Republic of the Philippines

SUPREME COURT
Manila
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.
DECISION
CHICO-NAZARIO, J.:
Before Us is a Petition for Review on Certiorari which seeks to set aside the decision1 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 Resolution2 dated 22 July 1999
denying petitioners motion for reconsideration.
A complaint3 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 authorized4 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 Realty5 (the Developer of the
property).
Of the P120,000.00, the following payments were made by petitioners:

Date
July 19, 1990
March 13, 1991
April 6, 1991
November 28, 1991
Total

Amount Paid
P40,000.006
15,000.007
15,000.008
5,000.009
P75,000.00

Thus, leaving a balance of P45,000.00.

A Deed of Sale with Assumption of Mortgage Obligation10 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
July 9, 1990
March 12, 1991
February 4, 1992
March 31, 1993
April 19, 1993
April 27, 1993

Amount
Receipt No.
P 14,312.47 D-50398611
8,000.00 D-72947812
10,000.00 D-99912713
6,000.00 E-56374914
10,000.00 E-58243215
7,000.00 E-61832616
P 55,312.47

Petitioners paid the "equity" or second mortgage to CERF Realty.17

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 letter18 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
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
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

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 attorneys 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
A Motion for Reconsideration25 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
The motion for reconsideration27 filed by petitioners was denied by the Court of Appeals in a
Resolution28 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
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
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
Galangs 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
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 computation32 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 119134 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 circumstances37 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
The fact that petitioners tendered a Managers 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
NHMFC42 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
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
Answer45 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. Calasanz46 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
138148 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 partys 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 petitioners 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 respondentsspouses 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
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
Cannus 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, testified53 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.
Puno, Acting C.J., (Chairman), Austria-Martinez, and Callejo, Sr., JJ., concur.
Tinga, J., out of the country.

THIRD DIVISION

VICELET LALICON and

G.R. No. 185440

VICELEN LALICON,
Petitioners,

Present:

CARPIO,* J.,
VELASCO, JR., Chairperson,
- versus -

ABAD,
MENDOZA, and
SERENO,** JJ.

NATIONAL HOUSING AUTHORITY,

Respondent.

Promulgated:

July 13, 2011

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

DECISION

ABAD, J.:

This case is about (a) the right of the National Housing Authority to seek
annulment of sales made by housing beneficiaries of lands they bought from it within
the prohibited period and (b) the distinction between actions for rescission instituted
under Article 1191 of the Civil Code and those instituted under Article 1381 of the
same code.

The Facts and the Case

On November 25, 1980 the National Housing Authority (NHA) executed a

Deed of Sale with Mortgage over a Quezon City lot1[1] in favor of the spouses Isidro
and Flaviana Alfaro (the Alfaros). In due time, the Quezon City Registry of Deeds
issued Transfer Certificate of Title (TCT) 277321 in the name of the Alfaros. The
deed of sale provided, among others, that the Alfaros could sell the land within five
years from the date of its release from mortgage without NHAs prior written
consent. Thus:

x x x. 5. Except by hereditary succession, the lot herein sold and

conveyed, or any part thereof, cannot be alienated, transferred or encumbered
within five (5) years from the date of release of herein mortgage without the
prior written consent and authority from the VENDOR-MORTGAGEE (NHA). x
x x.2[2] (Emphasis supplied)

The mortgage and the restriction on sale were annotated on the Alfaros title
on April 14, 1981.

About nine years later or on November 30, 1990, while the mortgage on the
land subsisted, the Alfaros sold the same to their son, Victor Alfaro, who had taken
in a common-law wife, Cecilia, with whom he had two daughters, petitioners Vicelet
and Vicelen Lalicon (the Lalicons). Cecilia, who had the means, had a house built
on the property and paid for the amortizations. After full payment of the loan or on
March 21, 1991 the NHA released the mortgage. Six days later or on March 27
Victor transferred ownership of the land to his illegitimate daughters.

About four and a half years after the release of the mortgage or on October 4,
1995, Victor registered the November 30, 1990 sale of the land in his favor, resulting
in the cancellation of his parents title. The register of deeds issued TCT 140646 in
Victors name. On December 14, 1995 Victor mortgaged the land to Marcela Lao
Chua, Rosa Sy, Amparo Ong, and Ida See. Subsequently, on February 14, 1997

Victor sold the property to Chua, one of the mortgagees, resulting in the cancellation
of his TCT 140646 and the issuance of TCT N-172342 in Chuas name.

