. No. 120747) and Catungal vs. Hao, (March 22, 2001, G.R. No. 134972), among other cases, this Court discussed at length the rate of interest, as well as the accrual thereof in awarding interest in the concept of actual and compensatory damages and held that:

"1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing.[23] Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of

interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169[24] of the Civil Code."

However, we do not deem it fit that the ruling in Eastern Shipping Lines, Inc. should also apply to the P70 million that the Ongs advanced to FLADC. This is because the Ongs themselves, in the Board Resolution (Exhibit "16") that was approved in the meeting of the Board of Directors of FLADC held on June 19, 1996 (during which the Tiu group was absent), authorized payment of 10% interest per annum on the said P70 million. Thus, as to the P70 million, the FLADC should be made to pay only 10% interest per annum and not 12%, the period to be reckoned from June 19, 1996.

The matter of why the P70 million paid by the Ongs should be adjudged as an advance and not a premium or paid-in surplus shall be taken up in G.R. No. 144629, the petition filed by the Tius.

On the fifth assigned error, the Ongs allege that the Court of Appeals erred in not ordering the Tius to pay costs and damages to the Ongs for the filing of this baseless and unwarranted suit. Considering all the foregoing which shows that the case filed by the Tius for confirmation of the rescission of the pre-subscription agreement, is meritorious, it is obviously no longer necessary to discuss this issue.

In their Petition, docketed as G.R. No. 144629, the Tius raise the following Assignment of Errors:

I The Court of Appeals erred in ordering the liquidation of FLADC instead of merely ordering the restitution of the parties' respective investments.

II The Court of Appeals erred in relaxing the application of the laws and jurisprudence on rescission of reciprocal obligations and in ordering the liquidation of FLADC obviously on the basis of its mistaken perception:

i) That in 1994, prior to the entry of the Ong Group in FLADC, the Masagana Citimall was threatened with incompletion;

ii) That at that time, FLADC was in financial distress in the amount of P190 million for being indebted to PNB;

iii) That the Tiu Group invited the Ong Group to come in as stockholders for FLADC to recover from its floundering finances;

iv) That the Pre-Subscription Agreement was entered into by the parties in order to rescue FLADC from financial distress, i.e., for the purpose of settling its P190 million indebtedness to PNB;

v) That under the circumstances, Masagana Citimall will not be what it is today were it not for the money that the Ong Group invested;

vi) That the Tiu Group violated the Pre-Subscription Agreement since the deed of assignment over the 151 sq. m. lot was not executed by the Tiu Group but by the Lichaucos in favor of FLADC, hence, the Tiu Group cannot be credited with the number of shares commensurate to the value of said lot and will not, therefore, be able to equal the Ong Group's one million subscription in FLADC;

vii) That the Tiu Group were pulling a fast one on the Ong Group by their 'alleged' 151 sq. m. property contribution in exchange for 49,800 shares in FLADC;

viii) That the Tiu Group did not turn over to the Ong Group the entire amount of FLADC funds;

ix) That the Tiu Group, by unilaterally rescinding the Pre-Subscription Agreement, are now trying to oust the Ong Group from enjoying the fruits of their P190 million investment in FLADC, and that this is ingratitude at its height;

x) That the Tiu Group were diverting rentals due to FLADC into their own MATERRCO account which rentals appear to have not been remitted to FLADC up to now; and

xi) That the P70 million paid by the Ong Group was an advance and not a premium on capital.

On their first assigned error, the Tius allege that the Court of Appeals erred in ordering the liquidation of FLADC instead of merely ordering the restitution of the parties' respective investments. The Tius continue: "To rescind is 'to declare a contract as though it never were.' It is not merely to terminate it and release the parties from further obligations to each other but to abrogate it from the beginning and restore parties to their relative position which they would have occupied had no contract ever been made (Ocampo vs. Court of Appeals, 233 SCRA 551)."[25] The Tius also contend that the liquidation of the profits of FLADC and the distribution thereof to the parties offend the very essence of rescission which merely requires mutual restoration in consonance with the basic principle that when an obligation has been extinguished, it is the duty of the court to require the parties to surrender whatever they may have received from the other so that they may be restored, as far as practicable, to their original situation. In support thereof, the Tius cite the following cases: Floro Enterprises, Inc. vs. Court of Appeals, 249 SCRA 354 [1995], citing Agustin vs. Court of Appeals, 186 SCRA 375 [1990]; Magdalena Estate, Inc. vs. Myrich, 71 Phil., 344 [1941]; Po Pauco vs. Siguenza, et al., 49 Phil. 404 [1926].

On the other hand, the Ongs, in their Comment also question the order of the Court of Appeals in its Decision for the rescission and liquidation of FLADC and for the return to the Ongs of their P190 million, and nothing more. The Ongs ask what became of the profits earned and the additional assets acquired by FLADC through the efforts of the Ongs, and the P190 million they invested in FLADC.

To the above queries of the Ongs, it is precisely for those reasons that the Court of Appeals in its Resolution of August 17, 2000, clarified thus:

"xxx. While the Court in the case at bench ordered the rescission of the Pre-Subscription Agreement, it did not, however, order restitution of what the parties contributed pursuant thereto. What the Court ordered was the liquidation of FLADC in accordance with the actual amount of investment each party made in FLADC (pp. 18-19 and 24 of Decision; pp. 1045-1046 and 1050, Rollo). Restitution and liquidation are two different things. Liquidation includes both the profits and losses each party derived within the duration of their respective investment (see Sibal, Philippine Legal Encyclopedia, p. 531; Black's Law Dictionary, p. 839; De Leon, The Corporation Code of the Philippines Annotated, 1997 ed., p. 705, citing 16 Fletcher, p. 658). Contrary therefore to Willie Ong's contention that the Ongs will simply receive a return of their money without any fruits or interest, the decision assures them that they (the Ong and Tiu Groups) will have a bountiful return of their respective investments derived from the profits of the corporation."[26]

With regard to the Tius' allegations, the same are without merit. As cited by the Tius themselves, "it is the duty of the court to require the parties to surrender whatever they may have received from the other so that they may be restored, as far as practicable, to their original situation." Restoration of the parties to their relative position which they would have occupied had no contract ever been made is not practicable nor possible because we cannot turn back the hands of time when the mall was only "nearing completion" in 1994, when the mall was not fully tenanted yet and they had an existing loan of P190 million with PNB with an interest of 19% per annum. But the Masagana Citimall is now completely constructed/finished, the P190 million loan fully paid without their having to pay enormous interest, and the Tius cannot deny that the Ongs are partly to be credited for the success of the venture. What the Tius want the Court to order would have been fair and just had there been no fault on their part as would be discussed in the second assigned error, and had they come to Court with clean hands because he who comes to Court must come with clean hands.[27] If, as the Tius espouse, the Court would simply order the return of the P190 million of the Ongs, then, the Tius would be unjustly enriched at the expense of the Ongs. Under the law, no one shall unjustly enrich himself at the expense of another. "Niguno non deue enriquecerse tortizamente condao de otro."

On their second assigned error, the Tius allege that the Court of Appeals erred in relaxing the application of the laws and jurisprudence on rescission of reciprocal obligations and ordering the liquidation of FLADC on the basis of its mistaken perception.

Subparagraphs i-iv, and ix, being interrelated, shall be discussed jointly. The Tius allege that contrary to the Court of Appeals' findings:

i.) In 1994, prior to the entry of the Ong Group in FLADC, the Masagana Citimall was never threatened with incompletion;

ii.) Prior to the execution of the Pre-Subscription Agreement, FLADC was not in financial distress;

iii.) The Tiu Group invited the Ong Group to come in as stockholders of FLADC to expand the company's leasing business;

iv.) It is not true that the Pre-Subscription Agreement was entered into by the parties in order to rescue FLADC from financial distress, i.e., for the purpose of settling its P190 million indebtedness to PNB;

ix.) It is the Tiu Group, not the Ong Group, who were ousted from enjoying the fruits of their investment in FLADC, hence, it is the Tiu Group who are the victims of ingratitude;

We are not persuaded. The Court of Appeals did not have any mistaken perception.

Granting that the Masagana Citimall was not threatened with incompletion in 1994, it would have gone off to a bad start had not the Ongs come in with P190 million which was used to pay the Tius' loan with the PNB. The said loan would have meant payment of 19% interest per annum. As presented by the Ongs in their Comment:[28]

"d. As of July 18, 1994, FLADC had already drawn a total amount of P188,254,599.77 from the credit line and was paying interest thereon at the rate of 19.00% per annum or close to P3 Million every month.

"From the above-mentioned facts, assuming that FLADC would no longer draw on its remaining credit line to complete the building, the following indisputable conclusions may be reached:

"a. At 19% interest per annum, the interest payments alone for the P188,254,599.77 existing loan of FLADC with the PNB would be equivalent to the following amount:

P35,768,373.96 on an annual basis;

P 8,942,093.49 on a quarterly basis; and

P 2,980,697.03 on a monthly basis.

x x x

"c. For the same P190 Million loan, and in addition to the above-mentioned interest payments, the semi-annual amortization for the PNB loan would have been P18,825,459.97 per payment and should have been payable as follows:

April 29, 1996 - initial payment

October 29, 1996 - 2nd payment

April 29, 1997 - 3rd payment

October 29, 1997 - 4th payment

April 29, 1998 - 5th payment

October 29, 1998 - 6th payment

April 29, 1999 - 7th payment

October 29, 1999 - 8th payment

April 29, 2000 - 9th payment

October 29, 2000 - final payment

"d. Again, had the Ongs not invested in FLADC in August 1994, then by the time FLADC would have made its initial amortization payment of P18,825,459.97 on April 29, 1996, it would have been paying interest in the total amount of P59,613,940.60 (P2,980,697.03/month x 20 months).

"Again, even assuming that the mall which FLADC was building was already completed, it was impossible to generate these amounts from the mall operation for that short period of time.

"e. Clearly, the Tius were constrained to invite a partner to rescue FLADC from its inevitable bankruptcy."

With the above illustration of the Ongs, it became incumbent upon the Tius to counter it by showing how it would have been able to generate such income as would enable FLADC to pay interest and loan amortization without P190 million infused by another group. This the Tius failed to do. All the Tius made was their bare allegation that the Mall was already more than 50% tenanted at that time, and was capable of paying the interests and amortization.

The Tius' claim that they invited the Ongs to come in as stockholders of FLADC to expand the company's leasing business does not also appear to be true. Were this the case, they should have used the new capital infusion of the Ongs to purchase adjoining properties and/or erect a new building that could be connected with the existing structure of FLADC. The Ongs put it in the following manner: "A close reading of the Pre-Subscription Agreement belies the claims of the Tius. The reality, as clearly appearing in the said agreement, is that the parties intended to fully liquidate[29] the P190 million loan of FLADC with PNB so that the company could continue to operate on a clean slate without the need of paying enormous interests. The reason is simple. Since the Tius were not able to attract enough lessees to occupy the Citimall, they knew that they would not be able to raise enough funds to pay its loan with PNB. Thus, the Tius invited the Ongs primarily for two reasons: [1] to pay off FLADC's obligation with PNB, and [2] to help the Tius fill up the Citimall with new lessees."

The Court also notes that while it was the Tius who started the corporation, they acquiesced to the arrangement that the President should come from the Ong Group and the Board of Directors shall comprise of six (6) members from the Ongs, and only five (5) from the Tius. If the Tius were not desperate or in financial distress why should they agree to such an arrangement when, as claimed by the Tius, (Petition, p. 74, Rollo, G.R. No. 144629, p. 171), the appraised value of the entire property of FLADC as of 1994 was P420.3 million? If the FLADC had enough funds, why did it have to borrow P70 million from the Ongs to be used in paying the P190 million loan with PNB? Therefore, we also agree with the Court of Appeals when it held that:

"The Tius, in unilaterally rescinding the Pre-subscription Agreement, are now trying to oust the Ongs from enjoying the fruits of their P190 million investment in FLADC. This is ingratitude at its height, xxx."[30]

As to sub-paragraph (v.) suffice it to say that none of the two groups may claim that their group's business acumen, hard work, and dedication account for what Masagana Citimall is today because both of the groups contributed money/property and labor thereto.

As to sub-paragraphs (vi) and (vii), the Court of Appeals indeed erred in finding that the Tiu Group violated the Pre-Subscription Agreement since the deed of assignment over the 151 sq. m. lot was not executed by the Tiu Group but by the Lichaucos in favor of FLADC. Hence, the Tiu Group cannot be credited with the number of shares commensurate to the value of said lot and will not, therefore, be able to equal the Ong Group's one million subscription in FLADC.

We do not agree with the following discussion of the Court of Appeals on this point:

"Under the Pre-Subscription Agreement, the Tius were obliged to execute a Deed of Assignment over a 151 square meter parcel of land in favor of FLADC as payment of 49,800 shares thereof at a par value of P100.00 per share (see paragraphs 14, 15 and 17 of the Pre-Subscription Agreement, p. 214, Rollo). While there is on record a Deed of Assignment thereon in favor of FLADC (pp. 308-312, Rollo), said Deed of Assignment was not executed by the Tius in favor of FLADC. The Deed of Assignment was executed by the Lichaucos in favor of FLADC (Ibid). If ever somebody has to be credited with the number of shares commensurate to the value of the 151 square meter property, it will not be the Tius but the Lichaucos.

"Per the Pre-Subscription Agreement, the 151 square meter property shall be used by the Tius to acquire a number of shares in FLADC in order to equal the 1 million subscription of the Ongs in FLADC (supra). It turned out, however, that the 151 square meter property was acquired by FLADC for a consideration of P900,000.00 (see paragraph 5 of Deed of Assignment, p. 309, Rollo). It will therefore be iniquitous were the Ongs to credit the Tius the number of shares in FLADC commensurate to the value of the 151 square meter property when the Tius did not contribute the same for the purpose of acquiring shares in FLADC. The deed assigning this property to FLADC was executed by the Lichaucos for a consideration which FLADC itself paid. Said deed was executed even before the Pre-Subscription Agreement was entered into between the parties. Consequently, the Tius cannot be credited with the number of shares commensurate to the value of the 151 square meter property and will not therefore be able to equal the Ongs' 1 million subscription in FLADC in accordance with their undertaking in the Pre-Subscription Agreement (see paragraph 14 of Pre-Subscription Agreement, p. 214, Rollo)."[31]

The Tius aver that the direct transfer of the property from the Lichaucos to FLADC did not prejudice the Ongs or FLADC. According to the Tius, what is important is that they obtained title to the 151 sq. m. property in the name of FLADC after the execution of the Pre-Subscription Agreement, and possession thereof has already been turned over to the corporation. Per the Tius, they cannot be denied full credit for such property contribution, without unjustly enriching the Ongs and FLADC which are now exercising control over the said property.

The Tius make the following explanations: "During the brief negotiations that culminated in the execution of the Pre-Subscription Agreement, the Tiu Group informed the Ong Group that as early as March 1994 they had acquired from the Lichauco family another adjoining property consisting of 151 sq. m. which was actually intended for the expansion of the mall. They disclosed to the Ong Group that the Deed of Assignment over the said property was placed in the name of FLADC and was to be directly transferred from the Lichauco family to the corporation. This is precisely the reason why the property was described in the Pre-Subscription Agreement as '[t]he lot under Transfer Certificate No. ______ with an area of 150 sq. m., more or less xxx,' clearly indicating that all that the parties were waiting for, at the time they were discussing the terms of the Pre-Subscription Agreement, was the issuance of the title to the said lot.

"The Ong Group were (sic) fully aware of the real status of the 151 sq. m. property when they agreed to consider it as one of the property contributions of the Tiu Group in payment for their additional subscription in FLADC."[32]

The Tius' contentions on this issue are well taken. We do not see why the Lichaucos, and not the Tius, should be credited with the number of shares commensurate to the value of the 151 sq. m. property. The Lichaucos are not parties to the Pre-Subscription Agreement and are not even demanding that they be credited with such shares in exchange for the said property. Just like this property, the 1,902.30 sq. m. parcel of land in the name of Masagana Telamart, Inc. (also a corporation owned by the Tius), was also acquired by the Tius before the execution of the Pre-Subscription Agreement. The fact that the 1,902.30 sq. m. property was acquired by the Tius beforehand does not prejudice the Ongs, as shown by the Ongs' non-objection to crediting the Masagana Telamart, Inc. with the commensurate number of shares, subject only to the Tius' payment of the expenses for the transfer of the title in the name of FLADC. So, too, in the case of the 151 sq. m. property, the fact that the Deed of Assignment between the Lichaucos and the FLADC was executed prior to the execution of the Pre-Subscription Agreement does not prejudice the Ongs. Therefore, the Tius should be credited with 49,800 shares in FLADC for this property contribution, pursuant to the Pre-Subscription Agreement.

Sub-paragraph (viii) of the second assigned error states that the Tius turned over to the Ong Group the entire amount of FLADC funds mentioned in paragraph 5 of the Pre-Subscription Agreement[33] The Tius have the following explanation: "xxx sometime in August 1994, the total amount of these available funds had not yet been determined. Consequently, in lieu of these funds, which amounted to P5,840,089.12, P1,.30,002.63(sic) of which had been earlier remitted to FLADC, Mr. Tiu paid the same using the P20 million he borrowed from Mr. Ong Yong. Such payment dispensed with the need to remit the said funds to FLADC."[34] Why should Mr. Tiu pay P20 million if he only needs to remit P5.8 million?

At any rate, assuming that the Tius' claim on this point, is true, the same is not reason enough to alter the order of the Court of Appeals for the liquidation of FLADC.

On sub-paragraph (x), the Tius maintain that they never siphoned any rentals due to FLADC to their MATERRCO account. In fact, the Tius continue, the trumped-up criminal charges filed by the Ongs against Mr. and Mrs. Tiu regarding the aforesaid act of siphoning FLADC funds, filed during the pendency of the rescission case with the SEC to harass the Tius, were dismissed by the DOJ in its Resolution dated 15 Feb. 1999.

The argument fails to persuade. The dismissal of the said criminal case does not necessarily mean that no act of siphoning FLADC funds was committed by the Tius. The following excerpts from the testimony of Mr. David Tiu on cross-examination shows otherwise:

Q Mr. Tiu, of course, you will admit that during the transition period, you were already operating Masagana Superstore, is that not correct? A Yes, partly we are occupying a portion of the building.

