1186 Constructive Fulfillment

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 96053 March 3, 1993
JOSEFINA TAYAG, RICARDO GALICIA, TERESITA GALICIA,
EVELYN GALICIA, JUAN GALICIA, JR. and RODRIGO
GALICIA, petitioners,
vs.
COURT OF APPEALS and ALBRIGIDO LEYVA, respondents.
Facundo T. Bautista for petitioners.
Jesus T. Garcia for private respondent.
MELO, J.:
The deed of conveyance executed on May 28, 1975 by Juan
Galicia, Sr., prior to his demise in 1979, and Celerina Labuguin,
in favor of Albrigido Leyva involving the undivided one-half
portion of a piece of land situated at Poblacion, Guimba, Nueva
Ecija for the sum of P50,000.00 under the following terms:
1. The sum of PESOS: THREE THOUSAND (P3,000.00) is
HEREBY acknowledged to have been paid upon the execution
of this agreement;
2. The sum of PESOS: TEN THOUSAND (P10,000.00) shall be
paid within ten (10) days from and after the execution of this
agreement;
3. The sum of PESOS: TEN THOUSAND (P10,000.00)
represents the VENDORS' indebtedness with the Philippine
Veterans Bank which is hereby assumed by the VENDEE; and
4. The balance of PESOS: TWENTY SEVEN THOUSAND
(P27,000.00.) shall be paid within one (1) year from and after the
execution of this instrument. (p. 53, Rollo)
is the subject matter of the present litigation between the heirs of
Juan Galicia, Sr. who assert breach of the conditions as against
private respondent's claim anchored on full payment and
compliance with the stipulations thereof.
The court of origin which tried the suit for specific performance
filed by private respondent on account of the herein petitioners'
reluctance to abide by the covenant, ruled in favor of the vendee
(p. 64, Rollo) while respondent court practically agreed with the
trial court except as to the amount to be paid to petitioners and
the refund to private respondent are concerned (p. 46, Rollo).
There is no dispute that the sum of P3,000.00 listed as first
installment was received by Juan Galicia, Sr. According to
petitioners, of the P10,000.00 to be paid within ten days from
execution of the instrument, only P9,707.00 was tendered to,
and received by, them on numerous occasions from May 29,
1975, up to November 3, 1979. Concerning private respondent's

assumption of the vendors' obligation to the Philippine Veterans

Bank, the vendee paid only the sum of P6,926.41 while the
difference the indebtedness came from Celerina Labuguin (p.
73, Rollo). Moreover, petitioners asserted that not a single
centavo of the P27,000.00 representing the remaining balance
was paid to them. Because of the apprehension that the heirs of
Juan Galicia, Sr. are disavowing the contract inked by their
predecessor, private respondent filed the complaint for specific
performance.
In addressing the issue of whether the conditions of the
instrument were performed by herein private respondent as
vendee, the Honorable Godofredo Rilloraza, Presiding Judge of
Branch 31 of the Regional Trial Court, Third Judicial Region
stationed at Guimba, Nueva Ecija, decided to uphold private
respondent's theory on the basis of constructive fulfillment under
Article 1186 and estoppel through acceptance of piecemeal
payments in line with Article 1235 of the Civil Code.
Anent the P10,000.00 specified as second installment, the lower
court counted against the vendors the candid statement of
Josefina Tayag who sat on the witness stand and made the
admission that the check issued as payment thereof was
nonetheless paid on a staggered basis when the check was
dishonored (TSN, September 1, 1983, pp. 3-4; p. 3, Decision; p.
66, Rollo). Regarding the third condition, the trial court noted that
plaintiff below paid more than P6,000.00 to the Philippine
Veterans Bank but Celerina Labuguin, the sister and co-vendor
of Juan Galicia, Sr. paid P3,778.77 which circumstance was
construed to be a ploy under Article 1186 of the Civil Code that
"prematurely prevented plaintiff from paying the installment fully"
and "for the purpose of withdrawing the title to the lot". The
acceptance by petitioners of the various payments even beyond
the periods agreed upon, was perceived by the lower court as
tantamount to faithful performance of the obligation pursuant to
Article 1235 of the Civil Code. Furthermore, the trial court noted
that private respondent consigned P18,520.00, an amount
sufficient to offset the remaining balance, leaving the sum of
P1,315.00 to be credited to private respondent.
On September 12, 1984, judgment was rendered:
1. Ordering the defendants heirs of Juan Galicia, to execute
the Deed of Sale of their undivided ONE HALF (1/2) portion of
Lot No. 1130, Guimba Cadastre, covered by TCT No. NT120563, in favor of plaintiff Albrigido Leyva, with an equal
frontage facing the national road upon finality of judgment; that,
in their default, the Clerk of Court II, is hereby ordered to execute
the deed of conveyance in line with the provisions of Section 10,
Rule 39 of the Rules of Court;
2. Ordering the defendants, heirs of Juan Galicia, jointly and
severally to pay attorney's fees of P6,000.00 and the further sum
of P3,000.00 for actual and compensatory damages;
3. Ordering Celerina Labuguin and the other defendants herein
to surrender to the Court the owner's duplicate of TCT No. NT-

120563, province of Nueva Ecija, for the use of plaintiff in

registering the portion, subject matter of the instant suit;
4. Ordering the withdrawal of the amount of P18,520.00 now
consigned with the Court, and the amount of P17,204.75 be
delivered to the heirs of Juan Galicia as payment of the balance
of the sale of the lot in question, the defendants herein after
deducting the amount of attorney's fees and damages awarded
to the plaintiff hereof and the delivery to the plaintiff of the further
sum of P1,315.25 excess or over payment and, defendants to
pay the cost of the suit. (p. 69, Rollo)
and following the appeal interposed with respondent court,
Justice Dayrit with whom Justices Purisima and Aldecoa, Jr.
concurred, modified the fourth paragraph of the decretal portion
to read:
4. Ordering the withdrawal of the amount of P18,500.00 now
consigned with the Court, and that the amount of P16,870.52 be
delivered to the heirs of Juan Galicia, Sr. as payment to the
unpaid balance of the sale, including the reimbursement of the
amount paid to Philippine Veterans Bank, minus the amount of
attorney's fees and damages awarded in favor of plaintiff. The
excess of P1,649.48 will be returned to plaintiff. The costs
against defendants. (p. 51, Rollo)
As to how the foregoing directive was arrived at, the appellate
court declared:
With respect to the fourth condition stipulated in the contract, the
period indicated therein is deemed modified by the parties when
the heirs of Juan Galicia, Sr. accepted payments without
objection up to November 3, 1979. On the basis of receipts
presented by appellee commencing from August 8, 1975 up to
November 3, 1979, a total amount of P13,908.25 has been paid,
thereby leaving a balance of P13,091.75. Said unpaid balance
plus the amount reimbursable to appellant in the amount of
P3,778.77 will leave an unpaid total of P16,870.52. Since
appellee consigned in court the sum of P18,500.00, he is entitled
to get the excess of P1,629.48. Thus, when the heirs of Juan
Galicia, Sr. (obligees) accepted the performance, knowing its
incompleteness or irregularity and without expressing any protest
or objection, the obligation is deemed fully complied with (Article
1235, Civil Code). (p. 50,Rollo)
Petitioners are of the impression that the decision appealed
from, which agreed with the conclusions of the trial court, is
vulnerable to attack via the recourse before Us on the principal
supposition that the full consideration of the agreement to sell
was not paid by private respondent and, therefore, the contract
must be rescinded.
The suggestion of petitioners that the covenant must be
cancelled in the light of private respondent's so-called breach
seems to overlook petitioners' demeanor who, instead of
immediately filing the case precisely to rescind the instrument
because of non-compliance, allowed private respondent to effect
numerous payments posterior to the grace periods provided in

the contract. This apathy of petitioners who even permitted

private respondent to take the initiative in filing the suit for
specific performance against them, is akin to waiver or
abandonment of the right to rescind normally conferred by Article
1191 of the Civil Code. As aptly observed by Justice Gutierrez,
Jr. in Angeles vs. Calasanz (135 SCRA 323 [1985]; 4 Paras,
Civil Code of the Philippines Annotated, Twelfth Ed. [1989], p.
203:
. . . We agree with the plaintiffs-appellees that when the
defendants-appellants, instead of availing of their alleged right to
rescind, have accepted and received delayed payments of
installments, though the plaintiffs-appellees have been in arrears
beyond the grace period mentioned in paragraph 6 of the
contract, the defendants-appellants have waived, and are now
estopped from exercising their alleged right of rescission . . .
In Development Bank of the Philippines vs. Sarandi (5 CAR (25)
811; 817-818; cited in 4 Padilla, Civil Code Annotated, Seventh
Ed. [1987], pp. 212-213) a similar opinion was expressed to the
effect that:
In a perfected contract of sale of land under an agreed schedule
of payments, while the parties may mutually oblige each other to
compel the specific performance of the monthly amortization
plan, and upon failure of the buyer to make the payment, the
seller has the right to ask for a rescission of the contract under
Art. 1191 of the Civil Code, this shall be deemed waived by
acceptance of posterior payments.
Both the trial and appellate courts were, therefore, correct in
sustaining the claim of private respondent anchored on estoppel
or waiver by acceptance of delayed payments under Article 1235
of the Civil Code in that:
When the obligee accepts the performance, knowing its
incompleteness or irregularity, and without expressing any
protest or objection, the obligation is deemed fully complied with.
considering that the heirs of Juan Galicia, Sr. accommodated
private respondent by accepting the latter's delayed payments
not only beyond the grace periods but also during the pendency
of the case for specific performance (p. 27, Memorandum for
petitioners; p. 166, Rollo). Indeed, the right to rescind is not
absolute and will not be granted where there has been
substantial compliance by partial payments (4 Caguioa,
Comments and Cases on Civil Law, First Ed. [1968] p. 132). By
and large, petitioners' actuation is susceptible of but one
construction that they are now estopped from reneging from
their commitment on account of acceptance of benefits arising
from overdue accounts of private respondent.
Now, as to the issue of whether payments had in fact been
made, there is no doubt that the second installment was actually
paid to the heirs of Juan Galicia, Sr. due to Josefina Tayag's
admission in judicio that the sum of P10,000.00 was fully
liquidated. It is thus erroneous for petitioners to suppose that
"the evidence in the records do not support this conclusion" (p.

18, Memorandum for Petitioners; p. 157, Rollo). A contrario,

when the court of origin, as well as the appellate court,
emphasized the frank representation along this line of Josefina
Tayag before the trial court (TSN, September l, 1983, pp. 3-4; p.
5, Decision in CA-G.R. CV No. 13339, p. 50, Rollo; p. 3,
Decision in Civil Case No. 681-G, p. 66, Rollo), petitioners chose
to remain completely mute even at this stage despite the
opportunity accorded to them, for clarification. Consequently, the
prejudicial aftermath of Josefina Tayag's spontaneous reaction
may no longer be obliterated on the basis of estoppel (Article
1431, Civil Code; Section 4, Rule 129; Section 2(a), Rule 131,
Revised Rules on Evidence).
Insofar as the third item of the contract is concerned, it may be
recalled that respondent court applied Article 1186 of the Civil
Code on constructive fulfillment which petitioners claim should
not have been appreciated because they are the obligees while
the proviso in point speaks of the obligor. But, petitioners must
concede that in a reciprocal obligation like a contract of
purchase, (Ang vs. Court of Appeals, 170 SCRA 286 [1989];
4 Paras, supra, at p. 201), both parties are mutually obligors and
also obligees (4 Padilla, supra, at p. 197), and any of the
contracting parties may, upon non-fulfillment by the other privy of
his part of the prestation, rescind the contract or seek fulfillment
(Article 1191, Civil Code). In short, it is puerile for petitioners to
say that they are the only obligees under the contract since they
are also bound as obligors to respect the stipulation in permitting
private respondent to assume the loan with the Philippine
Veterans Bank which petitioners impeded when they paid the
balance of said loan. As vendors, they are supposed to execute
the final deed of sale upon full payment of the balance as
determined hereafter.
Lastly, petitioners argue that there was no valid tender of
payment nor consignation of the sum of P18,520.00 which they
acknowledge to have been deposited in court on January 22,
1981 five years after the amount of P27,000.00 had to be paid
(p. 23, Memorandum for Petitioners; p. 162, Rollo). Again this
suggestion ignores the fact that consignation alone produced the
effect of payment in the case at bar because it was established
below that two or more heirs of Juan Galicia, Sr. claimed the
same right to collect (Article 1256, (4), Civil Code; pp. 4-5,
Decision in Civil Case No. 681-G; pp. 67-68, Rollo). Moreover,
petitioners did not bother to refute the evidence on hand that,
aside from the P18,520.00 (not P18,500.00 as computed by
respondent court) which was consigned, private respondent also
paid the sum of P13,908.25 (Exhibits "F" to "CC"; p. 50, Rollo).
These two figures representing private respondent's payment of
the fourth condition amount to P32,428.25, less the P3,778.77
paid by petitioners to the bank, will lead us to the sum of
P28,649.48 or a refund of P1,649.48 to private respondent as
overpayment of the P27,000.00 balance.

WHEREFORE, the petition is hereby DISMISSED and the

decision appealed from is hereby AFFIRMED with the slight
modification of Paragraph 4 of the dispositive thereof which is
thus amended to read:
4. ordering the withdrawal of the sum of P18,520.00 consigned
with the Regional Trial Court, and that the amount of P16,870.52
be delivered by private respondent with legal rate of interest until
fully paid to the heirs of Juan Galicia, Sr. as balance of the sale
including reimbursement of the sum paid to the Philippine
Veterans Bank, minus the attorney's fees and damages awarded
in favor of private respondent. The excess of P1,649.48 shall be
returned to private respondent also with legal interest until fully
paid by petitioners. With costs against petitioners.
SO ORDERED.

1191 Recission/Resolution

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 decision[1] of the Court of Appeals dated 30
September 1998 which affirmed with modification the decision of
Branch 135 of the Regional Trial Court (RTC) of Makati City,
dismissing the complaint for Specific Performance and Damages
filed by petitioners, and its Resolution[2] dated 22 July 1999
denying petitioners motion for reconsideration.
A complaint[3] for Specific Performance and Damages was filed
by petitioners-spouses Felipe and Leticia Cannu against
respondents-spouses Gil and Fernandina Galang and the
National Home Mortgage Finance Corporation (NHMFC) before
Branch 135 of the RTC of Makati, on 24 June 1993. The case
was docketed as Civil Case No. 93-2069.
The facts that gave rise to the aforesaid complaint are as follows:
Respondents-spouses Gil and Fernandina Galang obtained a
loan from Fortune Savings & Loan Association for P173,800.00
to purchase a house and lot located at Pulang Lupa, Las Pias,
with an area of 150 square meters covered by Transfer
Certificate of Title (TCT) No. T-8505 in the names of
respondents-spouses. To secure payment, a real estate
mortgage was constituted on the said house and lot in favor of
Fortune Savings & Loan Association. In early 1990, NHMFC
purchased the mortgage loan of respondents-spouses from
Fortune Savings & Loan Association forP173,800.00.
Respondent Fernandina Galang authorized[4] her attorney-infact, Adelina R. Timbang, to sell the subject house and lot.

Petitioner Leticia Cannu agreed to buy the property

for P120,000.00 and to assume the balance of the mortgage
obligations with the NHMFC and with CERF Realty[5] (the
Developer of the property).
Of the P120,000.00, the following payments were made by
petitioners:
Date
Amount Paid
July 19, 1990
P40,000.00[6]
March 13, 1991
15,000.00[7]
April 6, 1991
15,000.00[8]
November 28, 1991
5,000.00[9]
Total
P75,000.00
Thus, leaving a balance of P45,000.00.
A Deed of Sale with Assumption of Mortgage Obligation[10] dated
20 August 1990 was made and entered into by and between
spouses Fernandina and Gil Galang (vendors) and spouses
Leticia and Felipe Cannu (vendees) over the house and lot in
question which contains, inter alia, the following:
NOW, THEREFORE, for and in consideration of the sum of TWO
HUNDRED FIFTY THOUSAND PESOS (P250,000.00),
Philippine Currency, receipt of which is hereby acknowledged by
the Vendors and the assumption of the mortgage obligation, the
Vendors hereby sell, cede and transfer unto the Vendees, their
heirs, assigns and successor in interest the above-described
property together with the existing improvement thereon.
It is a special condition of this contract that the Vendees shall
assume and continue with the payment of the amortization with
the National Home Mortgage Finance Corporation Inc. in the
outstanding balance of P_______________, as of __________
and shall comply with and abide by the terms and conditions of
the mortgage document dated Feb. 27, 1989 and identified as
Doc. No. 82, Page 18, Book VII, S. of 1989 of Notary Public for
Quezon City Marites Sto. Tomas Alonzo, as if the Vendees are
the original signatories.
Petitioners immediately took possession and occupied the house
and lot.
Petitioners made the following payments to the NHMFC:
Date
Amount
Receipt No.
July 9, 1990
P 14,312.47
D-503986[11]
March 12, 1991
8,000.00
D-729478[12]
February 4, 1992
10,000.00
D-999127[13]
March 31, 1993
6,000.00
E-563749[14]
April 19, 1993
10,000.00
E-582432[15]
April 27, 1993
7,000.00
E-618326[16]
P 55,312.47
Petitioners paid the equity or second mortgage to CERF
Realty.[17]
Despite requests from Adelina R. Timbang and Fernandina
Galang to pay the balance of P45,000.00 or in the alternative to
vacate the property in question, petitioners refused to do so.

In a letter[18] dated 29 March 1993, petitioner Leticia Cannu

informed Mr. Fermin T. Arzaga, Vice President, Fund
Management Group of the NHMFC, that the ownership rights
over the land covered by TCT No. T-8505 in the names of
respondents-spouses had been ceded and transferred to her
and her husband per Deed of Sale with Assumption of Mortgage,
and that they were obligated to assume the mortgage and pay
the remaining unpaid loan balance. Petitioners formal
assumption of mortgage was not approved by the NHMFC.[19]
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 Reconsideration[25] was filed, but same was
denied. Petitioners appealed the decision of the RTC to the
Court of Appeals. On 30 September 1998, the Court of Appeals
disposed of the appeal as follows:
Obligations arising from contract have the force of law between
the contracting parties and should be complied in good
faith. The terms of a written contract are binding on the parties
thereto.
Plaintiffs-appellants therefore are under obligation to pay
defendants-appellees spouses Galang the sum of P250,000.00,
and to assume the mortgage.
Records show that upon the execution of the Contract of Sale or
on July 19, 1990 plaintiffs-appellants paid defendants-appellees
spouses Galang the amount of only P40,000.00.
The next payment was made by plaintiffs-appellants on March
13, 1991 or eight (8) months after the execution of the
contract. Plaintiffs-appellants paid the amount of P5,000.00.
The next payment was made on April 6, 1991 for P15,000.00
and on November 28, 1991, for another P15,000.00.
From 1991 until the present, no other payments were made by
plaintiffs-appellants to defendants-appellees spouses Galang.
Out of the P250,000.00 purchase price which was supposed to
be paid on the day of the execution of contract in July, 1990
plaintiffs-appellants have paid, in thespan of eight (8) years, from
1990 to present, the amount of only P75,000.00. Plaintiffsappellants 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 plaintiffsappellants 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, plaintiffsappellants 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 reconsideration[27] filed by petitioners was denied
by the Court of Appeals in a Resolution[28] dated 22 July 1999.
Hence, this Petition for Certiorari.
Petitioners raise the following assignment of errors:
1.
THE HONORABLE COURT OF APPEALS ERRED WHEN
IT HELD THAT PETITIONERS BREACH OF THE OBLIGATION
WAS SUBSTANTIAL.
2.
THE HONORABLE COURT OF APPEALS ERRED WHEN
IN EFFECT IT HELD THAT THERE WAS NO SUBSTANTIAL
COMPLIANCE WITH THE OBLIGATION TO PAY THE
MONTHLY AMORTIZATION WITH NHMFC.
3.
THE HONORABLE COURT OF APPEALS ERRED WHEN
IT FAILED TO CONSIDER THE OTHER FACTS AND
CIRCUMSTANCES THAT MILITATE AGAINST RESCISSION.
4.
THE HONORABLE COURT OF APPEALS ERRED WHEN
IT FAILED TO CONSIDER THAT THE ACTION FOR
RESCISSION IS SUBSIDIARY.[29]
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 respondentsspouses 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 respondentsspouses, 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-infact. 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 computation[32] of petitioners as to the breakdown
of the P250,000.00 consideration, we find the same to be selfserving and unsupported by evidence.
On the first assigned error, petitioners argue that the Court erred
when it ruled that their breach of the obligation was substantial.
Settled is the rule that rescission or, more accurately,
resolution,[33] of a party to an obligation under Article 1191[34] is
predicated on a breach of faith by the other party that violates
the reciprocity between them.[35] Article 1191 reads:
Art. 1191. The power to rescind obligations is implied in
reciprocal ones, in case one of the obligors should not comply
with what is incumbent upon him.
The injured party may choose between the fulfillment and the
rescission of the obligation, with the payment of damages in
either case. He may also seek rescission, even after he has
chosen fulfillment, if the latter should become impossible.

The court shall decree the rescission claimed, unless there be

just cause authorizing the fixing of a period.
Rescission will not be permitted for a slight or casual breach of
the contract. Rescission may be had only for such breaches that
are substantial and fundamental as to defeat the object of the
parties in making the agreement.[36] The question of whether a
breach of contract is substantial depends upon the attending
circumstances[37] and not merely on the percentage of the
amount not paid.
In the case at bar, we find petitioners failure to pay the
remaining balance of P45,000.00 to be substantial. Even
assuming arguendo that only said amount was left out of the
supposed consideration of P250,000.00, or eighteen (18%)
percent thereof, this percentage is still substantial. Taken
together with the fact that the last payment made was on 28
November 1991, eighteen months before the respondent
Fernandina Galang paid the outstanding balance of the
mortgage loan with NHMFC, the intention of petitioners to
renege on their obligation is utterly clear.
Citing Massive Construction, Inc. v. Intermediate Appellate
Court,[38] petitioners ask that they be granted additional time to
complete their obligation. Under the facts of the case, to give
petitioners additional time to comply with their obligation will be
putting premium on their blatant non-compliance of their
obligation. They had all the time to do what was required of
them (i.e., pay the P45,000.00 balance and to properly assume
the mortgage loan with the NHMFC), but still they failed to
comply. Despite demands for them to pay the balance, no
payments were made.[39]
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 NHMFC[42] on account of petitioners
non-submission of requirements in order to be considered as
assignees/successors-in-interest over the property covered by
the mortgage obligation.[43]
On the third assigned error, petitioners claim there was no clear
evidence to show that respondents-spouses Galang demanded
from them a strict and/or faithful compliance of the Deed of Sale
with Assumption of Mortgage.

We do not agree.
There is sufficient evidence showing that demands were made
from petitioners to comply with their obligation. Adelina R.
Timbang, attorney-in-fact of respondents-spouses, per
instruction of respondent Fernandina Galang, made constant
follow-ups after the last payment made on 28 November 1991,
but petitioners did not pay.[44] Respondent Fernandina Galang
stated in her Answer[45] that upon her arrival from America in
October 1992, she demanded from petitioners the complete
compliance of their obligation by paying the full amount of the
consideration (P120,000.00) or in the alternative to vacate the
property in question, but still, petitioners refused to fulfill their
obligations under the Deed of Sale with Assumption of
Mortgage. Sometime in March 1993, due to the fact that full
payment has not been paid and that the monthly amortizations
with the NHMFC have not been fully updated, she made her
intentions clear with petitioner Leticia Cannu that she will rescind
or annul the Deed of Sale with Assumption of Mortgage.
We likewise rule that there was no waiver on the part of
petitioners to demand the rescission of the Deed of Sale with
Assumption of Mortgage. The fact that respondents-spouses
accepted, through their attorney-in-fact, payments in installments
does not constitute waiver on their part to exercise their right to
rescind the Deed of Sale with Assumption of Mortgage. Adelina
Timbang merely accepted the installment payments as an
accommodation to petitioners since they kept on promising they
would pay. However, after the lapse of considerable time (18
months from last payment) and the purchase price was not yet
fully paid, respondents-spouses exercised their right of
rescission when they paid the outstanding balance of the
mortgage loan with NHMFC. It was only after petitioners
stopped paying that respondents-spouses moved to exercise
their right of rescission.
Petitioners cite the case of Angeles v. Calasanz[46] to support
their claim that respondents-spouses waived their right to
rescind. We cannot apply this case since it is not on all fours
with the case before us. First, in Angeles, the breach was only
slight and casual which is not true in the case before
us. Second, in Angeles, the buyer had already paid more than
the principal obligation, while in the instant case, the buyers
(petitioners) did not pay P45,000.00 of the P120,000.00 they
were obligated to pay.
We find petitioners statement that there is no evidence of
prejudice or damage to justify rescission in favor of respondentsspouses to be unfounded. The damage suffered by
respondents-spouses is the effect of petitioners failure to fully
comply with their obligation, that is, their failure to pay the
remaining P45,000.00 and to update the amortizations on the
mortgage loan with the NHMFC. Petitioners have in their
possession the property under litigation. Having parted with their
house and lot, respondents-spouses should be fully

compensated for it, not only monetarily, but also as to the terms
and conditions agreed upon by the parties. This did not happen
in the case before us.
Citing Seva v. Berwin & Co., Inc.,[47] petitioners argue that no
rescission should be decreed because there is no evidence on
record that respondent Fernandina Galang is ready, willing and
able to comply with her own obligation to restore to them the
total payments they made. They added that no allegation to that
effect is contained in respondents-spouses Answer.
We find this argument to be misleading.
First, the facts obtaining in Seva case do not fall squarely with
the case on hand. In the former, the failure of one party to
perform his obligation was the fault of the other party, while in
the case on hand, failure on the part of petitioners to perform
their obligation was due to their own fault.
Second, what is stated in the book of Justice Edgardo L. Paras is
[i]t (referring to the right to rescind or resolve) can be demanded
only if the plaintiff is ready, willing and able to comply with his
own obligation, and the other is not. In other words, if one party
has complied or fulfilled his obligation, and the other has not,
then the former can exercise his right to rescind. In this case,
respondents-spouses complied with their obligation when they
gave the possession of the property in question to
petitioners. Thus, they have the right to ask for the rescission of
the Deed of Sale with Assumption of Mortgage.
On the fourth assigned error, petitioners, relying on Article 1383
of the Civil Code, maintain that the Court of Appeals erred when
it failed to consider that the action for rescission is subsidiary.
Their reliance on Article 1383 is misplaced.
The subsidiary character of the action for rescission applies to
contracts enumerated in Articles 1381[48] of the Civil Code. The
contract involved in the case before us is not one of those
mentioned therein. The provision that applies in the case at bar
is Article 1191.
In the concurring opinion of Justice Jose B.L. Reyes in Universal
Food Corp. v. Court of Appeals,[49] rescission under Article 1191
was distinguished from rescission under Article 1381. Justice
J.B.L. Reyes said:
. . . The rescission on account of breach of stipulations is not
predicated on injury to economic interests of the party plaintiff
but on the breach of faith by the defendant, that violates the
reciprocity between the parties. It is not a subsidiary action, and
Article 1191 may be scanned without disclosing anywhere that
the action for rescission thereunder is subordinated to anything
other than the culpable breach of his obligations by the
defendant. This rescission is a principal action retaliatory in
character, it being unjust that a party be held bound to fulfill his
promises when the other violates his. As expressed in the old
Latin aphorism: Non servanti fidem, non est fides
servanda. Hence, the reparation of damages for the breach is
purely secondary.

On the contrary, in the rescission by reason of lesion or

economic prejudice, the cause of action is subordinated to the
existence of that prejudice, because it is theraison 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, testified[53] that same has been paid, it is but
proper to return this amount to petitioners. The three amounts
total P165,312.47 -- the sum to be returned to petitioners.
WHEREFORE, premises considered, the decision of the Court of
Appeals is hereby AFFIRMED with MODIFICATION. Spouses
Gil and Fernandina Galang are hereby ordered to return the
partial payments made by petitioners in the amount of
P165,312.47. With costs.
SO ORDERED.
Puno, Acting C.J., (Chairman), Austria-Martinez, and Callejo, Sr.,
JJ., concur.
Tinga, J., out of the country.
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 147695
September 13, 2007
MANUEL C. PAGTALUNAN, petitioner,
vs.
RUFINA DELA CRUZ VDA. DE MANZANO, respondent.
DECISION
AZCUNA, J.:
This is a petition for review on certiorari under Rule 45 of the
Rules of Court of the Court of Appeals (CA) Decision
promulgated on October 30, 2000 and its Resolution dated
March 23, 2001 denying petitioners motion for reconsideration.
The Decision of the CA affirmed the Decision of the Regional
Trial Court (RTC) of Malolos, Bulacan, dated June 25, 1999
dismissing the case of unlawful detainer for lack of merit.
The facts are as follows:
On July 19, 1974, Patricio Pagtalunan (Patricio), petitioners
stepfather and predecessor-in-interest, entered into a Contract to

Sell with respondent, wife of Patricios former mechanic, Teodoro

Manzano, whereby the former agreed to sell, and the latter to
buy, a house and lot which formed half of a parcel of land,
covered by Transfer Certificate of Title (TCT) No. T-10029 (now
TCT No. RT59929 [T-254773]), with an area of 236 square
meters. The consideration of P17,800 was agreed to be paid in
the following manner: P1,500 as downpayment upon execution
of the Contract to Sell, and the balance to be paid in equal
monthly installments of P150 on or before the last day of each
month until fully paid.
It was also stipulated in the contract that respondent could
immediately occupy the house and lot; that in case of default in
the payment of any of the installments for 90 days after its due
date, the contract would be automatically rescinded without need
of judicial declaration, and that all payments made and all
improvements done on the premises by respondent would be
considered as rentals for the use and occupation of the property
or payment for damages suffered, and respondent was obliged
to peacefully vacate the premises and deliver the possession
thereof to the vendor.
Petitioner claimed that respondent paid only P12,950. She
allegedly stopped paying after December 1979 without any
justification or explanation. Moreover, in a "Kasunduan"1 dated
November 18, 1979, respondent borrowedP3,000 from Patricio
payable in one year either in one lump sum payment or by
installments, failing which the balance of the loan would be
added to the principal subject of the monthly amortizations on
the land.
Lastly, petitioner asserted that when respondent ceased paying
her installments, her status of buyer was automatically
transformed to that of a lessee. Therefore, she continued to
possess the property by mere tolerance of Patricio and,
subsequently, of petitioner.
On the other hand, respondent alleged that she paid her monthly
installments religiously, until sometime in 1980 when Patricio
changed his mind and offered to refund all her payments
provided she would surrender the house. She refused. Patricio
then started harassing her and began demolishing the house
portion by portion. Respondent admitted that she failed to pay
some installments after December 1979, but that she resumed
paying in 1980 until her balance dwindled to P5,650. She
claimed that despite several months of delay in payment, Patricio
never sued for ejectment and even accepted her late payments.
Respondent also averred that on September 14, 1981, she and
Patricio signed an agreement (Exh. 2) whereby he consented to
the suspension of respondents monthly payments until
December 1981. However, even before the lapse of said period,
Patricio resumed demolishing respondents house, prompting
her to lodge a complaint with theBarangay Captain who advised
her that she could continue suspending payment even beyond

