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CORONA,

AZCUNA, and

*GARCIA,JJ.

Promulgated:

January 31, 2007

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

DECISION

SANDOVAL-GUTIERREZ,J.:

Hospitals, having undertaken one of mankinds most important and delicate endeavors, must assume the grave responsibility

of pursuing it with appropriate care. The care and service dispensed through this high trust, however technical, complex and

esoteric its character may be, must meet standards of responsibility commensurate with the undertaking to preserve and protect

the health, and indeed, the very lives of those placed in the hospitals keeping.[1]

Assailed in these three consolidated petitions for review on certiorari is the Court of Appeals Decision[2]

dated September 6,

1996 in CA-G.R. CV No. 42062 and CA-G.R. SP No. 32198 affirming with modification the Decision[3]

dated March 17, 1993 of the

Regional Trial Court (RTC), Branch 96, Quezon City in Civil Case No. Q-43322 and nullifying its Order dated September 21, 1993.

The facts, as culled from the records, are:

On April 4, 1984, Natividad Agana was rushed to the Medical City General Hospital (Medical City Hospital) because of difficulty

of bowel movement and bloody anal discharge. After a series of medical examinations, Dr. Miguel Ampil, petitioner in G.R. No.

127590, diagnosed her to be suffering from cancer of the sigmoid.

On April 11, 1984, Dr. Ampil, assisted by the medical staff[4]

of the Medical City Hospital, performed an anterior resection

surgery on Natividad. He found that the malignancy in her sigmoid area had spread on her left ovary, necessitating the removal ofcertain portions of it. Thus, Dr. Ampil obtained the consent of Natividads husband, Enrique Agana, to permit Dr. Juan Fuentes,

respondent in G.R. No. 126467, to perform hysterectomy on her.

After Dr. Fuentes had completed the hysterectomy, Dr. Ampil took over, completed the operation and closed the incision.

However, the operation appeared to be flawed. In the corresponding Record of Operation dated April 11, 1984, the attending

nurses entered these remarks:

sponge count lacking 2

announced to surgeon searched (sic) done but to no avail continue for closure.

On April 24, 1984, Natividad was released from the hospital. Her hospital and medical bills, including the doctors fees,

amounted to P60,000.00.

After a couple of days, Natividad complained of excruciating pain in her anal region. She consulted both Dr. Ampil and Dr.

Fuentes about it. They told her that the pain was the natural consequence of the surgery. Dr. Ampil then recommended that

she consult an oncologist to examine the cancerous nodes which were not removed during the operation.
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On May 9, 1984, Natividad, accompanied by her husband, went to the United States to seek further treatment. After four

months of consultations and laboratory examinations, Natividad was told she was free of cancer. Hence, she was advised to return

to the Philippines.

On August 31, 1984, Natividad flew back to the Philippines, still suffering from pains. Two weeks thereafter, her daughter

found a piece of gauze protruding from her vagina. Upon being informed about it, Dr. Ampil proceeded to her house where he

managed to extract by hand a piece of gauze measuring 1.5 inches in width. He then assured her that the pains would soon vanish.

Dr. Ampils assurance did not come true. Instead, the pains intensified, prompting Natividad to seek treatment at

the Polymedic General Hospital. While confined there, Dr. Ramon Gutierrez detected the presence of another foreign object in her

vagina -- a foul-smelling gauze measuring 1.5 inches in width which badly infected her vaginal vault. A recto-vaginal fistula had

formed in her reproductive organs which forced stool to excrete through the vagina. Another surgical operation was needed to

remedy the damage. Thus, in October 1984, Natividad underwent another surgery.

On November 12, 1984, Natividad and her husband filed with the RTC, Branch 96, Quezon City a complaint for damages against

the Professional Services, Inc. (PSI), owner of the Medical City Hospital, Dr. Ampil, and Dr. Fuentes, docketed as Civil Case No.

Q-43322. They alleged that the latter are liable for negligencefor leaving two pieces of gauze inside Natividads body

and malpractice for concealing their acts of negligence.

Meanwhile, Enrique Agana also filed with the Professional Regulation Commission (PRC) an administrative complaint for gross

negligence and malpractice against Dr. Ampil and Dr. Fuentes, docketed as Administrative Case No. 1690. The PRC Board ofMedicine heard the case only with respect to Dr. Fuentes because it failed to acquire jurisdiction over Dr. Ampil who was then in

the United States.

On February 16, 1986, pending the outcome of the above cases, Natividad died and was duly substituted by her above-

named children (the Aganas).

On March 17, 1993, the RTC rendered its Decision in favor of the Aganas, finding PSI, Dr. Ampil and Dr. Fuentes liable for

negligence and malpractice, the decretal part of which reads:

WHEREFORE, judgment is hereby rendered for the plaintiffs ordering the defendants PROFESSIONAL SERVICES, INC., DR.

MIGUEL AMPIL and DR. JUAN FUENTES to pay to the plaintiffs, jointly and severally, except in respect of the award for exemplary

damages and the interest thereon which are the liabilities of defendants Dr. Ampil and Dr. Fuentes only, as follows:

1. As actual damages, the following amounts:

a. The equivalent in Philippine Currency of the total of US$19,900.00 at the rate of P21.60-US$1.00, as reimbursement of actual

expenses incurred in the United States of America;

b. The sum of P4,800.00 as travel taxes of plaintiffs and their physician daughter;

c. The total sum of P45,802.50, representing the cost of hospitalization at Polymedic Hospital, medical fees, and cost of the

saline solution;

2. As moral damages, the sum of P2,000,000.00;

3. As exemplary damages, the sum of P300,000.00;

4. As attorneys fees, the sum ofP250,000.00;

5. Legal interest on items 1 (a), (b), and (c); 2; and 3 hereinabove, from date of filing of the complaint until full payment; and


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6. Costs of suit.

SO ORDERED.

Aggrieved, PSI, Dr. Fuentes and Dr. Ampil interposed an appeal to the Court of Appeals, docketed as CA-G.R. CV No. 42062.

Incidentally, on April 3, 1993, the Aganas filed with the RTC a motion for a partial execution of its Decision, which was granted

in an Order dated May 11, 1993. Thereafter, the sheriff levied upon certain properties of Dr. Ampil and sold them for P451,275.00

and delivered the amount to the Aganas.

Following their receipt of the money, the Aganas entered into an agreement with PSI and Dr. Fuentes to indefinitely suspend

any further execution of the RTC Decision. However, not long thereafter, the Aganas again filed a motion for an alias writ of

execution against the properties of PSI and Dr. Fuentes. On September 21, 1993, the RTC granted the motion and issued the

corresponding writ, prompting Dr. Fuentes to file with the Court of Appeals a petition for certiorari and prohibition, with prayer forpreliminary injunction, docketed as CA-G.R. SP No. 32198. During its pendency, the Court of Appeals issued a

Resolution[5]

dated October 29, 1993 granting Dr. Fuentes prayer for injunctive relief.

On January 24, 1994, CA-G.R. SP No. 32198 was consolidated with CA-G.R. CV No. 42062.

Meanwhile, on January 23, 1995, the PRC Board of Medicine rendered its Decision[6]

in Administrative Case No. 1690 dismissing

the case against Dr. Fuentes. The Board held that the prosecution failed to show that Dr. Fuentes was the one who left the two

pieces of gauze inside Natividads body; and that he concealed such fact from Natividad.