A year later or on April 10, 1998 the NHA instituted a case before the Quezon
City Regional Trial Court (RTC) for the annulment of the NHAs 1980 sale of the
land to the Alfaros, the latters 1990 sale of the land to their son Victor, and the
subsequent sale of the same to Chua, made in violation of NHA rules and
regulations.

On February 12, 2004 the RTC rendered a decision in the case. It ruled that,
although the Alfaros clearly violated the five-year prohibition, the NHA could no
longer rescind its sale to them since its right to do so had already prescribed, applying
Article 1389 of the New Civil Code. The NHA and the Lalicons, who intervened,
filed their respective appeals to the Court of Appeals (CA).

On August 1, 2008 the CA reversed the RTC decision and found the NHA
entitled to rescission. The CA declared TCT 277321 in the name of the Alfaros and
all subsequent titles and deeds of sale null and void. It ordered Chua to reconvey
the subject land to the NHA but the latter must pay the Lalicons the full amount of
their amortization, plus interest, and the value of the improvements they constructed
on the property.

The Issues Presented

The issues in this case are:

1.
Whether or not the CA erred in holding that the Alfaros violated their
contract with the NHA;

2.

Whether or not the NHAs right to rescind has prescribed; and

3.
Whether or not the subsequent buyers of the land acted in good faith
and their rights, therefore, cannot be affected by the rescission.

The Rulings of the Court

First. The contract between the NHA and the Alfaros forbade the latter from
selling the land within five years from the date of the release of the mortgage in
their favor.3[3] But the Alfaros sold the property to Victor on November 30, 1990
even before the NHA could release the mortgage in their favor on March 21, 1991.
Clearly, the Alfaros violated the five-year restriction, thus entitling the NHA to
rescind the contract.

The Lalicons contend, however, that the Alfaros did not violate the five-year
restriction against resale since what the contract between the parties barred was a
transfer of the property within five years from the release of the mortgage, not a
transfer of the same prior to such release.

But the Lalicons are trying to be clever. The restriction clause is more of a
condition on the sale of the property to the Alfaros rather than a condition on the
mortgage constituted on it. Indeed, the prohibition against resale remained even
after the land had been released from the mortgage. The five-year restriction
against resale, counted from the release of the property from the NHA mortgage,
measures out the desired hold that the government felt it needed to ensure that its
objective of providing cheap housing for the homeless is not defeated by wily
entrepreneurs.

The Lalicons claim that the NHA unreasonably ignored their letters that
asked for consent to the resale of the subject property. They also claim that their
failure to get NHAs prior written consent was not such a substantial breach that
warranted rescission.

But the NHA had no obligation to grant the Lalicons request for exemption
from the five-year restriction as to warrant their proceeding with the sale when
such consent was not immediately forthcoming. And the resale without the NHAs
consent is a substantial breach. The essence of the governments socialized
housing program is to preserve the beneficiarys ownerships for a reasonable
length of time, here at least within five years from the time he acquired it free from
any encumbrance.

Second. Invoking the RTC ruling, the Lalicons claim that under Article
1389 of the Civil Code the action to claim rescission must be commenced within
four years from the time of the commission of the cause for it.

But an action for rescission can proceed from either Article 1191 or Article
1381. It has been held that Article 1191 speaks of rescission in reciprocal
obligations within the context of Article 1124 of the Old Civil Code which uses the
term resolution. Resolution applies only to reciprocal obligations such that a
breach on the part of one party constitutes an implied resolutory condition which
entitles the other party to rescission. Resolution grants the injured party the option
to pursue, as principal actions, either a rescission or specific performance of the
obligation, with payment of damages in either case.

Rescission under Article 1381, on the other hand, was taken from Article
1291 of the Old Civil Code, which is a subsidiary action, not based on a partys
breach of obligation.4[4] The four-year prescriptive period provided in Article
1389 applies to rescissions under Article 1381.
.
Here, the NHA sought annulment of the Alfaros sale to Victor because they
violated the five-year restriction against such sale provided in their contract. Thus,
the CA correctly ruled that such violation comes under Article 1191 where the
applicable prescriptive period is that provided in Article 1144 which is 10 years
from the time the right of action accrues. The NHAs right of action accrued on
February 18, 1992 when it learned of the Alfaros forbidden sale of the property to
Victor. Since the NHA filed its action for annulment of sale on April 10, 1998, it
did so well within the 10-year prescriptive period.

Third. The Court also agrees with the CA that the Lalicons and Chua were
not buyers in good faith. Since the five-year prohibition against alienation without
the NHAs written consent was annotated on the propertys title, the Lalicons very
well knew that the Alfaros sale of the property to their father, Victor, even before
the release of the mortgage violated that prohibition.