Q Of course, Masagana Superstore was operated by Matterco, Inc. of which you were the president? A Yes, Ma'am.

Q And I understand also that Matterco, Inc. is wholly owned or majority owned by the Tius? A Yes, Ma'am.

Q Is it wholly owned by the Tius? A Majority owned.

Q Mr. Tiu, I am showing to you a rental receipt no. 067 of Mercury Drug Corporation which is a tenant of FLADC. This rental receipt is a receipt of Masagana Superstore operated by Matterco., Inc. Do you affirm that this receipt was issued by Masagana Superstore operated by Matterco, Inc. and that the rental here pertains to a rental due from Mercury Drugstore which is a tenant of FLADC?

A This was mistakenly deposited at Masagana account.

Q May I show you another receipt likewise issued by Masagana Superstore operated by Matterco, Inc. dated October 5, 1994. Will you please tell me if this another account, another payment that was mistakenly deposited to the account of Masagana? A This is also one of these . . . Because during the time . . . (TSN, March 5, 1997, pp. 88-91, a certified true copy of which forms part of Annex "N" and marked as Annex "N-3")[35]

Finally, the Tius disagree with the Court of Appeals' characterization of the P70 million paid by the Ongs to FLADC. The Tius allege that the P70 million paid by the Ongs in excess of the actual par value of one million shares they acquired from FLADC was a premium on capital and not an advance. The Tius contend that the receipt, Exh. "4," the Ongs' own exhibit, is quite clear that the amount of P170 million was the agreed price for the Ong Group's subscription to one million shares in FLADC representing 50% of the capital stock of the corporation. Exh. "4," reads:

"Received from Mr. Ong Yong the amount of TWENTY MILLION PESOS (P20,000,000.00) in full payment of the agreed price of ONE HUNDRED SEVENTY MILLION PESOS (P170,000,000.00) representing his group's FIFTY PERCENT (50%) share in First Landlink Asia Development Corporation."

The Tius explain that the excess payment of P70 million, considering that the par value of the one million shares subscribed by the Ongs was only P100 million, at P100 per share, in corporation law, is called "paid-in surplus" or premium.

We are not convinced. This issue was very well discussed by the Court of Appeals, and we agree and quote:

"But the available funds of FLADC were not enough to cover the P90,000,000.00 more needed to pay the PNB loan because all there was of FLADC's funds at the time was P5,840,089.12 (pp. 734-735, Rollo). It was then, therefore, that the Ongs advanced P70,000,000.00 in cash to FLADC while the Tius advanced P20,000,000.00 in cash, an amount they also had to borrow from the Ongs (pp. 437-441, Rollo).

"The Pre-Subscription Agreement is explicit in its terms - that the Ongs agreed to pay P100,000,000.00 only for 1 million shares in FLADC at a par value of P100.00 per share (p. 211, Rollo). FLADC's application for an increase in capital stock shows that the par value of each of its shares is P100.00 only (pp. 185-186, Rollo). The same application also shows that the Ongs subscribed to 1 million shares of FLADC at a par value of P100.00 per share (Ibid). There is nothing in the application which shows that FLADC's shares are to be sold at a premium or at an amount higher than the stated par value per share (Ibid).

"The receipt which states that the Ongs paid P170,000,000.00 for a 50% share in FLADC must not be construed to mean that the Ongs paid P170,000,000.00 for one million shares in FLADC, thereby making the P70,000,000.00 thereof a premium or paid-in-surplus on the actual par value of 1 million shares (p. 182, Rollo). To treat the P70,000,000.00 as premium would not only have the effect of modifying the Pre-Subscription Agreement, but would actually novate it (see Article 1291 (1), New civil Code).

"To allow a novation of the Pre-Subscription Agreement in this manner would negate or contravene the very intention of the parties in entering into the Pre-Subscription Agreement which is to maintain EQUALITY between them.

"The Tius, in filing the complaint for rescission a quo, rely heavily on the Pre-Subscription Agreement and even emphasized that it was entered into with the intention of maintaining EQUALITY as regards the parties standing in FLADC (pp. 127-136, Rollo). If the Court were to allow the P70,000,000.00 to be classified as premium or paid-in-surplus, then the Tius' theory will altogether crumble. The respective valuation of the properties to be used as payment of the Tius' 1 million share in FLADC which were presented in evidence to prove that said properties are worth more than the agreed value thereof in the Pre-Subscription Agreement, and therefore when added to the P45,020,000.00 paid up capital, are worth more than 1 million shares in FLADC, is of no consequence (pp. 1023-1047-A, Rollo). The same valuations have been made AFTER the Pre-Subscription Agreement was entered into and does not therefore reflect the actual value of the properties at the time the Pre-Subscription Agreement was entered into (p. 1046, Rollo).

"The Tius also claim that the P70,000,000.00 cannot be treated as an advance because there was no board resolution authorizing FLADC to incur such an obligation (pp. 764-767, Rollo). As pointed out by SEC Hearing Official Soller, the fact that no board resolution was passed allowing FLADC to incur such an obligation is immaterial, it appearing that there was also no board resolution authorizing FLADC to secure a P20,000,000.00 advance from the Tius (p. 367, Rollo). What matters then and now is that the P190,000,000.00 loan from PNB was finally settled in order for FLADC to resume its business without fear of foreclosure of its properties.

"Besides, at the time the Ongs invested in FLADC, they knew that the same was in financial distress. Why would the Ongs buy the shares of FLADC for 70% more than their actual par value of P100.00 per share, when to do so would not be in consonance with what a prudent man would do under the same circumstances?"[36]

Except for the issue regarding the rate of interest and reckoning period for the payment thereof, and that the Tius should be credited with 49,800 shares of FLADC for their 151 sq. m. lot property contribution, we find no other error in the assailed Decision which was judiciously rendered by the Court of Appeals.

WHEREFORE, the decision appealed from is hereby AFFIRMED with the following MODIFICATIONS:

1. the P20 million loan extended by the Ongs to the Tius shall earn interest at twelve percent (12%) per annum to be computed from the time of judicial demand which is from April 23, 1996;

2. the P70 million advanced by the Ongs to the FLADC shall earn interest at ten percent (10%) per annum to be computed from the date of the FLADC Board Resolution which is June 19, 1996; and

3. The Tius shall be credited with 49,800 shares in FLADC for their property contribution, specifically, the 151 sq. m. parcel of land.

SO ORDERED.

G.R. No. 106063 November 21, 1996

EQUATORIAL REALTY DEVELOPMENT, INC. & CARMELO & BAUERMANN, INC., petitioners, vs. MAYFAIR THEATER, INC., respondent.HERMOSISIMA, JR., J.:

Before us is a petition for review of the decision 1 of the Court ofAppeals 2 involving questions in the resolution of which the respondent appellate court analyzed and interpreted particular provisions of our laws on contracts and sales. In its assailed decision, the respondent court reversed the trial court 3 which, in dismissing the complaint for specific performance with damages and annulment of contract, 4 found the option clause in the lease contracts entered into by private respondent Mayfair Theater, Inc. (hereafter, Mayfair) and petitioner Carmelo & Bauermann, Inc. (hereafter, Carmelo) to be impossible of performance and unsupported by a consideration and the subsequent sale of the subject property to petitioner Equatorial Realty Development, Inc. (hereafter, Equatorial) to have been made without any breach of or prejudice to, the said lease contracts. 5

We reproduce below the facts as narrated by the respondent court, which narration, we note, is almost verbatim the basis of the statement of facts as rendered by the petitioners in their pleadings:

Carmelo owned a parcel of land, together with two 2-storey buildings constructed thereon located at Claro M Recto Avenue, Manila, and covered by TCT No. 18529 issued in its name by the Register of Deeds of Manila.

On June 1, 1967 Carmelo entered into a contract of lease with Mayfair for the latter's lease of a portion of Carmelo's property particularly described, to wit:

A PORTION OF THE SECOND FLOOR of the two-storey building, situated at C.M. Recto Avenue, Manila, with a floor area of 1,610 square meters.

THE SECOND FLOOR AND MEZZANINE of the two-storey building, situated at C.M. Recto Avenue, Manila, with a floor area of 150 square meters.

for use by Mayfair as a motion picture theater and for a term of twenty (20) years. Mayfair thereafter constructed on the leased property a movie house known as "Maxim Theatre."

Two years later, on March 31, 1969, Mayfair entered into a second contract of lease with Carmelo for the lease of another portion of Carmelo's property, to wit:

A PORTION OF THE SECOND FLOOR of the two-storey building, situated at C.M. Recto Avenue, Manila, with a floor area of 1,064 square meters.

THE TWO (2) STORE SPACES AT THE GROUND FLOOR and MEZZANINE of the two-storey building situated at C.M. Recto Avenue, Manila, with a floor area of 300 square meters and bearing street numbers 1871 and 1875,

for similar use as a movie theater and for a similar term of twenty (20) years. Mayfair put up another movie house known as "Miramar Theatre" on this leased property.

Both contracts of lease provides (sic) identically worded paragraph 8, which reads:

That if the LESSOR should desire to sell the leased premises, the LESSEE shall be given 30-days exclusive option to purchase the same.

In the event, however, that the leased premises is sold to someone other than the LESSEE, the LESSOR is bound and obligated, as it hereby binds and obligates itself, to stipulate in the Deed of Sale hereof that the purchaser shall recognize this lease and be bound by all the terms and conditions thereof.

Sometime in August 1974, Mr. Henry Pascal of Carmelo informed Mr. Henry Yang, President of Mayfair, through a telephone conversation that Carmelo was desirous of selling the entire Claro M. Recto property. Mr. Pascal told Mr. Yang that a certain Jose Araneta was offering to buy the whole property for US Dollars 1,200,000, and Mr. Pascal asked Mr. Yang if the latter was willing to buy the property for Six to Seven Million Pesos.

Mr. Yang replied that he would let Mr. Pascal know of his decision. On August 23, 1974, Mayfair replied through a letter stating as follows:

It appears that on August 19, 1974 your Mr. Henry Pascal informed our client's Mr. Henry Yang through the telephone that your company desires to sell your above-mentioned C.M. Recto Avenue property.

Under your company's two lease contracts with our client, it is uniformly provided:

8. That if the LESSOR should desire to sell the leased premises the LESSEE shall be given 30-days exclusive option to purchase the same. In the event, however, that the leased premises is sold to someone other than the LESSEE, the LESSOR is bound and obligated, as it is (sic) herebinds (sic) and obligates itself, to stipulate in the Deed of Sale thereof that the purchaser shall recognize this lease and be bound by all the terms and conditions hereof (sic).

Carmelo did not reply to this letter.

On September 18, 1974, Mayfair sent another letter to Carmelo purporting to express interest in acquiring not only the leased premises but "the entire building and other improvements if the price is reasonable. However, both Carmelo and Equatorial questioned the authenticity of the second letter.

Four years later, on July 30, 1978, Carmelo sold its entire C.M. Recto Avenue land and building, which included the leased premises housing the "Maxim" and "Miramar" theatres, to Equatorial by virtue of a Deed of Absolute Sale, for the total sum of P11,300,000.00.

In September 1978, Mayfair instituted the action a quo for specific performance and annulment of the sale of the leased premises to Equatorial. In its Answer, Carmelo alleged as special and affirmative defense (a) that it had informed Mayfair of its desire to sell the entire C.M. Recto Avenue property and offered the same to Mayfair, but the latter answered that it was interested only in buying the areas under lease, which was impossible since the property was not a condominium; and (b) that the option to purchase invoked by Mayfair is null and void for lack of consideration. Equatorial, in its Answer, pleaded as special and affirmative defense that the option is void for lack of consideration (sic) and is unenforceable by reason of its impossibility of performance because the leased premises could not be sold separately from the other portions of the land and building. It counterclaimed for cancellation of the contracts of lease, and for increase of rentals in view of alleged supervening extraordinary devaluation of the currency. Equatorial likewise cross-claimed against co-defendant Carmelo for indemnification in respect of Mayfair's claims.

During the pre-trial conference held on January 23, 1979, the parties stipulated on the following:

1. That there was a deed of sale of the contested premises by the defendant Carmelo . . . in favor of defendant Equatorial . . .;

2. That in both contracts of lease there appear (sic) the stipulation granting the plaintiff exclusive option to purchase the leased premises should the lessor desire to sell the same (admitted subject to the contention that the stipulation is null and void);

3. That the two buildings erected on this land are not of the condominium plan;

4. That the amounts stipulated and mentioned in paragraphs 3 (a) and (b) of the contracts of lease constitute the consideration for the plaintiff's occupancy of the leased premises, subject of the same contracts of lease, Exhibits A and B;

xxx xxx xxx

6. That there was no consideration specified in the option to buy embodied in the contract;

7. That Carmelo & Bauermann owned the land and the two buildings erected thereon;

8. That the leased premises constitute only the portions actually occupied by the theaters; and

9. That what was sold by Carmelo & Bauermann to defendant Equatorial Realty is the land and the two buildings erected thereon.

xxx xxx xxx

After assessing the evidence, the court a quo rendered the appealed decision, the decretal portion of which reads as follows:

WHEREFORE, judgment is hereby rendered:

(1) Dismissing the complaint with costs against the plaintiff;

(2) Ordering plaintiff to pay defendant Carmelo & Bauermann P40,000.00 by way of attorney's fees on its counterclaim;

(3) Ordering plaintiff to pay defendant Equatorial Realty P35,000.00 per month as reasonable compensation for the use of areas not covered by the contract (sic) of lease from July 31, 1979 until plaintiff vacates said area (sic) plus legal interest from July 31, 1978; P70,000 00 per month as reasonable compensation for the use of the premises covered by the contracts (sic) of lease dated (June 1, 1967 from June 1, 1987 until plaintiff vacates the premises plus legal interest from June 1, 1987; P55,000.00 per month as reasonable compensation for the use of the premises covered by the contract of lease dated March 31, 1969 from March 30, 1989 until plaintiff vacates the premises plus legal interest from March 30, 1989; and P40,000.00 as attorney's fees;

(4) Dismissing defendant Equatorial's crossclaim against defendant Carmelo & Bauermann.

The contracts of lease dated June 1, 1967 and March 31, 1969 are declared expired and all persons claiming rights under these contracts are directed to vacate the premises. 6

The trial court adjudged the identically worded paragraph 8 found in both aforecited lease contracts to be an option clause which however cannot be deemed to be binding on Carmelo because of lack of distinct consideration therefor.

The court a quo ratiocinated:

Significantly, during the pre-trial, it was admitted by the parties that the option in the contract of lease is not supported by a separate consideration. Without a consideration, the option is therefore not binding on defendant Carmelo & Bauermann to sell the C.M. Recto property to the former. The option invoked by the plaintiff appears in the contracts of lease . . . in effect there is no option, on the ground that there is no consideration. Article 1352 of the Civil Code, provides:

Contracts without cause or with unlawful cause, produce no effect whatever. The cause is unlawful if it is contrary to law, morals, good custom, public order or public policy.

Contracts therefore without consideration produce no effect whatsoever. Article 1324 provides:

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 consideration, as something paid or promised.

in relation with Article 1479 of the same Code:

A promise to buy and sell a determine thing for a price certain is reciprocally demandable.

An accepted unilateral promise to buy or to sell a determine thing for a price certain is binding upon the promissor if the promise is supported by a consideration distinct from the price.

The plaintiff cannot compel defendant Carmelo to comply with the promise unless the former establishes the existence of a distinct consideration. In other words, the promisee has the burden of proving the consideration. The consideration cannot be presumed as in Article 1354:

Although the cause is not stated in the contract, it is presumed that it exists and is lawful unless the debtor proves the contrary.

where consideration is legally presumed to exists. Article 1354 applies to contracts in general, whereas when it comes to an option it is governed particularly and more specifically by Article 1479 whereby the promisee has the burden of proving the existence of consideration distinct from the price. Thus, in the case of Sanchez vs. Rigor, 45 SCRA 368, 372-373, the Court said:

(1) Article 1354 applies to contracts in general, whereas the second paragraph of Article 1479 refers to sales in particular, and, more specifically, to an accepted unilateral promise to buy or to sell. In other words, Article 1479 is controlling in the case at bar.

(2) In order that said unilateral promise may be binding upon the promissor, Article 1479 requires the concurrence of a condition, namely, that the promise be supported by a consideration distinct from the price.

Accordingly, the promisee cannot compel the promissor to comply with the promise, unless the former establishes the existence of said distinct consideration. In other words, the promisee has the burden of proving such consideration. Plaintiff herein has not even alleged the existence thereof in his complaint. 7

It follows that plaintiff cannot compel defendant Carmelo & Bauermann to sell the C.M. Recto property to the former.

Mayfair taking exception to the decision of the trial court, the battleground shifted to the respondent Court of Appeals. Respondent appellate court reversed the court a quo and rendered judgment:

1. Reversing and setting aside the appealed Decision;

2. Directing the plaintiff-appellant Mayfair Theater Inc. to pay and return to Equatorial the amount of P11,300,000.00 within fifteen (15) days from notice of this Decision, and ordering Equatorial Realty Development, Inc. to accept such payment;

3. Upon payment of the sum of P11,300,000, directing Equatorial Realty Development, Inc. to execute the deeds and documents necessary for the issuance and transfer of ownership to Mayfair of the lot registered under TCT Nos. 17350, 118612, 60936, and 52571; and

4. Should plaintiff-appellant Mayfair Theater, Inc. be unable to pay the amount as adjudged, declaring the Deed of Absolute Sale between the defendants-appellants Carmelo & Bauermann, Inc. and Equatorial Realty Development, Inc. as valid and binding upon all the parties. 8

Rereading the law on the matter of sales and option contracts, respondent Court of Appeals differentiated between Article 1324 and Article 1479 of the Civil Code, analyzed their application to the facts of this case, and concluded that since paragraph 8 of the two lease contracts does not state a fixed price for the purchase of the leased premises, which is an essential element for a contract of sale to be perfected, what paragraph 8 is, must be a right of first refusal and not an option contract. It explicated:

Firstly, the court a quo misapplied the provisions of Articles 1324 and 1479, second paragraph, of the Civil Code.