December 31, 1981 until Patricio returned all the materials he

took from her house. This Patricio failed to do until his death.
Respondent did not deny that she still owed Patricio P5,650, but
claimed that she did not resume paying her monthly installment
because of the unlawful acts committed by Patricio, as well as
the filing of the ejectment case against her. She denied having
any knowledge of the Kasunduan of November 18, 1979.
Patricio and his wife died on September 17, 1992 and on
October 17, 1994, respectively. Petitioner became their sole
successor-in-interest pursuant to a waiver by the other heirs. On
March 5, 1997, respondent received a letter from petitioners
counsel dated February 24, 1997 demanding that she vacate the
premises within five days on the ground that her possession had
become unlawful. Respondent ignored the demand. The Punong
Barangay failed to settle the dispute amicably.
On April 8, 1997, petitioner filed a Complaint for unlawful
detainer against respondent with the Municipal Trial Court (MTC)
of Guiguinto, Bulacan praying that, after hearing, judgment be
rendered ordering respondent to immediately vacate the subject
property and surrender it to petitioner; forfeiting the amount
of P12,950 in favor of petitioner as rentals; ordering respondent
to pay petitioner the amount of P3,000 under the Kasunduan and
the amount of P500 per month from January 1980 until she
vacates the property, and to pay petitioner attorneys fees and
the costs.
On December 22, 1998, the MTC rendered a decision in favor of
petitioner. It stated that although the Contract to Sell provides for
a rescission of the agreement upon failure of the vendee to pay
any installment, what the contract actually allows is properly
termed a resolution under Art. 1191 of the Civil Code.
The MTC held that respondents failure to pay not a few
installments caused the resolution or termination of the Contract
to Sell. The last payment made by respondent was on January 9,
1980 (Exh. 71). Thereafter, respondents right of possession ipso
facto ceased to be a legal right, and became possession by
mere tolerance of Patricio and his successors-in-interest. Said
tolerance ceased upon demand on respondent to vacate the
property.
The dispositive portion of the MTC Decision reads:
Wherefore, all the foregoing considered, judgment is hereby
rendered, ordering the defendant:
a. to vacate the property covered by Transfer Certificate of Title
No. T-10029 of the Register of Deeds of Bulacan (now TCT No.
RT-59929 of the Register of Deeds of Bulacan), and to surrender
possession thereof to the plaintiff;
b. to pay the plaintiff the amount of P113,500 representing
rentals from January 1980 to the present;
c. to pay the plaintiff such amount of rentals, at P500/month, that
may become due after the date of judgment, until she finally
vacates the subject property;

d. to pay to the plaintiff the amount of P25,000 as attorneys

fees.
SO ORDERED.2
On appeal, the RTC of Malolos, Bulacan, in a Decision dated
June 25, 1999, reversed the decision of the MTC and dismissed
the case for lack of merit. According to the RTC, the agreement
could not be automatically rescinded since there was delivery to
the buyer. A judicial determination of rescission must be secured
by petitioner as a condition precedent to convert the
possession de facto of respondent from lawful to unlawful.
The dispositive portion of the RTC Decision states:
WHEREFORE, judgment is hereby rendered reversing the
decision of the Municipal Trial Court of Guiguinto, Bulacan and
the ejectment case instead be dismissed for lack of merit.3
The motion for reconsideration and motion for execution filed by
petitioner were denied by the RTC for lack of merit in an Order
dated August 10, 1999.
Thereafter, petitioner filed a petition for review with the CA.
In a Decision promulgated on October 30, 2000, the CA denied
the petition and affirmed the Decision of the RTC. The
dispositive portion of the Decision reads:
WHEREFORE, the petition for review on certiorari is Denied.
The assailed Decision of the Regional Trial Court of Malolos,
Bulacan dated 25 June 1999 and its Order dated 10 August
1999 are hereby AFFIRMED.
SO ORDERED. 4
The CA found that the parties, as well as the MTC and RTC
failed to advert to and to apply Republic Act (R.A.) No. 6552,
more commonly referred to as the Maceda Law, which is a
special law enacted in 1972 to protect buyers of real estate on
installment payments against onerous and oppressive
conditions.
The CA held that the Contract to Sell was not validly cancelled or
rescinded under Sec. 3 (b) of R.A. No. 6552, and recognized
respondents right to continue occupying unmolested the
property subject of the contract to sell.
The CA denied petitioners motion for reconsideration in a
Resolution dated March 23, 2001.
Hence, this petition for review on certiorari.
Petitioner contends that:
A. Respondent Dela Cruz must bear the consequences of her
deliberate withholding of, and refusal to pay, the monthly
payment. The Court of Appeals erred in allowing Dela Cruz who
acted in bad faith from benefiting under the Maceda Law.
B. The Court of Appeals erred in resolving the issue on the
applicability of the Maceda Law, which issue was not raised in
the proceedings a quo.
C. Assuming arguendo that the RTC was correct in ruling that
the MTC has no jurisdiction over a rescission case, the Court of
Appeals erred in not remanding the case to the RTC for trial.5

Petitioner submits that the Maceda Law supports and recognizes

the right of vendors of real estate to cancel the sale outside of
court, without need for a judicial declaration of rescission,
citing Luzon Brokerage Co., Inc., v. Maritime Building Co., Inc.6
Petitioner contends that respondent also had more than the
grace periods provided under the Maceda Law within which to
pay. Under Sec. 37 of the said law, a buyer who has paid at least
two years of installments has a grace period of one month for
every year of installment paid. Based on the amount of P12,950
which respondent had already paid, she is entitled to a grace
period of six months within which to pay her unpaid installments
after December, 1979. Respondent was given more than six
months from January 1980 within which to settle her unpaid
installments, but she failed to do so. Petitioners demand to
vacate was sent to respondent in February 1997.
There is nothing in the Maceda Law, petitioner asserts, which
gives the buyer a right to pay arrearages after the grace periods
have lapsed, in the event of an invalid demand for rescission.
The Maceda Law only provides that actual cancellation shall take
place after 30 days from receipt of the notice of cancellation or
demand for rescission and upon full payment of the cash
surrender value to the buyer.
Petitioner contends that his demand letter dated February 24,
1997 should be considered the notice of cancellation since the
demand letter informed respondent that she had "long ceased to
have any right to possess the premises in question due to [her]
failure to pay without justifiable cause." In support of his
contention, he cited Layug v. Intermediate Appellate
Court8 which held that "the additional formality of a demand on
[the sellers] part for rescission by notarial act would appear, in
the premises, to be merely circuitous and consequently
superfluous." He stated that in Layug, the seller already made a
written demand upon the buyer.
In addition, petitioner asserts that whatever cash surrender value
respondent is entitled to have been applied and must be applied
to rentals for her use of the house and lot after December, 1979
or after she stopped payment of her installments.
Petitioner argues that assuming Patricio accepted respondents
delayed installments in 1981, such act cannot prevent the
cancellation of the Contract to Sell. Installments after 1981 were
still unpaid and the applicable grace periods under the Maceda
Law on the unpaid installments have long lapsed. Respondent
cannot be allowed to hide behind the Maceda Law. She acted
with bad faith and must bear the consequences of her deliberate
withholding of and refusal to make the monthly payments.
Petitioner also contends that the applicability of the Maceda Law
was never raised in the proceedings below; hence, it should not
have been applied by the CA in resolving the case.
The Court is not persuaded.

The CA correctly ruled that R.A No. 6552, which governs sales
of real estate on installment, is applicable in the resolution of this
case.
This case originated as an action for unlawful detainer.
Respondent is alleged to be illegally withholding possession of
the subject property after the termination of the Contract to Sell
between Patricio and respondent. It is, therefore, incumbent
upon petitioner to prove that the Contract to Sell had been
cancelled in accordance with R.A. No. 6552.
The pertinent provision of R.A. No. 6552 reads:
Sec. 3. In all transactions or contracts involving the sale or
financing of real estate on installment payments, including
residential condominium apartments but excluding industrial lots,
commercial buildings and sales to tenants under Republic Act
Numbered Thirty-eight hundred forty-four as amended by
Republic Act Numbered Sixty-three hundred eighty-nine, where
the buyer has paid at least two years of installments, the buyer is
entitled to the following rights in case he defaults in the payment
of succeeding installments:
(a) To pay, without additional interest, the unpaid installments
due within the total grace period earned by him, which is hereby
fixed at the rate of one month grace period for every one year of
installment payments made: Provided, That this right shall be
exercised by the buyer only once in every five years of the life of
the contract and its extensions, if any.
(b) If the contract is cancelled, the seller shall refund to the
buyer the cash surrender value of the payments on the
property equivalent to fifty percent of the total payments made
and, after five years of installments, an additional five percent
every year but not to exceed ninety percent of the total payments
made: Provided, That the actual cancellation of the contract
shall take place after thirty days from receipt by the buyer of
the notice of cancellation or the demand for rescission of
the contract by a notarial act and upon full payment of the
cash surrender value to the buyer.9
R.A. No. 6552, otherwise known as the "Realty Installment Buyer
Protection Act," recognizes in conditional sales of all kinds of real
estate (industrial, commercial, residential) the right of the seller
to cancel the contract upon non-payment of an installment by the
buyer, which is simply an event that prevents the obligation of
the vendor to convey title from acquiring binding force.10 The
Court agrees with petitioner that the cancellation of the Contract
to Sell may be done outside the court particularly when the buyer
agrees to such cancellation.
However, the cancellation of the contract by the seller must be in
accordance with Sec. 3 (b) of R.A. No. 6552, which requires a
notarial act of rescission and the refund to the buyer of the full
payment of the cash surrender value of the payments on the
property. Actual cancellation of the contract takes place after 30
days from receipt by the buyer of the notice of cancellation or the

demand for rescission of the contract by a notarial act and upon

full payment of the cash surrender value to the buyer.
Based on the records of the case, the Contract to Sell was not
validly cancelled or rescinded under Sec. 3 (b) of R.A. No. 6552.
First, Patricio, the vendor in the Contract to Sell, died on
September 17, 1992 without canceling the Contract to Sell.
Second, petitioner also failed to cancel the Contract to Sell in
accordance with law.
Petitioner contends that he has complied with the requirements
of cancellation under Sec. 3 (b) of R.A. No. 6552. He asserts that
his demand letter dated February 24, 1997 should be considered
as the notice of cancellation or demand for rescission by notarial
act and that the cash surrender value of the payments on the
property has been applied to rentals for the use of the house and
lot after respondent stopped payment after January 1980.
The Court, however, finds that the letter11 dated February 24,
1997, which was written by petitioners counsel, merely made
formal demand upon respondent to vacate the premises in
question within five days from receipt thereof since she had "long
ceased to have any right to possess the premises x x x due to
[her] failure to pay without justifiable cause the installment
payments x x x."
Clearly, the demand letter is not the same as the notice of
cancellation or demand for rescission by a notarial actrequired
by R.A No. 6552. Petitioner cannot rely on Layug v. Intermediate
Appellate Court12 to support his contention that the demand letter
was sufficient compliance. Layug held that "the additional
formality of a demand on [the sellers] part for rescission by
notarial act would appear, in the premises, to be merely
circuitous and consequently superfluous" since the seller therein
filed an action for annulment of contract, which is a kindred
concept of rescission by notarial act.13 Evidently, the case of
unlawful detainer filed by petitioner does not exempt him from
complying with the said requirement.
In addition, Sec. 3 (b) of R.A. No. 6552 requires refund of the
cash surrender value of the payments on the property to the
buyer before cancellation of the contract. The provision does not
provide a different requirement for contracts to sell which allow
possession of the property by the buyer upon execution of the
contract like the instant case. Hence, petitioner cannot insist on
compliance with the requirement by assuming that the cash
surrender value payable to the buyer had been applied to rentals
of the property after respondent failed to pay the installments
due.
There being no valid cancellation of the Contract to Sell, the CA
correctly recognized respondents right to continue occupying the
property subject of the Contract to Sell and affirmed the
dismissal of the unlawful detainer case by the RTC.
The Court notes that this case has been pending for more than
ten years. Both parties prayed for other reliefs that are just and
equitable under the premises. Hence, the rights of the parties

over the subject property shall be resolved to finally dispose of

that issue in this case.
Considering that the Contract to Sell was not cancelled by the
vendor, Patricio, during his lifetime or by petitioner in accordance
with R.A. No. 6552 when petitioner filed this case of unlawful
detainer after 22 years of continuous possession of the property
by respondent who has paid the substantial amount of P12,300
out of the purchase price of P17,800, the Court agrees with the
CA that it is only right and just to allow respondent to pay her
arrears and settle the balance of the purchase price.
For respondents delay in the payment of the installments, the
Court, in its discretion, and applying Article 220914 of the Civil
Code, may award interest at the rate of 6% per annum15 on the
unpaid balance considering that there is no stipulation in the
Contract to Sell for such interest. For purposes of computing the
legal interest, the reckoning period should be the filing of the
complaint for unlawful detainer on April 8, 1997.
Based on respondents evidence16 of payments made, the MTC
found that respondent paid a total of P12,300 out of the
purchase price of P17,800. Hence, respondent still has a
balance of P5,500, plus legal interest at the rate of 6% per
annum on the unpaid balance starting April 8, 1997.
The third issue is disregarded since petitioner assails an
inexistent ruling of the RTC on the lack of jurisdiction of the MTC
over a rescission case when the instant case he filed is for
unlawful detainer.
WHEREFORE, the Decision of the Court of Appeals dated
October 30, 2000 sustaining the dismissal of the unlawful
detainer case by the RTC is AFFIRMED with the
following MODIFICATIONS:
1. Respondent Rufina Dela Cruz Vda. de Manzano shall pay
petitioner Manuel C. Pagtalunan the balance of the purchase
price in the amount of Five Thousand Five Hundred Pesos
(P5,500) plus interest at 6% per annum from April 8, 1997 up to
the finality of this judgment, and thereafter, at the rate of 12% per
annum;
2. Upon payment, petitioner Manuel C. Pagtalunan shall execute
a Deed of Absolute Sale of the subject property and deliver the
certificate of title in favor of respondent Rufina Dela Cruz Vda. de
Manzano; and
3. In case of failure to pay within 60 days from finality of this
Decision, respondent Rufina Dela Cruz Vda. de Manzano shall
immediately vacate the premises without need of further
demand, and the downpayment and installment payments
of P12,300 paid by her shall constitute rental for the subject
property.
No costs.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 179965
February 20, 2013
NICOLAS P. DIEGO, Petitioner,
vs.
RODOLFO P. DIEGO and EDUARDO P. DIEGO, Respondents.
DECISION
DEL CASTILLO, J.:
It is settled jurisprudence, to the point of being elementary, that
an agreement which stipulates that the seller shall execute a
deed of sale only upon or after tl1ll payment of the purchase
price is a contract to sell, not a contract of sale. In Reyes v.
Tuparan, 1 this Court declared in categorical terms that "[w]here
the vendor promises to execute a deed of absolute sale
upon the completion by the vendee of the payment of the
price, the contract is only a contract to sell. The aforecited
stipulation shows that the vendors reserved title to the
subject property until full payment of the purchase price."
In this case, it is not disputed as in tact both parties agreed that
the deed of sale shall only be executed upon payment of the
remaining balance of the purchase price. Thus, pursuant to the
above stated jurisprudence, we similarly declare that the
transaction entered into by the parties is a contract to sell.
Before us is a Petition for Review on Certiorari2 questioning the
June 29, 2007 Decision3 and the October 3, 2007 Resolution4 of
the Court of Appeals (CA) in CA-G.R. CV No. 86512, which
affirmed the April 19, 2005 Decision5 of the Regional Trial Court
(RTC), Branch 40, of Dagupan City in Civil Case No. 99-02971D.
Factual Antecedents
In 1993, petitioner Nicolas P. Diego (Nicolas) and his brother
Rodolfo, respondent herein, entered into an oral contract to sell
covering Nicolass share, fixed at P500,000.00, as co-owner of
the familys Diego Building situated in Dagupan City. Rodolfo
made a downpayment of P250,000.00. It was agreed that the
deed of sale shall be executed upon payment of the remaining
balance of P250,000.00. However, Rodolfo failed to pay the
remaining balance.
Meanwhile, the building was leased out to third parties, but
Nicolass share in the rents were not remitted to him by herein
respondent Eduardo, another brother of Nicolas and designated
administrator of the Diego Building. Instead, Eduardo gave
Nicolass monthly share in the rents to Rodolfo. Despite
demands and protestations by Nicolas, Rodolfo and Eduardo
failed to render an accounting and remit his share in the rents
and fruits of the building, and Eduardo continued to hand them
over to Rodolfo.
Thus, on May 17, 1999, Nicolas filed a Complaint6 against
Rodolfo and Eduardo before the RTC of Dagupan City and

docketed as Civil Case No. 99-02971-D. Nicolas prayed that

Eduardo be ordered to render an accounting of all the
transactions over the Diego Building; that Eduardo and Rodolfo
be ordered to deliver to Nicolas his share in the rents; and that
Eduardo and Rodolfo be held solidarily liable for attorneys fees
and litigation expenses.
Rodolfo and Eduardo filed their Answer with Counterclaim7 for
damages and attorneys fees. They argued that Nicolas had no
more claim in the rents in the Diego Building since he had
already sold his share to Rodolfo. Rodolfo admitted having
remitted only P250,000.00 to Nicolas. He asserted that he would
pay the balance of the purchase price to Nicolas only after the
latter shall have executed a deed of absolute sale.
Ruling of the Regional Trial Court
After trial on the merits, or on April 19, 2005, the trial court
rendered its Decision8 dismissing Civil Case No. 99-02971-D for
lack of merit and ordering Nicolas to execute a deed of absolute
sale in favor of Rodolfo upon payment by the latter of
the P250,000.00 balance of the agreed purchase price. It made
the following interesting pronouncement:
It is undisputed that plaintiff (Nicolas) is one of the co-owners of
the Diego Building, x x x. As a co-owner, he is entitled to [his]
share in the rentals of the said building. However, plaintiff [had]
already sold his share to defendant Rodolfo Diego in the amount
of P500,000.00 and in fact, [had] already received a partial
payment in the purchase price in the amount
of P250,000.00. Defendant Eduardo Diego testified that as
per agreement, verbal, of the plaintiff and defendant Rodolfo
Diego, the remaining balance of P250,000.00 will be paid
upon the execution of the Deed of Absolute Sale. It was in
the year 1997 when plaintiff was being required by defendant
Eduardo Diego to sign the Deed of Absolute Sale. Clearly,
defendant Rodolfo Diego was not yet in default as the plaintiff
claims which cause [sic] him to refuse to sign [sic] document.
The contract of sale was already perfected as early as the year
1993 when plaintiff received the partial payment, hence, he
cannot unilaterally revoke or rescind the same. From then on,
plaintiff has, therefore, ceased to be a co-owner of the building
and is no longer entitled to the fruits of the Diego Building.
Equity and fairness dictate that defendant [sic] has to execute
the necessary document regarding the sale of his share to
defendant Rodolfo Diego. Correspondingly, defendant Rodolfo
Diego has to perform his obligation as per their verbal agreement
by paying the remaining balance of P250,000.00.9
To summarize, the trial court ruled that as early as 1993, Nicolas
was no longer entitled to the fruits of his aliquot share in the
Diego Building because he had "ceased to be a co-owner"
thereof. The trial court held that when Nicolas received
the P250,000.00 downpayment, a "contract of sale" was
perfected. Consequently, Nicolas is obligated to convey such
share to Rodolfo, without right of rescission. Finally, the trial

court held that theP250,000.00 balance from Rodolfo will only be

due and demandable when Nicolas executes an absolute deed
of sale.
Ruling of the Court of Appeals
Nicolas appealed to the CA which sustained the trial courts
Decision in toto. The CA held that since there was a perfected
contract of sale between Nicolas and Rodolfo, the latter may
compel the former to execute the proper sale document.
Besides, Nicolass insistence that he has since rescinded their
agreement in 1997 proved the existence of a perfected sale. It
added that Nicolas could not validly rescind the contract
because: "1) Rodolfo ha[d] already made a partial payment; 2)
Nicolas ha[d] already partially performed his part regarding the
contract; and 3) Rodolfo opposes the rescission."10
The CA then proceeded to rule that since no period was
stipulated within which Rodolfo shall deliver the balance of the
purchase price, it was incumbent upon Nicolas to have filed a
civil case to fix the same. But because he failed to do so,
Rodolfo cannot be considered to be in delay or default.
Finally, the CA made another interesting pronouncement, that by
virtue of the agreement Nicolas entered into with Rodolfo, he had
already transferred his ownership over the subject property and
as a consequence, Rodolfo is legally entitled to collect the fruits
thereof in the form of rentals. Nicolas remaining right is to
demand payment of the balance of the purchase price, provided
that he first executes a deed of absolute sale in favor of Rodolfo.
Nicolas moved for reconsideration but the same was denied by
the CA in its Resolution dated October 3, 2007.
Hence, this Petition.
Issues
The Petition raises the following errors that must be rectified:
I
THE HONORABLE COURT OF APPEALS ERRED IN NOT
HOLDING THAT THERE WAS NO PERFECTED CONTRACT
OF SALE BETWEEN PETITIONER NICOLAS DIEGO AND
RESPONDENT RODOLFO DIEGO OVER NICOLASS SHARE
OF THE BUILDING BECAUSE THE SUSPENSIVE CONDITION
HAS NOT YET BEEN FULFILLED.
II
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING
THAT THE CONTRACT OF SALE BETWEEN PETITIONER
AND RESPONDENT RODOLFO DIEGO REMAINS LEGALLY
BINDING AND IS NOT RESCINDED GIVING MISPLACED
RELIANCE ON PETITIONER NICOLAS STATEMENT THAT
THE SALE HAS NOT YET BEEN REVOKED.
III
THE HONORABLE COURT OF APPEALS ERRED IN NOT
HOLDING THAT PETITIONER NICOLAS DIEGO ACTED
LEGALLY AND CORRECTLY WHEN HE UNILATERALLY
RESCINDED AND REVOKED HIS AGREEMENT OF SALE
WITH RESPONDENT RODOLFO DIEGO CONSIDERING

RODOLFOS MATERIAL, SUBSTANTIAL BREACH OF THE

CONTRACT.
IV
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING
THAT PETITIONER HAS NO MORE RIGHTS OVER HIS
SHARE IN THE BUILDING, DESPITE THE FACT THAT THERE
WAS AS YET NO PERFECTED CONTRACT OF SALE
BETWEEN PETITIONER NICOLAS DIEGO AND RODOLFO
DIEGO AND THERE WAS YET NO TRANSFER OF
OWNERSHIP OF PETITIONERS SHARE TO RODOLFO DUE
TO THE NON-FULFILLMENT BY RODOLFO OF THE
SUSPENSIVE CONDITION UNDER THE CONTRACT.
V
THE HONORABLE COURT OF APPEALS ERRED IN NOT
HOLDING THAT RESPONDENT RODOLFO HAS UNJUSTLY
ENRICHED HIMSELF AT THE EXPENSE OF PETITIONER
BECAUSE DESPITE NOT HAVING PAID THE BALANCE OF
THE PURCHASE PRICE OF THE SALE, THAT RODOLFO HAS
NOT YET ACQUIRED OWNERSHIP OVER THE SHARE OF
PETITIONER NICOLAS, HE HAS ALREADY BEEN
APPROPRIATING FOR HIMSELF AND FOR HIS PERSONAL
BENEFIT THE SHARE OF THE INCOME OF THE BUILDING
AND THE PORTION OF THE BUILDING ITSELF WHICH WAS
DUE TO AND OWNED BY PETITIONER NICOLAS.
VI
THE HONORABLE COURT OF APPEALS ERRED IN NOT
AWARDING ACTUAL DAMAGES, ATTORNEYS FEES AND
LITIGATION EXPENSES TO THE PETITIONER DESPITE THE
FACT THAT PETITIONERS RIGHTS HAD BEEN WANTONLY
VIOLATED BY THE RESPONDENTS.11
Petitioners Arguments
In his Petition, the Supplement12 thereon, and Reply,13 Nicolas
argues that, contrary to what the CA found, there was no
perfected contract of sale even though Rodolfo had partially paid
the price; that in the absence of the third element in a sale
contract the price there could be no perfected sale; that
failing to pay the required price in full, Nicolas had the right to
rescind the agreement as an unpaid seller.
Nicolas likewise takes exception to the CA finding that Rodolfo
was not in default or delay in the payment of the agreed balance
for his (Nicolass) failure to file a case to fix the period within
which payment of the balance should be made. He believes that
Rodolfos failure to pay within a reasonable time was a
substantial and material breach of the agreement which gave
him the right to unilaterally and extrajudicially rescind the
agreement and be discharged of his obligations as seller; and
that his repeated written demands upon Rodolfo to pay the
balance granted him such rights.
Nicolas further claims that based on his agreement with Rodolfo,
there was to be no transfer of title over his share in the building

until Rodolfo has effected full payment of the purchase price,

thus, giving no right to the latter to collect his share in the rentals.
Finally, Nicolas bewails the CAs failure to award damages,
attorneys fees and litigation expenses for what he believes is a
case of unjust enrichment at his expense.
Respondents Arguments
Apart from echoing the RTC and CA pronouncements,
respondents accuse the petitioner of "cheating" them, claiming
that after the latter received the P250,000.00 downpayment, he
"vanished like thin air and hibernated in the USA, he being an
American citizen,"14 only to come back claiming that the said
amount was a mere loan.
They add that the Petition is a mere rehash and reiteration of the
petitioners arguments below, which are deemed to have been
sufficiently passed upon and debunked by the appellate court.
Our Ruling
The Court finds merit in the Petition.
The contract entered into by Nicolas and Rodolfo was a
contract to sell.
a) The stipulation to execute a deed of sale upon full
payment of the purchase price is a unique and
distinguishing characteristic of a contract to sell. It also
shows that the vendor reserved title to the property until full
payment.
There is no dispute that in 1993, Rodolfo agreed to buy Nicolass
share in the Diego Building for the price ofP500,000.00. There is
also no dispute that of the total purchase price, Rodolfo paid,
and Nicolas received,P250,000.00. Significantly, it is also not
disputed that the parties agreed that the remaining amount
of P250,000.00 would be paid after Nicolas shall have executed
a deed of sale.
This stipulation, i.e., to execute a deed of absolute sale upon full
payment of the purchase price, is a unique and distinguishing
characteristic of a contract to sell. In Reyes v. Tuparan,15 this
Court ruled that a stipulation in the contract, "[w]here the
vendor promises to execute a deed of absolute sale upon
the completion by the vendee of the payment of the
price," indicates that the parties entered into a contract to sell.
According to this Court, this particular provision is tantamount to
a reservation of ownership on the part of the vendor. Explicitly
stated, the Court ruled that the agreement to execute a deed of
sale upon full payment of the purchase price"shows that the
vendors reserved title to the subject property until full
payment of the purchase price."16
In Tan v. Benolirao,17 this Court, speaking through Justice
Brion, ruled that the parties entered into a contract to sell as
revealed by the following stipulation:
d) That in case, BUYER has complied with the terms and
conditions of this contract, then the SELLERS shall execute and
deliver to the BUYER the appropriate Deed of Absolute Sale;18

The Court further held that "[j]urisprudence has established

that where the seller promises to execute a deed of absolute
sale upon the completion by the buyer of the payment of the
price, the contract is only a contract to sell."19
b) The acknowledgement receipt signed by Nicolas as well
as the contemporaneous acts of the parties show that they
agreed on a contract to sell, not of sale. The absence of a
formal deed of conveyance is indicative of a contract to sell.
In San Lorenzo Development Corporation v. Court of
Appeals,20 the facts show that spouses Miguel and Pacita Lu
(Lu) sold a certain parcel of land to Pablo Babasanta (Pablo).
After several payments, Pablo wrote Lu demanding "the
execution of a final deed of sale in his favor so that he could
effect full payment of the purchase price."21 To prove his
allegation that there was a perfected contract of sale between
him and Lu, Pablo presented a receipt signed by Lu
acknowledging receipt of P50,000.00 as partial payment.22
However, when the case reached this Court, it was ruled that the
transaction entered into by Pablo and Lu was only a contract to
sell, not a contract of sale. The Court held thus:
The receipt signed by Pacita Lu merely states that she accepted
the sum of fifty thousand pesos (P50,000.00) from Babasanta as
partial payment of 3.6 hectares of farm lot situated in Sta. Rosa,
Laguna. While there is no stipulation that the seller reserves the
ownership of the property until full payment of the price which is
a distinguishing feature of a contract to sell, the subsequent acts
of the parties convince us that the Spouses Lu never intended
to transfer ownership to Babasanta except upon full
payment of the purchase price.
Babasantas letter dated 22 May 1989 was quite telling. He
stated therein that despite his repeated requests for the
execution of the final deed of sale in his favor so that he could
effect full payment of the price, Pacita Lu allegedly refused to do
so. In effect, Babasanta himself recognized that ownership
of the property would not be transferred to him until such
time as he shall have effected full payment of the price.
Moreover, had the sellers intended to transfer title, they
could have easily executed the document of sale in its
required form simultaneously with their acceptance of the
partial payment, but they did not. Doubtlessly, the receipt
signed by Pacita Lu should legally be considered as a
perfected contract to sell.23
In the instant case, records show that Nicolas signed a mere
receipt24 acknowledging partial payment ofP250,000.00 from
Rodolfo. It states:
July 8, 1993
Received the amount of [P250,000.00] for 1 share of Diego
Building as partial payment for Nicolas Diego.
(signed)
Nicolas Diego25