As regards Chua, she and a few others with her took the property by way of
mortgage from Victor in 1995, well within the prohibited period. Chua knew,

therefore, based on the annotated restriction on the property, that Victor had no
right to mortgage the property to her group considering that the Alfaros could not
yet sell the same to him without the NHAs consent. Consequently, although
Victor later sold the property to Chua after the five-year restriction had lapsed,
Chua cannot claim lack of awareness of the illegality of Victors acquisition of the
property from the Alfaros.

Lastly, since mutual restitution is required in cases involving rescission

under Article 1191,5[5] the NHA must return the full amount of the amortizations
it received for the property, plus the value of the improvements introduced on the
same, with 6% interest per annum from the time of the finality of this judgment.
The Court will no longer dwell on the matter as to who has a better right to receive
the amount from the NHA: the Lalicons, who paid the amortizations and occupied
the property, or Chua, who bought the subject lot from Victor and obtained for
herself a title to the same, as this matter was not raised as one of the issues in this
case. Chuas appeal to the Court in a separate case6[6] having been denied due
course and NHA failing to file its own petition for review, the CA decision
ordering the restitution in favor of the Lalicons has now become final and binding
against them.

WHEREFORE, the Court AFFIRMS the Decision of the Court of Appeals

in CA-G.R. CV 82298 dated August 1, 2008.

SO ORDERED.

ROBERTO A. ABAD

Associate Justice

WE CONCUR:

ANTONIO T. CARPIO
Associate Justice

PRESBITERO J. VELASCO, JR.

Associate Justice

JOSE CATRAL MENDOZA

Associate Justice

MARIA LOURDES P. A. SERENO

Associate Justice

ATTESTATION
I attest that the conclusions in the above Decision had been reached in
consultation before the case was assigned to the writer of the opinion of the Courts
Division.

PRESBITERO J. VELASCO, JR.

Associate Justice
Chairperson, Third Division

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution and the Division
Chairpersons Attestation, I certify that the conclusions in the above Decision had
been reached in consultation before the case was assigned to the writer of the opinion
of the Courts Division.

RENATO C. CORONA
Chief Justice

FIRST DIVISION
[G.R. No. 150843. March 14, 2003]
CATHAY PACIFIC AIRWAYS, LTD., petitioner, vs. SPOUSES DANIEL VAZQUEZ and
MARIA LUISA MADRIGAL VAZQUEZ, respondents.
DECISION
DAVIDE, JR., C.J.:
Is an involuntary upgrading of an airline passengers accommodation from one class to a more
superior class at no extra cost a breach of contract of carriage that would entitle the passenger to
an award of damages? This is a novel question that has to be resolved in this case.
The facts in this case, as found by the Court of Appeals and adopted by petitioner Cathay Pacific
Airways, Ltd., (hereinafter Cathay) are as follows:
Cathay is a common carrier engaged in the business of transporting passengers and goods by air.
Among the many routes it services is the Manila-Hongkong-Manila course. As part of its
marketing strategy, Cathay accords its frequent flyers membership in its Marco Polo Club. The
members enjoy several privileges, such as priority for upgrading of booking without any extra
charge whenever an opportunity arises. Thus, a frequent flyer booked in the Business Class has
priority for upgrading to First Class if the Business Class Section is fully booked.
Respondents-spouses Dr. Daniel Earnshaw Vazquez and Maria Luisa Madrigal Vazquez are
frequent flyers of Cathay and are Gold Card members of its Marco Polo Club. On 24 September
1996, the Vazquezes, together with their maid and two friends Pacita Cruz and Josefina Vergel
de Dios, went to Hongkong for pleasure and business.
For their return flight to Manila on 28 September 1996, they were booked on Cathays Flight
CX-905, with departure time at 9:20 p.m. Two hours before their time of departure, the
Vazquezes and their companions checked in their luggage at Cathays check-in counter at Kai
Tak Airport and were given their respective boarding passes, to wit, Business Class boarding
passes for the Vazquezes and their two friends, and Economy Class for their maid. They then
proceeded to the Business Class passenger lounge.
When boarding time was announced, the Vazquezes and their two friends went to Departure
Gate No. 28, which was designated for Business Class passengers. Dr. Vazquez presented his
boarding pass to the ground stewardess, who in turn inserted it into an electronic machine reader
or computer at the gate. The ground stewardess was assisted by a ground attendant by the name
of Clara Lai Han Chiu. When Ms. Chiu glanced at the computer monitor, she saw a message
that there was a seat change from Business Class to First Class for the Vazquezes.
Ms. Chiu approached Dr. Vazquez and told him that the Vazquezes accommodations were
upgraded to First Class. Dr. Vazquez refused the upgrade, reasoning that it would not look nice