On September 6, 1996, the Court of Appeals rendered its Decision jointly disposing of CA-G.R. CV No. 42062 and CA-G.R. SP No.

32198, thus:

WHEREFORE, except for the modification that the case against defendant-appellant Dr. Juan Fuentes is hereby DISMISSED, and

with the pronouncement that defendant-appellant Dr. Miguel Ampil is liable to reimburse defendant-appellant Professional

Services, Inc., whatever amount the latter will pay or had paid to the plaintiffs-appellees, the decision appealed from is

hereby AFFIRMEDand the instant appeal DISMISSED.

Concomitant with the above, the petition for certiorari and prohibition filed by herein defendant-appellant Dr. Juan Fuentes

in CA-G.R. SP No. 32198 is hereby GRANTED and the challenged order of the respondent judge dated September 21, 1993, as well as

the alias writ of execution issued pursuant thereto are hereby NULLIFIED and SET ASIDE. The bond posted by the petitioner in

connection with the writ of preliminary injunction issued by this Court on November 29, 1993 is hereby cancelled.

Costs against defendants-appellants Dr. Miguel Ampil and Professional Services, Inc.

SO ORDERED.

Only Dr. Ampil filed a motion for reconsideration, but it was denied in a Resolution[7]

dated December 19, 1996.

Hence, the instant consolidated petitions.

In G.R. No. 126297, PSI alleged in its petition that the Court of Appeals erred in holding that: (1) it is estopped from raising the

defense that Dr. Ampil is not its employee;(2) it is solidarily liable with Dr. Ampil; and (3) it is not entitled to its counterclaim against

the Aganas. PSI contends that Dr. Ampil is not its employee, but a mere consultant or independent contractor. As such, he alone

should answer for his negligence.

In G.R. No. 126467, the Aganas maintain that the Court of Appeals erred in finding that Dr. Fuentes is not guilty of negligence

or medical malpractice, invoking the doctrine ofres ipsa loquitur. They contend that the pieces of gauze areprima facie proofs that

the operating surgeons have been negligent.
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Finally, in G.R. No. 127590, Dr. Ampil asserts that the Court of Appeals erred in finding him liable for negligence and

malpractice sansevidence that he left the two pieces of gauze in Natividads vagina. He pointed to other probable causes, such

as: (1) it was Dr. Fuentes who used gauzes in performing the hysterectomy; (2) the attending nurses failure to properly count the

gauzes used during surgery; and (3) the medical intervention of the American doctors who examined Natividad in the United States

of America.

For our resolution are these three vital issues:first, whether the Court of Appeals erred in holding Dr. Ampil liable for negligence and

malpractice; second, whether the Court of Appeals erred in absolving Dr. Fuentes of any liability; and third, whether PSI may be held

solidarily liable for the negligence of Dr. Ampil.

I - G.R. No. 127590

Whether the Court of Appeals Erred in Holding Dr. Ampil

Liable for Negligence and Malpractice.

Dr. Ampil, in an attempt to absolve himself, gears the Courts attention to other possible causes of Natividads detriment. He

argues that the Court should not discount either of the following possibilities: first, Dr. Fuentes left the gauzes in Natividads

body after performing hysterectomy; second, the attending nurses erred in counting the gauzes; and third, the American doctors

were the ones who placed the gauzes in Natividads body.

Dr. Ampils arguments are purely conjectural and without basis. Records show that he did not present any evidence to prove that

the American doctors were the ones who put or left the gauzes in Natividads body. Neither did he submit evidence to rebut the

correctness of the record of operation, particularly the number of gauzes used. As to the alleged negligence of Dr. Fuentes, we are

mindful that Dr. Ampil examined his (Dr. Fuentes) work and found it in order.

The glaring truth is that all the major circumstances, taken together, as specified by the Court of Appeals, directly point to Dr.

Ampil as the negligent party, thus:

First, it is not disputed that the surgeons used gauzes as sponges to control the bleeding of the patient during the surgical operation.

Second, immediately after the operation, the nurses who assisted in the surgery noted in their report that the sponge count (was)

lacking 2;that such anomaly was announced to surgeon and that a search was done but to no avail prompting Dr. Ampil to

continue for closure x x x.

Third, after the operation, two (2) gauzes were extracted from the same spot of the body of Mrs. Agana where the surgery was

performed.

An operation requiring the placing of sponges in the incision is not complete until the sponges are properly removed, and it is settledthat the leaving of sponges or other foreign substances in the wound after the incision has been closed is at

least prima facie negligence by the operating surgeon.[8]

To put it simply, such act is considered so inconsistent with due care as to

raise an inference of negligence. There are even legions of authorities to the effect that such act is negligence per se.[9]

Of course, the Court is not blind to the reality that there are times when danger to a patients life precludes a surgeon from further

searching missing sponges or foreign objects left in the body. But this does not leave him free from any obligation. Even if it has

been shown that a surgeon was required by the urgent necessities of the case to leave a sponge in his patients abdomen, because

of the dangers attendant upon delay, still, it is his legal duty to so inform his patient within a reasonable time thereafter by

advising her of what he had been compelled to do. This is in order that she might seek relief from the effects of the foreign object

left in her body as her condition might permit. The ruling in Smith v. Zeagler[10]

is explicit, thus:

The removal of all sponges used is part of a surgical operation, and when a physician or surgeon fails to remove a sponge he has

placed in his patients body that should be removed as part of the operation, he thereby leaves his operation uncompleted

and creates a new condition which imposes upon him the legal duty of calling the new condition to his patients attention, and

endeavoring with the means he has at hand to minimize and avoid untoward results likely to ensue therefrom.
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Here, Dr. Ampil did not inform Natividad about the missing two pieces of gauze. Worse, he even misled her that the pain she was

experiencing was the ordinary consequence of her operation. Had he been more candid, Natividad could have taken the

immediate and appropriate medical remedy to remove the gauzes from her body. To our mind, what was initially an act of

negligence by Dr. Ampil has ripened into a deliberate wrongful act of deceiving his patient.

This is a clear case of medical malpractice or more appropriately, medical negligence. To successfully pursue this kind of case, a

patient must only prove that a health care provider either failed to do something which a reasonably prudent health care provider

would have done, or that he did something that a reasonably prudent provider would not have done; and that failure or action

caused injury to the patient.

[11]

Simply put, the elements are duty, breach, injury and proximate causation. Dr, Ampil, as the leadsurgeon, had the duty to remove all foreign objects, such as gauzes, from Natividads body before closure of the incision. When he

failed to do so, it was his duty to inform Natividad about it. Dr. Ampil breached both duties. Such breach caused injury to Natividad,

necessitating her further examination by American doctors and another surgery. That Dr. Ampils negligence is the proximate

cause[12]

of Natividads injury could be traced from hisact of closing the incision despite the information given by the attending

nurses that two pieces of gauze were still missing. That they were later on extracted from Natividads vagina established the cau sal

link between Dr. Ampils negligence and the injury. And what further aggravated such injury was his deliberate concealment of the

missing gauzes from the knowledge of Natividad and her family.

II - G.R. No. 126467

Whether the Court of Appeals Erred in Absolving

Dr. Fuentes of any Liability

The Aganas assailed the dismissal by the trial court of the case against Dr. Fuentes on the ground that it is contrary to the

doctrine ofres ipsa loquitur. According to them, the fact that the two pieces of gauze were left inside Natividads body is aprima

facieevidence of Dr. Fuentes negligence.