Article 1324 speaks of an "offer" made by an offeror which the offeree may or may not accept within a certain period. Under this article, the offer may be withdrawn by the offeror before the expiration of the period and while the offeree has not yet accepted the offer. However, the offer cannot be withdrawn by the offeror within the period if a consideration has been promised or given by the offeree in exchange for the privilege of being given that period within which to accept the offer. The consideration is distinct from the price which is part of the offer. The contract that arises is known as option. In the case of Beaumont vs. Prieto, 41 Phil. 670, the Supreme court, citing Bouvier, defined an option as follows: "A contract by virtue of which A, in consideration of the payment of a certain sum to B, acquires the privilege of buying from or selling to B, certain securities or properties within a limited time at a specified price," (pp. 686-7).

Article 1479, second paragraph, on the other hand, contemplates of an "accepted unilateral promise to buy or to sell a determinate thing for a price within (which) is binding upon the promisee if the promise is supported by a consideration distinct from the price." That "unilateral promise to buy or to sell a determinate thing for a price certain" is called an offer. An "offer", in laws, is a proposal to enter into a contract (Rosenstock vs. Burke, 46 Phil. 217). To constitute a legal offer, the proposal must be certain as to the object, the price and other essential terms of the contract (Art. 1319, Civil Code).

Based on the foregoing discussion, it is evident that the provision granting Mayfair "30-days exclusive option to purchase" the leased premises is NOT AN OPTION in the context of Arts. 1324 and 1479, second paragraph, of the Civil Code. Although the provision is certain as to the object (the sale of the leased premises) the price for which the object is to be sold is not stated in the provision Otherwise stated, the questioned stipulation is not by itself, an "option" or the "offer to sell" because the clause does not specify the price for the subject property.

Although the provision giving Mayfair "30-days exclusive option to purchase" cannot be legally categorized as an option, it is, nevertheless, a valid and binding stipulation. What the trial court failed to appreciate was the intention of the parties behind the questioned proviso.

xxx xxx xxx

The provision in question is not of the pro-forma type customarily found in a contract of lease. Even appellees have recognized that the stipulation was incorporated in the two Contracts of Lease at the initiative and behest of Mayfair. Evidently, the stipulation was intended to benefit and protect Mayfair in its rights as lessee in case Carmelo should decide, during the term of the lease, to sell the leased property. This intention of the parties is achieved in two ways in accordance with the stipulation. The first is by giving Mayfair "30-days exclusive option to purchase" the leased property. The second is, in case Mayfair would opt not to purchase the leased property, "that the purchaser (the new owner of the leased property) shall recognize the lease and be bound by all the terms and conditions thereof."

In other words, paragraph 8 of the two Contracts of lease, particularly the stipulation giving Mayfair "30-days exclusive option to purchase the (leased premises)," was meant to provide Mayfair the opportunity to purchase and acquire the leased property in the event that Carmelo should decide to dispose of the property. In order to realize this intention, the implicit obligation of Carmelo once it had decided to sell the leased property, was not only to notify Mayfair of such decision to sell the property, but, more importantly, to make an offer to sell the leased premises to Mayfair, giving the latter a fair and reasonable opportunity to accept or reject the offer, before offering to sell or selling the leased property to third parties. The right vested in Mayfair is analogous to the right of first refusal, which means that Carmelo should have offered the sale of the leased premises to Mayfair before offering it to other parties, or, if Carmelo should receive any offer from third parties to purchase the leased premises, then Carmelo must first give Mayfair the opportunity to match that offer.

In fact, Mr. Pascal understood the provision as giving Mayfair a right of first refusal when he made the telephone call to Mr. Yang in 1974. Mr. Pascal thus testified:

Q Can you tell this Honorable Court how you made the offer to Mr. Henry Yang by telephone?

A I have an offer from another party to buy the property and having the offer we decided to make an offer to Henry Yang on a first-refusal basis. (TSN November 8, 1983, p. 12.).

and on cross-examination:

Q When you called Mr. Yang on August 1974 can you remember exactly what you have told him in connection with that matter, Mr. Pascal?

A More or less, I told him that I received an offer from another party to buy the property and I was offering him first choice of the enter property. (TSN, November 29, 1983, p. 18).

We rule, therefore, that the foregoing interpretation best renders effectual the intention of the parties. 9

Besides the ruling that paragraph 8 vests in Mayfair the right of first refusal as to which the requirement of distinct consideration indispensable in an option contract, has no application, respondent appellate court also addressed the claim of Carmelo and Equatorial that assuming arguendo that the option is valid and effective, it is impossible of performance because it covered only the leased premises and not the entire Claro M. Recto property, while Carmelo's offer to sell pertained to the entire property in question. The Court of Appeals ruled as to this issue in this wise:

We are not persuaded by the contentions of the defendants-appellees. It is to be noted that the Deed of Absolute Sale between Carmelo and Equatorial covering the whole Claro M. Recto property, made reference to four titles: TCT Nos. 17350, 118612, 60936 and 52571. Based on the information submitted by Mayfair in its appellant's Brief (pp. 5 and 46) which has not been controverted by the appellees, and which We, therefore, take judicial notice of the two theaters stand on the parcels of land covered by TCT No. 17350 with an area of 622.10 sq. m and TCT No. 118612 with an area of 2,100.10 sq. m. The existence of four separate parcels of land covering the whole Recto property demonstrates the legal and physical possibility that each parcel of land, together with the buildings and improvements thereof, could have been sold independently of the other parcels.

At the time both parties executed the contracts, they were aware of the physical and structural conditions of the buildings on which the theaters were to be constructed in relation to the remainder of the whole Recto property. The peculiar language of the stipulation would tend to limit Mayfair's right under paragraph 8 of the Contract of Lease to the acquisition of the leased areas only. Indeed, what is being contemplated by the questioned stipulation is a departure from the customary situation wherein the buildings and improvements are included in and form part of the sale of the subjacent land. Although this situation is not common, especially considering the non-condominium nature of the buildings, the sale would be valid and capable of being performed. A sale limited to the leased premises only, if hypothetically assumed, would have brought into operation the provisions of co-ownership under which Mayfair would have become the exclusive owner of the leased premises and at the same time a co-owner with Carmelo of the subjacent land in proportion to Mayfair's interest over the premises sold to it. 10

Carmelo and Equatorial now comes before us questioning the correctness and legal basis for the decision of respondent Court of Appeals on the basis of the following assigned errors:

I THE COURT OF APPEALS GRAVELY ERRED IN CONCLUDING THAT THE OPTION CLAUSE IN THE CONTRACTS OF LEASE IS ACTUALLY A RIGHT OF FIRST REFUSAL PROVISO. IN DOING SO THE COURT OF APPEALS DISREGARDED THE CONTRACTS OF LEASE WHICH CLEARLY AND UNEQUIVOCALLY PROVIDE FOR AN OPTION, AND THE ADMISSION OF THE PARTIES OF SUCH OPTION IN THEIR STIPULATION OF FACTS.

II WHETHER AN OPTION OR RIGHT OF FIRST REFUSAL, THE COURT OF APPEALS ERRED IN DIRECTING EQUATORIAL TO EXECUTE A DEED OF SALE EIGHTEEN (18) YEARS AFTER MAYFAIR FAILED TO EXERCISE ITS OPTION (OR, EVEN ITS RIGHT OF FIRST REFUSAL ASSUMING IT WAS ONE) WHEN THE CONTRACTS LIMITED THE EXERCISE OF SUCH OPTION TO 30 DAYS FROM NOTICE.

III THE COURT OF APPEALS GRIEVOUSLY ERRED WHEN IT DIRECTED IMPLEMENTATION OF ITS DECISION EVEN BEFORE ITS FINALITY, AND WHEN IT GRANTED MAYFAIR A RELIEF THAT WAS NOT EVEN PRAYED FOR IN THE COMPLAINT.

IV THE COURT OF APPEALS VIOLATED ITS OWN INTERNAL RULES IN THE ASSIGNMENT OF APPEALED CASES WHEN IT ALLOWED THE SAME DIVISION XII, PARTICULARLY JUSTICE MANUEL HERRERA, TO RESOLVE ALL THE MOTIONS IN THE "COMPLETION PROCESS" AND TO STILL RESOLVE THE MERITS OF THE CASE IN THE "DECISION STAGE". 11

We shall first dispose of the fourth assigned error respecting alleged irregularities in the raffle of this case in the Court of Appeals. Suffice it to say that in our Resolution, 12 dated December 9, 1992, we already took note of this matter and set out the proper applicable procedure to be the following:

On September 20, 1992, counsel for petitioner Equatorial Realty Development, Inc. wrote a letter-complaint to this Court alleging certain irregularities and infractions committed by certain lawyers, and Justices of the Court of Appeals and of this Court in connection with case CA-G.R. CV No. 32918 (now G.R. No. 106063). This partakes of the nature of an administrative complaint for misconduct against members of the judiciary. While the letter-complaint arose as an incident in case CA-G.R. CV No. 32918 (now G.R. No. 106063), the disposition thereof should be separate and independent from Case G.R. No. 106063. However, for purposes of receiving the requisite pleadings necessary in disposing of the administrative complaint, this Division shall continue to have control of the case. Upon completion thereof, the same shall be referred to the Court En Banc for proper disposition. 13

This court having ruled the procedural irregularities raised in the fourth assigned error of Carmelo and Equatorial, to be an independent and separate subject for an administrative complaint based on misconduct by the lawyers and justices implicated therein, it is the correct, prudent and consistent course of action not to pre-empt the administrative proceedings to be undertaken respecting the said irregularities. Certainly, a discussion thereupon by us in this case would entail a finding on the merits as to the real nature of the questioned procedures and the true intentions and motives of the players therein.

In essence, our task is two-fold: (1) to define the true nature, scope and efficacy of paragraph 8 stipulated in the two contracts of lease between Carmelo and Mayfair in the face of conflicting findings by the trial court and the Court of Appeals; and (2) to determine the rights and obligations of Carmelo and Mayfair, as well as Equatorial, in the aftermath of the sale by Carmelo of the entire Claro M. Recto property to Equatorial.

Both contracts of lease in question provide the identically worded paragraph 8, which reads:

That if the LESSOR should desire to sell the leased premises, the LESSEE shall be given 30-days exclusive option to purchase the same.

In the event, however, that the leased premises is sold to someone other than the LESSEE, the LESSOR is bound and obligated, as it hereby binds and obligates itself, to stipulate in the Deed of Sale thereof that the purchaser shall recognize this lease and be bound by all the terms and conditions thereof. 14

We agree with the respondent Court of Appeals that the aforecited contractual stipulation provides for a right of first refusal in favor of Mayfair. It is not an option clause or an option contract. It is a contract of a right of first refusal.

As early as 1916, in the case of Beaumont vs. Prieto, 15 unequivocal was our characterization of an option contract as one necessarily involving the choice granted to another for a distinct and separate consideration as to whether or not to purchase a determinate thing at a predetermined fixed price.

It is unquestionable that, by means of the document Exhibit E, to wit, the letter of December 4, 1911, quoted at the beginning of this decision, the defendant Valdes granted to the plaintiff Borck the right to purchase the Nagtajan Hacienda belonging to Benito Legarda, during the period of three months and for its assessed valuation, a grant which necessarily implied the offer or obligation on the part of the defendant Valdes to sell to Borck the said hacienda during the period and for the price mentioned . . . There was, therefore, a meeting of minds on the part of the one and the other, with regard to the stipulations made in the said document. But it is not shown that there was any cause or consideration for that agreement, and this omission is a bar which precludes our holding that the stipulations contained in Exhibit E is a contract of option, for, . . . there can be no contract without the requisite, among others, of the cause for the obligation to be established.

In his Law Dictionary, edition of 1897, Bouvier defines an option as a contract, in the following language:

A contract by virtue of which A, in consideration of the payment of a certain sum to B, acquires the privilege of buying from, or selling to B, certain securities or properties within a limited time at a specified price. (Story vs. Salamon, 71 N.Y., 420.)

From vol. 6, page 5001, of the work "Words and Phrases," citing the case of Ide vs. Leiser (24 Pac., 695; 10 Mont., 5; 24 Am. St. Rep., 17) the following quotation has been taken:

An agreement in writing to give a person the option to purchase lands within a given time at a named price is neither a sale nor an agreement to sell. It is simply a contract by which the owner of property agrees with another person that he shall have the right to buy his property at a fixed price within a certain time. He does not sell his land; he does not then agree to sell it; but he does sell something; that is, the right or privilege to buy at the election or option of the other party. The second party gets in praesenti, not lands, nor an agreement that he shall have lands, but he does get something of value; that is, the right to call for and receive lands if he elects. The owner parts with his right to sell his lands, except to the second party, for a limited period. The second party receives this right, or, rather, from his point of view, he receives the right to elect to buy.

But the two definitions above cited refer to the contract of option, or, what amounts to the same thing, to the case where there was cause or consideration for the obligation, the subject of the agreement made by the parties; while in the case at bar there was no such cause or consideration. 16 (Emphasis ours.)

The rule so early established in this jurisdiction is that the deed of option or the option clause in a contract, in order to be valid and enforceable, must, among other things, indicate the definite price at which the person granting the option, is willing to sell.

Notably, in one case we held that the lessee loses his right to buy the leased property for a named price per square meter upon failure to make the purchase within the time specified; 17 in one other case we freed the

landowner from her promise to sell her land if the prospective buyer could raise P4,500.00 in three weeks because such option was not supported by a distinct consideration; 18 in the same vein in yet one other case, we also invalidated an instrument entitled, "Option to Purchase" a parcel of land for the sum of P1,510.00 because of lack of consideration; 19 and as an exception to the doctrine enumerated in the two preceding cases, in another case, we ruled that the option to buy the leased premises for P12,000.00 as stipulated in the lease contract, is not without consideration for in reciprocal contracts, like lease, the obligation or promise of each party is the consideration for that of the other. 20 In all these cases, the selling price of the object thereof is always predetermined and specified in the option clause in the contract or in the separate deed of option. We elucidated, thus, in the very recent case of Ang Yu Asuncion vs. Court of Appeals 21 that:

. . . In sales, particularly, to which the topic for discussion about the case at bench belongs, the contract is perfected when a person, called the seller, obligates himself, for a price certain, to deliver and to transfer ownership of a thing or right to another, called the buyer, over which the latter agrees. Article 1458 of the Civil Code provides:

Art. 1458. By the contract of sale one of the contracting parties obligates himself to transfer the ownership of and to deliver a determinate thing, and the other to pay therefor a price certain in money or its equivalent.

A contract of sale may be absolute or conditional.

When the sale is not absolute but conditional, such as in a "Contract to Sell" where invariably the ownership of the thing sold in retained until the fulfillment of a positive suspensive condition (normally, the full payment of the purchase price), the breach of the condition will prevent the obligation to convey title from acquiring an obligatory force. . . .

An unconditional mutual promise to buy and sell, as long as the object is made determinate and the price is fixed, can be obligatory on the parties, and compliance therewith may accordingly be exacted.

An accepted unilateral promise which specifies the thing to be sold and the price to be paid, when coupled with a valuable consideration distinct and separate from the price, is what may properly be termed a perfected contract of option. This contract is legally binding, and in sales, it conforms with the second paragraph of Article 1479 of the Civil Code, viz:

Art. 1479. . . .

An accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding upon the promisor if the promise is supported by a consideration distinct from the price. (1451a).

Observe, however, that the option is not the contract of sale itself. The optionee has the right, but not the obligation, to buy. Once the option is exercised timely, i.e., the offer is accepted before a breach of the option, a bilateral promise to sell and to buy ensues and both parties are then reciprocally bound to comply with their respective undertakings.

Let us elucidate a little. A negotiation is formally initiated by an offer. An imperfect promise (policitacion) is merely an offer. Public advertisements or solicitations and the like are ordinarily construed as mere invitations to make offers or only as proposals. These relations, until a contract is perfected, are not considered binding commitments. Thus, at any time prior to the perfection of the contract, either negotiating party may stop the negotiation. The offer, at this stage, may be withdrawn; the withdrawal is effective immediately after its manifestation, such as by its mailing and not necessarily when the offeree learns of the withdrawal (Laudico vs. Arias, 43 Phil. 270). Where a period is given to the offeree within which to accept the offer, the following rules generally govern:

(1) If the period is not itself founded upon or supported by a consideration, the offeror is still free and has the right to withdraw the offer before its acceptance, or if an acceptance has been made, before the offeror's coming to know of such fact, by communicating that withdrawal to the offeree (see Art. 1324, Civil Code; see also Atkins, Kroll & Co. vs. Cua, 102 Phil. 948, holding that this rule is applicable to a unilateral promise to sell under Art. 1479, modifying the previous decision in South Western Sugar vs. Atlantic Gulf, 97 Phil. 249; see also Art. 1319, Civil Code; Rural Bank of Parañaque, Inc. vs. Remolado, 135 SCRA 409; Sanchez vs. Rigos, 45 SCRA 368). The right to withdraw, however, must not be exercised whimsically or arbitrarily; otherwise, it could give rise to a damage claim under Article 19 of the Civil Code which ordains that "every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith."

(2) If the period has a separate consideration, a contract of "option" deemed perfected, and it would be a breach of that contract to withdraw the offer during the agreed period. The option, however, is an independent contract by itself; and it is to be distinguished from the projected main agreement (subject matter of the option) which is obviously yet to be concluded. If, in fact, the optioner-offeror withdraws the offer before its acceptance (exercise of the option) by the optionee-offeree, the latter may not sue for specific performance on the proposed contract ("object" of the option) since it has failed to reach its own stage of perfection. The optioner-offeror, however, renders himself liable for damages for breach of the opinion. . .

In the light of the foregoing disquisition and in view of the wording of the questioned provision in the two lease contracts involved in the instant case, we so hold that no option to purchase in contemplation of the second paragraph of Article 1479 of the Civil Code, has been granted to Mayfair under the said lease contracts.

Respondent Court of Appeals correctly ruled that the said paragraph 8 grants the right of first refusal to Mayfair and is not an option contract. It also correctly reasoned that as such, the requirement of a separate consideration for the option, has no applicability in the instant case.

There is nothing in the identical Paragraphs "8" of the June 1, 1967 and March 31, 1969 contracts which would bring them into the ambit of the usual offer or option requiring an independent consideration.

An option is a contract granting a privilege to buy or sell within an agreed time and at a determined price. 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. 22 In the instant case, the right of first refusal is an integral part of the contracts of lease. The consideration is built into the reciprocal obligations of the parties.