As we ruled in San Lorenzo Development Corporation v. Court of

Appeals,26 the parties could have executed a document of sale
upon receipt of the partial payment but they did not. This is thus
an indication that Nicolas did not intend to immediately transfer
title over his share but only upon full payment of the purchase
price. Having thus reserved title over the property, the contract
entered into by Nicolas is a contract to sell. In addition, Eduardo
admitted that he and Rodolfo repeatedly asked Nicolas to sign
the deed of sale27 but the latter refused because he was not yet
paid the full amount. As we have ruled in San Lorenzo
Development Corporation v. Court of Appeals,28the fact that
Eduardo and Rodolfo asked Nicolas to execute a deed of sale is
a clear recognition on their part that the ownership over the
property still remains with Nicolas. In fine, the totality of the
parties acts convinces us that Nicolas never intended to transfer
the ownership over his share in the Diego Building until the full
payment of the purchase price. Without doubt, the transaction
agreed upon by the parties was a contract to sell, not of sale.
In Chua v. Court of Appeals,29 the parties reached an impasse
when the seller wanted to be first paid the consideration before a
new transfer certificate of title (TCT) is issued in the name of the
buyer. Contrarily, the buyer wanted to secure a new TCT in his
name before paying the full amount. Their agreement was
embodied in a receipt containing the following terms: "(1) the
balance of P10,215,000.00 is payable on or before 15 July 1989;
(2) the capital gains tax is for the account of x x x; and (3) if [the
buyer] fails to pay the balance x x x the [seller] has the right to
forfeit the earnest money x x x."30 The case eventually reached
this Court. In resolving the impasse, the Court, speaking
through Justice Carpio, held that "[a] perusal of the Receipt
shows that the true agreement between the parties was a
contract to sell."31 The Court noted that "the agreement x x x was
embodied in a receipt rather than in a deed of sale, ownership
not having passed between them."32 The Court thus concluded
that "[t]he absence of a formal deed of conveyance is a
strong indication that the parties did not intend immediate
transfer of ownership, but only a transfer after full payment
of the purchase price."33 Thus, the "true agreement between
the parties was a contract to sell."34
In the instant case, the parties were similarly embroiled in an
impasse. The parties agreement was likewise embodied only in
a receipt. Also, Nicolas did not want to sign the deed of sale
unless he is fully paid. On the other hand, Rodolfo did not want
to pay unless a deed of sale is duly executed in his favor. We
thus say, pursuant to our ruling in Chua v. Court of
Appeals35 that the agreement between Nicolas and Rodolfo is a
contract to sell.
This Court cannot subscribe to the appellate courts view that
Nicolas should first execute a deed of absolute sale in favor of
Rodolfo, before the latter can be compelled to pay the balance of
the price. This is patently ridiculous, and goes against every rule

in the book. This pronouncement virtually places the prospective

seller in a contract to sell at the mercy of the prospective buyer,
and sustaining this point of view would place all contracts to sell
in jeopardy of being rendered ineffective by the act of the
prospective buyers, who naturally would demand that the deeds
of absolute sale be first executed before they pay the balance of
the price. Surely, no prospective seller would accommodate.
In fine, "the need to execute a deed of absolute sale upon
completion of payment of the price generally indicates that
it is a contract to sell, as it implies the reservation of title in
the vendor until the vendee has completed the payment of
the price."36 In addition, "[a] stipulation reserving ownership in
the vendor until full payment of the price is x x x typical in a
contract to sell."37 Thus, contrary to the pronouncements of the
trial and appellate courts, the parties to this case only entered
into a contract to sell; as such title cannot legally pass to Rodolfo
until he makes full payment of the agreed purchase price.
c) Nicolas did not surrender or deliver title or possession to
Rodolfo.
Moreover, there could not even be a surrender or delivery of title
or possession to the prospective buyer Rodolfo. This was made
clear by the nature of the agreement, by Nicolass repeated
demands for the return of all rents unlawfully and unjustly
remitted to Rodolfo by Eduardo, and by Rodolfo and Eduardos
repeated demands for Nicolas to execute a deed of sale which,
as we said before, is a recognition on their part that ownership
over the subject property still remains with Nicolas.
Significantly, when Eduardo testified, he claimed to be
knowledgeable about the terms and conditions of the transaction
between Nicolas and Rodolfo. However, aside from stating that
out of the total consideration ofP500,000.00, the amount
of P250,000.00 had already been paid while the
remaining P250,000.00 would be paid after the execution of the
Deed of Sale, he never testified that there was a stipulation as
regards delivery of title or possession.38
It is also quite understandable why Nicolas belatedly demanded
the payment of the rentals. Records show that the structural
integrity of the Diego Building was severely compromised when
an earthquake struck Dagupan City in 1990.39 In order to
rehabilitate the building, the co-owners obtained a loan from a
bank.40 Starting May 1994, the property was leased to third
parties and the rentals received were used to pay off the
loan.41 It was only in 1996, or after payment of the loan that the
co-owners started receiving their share in the rentals.42 During
this time, Nicolas was in the USA but immediately upon his
return, he demanded for the payment of his share in the rentals
which Eduardo remitted to Rodolfo. Failing which, he filed the
instant Complaint. To us, this bolsters our findings that Nicolas
did not intend to immediately transfer title over the property.
It must be stressed that it is anathema in a contract to sell that
the prospective seller should deliver title to the property to the

prospective buyer pending the latters payment of the price in

full. It certainly is absurd to assume that in the absence of
stipulation, a buyer under a contract to sell is granted ownership
of the property even when he has not paid the seller in full. If this
were the case, then prospective sellers in a contract to sell would
in all likelihood not be paid the balance of the price.
This ponente has had occasion to rule that "[a] contract to sell is
one where the prospective seller reserves the transfer of title to
the prospective buyer until the happening of an event, such as
full payment of the purchase price. What the seller obliges
himself to do is to sell the subject property only when the entire
amount of the purchase price has already been delivered to him.
In other words, the full payment of the purchase price partakes
of a suspensive condition, the nonfulfillment of which prevents
the obligation to sell from arising and thus, ownership is retained
by the prospective seller without further remedies by the
prospective buyer. It does not, by itself, transfer ownership to
the buyer."43
The contract to sell is terminated or cancelled.
Having established that the transaction was a contract to sell,
what happens now to the parties agreement?
The remedy of rescission is not available in contracts to sell.44 As
explained in Spouses Santos v. Court of Appeals:45
In view of our finding in the present case that the agreement
between the parties is a contract to sell, it follows that the
appellate court erred when it decreed that a judicial rescission of
said agreement was necessary. This is because there was no
rescission to speak of in the first place. As we earlier pointed out,
in a contract to sell, title remains with the vendor and does not
pass on to the vendee until the purchase price is paid in full.
Thus, in a contract to sell, the payment of the purchase price is a
positive suspensive condition. Failure to pay the price agreed
upon is not a mere breach, casual or serious, but a situation that
prevents the obligation of the vendor to convey title from
acquiring an obligatory force. This is entirely different from the
situation in a contract of sale, where non-payment of the price is
a negative resolutory condition. The effects in law are not
identical. In a contract of sale, the vendor has lost ownership of
the thing sold and cannot recover it, unless the contract of sale is
rescinded and set aside. In a contract to sell, however, the
vendor remains the owner for as long as the vendee has not
complied fully with the condition of paying the purchase price. If
the vendor should eject the vendee for failure to meet the
condition precedent, he is enforcing the contract and not
rescinding it. When the petitioners in the instant case
repossessed the disputed house and lot for failure of private
respondents to pay the purchase price in full, they were merely
enforcing the contract and not rescinding it. As petitioners
correctly point out, the Court of Appeals erred when it ruled that
petitioners should have judicially rescinded the contract pursuant
to Articles 1592 and 1191 of the Civil Code. Article 1592 speaks

of non-payment of the purchase price as a resolutory condition. It

does not apply to a contract to sell. As to Article 1191, it is
subordinated to the provisions of Article 1592 when applied to
sales of immovable property. Neither provision is applicable in
the present case.46
Similarly, we held in Chua v. Court of Appeals47 that "Article
1592 of the Civil Code permits the buyer to pay, even after the
expiration of the period, as long as no demand for rescission of
the contract has been made upon him either judicially or by
notarial act. However, Article 1592 does not apply to a contract
to sell where the seller reserves the ownership until full payment
of the price,"48 as in this case.1wphi1
Applying the above jurisprudence, we hold that when Rodolfo
failed to fully pay the purchase price, the contract to sell was
deemed terminated or cancelled.49 As we have held in Chua v.
Court of Appeals,50 "[s]ince the agreement x x x is a mere
contract to sell, the full payment of the purchase price partakes
of a suspensive condition. The non-fulfillment of the condition
prevents the obligation to sell from arising and ownership is
retained by the seller without further remedies by the
buyer." Similarly, we held in Reyes v. Tuparan51 that "petitioners
obligation to sell the subject properties becomes demandable
only upon the happening of the positive suspensive condition,
which is the respondents full payment of the purchase
price. Without respondents full payment, there can be no
breach of contract to speak of because petitioner has no
obligation yet to turn over the title.Respondents failure to pay
in full the purchase price in full is not the breach of contract
contemplated under Article 1191 of the New Civil Code but
rather just an event that prevents the petitioner from being bound
to convey title to respondent." Otherwise stated, Rodolfo has no
right to compel Nicolas to transfer ownership to him because he
failed to pay in full the purchase price. Correlatively, Nicolas has
no obligation to transfer his ownership over his share in the
Diego Building to Rodolfo.52
Thus, it was erroneous for the CA to rule that Nicolas should
have filed a case to fix the period for Rodolfos payment of the
balance of the purchase price. It was not Nicolass obligation to
compel Rodolfo to pay the balance; it was Rodolfos duty to remit
it.
It would appear that after Nicolas refused to sign the deed as
there was yet no full payment, Rodolfo and Eduardo hired the
services of the Daroya Accounting Office "for the purpose of
estimating the amount to which [Nicolas] still owes [Rodolfo] as a
consequence of the unconsummated verbal agreement
regarding the formers share in the co-ownership of [Diego
Building] in favor of the latter."53 According to the accountants
report, after Nicolas revoked his agreement with Rodolfo due to
non-payment, the downpayment of P250,000.00 was considered
a loan of Nicolas from Rodolfo.54 The accountant opined that
the P250,000.00 should earn interest at 18%.55 Nicolas however

objected as regards the imposition of interest as it was not

previously agreed upon. Notably, the contents of the
accountants report were not disputed or rebutted by the
respondents. In fact, it was stated therein that "[a]ll the bases
and assumptions made particularly in the fixing of the applicable
rate of interest have been discussed with [Eduardo]."56
We find it irrelevant and immaterial that Nicolas described the
termination or cancellation of his agreement with Rodolfo as one
of rescission. Being a layman, he is understandably not adept in
legal terms and their implications. Besides, this Court should not
be held captive or bound by the conclusion reached by the
parties. The proper characterization of an action should be
based on what the law says it to be, not by what a party believed
it to be. "A contract is what the law defines it to be x x x and not
what the contracting parties call it."57
On the other hand, the respondents additional submission that
Nicolas cheated them by "vanishing and hibernating" in the USA
after receiving Rodolfos P250,000.00 downpayment, only to
come back later and claim that the amount he received was a
mere loan cannot be believed. How the respondents could
have been cheated or disadvantaged by Nicolass leaving is
beyond comprehension. If there was anybody who benefited
from Nicolass perceived "hibernation", it was the respondents,
for they certainly had free rein over Nicolass interest in the
Diego Building. Rodolfo put off payment of the balance of the
price, yet, with the aid of Eduardo, collected and appropriated for
himself the rents which belonged to Nicolas.
Eduardo is solidarily liable with Rodolfo as regards the
share of Nicolas in the rents.
For his complicity, bad faith and abuse of authority as the Diego
Building administrator, Eduardo must be held solidarily liable with
Rodolfo for all that Nicolas should be entitled to from 1993 up to
the present, or in respect of actual damages suffered in relation
to his interest in the Diego Building. Eduardo was the primary
cause of Nicolass loss, being directly responsible for making
and causing the wrongful payments to Rodolfo, who received
them under obligation to return them to Nicolas, the true
recipient.1wphi1 As such, Eduardo should be principally
responsible to Nicolas as well. Suffice it to state that every
person must, in the exercise of his rights and in the performance
of his duties, act with justice, give everyone his due, and observe
honesty and good faith; and every person who, contrary to law,
wilfully or negligently causes damage to another, shall indemnify
the latter for the same.58
Attorneys fees and other costs.
"Although attorneys fees are not allowed in the absence of
stipulation, the court can award the same when the defendants
act or omission has compelled the plaintiff to incur expenses to
protect his interest or where the defendant acted in gross and
evident bad faith in refusing to satisfy the plaintiffs plainly valid,
just and demandable claim."59 In the instant case, it is beyond

cavil that petitioner was constrained to file the instant case to

protect his interest because of respondents unreasonable and
unjustified refusal to render an accounting and to remit to the
petitioner his rightful share in rents and fruits in the Diego
Building. Thus, we deem it proper to award to petitioner
attorneys fees in the amount of P50,000.00,60 as well as
litigation expenses in the amount of P20,000.00 and the sum
of P1,000.00 for each court appearance by his lawyer or lawyers,
as prayed for.
WHEREFORE, premises considered, the Petition is GRANTED.
The June 29, 2007 Decision and October 3, 2007 Resolution of
the Court of Appeals in CA-G.R. CV No. 86512, and the April 19,
2005 Decision of the Dagupan City Regional Trial Court, Branch
40 in Civil Case No. 99-02971-D, are hereby ANNULLED and
SET ASIDE.
The Court further decrees the following:
1. The oral contract to sell between petitioner Nicolas P. Diego
and respondent Rodolfo P. Diego
isDECLARED terminated/cancelled;
2. Respondents Rodolfo P. Diego and Eduardo P. Diego
are ORDERED to surrender possession and control, as the
case may be, of Nicolas P. Diegos share in the Diego Building.
Respondents are further commanded to return or surrender to
the petitioner the documents of title, receipts, papers, contracts,
and all other documents in any form or manner pertaining to the
latters share in the building, which are deemed to be in their
unauthorized and illegal possession;
3. Respondents Rodolfo P. Diego and Eduardo P. Diego
are ORDERED to immediately render an accounting of all the
transactions, from the period beginning 1993 up to the present,
pertaining to Nicolas P. Diegos share in the Diego Building, and
thereafter commanded to jointly and severally remit to the
petitioner all rents, monies, payments and benefits of whatever
kind or nature pertaining thereto, which are hereby deemed
received by them during the said period, and made to them or
are due, demandable and forthcoming during the said period and
from the date of this Decision, with legal interest from the filing of
the Complaint;
4. Respondents Rodolfo P. Diego and Eduardo P. Diego
are ORDERED, immediately and without further delay upon
receipt of this Decision, to solidarily pay the petitioner attorneys
fees in the amount ofP50,000.00; litigation expenses in the
amount of P20,000.00 and the sum of P1,000.00 per counsel for
each court appearance by his lawyer or lawyers;
5. The payment of P250,000.00 made by respondent Rodolfo P.
Diego, with legal interest from the filing of the Complaint, shall
be APPLIED, by way of compensation, to his liabilities to the
petitioner and to answer for all damages and other awards and
interests which are owing to the latter under this Decision; and
6. Respondents counterclaim is DISMISSED.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 201167
February 27, 2013
GOTESCO PROPERTIES, INC., JOSE C. GO, EVELYN GO,
LOURDES G. ORTIGA, GEORGE GO, and VICENTE
GO, Petitioners,
vs.
SPOUSES EUGENIO and ANGELINA
FAJARDO, Respondents.
DECISION
PERLAS-BERNABE, J.:
Assailed in this Petition for Review on Certiorari under Rule 45 of
the Rules of Court is the July 22, 2011 Decision1and February
29, 2012 Resolution2 of the Court of Appeals (CA) in CA-G.R.
SP No. 112981, which affirmed with modification the August 27,
2009 Decision3 of the Office of the President (OP).
The Facts
On January 24, 1995, respondent-spouses Eugenio and
Angelina Fajardo (Sps. Fajardo) entered into a Contract to
Sell4 (contract) with petitioner-corporation Gotesco Properties,
Inc. (GPI) for the purchase of a 100-square meter lot identified
as Lot No. 13, Block No.6, Phase No. IV of Evergreen Executive
Village, a subdivision project owned and developed by GPI
located at Deparo Road, Novaliches, Caloocan City. The subject
lot is a portion of a bigger lot covered by Transfer Certificate of
Title (TCT) No. 2442205 (mother title).
Under the contract, Sps. Fajardo undertook to pay the purchase
price of P126,000.00 within a 10-year period, including interest at
the rate of nine percent (9%) per annum. GPI, on the other hand,
agreed to execute a final deed of sale (deed) in favor of Sps.
Fajardo upon full payment of the stipulated consideration.
However, despite its full payment of the purchase price on
January 17, 20006 and subsequent demands,7 GPI failed to
execute the deed and to deliver the title and physical possession
of the subject lot. Thus, on May 3, 2006, Sps. Fajardo filed
before the Housing and Land Use Regulatory Board-Expanded
National Capital Region Field Office (HLURBENCRFO) a
complaint8 for specific performance or rescission of contract with
damages against GPI and the members of its Board of Directors
namely, Jose C. Go, Evelyn Go, Lourdes G. Ortiga, George Go,
and Vicente Go (individual petitioners), docketed as HLURB
Case No. REM-050306-13319.
Sps. Fajardo averred that GPI violated Section 209 of
Presidential Decree No. 95710 (PD 957) due to its failure to
construct and provide water facilities, improvements,
infrastructures and other forms of development including water
supply and lighting facilities for the subdivision project. They also
alleged that GPI failed to provide boundary marks for each lot
and that the mother title including the subject lot had no technical

description and was even levied upon by the Bangko Sentral ng

Pilipinas (BSP) without their knowledge. They thus prayed that
GPI be ordered to execute the deed, to deliver the corresponding
certificate of title and the physical possession of the subject lot
within a reasonable period, and to develop Evergreen Executive
Village; or in the alternative, to cancel and/or rescind the contract
and refund the total payments made plus legal interest starting
January 2000.
For their part, petitioners maintained that at the time of the
execution of the contract, Sps. Fajardo were actually aware that
GPI's certificate of title had no technical description inscribed on
it. Nonetheless, the title to the subject lot was free from any liens
or encumbrances.11 Petitioners claimed that the failure to deliver
the title to Sps. Fajardo was beyond their control12 because while
GPI's petition for inscription of technical description (LRC Case
No. 4211) was favorably granted13 by the Regional Trial Court of
Caloocan City, Branch 131 (RTC-Caloocan), the same was
reversed14 by the CA; this caused the delay in the subdivision of
the property into individual lots with individual titles. Given the
foregoing incidents, petitioners thus argued that Article 1191 of
the Civil Code (Code) the provision on which Sps. Fajardo
anchor their right of rescission remained inapplicable since
they were actually willing to comply with their obligation but were
only prevented from doing so due to circumstances beyond their
control. Separately, petitioners pointed out that BSP's adverse
claim/levy which was annotated long after the execution of the
contract had already been settled.
The Ruling of the HLURB-ENCRFO
On February 9, 2007, the HLURB-ENCRFO issued a
Decision15 in favor of Sps. Fajardo, holding that GPIs obligation
to execute the corresponding deed and to deliver the transfer
certificate of title and possession of the subject lot arose and
thus became due and demandable at the time Sps. Fajardo had
fully paid the purchase price for the subject lot. Consequently,
GPIs failure to meet the said obligation constituted a substantial
breach of the contract which perforce warranted its rescission. In
this regard, Sps. Fajardo were given the option to recover the
money they paid to GPI in the amount of P168,728.83, plus legal
interest reckoned from date of extra-judicial demand in
September 2002 until fully paid. Petitioners were likewise held
jointly and solidarily liable for the payment of moral and
exemplary damages, attorney's fees and the costs of suit.
The Ruling of the HLURB Board of Commissioners
On appeal, the HLURB Board of Commissioners affirmed the
above ruling in its August 3, 2007 Decision,16 finding that the
failure to execute the deed and to deliver the title to Sps. Fajardo
amounted to a violation of Section 25 of PD 957 which therefore,
warranted the refund of payments in favor of Sps. Fajardo.
The Ruling of the OP
On further appeal, the OP affirmed the HLURB rulings in its
August 27, 2009 Decision.17 In so doing, it emphasized the

mandatory tenor of Section 25 of PD 957 which requires the

delivery of title to the buyer upon full payment and found that GPI
unjustifiably failed to comply with the same.
The Ruling of the CA
On petition for review, the CA affirmed the above rulings with
modification, fixing the amount to be refunded to Sps. Fajardo at
the prevailing market value of the property18 pursuant to the
ruling in Solid Homes v. Tan (Solid Homes).19
The Petition
Petitioners insist that Sps. Fajardo have no right to rescind the
contract considering that GPI's inability to comply therewith was
due to reasons beyond its control and thus, should not be held
liable to refund the payments they had received. Further, since
the individual petitioners never participated in the acts
complained of nor found to have acted in bad faith, they should
not be held liable to pay damages and attorney's fees.
The Court's Ruling
The petition is partly meritorious.
A. Sps. Fajardos right to rescind
It is settled that in a contract to sell, the seller's obligation to
deliver the corresponding certificates of title is simultaneous and
reciprocal to the buyer's full payment of the purchase price.20 In
this relation, Section 25 of PD 957, which regulates the subject
transaction, imposes on the subdivision owner or developer the
obligation to cause the transfer of the corresponding certificate of
title to the buyer upon full payment, to wit:
Sec. 25. Issuance of Title. The owner or developer shall
deliver the title of the lot or unit to the buyer upon full
payment of the lot or unit. No fee, except those required for the
registration of the deed of sale in the Registry of Deeds, shall be
collected for the issuance of such title. In the event a mortgage
over the lot or unit is outstanding at the time of the issuance of
the title to the buyer, the owner or developer shall redeem the
mortgage or the corresponding portion thereof within six months
from such issuance in order that the title over any fully paid lot or
unit may be secured and delivered to the buyer in accordance
herewith. (Emphasis supplied.)
In the present case, Sps. Fajardo claim that GPI breached the
contract due to its failure to execute the deed of sale and to
deliver the title and possession over the subject lot,
notwithstanding the full payment of the purchase price made by
Sps. Fajardo on January 17, 200021 as well as the latters
demand for GPI to comply with the aforementioned obligations
per the letter22 dated September 16, 2002. For its part,
petitioners proffer that GPI could not have committed any breach
of contract considering that its purported non-compliance was
largely impelled by circumstances beyond its control i.e., the
legal proceedings concerning the subdivision of the property into
individual lots. Hence, absent any substantial breach, Sps.
Fajardo had no right to rescind the contract.
The Court does not find merit in petitioners contention.

A perusal of the records shows that GPI acquired the subject

property on March 10, 1992 through a Deed of Partition and
Exchange23 executed between it and Andres Pacheco (Andres),
the former registered owner of the property. GPI was issued TCT
No. 244220 on March 16, 1992 but the same did not bear any
technical description.24 However, no plausible explanation was
advanced by the petitioners as to why the petition for inscription
(docketed as LRC Case No. 4211) dated January 6, 2000,25 was
filed only after almost eight (8) years from the acquisition of the
subject property.
Neither did petitioners sufficiently explain why GPI took no
positive action to cause the immediate filing of a new petition for
inscription within a reasonable time from notice of the July 15,
2003 CA Decision which dismissed GPIs earlier petition based
on technical defects, this notwithstanding Sps. Fajardo's full
payment of the purchase price and prior demand for delivery of
title. GPI filed the petition before the RTC-Caloocan, Branch 122
(docketed as LRC Case No. C-5026) only on November 23,
2006,26 following receipt of the letter27 dated February 10, 2006
and the filing of the complaint on May 3, 2006, alternatively
seeking refund of payments. While the court a quo decided the
latter petition for inscription in its favor,28 there is no showing that
the same had attained finality or that the approved technical
description had in fact been annotated on TCT No. 244220, or
even that the subdivision plan had already been approved.
Moreover, despite petitioners allegation29 that the claim of BSP
had been settled, there appears to be no cancellation of the
annotations30 in GPIs favor. Clearly, the long delay in the
performance of GPI's obligation from date of demand on
September 16, 2002 was unreasonable and unjustified. It cannot
therefore be denied that GPI substantially breached its contract
to sell with Sps. Fajardo which thereby accords the latter the
right to rescind the same pursuant to Article 1191 of the
Code, viz:
ART. 1191. The power to rescind obligations is implied in
reciprocal ones, in case one of the obligors should not comply
with what is incumbent upon him.
The injured party may choose between the fulfillment and the
rescission of the obligation, with the payment of damages in
either case. He may also seek rescission, even after he has
chosen fulfillment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be
just cause authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third
persons who have acquired the thing, in accordance with articles
1385 and 1388 and the Mortgage Law.
B. Effects of rescission
At this juncture, it is noteworthy to point out that rescission does
not merely terminate the contract and release the parties from
further obligations to each other, but abrogates the contract from
its inception and restores the parties to their original positions as

if no contract has been made.31 Consequently, mutual restitution,

which entails the return of the benefits that each party may have
received as a result of the contract, is thus required.32 To be
sure, it has been settled that the effects of rescission as provided
for in Article 1385 of the Code are equally applicable to cases
under Article 1191, to wit:
xxxx
Mutual restitution is required in cases involving rescission
under Article 1191.1wphi1 This means bringing the parties
back to their original status prior to the inception of the contract.
Article 1385 of the Civil Code provides, thus:
ART. 1385. Rescission creates the obligation to return the
things which were the object of the contract, together with
their fruits, and the price with its interest; consequently, it
can be carried out only when he who demands rescission
can return whatever he may be obligated to restore.
Neither shall rescission take place when the things which are the
object of the contract are legally in the possession of third
persons who did not act in bad faith.
In this case, indemnity for damages may be demanded from the
person causing the loss.
This Court has consistently ruled that this provision applies
to rescission under Article 1191:
Since Article 1385 of the Civil Code expressly and clearly states
that "rescission creates the obligation to return the things which
were the object of the contract, together with their fruits, and the
price with its interest," the Court finds no justification to sustain
petitioners position that said Article 1385 does not apply to
rescission under Article 1191. x x x33 (Emphasis supplied;
citations omitted.)
In this light, it cannot be denied that only GPI benefited from the
contract, having received full payment of the contract price plus
interests as early as January 17, 2000, while Sps. Fajardo
remained prejudiced by the persisting non-delivery of the subject
lot despite full payment. As a necessary consequence,
considering the propriety of the rescission as earlier discussed,
Sps. Fajardo must be able to recover the price of the property
pegged at its prevailing market value consistent with the Courts
pronouncement in Solid Homes,34 viz:
Indeed, there would be unjust enrichment if respondents Solid
Homes, Inc. & Purita Soliven are made to pay only the purchase
price plus interest. It is definite that the value of the subject
property already escalated after almost two decades from the
time the petitioner paid for it. Equity and justice dictate that
the injured party should be paid the market value of the lot,
otherwise, respondents Solid Homes, Inc. & Purita Soliven
would enrich themselves at the expense of herein lot
owners when they sell the same lot at the present market
value. Surely, such a situation should not be countenanced for
to do so would be contrary to reason and therefore,
unconscionable. Over time, courts have recognized with almost

pedantic adherence that what is inconvenient or contrary to

reason is not allowed in law. (Emphasis supplied.)
On this score, it is apt to mention that it is the intent of PD 957 to
protect the buyer against unscrupulous developers, operators
and/or sellers who reneged on their obligations.35 Thus, in order
to achieve this purpose, equity and justice dictate that the injured
party should be afforded full recompense and as such, be
allowed to recover the prevailing market value of the undelivered
lot which had been fully paid for.1wphi1
C. Moral and exemplary damages, attorneys fees and costs
of suit
Furthermore, the Court finds that there is proper legal basis to
accord moral and exemplary damages and attorney's fees,
including costs of suit. Verily, GPIs unjustified failure to comply
with its obligations as above-discussed caused Sps. Fajardo
serious anxiety, mental anguish and sleepless nights, thereby
justifying the award of moral damages. In the same vein, the
payment of exemplary damages remains in order so as to
prevent similarly minded subdivision developers to commit the
same transgression. And finally, considering that Sps. Fajardo
were constrained to engage the services of counsel to file this
suit, the award of attorneys fees must be likewise sustained.
D. Liability of individual Petitioners
However, the Court finds no basis to hold individual petitioners
solidarily liable with petitioner GPI for the payment of damages in
favor of Sps. Fajardo since it was not shown that they acted
maliciously or dealt with the latter in bad faith. Settled 1s the rule
that in the absence of malice and bad faith, as in this case,
officers of the corporation cannot be made personally liable for
liabilities of the corporation which, by legal fiction, has a
personality separate and distinct from its officers, stockholders,
and members.36
WHEREFORE, the assailed July 22, 2011 Decision and
February 29, 2012 Resolution of the Court of Appeals in CA-G.R.
SP No. 112981 are hereby AFFIRMED WITH
MODIFICATION, absolving individual petitioners Jose C. Go,
Evelyn Go, Lourdes G. Ortiga, George Go, and Vicente Go from
personal liability towards respondent-spouses Eugenio and
Angelina Fajardo.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 188986
March 20, 2013
GALILEO A. MAGLASANG, doing business under the name
GL Enterprises, Petitioner,
vs.
NORTHWESTERN INC., UNIVERSITY, Respondent.
DECISION
SERENO, CJ.:

Before this Court is a Rule 45 Petition, seeking a review of the

27 July 2009 Court of Appeals (CA) Decision in CA-G.R. CV No.
88989,1 which modified the Regional Trial Court (RTC) Decision
of 8 January 2007 in Civil Case No. Q-04-53660.2 The CA held
that petitioner substantially breached its contracts with
respondent for the installation of an integrated bridge system
(IBS).
The antecedent .facts are as follows:3
On 10 June 2004, respondent Northwestern University
(Northwestern), an educational institution offering maritimerelated courses, engaged the services of a Quezon City-based
firm, petitioner GL Enterprises, to install a new IBS in Laoag City.
The installation of an IBS, used as the students training
laboratory, was required by the Commission on Higher
Education (CHED) before a school could offer maritime
transportation programs.4
Since its IBS was already obsolete, respondent required
petitioner to supply and install specific components in order to
form the most modern IBS that would be acceptable to CHED
and would be compliant with the standards of the International
Maritime Organization (IMO). For this purpose, the parties
executed two contracts.
The first contract partly reads:5
That in consideration of the payment herein mentioned to be
made by the First Party (defendant), the Second Party agrees to
furnish, supply, install and integrate the most modern
INTEGRATED BRIDGE SYSTEM located at Northwestern
University MOCK BOAT in accordance with the general
conditions, plans and specifications of this contract.
SUPPLY & INSTALLATION OF THE FOLLOWING:
INTEGRATED BRIDGE SYSTEM
A. 2-RADAR SYSTEM
B. OVERHEAD CONSOLE MONITORING SYSTEM
C. ENGINE TELEGRAPH SYSTEM
D. ENGINE CONTROL SYSTEM
E. WEATHER CONTROL SYSTEM
F. ECDIS SYSTEM
G. STEERING WHEEL SYSTEM
H. BRIDGE CONSOLE
TOTAL COST:

Php
3,800,000.00

LESS: OLD MARITIME

EQUIPMENT TRADE-IN
VALUE

1,000,000.00

DISCOUNT

100,000.00

PROJECT COST
(MATERIALS &

PhP
2,700,000.00

INSTALLATION)
(Emphasis in the original)
The second contract essentially contains the same terms and
conditions as follows:6
That in consideration of the payment herein mentioned to be
made by the First Party (defendant), the Second Party agrees to
furnish, supply, install & integrate the most modern
INTEGRATED BRIDGE SYSTEM located at Northwestern
University MOCK BOAT in accordance with the general
conditions, plans and specifications of this contract.
SUPPLY & INSTALLATION OF THE FOLLOWING:
1. ARPA RADAR SIMULATION ROOM
xxxx
2. GMDSS SIMULATION ROOM
xxxx
TOTAL COST: PhP 270,000.00
(Emphasis in the original)
Common to both contracts are the following provisions: (1) the
IBS and its components must be compliant with the IMO and
CHED standard and with manuals for simulators/major
equipment; (2) the contracts may be terminated if one party
commits a substantial breach of its undertaking; and (3) any
dispute under the agreement shall first be settled mutually
between the parties, and if settlement is not obtained, resort
shall be sought in the courts of law.
Subsequently, Northwestern paid P1 million as down payment to
GL Enterprises. The former then assumed possession of
Northwesterns old IBS as trade-in payment for its service. Thus,
the balance of the contract price remained at P1.97 million.7
Two months after the execution of the contracts, GL Enterprises
technicians delivered various materials to the project site.
However, when they started installing the components,
respondent halted the operations. GL Enterprises then asked for
an explanation.8
Northwestern justified the work stoppage upon its finding that the
delivered equipment were substandard.9 It explained further that
GL Enterprises violated the terms and conditions of the
contracts, since the delivered components (1) were old; (2) did
not have instruction manuals and warranty certificates; (3)
contained indications of being reconditioned machines; and (4)
did not meet the IMO and CHED standards. Thus, Northwestern
demanded compliance with the agreement and suggested that
GL Enterprises meet with the formers representatives to iron out
the situation.
Instead of heeding this suggestion, GL Enterprises filed on 8
September 2004 a Complaint10 for breach of contract and prayed
for the following sums: P1.97 million, representing the amount
that it would have earned, had Northwestern not stopped it from
performing its tasks under the two contracts; at least P100,000

as moral damages; at least P100,000 by way of exemplary

damages; at least P100,000 as attorneys fees and litigation
expenses; and cost of suit. Petitioner alleged that Northwestern
breached the contracts by ordering the work stoppage and thus
preventing the installation of the materials for the IBS.
Northwestern denied the allegation. In its defense, it asserted
that since the equipment delivered were not in accordance with
the specifications provided by the contracts, all succeeding
works would be futile and would entail unnecessary expenses.
Hence, it prayed for the rescission of the contracts and made a
compulsory counterclaim for actual, moral, and exemplary
damages, and attorneys fees.
The RTC held both parties at fault. It found that Northwestern
unduly halted the operations, even if the contracts called for a
completed project to be evaluated by the CHED. In turn, the
breach committed by GL Enterprises consisted of the delivery of
substandard equipment that were not compliant with IMO and
CHED standards as required by the agreement.
Invoking the equitable principle that "each party must bear its
own loss," the trial court treated the contracts as impossible of
performance without the fault of either party or as having been
dissolved by mutual consent. Consequently, it ordered mutual
restitution, which would thereby restore the parties to their
original positions as follows:11
Accordingly, plaintiff is hereby ordered to restore to the
defendant all the equipment obtained by reason of the First
Contract and refund the downpayment of P1,000,000.00 to the
defendant; and for the defendant to return to the plaintiff the
equipment and materials it withheld by reason of the noncontinuance of the installation and integration project. In the
event that restoration of the old equipment taken from
defendant's premises is no longer possible, plaintiff is hereby
ordered to pay the appraised value of defendant's old equipment
at P1,000,000.00. Likewise, in the event that restoration of the
equipment and materials delivered by the plaintiff to the
defendant is no longer possible, defendant is hereby ordered to
pay its appraised value at P1,027,480.00.
Moreover, plaintiff is likewise ordered to restore and return all the
equipment obtained by reason of the Second Contract, or if
restoration or return is not possible, plaintiff is ordered to pay the
value thereof to the defendant.
SO ORDERED.
Aggrieved, both parties appealed to the CA. With each of them
pointing a finger at the other party as the violator of the
contracts, the appellate court ultimately determined that GL
Enterprises was the one guilty of substantial breach and liable
for attorneys fees.
The CA appreciated that since the parties essentially sought to
have an IBS compliant with the CHED and IMO standards, it was
GL Enterprises delivery of defective equipment that materially
and substantially breached the contracts. Although the contracts

contemplated a completed project to be evaluated by CHED,

Northwestern could not just sit idly by when it was apparent that
the components delivered were substandard.
The CA held that Northwestern only exercised ordinary prudence
to prevent the inevitable rejection of the IBS delivered by GL
Enterprises. Likewise, the appellate court disregarded
petitioners excuse that the equipment delivered might not have
been the components intended to be installed, for it would be
contrary to human experience to deliver equipment from Quezon
City to Laoag City with no intention to use it.
This time, applying Article 1191 of the Civil Code, the CA
declared the rescission of the contracts. It then proceeded to
affirm the RTCs order of mutual restitution. Additionally, the
appellate court granted P50,000 to Northwestern by way of
attorneys fees.
Before this Court, petitioner rehashes all the arguments he had
raised in the courts a quo.12 He maintains his prayer for actual
damages equivalent to the amount that he would have earned,
had respondent not stopped him from performing his tasks under
the two contracts; moral and exemplary damages; attorneys
fees; litigation expenses; and cost of suit.
Hence, the pertinent issue to be resolved in the instant appeal is
whether the CA gravely erred in (1) finding substantial breach on
the part of GL Enterprises; (2) refusing petitioners claims for
damages, and (3) awarding attorneys fees to Northwestern.
RULING OF THE COURT
Substantial Breaches of the Contracts
Although the RTC and the CA concurred in ordering restitution,
the courts a quo, however, differed on the basis thereof. The
RTC applied the equitable principle of mutual fault, while the CA
applied Article 1191 on rescission.
The power to rescind the obligations of the injured party is
implied in reciprocal obligations, such as in this case. On this
score, the CA correctly applied Article 1191, which provides thus:
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.
The two contracts require no less than substantial breach before
they can be rescinded. Since the contracts do not provide for a
definition of substantial breach that would terminate the rights
and obligations of the parties, we apply the definition found in our
jurisprudence.
This Court defined in Cannu v. Galang13 that substantial, unlike
slight or casual breaches of contract, are fundamental breaches

that defeat the object of the parties in entering into an

agreement, since the law is not concerned with trifles.14
The question of whether a breach of contract is substantial
depends upon the attending circumstances.15
In the case at bar, the parties explicitly agreed that the materials
to be delivered must be compliant with the CHED and IMO
standards and must be complete with manuals. Aside from these
clear provisions in the contracts, the courts a quo similarly found
that the intent of the parties was to replace the old IBS in order to
obtain CHED accreditation for Northwesterns maritime-related
courses.
According to CHED Memorandum Order (CMO) No. 10, Series
of 1999, as amended by CMO No. 13, Series of 2005, any
simulator used for simulator-based training shall be capable of
simulating the operating capabilities of the shipboard equipment
concerned. The simulation must be achieved at a level of
physical realism appropriate for training objectives; include the
capabilities, limitations and possible errors of such equipment;
and provide an interface through which a trainee can interact
with the equipment, and the simulated environment.
Given these conditions, it was thus incumbent upon GL
Enterprises to supply the components that would create an IBS
that would effectively facilitate the learning of the students.
However, GL Enterprises miserably failed in meeting its
responsibility. As contained in the findings of the CA and the
RTC, petitioner supplied substandard equipment when it
delivered components that (1) were old; (2) did not have
instruction manuals and warranty certificates; (3) bore indications
of being reconditioned machines; and, all told, (4) might not have
met the IMO and CHED standards. Highlighting the defects of
the delivered materials, the CA quoted respondents testimonial
evidence as follows:16
Q: In particular which of these equipment of CHED requirements
were not complied with?
A: The Radar Ma'am, because they delivered only 10-inch PPI,
that is the monitor of the Radar. That is 16-inch and the
gyrocompass with two (2) repeaters and the history card. The
gyrocompass - there is no marker, there is no model, there is no
serial number, no gimbal, no gyroscope and a bulb to work it
properly to point the true North because it is very important to the
Cadets to learn where is the true North being indicated by the
Master Gyrocompass.
xxxx
Q: Mr. Witness, one of the defects you noted down in this history
card is that the master gyrocompass had no gimbals, gyroscope
and balls and was replaced with an ordinary electric motor. So
what is the Implication of this?
A: Because those gimbals, balls and the gyroscope it let the
gyrocompass to work so it will point the true North but they being
replaced with the ordinary motor used for toys so it will not
indicate the true North.