We are not convinced.

Literally, res ipsa loquiturmeans the thing speaks for itself. It is the rule that the fact of the occurrence of an injury, taken

with the surrounding circumstances, may permit an inference or raise a presumption of negligence, or make out a plaintiffs prima

facie case, and present a question of fact for defendant to meet with an explanation.[13]

Stated differently, where the thing which

caused the injury, without the fault of the injured, is under the exclusive control of the defendant and the injury is such that it

should not have occurred if he, having such control used proper care, it affords reasonable evidence, in the absence of explanation

that the injury arose from the defendants want of care, and the burden of proof is shifted to him to establish that he has observed

due care and diligence.[14]

From the foregoing statements of the rule, the requisites for the applicability of the doctrine ofres ipsa loquiturare: (1) the

occurrence of an injury; (2) the thing which caused the injury was under the control and management of the defendant; (3) the

occurrence was such that in the ordinary course of things, would not have happened if those who had control or management used

proper care; and (4)the absence of explanation by the defendant. Of the foregoing requisites, the most instrumental is the control

and management of the thing which caused the injury.[15]

We find the element of control and management of the thing which caused the injury to be wanting. Hence, the doctrine

ofres ipsa loquiturwill not lie.

It was duly established that Dr. Ampil was the lead surgeon during the operation of Natividad. He requested the assistance of

Dr. Fuentes only to perform hysterectomy when he (Dr. Ampil) found that the malignancy in her sigmoid area had spread to her left

ovary. Dr. Fuentes performed the surgery and thereafter reported and showed his work to Dr. Ampil. The latter examined it and

finding everything to be in order, allowed Dr. Fuentes to leave the operating room. Dr. Ampil then resumed operating on

Natividad. He was about to finish the procedure when the attending nurses informed him that two pieces of gauze were missing. A

diligent search was conducted, but the misplaced gauzes were not found. Dr. Ampil then directed that the incision be

closed. During this entire period, Dr. Fuentes was no longer in the operating room and had, in fact, left the hospital.

Under the Captain of the Ship rule, the operating surgeon is the person in complete charge of the surgery room and all

personnel connected with the operation. Their duty is to obey his orders.[16]

As stated before, Dr. Ampil was the lead surgeon. In

other words, he was the Captain of the Ship. That he discharged such role is evident from his following conduct: (1) calling Dr.

Fuentes to perform a hysterectomy; (2) examining the work of Dr. Fuentes and finding it in order; (3)granting Dr. Fuentes

permission to leave; and (4) ordering the closure of the incision. To our mind, it was this act of ordering the closure of the incision

notwithstanding that two pieces of gauze remained unaccounted for, that caused injury to Natividads body.Clearly, the control

and management of the thing which caused the injury was in the hands of Dr. Ampil, not Dr. Fuentes.
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In this jurisdiction, res ipsa loquituris not a rule of substantive law, hence, does notper se create or constitute an independent

or separate ground of liability, being a mere evidentiary rule.[17]

In other words, mere invocation and application of the doctrine

does not dispense with the requirement of proof of negligence. Here, the negligence was proven to have been committed by Dr.

Ampil and not by Dr. Fuentes.

III - G.R. No. 126297

Whether PSI Is Liable for the Negligence of Dr. Ampil

The third issue necessitates a glimpse at the historical development of hospitals and the resulting theories concerning their

liability for the negligence of physicians.

Until the mid-nineteenth century, hospitals were generally charitable institutions, providing medical services to the lowest

classes of society, without regard for a patients ability to pay.[18]

Those who could afford medical treatment were usually treated at

home by their doctors.[19]

However, the days of house calls and philanthropic health care are over. The modern health care

industry continues to distance itself from its charitable past and has experienced a significant conversion from a not-for-profit health

care to for-profit hospital businesses. Consequently, significant changes in health law have accompanied the business-related

changes in the hospital industry. One important legal change is an increase in hospital liability for medical malpractice. Many courts

now allow claims for hospital vicarious l iability under the theories ofrespondeat superior, apparent authority, ostensible authority,

or agency by estoppel.[20]

In this jurisdiction, the statute governing liability for negligent acts is Article 2176 of the Civil Code, which reads:

Art. 2176. 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.

A derivative of this provision is Article 2180, the rule governing vicarious liability under the doctrine ofrespondeat superior, thus:

ART. 2180. The obligation imposed by Article 2176 is demandable not only for ones own acts or omissions, but also for those of

persons for whom one is responsible.

x x x x x x

The owners and managers of an establishment or enterprise are likewise responsible for damage s caused by their employees

in the service of the branches in which the latter are employed or on the occasion of their functions.

Employers shall be liable for the damages caused by their employees and household helpers acting within the scope of their

assigned tasks even though the former are not engaged in any business or industry.

x x x x x x

The responsibility treated of in this article shall cease when the persons herein mentioned prove that they observed all the

diligence of a good father of a family to prevent damage.

A prominent civilist commented that professionals engaged by an employer, such as physicians, dentists, and pharmacists, are

not employees under this article because the manner in which they perform their work is not within the control of the latter

(employer). In other words, professionals are considered personally liable for the fault or negligence they commit in the

discharge of their duties, and their employer cannot be held liable for such fault or negligence. In the context of the present case,

a hospital cannot be held liable for the fault or negligence of a physician or surgeon in the treatment or operat ion of patients.[21]

The foregoing view is grounded on the traditionalnotion that the professional status and the very nature of the physicians

calling preclude him from being classed as an agent or employee of a hospital, whenever he acts in a professional capacity.[22]

It has

been said that medical practice strictly involves highly developed and specialized knowledge,[23]

such that physicians are
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generally free to exercise their own skill and judgment in rendering medical services sansinterference.[24]

Hence, when a doctor

practices medicine in a hospital setting, the hospital and its employees are deemed to subserve him in his ministrations to the

patient and his actions are of his own responsibility.[25]

The case ofSchloendorff v. Society of New York Hospital[26]

was then considered an authority for this view. The

Schloendorffdoctrine regards a physician, even if employed by a hospital, as an independent contractor because of the skill he

exercises and the lack of control exerted over his work. Under this doctrine, hospitals are exempt from the application of

the respondeat superiorprinciple for fault or negligence committed by physicians in the discharge of their profession.

However, the efficacy of the foregoing doctrine has weakened with the significant developments in medical care. Courts came to

realize that modern hospitals are increasingly taking active role in supplying and regulating medical care to patients. No longer were

a hospitals functions limited to furnishing room, food, facilities for treatment and operation, and attendants for its patients. Thus,

in Bing v. Thunig,[27]

the New York Court of Appeals deviated from the Schloendorffdoctrine, noting that modern hospitals actually

do far more than provide facilities for treatment. Rather, they regularly employ, on a salaried basis, a large staff of physicians,

interns, nurses, administrative and manual workers. They charge patients for medical care and treatment, even collecting for such

services through legal action, if necessary. The court then concluded that there is no reason to exempt hospitals from the universal

rule ofrespondeat superior.