for them as hosts to travel in First Class and their guests, in the Business Class; and moreover,
they were going to discuss business matters during the flight. He also told Ms. Chiu that she
could have other passengers instead transferred to the First Class Section. Taken aback by the
refusal for upgrading, Ms. Chiu consulted her supervisor, who told her to handle the situation
and convince the Vazquezes to accept the upgrading. Ms. Chiu informed the latter that the
Business Class was fully booked, and that since they were Marco Polo Club members they had
the priority to be upgraded to the First Class. Dr. Vazquez continued to refuse, so Ms. Chiu told
them that if they would not avail themselves of the privilege, they would not be allowed to take
the flight. Eventually, after talking to his two friends, Dr. Vazquez gave in. He and Mrs.
Vazquez then proceeded to the First Class Cabin.
Upon their return to Manila, the Vazquezes, in a letter of 2 October 1996 addressed to Cathays
Country Manager, demanded that they be indemnified in the amount of P1million for the
humiliation and embarrassment caused by its employees. They also demanded a written
apology from the management of Cathay, preferably a responsible person with a rank of no less
than the Country Manager, as well as the apology from Ms. Chiu within fifteen days from
receipt of the letter.
In his reply of 14 October 1996, Mr. Larry Yuen, the assistant to Cathays Country Manager
Argus Guy Robson, informed the Vazquezes that Cathay would investigate the incident and get
back to them within a weeks time.
On 8 November 1996, after Cathays failure to give them any feedback within its self-imposed
deadline, the Vazquezes instituted before the Regional Trial Court of Makati City an action for
damages against Cathay, praying for the payment to each of them the amounts of P250,000 as
temperate damages; P500,000 as moral damages; P500,000 as exemplary or corrective damages;
and P250,000 as attorneys fees.
In their complaint, the Vazquezes alleged that when they informed Ms. Chiu that they preferred
to stay in Business Class, Ms. Chiu obstinately, uncompromisingly and in a loud, discourteous
and harsh voice threatened that they could not board and leave with the flight unless they go to
First Class, since the Business Class was overbooked. Ms. Chius loud and stringent shouting
annoyed, embarrassed, and humiliated them because the incident was witnessed by all the other
passengers waiting for boarding. They also claimed that they were unjustifiably delayed to
board the plane, and when they were finally permitted to get into the aircraft, the forward storage
compartment was already full. A flight stewardess instructed Dr. Vazquez to put his roll-on
luggage in the overhead storage compartment. Because he was not assisted by any of the crew in
putting up his luggage, his bilateral carpal tunnel syndrome was aggravated, causing him
extreme pain on his arm and wrist. The Vazquezes also averred that they belong to the
uppermost and absolutely top elite of both Philippine Society and the Philippine financial
community, [and that] they were among the wealthiest persons in the Philippine[s].
In its answer, Cathay alleged that it is a practice among commercial airlines to upgrade
passengers to the next better class of accommodation, whenever an opportunity arises, such as
when a certain section is fully booked. Priority in upgrading is given to its frequent flyers, who
are considered favored passengers like the Vazquezes. Thus, when the Business Class Section of