To rule that a contractual stipulation such as that found in paragraph 8 of the contracts is governed by Article 1324 on withdrawal of the offer or Article 1479 on promise to buy and sell would render in effectual or "inutile" the provisions on right of first refusal so commonly inserted in leases of real estate nowadays. The Court of Appeals is correct in stating that Paragraph 8 was incorporated into the contracts of lease for the benefit of Mayfair which wanted to be assured that it shall be given the first crack or the first option to buy the property at the price which Carmelo is willing to accept. It is not also correct to say that there is no consideration in an agreement of right of first refusal. The stipulation is part and parcel of the entire contract of lease. The consideration for the lease includes the consideration for the right of first refusal. Thus, Mayfair is in effect stating that it consents to lease the premises and to pay the price agreed upon provided the lessor also consents that, should it sell the leased property, then, Mayfair shall be given the right to match the offered purchase price and to buy the property at that price. As stated in Vda. De Quirino vs. Palarca, 23 in reciprocal contract, the obligation or promise of each party is the consideration for that of the other.

The respondent Court of Appeals was correct in ascertaining the true nature of the aforecited paragraph 8 to be that of a contractual grant of the right of first refusal to Mayfair.

We shall now determine the consequential rights, obligations and liabilities of Carmelo, Mayfair and Equatorial.

The different facts and circumstances in this case call for an amplification of the precedent in Ang Yu Asuncion vs. Court of Appeals. 24

First and foremost is that the petitioners acted in bad faith to render Paragraph 8 "inutile".

What Carmelo and Mayfair agreed to, by executing the two lease contracts, was that Mayfair will have the right of first refusal in the event Carmelo sells the leased premises. It is undisputed that Carmelo did recognize this right of Mayfair, for it informed the latter of its intention to sell the said property in 1974. There was an exchange of letters evidencing the offer and counter-offers made by both parties. Carmelo, however, did not pursue the exercise to its logical end. While it initially recognized Mayfair's right of first refusal, Carmelo violated such right when without affording its negotiations with Mayfair the full process to ripen to at least an interface of a definite offer and a possible corresponding acceptance within the "30-day exclusive option" time granted Mayfair, Carmelo abandoned negotiations, kept a low profile for some time, and then sold, without prior notice to Mayfair, the entire Claro M Recto property to Equatorial.

Since Equatorial is a buyer in bad faith, this finding renders the sale to it of the property in question rescissible. We agree with respondent Appellate Court that the records bear out the fact that Equatorial was aware of the lease contracts because its lawyers had, prior to the sale, studied the said contracts. As such, Equatorial cannot tenably claim to be a purchaser in good faith, and, therefore, rescission lies.

. . . Contract of Sale was not voidable but rescissible. Under Article 1380 to 1381(3) of the Civil Code, a contract otherwise valid may nonetheless be subsequently rescinded by reason of injury to third persons, like creditors. The status of creditors could be validly accorded the Bonnevies for they had substantial interests that were prejudiced by the sale of the subject property to the petitioner without recognizing their right of first priority under the Contract of Lease.

According to Tolentino, rescission is a remedy granted by law to the contracting parties and even to third persons, to secure reparation for damages caused to them by a contract, even if this should be valid, by means of the restoration of things to their condition at the moment prior to the celebration of said contract. It is a relief allowed for the protection of one of the contracting parties and even third persons from all injury and damage the contract may cause, or to protect some incompatible and preferent right created by the contract. Rescission implies a contract which, even if initially valid, produces a lesion or pecuniary damage to someone that justifies its invalidation for reasons of equity.

It is true that the acquisition by a third person of the property subject of the contract is an obstacle to the action for its rescission where it is shown that such third person is in lawful possession of the subject of the contract and that he did not act in bad faith. However, this rule is not applicable in the case before us because the petitioner is not considered a third party in relation to the Contract of Sale nor may its possession of the subject property be regarded as acquired lawfully and in good faith.

Indeed, Guzman, Bocaling and Co. was the vendee in the Contract of Sale. Moreover, the petitioner cannot be deemed a purchaser in good faith for the record shows that it categorically admitted it was aware of the lease in favor of the Bonnevies, who were actually occupying the subject property at the time it was sold to it. Although the Contract of Lease was not annotated on the transfer certificate of title in the name of the late Jose Reynoso and Africa Reynoso, the petitioner cannot deny actual knowledge of such lease which was equivalent to and indeed more binding than presumed notice by registration.

A purchaser in good faith and for value is one who buys the property of another without notice that some other person has a right to or interest in such property and pays a full and fair price for the same at the time of such

purchase or before he has notice of the claim or interest of some other person in the property. Good faith connotes an honest intention to abstain from taking unconscientious advantage of another. Tested by these principles, the petitioner cannot tenably claim to be a buyer in good faith as it had notice of the lease of the property by the Bonnevies and such knowledge should have cautioned it to look deeper into the agreement to determine if it involved stipulations that would prejudice its own interests.

The petitioner insists that it was not aware of the right of first priority granted by the Contract of Lease. Assuming this to be true, we nevertheless agree with the observation of the respondent court that:

If Guzman-Bocaling failed to inquire about the terms of the Lease Contract, which includes Par. 20 on priority right given to the Bonnevies, it had only itself to blame. Having known that the property it was buying was under lease, it behooved it as a prudent person to have required Reynoso or the broker to show to it the Contract of Lease in which Par. 20 is contained. 25

Petitioners assert the alleged impossibility of performance because the entire property is indivisible property. It was petitioner Carmelo which fixed the limits of the property it was leasing out. Common sense and fairness dictate that instead of nullifying the agreement on that basis, the stipulation should be given effect by including the indivisible appurtenances in the sale of the dominant portion under the right of first refusal. A valid and legal contract where the ascendant or the more important of the two parties is the landowner should be given effect, if possible, instead of being nullified on a selfish pretext posited by the owner. Following the arguments of petitioners and the participation of the owner in the attempt to strip Mayfair of its rights, the right of first refusal should include not only the property specified in the contracts of lease but also the appurtenant portions sold to Equatorial which are claimed by petitioners to be indivisible. Carmelo acted in bad faith when it sold the entire property to Equatorial without informing Mayfair, a clear violation of Mayfair's rights. While there was a series of exchanges of letters evidencing the offer and counter-offers between the parties, Carmelo abandoned the negotiations without giving Mayfair full opportunity to negotiate within the 30-day period.

Accordingly, even as it recognizes the right of first refusal, this Court should also order that Mayfair be authorized to exercise its right of first refusal under the contract to include the entirety of the indivisible property. The boundaries of the property sold should be the boundaries of the offer under the right of first refusal. As to the remedy to enforce Mayfair's right, the Court disagrees to a certain extent with the concluding part of the dissenting opinion of Justice Vitug. The doctrine enunciated in Ang Yu Asuncion vs. Court of Appeals should be modified, if not amplified under the peculiar facts of this case.

As also earlier emphasized, the contract of sale between Equatorial and Carmelo is characterized by bad faith, since it was knowingly entered into in violation of the rights of and to the prejudice of Mayfair. In fact, as correctly observed by the Court of Appeals, Equatorial admitted that its lawyers had studied the contract of lease prior to the sale. Equatorial's knowledge of the stipulations therein should have cautioned it to look further into the agreement to determine if it involved stipulations that would prejudice its own interests.

Since Mayfair has a right of first refusal, it can exercise the right only if the fraudulent sale is first set aside or rescinded. All of these matters are now before us and so there should be no piecemeal determination of this case and leave festering sores to deteriorate into endless litigation. The facts of the case and considerations of justice and equity require that we order rescission here and now. Rescission is a relief allowed for the protection of one of the contracting parties and even third persons from all injury and damage the contract may cause or to protect some incompatible and preferred right by the contract. 26 The sale of the subject real property by Carmelo to Equatorial should now be rescinded considering that Mayfair, which had substantial interest over the subject property, was prejudiced by the sale of the subject property to Equatorial without Carmelo conferring to Mayfair every opportunity to negotiate within the 30-day stipulated period. 27

This Court has always been against multiplicity of suits where all remedies according to the facts and the law can be included. Since Carmelo sold the property for P11,300,000.00 to Equatorial, the price at which Mayfair could have purchased the property is, therefore, fixed. It can neither be more nor less. There is no dispute over it. The damages which Mayfair suffered are in terms of actual injury and lost opportunities. The fairest solution would be to allow Mayfair to exercise its right of first refusal at the price which it was entitled to accept or reject which is P11,300,000.00. This is clear from the records.

To follow an alternative solution that Carmelo and Mayfair may resume negotiations for the sale to the latter of the disputed property would be unjust and unkind to Mayfair because it is once more compelled to litigate to enforce its right. It is not proper to give it an empty or vacuous victory in this case. From the viewpoint of Carmelo, it is like asking a fish if it would accept the choice of being thrown back into the river. Why should Carmelo be rewarded for and allowed to profit from, its wrongdoing? Prices of real estate have skyrocketed. After having sold the property for P11,300,000.00, why should it be given another chance to sell it at an increased price?

Under the Ang Yu Asuncion vs. Court of Appeals decision, the Court stated that there was nothing to execute because a contract over the right of first refusal belongs to a class of preparatory juridical relations governed not by the law on contracts but by the codal provisions on human relations. This may apply here if the contract is limited to the buying and selling of the real property. However, the obligation of Carmelo to first offer the property to Mayfair is embodied in a contract. It is Paragraph 8 on the right of first refusal which created the obligation. It should be enforced according to the law on contracts instead of the panoramic and indefinite rule on human relations . The latter remedy encourages multiplicity of suits. There is something to execute and that is for Carmelo to comply with its obligation to the property under the right of the first refusal according to the terms at which they should have been offered then to Mayfair, at the price when that offer should have been made. Also, Mayfair has to accept the offer. This juridical relation is not amorphous nor is it merely preparatory. Paragraphs 8 of the two leases can be executed according to their terms.

On the question of interest payments on the principal amount of P11,300,000.00, it must be borne in mind that both Carmelo and Equatorial acted in bad faith. Carmelo knowingly and deliberately broke a contract entered into with Mayfair. It sold the property to Equatorial with purpose and intend to withhold any notice or knowledge of the sale

coming to the attention of Mayfair. All the circumstances point to a calculated and contrived plan of non-compliance with the agreement of first refusal.

On the part of Equatorial, it cannot be a buyer in good faith because it bought the property with notice and full knowledge that Mayfair had a right to or interest in the property superior to its own. Carmelo and Equatorial took unconscientious advantage of Mayfair.

Neither may Carmelo and Equatorial avail of considerations based on equity which might warrant the grant of interests. The vendor received as payment from the vendee what, at the time, was a full and fair price for the property. It has used the P11,300,000.00 all these years earning income or interest from the amount. Equatorial, on the other hand, has received rents and otherwise profited from the use of the property turned over to it by Carmelo. In fact, during all the years that this controversy was being litigated, Mayfair paid rentals regularly to the buyer who had an inferior right to purchase the property. Mayfair is under no obligation to pay any interests arising from this judgment to either Carmelo or Equatorial.

WHEREFORE, the petition for review of the decision of the Court of Appeals, dated June 23, 1992, in CA-G.R. CV No. 32918, is HEREBY DENIED. The Deed of Absolute Sale between petitioners Equatorial Realty Development, Inc. and Carmelo & Bauermann, Inc. is hereby deemed rescinded; petitioner Carmelo & Bauermann is ordered to return to petitioner Equatorial Realty Development the purchase price. The latter is directed to execute the deeds and documents necessary to return ownership to Carmelo and Bauermann of the disputed lots. Carmelo & Bauermann is ordered to allow Mayfair Theater, Inc. to buy the aforesaid lots for P11,300,000.00.

SO ORDERED.

Regalado, Davide, Jr., Bellosillo, Melo, Puno, Kapunan, Mendoza and Francisco, JJ., concur.

Narvasa, C.J., took no part.

G. R. No. 154278. December 27, 2002]

VICTORY LINER, INC. petitioner, vs. HEIRS OF ANDRES MALECDAN, Respondents.

D E C I S I O N

MENDOZA, J.:

This is a petition for review of the decision[1] of the Eighth Division of the Court of Appeals, which affirmed the decision[2] of the Regional Trial Court of Baguio City, Branch 5, in Civil Case No. 3082-R, ordering petitioner and its driver, Ricardo Joson, Jr., to pay damages to the heirs of Andres Malecdan, who had been killed after being hit by a bus while attempting to cross the National Highway in Barangay Nungnungan 2 in Cauayan, Isabela.

The facts of the case are as follows:

Petitioner is a common carrier. Private respondent Elena Malecdan is the widow of the deceased, while private respondents Veronica, Virginia, Mary Pauline, Arthur, Viola, Manuel and Valentin Malecdan are their children.

Andres Malecdan was a 75 year-old farmer residing in Barangay Nungnungan 2, Municipality of Cauayan, Province of Isabela.[3] On July 15, 1994, at around 7:00 p.m., while Andres was crossing the National Highway on his way home from the farm, a Dalin Liner bus on the southbound lane stopped to allow him and his carabao to pass. However, as Andres was crossing the highway, a bus of petitioner Victory Liner, driven by Ricardo C. Joson, Jr., bypassed the Dalin bus. In so doing, respondent hit the old man and the carabao on which he was riding. As a result, Andres Malecdan was thrown off the carabao, while the beast toppled over.[4] The Victory Liner bus sped past the old man, while the Dalin bus proceeded to its destination without helping him.

The incident was witnessed by Andres Malecdans neighbor, Virgilio Lorena, who was resting in a nearby waiting shed after working on his farm. Malecdan sustained a wound on his left shoulder, from which bone fragments protruded. He was taken by Lorena and another person to the Cagayan District Hospital where he died a few hours after arrival. [5] The carabao also died soon afterwards.[6] Lorena executed a sworn statement before the police authorities. Subsequently, a criminal complaint for reckless imprudence resulting in homicide and damage to property was filed against the Victory Liner bus driver Ricardo Joson, Jr.[7]

On October 5, 1994, private respondents brought this suit for damages in the Regional Trial Court, Branch 5, Baguio City,[8] which, in a decision rendered on July 17, 2000, found the driver guilty of gross negligence in the operation of his vehicle and Victory Liner, Inc. also guilty of gross negligence in the selection and supervision of Joson, Jr. Petitioner and its driver were held liable for damages. The dispositive portion of the trial courts decision reads:

WHEREFORE, judgment is hereby rendered ordering the defendants to pay, jointly and severally to the plaintiffs the amounts of:

a. P50,000.00 as death indemnity;

b. P88,339.00 for actual damages;

c. P200,000.00 for moral damages;

d. P50,000.00 as exemplary damages;

e. Thirty percent (30%) as attorneys fees of whatever amount that can be collected by the plaintiff; and

f. The costs of the suit.

The counterclaim of the defendant Victory Liner, Inc. against the plaintiffs and the third-party complaint of the same defendant against the Zenith Insurance Corporation are dismissed.

SO ORDERED.[9]

On appeal, the decision was affirmed by the Court of Appeals, with the modification that the award of attorneys fees was fixed at P50,000.00.[10]

Hence, this appeal raising the following issues:

I. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN AFFIRMING THE APPEALED DECISION OF THE REGIONAL TRIAL COURT GRANTING P200,000.00 AS MORAL DAMAGES WHICH IS DOUBLE THE P100,000.00 AS PRAYED FOR BY THE PRIVATE RESPONDENTS IN THEIR COMPLAINT AND IN GRANTING ACTUAL DAMAGES NOT SUPPORTED BY OFFICIAL RECEIPTS AND SPENT WAY BEYOND THE BURIAL OF THE DECEASED VICTIM.

II. WHETHER OR NOT THE AFFIRMATION BY THE HONORABLE COURT OF APPEALS OF THE APPEALED DECISION OF THE REGIONAL TRIAL COURT GRANTING THE AWARD OF MORAL AND EXEMPLARY DAMAGES AND ATTORNEYS FEES WHICH WERE NOT PROVED AND CONSIDERING THAT THERE IS NO FINDING OF BAD FAITH AND GROSS NEGLIGENCE ON THE PART OF THE PETITIONER WAS NOT ESTABLISHED, IS IN ACCORD WITH LAW AND JURISPRUDENCE.

III. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN AFFIRMING THE APPEALED DECISION OF THE REGIONAL TRIAL COURT WHICH DISREGARDED THE APPELLANTS TESTIMONIAL AND DOCUMENTARY EVIDENCE THAT IT HAS EXERCISED EXTRAORDINARY DILIGENCE IN THE SELECTION AND SUPERVISION OF ITS EMPLOYEES, OR STATED DIFFERENTLY, WHETHER OR NOT THE AFFIRMATION BY THE COURT OF APPEALS OF THE APPEALED DECISION OF THE TRIAL COURT THAT IS CONTRARY TO LAW AND JURISPRUDENCE CONSTITUTES GRAVE ABUSE AND EXCESS OF JURISDICTION.[11]

We find the appealed decision to be in order.

First. Victory Liner, Inc. no longer questions the findings of the Regional Trial Court that Andres Malecdan was injured as a result of the gross negligence of its driver, Ricardo Joson, Jr. What petitioner now questions is the finding that it (petitioner) failed to exercise the diligence of a good father of the family in the selection and supervision of its employee. Petitioner argues,

With all due respect, the assignment of three inspectors to check and remind the drivers of petitioner Victory Liner of its policies in a two-and-a-half hour driving distance, the installation of tachometers to monitor the speed of the bus all throughout the trip, the periodic monitoring and checking of the trips from one station to another through a trip ticket from station to station, the regular periodic conducting of safety and defensive driving [training sessions] for its drivers are concrete and physical proofs of the formulated operating standards, the implementation and monitoring of the same, designed for the exercise of due diligence of a good father of a family in the supervision of its employees.[12]

It explained that it did not present bus driver Joson, Jr. on the witness stands because he had been dismissed from the company after the incident, which it found was a breach in the company regulations. Petitioner blames private respondents for the death of their father, Andres Malecdan, who was already 75 years old, for allowing him to plough their field by himself.[13]

The contention has no merit.

Article 2176 provides:

Whoever by act or omission causes damage to another, there being fault or negligence, is obliged to pay for the damage done. Such fault or negligence, if there is no pre-existing contractual relation between the parties, is called a quasi-delict and is governed by the provisions of this Chapter.