In our shores, the nature of the relationship between the hospital and the physicians is rendered inconsequential in view of our

categorical pronouncement in Ramos v. Court of Appeals[28]

that for purposes of apportioning responsibility in medical negligence

cases, an employer-employee relationship in effect exists between hospitals and their attending and visiting physicians. This

Court held:

We now discuss the responsibility of the hospital in this particular incident. The unique practice (among private hospitals) of filling

up specialist staff with attending and visiting consultants, who are allegedly not hospital employees, presents problems in

apportioning responsibility for negligence in medical malpractice cases. However, the difficulty is more apparent than real.

In the first place, hospitals exercise significant control in the hiring and firing of consultants and in the conduct of their work

within the hospital premises. Doctors who apply for consultant slots, visiting or attending, are required to submit proof of

completion of residency, their educational qualifications, generally, evidence of accreditation by the appropriate board

(diplomate), evidence of fellowship in most cases, and references. These requirements are carefully scrutinized by members of

the hospital administration or by a review committee set up by the hospital who either accept or reject the application. x x x.

After a physician is accepted, either as a visiting or attending consultant, he is normally required to attend clinico-pathological

conferences, conduct bedside rounds for clerks, interns and residents, moderate grand rounds and patient audits and perform

other tasks and responsibilities, for the privilege of being able to maintain a clinic in the hospital, and/or for the privilege of

admitting patients into the hospital.In addition to these, the physicians performance as a specialist is generally evaluated by a peer

review committee on the basis of mortality and morbidity statistics, and feedback from patients, nurses, interns and residents. A

consultant remiss in his duties, or a consultant who regularly falls short of the minimum standards acceptable to the hospital or

its peer review committee, is normally politely terminated.

In other words, private hospitals, hire, fire and exercise real control over their attending and visiting consultant staff. While

consultants are not, technically employees, x x x, the control exercised, the hiring, and the right to terminate consultants all

fulfill the important hallmarks of an employer-employee relationship, with the exception of the payment of wages. In assessing

whether such a relationship in fact exists, the control test is determining. Accordingly, on the basis of the foregoing, we rule that

for the purpose of allocating responsibility in medical negligence cases, an employer-employee relationship in effect exists

between hospitals and their attending and visiting physicians.

But the Ramospronouncement is not our only basis in sustaining PSIs liability. Its liability is also anchored upon the

agency principle ofapparent authority or agency by estoppel and the doctrine ofcorporate negligence which have gained

acceptance in the determination of a hospitals liability for negligent acts of health professionals. The present case serves as aperfect platform to test the applicability of these doctrines, thus, enriching our jurisprudence.

Apparent authority, or what is sometimes referred to as the holding
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outtheory, or doctrine ofostensible agency or agency by estoppel,[29]

has its origin from the law of agency. It imposes liability, not

as the result of the reality of a contractual relationship, but rather because of the actions of a principal or an employer in somehow

misleading the public into believing that the relationship or the authority exists.[30]

The concept is essentially one of estoppel and

has been explained in this manner:

The principal is bound by the acts of his agent with the apparent authority which he knowingly permits the agent to assume,

or which he holds the agent out to the public as possessing. The question in every case is whether the principal has by his voluntary

act placed the agent in such a situation that a person of ordinary prudence, conversant with business usages and the nature of the

particular business, is justified in presuming that such agent has authority to perform the particular act in question.[31]

The applicability of apparent authority in the field of hospital liability was upheld long time ago in Irving v. Doctor Hospital of Lake

Worth, Inc.[32]

There, it was explicitly stated that there does not appear to be any rational basis for excluding the concept of

apparent authority from the field of hospital liability. Thus, in cases where it can be shown that a hospital, by its actions, has held

out a particular physician as its agent and/or employee and that a patient has accepted treatment from that physician in the

reasonable belief that it is being rendered in behalf of the hospital, then the hospital will be liable for the physicians n egligence.

Our jurisdiction recognizes the concept of an agency by implication or estoppel. Article 1869 of the Civil Code reads:

ART. 1869. Agency may be express, or implied from the acts of the principal, from his silence or lack of action, or his failure torepudiate the agency, knowing that another person is acting on his behalf without authority.

In this case, PSI publicly displays in the lobby of the Medical City Hospital the names and specializations of the physicians

associated or accredited by it, including those of Dr. Ampil and Dr. Fuentes. We concur with the Court of Appeals conclusion that it

is now estopped from passing all the blame to the physicians whose names it proudly paraded in the public directory leading the

public to believe that it vouched for their skill and competence . Indeed, PSIs act is tantamount to holding out to the public

that Medical City Hospital, through its accredited physicians, offers quality health care services. By accrediting Dr. Ampil and Dr.

Fuentes and publicly advertising their qualifications, the hospital created the impression that they were its agents, authorized toperform medical or surgical services for its patients. As expected, these patients, Natividad being one of them, accepted the services

on the reasonable belief that such were being rendered by the hospital or its employees, agents, or servants. The trial court

correctly pointed out:

x x x regardless of the education and status in life of the patient, he ought not be burdened with the defense of absence of

employer-employee relationship between the hospital and the independent physician whose name and competence are certainly

certified to the general public by the hospitals act of listing him and his specialty in its lobby directory, as in the case herein. The

high costs of todays medical and health care should at least exact on the hospital greater, if not broader, legal responsibility for

the conduct of treatment and surgery within its facility by its accredited physician or surgeon, regardless of whether he is

independent or employed.[33]

The wisdom of the foregoing ratiocination is easy to discern. Corporate entities, like PSI, are capable of acting only through other

individuals, such as physicians. If these accredited physicians do their job well, the hospital succeeds in its mission of offering quality

medical services and thus profits financially. Logically, where negligence mars the quality of its services, the hospital should not be

allowed to escape liability for the acts of its ostensible agents.

We now proceed to the doctrine ofcorporate negligence or corporate responsibility.

One allegation in the complaint in Civil Case No. Q-43332 for negligence and malpractice is that PSI as owner, operator and

manager of Medical City Hospital, did not perform the necessary supervision nor exercise diligent efforts in the supervision of

Drs. Ampil and Fuentes and its nursing staff, resident doctors, and medical interns who assisted Drs. Ampil and Fuentes in the

performance of their duties as surgeons.[34]

Premised on the doctrine of corporate negligence, the trial court held that PSI

is directly liable for such breach of duty.

We agree with the trial court.

Recent years have seen the doctrine of corporate negligence as the judicial answer to the problem of allocating hospitals

liability for the negligent acts of health practitioners, absent facts to support the application ofrespondeat superioror apparent

authority. Its formulation proceeds from the judiciarys acknowledgment that in these modern times, the duty of providing qua lity
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medical service is no longer the sole prerogative and responsibility of the physician. The modern hospitals have changed structure.

Hospitals now tend to organize a highly professional medical staff whose competence and performance need to be monitored by the

hospitals commensurate with their inherent responsibility to provide quality medical care.[35]

The doctrine has its genesis in Darling v. Charleston Community Hospital.[36]

There, the Supreme Court of Illinois held that the jury

could have found a hospital negligent, inter alia, in failing to have a sufficient number of trained nurses attending the patient;

failing to require a consultation with or examination by members of the hospital staff; and failing to review the treatment

rendered to the patient. On the basis ofDarling, other jurisdictions held thata hospitals corporate negligence extends to

permitting a physician known to be incompetent to practice at the hospital.