Flight CX-905 was fully booked, Cathays computer sorted out the names of favored passengers
for involuntary upgrading to First Class. When Ms. Chiu informed the Vazquezes that they were
upgraded to First Class, Dr. Vazquez refused. He then stood at the entrance of the boarding
apron, blocking the queue of passengers from boarding the plane, which inconvenienced other
passengers. He shouted that it was impossible for him and his wife to be upgraded without his
two friends who were traveling with them. Because of Dr. Vazquezs outburst, Ms. Chiu thought
of upgrading the traveling companions of the Vazquezes. But when she checked the computer,
she learned that the Vazquezes companions did not have priority for upgrading. She then tried
to book the Vazquezes again to their original seats. However, since the Business Class Section
was already fully booked, she politely informed Dr. Vazquez of such fact and explained that the
upgrading was in recognition of their status as Cathays valued passengers. Finally, after talking
to their guests, the Vazquezes eventually decided to take the First Class accommodation.
Cathay also asserted that its employees at the Hong Kong airport acted in good faith in dealing
with the Vazquezes; none of them shouted, humiliated, embarrassed, or committed any act of
disrespect against them (the Vazquezes). Assuming that there was indeed a breach of contractual
obligation, Cathay acted in good faith, which negates any basis for their claim for temperate,
moral, and exemplary damages and attorneys fees. Hence, it prayed for the dismissal of the
complaint and for payment of P100,000 for exemplary damages and P300,000 as attorneys fees
and litigation expenses.
During the trial, Dr. Vazquez testified to support the allegations in the complaint. His testimony
was corroborated by his two friends who were with him at the time of the incident, namely,
Pacita G. Cruz and Josefina Vergel de Dios.
For its part, Cathay presented documentary evidence and the testimonies of Mr. Yuen; Ms. Chiu;
Norma Barrientos, Comptroller of its retained counsel; and Mr. Robson. Yuen and Robson
testified on Cathays policy of upgrading the seat accommodation of its Marco Polo Club
members when an opportunity arises. The upgrading of the Vazquezes to First Class was done
in good faith; in fact, the First Class Section is definitely much better than the Business Class in
terms of comfort, quality of food, and service from the cabin crew. They also testified that
overbooking is a widely accepted practice in the airline industry and is in accordance with the
International Air Transport Association (IATA) regulations. Airlines overbook because a lot of
passengers do not show up for their flight. With respect to Flight CX-905, there was no overall
overbooking to a degree that a passenger was bumped off or downgraded. Yuen and Robson
also stated that the demand letter of the Vazquezes was immediately acted upon. Reports were
gathered from their office in Hong Kong and immediately forwarded to their counsel Atty.
Remollo for legal advice. However, Atty. Remollo begged off because his services were likewise
retained by the Vazquezes; nonetheless, he undertook to solve the problem in behalf of Cathay.
But nothing happened until Cathay received a copy of the complaint in this case. For her part,
Ms. Chiu denied that she shouted or used foul or impolite language against the Vazquezes. Ms.
Barrientos testified on the amount of attorneys fees and other litigation expenses, such as those
for the taking of the depositions of Yuen and Chiu.

In its decision7[1] of 19 October 1998, the trial court found for the Vazquezes and decreed as
follows:
WHEREFORE, finding preponderance of evidence to sustain the instant complaint, judgment is
hereby rendered in favor of plaintiffs Vazquez spouses and against defendant Cathay Pacific
Airways, Ltd., ordering the latter to pay each plaintiff the following:

e)

a)

Nominal damages in the amount of P100,000.00 for each plaintiff;

b)

Moral damages in the amount of P2,000,000.00 for each plaintiff;

c)

Exemplary damages in the amount of P5,000,000.00 for each plaintiff;

d)

Attorneys fees and expenses of litigation in the amount of P1,000,000.00

for each plaintiff; and

Costs of suit.

SO ORDERED.
According to the trial court, Cathay offers various classes of seats from which passengers are
allowed to choose regardless of their reasons or motives, whether it be due to budgetary
constraints or whim. The choice imposes a clear obligation on Cathay to transport the
passengers in the class chosen by them. The carrier cannot, without exposing itself to liability,
force a passenger to involuntarily change his choice. The upgrading of the Vazquezes
accommodation over and above their vehement objections was due to the overbooking of the
Business Class. It was a pretext to pack as many passengers as possible into the plane to
maximize Cathays revenues. Cathays actuations in this case displayed deceit, gross
negligence, and bad faith, which entitled the Vazquezes to awards for damages.
On appeal by the petitioners, the Court of Appeals, in its decision of 24 July 2001,8[2] deleted the
award for exemplary damages; and it reduced the awards for moral and nominal damages for
each of the Vazquezes to P250,000 and P50,000, respectively, and the attorneys fees and
litigation expenses to P50,000 for both of them.
The Court of Appeals ratiocinated that by upgrading the Vazquezes to First Class, Cathay
novated the contract of carriage without the formers consent. There was a breach of contract not
because Cathay overbooked the Business Class Section of Flight CX-905 but because the latter
pushed through with the upgrading despite the objections of the Vazquezes.
However, the Court of Appeals was not convinced that Ms. Chiu shouted at, or meant to be
discourteous to, Dr. Vazquez, although it might seemed that way to the latter, who was a member