Q: So what happens if it will not indicate the true North?

A: It is very big problem for my cadets because they must, to
learn into school where is the true North and what is that
equipment to be used on board.
Q: One of the defects is that the steering wheel was that of an
ordinary automobile. And what is the implication of this?
A: Because. on board Maam, we are using the real steering
wheel and the cadets will be implicated if they will notice that the
ship have the same steering wheel as the car so it is not
advisable for them.
Q:. And another one is that the gyrocompass repeater was only
refurbished and it has no serial number. What is wrong with that?
A: It should be original Maam because this gyro repeater, it must
to repeat also the true North being indicated by the Master Gyro
Compass so it will not work properly, I dont know it will work
properly. (Underscoring supplied)
Evidently, the materials delivered were less likely to pass the
CHED standards, because the navigation system to be installed
might not accurately point to the true north; and the steering
wheel delivered was one that came from an automobile, instead
of one used in ships. Logically, by no stretch of the imagination
could these form part of the most modern IBS compliant with the
IMO and CHED standards.
Even in the instant appeal, GL Enterprises does not refute that
the equipment it delivered was substandard. However, it
reiterates its rejected excuse that Northwestern should have
made an assessment only after the completion of the
IBS.17 Thus, petitioner stresses that it was Northwestern that
breached the agreement when the latter halted the installation of
the materials for the IBS, even if the parties had contemplated a
completed project to be evaluated by CHED. However, as aptly
considered by the CA, respondent could not just "sit still and wait
for such day that its accreditation may not be granted by CHED
due to the apparent substandard equipment installed in the
bridge system."18 The appellate court correctly emphasized that,
by that time, both parties would have incurred more costs for
nothing.
Additionally, GL Enterprises reasons that, based on the
contracts, the materials that were hauled all the way from
Quezon City to Laoag City under the custody of the four
designated installers might not have been the components to be
used.19 Without belaboring the point, we affirm the conclusion of
the CA and the RTC that the excuse is untenable for being
contrary to human experience.20
Given that petitioner, without justification, supplied substandard
components for the new IBS, it is thus clear that its violation was
not merely incidental, but directly related to the essence of the
agreement pertaining to the installation of an IBS compliant with
the CHED and IMO standards.
Consequently, the CA correctly found substantial breach on the
part of petitioner.

In contrast, Northwesterns breach, if any, was characterized by

the appellate court as slight or casual.21 By way of negative
definition, a breach is considered casual if it does not
fundamentally defeat the object of the parties in entering into an
agreement. Furthermore, for there to be a breach to begin with,
there must be a "failure, without legal excuse, to perform any
promise which forms the whole or part of the contract."22
Here, as discussed, the stoppage of the installation was justified.
The action of Northwestern constituted a legal excuse to prevent
the highly possible rejection of the IBS. Hence, just as the CA
concluded, we find that Northwestern exercised ordinary
prudence to avert a possible wastage of time, effort, resources
and also of theP2.9 million representing the value of the new
IBS.
Actual Damages, Moral and Exemplary Damages, and
Attorney's Fees
As between the parties, substantial breach can clearly be
attributed to GL Enterprises.1wphi1 Consequently, it is not the
injured party who can claim damages under Article 1170 of the
Civil Code. For this reason, we concur in the result of the CA's
Decision denying petitioner actual damages in the form of lost
earnings, as well as moral and exemplary damages.
With respect to attorney's fees, Article 2208 of the Civil Code
allows the grant thereof when the court deems it just and
equitable that attorney's fees should be recovered. An award of
attorney's fees is proper if one was forced to litigate and incur
expenses to protect one's rights and interest by reason of an
unjustified act or omission on the part of the party from whom the
award is sought.23
Since we affirm the CA's finding that it was not Northwestern but
GL Enterprises that breached the contracts without justification, it
follows that the appellate court correctly awarded attorneys fees
to respondent. Notably, this litigation could have altogether been
avoided if petitioner heeded respondent's suggestion to amicably
settle; or, better yet, if in the first place petitioner delivered the
right materials as required by the contracts.
IN VIEW THEREOF, the assailed 27 July 2009 Decision of the
Court of Appeals in CA-G.R. CV No. 88989 is hereby
AFFIRMED.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 189145
December 4, 2013
OPTIMUM DEVELOPMENT BANK, Petitioner,
vs.
SPOUSES BENIGNO V. JOVELLANOS and LOURDES R.
JOVELLANOS, Respondents.
DECISION
PERLAS-BERNABE, J.:

Assailed in this petition for review on certiorari1 are the

Decision2 dated May 29, 2009 and Resolution 3 dated August 10,
2009 of the Court of Appeals (CA) in CA-G.R. SP No. 104487
which reversed the Decision4 dated December 27, 2007 of the
Regional Trial Court of Caloocan City, Branch 128 (RTC) in Civil
Case No. C-21867 that, in turn, affirmed the Decision5 dated
June 8, 2007 of the Metropolitan Trial Court, Branch 53 of that
same city (MeTC) in Civil Case No. 06-28830 ordering
respondents-spouses Benigno and Lourdes Jovellanos (Sps.
Jovellanos) to, inter alia, vacate the premises of the property
subject of this case.
The Facts
On April 26, 2005, Sps. Jovellanos entered into a Contract to
Sell6 with Palmera Homes, Inc. (Palmera Homes) for the
purchase of a residential house and lot situated in Block 3, Lot
14, Villa Alegria Subdivision, Caloocan City (subject property) for
a total consideration of P1,015,000.00. Pursuant to the contract,
Sps. Jovellanos took possession of the subject property upon a
down payment of P91,500.00, undertaking to pay the remaining
balance of the contract price in equal monthly installments
of P13,107.00 for a period of 10 years starting June 12, 2005.7
On August 22, 2006, Palmera Homes assigned all its rights, title
and interest in the Contract to Sell in favor of petitioner Optimum
Development Bank (Optimum) through a Deed of Assignment of
even date.8
On April 10, 2006, Optimum issued a Notice of Delinquency and
Cancellation of Contract to Sell9 for Sps. Jovellanoss failure to
pay their monthly installments despite several written and verbal
notices.10
In a final Demand Letter dated May 25, 2006,11 Optimum
required Sps. Jovellanos to vacate and deliver possession of the
subject property within seven (7) days which, however, remained
unheeded. Hence, Optimum filed, on November 3, 2006, a
complaint for unlawful detainer12 before the MeTC, docketed as
Civil Case No. 06-28830. Despite having been served with
summons, together with a copy of the complaint,13 Sps.
Jovellanos failed to file their answer within the prescribed
reglementary period, thus prompting Optimum to move for the
rendition of judgment.14
Thereafter, Sps. Jovellanos filed their opposition with motion to
admit answer, questioning the jurisdiction of the court, among
others. Further, they filed a Motion to Reopen and Set the Case
for Preliminary Conference, which the MeTC denied.
The MeTC Ruling
In a Decision15 dated June 8, 2007, the MeTC ordered Sps.
Jovellanos to vacate the subject property and pay Optimum
reasonable compensation in the amount of P5,000.00 for its use
and occupation until possession has been surrendered. It held
that Sps. Jovellanoss possession of the said property was by
virtue of a Contract to Sell which had already been cancelled for
non-payment of the stipulated monthly installment payments. As

such, their "rights of possession over the subject property

necessarily terminated or expired and hence, their continued
possession thereof constitute[d] unlawful detainer."16
Dissatisfied, Sps. Jovellanos appealed to the RTC, claiming that
Optimum counsel made them believe that a compromise
agreement was being prepared, thus their decision not to
engage the services of counsel and their concomitant failure to
file an answer.17
They also assailed the jurisdiction of the MeTC, claiming that the
case did not merely involve the issue of physical possession but
rather, questions arising from their rights under a contract to sell
which is a matter that is incapable of pecuniary estimation and,
therefore, within the jurisdiction of the RTC.18
The RTC Ruling
In a Decision19 dated December 27, 2007, the RTC affirmed the
MeTCs judgment, holding that the latter did not err in refusing to
admit Sps. Jovellanos s belatedly filed answer considering the
mandatory period for its filing. It also affirmed the MeTCs finding
that the action does not involve the rights of the respective
parties under the contract but merely the recovery of possession
by Optimum of the subject property after the spouses default.20
Aggrieved, Sps. Jovellanos moved for reconsideration which
was, however, denied in a Resolution21 dated June 27, 2008.
Hence, the petition before the CA reiterating that the RTC erred
in affirming the decision of the MeTC with respect to:
(a) the non-admission of their answer to the complaint; and
(b) the jurisdiction of the MeTC over the complaint for unlawful
detainer.22
The CA Ruling
In an Amended Decision23 dated May 29, 2009, the CA reversed
and set aside the RTCs decision, ruling to dismiss the complaint
for lack of jurisdiction. It found that the controversy does not only
involve the issue of possession but also the validity of the
cancellation of the Contract to Sell and the determination of the
rights of the parties thereunder as well as the governing law,
among others, Republic Act No. (RA) 6552.24
Accordingly, it concluded that the subject matter is one which is
incapable of pecuniary estimation and thus, within the jurisdiction
of the RTC.25
Undaunted, Optimum moved for reconsideration which was
denied in a Resolution26 dated August 10, 2009. Hence, the
instant petition, submitting that the case is one for unlawful
detainer, which falls within the exclusive original jurisdiction of
the municipal trial courts, and not a case incapable of pecuniary
estimation cognizable solely by the regional trial courts.
The Courts Ruling
The petition is meritorious. What is determinative of the nature of
the action and the court with jurisdiction over it are the
allegations in the complaint and the character of the relief
sought, not the defenses set up in an answer.27

A complaint sufficiently alleges a cause of action for unlawful

detainer if it recites that:
(a) initially, possession of the property by the defendant was by
contract with or by tolerance of the plaintiff;
(b) eventually, such possession became illegal upon notice by
plaintiff to defendant of the termination of the latter's right of
possession;
(c) thereafter, defendant remained in possession of the property
and deprived plaintiff of the enjoyment thereof; and
(d) within one year from the last demand on defendant to vacate
the property, plaintiff instituted the complaint for ejectment.28
Corollarily, the only issue to be resolved in an unlawful detainer
case is physical or material possession of the property involved,
independent of any claim of ownership by any of the parties
involved.29
In its complaint, Optimum alleged that it was by virtue of the April
26, 2005 Contract to Sell that Sps. Jovellanos were allowed to
take possession of the subject property. However, since the
latter failed to pay the stipulated monthly installments,
notwithstanding several written and verbal notices made upon
them, it cancelled the said contract as per the Notice of
Delinquency and Cancellation dated April 10, 2006. When Sps.
Jovellanos refused to vacate the subject property despite
repeated demands, Optimum instituted the present action for
unlawful detainer on November 3, 2006, or within one year from
the final demand made on May 25, 2006.
While the RTC upheld the MeTCs ruling in favor of Optimum,
the CA, on the other hand, declared that the MeTC had no
jurisdiction over the complaint for unlawful detainer, reasoning
that the case involves a matter which is incapable of pecuniary
estimation i.e., the validity of the cancellation of the Contract to
Sell and the determination of the rights of the parties under the
contract and law and hence, within the jurisdiction of the RTC.
The Court disagrees. Metropolitan Trial Courts are conditionally
vested with authority to resolve the question of ownership raised
as an incident in an ejectment case where the determination is
essential to a complete adjudication of the issue of
possession.30 Concomitant to the ejectment courts authority to
look into the claim of ownership for purposes of resolving the
issue of possession is its authority to interpret the contract or
agreement upon which the claim is premised. Thus, in the case
of Oronce v. CA,31 wherein the litigants opposing claims for
possession was hinged on whether their written agreement
reflected the intention to enter into a sale or merely an equitable
mortgage, the Court affirmed the propriety of the ejectment
courts examination of the terms of the agreement in question by
holding that, "because metropolitan trial courts are authorized to
look into the ownership of the property in controversy in
ejectment cases, it behooved MTC Branch 41 to examine the
bases for petitioners claim of ownership that entailed
interpretation of the Deed of Sale with Assumption of

Mortgage."32 Also, in Union Bank of the Philippines v. Maunlad

Homes, Inc.33 (Union Bank), citing Sps. Refugia v. CA,34 the
Court declared that MeTCs have authority to interpret contracts
in unlawful detainer cases, viz.:35
The authority granted to the MeTC to preliminarily resolve the
issue of ownership to determine the issue of possession
ultimately allows it to interpret and enforce the contract or
agreement between the plaintiff and the defendant. To deny the
MeTC jurisdiction over a complaint merely because the issue of
possession requires the interpretation of a contract will
effectively rule out unlawful detainer as a remedy. As stated, in
an action for unlawful detainer, the defendants right to possess
the property may be by virtue of a contract, express or implied;
corollarily, the termination of the defendants right to possess
would be governed by the terms of the same contract.
Interpretation of the contract between the plaintiff and the
defendant is inevitable because it is the contract that initially
granted the defendant the right to possess the property; it is this
same contract that the plaintiff subsequently claims was violated
or extinguished, terminating the defendants right to possess. We
ruled in Sps. Refugia v. CA that where the resolution of the
issue of possession hinges on a determination of the validity and
interpretation of the document of title or any other contract on
which the claim of possession is premised, the inferior court may
likewise pass upon these issues.
The MeTCs ruling on the rights of the parties based on its
interpretation of their contract is, of course, not conclusive, but is
merely provisional and is binding only with respect to the issue of
possession. (Emphases supplied; citations omitted)
In the case at bar, the unlawful detainer suit filed by Optimum
against Sps. Jovellanos for illegally withholding possession of
the subject property is similarly premised upon the cancellation
or termination of the Contract to Sell between them. Indeed, it
was well within the jurisdiction of the MeTC to consider the terms
of the parties agreement in order to ultimately determine the
factual bases of Optimums possessory claims over the subject
property. Proceeding accordingly, the MeTC held that Sps.
Jovellanoss non-payment of the installments due had rendered
the Contract to Sell without force and effect, thus depriving the
latter of their right to possess the property subject of said
contract.36 The foregoing disposition aptly squares with existing
jurisprudence. As the Court similarly held in the Union Bank
case, the sellers cancellation of the contract to sell necessarily
extinguished the buyers right of possession over the property
that was the subject of the terminated agreement.37
Verily, in a contract to sell, the prospective seller binds himself to
sell the property subject of the agreement exclusively to the
prospective buyer upon fulfillment of the condition agreed upon
which is the full payment of the purchase price but reserving to
himself the ownership of the subject property despite delivery
thereof to the prospective buyer.38

The full payment of the purchase price in a contract to sell is a

suspensive condition, the non-fulfillment of which prevents the
prospective sellers obligation to convey title from becoming
effective,39 as in this case. Further, it is significant to note that
given that the Contract to Sell in this case is one which has for its
object real property to be sold on an installment basis, the said
contract is especially governed by and thus, must be examined
under the provisions of RA 6552, or the "Realty Installment
Buyer Protection Act", which provides for the rights of the buyer
in case of his default in the payment of succeeding installments.
Breaking down the provisions of the law, the Court, in the case of
Rillo v. CA,40 explained the mechanics of cancellation under RA
6552 which are based mainly on the amount of installments
already paid by the buyer under the subject contract, to wit:41
Given the nature of the contract of the parties, the respondent
court correctly applied Republic Act No. 6552. Known as the
Maceda Law, R.A. No. 6552 recognizes in conditional sales of all
kinds of real estate (industrial, commercial, residential) the right
of the seller to cancel the contract upon non-payment of an
installment by the buyer, which is simply an event that prevents
the obligation of the vendor to convey title from acquiring binding
force. It also provides the right of the buyer on installments in
case he defaults in the payment of succeeding installments, viz.:
(1) Where he has paid at least two years of installments,
(a) To pay, without additional interest, the unpaid installments
due within the total grace period earned by him, which is hereby
fixed at the rate of one month grace period for every one year of
installment payments made:
Provided, That this right shall be exercised by the buyer only
once in every five years of the life of the contract and its
extensions, if any. (b) If the contract is cancelled, the seller shall
refund to the buyer the cash surrender value of the payments on
the property equivalent to fifty per cent of the total payments
made and, after five years of installments, an additional five per
cent every year but not to exceed ninety per cent of the total
payments made:
Provided, That the actual cancellation of the contract shall take
place after cancellation or the demand for rescission of the
contract by a notarial act and upon full payment of the cash
surrender value to the buyer.
Down payments, deposits or options on the contract shall be
included in the computation of the total number of installments
made.
(2) Where he has paid less than two years in installments, Sec.
4. x x x the seller shall give the buyer a grace period of not less
than sixty days from the date the installment became due. If the
buyer fails to pay the installments due at the expiration of the
grace period, the seller may cancel the contract after thirty days
from receipt by the buyer of the notice of cancellation or the
demand for rescission of the contract by a notarial act.
(Emphasis and underscoring supplied)

Pertinently, since Sps. Jovellanos failed to pay their stipulated

monthly installments as found by the MeTC, the Court examines
Optimums compliance with Section 4 of RA 6552, as abovequoted and highlighted, which is the provision applicable to
buyers who have paid less than two (2) years-worth of
installments. Essentially, the said provision provides for three (3)
requisites before the seller may actually cancel the subject
contract: first, the seller shall give the buyer a 60-day grace
period to be reckoned from the date the installment became
due; second, the seller must give the buyer a notice of
cancellation/demand for rescission by notarial act if the
buyer fails to pay the installments due at the expiration of the
said grace period; and third, the seller may actually cancel the
contract only after thirty (30) days from the buyers receipt of the
said notice of cancellation/demand for rescission by notarial act.
In the present case, the 60-day grace period automatically
operated42 in favor of the buyers, Sps. Jovellanos, and took
effect from the time that the maturity dates of the installment
payments lapsed. With the said grace period having expired
bereft of any installment payment on the part of Sps.
Jovellanos,43 Optimum then issued a notarized Notice of
Delinquency and Cancellation of Contract on April 10, 2006.
Finally, in proceeding with the actual cancellation of the contract
to sell, Optimum gave Sps. Jovellanos an additional thirty (30)
days within which to settle their arrears and reinstate the
contract, or sell or assign their rights to another.44
It was only after the expiration of the thirty day (30) period did
Optimum treat the contract to sell as effectively cancelled
making as it did a final demand upon Sps. Jovellanos to vacate
the subject property only on May 25, 2006. Thus, based on the
foregoing, the Court finds that there was a valid and effective
cancellation of the Contract to Sell in accordance with Section 4
of RA 6552 and since Sps. Jovellanos had already lost their right
to retain possession of the subject property as a consequence of
such cancellation, their refusal to vacate and turn over
possession to Optimum makes out a valid case for unlawful
detainer as properly adjudged by the MeTC.
WHEREFORE, the petition is GRANTED. The Decision dated
May 29, 2009 and Resolution dated August 10, 2009 of the
Court of Appeals in CA-G.R. SP No. 104487 are SET ASIDE.
The Decision dated June 8, 2007 of Metropolitan Trial Court,
Branch 53, Caloocan City in Civil Case No. 06-28830 is hereby
REINSTATED.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 185798

January 13, 2014

FIL-ESTATE PROPERTIES, INC. AND FIL-ESTATE

NETWORK INC., Petitioners,
vs.
SPOUSES CONRADO AND MARIA VICTORIA
RONQUILLO, Respondents.
DECISION
PEREZ, J.:
Before the Court is a petition for review on certiorari under Rule
45 of the 1997 Rules .of Civil Procedure assailing the
Decision1 of the Court of Appeals in CA-G.R. SP No. 100450
which affirmed the Decision of the Office of the President in O.P.
Case No. 06-F-216.
As culled from the records, the facts are as follow:
Petitioner Fil-Estate Properties, Inc. is the owner and developer
of the Central Park Place Tower while co-petitioner Fil-Estate
Network, Inc. is its authorized marketing agent. Respondent
Spouses Conrado and Maria Victoria Ronquillo purchased from
petitioners an 82-square meter condominium unit at Central Park
Place Tower in Mandaluyong City for a pre-selling contract price
of FIVE MILLION ONE HUNDRED SEVENTY-FOUR
THOUSAND ONLY (P5,174,000.00). On 29 August 1997,
respondents executed and signed a Reservation Application
Agreement wherein they deposited P200,000.00 as reservation
fee. As agreed upon, respondents paid the full downpayment
of P1,552,200.00 and had been paying the P63,363.33 monthly
amortizations until September 1998.
Upon learning that construction works had stopped, respondents
likewise stopped paying their monthly amortization. Claiming to
have paid a total of P2,198,949.96 to petitioners, respondents
through two (2) successive letters, demanded a full refund of
their payment with interest. When their demands went
unheeded, respondents were constrained to file a Complaint for
Refund and Damages before the Housing and Land Use
Regulatory Board (HLURB). Respondents prayed for
reimbursement/refund of P2,198,949.96 representing the total
amortization payments, P200,000.00 as and by way of moral
damages, attorneys fees and other litigation expenses.
On 21 October 2000, the HLURB issued an Order of Default
against petitioners for failing to file their Answer within the
reglementary period despite service of summons.2
Petitioners filed a motion to lift order of default and attached their
position paper attributing the delay in construction to the 1997
Asian financial crisis. Petitioners denied committing fraud or
misrepresentation which could entitle respondents to an award of
moral damages.
On 13 June 2002, the HLURB, through Arbiter Atty. Joselito F.
Melchor, rendered judgment ordering petitioners to jointly and
severally pay respondents the following amount:
a) The amount of TWO MILLION ONE HUNDRED NINETYEIGHT THOUSAND NINE HUNDRED FORTY NINE PESOS &
96/100 (P2,198,949.96) with interest thereon at twelve percent

(12%) per annum to be computed from the time of the

complainants demand for refund on October 08, 1998 until fully
paid,
b) ONE HUNDRED THOUSAND PESOS (P100,000.00) as
moral damages,
c) FIFTY THOUSAND PESOS (P50,000.00) as attorneys fees,
d) The costs of suit, and
e) An administrative fine of TEN THOUSAND PESOS
(P10,000.00) payable to this Office fifteen (15) days upon receipt
of this decision, for violation of Section 20 in relation to Section
38 of PD 957.3
The Arbiter considered petitioners failure to develop the
condominium project as a substantial breach of their obligation
which entitles respondents to seek for rescission with payment of
damages. The Arbiter also stated that mere economic hardship
is not an excuse for contractual and legal delay.
Petitioners appealed the Arbiters Decision through a petition for
review pursuant to Rule XII of the 1996 Rules of Procedure of
HLURB. On 17 February 2005, the Board of Commissioners of
the HLURB denied4 the petition and affirmed the Arbiters
Decision. The HLURB reiterated that the depreciation of the
peso as a result of the Asian financial crisis is not a fortuitous
event which will exempt petitioners from the performance of their
contractual obligation.
Petitioners filed a motion for reconsideration but it was
denied5 on 8 May 2006. Thereafter, petitioners filed a Notice of
Appeal with the Office of the President. On 18 April 2007,
petitioners appeal was dismissed6 by the Office of the President
for lack of merit. Petitioners moved for a reconsideration but their
motion was denied7 on 26 July 2007.
Petitioners sought relief from the Court of Appeals through a
petition for review under Rule 43 containing the same arguments
they raised before the HLURB and the Office of the President:
I.
THE HONORABLE OFFICE OF THE PRESIDENT ERRED IN
AFFIRMING THE DECISION OF THE HONORABLE HOUSING
AND LAND USE REGULATORY BOARD AND ORDERING
PETITIONERS-APPELLANTS TO REFUND RESPONDENTSAPPELLEES THE SUM OF P2,198,949.96 WITH 12%
INTEREST FROM 8 OCTOBER 1998 UNTIL FULLY PAID,
CONSIDERING THAT THE COMPLAINT STATES NO CAUSE
OF ACTION AGAINST PETITIONERS-APPELLANTS.
II.
THE HONORABLE OFFICE OF THE PRESIDENT ERRED IN
AFFIRMING THE DECISION OF THE OFFICE BELOW
ORDERING PETITIONERS-APPELLANTS TO PAY
RESPONDENTS-APPELLEES THE SUM OF P100,000.00 AS
MORAL DAMAGES AND P50,000.00 AS ATTORNEYS FEES
CONSIDERING THE ABSENCE OF ANY FACTUAL OR LEGAL
BASIS THEREFOR.
III.

THE HONORABLE OFFICE OF THE PRESIDENT ERRED IN

AFFIRMING THE DECISION OF THE HOUSING AND LAND
USE REGULATORY BOARD ORDERING PETITIONERSAPPELLANTS TO PAY P10,000.00 AS ADMINISTRATIVE FINE
IN THE ABSENCE OF ANY FACTUAL OR LEGAL BASIS TO
SUPPORT SUCH FINDING.8
On 30 July 2008, the Court of Appeals denied the petition for
review for lack of merit. The appellate court echoed the HLURB
Arbiters ruling that "a buyer for a condominium/subdivision
unit/lot unit which has not been developed in accordance with
the approved condominium/subdivision plan within the time limit
for complying with said developmental requirement may opt for
reimbursement under Section 20 in relation to Section 23 of
Presidential Decree (P.D.) 957 x x x."9 The appellate court
supported the HLURB Arbiters conclusion, which was affirmed
by the HLURB Board of Commission and the Office of the
President, that petitioners failure to develop the condominium
project is tantamount to a substantial breach which warrants a
refund of the total amount paid, including interest. The appellate
court pointed out that petitioners failed to prove that the Asian
financial crisis constitutes a fortuitous event which could excuse
them from the performance of their contractual and statutory
obligations. The appellate court also affirmed the award of moral
damages in light of petitioners unjustified refusal to satisfy
respondents claim and the legality of the administrative fine, as
provided in Section 20 of Presidential Decree No. 957.
Petitioners sought reconsideration but it was denied in a
Resolution10 dated 11 December 2008 by the Court of Appeals.
Aggrieved, petitioners filed the instant petition advancing
substantially the same grounds for review:
A.
THE HONORABLE COURT OF APPEALS ERRED WHEN IT
AFFIRMED IN TOTO THE DECISION OF THE OFFICE OF THE
PRESIDENT WHICH SUSTAINED RESCISSION AND REFUND
IN FAVOR OF THE RESPONDENTS DESPITE LACK OF
CAUSE OF ACTION.
B.
GRANTING FOR THE SAKE OF ARGUMENT THAT THE
PETITIONERS ARE LIABLE UNDER THE PREMISES, THE
HONORABLE COURT OF APPEALS ERRED WHEN IT
AFFIRMED THE HUGE AMOUNT OF INTEREST OF TWELVE
PERCENT (12%).
C.
THE HONORABLE COURT OF APPEALS LIKEWISE ERRED
WHEN IT AFFIRMED IN TOTO THE DECISION OF THE
OFFICE OF THE PRESIDENT INCLUDING THE PAYMENT
OF P100,000.00 AS MORAL DAMAGES, P50,000.00 AS
ATTORNEYS FEES AND P10,000.00 AS ADMINISTRATIVE
FINE IN THE ABSENCE OF ANY FACTUAL OR LEGAL BASIS
TO SUPPORT SUCH CONCLUSIONS.11

Petitioners insist that the complaint states no cause of action

because they allegedly have not committed any act of
misrepresentation amounting to bad faith which could entitle
respondents to a refund. Petitioners claim that there was a mere
delay in the completion of the project and that they only resorted
to "suspension and reformatting as a testament to their
commitment to their buyers." Petitioners attribute the delay to the
1997 Asian financial crisis that befell the real estate industry.
Invoking Article 1174 of the New Civil Code, petitioners maintain
that they cannot be held liable for a fortuitous event.
Petitioners contest the payment of a huge amount of interest on
account of suspension of development on a project. They liken
their situation to a bank which this Court, in Overseas Bank v.
Court of Appeals,12 adjudged as not liable to pay interest on
deposits during the period that its operations are ordered
suspended by the Monetary Board of the Central Bank.
Lastly, petitioners aver that they should not be ordered to pay
moral damages because they never intended to cause delay,
and again blamed the Asian economic crisis as the direct,
proximate and only cause of their failure to complete the project.
Petitioners submit that moral damages should not be awarded
unless so stipulated except under the instances enumerated in
Article 2208 of the New Civil Code. Lastly, petitioners refuse to
pay the administrative fine because the delay in the project was
caused not by their own deceptive intent to defraud their buyers,
but due to unforeseen circumstances beyond their control.
Three issues are presented for our resolution: 1) whether or not
the Asian financial crisis constitute a fortuitous event which
would justify delay by petitioners in the performance of their
contractual obligation; 2) assuming that petitioners are liable,
whether or not 12% interest was correctly imposed on the
judgment award, and 3) whether the award of moral damages,
attorneys fees and administrative fine was proper.
It is apparent that these issues were repeatedly raised by
petitioners in all the legal fora. The rulings were consistent that
first, the Asian financial crisis is not a fortuitous event that would
excuse petitioners from performing their contractual obligation;
second, as a result of the breach committed by petitioners,
respondents are entitled to rescind the contract and to be
refunded the amount of amortizations paid including interest and
damages; and third, petitioners are likewise obligated to pay
attorneys fees and the administrative fine.
This petition did not present any justification for us to deviate
from the rulings of the HLURB, the Office of the President and
the Court of Appeals.
Indeed, the non-performance of petitioners obligation entitles
respondents to rescission under Article 1191 of the New Civil
Code which states:
Article 1191. The power to rescind obligations is implied in
reciprocal ones, in case one of the obligors should not comply
with what is incumbent upon him.