[37]

With the passage of time, more duties wereexpected from hospitals, among them: (1) the use of reasonable care in the maintenance of safe and adequate facilities and

equipment; (2)the selection and retention of competent physicians;(3)the overseeing or supervision of all persons who practice

medicine within its walls; and (4) the formulation, adoption and enforcement of adequate rules and policies that ensure quality care

for its patients.[38]

Thus, in Tucson Medical Center, Inc. v. Misevich,[39]

it was held that a hospital, following the doctrine of corporate

responsibility, has the duty to see that it meets the standards of responsibilities for the care of patients. Such duty includes the

proper supervision of the members of its medical staff. And in Bost v. Riley,[40]

the court concluded that a patient who enters a

hospital does so with the reasonable expectation that it will attempt to cure him. The hospital accordingly has the duty to make a

reasonable effort to monitor and oversee the treatment prescribed and administered by the physicians practicing in its premises.

In the present case, it was duly established that PSI operates the Medical City Hospital for the purpose and under the concept

of providing comprehensive medical services to the public. Accordingly, it has the duty to exercise reasonable care to protect fromharm all patients admitted into its facility for medical treatment. Unfortunately, PSI failed to perform such duty. The findings of

the trial court are convincing, thus:

x x x PSIs liability is traceable to its failure to conduct an investigation of the matter reported in the nota bene of the count nurse.

Such failure established PSIs part in the dark conspiracy of silence and concealment about the gauzes. Ethical considerations, if

not also legal, dictated the holding of an immediate inquiry into the events, if not for the benefit of the patient to whom the duty is

primarily owed, then in the interest of arriving at the truth. The Court cannot accept that the medical and the healing professions,

through their members like defendant surgeons, and their institutions like PSIs hospital facility, can callously turn their backs on and

disregard even a mere probability of mistake or negligence by refusing or failing to investigate a report of such seriousness as the

one in Natividads case.

It is worthy to note that Dr. Ampil and Dr. Fuentes operated on Natividad with the assistance of the Medical City Hospitals staff,

composed of resident doctors, nurses, and interns. As such, it is reasonable to conclude that PSI, as the operator of the hospital,

has actual or constructive knowledge of the procedures carried out, particularly the report of the attending nurses that the two

pieces of gauze were missing. In Fridena v. Evans,[41]

it was held that a corporation is bound by the knowledge acquired by or

notice given to its agents or officers within the scope of their authority and in reference to a matter to which their authority extends.

This means that the knowledge of any of the staff of Medical City Hospital constitutes knowledge of PSI. Now, the failure of PSI,

despite the attending nurses report, to investigate and inform Natividad regarding the missing gauzes amounts to callous

negligence. Not only did PSI breach its duties to oversee or supervise all persons who practice medicine within its walls, it also

failed to take an active step in fixing the negligence committed. This renders PSI, not only vicariously liable for the negligence of

Dr. Ampil under Article 2180 of the Civil Code, but also directly liable for its own negligence under Article 2176. In Fridena, theSupreme Court of Arizona held:

x x x In recent years, however, the duty of care owed to the patient by the hospital has expanded. The emerging trend is to hold the

hospital responsible where the hospital has failed to monitor and review medical services being provided within its

walls. See Kahn Hospital Malpractice Prevention, 27 De Paul . Rev. 23 (1977).

Among the cases indicative of the emerging trend isPurcell v. Zimbelman, 18 Ariz. App. 75,500 P. 2d 335 (1972). In Purcell, the

hospital argued that it could not be held liable for the malpractice of a medical practitioner because he was an independent

contractor within the hospital. The Court of Appeals pointed out that the hospital had created a professional staff whose

competence and performance was to be monitored and reviewed by the governing body of the hospital, and the court held that

a hospital would be negligent where it had knowledge or reason to believe that a doctor using the facilities was employing a

method of treatment or care which fell below the recognized standard of care.

Subsequent to the Purcelldecision, the Arizona Court of Appeals held that a hospital has certain inherent responsibilities

regarding the quality of medical care furnished to patients within its walls and it must meet the standards of responsibility

commensurate with this undertaking.Beeck v. Tucson General Hospital, 18 Ariz. App. 165, 500 P. 2d 1153 (1972). This court has

confirmed the rulings of the Court of Appeals that a hospital has the duty of supervising the competence of the doctors on its

staff. x x x.

x x x x x x
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In the amended complaint, the plaintiffs did plead that the operation was performed at the hospital with its knowledge, aid, and

assistance, and that the negligence of the defendants was the proximate cause of the patients injuries.We find that such general

allegations of negligence, along with the evidence produced at the trial of this case, are sufficient to support the hospitals

liability based on the theory of negligent supervision.

Anent the corollary issue of whether PSI is solidarily liable with Dr. Ampil for damages, let it be emphasized that PSI,

apart from a general denial of its responsibility, failed to adduce evidence showing that it exercised the dilig ence of a good father of

a family in the accreditation and supervision of the latter. In neglecting to offer such proof, PSI failed to discharge its b urden under

the last paragraph of Article 2180 cited earlier, and, therefore, must be adjudged solidarily liable with Dr. Ampil. Moreover, as we

have discussed, PSI is also directly liable to the Aganas.

One final word. Once a physician undertakes the treatment and care of a patient, the law imposes on him certain obligations.

In order to escape liability, he must possess that reasonable degree of learning, skill and experience required by his profession. At

the same time, he must apply reasonable care and diligence in the exercise of his skill and the application of his knowledge, and

exert his best judgment.

WHEREFORE, we DENY all the petitions and AFFIRM the challenged Decision of the Court of Appeals in CA-G.R. CV No. 42062

and CA-G.R. SP No. 32198.

Costs against petitioners PSI and Dr. Miguel Ampil.

SO ORDERED.


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Petitioners allege:

1. The award of moral damages is specifically allowable. under paragraph 3 of Article 2206 of the NewCivil Code which provides that the spouse, legitimate and illegitimate descendants and ascendants of thedeceased may demand moral damages for mental anguish by reason of the death of the deceased.Should moral damages be granted, the award should be made to each of petitioners-spouses individuallyand in varying amounts depending upon proof of mental and depth of intensity of thesame, which should not be less than P50,000.00 for each of them.

2. The decision of the trial court had made an impression that respondent National IrrigationAdministration acted with gross negligence because of the accident and the subsequent failure of theNational Irrigation Administration personnel including the driver to stop in order to give assistance to the,victims. Thus, by reason of the gross negligence of respondent, petitioners become entitled to exemplarydamages under Arts. 2231 and 2229 of the New Civil Code.

3. Petitioners are entitled to an award of attorney's fees, the amount of which (20%) had been sufficientlyestablished in the hearing of May 23, 1979.

4. This petition has been filed only for the purpose of reviewing the findings of the lower court upon whichthe disallowance of moral damages, exemplary damages and attorney's fees was based and not for thepurpose of disturbing the other findings of fact and conclusions of law.

The Solicitor General, taking up the cudgels for public respondent National Irrigation Administration, contends thus:

1. The filing of the instant petition is rot proper in view of the appeal taken by respondent NationalIrrigation Administration to the Court of Appeals against the judgment sought to be reviewed. The focalissue raised in respondent's appeal to the Court of Appeals involves the question as to whether or not thedriver of the vehicle that bumped the victims was negligent in his operation of said vehicle. It thusbecomes necessary that before petitioners' claim for moral and exemplary damages could be resolved,there should first be a finding of negligence on the part of respondent's employee-driver. In this regard,the Solicitor General alleges that the trial court decision does not categorically contain such finding.