of the elite in Philippine society and was not therefore used to being harangued by anybody. Ms.
Chiu was a Hong Kong Chinese whose fractured Chinese was difficult to understand and whose
manner of speaking might sound harsh or shrill to Filipinos because of cultural differences. But
the Court of Appeals did not find her to have acted with deliberate malice, deceit, gross
negligence, or bad faith. If at all, she was negligent in not offering the First Class
accommodations to other passengers. Neither can the flight stewardess in the First Class Cabin
be said to have been in bad faith when she failed to assist Dr. Vazquez in lifting his baggage into
the overhead storage bin. There is no proof that he asked for help and was refused even after
saying that he was suffering from bilateral carpal tunnel syndrome. Anent the delay of Yuen
in responding to the demand letter of the Vazquezes, the Court of Appeals found it to have been
sufficiently explained.
The Vazquezes and Cathay separately filed motions for a reconsideration of the decision, both of
which were denied by the Court of Appeals.
Cathay seasonably filed with us this petition in this case. Cathay maintains that the award for
moral damages has no basis, since the Court of Appeals found that there was no wanton,
fraudulent, reckless and oppressive display of manners on the part of its personnel; and that the
breach of contract was not attended by fraud, malice, or bad faith. If any damage had been
suffered by the Vazquezes, it was damnum absque injuria, which is damage without injury,
damage or injury inflicted without injustice, loss or damage without violation of a legal right, or
a wrong done to a man for which the law provides no remedy. Cathay also invokes our decision
in United Airlines, Inc. v. Court of Appeals9[3] where we recognized that, in accordance with the
Civil Aeronautics Boards Economic Regulation No. 7, as amended, an overbooking that does
not exceed ten percent cannot be considered deliberate and done in bad faith. We thus deleted in
that case the awards for moral and exemplary damages, as well as attorneys fees, for lack of
proof of overbooking exceeding ten percent or of bad faith on the part of the airline carrier.
On the other hand, the Vazquezes assert that the Court of Appeals was correct in granting awards
for moral and nominal damages and attorneys fees in view of the breach of contract committed
by Cathay for transferring them from the Business Class to First Class Section without prior
notice or consent and over their vigorous objection. They likewise argue that the issuance of
passenger tickets more than the seating capacity of each section of the plane is in itself
fraudulent, malicious and tainted with bad faith.
The key issues for our consideration are whether (1) by upgrading the seat accommodation of the
Vazquezes from Business Class to First Class Cathay breached its contract of carriage with the
Vazquezes; (2) the upgrading was tainted with fraud or bad faith; and (3) the Vazquezes are
entitled to damages.
We resolve the first issue in the affirmative.
A contract is a meeting of minds between two persons whereby one agrees to give something or
render some service to another for a consideration. There is no contract unless the following

requisites concur: (1) consent of the contracting parties; (2) an object certain which is the subject
of the contract; and (3) the cause of the obligation which is established.10[4] Undoubtedly, a
contract of carriage existed between Cathay and the Vazquezes. They voluntarily and freely gave
their consent to an agreement whose object was the transportation of the Vazquezes from Manila
to Hong Kong and back to Manila, with seats in the Business Class Section of the aircraft, and
whose cause or consideration was the fare paid by the Vazquezes to Cathay.
The only problem is the legal effect of the upgrading of the seat accommodation of the
Vazquezes. Did it constitute a breach of contract?
Breach of contract is defined as the failure without legal reason to comply with the terms of a
contract.11[5] It is also defined as the [f]ailure, without legal excuse, to perform any promise
which forms the whole or part of the contract.12[6]
In previous cases, the breach of contract of carriage consisted in either the bumping off of a
passenger with confirmed reservation or the downgrading of a passengers seat accommodation
from one class to a lower class. In this case, what happened was the reverse. The contract
between the parties was for Cathay to transport the Vazquezes to Manila on a Business Class
accommodation in Flight CX-905. After checking-in their luggage at the Kai Tak Airport in
Hong Kong, the Vazquezes were given boarding cards indicating their seat assignments in the
Business Class Section. However, during the boarding time, when the Vazquezes presented their
boarding passes, they were informed that they had a seat change from Business Class to First
Class. It turned out that the Business Class was overbooked in that there were more passengers
than the number of seats. Thus, the seat assignments of the Vazquezes were given to waitlisted
passengers, and the Vazquezes, being members of the Marco Polo Club, were upgraded from
Business Class to First Class.
We note that in all their pleadings, the Vazquezes never denied that they were members of
Cathays Marco Polo Club. They knew that as members of the Club, they had priority for
upgrading of their seat accommodation at no extra cost when an opportunity arises. But, just like
other privileges, such priority could be waived. The Vazquezes should have been consulted first
whether they wanted to avail themselves of the privilege or would consent to a change of seat
accommodation before their seat assignments were given to other passengers. Normally, one
would appreciate and accept an upgrading, for it would mean a better accommodation. But,
whatever their reason was and however odd it might be, the Vazquezes had every right to decline
the upgrade and insist on the Business Class accommodation they had booked for and which was
designated in their boarding passes. They clearly waived their priority or preference when they
asked that other passengers be given the upgrade. It should not have been imposed on them over
their vehement objection. By insisting on the upgrade, Cathay breached its contract of carriage
with the Vazquezes.