The injured party may choose between the fulfillment and the
rescission of the obligation, with payment of damages in either
case. He may also seek rescission, even after he has chosen
fulfillment, if the latter should become impossible.
More in point is Section 23 of Presidential Decree No. 957, the
rule governing the sale of condominiums, which provides:
Section 23. Non-Forfeiture of Payments.1wphi1 No installment
payment made by a buyer in a subdivision or condominium
project for the lot or unit he contracted to buy shall be forfeited in
favor of the owner or developer when the buyer, after due notice
to the owner or developer, desists from further payment due to
the failure of the owner or developer to develop the subdivision
or condominium project according to the approved plans and
within the time limit for complying with the same. Such buyer
may, at his option, be reimbursed the total amount paid including
amortization interests but excluding delinquency interests, with
interest thereon at the legal rate. (Emphasis supplied).
Conformably with these provisions of law, respondents are
entitled to rescind the contract and demand reimbursement for
the payments they had made to petitioners.
Notably, the issues had already been settled by the Court in the
case of Fil-Estate Properties, Inc. v. Spouses Go13promulgated
on 17 August 2007, where the Court stated that the Asian
financial crisis is not an instance of caso fortuito. Bearing the
same factual milieu as the instant case, G.R. No. 165164
involves the same company, Fil-Estate, albeit about a different
condominium property. The company likewise reneged on its
obligation to respondents therein by failing to develop the
condominium project despite substantial payment of the contract
price. Fil-Estate advanced the same argument that the 1997
Asian financial crisis is a fortuitous event which justifies the delay
of the construction project. First off, the Court classified the issue
as a question of fact which may not be raised in a petition for
review considering that there was no variance in the factual
findings of the HLURB, the Office of the President and the Court
of Appeals. Second, the Court cited the previous rulings of Asian
Construction and Development Corporation v. Philippine
Commercial International Bank14 and Mondragon Leisure and
Resorts Corporation v. Court of Appeals15 holding that the 1997
Asian financial crisis did not constitute a valid justification to
renege on obligations. The Court expounded:
Also, we cannot generalize that the Asian financial crisis in 1997
was unforeseeable and beyond the control of a business
corporation. It is unfortunate that petitioner apparently met with
considerable difficulty e.g. increase cost of materials and labor,
even before the scheduled commencement of its real estate
project as early as 1995. However, a real estate enterprise
engaged in the pre-selling of condominium units is concededly a
master in projections on commodities and currency movements
and business risks. The fluctuating movement of the Philippine
peso in the foreign exchange market is an everyday occurrence,

and fluctuations in currency exchange rates happen everyday,

thus, not an instance of caso fortuito.16
The aforementioned decision becomes a precedent to future
cases in which the facts are substantially the same, as in this
case. The principle of stare decisis, which means adherence to
judicial precedents, applies.
In said case, the Court ordered the refund of the total
amortizations paid by respondents plus 6% legal interest
computed from the date of demand. The Court also awarded
attorneys fees. We follow that ruling in the case before us.
The resulting modification of the award of legal interest is, also,
in line with our recent ruling in Nacar v. Gallery
Frames,17 embodying the amendment introduced by the Bangko
Sentral ng Pilipinas Monetary Board in BSP-MB Circular No. 799
which pegged the interest rate at 6% regardless of the source of
obligation.
We likewise affirm the award of attorneys fees because
respondents were forced to litigate for 14 years and incur
expenses to protect their rights and interest by reason of the
unjustified act on the part of petitioners.18 The imposition
of P10,000.00 administrative fine is correct pursuant to Section
38 of Presidential Decree No. 957 which reads:
Section 38. Administrative Fines. The Authority may prescribe
and impose fines not exceeding ten thousand pesos for
violations of the provisions of this Decree or of any rule or
regulation thereunder. Fines shall be payable to the Authority
and enforceable through writs of execution in accordance with
the provisions of the Rules of Court.
Finally, we sustain the award of moral damages. In order that
moral damages may be awarded in breach of contract cases, the
defendant must have acted in bad faith, must be found guilty of
gross negligence amounting to bad faith, or must have acted in
wanton disregard of contractual obligations.19 The Arbiter found
petitioners to have acted in bad faith when they breached their
contract, when they failed to address respondents grievances
and when they adamantly refused to refund respondents'
payment.
In fine, we find no reversible error on the merits in the impugned
Court of Appeals' Decision and Resolution.
WHEREFORE, the petition is PARTLY GRANTED. The
appealed Decision is AFFIRMED with the MODIFICATION that
the legal interest to be paid is SIX PERCENT (6%) on the
amount due computed from the time of respondents' demand for
refund on 8 October 1998.
SO ORDERED.

1207 Joint/ Solidary Obligations

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION

not in any manner release me/us from responsibility

hereunder, it being understood that I fully agree to such
charges, novation or extension, and that this understanding
is a continuing one and shall subsist and bind me until the
liabilities of the said Celia Syjuco Regala have been fully
G.R. No. 72275 November 13, 1991
satisfied or paid.
PACIFIC BANKING CORPORATION, petitioner,
Plaintiff-appellee Pacific Banking Corporation has
vs.
contracted with accredited business establishments to
HON INTERMEDIATE APPELLATE COURT AND
honor purchases of goods and/or services by Pacificard
ROBERTO REGALA, JR., respondents.
holders and the cost thereof to be advanced by the plaintiffOcampo, Dizon & Domingo for petitioner.
appellee for the account of the defendant cardholder, and
Angara, Concepcion, Regala & Cruz for private respondent. the latter undertook to pay any statements of account
rendered by the plaintiff-appellee for the advances thus
MEDIALDEA, J.:p
made within thirty (30) days from the date of the statement,
This is a petition for review on certiorari of the decision (pp provided that any overdue account shall earn interest at the
21-31, Rollo) of the Intermediate Appellate Court (now
rate of 14% per annum from date of default.
Court of Appeals) in AC-G.R. C.V. No. 02753, 1 which
The defendant Celia Regala, as such Pacificard holder, had
modified the decision of the trial court against herein private purchased goods and/or services on credit (Exh. "C", "C-l"
to "C-112") under her Pacificard, for which the plaintiff
respondent Roberto Regala, Jr., one of the defendants in
the case for sum of money filed by Pacific Banking
advanced the cost amounting to P92,803.98 at the time of
Corporation.
the filing of the complaint.
The facts of the case as adopted by the respondent
In view of defendant Celia Regala's failure to settle her
account for the purchases made thru the use of the
appellant court from herein petitioner's brief before said
court are as follows:
Pacificard, a written demand (Exh. "D") was sent to the
On October 24, 1975, defendant Celia Syjuco Regala
latter and also to the defendant Roberto Regala, Jr. (Exh. "
(hereinafter referred to as Celia Regala for brevity), applied ") under his "Guarantor's Undertaking."
A complaint was subsequently filed in Court for defendant's
for and obtained from the plaintiff the issuance and use of
Pacificard credit card (Exhs. "A", "A-l",), under the Terms
(sic) repeated failure to settle their obligation. Defendant
and Conditions Governing the Issuance and Use of
Celia Regala was declared in default for her failure to file
Pacificard (Exh. "B" and hereinafter referred to as Terms
her answer within the reglementary period. Defendantappellant Roberto Regala, Jr., on the other hand, filed his
and Conditions), a copy of which was issued to and
received by the said defendant on the date of the
Answer with Counterclaim admitting his execution of the
application and expressly agreed that the use of the
"Guarantor's Understanding", "but with the understanding
Pacificard is governed by said Terms and Conditions. On
that his liability would be limited to P2,000.00 per month."
the same date, the defendant-appelant Robert Regala, Jr., In view of the solidary nature of the liability of the parties,
spouse of defendant Celia Regala, executed a "Guarantor's the presentation of evidence ex-parte as against the
Undertaking" (Exh. "A-1-a") in favor of the appellee Bank,
defendant Celia Regala was jointly held with the trial of the
whereby the latter agreed "jointly and severally of Celia
case as against defendant Roberto Regala.
Aurora Syjuco Regala, to pay the Pacific Banking
After the presentation of plaintiff's testimonial and
Corporation upon demand, any and all indebtedness,
documentary evidence, fire struck the City Hall of Manila,
obligations, charges or liabilities due and incurred by said
including the court where the instant case was pending, as
Celia Aurora Syjuco Regala with the use of the Pacificard,
well as all its records.
or renewals thereof, issued in her favor by the Pacific
Upon plaintiff-appellee's petition for reconstitution, the
Banking Corporation". It was also agreed that "any changes records of the instant case were duly reconstituted.
of or novation in the terms and conditions in connection
Thereafter, the case was set for pre-trial conference with
with the issuance or use of the Pacificard, or any extension respect to the defendant-appellant Roberto Regala on
of time to pay such obligations, charges or liabilities shall
plaintiff-appellee's motion, after furnishing the latter a copy

of the same. No opposition thereto having been interposed

by defendant-appellant, the trial court set the case for pretrial conference. Neither did said defendant-appellant nor
his counsel appear on the date scheduled by the trial court
for said conference despite due notice. Consequently,
plaintiff-appellee moved that the defendant-appellant
Roberto Regala he declared as in default and that it be
allowed to present its evidence ex-parte, which motion was
granted. On July 21, 1983, plaintiff-appellee presented its
evidence ex-parte. (pp. 23-26, Rollo)
After trial, the court a quo rendered judgment on December
5, 1983, the dispositive portion of which reads:
WHEREFORE, the Court renders judgment for the plaintiff
and against the defendants condemning the latter, jointly
and severally, to pay said plaintiff the amount of
P92,803.98, with interest thereon at 14% per annum,
compounded annually, from the time of demand on
November 17, 1978 until said principal amount is fully paid;
plus 15% of the principal obligation as and for attorney's
fees and expense of suit; and the costs.
The counterclaim of defendant Roberto Regala, Jr. is
dismissed for lack of merit.
SO ORDERED. (pp. 22-23, Rollo)
The defendants appealed from the decision of the court a
quo to the Intermediate Appellate Court.
On August 12, 1985, respondent appellate court rendered
judgment modifying the decision of the trial court. Private
respondent Roberto Regala, Jr. was made liable only to the
extent of the monthly credit limit granted to Celia
Regala, i.e., at P2,000.00 a month and only for the
advances made during the one year period of the card's
effectivity counted from October 29, 1975 up to October 29,
1976. The dispositive portion of the decision states:
WHEREFORE, the judgment of the trial court dated
December 5, 1983 is modified only as to appellant Roberto
Regala, Jr., so as to make him liable only for the purchases
made by defendant Celia Aurora Syjuco Regala with the
use of the Pacificard from October 29, 1975 up to October
29, 1976 up to the amount of P2,000.00 per month only,
with interest from the filing of the complaint up to the
payment at the rate of 14% per annum without
pronouncement as to costs. (p. 32, Rollo)
A motion for reconsideration was filed by Pacific Banking
Corporation which the respondent appellate court denied
for lack of merit on September 19, 1985 (p. 33, Rollo).
On November 8, 1985, Pacificard filed this petition. The
petitioner contends that while the appellate court correctly

recognized Celia Regala's obligation to Pacific Banking

Corp. for the purchases of goods and services with the use
of a Pacificard credit card in the total amount of P92,803.98
with 14% interest per annum, it erred in limiting private
respondent Roberto Regala, Jr.'s liability only for purchases
made by Celia Regala with the use of the card from
October 29, 1975 up to October 29, 1976 up to the amount
of P2,000.00 per month with 14% interest from the filing of
the complaint.
There is merit in this petition.
The pertinent portion of the "Guarantor's Undertaking"
which private respondent Roberto Regala, Jr. signed in
favor of Pacific Banking Corporation provides:
I/We, the undersigned, hereby agree, jointly and severally
with Celia Syjuco Regala to pay the Pacific Banking
Corporation upon demand any and all indebtedness,
obligations, charges or liabilities due and incurred by said
Celia Syjuco Regala with the use of the Pacificard or
renewals thereof issued in his favor by the Pacific Banking
Corporation. Any changes of or Novation in the terms and
conditions in connection with the issuance or use of said
Pacificard, or any extension of time to pay such obligations,
charges or liabilities shall not in any manner release me/us
from the responsibility hereunder, it being understood that
the undertaking is a continuing one and shall subsist and
bind me/us until all the liabilities of the said Celia Syjuco
Regala have been fully satisfied or paid. (p. 12, Rollo)
The undertaking signed by Roberto Regala, Jr. although
denominated "Guarantor's Undertaking," was in substance
a contract of surety. As distinguished from a contract of
guaranty where the guarantor binds himself to the creditor
to fulfill the obligation of the principal debtor only in case
the latter should fail to do so, in a contract of suretyship, the
surety binds himself solidarily with the principal debtor (Art.
2047, Civil Code of the Philippines).
We need not look elsewhere to determine the nature and
extent of private respondent Roberto Regala, Jr.'s
undertaking. As a surety he bound himself jointly and
severally with the debtor Celia Regala "to pay the Pacific
Banking Corporation upon demand, any and all
indebtedness, obligations, charges or liabilities due and
incurred by said Celia Syjuco Regala with the use of
Pacificard or renewals thereof issued in (her) favor by
Pacific Banking Corporation." This undertaking was also
provided as a condition in the issuance of the Pacificard to
Celia Regala, thus:

5. A Pacificard is issued to a Pacificard-holder against the

joint and several signature of a third party and as such, the
Pacificard holder and the guarantor assume joint and
several liabilities for any and all amount arising out of the
use of the Pacificard. (p. 14, Rollo)
The respondent appellate court held that "all the other
rights of the guarantor are not thereby lost by the guarantor
becoming liable solidarily and therefore a surety." It further
ruled that although the surety's liability is like that of a joint
and several debtor, it does not make him the debtor but still
the guarantor (or the surety), relying on the case of
Government of the Philippines v. Tizon. G.R. No. L-22108,
August 30, 1967, 20 SCRA 1182. Consequently, Article
2054 of the Civil Code providing for a limited liability on the
part of the guarantor or debtor still applies.
It is true that under Article 2054 of the Civil Code, "(A)
guarantor may bind himself for less, but not for more than
the principal debtor, both as regards the amount and the
onerous nature of the conditions. 2 It is likewise not
disputed by the parties that the credit limit granted to Celia
Regala was P2,000.00 per month and that Celia Regala
succeeded in using the card beyond the original period of
its effectivity, October 29, 1979. We do not agree however,
that Roberto Jr.'s liability should be limited to that extent.
Private respondent Roberto Regala, Jr., as surety of his
wife, expressly bound himself up to the extent of the
debtor's (Celia) indebtedness likewise expressly waiving
any "discharge in case of any change or novation of the
terms and conditions in connection with the issuance of the
Pacificard credit card." Roberto, in fact, made his
commitment as a surety a continuing one, binding upon
himself until all the liabilities of Celia Regala have been fully
paid. All these were clear under the "Guarantor's
Undertaking" Roberto signed, thus:
. . . Any changes of or novation in the terms and conditions
in connection with the issuance or use of said Pacificard, or
any extension of time to pay such obligations, charges or
liabilities shall not in any manner release me/us from the
responsibility hereunder, it being understood that the
undertaking is a continuing one and shall subsist and bind
me/us until all the liabilities of the said Celia Syjuco Regala
have been fully satisfied or paid. (p. 12, supra; emphasis
supplied)
Private respondent Roberto Regala, Jr. had been made
aware by the terms of the undertaking of future changes in
the terms and conditions governing the issuance of the
credit card to his wife and that, notwithstanding, he

voluntarily agreed to be bound as a surety. As in guaranty,

a surety may secure additional and future debts of the
principal debtor the amount of which is not yet known (see
Article 2053, supra).
The application by respondent court of the ruling in
Government v. Tizon, supra is misplaced. It was held in
that case that:
. . . although the defendants bound themselves in solidum,
the liability of the Surety under its bond would arise only if
its co-defendants, the principal obligor, should fail to
comply with the contract. To paraphrase the ruling in the
case of Municipality of Orion vs. Concha, the liability of the
Surety is "consequent upon the liability" of Tizon, or "so
dependent on that of the principal debtor" that the Surety
"is considered in law as being the same party as the debtor
in relation to whatever is adjudged, touching the obligation
of the latter"; or the liabilities of the two defendants herein
"are so interwoven and dependent as to be inseparable."
Changing the expression, if the defendants are held liable,
their liability to pay the plaintiff would be solidary, but the
nature of the Surety's undertaking is such that it does not
incur liability unless and until the principal debtor is held
liable.
A guarantor or surety does not incur liability unless the
principal debtor is held liable. It is in this sense that a
surety, although solidarily liable with the principal debtor, is
different from the debtor. It does not mean, however, that
the surety cannot be held liable to the same extent as the
principal debtor. The nature and extent of the liabilities of a
guarantor or a surety is determined by the clauses in the
contract of suretyship(see PCIB v. CA, L-34959, March 18,
1988, 159 SCRA 24).
ACCORDINGLY, the petition is GRANTED. The questioned
decision of respondent appellate court is SET ASIDE and
the decision of the trial court is REINSTATED.
SO ORDERED.
SECOND DIVISION
[G.R. No. 101723. May 11, 2000]
INDUSTRIAL MANAGEMENT INTERNATIONAL
DEVELOPMENT CORP. (INIMACO), petitioner,
vs. NATIONAL LABOR RELATIONS COMMISSION,
(Fourth Division) Cebu City, and ENRIQUE SULIT,
SOCORRO MAHINAY, ESMERALDO PEGARIDO, TITA
BACUSMO, GINO NIERE, VIRGINIA BACUS, ROBERTO

NEMENZO, DARIO GO, and ROBERTO

ALEGARBES, respondents.
DECISION
BUENA, J.:
This is a petition for certiorari assailing the Resolution
dated September 4, 1991 issued by the National Labor
Relations Commission in RAB-VII-0711-84 on the alleged
ground that it committed a grave abuse of discretion
amounting to lack of jurisdiction in upholding the Alias Writ
of Execution issued by the Labor Arbiter which deviated
from the dispositive portion of the Decision dated March 10,
1987, thereby holding that the liability of the six
respondents in the case below is solidary despite the
absence of the word "solidary" in the dispositive portion of
the Decision, when their liability should merely be joint. Sjcj
The factual antecedents are undisputed: Supr-eme
In September 1984, private respondent Enrique Sulit,
Socorro Mahinay, Esmeraldo Pegarido, Tita Bacusmo,
Gino Niere, Virginia Bacus, Roberto Nemenzo, Dariogo,
and Roberto Alegarbes filed a complaint with the
Department of Labor and Employment, Regional Arbitration
Branch No. VII in Cebu City against Filipinas Carbon
Mining Corporation, Gerardo Sicat, Antonio Gonzales, Chiu
Chin Gin, Lo Kuan Chin, and petitioner Industrial
Management Development Corporation (INIMACO), for
payment of separation pay and unpaid wages. Sc-jj
In a Decision dated March 10, 1987, Labor Arbiter
Bonifacio B. Tumamak held that:
"RESPONSIVE, to all the foregoing, judgment is hereby
entered, ordering respondents Filipinas Carbon and Mining
Corp. Gerardo Sicat, Antonio Gonzales/Industrial
Management Development Corp. (INIMACO), Chiu Chin
Gin and Lo Kuan Chin, to pay complainants Enrique Sulit,
the total award of P82,800.00; ESMERALDO PEGARIDO
the full award of P19,565.00; Roberto Nemenzo the total
sum of P29,623.60 and DARIO GO the total award of
P6,599.71, or the total aggregate award of ONE
HUNDRED THIRTY-EIGHT THOUSAND FIVE HUNDRED
EIGHTY-EIGHT PESOS AND 31/100 (P138,588.31) to be
deposited with this Commission within ten (10) days from
receipt of this Decision for appropriate disposition. All other
claims are hereby Dismiss (sic) for lack of merit. Jjs-c
"SO ORDERED.
"Cebu City, Philippines.
"10 March 1987."0[1]

No appeal was filed within the reglementary period thus,

the above Decision became final and executory. On June
16, 1987, the Labor Arbiter issued a writ of execution but it
was returned unsatisfied. On August 26, 1987, the Labor
Arbiter issued an Alias Writ of Execution which ordered
thus: Ed-pm-is
"NOW THEREFORE, by virtue of the powers vested in me
by law, you are hereby commanded to proceed to the
premises of respondents Antonio Gonzales/Industrial
Management Development Corporation (INIMACO)
situated at Barangay Lahug, Cebu City, in front of La
Curacha Restaurant, and/or to Filipinas Carbon and
Mining corporation and Gerardo Sicat at 4th Floor Universal
RE-Bldg. 106 Paseo de Roxas, Legaspi Village, Makati
Metro Manila and at Philippine National Bank, Escolta,
Manila respectively, and collect the aggregate award of
ONE HUNDRED THIRTY-EIGHT THOUSAND FIVE
HUNDRED EIGHTY-EIGHT PESOS AND THIRTY ONE
CENTAVOS (P138,588.31) and thereafter turn over said
amount to complainants ENRIQUE SULIT, ESMERALDO
PEGARIDO, ROBERTO NEMENZO AND DARIO GO or to
this Office for appropriate disposition. Should you fail to
collect the said sum in cash, you are hereby authorized to
cause the satisfaction of the same on the movable or
immovable property(s) of respondents not exempt from
execution. You are to return this writ sixty (6) (sic) days
from your receipt hereof, together with your corresponding
report.
"You may collect your legal expenses from the respondents
as provided for by law.
"SO ORDERED."[2]
On September 3, 1987, petitioner filed a "Motion to Quash
Alias Writ of Execution and Set Aside Decision,"[3] alleging
among others that the alias writ of execution altered and
changed the tenor of the decision by changing the liability
of therein respondents from joint to solidary, by the
insertion of the words "AND/OR" between "Antonio
Gonzales/Industrial Management Development Corporation
and Filipinas Carbon and Mining Corporation, et al."
However, in an order dated September 14, 1987, the Labor
Arbiter denied the motion. Mis-oedp
On October 2, 1987, petitioner appealed[4] the Labor
Arbiters Order dated September 14, 1987 to the
respondent NLRC. Mis-edp
The respondent NLRC dismissed the appeal in a
Decision[5] dated August 31, 1988, the pertinent portions of
which read:

"In matters affecting labor rights and labor justice, we have

always adopted the liberal approach which favors the
exercise of labor rights and which is beneficial to labor as a
means to give full meaning and import to the constitutional
mandate to afford protection to labor. Considering the
factual circumstances in this case, there is no doubt in our
mind that the respondents herein are called upon to pay,
jointly and severally, the claims of the complainants as was
the latters prayers. Inasmuch as respondents herein never
controverted the claims of the complainants below, there is
no reason why complainants prayer should not be granted.
Further, in line with the powers granted to the Commission
under Article 218 (c) of the Labor code, to waive any error,
defect or irregularity whether in substance or in form in a
proceeding before Us, We hold that the Writ of Execution
be given due course in all respects." Ed-p
On July 31, 1989, petitioner filed a "Motion To Compel
Sheriff To Accept Payment Of P23,198.05 Representing
One Sixth Pro Rata Share of Respondent INIMACO As Full
and Final Satisfaction of Judgment As to Said
Respondent."[6] The private respondents opposed the
motion. In an Order[7] dated August 15, 1989, the Labor
Arbiter denied the motion ruling thus:
"WHEREFORE, responsive to the foregoing respondent
INIMACOs Motions are hereby DENIED. The Sheriff of this
Office is order (sic) to accept INIMACOs tender payment
(sic) of the sum of P23,198.05, as partial satisfaction of the
judgment and to proceed with the enforcement of the Alias
Writ of Execution of the levied properties, now issued by
this Office, for the full and final satisfaction of the monetary
award granted in the instant case.
"SO ORDERED." Ed-psc
Petitioner appealed the above Order of the Labor Arbiter
but this was again dismissed by the respondent NLRC in its
Resolution[8] dated September 4, 1991 which held that:
"The arguments of respondent on the finality of the
dispositive portion of the decision in this case is beside the
point. What is important is that the Commission has ruled
that the Writ of Execution issued by the Labor Arbiter in this
case is proper. It is not really correct to say that said Writ of
Execution varied the terms of the judgment. At most,
considering the nature of labor proceedings there was, an
ambiguity in said dispositive portion which was
subsequently clarified by the Labor Arbiter and the
Commission in the incidents which were initiated by
INIMACO itself. By sheer technicality and unfounded
assertions, INIMACO would now reopen the issue which

was already resolved against it. It is not in keeping with the

established rules of practice and procedure to allow this
attempt of INIMACO to delay the final disposition of this
case.
"WHEREFORE, in view of all the foregoing, this appeal is
DISMISSED and the Order appealed from is hereby
AFFIRMED. Sce-dp
"With double costs against appellant."
Dissatisfied with the foregoing, petitioner filed the instant
case, alleging that the respondent NLRC committed grave
abuse of discretion in affirming the Order of the Labor
Arbiter dated August 15, 1989, which declared the liability
of petitioner to be solidary.
The only issue in this petition is whether petitioners liability
pursuant to the Decision of the Labor Arbiter dated March
10, 1987, is solidary or not.Calrs-pped
Upon careful examination of the pleadings filed by the
parties, the Court finds that petitioner INIMACOs liability is
not solidary but merely joint and that the respondent NLRC
acted with grave abuse of discretion in upholding the Labor
Arbiters Alias Writ of Execution and subsequent Orders to
the effect that petitioners liability is solidary.
A solidary or joint and several obligation is one in which
each debtor is liable for the entire obligation, and each
creditor is entitled to demand the whole obligation.[9] In a
joint obligation each obligor answers only for a part of the
whole liability and to each obligee belongs only a part of the
correlative rights.[10]
Well-entrenched is the rule that solidary obligation cannot
lightly be inferred.[11] There is a solidary liability only when
the obligation expressly so states, when the law so
provides or when the nature of the obligation so requires.[12]
In the dispositive portion of the Labor Arbiter, the word
"solidary" does not appear. The said fallo expressly states
the following respondents therein as liable, namely:
Filipinas Carbon and Mining Corporation, Gerardo Sicat,
Antonio Gonzales, Industrial Management Development
Corporation (petitioner INIMACO), Chiu Chin Gin, and Lo
Kuan Chin. Nor can it be inferred therefrom that the liability
of the six (6) respondents in the case below is solidary,
thus their liability should merely be joint.
Moreover, it is already a well-settled doctrine in this
jurisdiction that, when it is not provided in a judgment that
the defendants are liable to pay jointly and severally a
certain sum of money, none of them may be compelled to
satisfy in full said judgment. In Oriental Commercial Co.
vs. Abeto and Mabanag[13] this Court held:

"It is of no consequence that, under the contract of

suretyship executed by the parties, the obligation
contracted by the sureties was joint and several in
character. The final judgment, which superseded the action
for the enforcement of said contract, declared the obligation
to be merely joint, and the same cannot be executed
otherwise."[14]
Granting that the Labor Arbiter has committed a mistake in
failing to indicate in the dispositive portion that the liability
of respondents therein is solidary, the correction -- which is
substantial -- can no longer be allowed in this case
because the judgment has already become final and
executory.Scc-alr
It is an elementary principle of procedure that the resolution
of the court in a given issue as embodied in the dispositive
part of a decision or order is the controlling factor as to
settlement of rights of the parties.[15] Once a decision or
order becomes final and executory, it is removed from the
power or jurisdiction of the court which rendered it to further
alter or amend it.[16] It thereby becomes immutable and
unalterable and any amendment or alteration which
substantially affects a final and executory judgment is null
and void for lack of jurisdiction, including the entire
proceedings held for that purpose.[17] An order of execution
which varies the tenor of the judgment or exceeds the
terms thereof is a nullity.[18]
None of the parties in the case before the Labor Arbiter
appealed the Decision dated March 10, 1987, hence the
same became final and executory. It was, therefore,
removed from the jurisdiction of the Labor Arbiter or the
NLRC to further alter or amend it. Thus, the proceedings
held for the purpose of amending or altering the dispositive
portion of the said decision are null and void for lack of
jurisdiction. Also, the Alias Writ of Execution is null and void
because it varied the tenor of the judgment in that it sought
to enforce the final judgment against "Antonio
Gonzales/Industrial Management Development Corp.
(INIMACO) and/or Filipinas Carbon and Mining Corp. and
Gerardo Sicat," which makes the liability solidary. Ca-lrsc
WHEREFORE, the petition is hereby GRANTED. The
Resolution dated September 4, 1991 of the respondent
National Labor Relations is hereby declared NULL and
VOID. The liability of the respondents in RAB-VII-0711-84
pursuant to the Decision of the Labor Arbiter dated March
10, 1987 should be, as it is hereby, considered joint and
petitioners payment which has been accepted considered
as full satisfaction of its liability, without prejudice to the

enforcement of the award, against the other five (5)

respondents in the said case. Sppedsc
SO ORDERED.
SECOND DIVISION
[G.R. No. 144134. November 11, 2003]
MARIVELES SHIPYARD CORP., petitioner, vs. HON.
COURT OF APPEALS, LUIS REGONDOLA, MANUELIT
GATALAN,ORESCA AGAPITO, NOEL
ALBADBAD, ROGELIO PINTUAN, DANILO
CRISOSTOMO, ROMULO MACALINAO, NESTOR
FERER, RICKY CUESTA, ROLLY ANDRADA, LARRY
ROGOLA, FRANCISCO LENOGON,
AUGUSTO QUINTO, ARFE BERAMO, BONIFACIO
TRINIDAD, ALFREDO ASCARRAGA, ERNESTO
MAGNO, HONORARIO HORTECIO, NELBERT PINEDA,
GLEN ESTIPULAR, FRANCISCO COMPUESTO,
ISABELITO CORTEZ, MATURAN ROSAURO, SAMSON
CANAS, FEBIEN ISIP, JESUS RIPARIP, ALFREDO
SIENES, ADOLAR ALBERT, HONESTO CABANILLAS,
AMPING CASTILLO and ELWIN
REVILLA, respondents.
DECISION
QUISUMBING, J.:
For review on certiorari is the Resolution,[1] dated
December 29, 1999, of the Court of Appeals in CA-G.R. SP
No. 55416, which dismissed outright the petition
for certiorari of Mariveles Shipyard Corp., due to a defective
certificate of non-forum shopping and non-submission of
the required documents to accompany said petition.
Mariveles Shipyard Corp., had filed a special civil action
for certiorari with the Court of Appeals to nullify the
resolution[2] of the National Labor Relations Commission
(NLRC), dated April 22, 1999, in NLRC NCR Case No. 0009-005440-96-A, which affirmed the Labor Arbiters
decision,[3] dated May 22, 1998, holding petitioner jointly
and severally liable with Longest Force Investigation and
Security Agency, Inc., for the underpayment of wages and
overtime pay due to the private respondents. Likewise
challenged in the instant petition is the resolution[4] of the
Court of Appeals, dated July 12, 2000, denying petitioners
motion for reconsideration.
The facts, as culled from records, are as follows:
Sometime on October 1993, petitioner Mariveles Shipyard
Corporation engaged the services of Longest Force
Investigation and Security Agency, Inc. (hereinafter,

Longest Force) to render security services at its premises.