2. The filing of the "Appearance and Urgent Motion For Leave to File Plaintiff-Appellee's Brief" datedDecember 28, 1981 by petitioners in the appeal (CA-G.R. No. 67237-R; and G. R. No.61045) of therespondent National Irrigation Administration before the Court of Appeals, is an explicit admission of said

petitioners that the herein petition, is not proper. Inconsistent procedures are manifest because whilepetitioners question the findings of fact in the Court of Appeals, they present only the questions of lawbefore this Court which posture confirms their admission of the facts.

3. The fact that the parties failed to agree on whether or not negligence caused the vehicular accidentinvolves a question of fact which petitioners should have brought to the Court of Appeals within thereglementary period. Hence, the decision of the trial court has become final as to the petitioners and forthis reason alone, the petition should be dismissed.

4. Respondent Judge acted within his jurisdiction, sound discretion and in conformity with the law.

5. Respondents do not assail petitioners' claim to moral and exemplary damages by reason of the shock

and subsequent illness they suffered because of the death of their son. Respondent National IrrigationAdministration, however, avers that it cannot be held liable for the damages because it is an agency ofthe State performing governmental functions and driver Hugo Garcia was a regular driver of the vehicle,not a special agent who was performing a job or act foreign to his usual duties. Hence, the liability for thetortious act should. not be borne by respondent government agency but by driver Garcia who shouldanswer for the consequences of his act.

6. Even as the trial court touched on the failure or laxity of respondent National Irrigation Administration inexercising due diligence in the selection and supervision of its employee, the matter of due diligence isnot an issue in this case since driver Garcia was not its special agent but a regular driver of the vehicle.

The sole legal question on whether or not petitioners may be entitled to an award of moral and exemplary damages andattorney's fees can very well be answered with the application of Arts. 2176 and 2180 of theNew Civil Code.

Art. 2176 thus provides:

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

Paragraphs 5 and 6 of Art. 21 80 read as follows:


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Employers shall be liable for the damages caused by their employees and household helpers actingwithin the scope of their assigned tasks, even the though the former are not engaged in any business orindustry.

The State is responsible in like manner when it acts through a special agent.; but not when the damagehas been caused by the official to whom the task done properly pertains, in which case what is providedin Art. 2176 shall be applicable.

The liability of the State has two aspects. namely:

1. Its public or governmental aspects where it is liable for the tortious acts of special agents only.

2. Its private or business aspects (as when it engages in private enterprises) where it becomes liable asan ordinary employer. (p. 961, Civil Code of the Philippines; Annotated, Paras; 1986 Ed. ).

In this jurisdiction, the State assumes a limited liability for the damage caused by the tortious acts or conduct of its specialagent.

Under the aforequoted paragrah 6 of Art. 2180, the State has voluntarily assumed liability for acts done through specialagents. The State's agent, if a public official, must not only be specially commissioned to do a particular task but that suchtask must be foreign to said official's usual governmental functions. If the State's agent is not a public official, and iscommissioned to perform non-governmental functions, then the State assumes the role of an ordinary employer and willbe held liable as such for its agent's tort. Where the government commissions a private individual for a specialgovernmental task, it is acting through a special agent within the meaning of the provision. (Torts and Damages, Sangco,p. 347, 1984 Ed.)

Certain functions and activities, which can be performed only by the government, are more or less generally agreed to be"governmental" in character, and so the State is immune from tort liability. On the other hand, a service which might aswell be provided by a private corporation, and particularly when it collects revenues from it, the function is considered a"proprietary" one, as to which there may be liability for the torts of agents within the scope of their employment.

The National Irrigation Administration is an agency of the government exercising proprietary functions, by expressprovision of Rep. Act No. 3601. Section 1 of said Act provides:

Section 1. Name and domicile.-A body corporateis hereby created which shall be known as the NationalIrrigation Administration, hereinafter called the NIA for short, which shall be organized immediately afterthe approval of this Act. It shall have its principal seat of business in the City of Manila and shall haverepresentatives in all provinces for the proper conduct of its business.

Section 2 of said law spells out some of the NIA's proprietary functions. Thus-

Sec. 2. Powers and objectives.-The NIA shall have the following powers and objectives:

(a) x x x x x x x x x x x x x x x x x x

(b) x x x x x x x x x x x x x x x x x x

(c) To collect from the users of each irrigation system constructed by it such fees as may be necessary tofinance the continuous operation of the system and reimburse within a certain period not less thantwenty-five years cost of construction thereof; and

(d) To do all such other tthings and to transact all such business as are directly or indirectly necessary,incidental or conducive to the attainment of the above objectives.

Indubitably, the NIA is a government corporation with juridical personality and not a mere agency of the government.Since it is a corporate body performing non-governmental functions, it now becomes liable for the damage caused by theaccident resulting from the tortious act of its driver-employee. In this particular case, the NIA assumes the responsibility ofan ordinary employer and as such, it becomes answerable for damages.

This assumption of liability, however, is predicated upon the existence of negligence on the part of respondent NIA. Thenegligence referred to here is the negligence of supervision.

At this juncture, the matter of due diligence on the part of respondent NIA becomes a crucial issue in determining itsliability since it has been established that respondent is a government agency performing proprietary functions and assuch, it assumes the posture of an ordinary employer which, under Par. 5 of Art. 2180, is responsible for the damagescaused by its employees provided that it has failed to observe or exercise due diligence in the selection and supervision ofthe driver.

It will be noted from the assailed decision of the trial court that "as a result of the impact, Francisco Fontanilla wasthrownto a distance 50 meters away from the point of impactwhile Restituto Deligo was thrown a little bit further away. Theimpact took place almost at the edge of the cemented portion of the road." (Emphasis supplied,) [page 26, Rollo]


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The lower court further declared that "a speeding vehicle coming in contact with a person causes force and impact uponthe vehicle that anyone in the vehicle cannot fail to notice. As a matter of fact, the impact was so strong as shown by thefact that the vehicle suffered dents on the right side of the radiator guard, the hood, the fender and a crack on the radiatoras shown by the investigation report(Exhibit "E"). (Emphasis supplied) [page 29, Rollo]

It should be emphasized that the accident happened along the Maharlika National Road within the city limits of San JoseCity, an urban area. Considering the fact that the victim was thrown 50 meters away from the point of impact, there is astrong indication that driver Garcia was driving at a high speed. This is confirmed by the fact that the pick-up sufferedsubstantial and heavy damage as above-described and the fact that the NIA group was then "in a hurry to reach the

campsite as early as possible", as shown by their not stopping to find out what they bumped as would have been theirnormal and initial reaction.

Evidently, there was negligence in the supervision of the driver for the reason that they were travelling at a high speedwithin the city limits and yet the supervisor of the group, Ely Salonga, failed to caution and make the driver observe theproper and allowed speed limit within the city. Under the situation, such negligence is further aggravated by their desire toreach their destination without even checking whether or not the vehicle suffered damage from the object it bumped, thusshowing imprudence and reckelessness on the part of both the driver and the supervisor in the group.

Significantly, this Court has ruled that even if the employer can prove the diligence in the selection and supervision (thelatter aspect has not been established herein) of the employee, still if he ratifies the wrongful acts, or take no step to avertfurther damage, the employer would still be liable. (Maxion vs. Manila Railroad Co., 44 Phil. 597).