Article 2180 provides for the solidary liability of an employer for the quasi-delict committed by an employee. The responsibility of employers for the negligence of their employees in the performance of their duties is primary and, therefore, the injured party may recover from the employers directly, regardless of the solvency of their employees.[14] The rationale for the rule on vicarious liability has been explained thus:

What has emerged as the modern justification for vicarious liability is a rule of policy, a deliberate allocation of a risk. The losses caused by the torts of employees, which as a practical matter are sure to occur in the conduct of the employers enterprise, are placed upon that enterprise itself, as a required cost of doing business. They are placed upon the employer because, having engaged in an enterprise, which will on the basis of all past experience involve harm to others through the tort of employees, and sought to profit by it, it is just that he, rather than the innocent injured plaintiff, should bear them; and because he is better able to absorb them and to distribute them, through prices, rates or liability insurance, to the public, and so to shift them to society, to the community at large. Added to this is the makeweight argument that an employer who is held strictly liable is under the greatest incentive to be careful in the selection, instruction and supervision of his servants, and to take every precaution to see that the enterprise is conducted safely.[15]

Employers may be relieved of responsibility for the negligent acts of their employees acting within the scope of their assigned task only if they can show that they observed all the diligence of a good father of a family to prevent damage.

[16] For this purpose, they have the burden of proving that they have indeed exercised such diligence, both in the selection of the employee and in the supervision of the performance of his duties.[17]

In the selection of prospective employees, employers are required to examine them as to their qualifications, experience and service records.[18] With respect to the supervision of employees, employers must formulate standard operating procedures, monitor their implementation and impose disciplinary measures for breaches thereof.[19] These facts must be shown by concrete proof, including documentary evidence.[20]

In the instant case, petitioner presented the results of Joson, Jr.s written examination,[21] actual driving tests,[22] x-ray examination,[23] psychological examination,[24] NBI clearance,[25] physical examination,[26] hematology examination,[27] urinalysis,[28] student driver training,[29] shop training,[30] birth certificate,[31] high school diploma[32] and reports from the General Maintenance Manager and the Personnel Manager showing that he had passed all the tests and training sessions and was ready to work as a professional driver.[33] However, as the trial court noted, petitioner did not present proof that Joson, Jr. had nine years of driving experience.[34]

Petitioner also presented testimonial evidence that drivers of the company were given seminars on driving safety at least twice a year.[35] Again, however, as the trial court noted there is no record of Joson, Jr. ever attending such a seminar.[36] Petitioner likewise failed to establish the speed of its buses during its daily trips or to submit in evidence the trip tickets, speed meters and reports of field inspectors. The finding of the trial court that petitioners bus was running at a very fast speed when it overtook the Dalin bus and hit the deceased was not disputed by petitioner. For these reasons, we hold that the trial court did not err in finding petitioner to be negligent in the supervision of its driver Joson, Jr.

Second. To justify an award of actual damages, there should be proof of the actual amount of loss incurred in connection with the death, wake or burial of the victim.[37] We cannot take into account receipts showing expenses incurred some time after the burial of the victim, such as expenses relating to the 9 th day, 40th day and 1st year death anniversaries.[38] In this case, the trial court awarded P88,339.00 as actual damages. While these were duly supported by receipts, these included the amount of P5,900.00, the cost of one pig which had been butchered for the 9th day death anniversary of the deceased. This item cannot be allowed. We, therefore, reduce the amount of actual damages to P82,439.00.00. The award of P200,000.00 for moral damages should likewise be reduced. The trial court found that the wife and children of the deceased underwent intense moral suffering as a result of the latters death.[39] Under Art. 2206 of the Civil Code, the spouse, legitimate children and illegitimate descendants and ascendants of the deceased may demand moral damages for mental anguish by reason of the death of the deceased. Under the circumstances of this case an award of P100,000.00 would be in keeping with the purpose of the law in allowing moral damages.[40]

On the other hand, the award of P50,000.00 for indemnity is in accordance with current rulings of the Court.[41]

Art. 2231 provides that exemplary damages may be recovered in cases involving quasi-delicts if the defendant acted with gross negligence. Exemplary damages are imposed not to enrich one party or impoverish another but to serve as a deterrent against or as a negative incentive to curb socially deleterious actions.[42] In this case, petitioners driver Joson, Jr. was grossly negligent in driving at such a high speed along the national highway and overtaking another vehicle which had stopped to allow a pedestrian to cross. Worse, after the accident, Joson, Jr. did not stop the bus to help the victim. Under the circumstances, we believe that the trial courts award of P50,000.00 as exemplary damages is proper.

Finally, private respondents are entitled to attorneys fees. Under Art. 2008 of the Civil Code, attorneys fees may be recovered when, as in the instant case, exemplary damages are awarded. In the recent case of Metro Manila Transit Corporation v. Court of Appeals,[43] we held an award of P50,000.00 as attorneys fees to be reasonable. Hence, private respondents are entitled to attorneys fees in that amount.

WHEREFORE, the decision of the Court of Appeals, dated January 17, 2002, is hereby AFFIRMED, with the MODIFICATION that petitioner Victory Liner, Inc. is ordered to pay the following amounts to the respondent heirs of Andres Malecdan:

1. Death indemnity in the amount of Fifty Thousand Pesos (P50,000.00);

2. Actual damages in the amount of Eighty-Two Thousand Four Hundred Thirty-Nine Pesos (P82,439.00);

3. Moral damages in the amount of One Hundred Thousand Pesos (P100,000.00);

4. Exemplary damages in the amount of Fifty Thousand Pesos (P50,000.00);

5. Attorneys fees in the amount of Fifty Thousand Pesos (P50,000.00); and

6. Costs of suit.

SO ORDERED.

Bellosillo, (Chairman), Quisumbing, Austria-Martinez, and Callejo, Sr., JJ., concur.

G.R. No. 181206               October 9, 2009

MEGAWORLD GLOBUS ASIA, INC., Petitioner, vs.MILA S. TANSECO, Respondent.

D E C I S I O N

CARPIO MORALES, J.:

On July 7, 1995, petitioner Megaworld Globus Asia, Inc. (Megaworld) and respondent Mila S. Tanseco (Tanseco) entered into a Contract to Buy and Sell1 a 224 square-meter (more or less) condominium unit at a pre-selling project, "The Salcedo Park," located along Senator Gil Puyat Avenue, Makati City.

The purchase price was P16,802,037.32, to be paid as follows: (1) 30% less the reservation fee of P100,000, or P4,940,611.19, by postdated check payable on July 14, 1995; (2) P9,241,120.50 through 30 equal monthly installments of P308,037.35 from August 14, 1995 to January 14, 1998; and (3) the balance of P2,520,305.63 on October 31, 1998, the stipulated delivery date of the unit; provided that if the construction is completed earlier, Tanseco would pay the balance within seven days from receipt of a notice of turnover.

Section 4 of the Contract to Buy and Sell provided for the construction schedule as follows:

4. CONSTRUCTION SCHEDULE – The construction of the Project and the unit/s herein purchased shall be completed and delivered not later than October 31, 1998 with additional grace period of six (6) months within which to complete the Project and the unit/s, barring delays due to fire, earthquakes, the elements, acts of God, war, civil disturbances, strikes or other labor disturbances, government and economic controls making it, among others, impossible or difficult to obtain the necessary materials, acts of third person, or any other cause or conditions beyond the control of the SELLER. In this event, the completion and delivery of the unit are deemed extended accordingly without liability on the part of the SELLER. The foregoing notwithstanding, the SELLER reserves the right to withdraw from this transaction and refund to the BUYER without interest the amounts received from him under this contract if for any reason not attributable to SELLER, such as but not limited to fire, storms, floods, earthquakes, rebellion, insurrection, wars, coup de etat, civil disturbances or for other reasons beyond its control, the Project may not be completed or it can only be completed at a financial loss to the SELLER. In any event, all construction on or of the Project shall remain the property of the SELLER. (Underscoring supplied)

Tanseco paid all installments due up to January, 1998, leaving unpaid the balance of P2,520,305.63 pending delivery of the unit.2 Megaworld, however, failed to deliver the unit within the stipulated period on October 31, 1998 or April 30, 1999, the last day of the six-month grace period.

A few days shy of three years later, Megaworld, by notice dated April 23, 2002 (notice of turnover), informed Tanseco that the unit was ready for inspection preparatory to delivery.3 Tanseco replied through counsel, by letter of May 6, 2002, that in view of Megaworld’s failure to deliver the unit on time, she was demanding the return of P14,281,731.70 representing the total installment payment she had made, with interest at 12% per annum from April 30, 1999, the expiration of the six-month grace period. Tanseco pointed out that none of the excepted causes of delay existed.4

Her demand having been unheeded, Tanseco filed on June 5, 2002 with the Housing and Land Use Regulatory Board’s (HLURB) Expanded National Capital Region Field Office a complaint against Megaworld for rescission of contract, refund of payment, and damages.5

In its Answer, Megaworld attributed the delay to the 1997 Asian financial crisis which was beyond its control; and argued that default had not set in, Tanseco not having made any judicial or extrajudicial demand for delivery before receipt of the notice of turnover.6

By Decision of May 28, 2003,7 the HLURB Arbiter dismissed Tanseco’s complaint for lack of cause of action, finding that Megaworld had effected delivery by the notice of turnover before Tanseco made a demand. Tanseco was thereupon ordered to pay Megaworld the balance of the purchase price, plus P25,000 as moral damages, P25,000 as exemplary damages, and P25,000 as attorney’s fees.

On appeal by Tanseco, the HLURB Board of Commissioners, by Decision of November 28, 2003,8 sustained the HLURB Arbiter’s Decision on the ground of laches for failure to demand rescission when the right thereto accrued. It deleted the award of damages, however. Tanseco’s Motion for Reconsideration having been denied,9 she appealed to the Office of the President which dismissed the appeal by Decision of April 28, 200610 for failure to show that the findings of the HLURB were tainted with grave abuse of discretion. Her Motion for Reconsideration having been denied by Resolution dated August 30, 2006,11 Tanseco filed a Petition for Review under Rule 43 with the Court of Appeals.12

By Decision of September 28, 2007,13 the appellate court granted Tanseco’s petition, disposing thus:

WHEREFORE, premises considered, petition is hereby GRANTED and the assailed May 28, 2003 decision of the HLURB Field Office, the November 28, 2003 decision of the HLURB Board of Commissioners in HLURB Case No. REM-A-030711-0162, the April 28, 2006 Decision and August 30, 2006 Resolution of the Office of the President in O.P. Case No. 05-I-318, are hereby REVERSED and SET ASIDE and a new one entered: (1) RESCINDING, as prayed for by TANSECO, the aggrieved party, the contract to buy and sell; (2) DIRECTING MEGAWORLD TO PAY TANSECO the amount she had paid totaling P14,281,731.70 with Twelve (12%) Percent interest per annum from October 31, 1998; (3) ORDERING MEGAWORLD TO PAY TANSECO P200,000.00 by way of exemplary damages; (4) ORDERING MEGAWORLD TO PAY TANSECO P200,000.00 as attorney’s fees; and (5) ORDERING MEGAWORLD TO PAY TANSECO the cost of suit. (Emphasis in the original; underscoring supplied)

The appellate court held that under Article 1169 of the Civil Code, no judicial or extrajudicial demand is needed to put the obligor in default if the contract, as in the herein parties’ contract, states the date when the obligation should be performed; that time was of the essence because Tanseco relied on Megaworld’s promise of timely delivery when she agreed to part with her money; that the delay should be reckoned from October 31, 1998, there being no force majeure to warrant the application of the April 30, 1999 alternative date; and that specific performance could not be ordered in lieu of rescission as the right to choose the remedy belongs to the aggrieved party.

The appellate court awarded Tanseco exemplary damages on a finding of bad faith on the part of Megaworld in forcing her to accept its long-delayed delivery; and attorney’s fees, she having been compelled to sue to protect her rights.

Its Motion for Reconsideration having been denied by Resolution of January 8, 2008,14 Megaworld filed the present Petition for Review on Certiorari, echoing its position before the HLURB, adding that Tanseco had not shown any basis for the award of damages and attorney’s fees.15

Tanseco, on the other hand, maintained her position too, and citing Megaworld’s bad faith which became evident when it insisted on making the delivery despite the long delay,16 insisted that she deserved the award of damages and attorney’s fees.

Article 1169 of the Civil Code provides:

Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extrajudicially demands from them the fulfillment of their obligation.

However, the demand by the creditor shall not be necessary in order that delay may exist:

(1) When the obligation or the law expressly so declares; or

(2) When from the nature and the circumstances of the obligation it appears that the designation of the time when the thing is to be delivered or the service is to be rendered was a controlling motive for the establishment of the contract; or

(3) When demand would be useless, as when the obligor has rendered it beyond his power to perform.

In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him. From the moment one of the parties fulfills his obligation, delay by the other begins. (Underscoring supplied)

The Contract to Buy and Sell of the parties contains reciprocal obligations, i.e., to complete and deliver the condominium unit on October 31, 1998 or six months thereafter on the part of Megaworld, and to pay the balance of the purchase price at or about the time of delivery on the part of Tanseco. Compliance by Megaworld with its obligation is determinative of compliance by Tanseco with her obligation to pay the balance of the purchase price. Megaworld having failed to comply with its obligation under the contract, it is liable therefor.17

That Megaworld’s sending of a notice of turnover preceded Tanseco’s demand for refund does not abate her cause. For demand would have been useless, Megaworld admittedly having failed in its obligation to deliver the unit on the agreed date.

Article 1174 of the Civil Code provides:

Art. 1174. Except in cases expressly specified by the law, or when it is otherwise declared by stipulation, or when the nature of the obligation requires the assumption of risk, no person shall be responsible for those events which could not be foreseen, or which, though foreseen, were inevitable.18

The Court cannot generalize the 1997 Asian financial crisis to be unforeseeable and beyond the control of a business corporation. A real estate enterprise engaged in the pre-selling of condominium units is concededly a master in projections on commodities and currency movements, as well as business risks. The fluctuating movement of the Philippine peso in the foreign exchange market is an everyday occurrence, hence, not an instance of caso fortuito.19

Megaworld’s excuse for its delay does not thus lie.

As for Megaworld’s argument that Tanseco’s claim is considered barred by laches on account of her belated demand, it does not lie too. Laches is a creation of equity and its application is controlled by equitable considerations.20 It bears noting that Tanseco religiously paid all the installments due up to January, 1998, whereas Megaworld reneged on its obligation to deliver within the stipulated period. A circumspect weighing of equitable considerations thus tilts the scale of justice in favor of Tanseco.

Pursuant to Section 23 of Presidential Decree No. 95721 which reads:

Sec. 23. Non-Forfeiture of Payments. - No installment payment made by a buyer in a subdivision or condominium project for the lot or unit he contracted to buy shall be forfeited in favor of the owner or developer when the buyer, after due notice to the owner or developer, desists from further payment due to the failure of the owner or developer to develop the subdivision or condominium project according to the approved plans and within the time limit for complying with the same. Such buyer may, at his option, be reimbursed the total amount paid including amortization interests but excluding delinquency interests, with interest thereon at the legal rate. (Emphasis and underscoring supplied),

Tanseco is, as thus prayed for, entitled to be reimbursed the total amount she paid Megaworld.

While the appellate court correctly awarded P14,281,731.70 then, the interest rate should, however, be 6% per annum accruing from the date of demand on May 6, 2002, and then 12% per annum from the time this judgment becomes final and executory, conformably with Eastern Shipping Lines, Inc. v. Court of Appeals.22

The award of P200,000 attorney’s fees and of costs of suit is in order too, the parties having stipulated in the Contract to Buy and Sell that these shall be borne by the losing party in a suit based thereon, 23 not to mention that Tanseco was

compelled to retain the services of counsel to protect her interest. And so is the award of exemplary damages. With pre-selling ventures mushrooming in the metropolis, there is an increasing need to correct the insidious practice of real estate companies of proffering all sorts of empty promises to entice innocent buyers and ensure the profitability of their projects.

The Court finds the appellate court’s award of P200,000 as exemplary damages excessive, however. Exemplary damages are imposed not to enrich one party or impoverish another but to serve as a deterrent against or as a negative incentive to curb socially deleterious actions.24 The Court finds that P100,000 is reasonable in this case.

Finally, since Article 119125 of the Civil Code does not apply to a contract to buy and sell, the suspensive condition of full payment of the purchase price not having occurred to trigger the obligation to convey title, cancellation, not rescission, of the contract is thus the correct remedy in the premises.26

WHEREFORE, the challenged Decision of the Court of Appeals is, in light of the foregoing, AFFIRMED with MODIFICATION.

As modified, the dispositive portion of the Decision reads:

The July 7, 1995 Contract to Buy and Sell between the parties is cancelled. Petitioner, Megaworld Globus Asia, Inc., is directed to pay respondent, Mila S. Tanseco, the amount of P14,281,731.70, to bear 6% interest per annum starting May 6, 2002 and 12% interest per annum from the time the judgment becomes final and executory; and to pay P200,000 attorney’s fees, P 100,000 exemplary damages, and costs of suit.

Costs against petitioner. SO ORDERED.

G.R. No. L-25906 May 28, 1970

PEDRO D. DIOQUINO, plaintiff-appellee, vs.FEDERICO LAUREANO, AIDA DE LAUREANO and JUANITO LAUREANO, defendants-appellants.

FERNANDO, J.:

The present lawsuit had its origin in a relationship, if it could be called such, the use of a car owned by plaintiff Pedro D. Dioquino by defendant Federico Laureano, clearly of a character casual and temporary but unfortunately married by an occurrence resulting in its windshield being damaged. A stone thrown by a boy who, with his other companions, was thus engaged in what undoubtedly for them must have been mistakenly thought to be a none too harmful prank did not miss its mark. Plaintiff would hold defendant Federico Laureano accountable for the loss thus sustained, including in the action filed the wife, Aida de Laureano, and the father, Juanito Laureano. Plaintiff prevail in the lower court, the judgment however going only against the principal defendant, his spouse and his father being absolved of any responsibility. Nonetheless, all three of them appealed directly to us, raising two questions of law, the first being the failure of the lower court to dismiss such a suit as no liability could have been incurred as a result of a fortuitous event and the other being its failure to award damages against plaintiff for the unwarranted inclusion of the wife and the father in this litigation. We agree that the lower court ought to have dismissed the suit, but it does not follow that thereby damages for the inclusion of the above two other parties in the complaint should have been awarded appellants.