Pursuant to their agreement, Longest Force deployed its
security guards, the private respondents herein, at the
petitioners shipyard in Mariveles, Bataan.
According to petitioner, it religiously complied with the
terms of the security contract with Longest Force, promptly
paying its bills and the contract rates of the latter. However,
it found the services being rendered by the assigned
guards unsatisfactory and inadequate, causing it to
terminate its contract with Longest Force on April
1995.[5] Longest Force, in turn, terminated the employment
of the security guards it had deployed at petitioners
shipyard.
On September 2, 1996, private respondents filed a case for
illegal dismissal, underpayment of wages pursuant to the
PNPSOSIA-PADPAO rates, non-payment of overtime pay,
premium pay for holiday and rest day, service incentive
leave pay, 13th month pay and attorneys fees, against both
Longest Force and petitioner, before the Labor
Arbiter. Docketed as NLRC NCR Case No. 00-09-00544096-A, the case sought the guards reinstatement with full
backwages and without loss of seniority rights.
For its part, Longest Force filed a cross-claim[6] against the
petitioner. Longest Force admitted that it employed private
respondents and assigned them as security guards at the
premises of petitioner from October 16, 1993 to April 30,
1995, rendering a 12 hours duty per shift for the said
period. It likewise admitted its liability as to the nonpayment of the alleged wage differential in the total amount
of P2,618,025 but passed on the liability to petitioner
alleging that the service fee paid by the latter to it was way
below the PNPSOSIA and PADPAO rate, thus, contrary to
the mandatory and prohibitive laws because the right to
proper compensation and benefits provided under the
existing labor laws cannot be waived nor compromised.
The petitioner denied any liability on account of the alleged
illegal dismissal, stressing that no employer-employee
relationship existed between it and the security guards. It
further pointed out that it would be the height of injustice to
make it liable again for monetary claims which it had
already paid. Anent the cross-claim filed by Longest Force
against it, petitioner prayed that it be dismissed for lack of
merit. Petitioner averred that Longest Force had benefited
from the contract, it was now estopped from questioning
said agreement on the ground that it had made a bad deal.
On May 22, 1998, the Labor Arbiter decided NLRC NCR
Case No. 00-09-005440-96-A, to wit:

WHEREFORE, conformably with the foregoing, judgment is

hereby rendered ordering the respondents as follows:
1.
DECLARING respondents Longest Force
Investigation & Security Agency, Inc. and Mariveles
Shipyard Corporation jointly and severally liable to pay the
money claims of complainants representing underpayment
of wages and overtime pay in the total amount
of P2,700,623.40 based on the PADPAO rates of pay
covering the period from October 16, 1993 up to April 29,
1995 broken down as follows:
UNDERPAYMENT OF WAGES:
PERIOD
MONTHLY
COVERED
PADPAO
ACTUAL
UNDERPAYMENT
RATES
SALARY FOR THE
Wage
(8 hrs.
duty)
RECEIVED
PERIOD
DIFFER
ENTIALS
Oct. 16Dec.
P5,485.00
P5,000
P4
85.00
P970.00
15/93 (2 mos.)
Dec. 16/93Mar.
6,630.00
5,000
1,630.00
5,705.00
31/94 (3.5 mos.)
Apr. 1Dec.
7,090.00
5,810
1,280.00
11,520.00
31/94 (9 mos.)
Jan. 1Apr.
7,220.00
5,810
1,410.00
5,597.70
29/95 (3.97 mos.)
TOTAL UNDERPAYMENTS - - - - - - - - - - - - - - - P23,792.70
OVERTIME:
Oct. 16-Dec. 15/93 P5,485 x 2
= P 5,485.00
(2 mos.)
2
Dec. 16/93-Mar.
6,630 x 3.5 = 11,602.50
31/94 (3.5 mos.)
2
Apr. 1-Dec.
7,090 x 9
= 31,905.00
31/94 (9 mos.)
2
Jan. 1-Apr.
7,220 x 3.97 = 14,331.70
29/95 (3.97 mos.) 2
TOTAL OVERTIME- - - - - - - - - P63,324.20

Sub-Total of Underpayments and

Overtime P87,116.90
1. Luis Regondula
(the
same) P
87,116.90
2. Manolito Catalan
(the
same)
87,116.90
3. Oresca Agapito
(the
same)
87,116.90
4. Noel Alibadbad
(the
same)
87,116.90
5. Rogelio Pintuan
(the
same)
87,116.90
6. Danilo Crisostomo
(the
same)
87,116.90
7. Romulo Macalinao
(the
same)
87,116.90
8. Nestor Ferrer
(the
same)
87,116.90
9. Ricky Cuesta
(the
same)
87,116.90
10. Andrada Ricky
(the
same)
87,116.90
11. Larry Rogola
(the
same)
87,116.90
12. Francisco Lenogon
(the
same)
87,116.90
13. Augosto Quinto
(the
same)
87,116.90
14. Arfe Beramo
(the
same)
87,116.90
15. Bonifacio Trinidad
(the
same)
87,116.90
16. Alfredo Azcarraga
(the
same)
87,116.90
17. Ernesto Magno
(the
same)
87,116.90
18. Honario Hortecio
(the
same)
87,116.90
19. Nelbert Pineda
(the
same)
87,116.90
20. Glen Estipular
(the
same)
87,116.90
21. Francisco Compuesto (the
same)
87,116.90
22. Isabelito Cortes
(the
same)
87,116.90

23. Maturan Rosauro

(the
same)
87,116.90
24. Samson Canas
(the
same)
87,116.90
25. Febien Isip
(the
same)
87,116.90
26. Jesus Riparip
(the
same)
87,116.90
27. Alfredo Sienes
(the
same)
87,116.90
28. Adolar Albert
(the
same)
87,116.90
29. Cabanillas Honesto
(the
same)
87,116.90
30. Castillo Amping
(the
same)
87,116.90
31. Revilla Elwin
(the
same)
87,116.90
GRAND
TOTAL
P 2,700,623.90
2. DECLARING both respondents liable to pay
complainants attorneys fees equivalent to ten (10%)
percent of the total award recovered or the sum
ofP270,062.34.
3. ORDERING respondent Longest Force Investigation &
Security Agency, Inc. to reinstate all the herein
complainants to their former or equivalent positions without
loss of seniority rights and privileges with full backwages
which as computed as of the date of this decision are as
follows:
Backwages:
10/16 12/15/93 =2 mos.
P 5,485.00 x 2 mos.
=
P 10,970.00
12/16/93 3/31/94=3.5 mos.
P 6,630.00 x 3.5 mos.
=
23,205.00
4/1 12/31/94 = 9 mos.
P 7,090.00 x 9 mos.
=
63,810.00
1/1 4/29/95 = 3.97 mos.
P 7,220.00 x 3.97 mos.
=
28,663.40
TOTAL
P 126,684.40[7]
1. Luis
Regondula
(same)
P
126,684.
[8]
40
2. Manolito Catalan
(same)
126,684.40
3. Oresca Agapito
(same)
1
26,684.40

4. Noel Alibadbad
126,684.40
5. Rogelio Pintuan
26,684.40
6. Danilo Crisostomo
26,684.40
7. Romulo Macalinao
26,684.40
8. Nestor Ferrer
26,684.40
9. Ricky Cuesta
26,684.40
10. Andrada Rolly
26,684.40
11. Larry Rogola
26,684.40
12. Francisco Lenogon
26,684.40
13. Augosto Quinto
126,684.40
14. Arfe Beramo
26,684.40
15. Bonifacio
Trinidad
(same)
16. Alfredo Azcarraga
26,684.40
17. Ernesto Magno
26,684.40
18. Honario Hortecio
126,684.40
19. Nelbert
Pineda
(same)
20. Glen Estipular
26,684.40
21. Francisco Compuesto
26,684.40
22. Isabelito
Cortes
(same)
23. Maturan Rosauro
26,684.40
24. Samson Canas
26,684.40
25. Febien Isip
26,684.40
26. Jesus Riparip
26,684.40

(same)
(same)
(same)
(same)
(same)
(same)
(same)
(same)
(same)
(same)
(same)

(same)
(same)
(same)

(same)
(same)

(same)
(same)
(same)
(same)

27. Alfredo Sienes

(same)
1
26,684.40
1 28. Adolar
Albert
(same)
126,684.40
1 29. Cabanillas Honesto
(same)
1
26,684.40
1 30. Castillo Amping
(same)
1
26,684.40
1 31. Revilla
Elwin
(same)
126,684.40
1
GRAND
TOTAL
P3,927,216.40[9]
1 4. ORDERING said Longest Force Investigation & Security
Agency, Inc. to pay attorneys fees equivalent to ten (10%)
1 percent of the total award recovered representing
backwages in the amount of P392,721.64.[10]
1 5. DISMISSING all other claims for lack of legal basis.
SO ORDERED.[11]
Petitioner appealed the foregoing to the NLRC in NLRC
NCR Case No. 00-09-005440-96-A. The labor tribunal,
1 however, affirmed in toto the decision of the Labor Arbiter.
Petitioner moved for reconsideration, but this was denied
by the NLRC.
126,684.40
The petitioner then filed a special civil action
1 for certiorari assailing the NLRC judgment for having been
rendered with grave abuse of discretion with the Court of
1 Appeals, docketed as CA-G.R. SP No. 55416. The Court of
Appeals, however, denied due course to the petition and
dismissed it outright for the following reasons:
1. The verification and certification on non-forum shopping
is signed not by duly authorized officer of petitioner
126,684.40
corporation, but by counsel (Section 1, Rule 65, 1997 Rules
1 of Civil Procedure).
2. The petition is unaccompanied by copies of relevant and
1 pertinent documents, particularly the motion for
reconsideration filed before the NLRC (Section 1, Rule 65,
1997 Rules of Civil Procedure).[12]
126,684.40
The petitioner then moved for reconsideration of the order
1 of dismissal. The appellate court denied the motion,
pointing out that under prevailing case law subsequent
1 compliance with formal requirements for filing a petition as
prescribed by the Rules, does not ipso facto warrant a
1 reconsideration. In any event, it found no grave abuse of
discretion on the part of the NLRC to grant the writ of
1 certiorari.
Hence, this present petition before us. Petitioner submits
that THE COURT OF APPEALS GRAVELY ERRED:

1. .IN DISMISSING THE PETITION AND DENYING THE

MOTION FOR RECONSIDERATION DESPITE THE FACT
THAT PETITIONER SUBSTANTIALLY COMPLIED WITH
THE REQUIREMENTS OF SECTION 1, RULE 65, 1997
RULES OF CIVIL PROCEDURE.
2. .IN RULING THAT PETITIONER WAS NOT DENIED
DUE PROCESS OF LAW.
3. .IN AFFIRMING THE DECISION OF THE NATIONAL
LABOR RELATIONS COMMISSION THAT LONGEST
FORCE AND PETITIONER ARE JOINTLY AND
SEVERALLY LIABLE FOR PAYMENT OF WAGES AND
OVERTIME PAY DESPITE THE CLEAR SHOWING THAT
PETITIONER HAVE ALREADY PAID THE SECURITY
SERVICES THAT WAS RENDERED BY PRIVATE
RESPONDENTS.
4. WHEN IT FAILED TO RULE THAT ONLY LONGEST
FORCE SHOULD BE SOLELY AND ULTIMATELY
LIABLE IN THE INSTANT CASE.[13]
We find the issues for our resolution to be: (1) Was it error
for the Court of Appeals to sustain its order of dismissal of
petitioners special civil action for certiorari, notwithstanding
subsequent compliance with the requirements under the
Rules of Court by the petitioner? (2) Did the appellate court
err in not holding that petitioner was denied due process of
law by the NLRC? and (3) Did the appellate court
grievously err in finding petitioner jointly and severally liable
with Longest Force for the payment of wage differentials
and overtime pay owing to the private respondents?
On the first issue, the Court of Appeals in dismissing CAG.R. SP No. 55416 observed that: (1) the verification and
certification of non-forum shopping was not signed by any
duly authorized officer of petitioner but merely by
petitioners counsel; and (2) the petition was not
accompanied by a copy of motion for reconsideration filed
before the NLRC, thus violating Section 1,[14] Rule 65 of the
Rules of Court. Hence, a dismissal was proper under
Section 3,[15] Rule 46 of the Rules.
In assailing the appellate courts ruling, the petitioner
appeals to our sense of compassion and kind
consideration. It submits that the certification signed by its
counsel and attached to its petition filed with the Court of
Appeals is substantial compliance with the
requirement. Moreover, petitioner calls our attention to the
fact that when it filed its motion for reconsideration before
the Court of Appeals, a joint verification and certification of
non-forum shopping duly signed by its Personnel
Manager[16] and a copy of the Motion for

Reconsideration[17] filed before the NLRC were attached

therein. Thus, petitioner prays that we take a liberal stance
to promote the ends of justice.
Petitioners plea for liberality, however, cannot be granted
by the Court for reasons herein elucidated.
It is settled that the requirement in the Rules that the
certification of non-forum shopping should be executed and
signed by the plaintiff or the principal means that counsel
cannot sign said certification unless clothed with special
authority to do so.[18] The reason for this is that the plaintiff
or principal knows better than anyone else whether a
petition has previously been filed involving the same case
or substantially the same issues. Hence, a certification
signed by counsel alone is defective and constitutes a valid
cause for dismissal of the petition.[19] In the case of natural
persons, the Rule requires the parties themselves to sign
the certificate of non-forum shopping. However, in the case
of the corporations, the physical act of signing may be
performed, on behalf of the corporate entity, only by
specifically authorized individuals for the simple reason that
corporations, as artificial persons, cannot personally do the
task themselves.[20] In this case, not only was the originally
appended certification signed by counsel, but in its motion
for reconsideration, still petitioner utterly failed to show that
Ms. Rosanna Ignacio, its Personnel Manager who signed
the verification and certification of non-forum shopping
attached thereto, was duly authorized for this purpose. It
cannot be gainsaid that obedience to the requirements of
procedural rule is needed if we are to expect fair results
therefrom. Utter disregard of the rules cannot justly be
rationalized by harking on the policy of liberal
construction.[21]
Thus, on this point, no error could be validly attributed to
respondent Court of Appeals. It did not err in dismissing
the petition for non-compliance with the requirements
governing the certification of non-forum shopping.
Anent the second issue, petitioner avers that there was
denial of due process of law when the Labor Arbiter failed
to have the case tried on the merits. Petitioner adds that
the Arbiter did not observe the mandatory language of the
then Sec. 5(b) Rule V (now Section 11, per amendment in
Resolution No. 01-02, Series of 2002) of the NLRC New
Rules of Procedure which provided that:
If the Labor Arbiter finds no necessity of further hearing
after the parties have submitted their position papers and
supporting documents, he shall issue an Order to that

effect and shall inform the parties, stating the reasons

therefor. [22]
Petitioners contention, in our view, lacks sufficient
basis. Well settled is the rule that the essence of due
process is simply an opportunity to be heard, or, as applied
to administrative proceedings, an opportunity to explain
ones side or an opportunity to seek a reconsideration of
the action or ruling complained of.[23] Not all cases require
a trial-type hearing. The requirement of due process in
labor cases before a Labor Arbiter is satisfied when the
parties are given the opportunity to submit their position
papers to which they are supposed to attach all the
supporting documents or documentary evidence that would
prove their respective claims, in the event the Labor Arbiter
determines that no formal hearing would be conducted or
that such hearing was not necessary.[24] In any event, as
found by the NLRC, petitioner was given ample opportunity
to present its side in several hearings conducted before the
Labor Arbiter and in the position papers and other
supporting documents that it had submitted. We find that
such opportunity more than satisfies the requirement of due
process in labor cases.
On the third issue, petitioner argues that it should not be
held jointly and severally liable with Longest Force for
underpayment of wages and overtime pay because it had
been religiously and promptly paying the bills for the
security services sent by Longest Force and that these are
in accordance with the statutory minimum wage. Also,
petitioner contends that it should not be held liable for
overtime pay as private respondents failed to present proof
that overtime work was actually performed. Lastly,
petitioner claims that the Court of Appeals failed to render a
decision that finally disposed of the case because it did not
specifically rule on the immediate recourse of private
respondents, that is, the matter of reimbursement between
petitioner and Longest Force in accordance with Eagle
Security Agency Inc. v. NLRC,[25] and Philippine Fisheries
Development Authority v. NLRC.[26]
Petitioners liability is joint and several with that of Longest
Force, pursuant to Articles 106, 107 and 109 of the Labor
Code which provide as follows:
ART. 106. CONTRACTOR OR SUBCONTRACTOR
Whenever an employer enters into a contract with another
person for the performance of the formers work, the
employees of the contractor and of the latters
subcontractor, if any, shall be paid in accordance with the
provisions of this Code.

In the event that the contractor or subcontractor fails to pay

the wages of his employees in accordance with this Code,
the employer shall be jointly and severally liable with his
contractor or subcontractor to such employees to the extent
of the work performed under the contract, in the same
manner and extent that he is liable to employees directly
employed by him.
xxx
ART. 107. INDIRECT EMPLOYER. The provisions of the
immediately preceding Article shall likewise apply to any
person, partnership, association or corporation which, not
being an employer, contracts with an independent
contractor for the performance of any work, task, job or
project.
ART. 109. SOLIDARY LIABILITY. The provisions of
existing laws to the contrary notwithstanding, every
employer or indirect employer shall be held responsible
with his contractor or subcontractor for any violation of any
provision of this Code. For purposes of determining the
extent of their civil liability under this Chapter, they shall be
considered as direct employers.
In this case, when petitioner contracted for security
services with Longest Force as the security agency that
hired private respondents to work as guards for the
shipyard corporation, petitioner became an indirect
employer of private respondents pursuant to Article 107
abovecited. Following Article 106, when the agency as
contractor failed to pay the guards, the corporation as
principal becomes jointly and severally liable for the guards
wages. This is mandated by the Labor Code to ensure
compliance with its provisions, including payment of
statutory minimum wage. The security agency is held liable
by virtue of its status as direct employer, while the
corporation is deemed the indirect employer of the guards
for the purpose of paying their wages in the event of failure
of the agency to pay them. This statutory scheme gives the
workers the ample protection consonant with labor and
social justice provisions of the 1987 Constitution.[27]
Petitioner cannot evade its liability by claiming that it had
religiously paid the compensation of guards as stipulated
under the contract with the security agency. Labor
standards are enacted by the legislature to alleviate the
plight of workers whose wages barely meet the spiraling
costs of their basic needs. Labor laws are considered
written in every contract. Stipulations in violation thereof
are considered null. Similarly, legislated wage increases
are deemed amendments to the contract. Thus, employers

cannot hide behind their contracts in order to evade their

(or their contractors or subcontractors) liability for
noncompliance with the statutory minimum wage.[28]
However, we must emphasize that the solidary liability of
petitioner with that of Longest Force does not preclude the
application of the Civil Code provision on the right of
reimbursement from his co-debtor by the one who
paid.[29] As held in Del Rosario & Sons Logging
Enterprises, Inc. v. NLRC,[30] the joint and several liability
imposed on petitioner is without prejudice to a claim for
reimbursement by petitioner against the security agency for
such amounts as petitioner may have to pay to
complainants, the private respondents herein. The security
agency may not seek exculpation by claiming that the
principals payments to it were inadequate for the guards
lawful compensation. As an employer, the security agency
is charged with knowledge of labor laws; and the adequacy
of the compensation that it demands for contractual
services is its principal concern and not any others.[31]
On the issue of the propriety of the award of overtime pay
despite the alleged lack of proof thereof, suffice it to state
that such involves a determination and evaluation of facts
which cannot be done in a petition for review. Well
established is the rule that in an appeal via certiorari, only
questions of law may be reviewed.[32]
One final point. Upon review of the award of backwages
and attorneys fees, we discovered certain errors that
happened in the addition of the amount of individual
backwages that resulted in the erroneous total amount of
backwages and attorneys fees. These errors ought to be
properly rectified now. Thus, the correct sum of individual
backwages should be P126,648.40 instead
of P126,684.40, while the correct sum of total backwages
awarded and attorneys fees should
be P3,926,100.40 and P392,610.04, instead
of P3,927,216.40 and P392,721.64, respectively.
WHEREFORE, the Resolution of the Court of Appeals in
CA-G.R. SP No. 55416 is
AFFIRMED with MODIFICATION. Petitioner and Longest
Force are held liable jointly and severally for underpayment
of wages and overtime pay of the security guards, without
prejudice to petitioners right of reimbursement from
Longest Force Investigation and Security Agency, Inc. The
amounts payable to complaining security guards, herein
private respondents, by way of total backwages and
attorneys fees are hereby set at P3,926,100.40
and P392,610.04, respectively. Costs against petitioner.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 147791
September 8, 2006
CONSTRUCTION DEVELOPMENT CORPORATION OF
THE PHILIPPINES, petitioner,
vs.
REBECCA G. ESTRELLA, RACHEL E. FLETCHER,
PHILIPPINE PHOENIX SURETY & INSURANCE INC.,
BATANGAS LAGUNA TAYABAS BUS CO., and
WILFREDO DATINGUINOO, respondents.
DECISION
YNARES-SANTIAGO, J.:
This petition for review assails the March 29, 2001
Decision1 of the Court of Appeals in CA-G.R. CV No.
46896, which affirmed with modification the February 9,
1993 Decision2 of the Regional Trial Court of Manila,
Branch 13, in Civil Case No. R-82-2137, finding Batangas
Laguna Tayabas Bus Co. (BLTB) and Construction
Development Corporation of the Philippines (CDCP) liable
for damages.
The antecedent facts are as follows:
On December 29, 1978, respondents Rebecca G. Estrella
and her granddaughter, Rachel E. Fletcher, boarded in San
Pablo City, a BLTB bus bound for Pasay City. However,
they never reached their destination because their bus was
rammed from behind by a tractor-truck of CDCP in the
South Expressway. The strong impact pushed forward their
seats and pinned their knees to the seats in front of them.
They regained consciousness only when rescuers created
a hole in the bus and extricated their legs from under the
seats. They were brought to the Makati Medical Center
where the doctors diagnosed their injuries to be as follows:
Medical Certificate of Rebecca Estrella
Fracture, left tibia mid 3rd
Lacerated wound, chin
Contusions with abrasions, left lower leg
Fracture, 6th and 7th ribs, right3
Medical Certificate of Rachel Fletcher
Extensive lacerated wounds, right leg posterior aspect
popliteal area
and antero-lateral aspect mid lower leg with severance of

muscles.
Partial amputation BK left leg with severance of gastrosoleus and
antero-lateral compartment of lower leg.
Fracture, open comminuted, both tibial4
Thereafter, respondents filed a Complaint5 for damages
against CDCP, BLTB, Espiridion Payunan, Jr. and Wilfredo
Datinguinoo before the Regional Trial Court of Manila,
Branch 13. They alleged (1) that Payunan, Jr. and
Datinguinoo, who were the drivers of CDCP and BLTB
buses, respectively, were negligent and did not obey traffic
laws; (2) that BLTB and CDCP did not exercise the
diligence of a good father of a family in the selection and
supervision of their employees; (3) that BLTB allowed its
bus to operate knowing that it lacked proper maintenance
thus exposing its passengers to grave danger; (4) that they
suffered actual damages amounting to P250,000.00 for
Estrella and P300,000.00 for Fletcher; (5) that they suffered
physical discomfort, serious anxiety, fright and mental
anguish, besmirched reputation and wounded feelings,
moral shock, and lifelong social humiliation; (6) that
defendants failed to act with justice, give respondents their
due, observe honesty and good faith which entitles them to
claim for exemplary damage; and (7) that they are entitled
to a reasonable amount of attorney's fees and litigation
expenses.
CDCP filed its Answer6 which was later amended to include
a third-party complaint against Philippine Phoenix Surety
and Insurance, Inc. (Phoenix).7
On February 9, 1993, the trial court rendered a decision
finding CDCP and BLTB and their employees liable for
damages, the dispositive portion of which, states:
WHEREFORE, judgment is rendered:
In the Complaint
1. In favor of the plaintiffs and against the defendants
BLTB, Wilfredo Datinguinoo, Construction and
Development Corporation of the Philippines (now PNCC)
and Espiridion Payunan, Jr., ordering said defendants,
jointly and severally to pay the plaintiffs the sum of
P79,254.43 as actual damages and to pay the sum of
P10,000.00 as attorney's fees or a total of P89,254.43;
2. In addition, defendant Construction and Development
Corporation of the Philippines and defendant Espiridion
Payunan, Jr., shall pay the plaintiffs the amount of Fifty
Thousand (P50,000.00) Pesos to plaintiff Rachel Fletcher
and Twenty Five Thousand (P25,000.00) Pesos to plaintiff
Rebecca Estrella;

3. On the counterclaim of BLTB Co. and Wilfredo

Datinguinoo
Dismissing the counterclaim;
4. On the crossclaim against Construction and
Development Corporation of the Philippines (now PNCC)
and Espiridion Payunan, Jr.
Dismissing the crossclaim;
5. On the counterclaim of Construction and Development
Corporation of the Philippines (now PNCC)
Dismissing the counterclaim;
6. On the crossclaim against BLTB
Dismissing the crossclaim;
7. On the Third Party Complaint by Construction and
Development Corporation of the Philippines against
Philippine Phoenix Surety and Insurance, Incorporated
Dismissing the Third Party Complaint.
SO ORDERED.8
The trial court held that BLTB, as a common carrier, was
bound to observe extraordinary diligence in the vigilance
over the safety of its passengers. It must carry the
passengers safely as far as human care and foresight
provide, using the utmost diligence of very cautious
persons, with a due regard for all the circumstances. Thus,
where a passenger dies or is injured, the carrier is
presumed to have been at fault or has acted negligently.
BLTB's inability to carry respondents to their destination
gave rise to an action for breach of contract of carriage
while its failure to rebut the presumption of negligence
made it liable to respondents for the breach.9
Regarding CDCP, the trial court found that the tractor-truck
it owned bumped the BLTB bus from behind. Evidence
showed that CDCP's driver was reckless and driving very
fast at the time of the incident. The gross negligence of its
driver raised the presumption that CDCP was negligent
either in the selection or in the supervision of its employees
which it failed to rebut thus making it and its driver liable to
respondents.10
Unsatisfied with the award of damages and attorney's fees
by the trial court, respondents moved that the decision be
reconsidered but was denied. Respondents elevated the
case11 to the Court of Appeals which affirmed the decision
of the trial court but modified the amount of damages, the
dispositive portion of which provides:
WHEREFORE, the assailed decision dated October 7,
1993 of the Regional Trial Court, Branch 13, Manila is
hereby AFFIRMED with the following MODIFICATION:

1. The interest of six (6) percent per annum on the actual

damages of P79,354.43 should commence to run from the
time the judicial demand was made or from the filing of the
complaint on February 4, 1980;
2. Thirty (30) percent of the total amount recovered is
hereby awarded as attorney's fees;
3. Defendants-appellants Construction and Development
Corporation of the Philippines (now PNCC) and Espiridion
Payunan, Jr. are ordered to pay plaintiff-appellants
Rebecca Estrella and Rachel Fletcher the amount of
Twenty Thousand (P20,000.00) each as exemplary
damages and P80,000.00 by way of moral damages to
Rachel Fletcher.
SO ORDERED.12
The Court of Appeals held that the actual or compensatory
damage sought by respondents for the injuries they
sustained in the form of hospital bills were already
liquidated and were ascertained. Accordingly, the 6%
interest per annum should commence to run from the time
the judicial demand was made or from the filing of the
complaint and not from the date of judgment. The Court of
Appeals also awarded attorney's fees equivalent to 30% of
the total amount recovered based on the retainer
agreement of the parties. The appellate court also held that
respondents are entitled to exemplary and moral damages.
Finally, it affirmed the ruling of the trial court that the claim
of CDCP against Phoenix had already prescribed.
Hence, this petition raising the following issues:
I
WHETHER OR NOT THE COURT OF APPEALS
GRAVELY ERRED IN NOT HOLDING RESPONDENTS
BLTB AND/OR ITS DRIVER WILFREDO DATINGUINOO
SOLELY LIABLE FOR THE DAMAGES SUSTAINED BY
HEREIN RESPONDENTS FLETCHER AND ESTRELLA.
II
WHETHER OR NOT THE COURT OF APPEALS
GRAVELY ERRED IN AWARDING EXCESSIVE OR
UNFOUNDED DAMAGES, ATTORNEY'S FEES AND
LEGAL INTEREST TO RESPONDENTS FLETCHER AND
ESTRELLA.
III
WHETHER OR NOT THE COURT OF APPEALS
GRAVELY ERRED IN NOT HOLDING RESPONDENT
PHOENIX LIABLE UNDER ITS INSURANCE POLICY ON
THE GROUND OF PRESCRIPTION.
The issues for resolution are as follows: (1) whether BLTB
and its driver Wilfredo Datinguinoo are solely liable for the

damages sustained by respondents; (2) whether the

damages, attorney's fees and legal interest awarded by the
CA are excessive and unfounded; (3) whether CDCP can
recover under its insurance policy from Phoenix.
Petitioner contends that since it was made solidarily liable
with BLTB for actual damages and attorney's fees in
paragraph 1 of the trial court's decision, then it should no
longer be held liable to pay the amounts stated in
paragraph 2 of the same decision. Petitioner claims that the
liability for actual damages and attorney's fees is based on
culpa contractual, thus, only BLTB should be held liable. As
regards paragraph 2 of the trial court's decision, petitioner
claims that it is ambiguous and arbitrary because the
dispositive portion did not state the basis and nature of
such award.
Respondents, on the other hand, argue that petitioner is
also at fault, hence, it was properly joined as a party. There
may be an action arising out of one incident where
questions of fact are common to all. Thus, the cause of
action based on culpa aquiliana in the civil suit they filed
against it was valid.
The petition lacks merit.
The case filed by respondents against petitioner is an
action for culpa aquiliana or quasi-delict under Article 2176
of the Civil Code.13 In this regard, Article 2180 provides that
the obligation imposed by Article 2176 is demandable for
the acts or omissions of those persons for whom one is
responsible. Consequently, an action based on quasi-delict
may be instituted against the employer for an employee's
act or omission. The liability for the negligent conduct of the
subordinate is direct and primary, but is subject to the
defense of due diligence in the selection and supervision of
the employee.14 In the instant case, the trial court found
that petitioner failed to prove that it exercised the diligence
of a good father of a family in the selection and supervision
of Payunan, Jr.
The trial court and the Court of Appeals found petitioner
solidarily liable with BLTB for the actual damages suffered
by respondents because of the injuries they sustained. It
was established that Payunan, Jr. was driving recklessly
because of the skid marks as shown in the sketch of the
police investigator.
It is well-settled in Fabre, Jr. v. Court of Appeals,15 that the
owner of the other vehicle which collided with a common
carrier is solidarily liable to the injured passenger of the
same. We held, thus:

The same rule of liability was applied in situations where

the negligence of the driver of the bus on which plaintiff
was riding concurred with the negligence of a third party
who was the driver of another vehicle, thus causing an
accident. In Anuran v. Buo, Batangas Laguna Tayabas
Bus Co. v. Intermediate Appellate Court, and Metro Manila
Transit Corporation v. Court of Appeals, the bus company,
its driver, the operator of the other vehicle and the
driver of the vehicle were jointly and severally held
liable to the injured passenger or the latter's heirs. The
basis of this allocation of liability was explained in Viluan v.
Court of Appeals, thus:
Nor should it make any difference that the liability of
petitioner [bus owner] springs from contract while that
of respondents [owner and driver of other vehicle]
arises from quasi-delict. As early as 1913, we already
ruled in Gutierrez vs. Gutierrez, 56 Phil. 177, that in case of
injury to a passenger due to the negligence of the driver of
the bus on which he was riding and of the driver of another
vehicle, the drivers as well as the owners of the two
vehicles are jointly and severally liable for damages. x x x
xxxx
As in the case of BLTB, private respondents in this case
and her co-plaintiffs did not stake out their claim against the
carrier and the driver exclusively on one theory, much less
on that of breach of contract alone.After all, it was
permitted for them to allege alternative causes of
action and join as many parties as may be liable on
such causes of action so long as private respondent
and her co-plaintiffs do not recover twice for the same
injury. What is clear from the cases is the intent of the
plaintiff there to recover from both the carrier and the driver,
thus justifying the holding that the carrier and the driver
were jointly and severally liable because their separate and
distinct acts concurred to produce the same
injury.16 (Emphasis supplied)
In a "joint" obligation, each obligor answers only for a part
of the whole liability; in a "solidary" or "joint and several"
obligation, the relationship between the active and the
passive subjects is so close that each of them must comply
with or demand the fulfillment of the whole obligation.
In Lafarge Cement v. Continental Cement
Corporation,17 we reiterated that joint tort feasors are jointly
and severally liable for the tort which they commit.
Citing Worcester v. Ocampo,18 we held that:
x x x The difficulty in the contention of the appellants is that
they fail to recognize that the basis of the present action is

tort. They fail to recognize the universal doctrine that each

joint tort feasor is not only individually liable for the tort in
which he participates, but is also jointly liable with his tort
feasors. x x x
It may be stated as a general rule that joint tort feasors are
all the persons who command, instigate, promote,
encourage, advise, countenance, cooperate in, aid or abet
the commission of a tort, or who approve of it after it is
done, if done for their benefit. They are each liable as
principals, to the same extent and in the same manner as if
they had performed the wrongful act themselves. x x x
Joint tort feasors are jointly and severally liable for the tort
which they commit. The persons injured may sue all of
them or any number less than all. Each is liable for the
whole damages caused by all, and all together are jointly
liable for the whole damage. It is no defense for one sued
alone, that the others who participated in the wrongful act
are not joined with him as defendants; nor is it any excuse
for him that his participation in the tort was insignificant as
compared to that of the others. x x x
Joint tort feasors are not liable pro rata. The damages can
not be apportioned among them, except among
themselves. They cannot insist upon an apportionment, for
the purpose of each paying an aliquot part. They are jointly
and severally liable for the whole amount. x x x
A payment in full for the damage done, by one of the joint
tort feasors, of course satisfies any claim which might exist
against the others. There can be but satisfaction. The
release of one of the joint tort feasors by agreement
generally operates to discharge all. x x x
Of course the court during trial may find that some of the
alleged tort feasors are liable and that others are not liable.
The courts may release some for lack of evidence while
condemning others of the alleged tort feasors. And this is
true even though they are charged jointly and severally.19
Petitioner's claim that paragraph 2 of the dispositive portion
of the trial court's decision is ambiguous and arbitrary and
also entitles respondents to recover twice is without basis.
In the body of the trial court's decision, it was clearly stated
that petitioner and its driver Payunan, Jr., are jointly and
solidarily liable for moral damages in the amount of
P50,000.00 to respondent Fletcher and P25,000.00 to
respondent Estrella.20 Moreover, there could be no double
recovery because the award in paragraph 2 is for moral
damages while the award in paragraph 1 is for actual
damages and attorney's fees.