Thus, too, in the case of Vda. de Bonifacio vs. B.L.T. Bus Co. (L-26810, August 31, 1970, 34 SCRA 618), this Court heldthat a driver should be especially watchful in anticipation of others who may be using the highway, and his failure to keepa proper look out for reasons and objects in the line to be traversed constitutes negligence.

Considering the foregoing, respondent NIA is hereby directed to pay herein petitioners-spouses the amounts ofP12,000.00 for the death of Francisco Fontanilla; P3,389.00 for hospitalization and burial expenses of the aforenameddeceased; P30,000.00 as moral damages; P8,000.00 as exemplary damages and attorney's fees of 20% of the totalaward.

SO ORDERED.


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L.C. Diaz then appealed[8]

to the Court of Appeals. On 27 October 1998, the Court of Appeals issued its Decisionreversing the decision of the trial court.

On 11 May 1999, the Court of Appeals issued its Resolution denying the motion for reconsideration ofSolidbank. The appellate court, however, modified its decision by deleting the award of exemplary damages andattorneys fees.

The Ruling of the Trial Court

In absolving Solidbank, the trial court applied the rules on savings account written on the passbook. The rules statethat possession of this book shall raise the presumption of ownership and any payment or payments made by the bankupon the production of the said book and entry therein of the withdrawal shall have the same effect as if made to thedepositorpersonally.

[9]

At the time of the withdrawal, a certain Noel Tamayo was not only in possession of the passbook, he also presenteda withdrawal slip with the signatures of the authorized signatories of L.C. Diaz. The specimen signatures of these personswere in the signature cards. The teller stamped the withdrawal slip with the words Saving Teller No. 5. The teller thenpassed on the withdrawal slip to Genere Manuel (Manuel) for authentication. Manuel verified the signatures on thewithdrawal slip. The withdrawal slip was then given to another officer who compared the signatures on the withdrawal slipwith the specimen on the signature cards. The trial court concluded that Solidbank acted with care and observed the ruleson savings account when it allowed the withdrawal ofP300,000 from the savings account of L.C. Diaz.

The trial court pointed out that the burden of proof now shifted to L.C. Diaz to prove that the signatures on thewithdrawal slip were forged. The trial court admonished L.C. Diaz for not offering in evidence the National Bureau ofInvestigation (NBI) report on the authenticity of the signatures on the withdrawal slip for P300,000. The trial courtbelieved that L.C. Diaz did not offer this evidence because it is derogatory to its action.

Another provision of the rules on savings account states that the depositor must keep the passbook under lock andkey.

[10]When another person presents the passbook for withdrawal prior to Solidbanks receipt of the notice of loss of the

passbook, that person is considered as the owner of the passbook. The trial court ruled that the passbook presentedduring the questioned transaction was now out of the lock and key and presumptively ready for a businesstransaction.

[11]

Solidbank did not have any participation in the custody and care of the passbook. The trial court believed thatSolidbanks act of allowing the withdrawal ofP300,000 was not the direct and proximate cause of the loss. The trial courtheld that L.C. Diazs negligence caused the unauthorized withdrawal. Three facts establish L.C. Diazs negligence: (1)

the possession of the passbook by a person other than the depositor L.C. Diaz; (2) the presentation of a signedwithdrawal receipt by an unauthorized person; and (3) the possession by an unauthorized person of a PBC check longclosed by L.C. Diaz, which check was deposited on the day of the fraudulent withdrawal.

The trial court debunked L.C. Diazs contention that Solidbank did not follow the precautionary procedures observedby the two parties whenever L.C. Diaz withdrew significant amounts from its account. L.C. Diaz claimed that a letter mustaccompany withdrawals of more than P20,000. The letter must request Solidbank to allow the withdrawal and convert theamount to a managers check. The bearer must also have a letter authorizing him to withdraw the same amount. Anotherperson driving a car must accompany the bearer so that he would not walk from Solidbank to the office in making thewithdrawal. The trial court pointed out that L.C. Diaz disregarded these precautions in its past withdrawal. On 16 July1991, L.C. Diaz withdrew P82,554 without any separate letter of authorization or any communication with Solidbank thatthe money be converted into a managers check.

The trial court further justified the dismissal of the complaint by holding that the case was a last ditch effort of L.C.

Diaz to recover P300,000 after the dismissal of the criminal case against Ilagan.

The dispositive portion of the decision of the trial court reads:

IN VIEW OF THE FOREGOING, judgment is hereby rendered DISMISSING the complaint.

The Court further renders judgment in favor of defendant bank pursuant to its counterclaim the amount of Thir ty Thousand Pesos

(P30,000.00) as attorneys fees.

With costs against plaintiff.

SO ORDERED.[12]

The Ruling of the Court of Appeals

The Court of Appeals ruled that Solidbanks negligence was the proximate cause of the unauthorized withdrawalof P300,000 from the savings account of L.C. Diaz. The appellate court reached this conclusion after applying theprovision of the Civil Code on quasi-delict, to wit:

Article 2176. 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.
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The appellate court held that the three elements of a quasi-delict are present in this case, namely: (a) damages sufferedby the plaintiff; (b) fault or negligence of the defendant, or some other person for whose acts he must respond; and (c) theconnection of cause and effect between the fault or negligence of the defendant and the damage incurred by the plaintiff.

The Court of Appeals pointed out that the teller of Solidbank who received the withdrawal slip for P300,000 allowedthe withdrawal without making the necessary inquiry. The appellate court stated that the teller, who was not presented bySolidbank during trial, should have called up the depositor because the money to be withdrawn was a significantamount. Had the teller called up L.C. Diaz, Solidbank would have known that the withdrawal was unauthorized. The tellerdid not even verify the identity of the impostor who made the withdrawal. Thus, the appellate court found Solidbank liablefor its negligence in the selection and supervision of its employees.

The appellate court ruled that while L.C. Diaz was also negligent in entrusting its deposits to its messenger and itsmessenger in leaving the passbook with the teller, Solidbank could not escape liability because of the doctrine of lastclear chance. Solidbank could have averted the injury suffered by L.C. Diaz had it called up L.C. Diaz to verify thewithdrawal.

The appellate court ruled that the degree of diligence required from Solidbank is more than that of a good father of afamily. The business and functions of banks are affected with public interest. Banks are obligated to treat the accounts oftheir depositors with meticulous care, always having in mind the fiduciary nature of their relationship with their clients. TheCourt of Appeals found Solidbank remiss in its duty, violating its fiduciary relationship with L.C. Diaz.

The dispositive portion of the decision of the Court of Appeals reads:

WHEREFORE, premises considered, the decision appealed from is hereby REVERSED and a new one entered.

1. Ordering defendant-appellee Consolidated Bank and Trust Corporation to pay plaintiff-appellant the sum of Three

Hundred Thousand Pesos (P300,000.00), with interest thereon at the rate of 12% per annum from the date of filing

of the complaint until paid, the sum of P20,000.00 as exemplary damages, and P20,000.00 as attorneys fees and

expenses of litigation as well as the cost of suit; and

2. Ordering the dismissal of defendant-appellees counterclaim in the amount ofP30,000.00 as attorneys fees.

SO ORDERED.[13]

Acting on the motion for reconsideration of Solidbank, the appellate court affirmed its decision but modified the award ofdamages. The appellate court deleted the award of exemplary damages and attorneys fees. Invoking Article 2231

[14]of

the Civil Code, the appellate court ruled that exemplary damages could be granted if the defendant acted with grossnegligence. Since Solidbank was guilty of simple negligence only, the award of exemplary damages was not justified.Consequently, the award of attorneys fees was also disallowed pursuant to Article 2208 of the Civil Code. The expensesof litigation and cost of suit were also not imposed on Solidbank.