We are not, however, convinced that the upgrading or the breach of contract was attended by
fraud or bad faith. Thus, we resolve the second issue in the negative.
Bad faith and fraud are allegations of fact that demand clear and convincing proof. They are
serious accusations that can be so conveniently and casually invoked, and that is why they are
never presumed. They amount to mere slogans or mudslinging unless convincingly substantiated
by whoever is alleging them.
Fraud has been defined to include an inducement through insidious machination. Insidious
machination refers to a deceitful scheme or plot with an evil or devious purpose. Deceit exists
where the party, with intent to deceive, conceals or omits to state material facts and, by reason of
such omission or concealment, the other party was induced to give consent that would not
otherwise have been given.13[7]
Bad faith does not simply connote bad judgment or negligence; it imports a dishonest purpose or
some moral obliquity and conscious doing of a wrong, a breach of a known duty through some
motive or interest or ill will that partakes of the nature of fraud.14[8]
We find no persuasive proof of fraud or bad faith in this case. The Vazquezes were not induced
to agree to the upgrading through insidious words or deceitful machination or through willful
concealment of material facts. Upon boarding, Ms. Chiu told the Vazquezes that their
accommodations were upgraded to First Class in view of their being Gold Card members of
Cathays Marco Polo Club. She was honest in telling them that their seats were already given to
other passengers and the Business Class Section was fully booked. Ms. Chiu might have failed
to consider the remedy of offering the First Class seats to other passengers. But, we find no bad
faith in her failure to do so, even if that amounted to an exercise of poor judgment.
Neither was the transfer of the Vazquezes effected for some evil or devious purpose. As testified
to by Mr. Robson, the First Class Section is better than the Business Class Section in terms of
comfort, quality of food, and service from the cabin crew; thus, the difference in fare between
the First Class and Business Class at that time was $250.15[9] Needless to state, an upgrading is
for the better condition and, definitely, for the benefit of the passenger.
We are not persuaded by the Vazquezes argument that the overbooking of the Business Class
Section constituted bad faith on the part of Cathay. Section 3 of the Economic Regulation No. 7
of the Civil Aeronautics Board, as amended, provides:
Sec 3. Scope. This regulation shall apply to every Philippine and foreign air carrier with
respect to its operation of flights or portions of flights originating from or terminating at, or
serving a point within the territory of the Republic of the Philippines insofar as it denies boarding

to a passenger on a flight, or portion of a flight inside or outside the Philippines, for which he
holds confirmed reserved space. Furthermore, this Regulation is designed to cover only honest
mistakes on the part of the carriers and excludes deliberate and willful acts of nonaccommodation. Provided, however, that overbooking not exceeding 10% of the seating capacity
of the aircraft shall not be considered as a deliberate and willful act of non-accommodation.
It is clear from this section that an overbooking that does not exceed ten percent is not
considered deliberate and therefore does not amount to bad faith.16[10] Here, while there was
admittedly an overbooking of the Business Class, there was no evidence of overbooking of the
plane beyond ten percent, and no passenger was ever bumped off or was refused to board the
aircraft.
Now we come to the third issue on damages.
The Court of Appeals awarded each of the Vazquezes moral damages in the amount of
P250,000. Article 2220 of the Civil Code provides:
Article 2220. Willful injury to property may be a legal ground for awarding moral damages if the
court should find that, under the circumstances, such damages are justly due. The same rule
applies to breaches of contract where the defendant acted fraudulently or in bad faith.
Moral damages include physical suffering, mental anguish, fright, serious anxiety, besmirched
reputation, wounded feelings, moral shock, social humiliation, and similar injury. Although
incapable of pecuniary computation, moral damages may be recovered if they are the proximate
result of the defendants wrongful act or omission.17[11] Thus, case law establishes the following
requisites for the award of moral damages: (1) there must be an injury clearly sustained by the
claimant, whether physical, mental or psychological; (2) there must be a culpable act or omission
factually established; (3) the wrongful act or omission of the defendant is the proximate cause of
the injury sustained by the claimant; and (4) the award for damages is predicated on any of the
cases stated in Article 2219 of the Civil Code.18[12]
Moral damages predicated upon a breach of contract of carriage may only be recoverable in
instances where the carrier is guilty of fraud or bad faith or where the mishap resulted in the
death of a passenger.19[13] Where in breaching the contract of carriage the airline is not shown to
have acted fraudulently or in bad faith, liability for damages is limited to the natural and
probable consequences of the breach of the obligation which the parties had foreseen or could