The facts as found by the lower court follow: "Attorney Pedro Dioquino, a practicing lawyer of Masbate, is the owner of a car. On March 31, 1964, he went to the office of the MVO, Masbate, to register the same. He met the defendant Federico Laureano, a patrol officer of said MVO office, who was waiting for a jeepney to take him to the office of the Provincial Commander, PC, Masbate. Attorney Dioquino requested the defendant Federico Laureano to introduce him to one of the clerks in the MVO Office, who could facilitate the registration of his car and the request was graciously attended to. Defendant Laureano rode on the car of Atty. Dioquino on his way to the P.C. Barracks at Masbate. While about to reach their destination, the car driven by plaintiff's driver and with defendant Federico Laureano as the sole passenger was stoned by some 'mischievous boys,' and its windshield was broken. Defendant Federico Laureano chased the boys and he was able to catch one of them. The boy was taken to Atty. Dioquino [and] admitted having thrown the stone that broke the car's windshield. The plaintiff and the defendant Federico Laureano with the boy returned to the P.C. barracks and the father of the boy was called, but no satisfactory arrangements [were] made about the damage to the windshield." 1

It was likewise noted in the decision now on appeal: "The defendant Federico Laureano refused to file any charges against the boy and his parents because he thought that the stone-throwing was merely accidental and that it was due to force majeure. So he did not want to take any action and after delaying the settlement, after perhaps consulting a lawyer, the defendant Federico Laureano refused to pay the windshield himself and challenged that the case be brought to court for judicial adjudication. There is no question that the plaintiff tried to convince the defendant Federico Laureano just to pay the value of the windshield and he even came to the extent of asking the wife to convince her husband to settle the matter amicably but the defendant Federico Laureano refused to make any settlement, clinging [to] the belief that he could not be held liable because a minor child threw a stone accidentally on the windshield and therefore, the same was due to force majeure." 2

1. The law being what it is, such a belief on the part of defendant Federico Laureano was justified. The express language of Art. 1174 of the present Civil Code which is a restatement of Art. 1105 of the Old Civil Code, except for the addition of the nature of an obligation requiring the assumption of risk, compels such a conclusion. It reads thus: "Except in cases expressly specified by the law, or when it is otherwise declared by stipulation, or when the nature of the obligation requires the assumption of risk, no person shall be responsible for those events which could not be, foreseen, or which, though foreseen were inevitable." Even under the old Civil Code then, as stressed by us in the first decision dating back to 1908, in an opinion by Justice Mapa, the rule was well-settled that in the absence of a legal provision or an express covenant, "no one should be held to account for fortuitous cases." 3 Its basis, as Justice

Moreland stressed, is the Roman law principle major casus est, cui humana infirmitas resistere non potest. 4

Authorities of repute are in agreement, more specifically concerning an obligation arising from contract "that some extraordinary circumstance independent of the will of the obligor, or of his employees, is an essential element of a caso fortuito." 5 If it could be shown that such indeed was the case, liability is ruled out. There is no requirement of "diligence beyond what human care and foresight can provide." 6

The error committed by the lower court in holding defendant Federico Laureano liable appears to be thus obvious. Its own findings of fact repel the motion that he should be made to respond in damages to the plaintiff for the broken windshield. What happened was clearly unforeseen. It was a fortuitous event resulting in a loss which must be borne by the owner of the car. An element of reasonableness in the law would be manifestly lacking if, on the circumstances as thus disclosed, legal responsibility could be imputed to an individual in the situation of defendant Laureano. Art. 1174 of the Civil Code guards against the possibility of its being visited with such a reproach. Unfortunately, the lower court was of a different mind and thus failed to heed its command.

It was misled, apparently, by the inclusion of the exemption from the operation of such a provision of a party assuming the risk, considering the nature of the obligation undertaken. A more careful analysis would have led the lower court to a different and correct interpretation. The very wording of the law dispels any doubt that what is therein contemplated is the resulting liability even if caused by a fortuitous event where the party charged may be considered as having assumed the risk incident in the nature of the obligation to be performed. It would be an affront, not only to the logic but to the realities of the situation, if in the light of what transpired, as found by the lower court, defendant Federico Laureano could be held as bound to assume a risk of this nature. There was no such obligation on his part.

Reference to the leading case of Republic v. Luzon Stevedoring Corp. 7 will illustrate when the nature of the obligation is such that the risk could be considered as having been assumed. As noted in the opinion of Justice J.B.L. Reyes, speaking for the Court: "The appellant strongly stresses the precautions taken by it on the day in question: that it assigned two of its most powerful tugboats to tow down river its barge L-1892; that it assigned to the task the more competent and experienced among its patrons, had the towlines, engines and equipment double-checked and inspected; that it instructed its patrons to take extra-precautions; and concludes that it had done all it was called to do, and that the accident, therefore, should be held due to force majeure or fortuitous event." Its next paragraph explained clearly why the defense of caso fortuito or force majeure does not lie. Thus: "These very precautions, however, completely destroy the appellant's defense. For caso fortuito or force majeure (which in law are identical in so far as they exempt an obligor from liability) by definition, are extraordinary events not foreseeable or avoidable, 'events that could not be foreseen, or which, though foreseen, were inevitable' (Art. 1174, Civil Code of the Philippines). It is, therefore, not enough that the event should not have been foreseen or participated, as is commonly believed, but it must be one impossible to foresee or to avoid. The mere difficulty to foresee the happening is not impossibility to foresee the same: un hecho no constituye caso fortuito por la sola circunstancia de que su existencia haga mas dificil o mas onerosa la accion diligente del presente ofensor' (Peirano Facio, Responsibilidad Extra-contractual, p. 465; Mazeaud, Traite de la Responsibilite Civile, Vol. 2, sec. 1569). The very measures adopted by appellant prove that the possibility of danger was not only foreseeable, but actually foreseen, and was not caso fortuito."

In that case then, the risk was quite evident and the nature of the obligation such that a party could rightfully be deemed as having assumed it. It is not so in the case before us. It is anything but that. If the lower court, therefore, were duly mindful of what this particular legal provision contemplates, it could not have reached the conclusion that defendant Federico Laureano could be held liable. To repeat, that was clear error on its part.

2. Appellants do not stop there. It does not suffice for them that defendant Federico Laureano would be freed from liability. They would go farther. They would take plaintiff to task for his complaint having joined the wife, Aida de Laureano, and the father, Juanita Laureano. They were far from satisfied with the lower court's absolving these two from any financial responsibility. Appellants would have plaintiff pay damages for their inclusion in this litigation. We are not disposed to view the matter thus.

It is to be admitted, of course, that plaintiff, who is a member of the bar, ought to have exercised greater care in selecting the parties against whom he would proceed. It may be said that his view of the law that would consider defendant Federico Laureano liable on the facts as thus disclosed, while erroneous, is not bereft of plausibility. Even the lower court, mistakenly of course, entertained similar view. For plaintiff, however, to have included the wife and the father would seem to indicate that his understanding of the law is not all that it ought to have been.

Plaintiff apparently was not entirely unaware that the inclusion in the suit filed by him was characterized by unorthodoxy. He did attempt to lend some color of justification by explicitly setting forth that the father was joined as party defendant in the case as he was the administrator of the inheritance of an undivided property to which defendant Federico Laureano could lay claim and that the wife was likewise proceeded against because the conjugal partnership would be made to respond for whatever liability would be adjudicated against the husband.

It cannot be said that such an attempt at justification is impressed with a high persuasive quality. Far from it. Nonetheless, mistaken as plaintiff apparently was, it cannot be concluded that he was prompted solely by the desire to inflict needless and unjustified vexation on them. Considering the equities of the situation, plaintiff having suffered a pecuniary loss which, while resulting from a fortuitous event, perhaps would not have occurred at all had not defendant Federico Laureano borrowed his car, we, feel that he is not to be penalized further by his mistaken view of the law in including them in his complaint. Well-worth paraphrasing is the thought expressed in a United States Supreme Court decision as to the existence of an abiding and fundamental principle that the expenses and annoyance of litigation form part of the social burden of living in a society which seeks to attain social control through law. 8

WHEREFORE, the decision of the lower court of November 2, 1965 insofar as it orders defendant Federico Laureano to pay plaintiff the amount of P30,000.00 as damages plus the payment of costs, is hereby reversed. It is affirmed insofar as it dismissed the case against the other two defendants, Juanita Laureano and Aida de Laureano, and declared that no moral damages should be awarded the parties. Without pronouncement as to costs.

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Teehankee, Barredo and Villamor, JJ., concur.

Castro. J., is on leave.

G.R. No. 126204            November 20, 2001

NATIONAL POWER CORPORATION, petitioner, vs.PHILIPP BROTHERS OCEANIC, INC., respondent.

SANDOVAL-GUTIERREZ, J.:

Where a person merely uses a right pertaining to him, without bad faith or intent to injure, the fact that damages are thereby suffered by another will not make him liable.1

This principle finds useful application to the present case.

Before us is a petition for review of the Decision2 dated August 27, 1996 of the Court of Appeals affirming in toto the Decision3 dated January 16, 1992 of the Regional Trial Court, Branch 57, Makati City.

The facts are:

On May 14, 1987, the National Power Corporation (NAPOCOR) issued invitations to bid for the supply and delivery of 120,000 metric tons of imported coal for its Batangas Coal-Fired Thermal Power Plant in Calaca, Batangas. The Philipp Brothers Oceanic, Inc. (PHIBRO) prequalified and was allowed to participate as one of the bidders. After the public bidding was conducted, PHIBRO's bid was accepted. NAPOCOR's acceptance was conveyed in a letter dated July 8, 1987, which was received by PHIBRO on July 15, 1987.The "Bidding Terms and Specifications" 4 provide for the manner of shipment of coals, thus:

"SECTION V

SHIPMENT

The winning TENDERER who then becomes the SELLER shall arrange and provide gearless bulk carrier for the shipment of coal to arrive at discharging port on or before thirty (30) calendar days after receipt of the Letter of Credit by the SELLER or its nominee as per Section XIV hereof to meet the vessel arrival schedules at Calaca, Batangas, Philippines as follows:

60,000 +/ - 10 % July 20, 1987

60,000 +/ - 10% September 4, 1987"5

On July 10, 1987, PHIBRO sent word to NAPOCOR that industrial disputes might soon plague Australia, the shipment's point of origin, which could seriously hamper PHIBRO's ability to supply the needed coal.6 From July 23 to July 31, 1987, PHIBRO again apprised NAPOCOR of the situation in Australia, particularly informing the latter that the ship owners therein are not willing to load cargo unless a "strike-free" clause is incorporated in the charter party or the contract of carriage.7 In order to hasten the transfer of coal, PHIBRO proposed to NAPOCOR that they equally share the burden of a "strike-free" clause. NAPOCOR refused.

On August 6, 1987, PHIBRO received from NAPOCOR a confirmed and workable letter of credit. Instead of delivering the coal on or before the thirtieth day after receipt of the Letter of Credit, as agreed upon by the parties in the July contract, PHIBRO effected its first shipment only on November 17, 1987.

Consequently, in October 1987, NAPOCOR once more advertised for the delivery of coal to its Calaca thermal plant. PHIBRO participated anew in this subsequent bidding. On November 24, 1987, NAPOCOR disapproved PHIBRO's application for pre-qualification to bid for not meeting the minimum requirements.8 Upon further inquiry, PHIBRO found that the real reason for the disapproval was its purported failure to satisfy NAPOCOR's demand for damages due to the delay in the delivery of the first coal shipment.

This prompted PHIBRO to file an action for damages with application for injunction against NAPOCOR with the Regional Trial Court, Branch 57, Makati City.9 In its complaint, PHIBRO alleged that NAPOCOR's act of disqualifying it in the October 1987 bidding and in all subsequent biddings was tainted with malice and bad faith. PHIBRO prayed for actual, moral and exemplary damages and attorney's fees.

In its answer, NAPOCOR averred that the strikes in Australia could not be invoked as reason for the delay in the delivery of coal because PHIBRO itself admitted that as of July 28, 1987 those strikes had already ceased. And, even assuming that the strikes were still ongoing, PHIBRO should have shouldered the burden of a "strike-free" clause because their contract was "C and F Calaca, Batangas, Philippines," meaning, the cost and freight from the point of origin until the point of destination would be for the account of PHIBRO. Furthermore, NAPOCOR claimed that due to PHIBRO's failure to deliver the coal on time, it was compelled to purchase coal from ASEA at a higher price. NAPOCOR claimed for actual damages in the amount of P12,436,185.73, representing the increase in the price of coal, and a claim of P500,000.00 as litigation expenses.10

Thereafter, trial on the merits ensued.

On January 16, 1992, the trial court rendered a decision in favor of PHIBRO, the dispositive portion of which reads:

"WHEREFORE, judgment is hereby rendered in favor of plaintiff Philipp Brothers Oceanic Inc. (PHIBRO) and against the defendant National Power Corporation (NAPOCOR) ordering the said defendant NAPOCOR:

1. To reinstate Philipp Brothers Oceanic, Inc. (PHIBRO) in the defendant National Power Corporation's list of accredited bidders and allow PHIBRO to participate in any and all future tenders of National Power Corporation for the supply and delivery of imported steam coal;

2. To pay Philipp Brothers Oceanic, Inc. (PHIBRO);

a. The peso equivalent at the time of payment of $864,000 as actual damages,

b. The peso equivalent at the time of payment of $100,000 as moral damages;

c. The peso equivalent at the time of payment of $50,000 as exemplary damages;

d. The peso equivalent at the time of payment of $73,231.91 as reimbursement for expenses, cost of litigation and attorney's fees;

3. To pay the costs of suit;

4. The counterclaims of defendant NAPOCOR are dismissed for lack of merit.

SO ORDERED."11

Unsatisfied, NAPOCOR, through the Solicitor General, elevated the case to the Court of Appeals. On August 27, 1996, the Court of Appeals rendered a Decision affirming in toto the Decision of the Regional Trial Court. It ratiocinated that:

"There is ample evidence to show that although PHIBRO's delivery of the shipment of coal was delayed, the delay was in fact caused by a) Napocor's own delay in opening a workable letter of credit; and b) the strikes which plaqued the Australian coal industry from the first week of July to the third week of September 1987. Strikes are included in the definition of force majeure in Section XVII of the Bidding Terms and Specifications, (supra), so Phibro is not liable for any delay caused thereby.

Phibro was informed of the acceptance of its bid on July 8, 1987. Delivery of coal was to be effected thirty (30) days from Napocor's opening of a confirmed and workable letter of credit. Napocor was only able to do so on August 6, 1987.

By that time, Australia's coal industry was in the middle of a seething controversy and unrest, occasioned by strikes, overtime bans, mine stoppages. The origin, the scope and the effects of this industrial unrest are lucidly described in the uncontroverted testimony of James Archibald, an employee of Phibro and member of the Export Committee of the Australian Coal Association during the time these events transpired.

xxx           xxx           xxx

The records also attest that Phibro periodically informed Napocor of these developments as early as July 1, 1987, even before the bid was approved. Yet, Napocor did not forthwith open the letter of credit in order to avoid delay which might be caused by the strikes and their after-effects.

"Strikes" are undoubtedly included in the force majeure clause of the Bidding Terms and Specifications (supra). The renowned civilist, Prof. Arturo Tolentino, defines force majeure as "an event which takes place by accident and could not have been foreseen." (Civil Code of the Philippines, Volume IV, Obligations and Contracts, 126, [1991]) He further states:

"Fortuitous events may be produced by two general causes: (1) by Nature, such as earthquakes, storms, floods, epidemics, fires, etc., and (2) by the act of man, such as an armed invasion, attack by bandits, governmental prohibitions, robbery, etc."

Tolentino adds that the term generally applies, broadly speaking, to natural accidents. In order that acts of man such as a strike, may constitute fortuitous event, it is necessary that they have the force of an imposition which the debtor could not have resisted. He cites a parallel example in the case of Philippine National Bank v. Court of Appeals, 94 SCRA 357 (1979), wherein the Supreme Court said that the outbreak of war which prevents performance exempts a party from liability.

Hence, by law and by stipulation of the parties, the strikes which took place in Australia from the first week of July to the third week of September, 1987, exempted Phibro from the effects of delay of the delivery of the shipment of coal."12

Twice thwarted, NAPOCOR comes to us via a petition for review ascribing to the Court of Appeals the following errors:

I"Respondent Court of Appeals gravely and seriously erred in concluding and so holding that PHIBRO's delay in the delivery of imported coal was due to NAPOCOR's alleged delay in opening a letter of credit and to force majeure, and not to PHIBRO's own deliberate acts and faults."13

II"Respondent Court of Appeals gravely and seriously erred in concluding and so holding that NAPOCOR acted maliciously and unjustifiably in disqualifying PHIBRO from participating in the December 8, 1987 and future biddings for the supply of imported coal despite the existence of valid grounds therefor such as serious impairment of its track record."14

III"Respondent Court of Appeals gravely and seriously erred in concluding and so holding that PHIBRO was entitled to injunctive relief, to actual or compensatory, moral and exemplary damages, attorney's fees and litigation expenses despite the clear absence of legal and factual bases for such award."15

IV"Respondent Court of Appeals gravely and seriously erred in absolving PHIBRO from any liability for damages to NAPOCOR for its unjustified and deliberate refusal and/or failure to deliver the contracted imported coal within the stipulated period."16

V"Respondent Court of Appeals gravely and seriously erred in dismissing NAPOCOR's counterclaims for damages and litigation expenses."17

It is axiomatic that only questions of law, not questions of fact, may be raised before this Court in a petition for review under Rule 45 of the Rules of Court.18 The findings of facts of the Court of Appeals are conclusive and binding on this Court19 and they carry even more weight when the said court affirms the factual findings of the trial court.20 Stated differently, the findings of the Court of .Appeals, by itself, which are supported by substantial evidence, are almost beyond the power of review by this Court.21

With the foregoing settled jurisprudence, we find it pointless to delve lengthily on the factual issues raised by petitioner. The existence of strikes in Australia having been duly established in the lower courts, we are left only with the burden of determining whether or not NAPOCOR acted wrongfully or with bad faith in disqualifying PHIBRO from participating in the subsequent public bidding.

Let us consider the case in its proper perspective.