Petitioner next claims that the damages, attorney's fees,

and legal interest awarded by the Court of Appeals are
excessive.
Moral damages may be recovered in quasi-delicts causing
physical injuries.21 The award of moral damages in favor of
Fletcher and Estrella in the amount of P80,000.00 must be
reduced since prevailing jurisprudence fixed the same at
P50,000.00.22 While moral damages are not intended to
enrich the plaintiff at the expense of the defendant, the
award should nonetheless be commensurate to the
suffering inflicted.23
The Court of Appeals correctly awarded respondents
exemplary damages in the amount of P20,000.00 each.
Exemplary damages may be awarded in addition to moral
and compensatory damages.24 Article 2231 of the Civil
Code also states that in quasi-delicts, exemplary damages
may be granted if the defendant acted with gross
negligence.25 In this case, petitioner's driver was driving
recklessly at the time its truck rammed the BLTB bus.
Petitioner, who has direct and primary liability for the
negligent conduct of its subordinates, was also found
negligent in the selection and supervision of its employees.
In Del Rosario v. Court of Appeals,26 we held, thus:
ART. 2229 of the Civil Code also provides that such
damages may be imposed, by way of example or correction
for the public good. While exemplary damages cannot be
recovered as a matter of right, they need not be proved,
although plaintiff must show that he is entitled to moral,
temperate or compensatory damages before the court may
consider the question of whether or not exemplary
damages should be awarded. Exemplary Damages are
imposed not to enrich one party or impoverish another but
to serve as a deterrent against or as a negative incentive to
curb socially deleterious actions.
Regarding attorney's fees, we held in Traders Royal Bank
Employees Union-Independent v. National Labor Relations
Commission,27 that:
There are two commonly accepted concepts of attorney's
fees, the so-called ordinary and extraordinary. In its
ordinary concept, an attorney's fee is the reasonable
compensation paid to a lawyer by his client for the legal
services he has rendered to the latter. The basis of this
compensation is the fact of his employment by and his
agreement with the client.
In its extraordinary concept, an attorney's fee is an
indemnity for damages ordered by the court to be paid
by the losing party in a litigation. The basis of this is any

of the cases provided by law where such award can be

made, such as those authorized in Article 2208, Civil Code,
and is payable not to the lawyer but to the client,
unless they have agreed that the award shall pertain to
the lawyer as additional compensation or as part
thereof.28 (Emphasis supplied)
In the instant case, the Court of Appeals correctly awarded
attorney's fees and other expenses of litigation as they may
be recovered as actual or compensatory damages when
exemplary damages are awarded; when the defendant
acted in gross and evident bad faith in refusing to satisfy
the plaintiff's valid, just and demandable claim; and in any
other case where the court deems it just and equitable that
attorney's fees and expenses of litigation should be
recovered.29
Regarding the imposition of legal interest at the rate of 6%
from the time of the filing of the complaint, we held
inEastern Shipping Lines, Inc. v. Court of Appeals,30 that
when an obligation, regardless of its source, i.e., law,
contracts, quasi-contracts, delicts or quasi-delicts is
breached, the contravenor can be held liable for payment of
interest in the concept of actual and compensatory
damages,31 subject to the following rules, to wit
1. When the obligation is breached, and it consists in the
payment of a sum of money, i.e., a loan or forbearance of
money, the interest due should be that which may have
been stipulated in writing. Furthermore, the interest due
shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of interest
shall be 12% per annum to be computed from default, i.e.,
from judicial or extrajudicial demand under and subject to
the provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or
forbearance of money, is breached, an interest on the
amount of damages awarded may be imposed at the
discretion of the court at the rate of 6% per annum. No
interest, however, shall be adjudged on unliquidated claims
or damages except when or until the demand can be
established with reasonable certainty. Accordingly, where
the demand is established with reasonable certainty, the
interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code) but when
such certainty cannot be so reasonably established at the
time the demand is made, the interest shall begin to run
only from the date the judgment of the court is made
(at which time the quantification of damages may be
deemed to have been reasonably ascertained). The

actual base for the computation of legal interest shall, in

any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of
money becomes final and executory, the rate of legal
interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 12% per annum from such
finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of
credit.32 (Emphasis supplied)
Accordingly, the legal interest of 6% shall begin to run on
February 9, 1993 when the trial court rendered judgment
and not on February 4, 1980 when the complaint was filed.
This is because at the time of the filing of the complaint, the
amount of the damages to which plaintiffs may be entitled
remains unliquidated and unknown, until it is definitely
ascertained, assessed and determined by the court and
only upon presentation of proof thereon.33 From the time
the judgment becomes final and executory, the interest rate
shall be 12% until its satisfaction.
Anent the last issue of whether petitioner can recover under
its insurance policy from Phoenix, we affirm the findings of
both the trial court and the Court of Appeals, thus:
As regards the liability of Phoenix, the court a quo correctly
ruled that defendant-appellant CDCP's claim against
Phoenix already prescribed pursuant to Section 384 of P.D.
612, as amended, which provides:
Any person having any claim upon the policy issued
pursuant to this chapter shall, without any unnecessary
delay, present to the insurance company concerned a
written notice of claim setting forth the nature, extent and
duration of the injuries sustained as certified by a duly
licensed physician. Notice of claim must be filed within six
months from date of the accident, otherwise, the claim shall
be deemed waived. Action or suit for recovery of damage
due to loss or injury must be brought in proper cases, with
the Commissioner or Courts within one year from denial of
the claim, otherwise, the claimant's right of action shall
prescribe. (As amended by PD 1814, BP 874.)34
The law is clear and leaves no room for interpretation. A
written notice of claim must be filed within six months from
the date of the accident. Since petitioner never made any
claim within six months from the date of the accident, its
claim has already prescribed.
WHEREFORE, the instant petition is DENIED. The
Decision of the Court of Appeals in CA-G.R. CV No. 46896
dated March 29, 2001, which modified the Decision of the
Regional Trial Court of Manila, Branch 13, in Civil Case No.

R-82-2137, is AFFIRMED with the MODIFICATIONS that

petitioner is held jointly and severally liable to pay (1) actual
damages in the amount of P79,354.43; (2) moral damages
in the amount of P50,000.00 each for Rachel Fletcher and
Rebecca Estrella; (3) exemplary damages in the amount of
P20,000.00 each for Rebecca Estrella and Rachel Fletcher;
and (4) thirty percent (30%) of the total amount recovered
as attorney's fees. The total amount adjudged shall earn
interest at the rate of 6% per annum from the date of
judgment of the trial court until finality of this judgment.
From the time this Decision becomes final and executory
and the judgment amount remains unsatisfied, the same
shall earn interest at the rate of 12% per annum until its
satisfaction.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 157917
August 29, 2012
1
SPOUSES TEODORO and NANETTE
PERENA, Petitioners,
vs.
SPOUSES TERESITA PHILIPPINE NICOLAS and L.
ZARATE, NATIONAL RAILWAYS, and the COURT OF
APPEALS Respondents.
DECISION
BERSAMIN, J.:
The operator of a. school bus service is a common carrier
in the eyes of the law. He is bound to observe extraordinary
diligence in the conduct of his business. He is presumed to
be negligent when death occurs to a passenger. His liability
may include indemnity for loss of earning capacity even if
the deceased passenger may only be an unemployed high
school student at the time of the accident.
The Case
By petition for review on certiorari, Spouses Teodoro and
Nanette Perefia (Perefias) appeal the adverse decision
promulgated on November 13, 2002, by which the Court of
Appeals (CA) affirmed with modification the decision
rendered on December 3, 1999 by the Regional Trial Court
(RTC), Branch 260, in Paraaque City that had decreed
them jointly and severally liable with Philippine National
Railways (PNR), their co-defendant, to Spouses Nicolas
and Teresita Zarate (Zarates) for the death of their 15-year

old son, Aaron John L. Zarate (Aaron), then a high school

student of Don Bosco Technical Institute (Don Bosco).
Antecedents
The Pereas were engaged in the business of transporting
students from their respective residences in Paraaque
City to Don Bosco in Pasong Tamo, Makati City, and back.
In their business, the Pereas used a KIA Ceres Van (van)
with Plate No. PYA 896, which had the capacity to transport
14 students at a time, two of whom would be seated in the
front beside the driver, and the others in the rear, with six
students on either side. They employed Clemente Alfaro
(Alfaro) as driver of the van.
In June 1996, the Zarates contracted the Pereas to
transport Aaron to and from Don Bosco. On August 22,
1996, as on previous school days, the van picked Aaron up
around 6:00 a.m. from the Zarates residence. Aaron took
his place on the left side of the van near the rear door. The
van, with its air-conditioning unit turned on and the stereo
playing loudly, ultimately carried all the 14 student riders on
their way to Don Bosco. Considering that the students were
due at Don Bosco by 7:15 a.m., and that they were already
running late because of the heavy vehicular traffic on the
South Superhighway, Alfaro took the van to an alternate
route at about 6:45 a.m. by traversing the narrow path
underneath the Magallanes Interchange that was then
commonly used by Makati-bound vehicles as a short cut
into Makati. At the time, the narrow path was marked by
piles of construction materials and parked passenger
jeepneys, and the railroad crossing in the narrow path had
no railroad warning signs, or watchmen, or other
responsible persons manning the crossing. In fact, the
bamboo barandilla was up, leaving the railroad crossing
open to traversing motorists.
At about the time the van was to traverse the railroad
crossing, PNR Commuter No. 302 (train), operated by
Jhonny Alano (Alano), was in the vicinity of the Magallanes
Interchange travelling northbound. As the train neared the
railroad crossing, Alfaro drove the van eastward across the
railroad tracks, closely tailing a large passenger bus. His
view of the oncoming train was blocked because he
overtook the passenger bus on its left side. The train blew
its horn to warn motorists of its approach. When the train
was about 50 meters away from the passenger bus and the
van, Alano applied the ordinary brakes of the train. He
applied the emergency brakes only when he saw that a
collision was imminent. The passenger bus successfully
crossed the railroad tracks, but the van driven by Alfaro did

not. The train hit the rear end of the van, and the impact
threw nine of the 12 students in the rear, including Aaron,
out of the van. Aaron landed in the path of the train, which
dragged his body and severed his head, instantaneously
killing him. Alano fled the scene on board the train, and did
not wait for the police investigator to arrive.
Devastated by the early and unexpected death of Aaron,
the Zarates commenced this action for damages against
Alfaro, the Pereas, PNR and Alano. The Pereas and
PNR filed their respective answers, with cross-claims
against each other, but Alfaro could not be served with
summons.
At the pre-trial, the parties stipulated on the facts and
issues, viz:
A. FACTS:
(1) That spouses Zarate were the legitimate parents of
Aaron John L. Zarate;
(2) Spouses Zarate engaged the services of spouses
Perea for the adequate and safe transportation carriage of
the former spouses' son from their residence in Paraaque
to his school at the Don Bosco Technical Institute in Makati
City;
(3) During the effectivity of the contract of carriage and in
the implementation thereof, Aaron, the minor son of
spouses Zarate died in connection with a vehicular/train
collision which occurred while Aaron was riding the
contracted carrier Kia Ceres van of spouses Perea, then
driven and operated by the latter's employee/authorized
driver Clemente Alfaro, which van collided with the train of
PNR, at around 6:45 A.M. of August 22, 1996, within the
vicinity of the Magallanes Interchange in Makati City, Metro
Manila, Philippines;
(4) At the time of the vehicular/train collision, the subject
site of the vehicular/train collision was a railroad crossing
used by motorists for crossing the railroad tracks;
(5) During the said time of the vehicular/train collision,
there were no appropriate and safety warning signs and
railings at the site commonly used for railroad crossing;
(6) At the material time, countless number of Makati bound
public utility and private vehicles used on a daily basis the
site of the collision as an alternative route and short-cut to
Makati;
(7) The train driver or operator left the scene of the
incident on board the commuter train involved without
waiting for the police investigator;

(8) The site commonly used for railroad crossing by

motorists was not in fact intended by the railroad operator
for railroad crossing at the time of the vehicular collision;
(9) PNR received the demand letter of the spouses Zarate;
(10) PNR refused to acknowledge any liability for the
vehicular/train collision;
(11) The eventual closure of the railroad crossing alleged
by PNR was an internal arrangement between the former
and its project contractor; and
(12) The site of the vehicular/train collision was within the
vicinity or less than 100 meters from the Magallanes station
of PNR.
B. ISSUES
(1) Whether or not defendant-driver of the van is, in the
performance of his functions, liable for negligence
constituting the proximate cause of the vehicular collision,
which resulted in the death of plaintiff spouses' son;
(2) Whether or not the defendant spouses Perea being the
employer of defendant Alfaro are liable for any negligence
which may be attributed to defendant Alfaro;
(3) Whether or not defendant Philippine National Railways
being the operator of the railroad system is liable for
negligence in failing to provide adequate safety warning
signs and railings in the area commonly used by motorists
for railroad crossings, constituting the proximate cause of
the vehicular collision which resulted in the death of the
plaintiff spouses' son;
(4) Whether or not defendant spouses Perea are liable for
breach of the contract of carriage with plaintiff-spouses in
failing to provide adequate and safe transportation for the
latter's son;
(5) Whether or not defendants spouses are liable for actual,
moral damages, exemplary damages, and attorney's fees;
(6) Whether or not defendants spouses Teodorico and
Nanette Perea observed the diligence of employers and
school bus operators;
(7) Whether or not defendant-spouses are civilly liable for
the accidental death of Aaron John Zarate;
(8) Whether or not defendant PNR was grossly negligent in
operating the commuter train involved in the accident, in
allowing or tolerating the motoring public to cross, and its
failure to install safety devices or equipment at the site of
the accident for the protection of the public;
(9) Whether or not defendant PNR should be made to
reimburse defendant spouses for any and whatever amount

the latter may be held answerable or which they may be

ordered to pay in favor of plaintiffs by reason of the action;
(10) Whether or not defendant PNR should pay plaintiffs
directly and fully on the amounts claimed by the latter in
their Complaint by reason of its gross negligence;
(11) Whether or not defendant PNR is liable to defendants
spouses for actual, moral and exemplary damages and
attorney's fees.2
The Zarates claim against the Pereas was upon breach of
the contract of carriage for the safe transport of Aaron; but
that against PNR was based on quasi-delict under Article
2176, Civil Code.
In their defense, the Pereas adduced evidence to show
that they had exercised the diligence of a good father of the
family in the selection and supervision of Alfaro, by making
sure that Alfaro had been issued a drivers license and had
not been involved in any vehicular accident prior to the
collision; that their own son had taken the van daily; and
that Teodoro Perea had sometimes accompanied Alfaro in
the vans trips transporting the students to school.
For its part, PNR tended to show that the proximate cause
of the collision had been the reckless crossing of the van
whose driver had not first stopped, looked and listened; and
that the narrow path traversed by the van had not been
intended to be a railroad crossing for motorists.
Ruling of the RTC
On December 3, 1999, the RTC rendered its
decision,3 disposing:
WHEREFORE, premises considered, judgment is hereby
rendered in favor of the plaintiff and against the defendants
ordering them to jointly and severally pay the plaintiffs as
follows:
(1) (for) the death of Aaron- Php50,000.00;
(2) Actual damages in the amount of Php100,000.00;
(3) For the loss of earning capacity- Php2,109,071.00;
(4) Moral damages in the amount of Php4,000,000.00;
(5) Exemplary damages in the amount of Php1,000,000.00;
(6) Attorneys fees in the amount of Php200,000.00; and
(7) Cost of suit.
SO ORDERED.
On June 29, 2000, the RTC denied the Pereas motion for
reconsideration,4 reiterating that the cooperative gross
negligence of the Pereas and PNR had caused the
collision that led to the death of Aaron; and that the
damages awarded to the Zarates were not excessive, but
based on the established circumstances.
The CAs Ruling

Both the Pereas and PNR appealed (C.A.-G.R. CV No.

68916).
PNR assigned the following errors, to wit:5
The Court a quo erred in:
1. In finding the defendant-appellant Philippine National
Railways jointly and severally liable together with
defendant-appellants spouses Teodorico and Nanette
Perea and defendant-appellant Clemente Alfaro to pay
plaintiffs-appellees for the death of Aaron Zarate and
damages.
2. In giving full faith and merit to the oral testimonies of
plaintiffs-appellees witnesses despite overwhelming
documentary evidence on record, supporting the case of
defendants-appellants Philippine National Railways.
The Pereas ascribed the following errors to the RTC,
namely:
The trial court erred in finding defendants-appellants jointly
and severally liable for actual, moral and exemplary
damages and attorneys fees with the other defendants.
The trial court erred in dismissing the cross-claim of the
appellants Pereas against the Philippine National
Railways and in not holding the latter and its train driver
primarily responsible for the incident.
The trial court erred in awarding excessive damages and
attorneys fees.
The trial court erred in awarding damages in the form of
deceaseds loss of earning capacity in the absence of
sufficient basis for such an award.
On November 13, 2002, the CA promulgated its decision,
affirming the findings of the RTC, but limited the moral
damages to P 2,500,000.00; and deleted the attorneys
fees because the RTC did not state the factual and legal
bases, to wit:6
WHEREFORE, premises considered, the assailed Decision
of the Regional Trial Court, Branch 260 of Paraaque City
is AFFIRMED with the modification that the award of Actual
Damages is reduced to P59,502.76; Moral Damages is
reduced to P 2,500,000.00; and the award for Attorneys
Fees is Deleted.
SO ORDERED.
The CA upheld the award for the loss of Aarons earning
capacity, taking cognizance of the ruling in Cariaga v.
Laguna Tayabas Bus Company and Manila Railroad
Company,7 wherein the Court gave the heirs of Cariaga a
sum representing the loss of the deceaseds earning
capacity despite Cariaga being only a medical student at

the time of the fatal incident. Applying the formula adopted

in the American Expectancy Table of Mortality:
2/3 x (80 - age at the time of death) = life expectancy
the CA determined the life expectancy of Aaron to be 39.3
years upon reckoning his life expectancy from age of 21
(the age when he would have graduated from college and
started working for his own livelihood) instead of 15 years
(his age when he died). Considering that the nature of his
work and his salary at the time of Aarons death were
unknown, it used the prevailing minimum wage
of P 280.00/day to compute Aarons gross annual salary to
be P110,716.65, inclusive of the thirteenth month pay.
Multiplying this annual salary by Aarons life expectancy of
39.3 years, his gross income would aggregate
to P 4,351,164.30, from which his estimated expenses in
the sum of P2,189,664.30 was deducted to finally arrive at
P 2,161,500.00 as net income. Due to Aarons computed
net income turning out to be higher than the amount
claimed by the Zarates, only P 2,109,071.00, the amount
expressly prayed for by them, was granted.
On April 4, 2003, the CA denied the Pereas motion for
reconsideration.8
Issues
In this appeal, the Pereas list the following as the errors
committed by the CA, to wit:
I. The lower court erred when it upheld the trial courts
decision holding the petitioners jointly and severally liable
to pay damages with Philippine National Railways and
dismissing their cross-claim against the latter.
II. The lower court erred in affirming the trial courts
decision awarding damages for loss of earning capacity of
a minor who was only a high school student at the time of
his death in the absence of sufficient basis for such an
award.
III. The lower court erred in not reducing further the amount
of damages awarded, assuming petitioners are liable at all.
Ruling
The petition has no merit.
1.
Were the Pereas and PNR jointly
and severally liable for damages?
The Zarates brought this action for recovery of damages
against both the Pereas and the PNR, basing their claim
against the Pereas on breach of contract of carriage and
against the PNR on quasi-delict.
The RTC found the Pereas and the PNR negligent. The
CA affirmed the findings.

We concur with the CA.

To start with, the Pereas defense was that they exercised
the diligence of a good father of the family in the selection
and supervision of Alfaro, the van driver, by seeing to it that
Alfaro had a drivers license and that he had not been
involved in any vehicular accident prior to the fatal collision
with the train; that they even had their own son travel to
and from school on a daily basis; and that Teodoro Perea
himself sometimes accompanied Alfaro in transporting the
passengers to and from school. The RTC gave scant
consideration to such defense by regarding such defense
as inappropriate in an action for breach of contract of
carriage.
We find no adequate cause to differ from the conclusions of
the lower courts that the Pereas operated as a common
carrier; and that their standard of care was extraordinary
diligence, not the ordinary diligence of a good father of a
family.
Although in this jurisdiction the operator of a school bus
service has been usually regarded as a private
carrier,9primarily because he only caters to some specific
or privileged individuals, and his operation is neither open
to the indefinite public nor for public use, the exact nature
of the operation of a school bus service has not been finally
settled. This is the occasion to lay the matter to rest.
A carrier is a person or corporation who undertakes to
transport or convey goods or persons from one place to
another, gratuitously or for hire. The carrier is classified
either as a private/special carrier or as a common/public
carrier.10 A private carrier is one who, without making the
activity a vocation, or without holding himself or itself out to
the public as ready to act for all who may desire his or its
services, undertakes, by special agreement in a particular
instance only, to transport goods or persons from one place
to another either gratuitously or for hire.11The provisions on
ordinary contracts of the Civil Code govern the contract of
private carriage.The diligence required of a private carrier is
only ordinary, that is, the diligence of a good father of the
family. In contrast, a common carrier is a person,
corporation, firm or association engaged in the business of
carrying or transporting passengers or goods or both, by
land, water, or air, for compensation, offering such services
to the public.12 Contracts of common carriage are governed
by the provisions on common carriers of the Civil Code, the
Public Service Act,13 and other special laws relating to
transportation. A common carrier is required to observe
extraordinary diligence, and is presumed to be at fault or to

have acted negligently in case of the loss of the effects of

passengers, or the death or injuries to passengers.14
In relation to common carriers, the Court defined public use
in the following terms in United States v. Tan Piaco,15viz:
"Public use" is the same as "use by the public". The
essential feature of the public use is not confined to
privileged individuals, but is open to the indefinite public. It
is this indefinite or unrestricted quality that gives it its public
character. In determining whether a use is public, we must
look not only to the character of the business to be done,
but also to the proposed mode of doing it. If the use is
merely optional with the owners, or the public benefit is
merely incidental, it is not a public use, authorizing the
exercise of the jurisdiction of the public utility commission.
There must be, in general, a right which the law compels
the owner to give to the general public. It is not enough that
the general prosperity of the public is promoted. Public use
is not synonymous with public interest. The true criterion by
which to judge the character of the use is whether the
public may enjoy it by right or only by permission.
In De Guzman v. Court of Appeals,16 the Court noted that
Article 1732 of the Civil Code avoided any distinction
between a person or an enterprise offering transportation
on a regular or an isolated basis; and has not distinguished
a carrier offering his services to the general public, that is,
the general community or population, from one offering his
services only to a narrow segment of the general
population.
Nonetheless, the concept of a common carrier embodied in
Article 1732 of the Civil Code coincides neatly with the
notion of public service under the Public Service Act, which
supplements the law on common carriers found in the Civil
Code. Public service, according to Section 13, paragraph
(b) of the Public Service Act, includes:
x x x every person that now or hereafter may own, operate,
manage, or control in the Philippines, for hire or
compensation, with general or limited clientle, whether
permanent or occasional, and done for the general
business purposes, any common carrier, railroad, street
railway, traction railway, subway motor vehicle, either for
freight or passenger, or both, with or without fixed route and
whatever may be its classification, freight or carrier service
of any class, express service, steamboat, or steamship line,
pontines, ferries and water craft, engaged in the
transportation of passengers or freight or both, shipyard,
marine repair shop, ice-refrigeration plant, canal, irrigation
system, gas, electric light, heat and power, water supply

and power petroleum, sewerage system, wire or wireless

communications systems, wire or wireless broadcasting
stations and other similar public services. x x x.17
Given the breadth of the aforequoted characterization of a
common carrier, the Court has considered as common
carriers pipeline operators,18 custom brokers and
warehousemen,19 and barge operators20 even if they had
limited clientle.
As all the foregoing indicate, the true test for a common
carrier is not the quantity or extent of the business actually
transacted, or the number and character of the
conveyances used in the activity, but whether the
undertaking is a part of the activity engaged in by the
carrier that he has held out to the general public as his
business or occupation. If the undertaking is a single
transaction, not a part of the general business or
occupation engaged in, as advertised and held out to the
general public, the individual or the entity rendering such
service is a private, not a common, carrier. The question
must be determined by the character of the business
actually carried on by the carrier, not by any secret
intention or mental reservation it may entertain or assert
when charged with the duties and obligations that the law
imposes.21
Applying these considerations to the case before us, there
is no question that the Pereas as the operators of a school
bus service were: (a) engaged in transporting passengers
generally as a business, not just as a casual occupation;
(b) undertaking to carry passengers over established roads
by the method by which the business was conducted; and
(c) transporting students for a fee. Despite catering to a
limited clientle, the Pereas operated as a common carrier
because they held themselves out as a ready
transportation indiscriminately to the students of a particular
school living within or near where they operated the service
and for a fee.
The common carriers standard of care and vigilance as to
the safety of the passengers is defined by law. Given the
nature of the business and for reasons of public policy, the
common carrier is bound "to observe extraordinary
diligence in the vigilance over the goods and for the safety
of the passengers transported by them, according to all the
circumstances of each case."22 Article 1755 of the Civil
Code specifies that the common carrier should "carry the
passengers safely as far as human care and foresight can
provide, using the utmost diligence of very cautious
persons, with a due regard for all the circumstances." To

successfully fend off liability in an action upon the death or

injury to a passenger, the common carrier must prove his or
its observance of that extraordinary diligence; otherwise,
the legal presumption that he or it was at fault or acted
negligently would stand.23 No device, whether by
stipulation, posting of notices, statements on tickets, or
otherwise, may dispense with or lessen the responsibility of
the common carrier as defined under Article 1755 of the
Civil Code. 24
And, secondly, the Pereas have not presented any
compelling defense or reason by which the Court might
now reverse the CAs findings on their liability. On the
contrary, an examination of the records shows that the
evidence fully supported the findings of the CA.
As earlier stated, the Pereas, acting as a common carrier,
were already presumed to be negligent at the time of the
accident because death had occurred to their
passenger.25 The presumption of negligence, being a
presumption of law, laid the burden of evidence on their
shoulders to establish that they had not been negligent.26 It
was the law no less that required them to prove their
observance of extraordinary diligence in seeing to the safe
and secure carriage of the passengers to their destination.
Until they did so in a credible manner, they stood to be held
legally responsible for the death of Aaron and thus to be
held liable for all the natural consequences of such death.
There is no question that the Pereas did not overturn the
presumption of their negligence by credible evidence. Their
defense of having observed the diligence of a good father
of a family in the selection and supervision of their driver
was not legally sufficient. According to Article 1759 of the
Civil Code, their liability as a common carrier did not cease
upon proof that they exercised all the diligence of a good
father of a family in the selection and supervision of their
employee. This was the reason why the RTC treated this
defense of the Pereas as inappropriate in this action for
breach of contract of carriage.
The Pereas were liable for the death of Aaron despite the
fact that their driver might have acted beyond the scope of
his authority or even in violation of the orders of the
common carrier.27 In this connection, the records showed
their drivers actual negligence. There was a showing, to
begin with, that their driver traversed the railroad tracks at a
point at which the PNR did not permit motorists going into
the Makati area to cross the railroad tracks. Although that
point had been used by motorists as a shortcut into the
Makati area, that fact alone did not excuse their driver into

taking that route. On the other hand, with his familiarity with
that shortcut, their driver was fully aware of the risks to his
passengers but he still disregarded the risks. Compounding
his lack of care was that loud music was playing inside the
air-conditioned van at the time of the accident. The
loudness most probably reduced his ability to hear the
warning horns of the oncoming train to allow him to
correctly appreciate the lurking dangers on the railroad
tracks. Also, he sought to overtake a passenger bus on the
left side as both vehicles traversed the railroad tracks. In so
doing, he lost his view of the train that was then coming
from the opposite side of the passenger bus, leading him to
miscalculate his chances of beating the bus in their race,
and of getting clear of the train. As a result, the bus avoided
a collision with the train but the van got slammed at its rear,
causing the fatality. Lastly, he did not slow down or go to a
full stop before traversing the railroad tracks despite
knowing that his slackening of speed and going to a full
stop were in observance of the right of way at railroad
tracks as defined by the traffic laws and regulations.28He
thereby violated a specific traffic regulation on right of way,
by virtue of which he was immediately presumed to be
negligent.29
The omissions of care on the part of the van driver
constituted negligence,30 which, according to Layugan v.
Intermediate Appellate Court,31 is "the omission to do
something which a reasonable man, guided by those
considerations which ordinarily regulate the conduct of
human affairs, would do, or the doing of something which a
prudent and reasonable man would not do,32 or as Judge
Cooley defines it, (t)he failure to observe for the protection
of the interests of another person, that degree of care,
precaution, and vigilance which the circumstances justly
demand, whereby such other person suffers injury."33
The test by which to determine the existence of negligence
in a particular case has been aptly stated in the leading
case of Picart v. Smith,34 thuswise:
The test by which to determine the existence of negligence
in a particular case may be stated as follows: Did the
defendant in doing the alleged negligent act use that
reasonable care and caution which an ordinarily prudent
person would have used in the same situation? If not, then
he is guilty of negligence. The law here in effect adopts the
standard supposed to be supplied by the imaginary conduct
of the discreet paterfamilias of the Roman law. The
existence of negligence in a given case is not determined
by reference to the personal judgment of the actor in the

situation before him. The law considers what would be

reckless, blameworthy, or negligent in the man of ordinary
intelligence and prudence and determines liability by that.
The question as to what would constitute the conduct of a
prudent man in a given situation must of course be always
determined in the light of human experience and in view of
the facts involved in the particular case. Abstract
speculation cannot here be of much value but this much
can be profitably said: Reasonable men govern their
conduct by the circumstances which are before them or
known to them. They are not, and are not supposed to be,
omniscient of the future. Hence they can be expected to
take care only when there is something before them to
suggest or warn of danger. Could a prudent man, in the
case under consideration, foresee harm as a result of the
course actually pursued? If so, it was the duty of the actor
to take precautions to guard against that harm. Reasonable
foresight of harm, followed by the ignoring of the
suggestion born of this prevision, is always necessary
before negligence can be held to exist. Stated in these
terms, the proper criterion for determining the existence of
negligence in a given case is this: Conduct is said to be
negligent when a prudent man in the position of the
tortfeasor would have foreseen that an effect harmful to
another was sufficiently probable to warrant his foregoing
the conduct or guarding against its consequences.
(Emphasis supplied)
Pursuant to the Picart v. Smith test of negligence, the
Pereas driver was entirely negligent when he traversed
the railroad tracks at a point not allowed for a motorists
crossing despite being fully aware of the grave harm to be
thereby caused to his passengers; and when he
disregarded the foresight of harm to his passengers by
overtaking the bus on the left side as to leave himself blind
to the approach of the oncoming train that he knew was on
the opposite side of the bus.
Unrelenting, the Pereas cite Phil. National Railways v.
Intermediate Appellate Court,35 where the Court held the
PNR solely liable for the damages caused to a passenger
bus and its passengers when its train hit the rear end of the
bus that was then traversing the railroad crossing. But the
circumstances of that case and this one share no
similarities. In Philippine National Railways v. Intermediate
Appellate Court, no evidence of contributory negligence
was adduced against the owner of the bus. Instead, it was
the owner of the bus who proved the exercise of
extraordinary diligence by preponderant evidence. Also, the