The dispositive portion of the Resolution reads as follows:

WHEREFORE, foregoing considered, our decision dated October 27, 1998 is affirmed with modification by deleting the award ofexemplary damages and attorneys fees, expenses of litigation and cost of suit.

SO ORDERED.[15]

Hence, this petition.

The Issues

Solidbank seeks the review of the decision and resolution of the Court of Appeals on these grounds:

I. THE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER BANK SHOULD SUFFER THE LOSS

BECAUSE ITS TELLER SHOULD HAVE FIRST CALLED PRIVATE RESPONDENT BY TELEPHONE

BEFORE IT ALLOWED THE WITHDRAWAL OF P300,000.00 TO RESPONDENTS MESSENGER

EMERANO ILAGAN, SINCE THERE IS NO AGREEMENT BETWEEN THE PARTIES IN THE OPERATION

OF THE SAVINGS ACCOUNT, NOR IS THERE ANY BANKING LAW, WHICH MANDATES THAT A

BANK TELLER SHOULD FIRST CALL UP THE DEPOSITOR BEFORE ALLOWING A WITHDRAWAL OF

A BIG AMOUNT IN A SAVINGS ACCOUNT.

II. THE COURT OF APPEALS ERRED IN APPLYING THE DOCTRINE OF LAST CLEAR CHANCE AND IN

HOLDING THAT PETITIONER BANKS TELLER HAD THE LAST OPPORTUNITY TO WITHHOLD THE

WITHDRAWAL WHEN IT IS UNDISPUTED THAT THE TWO SIGNATURES OF RESPONDENT ON THE

WITHDRAWAL SLIP ARE GENUINE AND PRIVATE RESPONDENTS PASSBOOK WAS DULY

PRESENTED, AND CONTRARIWISE RESPONDENT WAS NEGLIGENT IN THE SELECTION AND

SUPERVISION OF ITS MESSENGER EMERANO ILAGAN, AND IN THE SAFEKEEPING OF ITS CHECKS

AND OTHER FINANCIAL DOCUMENTS.
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III. THE COURT OF APPEALS ERRED IN NOT FINDING THAT THE INSTANT CASE IS A LAST DITCH

EFFORT OF PRIVATE RESPONDENT TO RECOVER ITS P300,000.00 AFTER FAILING IN ITS EFFORTS

TO RECOVER THE SAME FROM ITS EMPLOYEE EMERANO ILAGAN.

IV. THE COURT OF APPEALS ERRED IN NOT MITIGATING THE DAMAGES AWARDED AGAINST

PETITIONER UNDER ARTICLE 2197 OF THE CIVIL CODE, NOTWITHSTANDING ITS FINDING THAT

PETITIONER BANKS NEGLIGENCE WAS ONLY CONTRIBUTORY.[16]

The Ruling of the Court

The petition is partly meritorious.

Solidbanks Fiduciary Duty under the Law

The rulings of the trial court and the Court of Appeals conflict on the application of the law. The trial court pinned theliability on L.C. Diaz based on the provisions of the rules on savings account, a recognition of the contractual relationshipbetween Solidbank and L.C. Diaz, the latter being a depositor of the former. On the other hand, the Court of Appealsapplied the law on quasi-delict to determine who between the two parties was ultimately negligent. The law on quasi-

delict orculpa aquilianais generally applicable when there is no pre-existing contractual relationship between the parties.

We hold that Solidbank is liable for breach of contract due to negligence, orculpa contractual.

The contract between the bank and its depositor is governed by the provisions of the Civil Code on simpleloan.

[17]Article 1980 of the Civil Code expressly provides that x x x savings x x x deposits of money in banks and similar

institutions shall be governed by the provisions concerning simple loan. There is a debtor-creditor relationship betweenthe bank and its depositor. The bank is the debtor and the depositor is the creditor. The depositor lends the bank moneyand the bank agrees to pay the depositor on demand. The savings deposit agreement between the bank and thedepositor is the contract that determines the rights and obligations of the parties.

The law imposes on banks high standards in view of the fiduciary nature of banking. Section 2 of Republic Act No.8791 (RA 8791),

[18]which took effect on 13 June 2000, declares that the State recognizes the fiduciary nature of

banking that requires high standards of integrity and performance.[19]

This new provision in the general banking law,

introduced in 2000, is a statutory affirmation of Supreme Court decisions, starting with the 1990 case of SimexInternational v. Court of Appeals,[20]

holding that the bank is under obligation to treat the accounts of its depositorswith meticulous care, always having in mind the fiduciary nature of their relationship.

[21]

This fiduciary relationship means that the banks obligation to observe high standards of integrity and performanceis deemed written into every deposit agreement between a bank and its depositor. The fiduciary nature of bankingrequires banks to assume a degree of diligence higher than that of a good father of a family. Article 1172 of the CivilCode states that the degree of diligence required of an obligor is that prescribed by law or contract, and absent suchstipulation then the diligence of a good father of a family.

[22]Section 2 of RA 8791 prescribes the statutory diligence

required from banks that banks must observe high standards of integrity and performance in servicing theirdepositors. Although RA 8791 took effect almost nine years after the unauthorized withdrawal of the P300,000 from L.C.Diazs savings account, jurisprudence

[23]at the time of the withdrawal already imposed on banks the same high standard

of diligence required under RA No. 8791.

However, the fiduciary nature of a bank-depositor relationship does not convert the contract between the bank and itsdepositors from a simple loan to a trust agreement, whether express or implied. Failure by the bank to pay the depositoris failure to pay a simple loan, and not a breach of trust .

[24]The law simply imposes on the bank a higher standardof

integrity and performance in complying with its obligations under the contract of simple loan, beyond those required ofnon-bank debtors under a similar contract of simple loan.

The fiduciary nature of banking does not convert a simple loan into a trust agreement because banks do not acceptdeposits to enrich depositors but to earn money for themselves. The law allows banks to offer the lowest possible interestrate to depositors while charging the highest possible interest rate on their own borrowers. The interest spread ordifferential belongs to the bank and not to the depositors who are not cestui que trustof banks. If depositors are cestuique trustof banks, then the interest spread or income belongs to the depositors, a situation that Congress certainly didnot intend in enacting Section 2 of RA 8791.

Solidbanks Breach of its Contractual Obligation

Article 1172 of the Civil Code provides that responsibility arising from negligence in the performance of every kind ofobligation is demandable. For breach of the savings deposit agreement due to negligence, orculpa contractual, the bankis liable to its depositor.

Calapre left the passbook with Solidbank because the transaction took time and he had to go to Allied Bank foranother transaction. The passbook was still in the hands of the employees of Solidbank for the processing of the depositwhen Calapre left Solidbank. Solidbanks rules on savings account require that the deposit book should be carefullyguarded by the depositor and kept under lock and key, if possible. When the passbook is in the possession o f
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