The Court of Appeals is justified in sustaining the Regional Trial Court's decision exonerating PHIBRO from any liability for damages to NAPOCOR as it was clearly established from the evidence, testimonial and documentary, that what prevented PHIBRO from complying with its obligation under the July 1987 contract was the industrial disputes which besieged Australia during that time. Extant in our Civil Code is the rule that no person shall be responsible for those events which could not be foreseen, or which, though foreseen, were inevitable.22 This means that when an obligor is unable to fulfill his obligation because of a fortuitous event or force majeure, he cannot be held liable for damages for non-performance.23

In addition to the above legal precept, it is worthy to note that PHIBRO and NAPOCOR explicitly agreed in Section XVII of the "Bidding Terms and Specifications"24 that "neither seller (PHIBRO) nor buyer (NAPOCOR) shall be liable for any delay in or failure of the performance of its obligations, other than the payment of money due, if any such delay or failure is due to Force Majeure." Specifically, they defined force majeure as "any disabling cause beyond the control of and without fault or negligence of the party, which causes may include but are not restricted to Acts of God or of the public enemy; acts of the Government in either its sovereign or contractual capacity; governmental restrictions; strikes, fires, floods, wars, typhoons, storms, epidemics and quarantine restrictions."

The law is clear and so is the contract between NAPOCOR and PHIBRO. Therefore, we have no reason to rule otherwise.

However, proceeding from the premise that PHIBRO was prevented by force majeure from complying with its obligation, does it necessarily follow that NAPOCOR acted unjustly, capriciously, and unfairly in disapproving PHIBRO's application for pre-qualification to bid?

First, it must be stressed that NAPOCOR was not bound under any contract to approve PHIBRO's pre-qualification requirements. In fact, NAPOCOR had expressly reserved its right to reject bids. The Instruction to Bidders found in the "Post-Qualification Documents/Specifications for the Supply and Delivery of Coal for the Batangas Coal-Fired Thermal Power Plant I at Calaca, Batangas Philippines,"25 is explicit, thus:

"IB-17 RESERVATION OF NAPOCOR TO REJECT BIDS

NAPOCOR reserves the right to reject any or all bids, to waive any minor informality in the bids received. The right is also reserved to reject the bids of any bidder who has previously failed to properly perform or complete on time any and all contracts for delivery of coal or any supply undertaken by a bidder."26 (Emphasis supplied)

This Court has held that where the right to reject is so reserved, the lowest bid or any bid for that matter may be rejected on a mere technicality.27 And where the government as advertiser, availing itself of that right, makes its choice in rejecting any or all bids, the losing bidder has no cause to complain nor right to dispute that choice unless an unfairness or injustice is shown. Accordingly, a bidder has no ground of action to compel the Government to award the contract in his favor, nor to compel it to accept his bid. Even the lowest bid or any bid may be rejected.28 In Celeste v. Court of Appeals,29 we had the occasion to rule:

"Moreover, paragraph 15 of the Instructions to Bidders states that 'the Government hereby reserves the right to reject any or all bids submitted.' In the case of A.C. Esguerra and Sons v. Aytona, 4 SCRA 1245, 1249 (1962), we held:

'x x x [I]n the invitation to bid, there is a condition imposed upon the bidders to the effect that the bidders shall be subject to the right of the government to reject any and all bids subject to its discretion. Here the government has made its choice, and unless an unfairness or injustice is shown, the losing bidders have no cause to complain, nor right to dispute that choice.'

Since there is no evidence to prove bad faith and arbitrariness on the part of the petitioners in evaluating the bids, we rule that the private respondents are not entitled to damages representing lost profits." (Emphasis supplied)

Verily, a reservation of the government of its right to reject any bid, generally vests in the authorities a wide discretion as to who is the best and most advantageous bidder. The exercise of such discretion involves inquiry, investigation, comparison, deliberation and decision, which are quasi-judicial functions, and when honestly exercised, may not be reviewed by the court.30 In Bureau Veritas v. Office of the President,31 we decreed:

"The discretion to accept or reject a bid and award contracts is vested in the Government agencies entrusted with that function. The discretion given to the authorities on this matter is of such wide latitude that the Courts will not interfere therewith, unless it is apparent that it is used as a shield to a fraudulent award. (Jalandoni v. NARRA, 108 Phil. 486 [1960]) x x x. The exercise of this discretion is a policy decision that necessitates prior inquiry, investigation, comparison, evaluation, and deliberation. This task can best be discharged by the Government agencies concerned, not by the Courts. The role of the Courts is to ascertain whether a branch or instrumentality of the Government has transgresses its constitutional boundaries. But the Courts will not interfere with executive or legislative discretion exercised within those boundaries. Otherwise, it strays into the realm of policy decision-making. x x x." (Emphasis supplied)

Owing to the discretionary character of the right involved in this case, the propriety of NAPOCOR's act should therefore be judged on the basis of the general principles regulating human relations, the forefront provision of which is Article 19 of the Civil Code which provides that "every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith."32 Accordingly, a person will be protected only when he acts in the legitimate exercise of his right, that is, when he acts with prudence and in good faith; but not when he acts with negligence or abuse.33

Did NAPOCOR abuse its right or act unjustly in disqualifying PHIBRO from the public bidding?

We rule in the negative.

In practice, courts, in the sound exercise of their discretion, will have to determine under all the facts and circumstances when the exercise of a right is unjust, or when there has been an abuse of right.34

We went over the record of the case with painstaking solicitude and we are convinced that NAPOCOR's act of disapproving PHIBRO's application for pre-qualification to bid was without any intent to injure or a purposive motive to perpetrate damage. Apparently, NAPOCOR acted on the strong conviction that PHIBRO had a "seriously-impaired" track record. NAPOCOR cannot be faulted from believing so. At this juncture, it is worth mentioning that at the time NAPOCOR issued its subsequent Invitation to Bid, i.e., October 1987, PHIBRO had not yet delivered the first shipment of coal under the July 1987 contract, which was due on or before September 5, 1987. Naturally, NAPOCOR is justified in entertaining doubts on PHIBRO's qualification or capability to assume an obligation under a new contract.

Moreover, PHIBRO's actuation in 1987 raised doubts as to the real situation of the coal industry in Australia. It appears from the records that when NAPOCOR was constrained to consider an offer from another coal supplier (ASEA) at a price of US$33.44 per metric ton, PHIBRO unexpectedly offered the immediate delivery of 60,000 metric tons of Ulan steam coal at US$31.00 per metric ton for arrival at Calaca, Batangas on September 20-21, 1987."35 Of course, NAPOCOR had reason to ponder — how come PHIBRO could assure the immediate delivery of 60,000 metric tons of coal from the same source to arrive at Calaca not later than September 20/21, 1987 but it could not deliver the coal it had undertaken under its contract?

Significantly, one characteristic of a fortuitous event, in a legal sense, and consequently in relations to contracts, is that "the concurrence must be such as to render it impossible for the debtor to fulfill his obligation in a normal manner."36 Faced with the above circumstance, NAPOCOR is justified in assuming that, may be, there was really no fortuitous event or force majeure which could render it impossible for PHIBRO to effect the delivery of coal. Correspondingly, it is also justified in treating PHIBRO's failure to deliver a serious impairment of its track record. That the trial court, thereafter, found PHIBRO's unexpected offer actually a result of its desire to minimize losses on the part of NAPOCOR is inconsequential. In determining the existence of good faith, the yardstick is the frame of mind of the actor at the time he committed the act, disregarding actualities or facts outside his knowledge. We cannot fault NAPOCOR if it mistook PHIBRO's unexpected offer a mere attempt on the latter's part to undercut ASEA or an indication of PHIBRO's inconsistency. The circumstances warrant such contemplation.

That NAPOCOR believed all along that PHIBRO's failure to deliver on time was unfounded is manifest from its letters37 reminding PHIBRO that it was bound to deliver the coal within 30 days from its (PHIBRO's) receipt of the Letter of Credit, otherwise it would be constrained to take legal action. The same honest belief can be deduced from NAPOCOR's Board Resolution, thus:

"On the legal aspect, Management stressed that failure of PBO to deliver under the contract makes them liable for damages, considering that the reasons invoked were not valid. The measure of the damages will be limited to actual and compensatory damages. However, it was reported that Philipp Brothers advised they would like to have continuous business relation with NPC so they are willing to sit down or even proposed that the case be submitted to the Department of Justice as to avoid a court action or arbitration.

xxx           xxx           xxx

On the technical-economic aspect, Management claims that if PBO delivers in November 1987 and January 1988, there are some advantages. If PBO reacts to any legal action and fails to deliver, the options are: one, to use 100% Semirara and second, to go into urgent coal order. The first option will result in a 75 MW derating and oil will be needed as supplement. We will stand to lose around P30 M. On the other hand, if NPC goes into an urgent coal order, there will be an additional expense of $786,000 or P16.11 M, considering the price of the latest purchase with ASEA. On both points, reliability is decreased."38

The very purpose of requiring a bidder to furnish the awarding authority its pre-qualification documents is to ensure that only those "responsible" and "qualified" bidders could bid and be awarded with government contracts. It bears stressing that the award of a contract is measured not solely by the smallest amount of bid for its performance, but also by the "responsibility" of the bidder. Consequently, the integrity, honesty, and trustworthiness of the bidder is to be considered. An awarding official is justified in considering a bidder not qualified or not responsible if he has previously defrauded the public in such contracts or if, on the evidence before him, the official bona fide believes the bidder has committed such fraud, despite the fact that there is yet no judicial determination to that effect.39

Otherwise stated, if the awarding body bona fide believes that a bidder has seriously impaired its track record because of a particular conduct, it is justified in disqualifying the bidder. This policy is necessary to protect the interest of the awarding body against irresponsible bidders.

Thus, one who acted pursuant to the sincere belief that another willfully committed an act prejudicial to the interest of the government cannot be considered to have acted in bad faith. Bad faith has always been a question of intention. It is that corrupt motive that operates in the mind. As understood in law, it contemplates a state of mind affirmatively operating with furtive design or with some motive of self-interest or ill-will or for ulterior purpose.40 While confined in the realm of thought, its presence may be ascertained through the party's actuation or through circumstantial evidence.41 The circumstances under which NAPOCOR disapproved PHIBRO's pre-qualification to bid do not show an intention to cause damage to the latter. The measure it adopted was one of self-protection. Consequently, we cannot penalize NAPOCOR for the course of action it took. NAPOCOR cannot be made liable for actual, moral and exemplary damages.

Corollarily, in awarding to PHIBRO actual damages in the amount of $864,000, the Regional Trial Court computed what could have been the profits of PHIBRO had NAPOCOR allowed it to participate in the subsequent public bidding. It ruled that "PHIBRO would have won the tenders for the supply of about 960,000 metric tons out of at least 1,200,000 metric tons" from the public bidding of December 1987 to 1990. We quote the trial court's ruling, thus:

". . . PHIBRO was unjustly excluded from participating in at least five (5) tenders beginning December 1987 to 1990, for the supply and delivery of imported coal with a total volume of about 1,200,000 metric tons valued at no less than US$32 Million. (Exhs. "AA," "AA-1-1," to "AA-2"). The price of imported coal for delivery in 1988 was quoted in June 1988 by bidders at US$41.35 to US$43.95 per metric ton (Exh. "JJ"); in September 1988 at US$41.50 to US$49.50 per metric ton (Exh. "J-1"); in November 1988 at US$39.00 to US$48.50 per metric ton (Exh. "J-2") and for the 1989 deliveries, at US$44.35 to US$47.35 per metric ton (Exh. "J-3") and US$38.00 to US$48.25 per metric ton in September 1990 (Exh. "JJ-6" and "JJ-7"). PHIBRO would have won the tenders for the supply and delivery of about 960,000 metric tons of coal out of at least 1,200,000 metric tons awarded during said period based on its proven track record of 80%. The Court, therefore finds that as a result of its disqualification, PHIBRO suffered damages equivalent to its standard 3% margin in 960,000 metric tons of coal at the most conservative price of US$30,000 per metric ton, or the total of US$864,000 which PHIBRO would have earned had it been allowed to participate in biddings in which it was disqualified and in subsequent tenders for supply and delivery of imported coal."

We find this to be erroneous.

Basic is the rule that to recover actual damages, the amount of loss must not only be capable of proof but must actually be proven with reasonable degree of certainty, premised upon competent proof or best evidence obtainable of the actual amount thereof.42 A court cannot merely rely on speculations, conjectures, or guesswork as to the fact and amount of damages. Thus, while indemnification for damages shall comprehend not only the value of the loss suffered, but also that of the profits which the obligee failed to obtain,43 it is imperative that the basis of the alleged unearned profits is not too speculative and conjectural as to show the actual damages which may be suffered on a future period.

In Pantranco North Express, Inc. v. Court of Appeals,44 this Court denied the plaintiff's claim for actual damages which was premised on a contract he was about to negotiate on the ground that there was still the requisite public bidding to be complied with, thus:

"As to the alleged contract he was about to negotiate with Minister Hipolito, there is no showing that the same has been awarded to him. If Tandoc was about to negotiate a contract with Minister Hipolito, there was no assurance that the former would get it or that the latter would

award the contract to him since there was the requisite public bidding. The claimed loss of profit arising out of that alleged contract which was still to be negotiated is a mere expectancy. Tandoc's claim that he could have earned P2 million in profits is highly speculative and no concrete evidence was presented to prove the same. The only unearned income to which Tandoc is entitled to from the evidence presented is that for the one-month period, during which his business was interrupted, which is P6,125.00, considering that his annual net income was P73,500.00."

In Lufthansa German Airlines v. Court of Appeals,45 this Court likewise disallowed the trial court's award of actual damages for unrealized profits in the amount of US$75,000.00 for being highly speculative. It was held that "the realization of profits by respondent . . . was not a certainty, but depended on a number of factors, foremost of which was his ability to invite investors and to win the bid." This Court went further saying that actual or compensatory damages cannot be presumed, but must be duly proved, and proved with reasonable degree of certainty.

And in National Power Corporation v. Court of Appeals,46 the Court, in denying the bidder's claim for unrealized commissions, ruled that even if NAPOCOR does not deny its (bidder's) claims for unrealized commissions, and that these claims have been transmuted into judicial admissions, these admissions cannot prevail over the rules and regulations governing the bidding for NAPOCOR contracts, which necessarily and inherently include the reservation by the NAPOCOR of its right to reject any or all bids.

The award of moral damages is likewise improper. To reiterate, NAPOCOR did not act in bad faith. Moreover, moral damages are not, as a general rule, granted to a corporation.47 While it is true that besmirched reputation is included in moral damages, it cannot cause mental anguish to a corporation, unlike in the case of a natural person, for a corporation has no reputation in the sense that an individual has, and besides, it is inherently impossible for a corporation to suffer mental anguish.48 In LBC Express, Inc. v. Court of Appeals,49 we ruled:

"Moral damages are granted in recompense for physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and similar injury. A corporation, being an artificial person and having existence only in legal contemplation, has no feelings, no emotions, no senses; therefore, it cannot experience physical suffering and mental anguish. Mental suffering can be experienced only by one having a nervous system and it flows from real ills, sorrows, and griefs of life — all of which cannot be suffered by respondent bank as an artificial person."

Neither can we award exemplary damages under Article 2234 of the Civil Code. Before the court may consider the question of whether or not exemplary damages should be awarded, the plaintiff must show that he is entitled to moral, temperate, or compensatory damages.

NAPOCOR, in this petition, likewise contests the judgment of the lower courts awarding PHIBRO the amount of $73,231.91 as reimbursement for expenses, cost of litigation and attorney's fees.

We agree with NAPOCOR.

This Court has laid down the rule that in the absence of stipulation, a winning party may be awarded attorney's fees only in case plaintiff's action or defendant's stand is so untenable as to amount to gross and evident bad faith.50 This cannot be said of the case at bar. NAPOCOR is justified in resisting PHIBRO's claim for damages. As a matter of fact, we partially grant the prayer of NAPOCOR as we find that it did not act in bad faith in disapproving PHIBRO's pre-qualification to bid.

Trial courts must be reminded that attorney's fees may not be awarded to a party simply because the judgment is favorable to him, for it may amount to imposing a premium on the right to redress grievances in court. We adopt the same policy with respect to the expenses of litigation. A winning party may be entitled to expenses of litigation only where he, by reason of plaintiff's clearly unjustifiable claims or defendant's unreasonable refusal to his demands, was compelled to incur said expenditures. Evidently, the facts of this case do not warrant the granting of such litigation expenses to PHIBRO.

At this point, we believe that, in the interest of fairness, NAPOCOR should give PHIBRO another opportunity to participate in future public bidding. As earlier mentioned, the delay on its part was due to a fortuitous event.

But before we dispose of this case, we take this occasion to remind PHIBRO of the indispensability of coal to a coal-fired thermal plant. With households and businesses being entirely dependent on the electricity supplied by NAPOCOR, the delivery of coal cannot be venturesome. Indeed, public interest demands that one who offers to deliver coal at an appointed time must give a reasonable assurance that it can carry through. With the deleterious possible consequences that may result from failure to deliver the needed coal, we believe there is greater strain of commitment in this kind of obligation.

WHEREFORE, the decision of the Court of Appeals in CA-G.R. CV No. 126204 dated August 27, 1996 is hereby MODIFIED. The award, in favor of PHIBRO, of actual, moral and exemplary damages, reimbursement for expenses, cost of litigation and attorney's fees, and costs of suit, is DELETED.

SO ORDERED.

Vitug, Panganiban and Carpio, JJ., concur.

Dissenting Opinions

MELO, J., dissenting:

While I agree with the majority opinion insofar as it finds that the delay in delivery of coal by respondent Philipp Brothers Oceanic, Inc. (hereafter PHIBRO) to petitioner National Power Corporation (hereafter NAPOCOR) was not due to the former's fault, I have to dissent from the majority insofar as it denies the award of actual, moral, and exemplary damages to PHIBRO for the latter's act of excluding PHIBRO from participating in biddings conducted by NAPOCOR.

The facts are undisputed.

On July 8, 1987, private respondent PHIBRO, one of the largest trading firms in energy worldwide, was awarded by NAPOCOR the contract to supply 120,000 MT of steam coal for the Batangas Coal Fired Thermal Power Plant, the same to be delivered in two (2) equal shipments on July 20 and September 14, 1987.

However, while the contract provided for the arrival schedule of the two coal shipments, it also provided that PHIBRO had to effect delivery not later than 30 days from receipt of the letter of credit to be opened by NAPOCOR. Petitioner NAPOCOR was able to open its letter of credit only on August 6, 1987. Moreover, the contract had a clause which excused any delay occasioned by force majeure. This clause included strikes as one of the events to be considered as constituting force majeure.