have reasonably foreseen. In such a case the liability does not include moral and exemplary
damages.20[14]
In this case, we have ruled that the breach of contract of carriage, which consisted in the
involuntary upgrading of the Vazquezes seat accommodation, was not attended by fraud or bad
faith. The Court of Appeals award of moral damages has, therefore, no leg to stand on.
The deletion of the award for exemplary damages by the Court of Appeals is correct. It is a
requisite in the grant of exemplary damages that the act of the offender must be accompanied by
bad faith or done in wanton, fraudulent or malevolent manner.21[15] Such requisite is absent in
this case. Moreover, to be entitled thereto the claimant must first establish his right to moral,
temperate, or compensatory damages.22[16] Since the Vazquezes are not entitled to any of these
damages, the award for exemplary damages has no legal basis. And where the awards for moral
and exemplary damages are eliminated, so must the award for attorneys fees.23[17]
The most that can be adjudged in favor of the Vazquezes for Cathays breach of contract is an
award for nominal damages under Article 2221 of the Civil Code, which reads as follows:
Article 2221 of the Civil Code provides:
Article 2221. Nominal damages are adjudicated in order that a right of the plaintiff, which has
been violated or invaded by the defendant, may be vindicated or recognized, and not for the
purpose of indemnifying the plaintiff for any loss suffered by him.
Worth noting is the fact that in Cathays Memorandum filed with this Court, it prayed only for
the deletion of the award for moral damages. It deferred to the Court of Appeals discretion in
awarding nominal damages; thus:
As far as the award of nominal damages is concerned, petitioner respectfully defers to the
Honorable Court of Appeals discretion. Aware as it is that somehow, due to the resistance of
respondents-spouses to the normally-appreciated gesture of petitioner to upgrade their
accommodations, petitioner may have disturbed the respondents-spouses wish to be with their
companions (who traveled to Hong Kong with them) at the Business Class on their flight to
Manila. Petitioner regrets that in its desire to provide the respondents-spouses with additional
amenities for the one and one-half (1 1/2) hour flight to Manila, unintended tension ensued.24[18]

Nonetheless, considering that the breach was intended to give more benefit and advantage to the
Vazquezes by upgrading their Business Class accommodation to First Class because of their
valued status as Marco Polo members, we reduce the award for nominal damages to P5,000.
Before writing finis to this decision, we find it well-worth to quote the apt observation of the
Court of Appeals regarding the awards adjudged by the trial court:
We are not amused but alarmed at the lower courts unbelievable alacrity, bordering on the
scandalous, to award excessive amounts as damages. In their complaint, appellees asked for P1
million as moral damages but the lower court awarded P4 million; they asked for P500,000.00 as
exemplary damages but the lower court cavalierly awarded a whooping P10 million; they asked
for P250,000.00 as attorneys fees but were awarded P2 million; they did not ask for nominal
damages but were awarded P200,000.00. It is as if the lower court went on a rampage, and why
it acted that way is beyond all tests of reason. In fact the excessiveness of the total award invites
the suspicion that it was the result of prejudice or corruption on the part of the trial court.
The presiding judge of the lower court is enjoined to hearken to the Supreme Courts admonition
in Singson vs. CA (282 SCRA 149 [1997]), where it said:
The well-entrenched principle is that the grant of moral damages depends upon the discretion of
the court based on the circumstances of each case. This discretion is limited by the principle that
the amount awarded should not be palpably and scandalously excessive as to indicate that it was
the result of prejudice or corruption on the part of the trial court.
and in Alitalia Airways vs. CA (187 SCRA 763 [1990], where it was held:
Nonetheless, we agree with the injunction expressed by the Court of Appeals that passengers
must not prey on international airlines for damage awards, like trophies in a safari. After all
neither the social standing nor prestige of the passenger should determine the extent to which he
would suffer because of a wrong done, since the dignity affronted in the individual is a quality
inherent in him and not conferred by these social indicators. 25[19]
We adopt as our own this observation of the Court of Appeals.
WHEREFORE, the instant petition is hereby partly GRANTED. The Decision of the Court of
Appeals of 24 July 2001 in CA-G.R. CV No. 63339 is hereby MODIFIED, and as modified, the
awards for moral damages and attorneys fees are set aside and deleted, and the award for
nominal damages is reduced to P5,000.
No pronouncement on costs.