From July to September 1987, a series of strikes in the collieries in New South Wales (NSW), Australia, and the coal loading facility at Newcastle Port took place, which adversely affected PHIBRO's ability to deliver the first shipment on time.

Pursuant to the contract, PHIBRO notified NAPOCOR of these force majeure conditions and that as a result of the strikes, vessels were not readily available and shipowners were unwilling to load cargo unless a strike-free risk was incorporated in the charter party.

PHIBRO proposed an equal sharing in the strike-free risk, but NAPOCOR refused. Instead, it demanded delivery of the first shipment not later than 30 days from the opening of its letter of credit.

In the meantime, NAPOCOR negotiated to buy from a company called ASEA 60,000MT imported steam coal at US$33.00/MT. This higher priced coal was purchased by NAPOCOR despite PHIBRO's offer for the same tonnage and delivery date at only US$31.00/MT, a price differential of US$2.00/MT. The PHIBRO offer was with the understanding that the existing 120,000MT contract would be delivered in accordance with a shipping schedule to be mutually agreed between PHIBRO and NAPOCOR, taking into account the strikes and NAPOCOR's needs. NAPOCOR ignored the offer and bought the higher priced material from ASEA.

In October 1987, NAPOCOR conducted a tender for the supply of 180,000 MT imported coal. PHIBRO, as in prior tenders, complied with all prequalification requirements of the tender. However, NAPOCOR disqualified PHIBRO allegedly for "not meeting the minimum prequalification requirements." PHIBRO was also refused the tender documents. In addition, NAPOCOR, in total disregard of the force majeure clause incorporated in the July 8, 1987 contract, demanded that unless its claims for damages due to the delayed delivery of the coal in said contract were first settled, PHIBRO would not be allowed to participate in any and all subsequent tenders to be conducted by NAPOCOR for the supply of imported coal. On November 25, 1987, PHIBRO protested the wrongful and unjust action taken by NAPOCOR inasmuch as PHIBRO had all the qualifications and none of the disqualifications. PHIBRO demanded that it be provided with tender and post qualification documents but NAPOCOR withheld the release of tender documents to PHIBRO. After, inquiry, PHIBRO was told that the real reason for the disqualification was not its "failure to meet the minimum prequalification requirements," but was principally the claim of NAPOCOR for alleged damages due to the delayed delivery of the first shipment of the July 8, 1987 contract. PHIBRO, on the other hand, maintained that its delayed deliveries were due to force majeure and NAPOCOR's delayed opening of its letter of credit. Despite this, however, NAPOCOR continued to bar PHIBRO from participating in tenders.

Consequently, PHIBRO initiated suit before the Makati Regional Trial Court on December 4, 1987 against NAPOCOR, docketed therein as Civil Case No. 18473, complaining against the latter's alleged capricious, malevolent, iniquitous, discriminatory, oppressive and unjustified disqualification of PHIBRO, and asking for damages and that NAPOCOR be enjoined from blacklisting PHIBRO in the subsequent NAPOCOR tenders.

After trial on the merits, the Makati Regional Trial Court, Branch 57, rendered its Decision on January 16, 1992 in favor of PHIBRO and against NAPOCOR, the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff Philipp Brothers Oceanic, Inc. (PHIBRO) and against the defendant National Power Corporation (NAPOCOR) ordering the said defendant NAPOCOR:

1. To reinstate Philipp Brothers Oceanic, Inc. (PHIBRO) in the defendant National Power Corporation's list of accredited bidders and allow PHIBRO to participate in any and all future tenders of National Power Corporation for the supply and delivery of imported steam coal;

2. To pay Philipp Brothers Oceanic, Inc. (PHIBRO):

a) The peso equivalent at the time of payment of $864,000 actual damages;

b) The peso equivalent at the time of payment of $100,000 as moral damages;

c) The peso equivalent at the time of payment of $50,000 as exemplary damages;

d) The peso equivalent at the time of payment of $73,231.91 as reimbursement for expenses, cost of litigation and attorney's fees;

3. To pay the costs of suit;

4. The counterclaim of defendant NAPOCOR are dismissed for lack of merit.

On January 27, 1992, the Office of the Solicitor General appealed the lower court's decision to the Court of Appeals. The appeal, docketed therein as CA-G.R. CV No. 37906, was decided on August 27, 1996 with the appellate court handing down an affirmance of the decision.

Petitioner NAPOCOR now comes to this Court by way of a petition for review by certiorari under Rule 45 of the Rules of Court seeking to review, reverse, and set aside the aforementioned decision.

Petitioner alleges that the Court of Appeals committed serious errors of law, overlooked certain substantial facts which if properly considered would affect the results of the case, drew incorrect conclusions from facts established by evidence or based on misapprehension of facts, its factual findings being incomplete and do not reflect the actual events that, transpired and the important points were left out and decided the case in a way not in accord with law or the applicable decisions of this Court, which collectively amount to grave abuse of discretion, to the damage and prejudice of petitioner's right to due process. Specifically, petitioner maintains that the Court of Appeals gravely and seriously erred:

(1) in concluding and so holding that PHIBRO's delay in the delivery of imported coal was due to NAPOCOR's alleged delay in opening letter of credit to force majeure, and not to PHIBRO's own deliberate acts and faults;

(2) in concluding and so holding that NAPOCOR acted maliciously and unjustifiably in disqualifying PHIBRO from participating in the December 8, 1987 and future biddings for the supply of imported coal despite the existence of valid grounds therefore such as serious impairment of its track record;

(3) in concluding and so holding that PHIBRO was entitled to injunctive relief, to actual or compensatory, moral and exemplary damages, attorney's fees and litigation expenses despite the clear absence of legal and factual bases for such award;

(4) in absolving PHIBRO from any liability for damages to NAPOCOR for its unjustified and deliberate refusal and/or failure to deliver the contracted imported coal within the stipulated period; and

(5) in dismissing NAPOCOR's counterclaims for damages and litigation expenses.

As correctly pointed out in the majority opinion, the rules are explicit that a petition under Rule 45 of the Rules of Court can raise only questions of law (Section 1, Rule 45, 1997 Rules of Civil Procedure). PHIBRO's delay in the delivery of imported coal was found by both the trial court and the Court of Appeals to have been due to the industrial unrest, occasioned by strikes and work stoppages, that occurred in Australia from the first week of July to the third week of September, 1987. As aptly observed by the Court of Appeals:

There is ample evidence to show that although PHIBRO's delivery of the shipment of coal was delayed, the delay was in fact caused by a) NAPOCOR's own delay in opening a workable letter of credit; and b) the strikes which plagued the Australian coal industry from the first week of July to the week of September, 1987. Strikes are included in the definition of force majeure in Section XVII of the Bidding Terms and Specifications, (supra), so PHIBRO is not liable for any delay caused thereby.

PHIBRO was informed of the acceptance of its bid on July 8, 1987. Delivery of coal was to be effected thirty (30) days from NAPOCOR's opening of a confirmed and workable letter of credit. NAPOCOR was only able to do so on August 6, 1987.

By that time, Australia's coal industry was in the middle of a seething controversy and unrest, occasioned by strikes, overtime bans, and mine stoppages.

The general rule is that findings of fact of the Court of Appeals are binding and conclusive upon this Court (DBP vs. CA, 302 SCRA 362 [1999]). These factual findings carry even more weight when said court affirms the factual findings of the trial court (Lagrosa vs. CA, 312 SCRA 298 [1999]). Thus, it is beyond question that PHIBRO's delay in the delivery of coal is not attributable to its fault or negligence, these being the factual findings of both the trial court and the appellate court.

However, despite this finding, the majority would find NAPOCOR free from liability to PHIBRO for its act of excluding the PHIBRO from NAPOCOR's subsequent biddings on the ground that the exclusion is merely the legitimate exercise of a right vested in NAPOCOR. In fine, The majority opinion would characterize PHIBRO's exclusion as damnum absque injuria. I beg to disagree.

The majority opinion anchors its thesis on the Instruction to Bidders found in the "Post-Qualification Documents/Specifications for the Supply and Delivery of Coal for the Batangas Coal-Fired Thermal Power Plant I at Calaca, Batangas, Philippines" providing that:

NAPOCOR reserves the right to reject any and all bids, to waive any minor informality in the bids received. The right is also reserved to reject the bids of any bidder who has previously failed to

properly perform or complete on time any and all contracts for delivery of coal or any supply undertaken by a bidder.

(Original Records, p. 250.)

My esteemed colleagues declare that since NAPOCOR has reserved the right to reject the bid of any bidder, the exclusion of PHIBRO was, in effect, only the use by NAPOCOR of a right pertaining to it, without bad faith or intent to injure and that the fact that PHIBRO may have suffered injuries thereby would not make NAPOCOR liable. The majority opinion goes on to state that where the government rejects any or all bids, the losing bidder has no cause to complain and that accordingly, "a bidder has no ground of action to compel the Government to award the contract in his favor, nor to compel it to accept his bid."

I would wish to point out the following circumstances which I believe were ignored by the majority.

Firstly, the instant case does not involve the rejection of PHIBRO's bid by NAPOCOR. The fact is that PHIBRO was not even allowed to bid by NAPOCOR. While it may be true that any bid may be rejected on a mere technicality if the right to reject is reserved, there is a whale of a difference between rejecting a bid and excluding a prospective bidder from participating in tenders, more so in this case where the prospective bidder has complied with all the prequalification requirements. Indubitably, the reservation of the right to reject any and all bids does not include the right to exclude a prospective bidder, perforce a qualified one at that.

Secondly, the reservation of the right to reject bids contained in the Instruction to Bidders is of doubtful applicability in this case since PHIBRO was not even allowed to submit a bid by NAPOCOR. The right to reject a bid implies that there was a bid submitted. In this case, PHIBRO was barred from submitting bids for subsequent tenders of NAPOCOR.

Thirdly, this is not a simple case of rejecting a bid but one of barring participation in any and all subsequent bids for the supply of coal. This barring of PHIBRO caused the latter to incur damages, all because of what both the trial court and the Court of Appeals viewed to be an unfounded imputation of delay to PHIBRO in the July 8, 1987 contract for delivery of coal.

As adverted to earlier, this delay was covered by the force majeure clause of the contract which validly excused the non-compliance with the specified delivery date. The situation was further exacerbated to private respondent's disadvantage when NAPOCOR, instead of accepting PHIBRO's offer to shoulder half the burden of a strike free clause, used the non-delivery on time of the coal as an excuse to exclude private respondent from future bidding processes at NAPOCOR. Thus, the Court of Appeals correctly found that:

Under the factual milieu, the. court a quo correctly made an award of damages to PHIBRO for Napocor's malicious and unjustified act of disqualifying it from any and all subsequent bids for the supply of coal. It was sufficiently established that Phibro was entitled to an amount of US$864,000.00 representing unrealized profits or lucro cessante. Article 2200 of the Civil Code provides:

"Article 2200. Indemnification for damages shall comprehend not only the value for the loss suffered, but also that of the profits when the obligee failed to obtain."

Undoubtedly, PHIBRO could have earned the questioned amount if NAPOCOR did not unjustly discriminate against it during the October, 1987 bidding and all other bidding subsequent thereto. . . .

Moreover, private respondent's business reputation and credibility in the market greatly suffered because of this malicious act of petitioner. As attested to by Vicente del Castillo:

Q.       In addition to loss of earnings and opportunity loss which you quantified earlier to be in the range of 770,000.00, what other damage, if any, did Philip Brothers incur?

A.       Well, when we were blacklisted by the National Power Corporation, it became known to the international market, and with such an unfair reputation, we had difficulty in obtaining business, new clients since our old clients know what kind of company we are and they continued to do business with us, and our business with Ulan Coal Mines for market other than the Philippines became difficult and we could no longer do business that we used to before this problem came about.

(TSN, January 31, 1989, pp. 50-51.)

Furthermore, James Archibald, an employee of PHIBRO and a member of the Export Committee of the Australia Coal Association, stated in his deposition, thus:

NBP Can you please state what affect the banning of NPC of PHIBRO tendering a supply of coal has had on PHIBRO?

JMA Well, it ended the special relationship between Phibro and Ulan for a start out now I am in the cost trading business and I can tell you that when you loss a significant portion of your throughout like that the industry is extremely incestuous and everybody known very quickly that you have not been so successful as your past years which makes it that much more difficult to gain support from supplier in bidding for other spot contracts.

NBP Can you explain what you mean by incestuous?

JMA It is a very tight industry. Most people have worked in it in a number of companies such as myself, with deals with some markets such as Japan, we have actually joint negotiations and we actually go in to customers, on a collective needs. It is inevitable that we get to know each other very well. Also at the port of Newcastle, ten per cent of the coal shipped is actually traded amongst the various shippers because often one shipper maybe short say ten thousand tonnes for a particular cargo and they would buy in or swap coal with other shippers. A very common port practice. So you know everybody quite well. And also I am a representative of the Coal Association so I may have had a lot more exposure to the people in the industry.

(Exh. (CC-30, 30-31.)

Despite the favorable findings of the lower court and the Court of Appeals attributing no fault to PHIBRO, the harm done to PHIBRO's good standing in the market by the blacklisting of NAPOCOR, at least as far as Philippine setting is concerned, has already beer done. Thus, I believe that the court a quo, as sustained by the Court of Appeals, correctly made the following findings:

PHIBRO is therefore entitled to damages for the discriminatory, oppressive and unjustified disqualification imposed upon it by NAPOCOR. PHIBRO was unjustly excluded from participating in at least five (5) tenders beginning December 1987 to 1990, for the supply and delivery of imported coal with a total volume of about 1,200,00 metric tons valued at no less than US$32 Million (Exhs. "AA", "AA-1", to "AA-2"). The price of imported coal for delivery in 1988 was quoted in June 1988 by bidders at US$41.35 to US$43.95 per metric ton (Exh. "JJ"); in September 1988 at US$41.50 to US$49.50 per metric ton (Exh. J-1); in November 1988 at US$39.00 to US$48.50 per metric ton (Exh. "J-2"); and for the 1989 deliveries, at US$44.35 to US$47.35 per metric ton (Exh. "J-3") and US$38.00 to US$48.25 per metric ton in September 1990 (Exhs. "JJ-6" and "JJ-7"). PHIBRO would have won the tenders for the supply and delivery of about 960,000 metric tons of coal out of at least 1,200,000 metric tons awarded during said period based on its proven track record of 80%. The Court, therefore, finds that as a result of its disqualification, PHIBRO suffered damages equivalent to its standard 3% margin in 960,000 metric tons of coal at the most conservative price of US$30.00 per metric ton, or the total of US$864,000 which PHIBRO would have earned had it been allowed to participate in biddings in which it was disqualified and in subsequent tenders for supply and delivery of imported coal.

There is likewise uncontested or unrefuted evidence that as a result of PHIBRO's disqualification by NAPOCOR, PHIBRO suffered damages in its international reputation and lost credibility in Government and business circle, and hence an award is authorized by Art. 2205 of our Civil Code.

For the damage done to the business reputation of PHIBRO, I respectfully submit that the Court of Appeals was likewise correct in sustaining the award of US$100,000.00 as moral damages to private respondent — a corporate body — under Article 2217 of the Civil Code.

The Court, in a number of cases (i.e. Asset Privatization Trust vs. CA, 300 SCRA 579 [1998]; Maersk Tabacalera Shipping Agency (Filipina), Inc. vs. CA, 197 SCRA 646 [1991]), has sustained the award of moral damages to a corporation despite the general rule that moral damages cannot be awarded to an artificial person which has no feelings, emotions or senses, and which cannot experience physical suffering and mental anguish (LBC Express Inc. vs. CA, 236 SCRA 602 [1994]; see also Solid Homes, Inc. vs. CA, 275 SCRA 267 [1997]) because a corporation may have a good reputation which, if besmirched, may also be a ground for the award of moral damages (Mambulao Lumber Co. vs. PNB, 22 SCRA 359 [1968]). Thus, in the case of Simex International (Manila), Inc. vs. CA (183 SCRA 360 [1990]), the Court held:

From every viewpoint except that of the petitioner's, its claim of moral damages in the amount of Php1,000,000.00 is nothing short of preposterous. Its business certainly is not that big, or its name that prestigious, to sustain such an extravagant pretense. Moreover, a corporation is not as a rule entitled to moral damages because, not being a natural person, it cannot experience physical suffering or such sentiments as wounded feelings, serious anxiety, mental anguish and moral shock. The only exception to this rule is where the corporation has a good reputation that is debased, resulting in its social humiliation.

We shall recognize that the petitioner did suffer injury because of the private respondent's negligence that caused the dishonor of the checks issued by it. The immediate consequence was that its prestige was impaired because of the bouncing checks and confidence in it as a reliable debtor was diminished. The private respondent makes much of the one instance when the petitioner was sued in a collection case, but that did not prove that it did not have a good reputation that could not be marred, more so since that case was ultimately settled. It does not appear that, as the private respondent would portray it, the petitioner is an unsavory and disreputable entity that has no good name to protect.

Considering all this, we feel that the award of nominal damages in the sum of Php20,000.00 was not the proper relief to which the petitioner was entitled. Under Article 2221 of the Civil Code, "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." As we have found that the petitioner has indeed incurred loss through the fault of the private respondent, the proper remedy is the award to it of moral damages, which we impose, in our discretion, in the same amount of Php20,000.00.

It must be noted that trial courts are generally given discretion to determine the amount of moral damages, the same being incapable of pecuniary estimation. The Court of Appeals can only modify or change the amount awarded when they are palpably or scandalously excessive so as to indicate that it was the result of passion, prejudice or corruption on the part of the trial court. In the case at bar, the conclusive finding of the Court of Appeals of petitioner's malice and bad faith justify the award of both moral and exemplary damages. As held in De Guzman vs. NLRC, (211 SCRA 723 [1992]):

When moral damages are awarded, 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. They are an antidote so that the poison of wickedness may not run through the body politic." These damages are legally assessible against him.

In addition, NAPOCOR's baseless and unwarranted discrimination against PHIBRO constrained the latter to seek the aid of the courts in order to obtain redress. This calls for an award of attorney's fees, which the lower court correctly made.

Consequently, I vote to dismiss the petition and to affirm the decision of the Court of Appeals.