records are replete with the showing of negligence on the

part of both the Pereas and the PNR. Another distinction
is that the passenger bus in Philippine National Railways v.
Intermediate Appellate Court was traversing the dedicated
railroad crossing when it was hit by the train, but the
Pereas school van traversed the railroad tracks at a point
not intended for that purpose.
At any rate, the lower courts correctly held both the
Pereas and the PNR "jointly and severally" liable for
damages arising from the death of Aaron. They had been
impleaded in the same complaint as defendants against
whom the Zarates had the right to relief, whether jointly,
severally, or in the alternative, in respect to or arising out of
the accident, and questions of fact and of law were
common as to the Zarates.36 Although the basis of the right
to relief of the Zarates (i.e., breach of contract of carriage)
against the Pereas was distinct from the basis of the
Zarates right to relief against the PNR (i.e., quasi-delict
under Article 2176, Civil Code), they nonetheless could be
held jointly and severally liable by virtue of their respective
negligence combining to cause the death of Aaron. As to
the PNR, the RTC rightly found the PNR also guilty of
negligence despite the school van of the Pereas
traversing the railroad tracks at a point not dedicated by the
PNR as a railroad crossing for pedestrians and motorists,
because the PNR did not ensure the safety of others
through the placing of crossbars, signal lights, warning
signs, and other permanent safety barriers to prevent
vehicles or pedestrians from crossing there. The RTC
observed that the fact that a crossing guard had been
assigned to man that point from 7 a.m. to 5 p.m. was a
good indicium that the PNR was aware of the risks to
others as well as the need to control the vehicular and
other traffic there. Verily, the Pereas and the PNR were
joint tortfeasors.
2.
Was the indemnity for loss of
Aarons earning capacity proper?
The RTC awarded indemnity for loss of Aarons earning
capacity. Although agreeing with the RTC on the liability,
the CA modified the amount. Both lower courts took into
consideration that Aaron, while only a high school student,
had been enrolled in one of the reputable schools in the
Philippines and that he had been a normal and able-bodied
child prior to his death. The basis for the computation of
Aarons earning capacity was not what he would have
become or what he would have wanted to be if not for his

untimely death, but the minimum wage in effect at the time

of his death. Moreover, the RTCs computation of Aarons
life expectancy rate was not reckoned from his age of 15
years at the time of his death, but on 21 years, his age
when he would have graduated from college.
We find the considerations taken into account by the lower
courts to be reasonable and fully warranted.
Yet, the Pereas submit that the indemnity for loss of
earning capacity was speculative and
unfounded.1wphi1 They cited People v. Teehankee,
Jr.,37 where the Court deleted the indemnity for victim Jussi
Leinos loss of earning capacity as a pilot for being
speculative due to his having graduated from high school at
the International School in Manila only two years before the
shooting, and was at the time of the shooting only enrolled
in the first semester at the Manila Aero Club to pursue his
ambition to become a professional pilot. That meant,
according to the Court, that he was for all intents and
purposes only a high school graduate.
We reject the Pereas submission.
First of all, a careful perusal of the Teehankee, Jr. case
shows that the situation there of Jussi Leino was not akin to
that of Aaron here. The CA and the RTC were not
speculating that Aaron would be some highly-paid
professional, like a pilot (or, for that matter, an engineer, a
physician, or a lawyer). Instead, the computation of Aarons
earning capacity was premised on him being a lowly
minimum wage earner despite his being then enrolled at a
prestigious high school like Don Bosco in Makati, a fact that
would have likely ensured his success in his later years in
life and at work.
And, secondly, the fact that Aaron was then without a
history of earnings should not be taken against his parents
and in favor of the defendants whose negligence not only
cost Aaron his life and his right to work and earn money,
but also deprived his parents of their right to his presence
and his services as well. Our law itself states that the loss
of the earning capacity of the deceased shall be the liability
of the guilty party in favor of the heirs of the deceased, and
shall in every case be assessed and awarded by the court
"unless the deceased on account of permanent physical
disability not caused by the defendant, had no earning
capacity at the time of his death."38 Accordingly, we
emphatically hold in favor of the indemnification for Aarons
loss of earning capacity despite him having been
unemployed, because compensation of this nature is

awarded not for loss of time or earnings but for loss of the
deceaseds power or ability to earn money.39
This favorable treatment of the Zarates claim is not
unprecedented. In Cariaga v. Laguna Tayabas Bus
Company and Manila Railroad Company,40 fourth-year
medical student Edgardo Carriagas earning capacity,
although he survived the accident but his injuries rendered
him permanently incapacitated, was computed to be that of
the physician that he dreamed to become. The Court
considered his scholastic record sufficient to justify the
assumption that he could have finished the medical course
and would have passed the medical board examinations in
due time, and that he could have possibly earned a modest
income as a medical practitioner. Also, in People v.
Sanchez,41the Court opined that murder and rape victim
Eileen Sarmienta and murder victim Allan Gomez could
have easily landed good-paying jobs had they graduated in
due time, and that their jobs would probably pay them high
monthly salaries from P 10,000.00 to P 15,000.00 upon
their graduation. Their earning capacities were computed at
rates higher than the minimum wage at the time of their
deaths due to their being already senior agriculture
students of the University of the Philippines in Los Baos,
the countrys leading educational institution in agriculture.
3.
Were the amounts of damages excessive?
The Pereas plead for the reduction of the moral and
exemplary damages awarded to the Zarates in the
respective amounts of P 2,500,000.00 and P 1,000,000.00
on the ground that such amounts were excessive.
The plea is unwarranted.
The moral damages of P 2,500,000.00 were really just and
reasonable under the established circumstances of this
case because they were intended by the law to assuage
the Zarates deep mental anguish over their sons
unexpected and violent death, and their moral shock over
the senseless accident. That amount would not be too
much, considering that it would help the Zarates obtain the
means, diversions or amusements that would alleviate their
suffering for the loss of their child. At any rate, reducing the
amount as excessive might prove to be an injustice, given
the passage of a long time from when their mental anguish
was inflicted on them on August 22, 1996.
Anent the P 1,000,000.00 allowed as exemplary damages,
we should not reduce the amount if only to render effective
the desired example for the public good. As a common
carrier, the Pereas needed to be vigorously reminded to

observe their duty to exercise extraordinary diligence to

prevent a similarly senseless accident from happening
again. Only by an award of exemplary damages in that
amount would suffice to instill in them and others similarly
situated like them the ever-present need for greater and
constant vigilance in the conduct of a business imbued with
public interest.
WHEREFORE, we DENY the petition for review
on certiorari; AFFIRM the decision promulgated on
November 13, 2002; and ORDER the petitioners to pay the
costs of suit.
SO ORDERED.

1226 Obligations with a Penal Clause

THIRD DIVISION
[G.R. No. 138677. February 12, 2002]
TOLOMEO LIGUTAN and LEONIDAS DE LA
LLANA, petitioners, vs. HON. COURT OF APPEALS &
SECURITY BANK & TRUST COMPANY, respondents.
DECISION
VITUG, J.:
Before the Court is a petition for review on certiorari under
Rule 45 of the Rules of Court, assailing the decision and
resolutions of the Court of Appeals in CA-G.R. CV No.
34594, entitled "Security Bank and Trust Co.
vs. Tolomeo Ligutan, et al."
Petitioners Tolomeo Ligutan and Leonidas dela Llana obtai
ned on 11 May 1981 a loan in the amount of P120,000.00
from respondent Security Bank and Trust
Company. Petitioners executed a promissory note binding
themselves, jointly and severally, to pay the sum borrowed
with an interest of 15.189% per annum upon maturity and
to pay a penalty of 5% every month on the outstanding
principal and interest in case of default. In addition,
petitioners agreed to pay 10% of the total amount due by
way of attorneys fees if the matter were indorsed to a
lawyer for collection or if a suit were instituted to enforce
payment. The obligation matured on 8 September 1981;
the bank, however, granted an extension but only up
until 29 December 1981.
Despite several demands from the bank, petitioners failed
to settle the debt which, as of 20 May 1982, amounted to
P114,416.10. On 30 September 1982, the bank sent a
final demand letter to petitioners informing them that they

had five days within which to make full payment. Since

petitioners still defaulted on their obligation, the bank filed
on 3 November 1982, with the Regional Trial Court
of Makati, Branch 143, a complaint for recovery of the due
amount.
After petitioners had filed a joint answer to the complaint,
the bank presented its evidence and, on 27 March 1985,
rested its case. Petitioners, instead of introducing their own
evidence, had the hearing of the case reset on two
consecutive occasions. In view of the absence of
petitioners and their counsel on 28 August 1985, the third
hearing date, the bank moved, and the trial court resolved,
to consider the case submitted for decision.
Two years later, or on 23 October 1987, petitioners filed a
motion for reconsideration of the order of the trial court
declaring them as having waived their right to present
evidence and prayed that they be allowed to prove their
case. The court a quo denied the motion in an order,
dated 5 September 1988, and on 20 October 1989, it
rendered its decision,[1] the dispositive portion of which
read:
WHEREFORE, judgment is hereby rendered in favor of
the plaintiff and against the defendants, ordering the latter
to pay, jointly and severally, to the plaintiff, as follows:
"1. The sum of P114,416.00 with interest thereon at the
rate of 15.189% per annum, 2% service charge and 5% per
month penalty charge, commencing on 20 May 1982 until
fully paid;
"2. To pay the further sum equivalent to 10% of the total
amount of indebtedness for and as attorneys fees; and
"3. To pay the costs of the suit.[2]
Petitioners interposed an appeal with the Court of Appeals,
questioning the rejection by the trial court of their motion to
present evidence and assailing the imposition of the 2%
service charge, the 5% per month penalty charge and 10%
attorney's fees. In its decision[3] of 7 March 1996, the
appellate court affirmed the judgment of the trial court
except on the matter of the 2% service charge which was
deleted pursuant to Central Bank Circular No. 783. Not
fully satisfied with the decision of the appellate court, both
parties filed their respective motions for
reconsideration.[4] Petitioners prayed for the reduction of
the 5% stipulated penalty for being unconscionable. The
bank, on the other hand, asked that the payment of interest
and penalty be commenced not from the date of filing of
complaint but from the time of default as so stipulated in the
contract of the parties.

On 28 October 1998, the Court of Appeals resolved the two

motions thusly:
We find merit in plaintiff-appellees claim that the principal
sum of P114,416.00 with interest thereon must commence
not on the date of filing of the complaint as we have
previously held in our decision but on the date when the
obligation became due.
Default generally begins from the moment the creditor
demands the performance of the obligation. However,
demand is not necessary to render the obligor in default
when the obligation or the law so provides.
In the case at bar, defendants-appellants executed a
promissory note where they undertook to pay the obligation
on its maturity date 'without necessity of demand.' They
also agreed to pay the interest in case of non-payment from
the date of default.
x x x
xxx
xxx
While we maintain that defendants-appellants must be
bound by the contract which they acknowledged and
signed, we take cognizance of their plea for the application
of the provisions of Article 1229 x x x.
Considering that defendants-appellants partially complied
with their obligation under the promissory note by the
reduction of the original amount of P120,000.00 to
P114,416.00 and in order that they will finally settle their
obligation, it is our view and we so hold that in the interest
of justice and public policy, a penalty of 3% per month or
36% per annum would suffice.
x x x
xxx
xxx
WHEREFORE, the decision sought to be reconsidered is
hereby MODIFIED. The defendantsappellants Tolomeo Ligutan and Leonidas dela Llana are
hereby ordered to pay the plaintiff-appellee Security Bank
and Trust Company the following:
1. The sum of P114,416.00 with interest thereon at the
rate of 15.189% per annum and 3% per month penalty
charge commencing May 20, 1982 until fully paid;
2. The sum equivalent to 10% of the total amount of the
indebtedness as and for attorneys fees.[5]
On 16 November 1998, petitioners filed an omnibus motion
for reconsideration and to admit newly discovered
evidence,[6] alleging that while the case was pending before
the trial court, petitioner Tolomeo Ligutan and his
wife Bienvenida Ligutan executed a real estate mortgage
on 18 January 1984 to secure the existing indebtedness of

petitioners Ligutan and dela Llana with the

bank. Petitioners contended that the execution of the real
estate mortgage had the effect of novating the contract
between them and the bank. Petitioners further averred
that the mortgage was extrajudiciallyforeclosed on 26
August 1986, that they were not informed about it, and the
bank did not credit them with the proceeds of the sale. The
appellate court denied the omnibus motion for
reconsideration and to admit newly discovered evidence,
ratiocinating that such a second motion for reconsideration
cannot be entertained under Section 2, Rule 52, of the
1997 Rules of Civil Procedure. Furthermore, the appellate
court said, the newly-discovered evidence being invoked by
petitioners had actually been known to them when the case
was brought on appeal and when the first motion for
reconsideration was filed.[7]
Aggrieved by the decision and resolutions of the Court of
Appeals, petitioners elevated their case to this Court on 9
July 1999 via a petition for review on certiorari under Rule
45 of the Rules of Court, submitting thusly I.
The respondent Court of Appeals seriously erred
in not holding that the 15.189% interest and the penalty of
three (3%) percent per month or thirty-six (36%) percent
per annum imposed by private respondent bank on
petitioners loan obligation are still manifestly exorbitant,
iniquitous and unconscionable.
II.
The respondent Court of Appeals gravely erred
in not reducing to a reasonable level the ten (10%) percent
award of attorneys fees which is highly and grossly
excessive, unreasonable and unconscionable.
III.
The respondent Court of Appeals gravely erred
in not admitting petitioners newly discovered evidence
which could not have been timely produced during the trial
of this case.
IV.
The respondent Court of Appeals seriously
erred in not holding that there was a novation of the cause
of action of private respondents complaint in the instant
case due to the subsequent execution of the real estate
mortgage during the pendency of this case and the
subsequent foreclosure of the mortgage.[8]
Respondent bank, which did not take an appeal, would,
however, have it that the penalty sought to be deleted by
petitioners was even insufficient to fully cover and
compensate for the cost of money brought about by the
radical devaluation and decrease in the purchasing power
of the peso, particularly vis-a-vis the U.S. dollar, taking into
account the time frame of its occurrence. The Bank would

stress that only the amount of P5,584.00 had been remitted

out of the entire loan of P120,000.00.[9]
A penalty clause, expressly recognized by law,[10] is an
accessory undertaking to assume greater liability on the
part of an obligor in case of breach of an obligation. It
functions to strengthen the coercive force of the
obligation[11] and to provide, in effect, for what could be the
liquidated damages resulting from such a breach. The
obligor would then be bound to pay the stipulated indemnity
without the necessity of proof on the existence and on the
measure of damages caused by the breach.[12] Although a
court may not at liberty ignore the freedom of the parties to
agree on such terms and conditions as they see fit that
contravene neither law nor morals, good customs, public
order or public policy, a stipulated penalty, nevertheless,
may be equitably reduced by the courts if it is iniquitous or
unconscionable or if the principal obligation has been partly
or irregularly complied with.[13]
The question of whether a penalty is reasonable or
iniquitous can be partly subjective and partly objective. Its
resolution would depend on such factors as, but not
necessarily confined to, the type, extent and purpose of the
penalty, the nature of the obligation, the mode of breach
and its consequences, the supervening realities, the
standing and relationship of the parties, and the like, the
application of which, by and large, is addressed to the
sound discretion of the court. In Rizal Commercial Banking
Corp. vs. Court of Appeals,[14] just an example, the Court
has tempered the penalty charges after taking into account
the debtors pitiful situation and its offer to settle the entire
obligation with the creditor bank. The stipulated penalty
might likewise be reduced when a partial or irregular
performance is made by the debtor.[15] The stipulated
penalty might even be deleted such as when there has
been substantial performance in good faith by the
obligor,[16] when the penalty clause itself suffers from fatal
infirmity, or when exceptional circumstances so exist as to
warrant it.[17]
The Court of Appeals, exercising its good judgment in the
instant case, has reduced the penalty interest from 5% a
month to 3% a month which petitioner still disputes. Given
the circumstances, not to mention the repeated acts of
breach by petitioners of their contractual obligation, the
Court sees no cogent ground to modify the ruling of the
appellate court..
Anent the stipulated interest of 15.189% per annum,
petitioners, for the first time, question its reasonableness

and prays that the Court reduce the amount. This

contention is a fresh issue that has not been raised and
ventilated before the courts below. In any event, the
interest stipulation, on its face, does not appear as being
that excessive. The essence or rationale for the payment
of interest, quite often referred to as cost of money, is not
exactly the same as that of a surcharge or a penalty. A
penalty stipulation is not necessarily preclusive of interest,
if there is an agreement to that effect, the two being distinct
concepts which may separately be demanded.[18] What
may justify a court in not allowing the creditor to impose full
surcharges and penalties, despite an express
stipulation therefor in a valid agreement, may not equally
justify the non-payment or reduction of interest. Indeed, the
interest prescribed in loan financing arrangements is a
fundamental part of the banking business and the core of a
bank's existence.[19]
Petitioners next assail the award of 10% of the total amount
of indebtedness by way of attorney's fees for being grossly
excessive, exorbitant and unconscionable vis-a-vis the time
spent and the extent of services rendered by counsel for
the bank and the nature of the case. Bearing in mind that
the rate of attorneys fees has been agreed to by the
parties and intended to answer not only for litigation
expenses but also for collection efforts as well, the Court,
like the appellate court, deems the award of 10% attorneys
fees to be reasonable.
Neither can the appellate court be held to have erred in
rejecting petitioners' call for a new trial or to admit newly
discovered evidence. As the appellate court so held in its
resolution of 14 May 1999 Under Section 2, Rule 52 of the 1997 Rules of Civil
Procedure, no second motion for reconsideration of a
judgment or final resolution by the same party shall be
entertained. Considering that the instant motion is already
a second motion for reconsideration, the same must
therefore be denied.
Furthermore, it would appear from the records available to
this court that the newly-discovered evidence being invoked
by defendants-appellants have actually been existent when
the case was brought on appeal to this court as well as
when the first motion for reconsideration was filed. Hence,
it is quite surprising why defendants-appellants raised the
alleged newly-discovered evidence only at this stage when
they could have done so in the earlier pleadings filed before
this court.

The propriety or acceptability of such a second motion for

reconsideration is not contingent upon the averment of
'new' grounds to assail the judgment, i.e., grounds other
than those theretofore presented and rejected. Otherwise,
attainment of finality of a judgment might be stayed off
indefinitely, depending on the partys ingenuousness or
cleverness in conceiving and formulating 'additional flaws'
or 'newly discovered errors' therein, or thinking up some
injury or prejudice to the rights of the movant for
reconsideration.[20]
At any rate, the subsequent execution of the real estate
mortgage as security for the existing loan would not have
resulted in the extinguishment of the original contract of
loan because of novation. Petitioners acknowledge that the
real estate mortgage contract does not contain any express
stipulation by the parties intending it to supersede the
existing loan agreement between the petitioners and the
bank.[21] Respondent bank has correctly postulated that the
mortgage is but an accessory contract to secure the loan in
the promissory note.
Extinctive novation requires, first, a previous valid
obligation; second, the agreement of all the parties to the
new contract; third, the extinguishment of the obligation;
and fourth, the validity of the new one.[22] In order that an
obligation may be extinguished by another which
substitutes the same, it is imperative that it be so declared
in unequivocal terms, or that the old and the new obligation
be on every point incompatible with each other.[23] An
obligation to pay a sum of money is
not extinctively novated by a new instrument which merely
changes the terms of payment or adding compatible
covenants or where the old contract is merely
supplemented by the new one.[24] When not expressed,
incompatibility is required so as to ensure that the parties
have indeed intended such novation despite their failure to
express it in categorical terms. The incompatibility, to be
sure, should take place in any of the essential elements of
the obligation, i.e., (1) the juridical relation or tie, such as
from a mere commodatum to lease of things, or
from negotiorum gestio to agency, or from a mortgage
to antichresis,[25] or from a sale to one of loan;[26] (2) the
object or principal conditions, such as a change of the
nature of the prestation; or (3) the subjects, such as the
substitution of a debtor[27] or the subrogation of the
creditor. Extinctive novation does not necessarily imply
that the new agreement should be complete by itself;

certain terms and conditions may be carried, expressly or

by implication, over to the new obligation.
WHEREFORE, the petition is DENIED.
SO ORDERED.

THIRD DIVISION
[G.R. No. 157480. May 6, 2005]
PRYCE CORPORATION (formerly PRYCE PROPERTIES
CORPORATION), petitioner, vs. PHILIPPINE
AMUSEMENT AND GAMING
CORPORATION, respondent.
DECISION
PANGANIBAN, J.:
In legal contemplation, the termination of a contract is not
equivalent to its rescission. When an agreement is
terminated, it is deemed valid at inception. Prior to
termination, the contract binds the parties, who are thus
obliged to observe its provisions. However, when it is
rescinded, it is deemed inexistent, and the parties are
returned to their status quo ante. Hence, there is mutual
restitution of benefits received. The consequences of
termination may be anticipated and provided for by the
contract. As long as the terms of the contract are not
contrary to law, morals, good customs, public order or
public policy, they shall be respected by courts. The
judiciary is not authorized to make or modify contracts;
neither may it rescue parties from disadvantageous
stipulations. Courts, however, are empowered to reduce
iniquitous or unconscionable liquidated damages,
indemnities and penalties agreed upon by the parties.
The Case
Before us is a Petition for Review[1] under Rule 45 of the
Rules of Court, assailing the May 22, 2002 Decision[2] of
the Court of Appeals (CA) in CA-GR CV No. 51629 and its
March 4, 2003 Resolution[3] denying petitioners Motion for
Reconsideration. The assailed Decision disposed thus:
WHEREFORE, in view of the foregoing, judgment is
hereby rendered as follows: (1) In Civil Case No. 93-68266,
the appealed decision[,] is AFFIRMED with
MODIFICATION[,] ordering [Respondent] Philippine
Amusement and Gaming Corporation to pay [Petitioner]
Pryce Properties Corporation the total amount
ofP687,289.50 as actual damages representing the
accrued rentals for the quarter September to November

1993 with interest and penalty at the rate of two percent

(2%) per month from date of filing of the complaint until the
amount shall have been fully paid, and the sum
of P50,000.00 as attorneys fees; (2) In Civil Case No. 9368337, the appealed decision is REVERSED and SET
ASIDE and a new judgment is rendered ordering
[Petitioner] Pryce Properties Corporation to reimburse
[Respondent] Philippine Amusement and Gaming
Corporation the amount of P687,289.50 representing the
advanced rental deposits, which amount may be
compensated by [Petitioner] Pryce Properties Corporation
with its award in Civil Case No. 93-68266 in the equal
amount of P687,289.50.[4]
The Facts
According to the CA, the facts are as follows:
Sometime in the first half of 1992, representatives from
Pryce Properties Corporation (PPC for brevity) made
representations with the Philippine Amusement and
Gaming Corporation (PAGCOR) on the possibility of setting
up a casino in Pryce Plaza Hotel in Cagayan de Oro
City. [A] series of negotiations followed. PAGCOR
representatives went to Cagayan de Oro City to determine
the pulse of the people whether the presence of a casino
would be welcomed by the residents. Some local
government officials showed keen interest in the casino
operation and expressed the view that possible problems
were surmountable. Their negotiations culminated with
PPCs counter-letter proposal dated October 14, 1992.
On November 11, 1992, the parties executed a Contract of
Lease x x x involving the ballroom of the Hotel for a period
of three (3) years starting December 1, 1992 and until
November 30, 1995. On November 13, 1992, they
executed an addendum to the contract x x x which included
a lease of an additional 1000 square meters of the hotel
grounds as living quarters and playground of the casino
personnel. PAGCOR advertised the start of their casino
operations on December 18, 1992.
Way back in 1990, the Sangguniang Panlungsod of
Cagayan de Oro City passed Resolution No. 2295 x x x
dated November 19, 1990 declaring as a matter of policy to
prohibit and/or not to allow the establishment of a gambling
casino in Cagayan de Oro City. Resolution No. 2673 x x x
dated October 19, 1992 (or a month before the contract of
lease was executed) was subsequently passed reiterating
with vigor and vehemence the policy of the City under
Resolution No. 2295, series of 1990, banning casinos in
Cagayan de Oro City. On December 7, 1992, the

Sangguniang Panlungsod of Cagayan de Oro City enacted

Ordinance No. 3353 x x x prohibiting the issuance of
business permits and canceling existing business permits
to any establishment for using, or allowing to be used, its
premises or any portion thereof for the operation of a
casino.
In the afternoon of December 18, 1992 and just hours
before the actual formal opening of casino operations, a
public rally in front of the hotel was staged by some local
officials, residents and religious leaders. Barricades were
placed [which] prevented some casino personnel and hotel
guests from entering and exiting from the Hotel. PAGCOR
was constrained to suspend casino operations because of
the rally. An agreement between PPC and PAGCOR, on
one hand, and representatives of the rallyists, on the other,
eventually ended the rally on the 20th of December, 1992.
On January 4, 1993, Ordinance No. 3375-93 x x x was
passed by the Sangguniang Panlungsod of Cagayan de
Oro City, prohibiting the operation of casinos and providing
for penalty for violation thereof. On January 7, 1993, PPC
filed a Petition for Prohibition with Preliminary Injunction x x
x against then public respondent Cagayan de Oro City
and/or Mayor Pablo P. Magtajas x x x before the Court of
Appeals, docketed as CA G.R. SP No. 29851 praying inter
alia, for the declaration of unconstitutionality of Ordinance
No. 3353. PAGCOR intervened in said petition and further
assailed Ordinance No. 4475-93 as being violative of the
non-impairment of contracts and equal protection
clauses. On March 31, 1993, the Court of Appeals
promulgated its decision x x x, the dispositive portion of
which reads:
IN VIEW OF ALL THE FOREGOING, Ordinance No. 3353
and Ordinance No. 3375-93 are hereby DECLARED
UNCONSTITUTIONAL and VOID and the respondents and
all other persons acting under their authority and in their
behalf are PERMANENTLY ENJOINED from enforcing
those ordinances.
SO ORDERED.
Aggrieved by the decision, then public respondents
Cagayan de Oro City, et al. elevated the case to the
Supreme Court in G.R. No. 111097, where, in an En Banc
Decision dated July 20, 1994 x x x, the Supreme Court
denied the petition and affirmed the decision of the Court of
Appeals.
In the meantime, PAGCOR resumed casino operations on
July 15, 1993, against which, however, another public rally
was held. Casino operations continued for some time, but

were later on indefinitely suspended due to the incessant

demonstrations. Per verbal advice x x x from the Office of
the President of the Philippines, PAGCOR decided to stop
its casino operations in Cagayan de Oro City. PAGCOR
stopped its casino operations in the hotel prior to
September, 1993. In two Statements of Account dated
September 1, 1993 x x x, PPC apprised PAGCOR of its
outstanding account for the quarter September 1 to
November 30, 1993. PPC sent PAGCOR another Letter
dated September 3, 1993 x x x as a follow-up to the parties
earlier conference. PPC sent PAGCOR another Letter
dated September 15, 1993 x x x stating its Board of
Directors decision to collect the full rentals in case of pretermination of the lease.
PAGCOR sent PPC a letter dated September 20, 1993 x x
x [stating] that it was not amenable to the payment of the
full rentals citing as reasons unforeseen legal and other
circumstances which prevented it from complying with its
obligations. PAGCOR further stated that it had no other
alternative but to pre-terminate the lease agreement due to
the relentless and vehement opposition to their casino
operations. In a letter dated October 12, 1993 x x x,
PAGCOR asked PPC to refund the total of P1,437,582.25
representing the reimbursable rental deposits and
expenses for the permanent improvement of the Hotels
parking lot. In a letter dated November 5, 1993 x x x,
PAGCOR formally demanded from PPC the payment of its
claim for reimbursement.
On November 15, 1993 x x x, PPC filed a case for sum of
money in the Regional Trial Court of Manila docketed as
Civil Case No. 93-68266. On November 19, 1993,
PAGCOR also filed a case for sum of money in the
Regional Trial Court of Manila docketed as Civil Case No.
93-68337.
In a letter dated November 25, 1993, PPC informed
PAGCOR that it was terminating the contract of lease due
to PAGCORs continuing breach of the contract and further
stated that it was exercising its rights under the contract of
lease pursuant to Article 20 (a) and (c) thereof.
On February 2, 1994, PPC filed a supplemental complaint
x x x in Civil Case No. 93-68266, which the trial court
admitted in an Order dated February 11, 1994. In an Order
dated April 27, 1994, Civil Case No. 93-68377 was ordered
consolidated with Civil Case No. 93-68266. These cases
were jointly tried by the court a quo. On August 17, 1995,
the court a quo promulgated its decision. Both parties
appealed.[5]

In its appeal, PPC faulted the trial court for the following
reasons: 1) failure of the court to award actual and moral
damages; 2) the 50 percent reduction of the amount PPC
was claiming; and 3) the courts ruling that the 2 percent
penalty was to be imposed from the date of the
promulgation of the Decision, not from the date stipulated in
the Contract.
On the other hand, PAGCOR criticized the trial court for the
latters failure to rule that the Contract of Lease had already
been terminated as early as September 21, 1993, or at the
latest, on October 14, 1993, when PPC received
PAGCORs letter dated October 12, 1993. The gaming
corporation added that the trial court erred in 1) failing to
consider that PPC was entitled to avail itself of the
provisions of Article XX only when PPC was the party
terminating the Contract; 2) not finding that there were
valid, justifiable and good reasons for terminating the
Contract; and 3) dismissing the Complaint of PAGCOR in
Civil Case No. 93-68337 for lack of merit, and not finding
PPC liable for the reimbursement of PAGCORS cash
deposits and of the value of improvements.
Ruling of the Court of Appeals
First, on the appeal of PAGCOR, the CA ruled that the
PAGCORS pretermination of the Contract of Lease was
unjustified. The appellate court explained that public
demonstrations and rallies could not be considered as
fortuitous events that would exempt the gaming corporation
from complying with the latters contractual
obligations. Therefore, the Contract continued to be
effective until PPC elected to terminate it on November 25,
1993.
Regarding the contentions of PPC, the CA held that under
Article 1659 of the Civil Code, PPC had the right to ask for
(1) rescission of the Contract and indemnification for
damages; or (2) only indemnification plus the continuation
of the Contract. These two remedies were alternative, not
cumulative, ruled the CA.
As PAGCOR had admitted its failure to pay the rentals for
September to November 1993, PPC correctly exercised the
option to terminate the lease agreement. Previously, the
Contract remained effective, and PPC could collect the
accrued rentals. However, from the time it terminated the
Contract on November 25, 1993, PPC could no longer
demand payment of the remaining rentals as part of actual
damages, the CA added.
Denying the claim for moral damages, the CA pointed out
the failure of PPC to show that PAGCOR had acted in

gross or evident bad faith in failing to pay the rentals from

September to November 1993. Such failure was shown
especially by the fact that PPC still had in hand three (3)
months advance rental deposits of PAGCOR. The former
could have simply applied this deposit to the unpaid rentals,
as provided in the Contract. Neither did PPC adequately
show that its reputation had been besmirched or the hotels
goodwill eroded by the establishment of the casino and the
public protests.
Finally, as to the claimed reimbursement for parking lot
improvement, the CA held that PAGCOR had not
presented official receipts to prove the latters alleged
expenses. The appellate court, however, upheld the trial
courts award to PPC of P50,000 attorneys fees.
Hence this Petition.[6]
Issues
In their Memorandum, petitioner raised the following issues:
MAIN ISSUE:
Did the Honorable Court of Appeals commit x x x grave
and reversible error by holding that Pryce was not entitled
to future rentals or lease payments for the unexpired period
of the Contract of Lease between Pryce and PAGCOR?
Sub-Issues:
1. Were the provisions of Sections 20(a) and 20(c) of
the Contract of Lease relative to the right of PRYCE to
terminate the Contract for cause and to moreover collect
rentals from PAGCOR corresponding to the remaining term
of the lease valid and binding?
2. Did not Article 1659 of the Civil Code supersede
Sections 20(a) and 20(c) of the Contract, PRYCE having
rescinded the Contract of Lease?
3. Do the case of Rios, et al. vs. Jacinto Palma
Enterprises, et al. and the other cases cited by PAGCOR
support its position that PRYCE was not entitled to future
rentals?
4. Would the collection by PRYCE of future rentals not
give rise to unjust enrichment?
5. Could we not have harmonized Article 1659 of the
Civil Code and Article 20 of the Contract of Lease?
6. Is it not a basic rule that the law, i.e. Article 1659, is
deemed written in contracts, particularly in the PRYCEPAGCOR Contract of Lease?[7]
The Courts Ruling
The Petition is partly meritorious.
Main Issue:
Collection of Remaining Rentals

PPC anchors its right to collect future rentals upon the

provisions of the Contract. Likewise, it argues
that termination, as defined under the Contract, is different
from the remedy of rescission prescribed under Article
1659 of the Civil Code. On the other hand, PAGCOR
contends, as the CA ruled, that Article 1659 of the Civil
Code governs; hence, PPC is allegedly no longer entitled to
future rentals, because it chose to rescind the Contract.
Contract Provisions
Clear and Binding
Article 1159 of the Civil Code provides that obligations
arising from contracts have the force of law between the
contracting parties and should be complied with in good
faith.[8] In deference to the rights of the parties, the
law[9] allows them to enter into stipulations, clauses, terms
and conditions they may deem convenient; that is, as long
as these are not contrary to law, morals, good customs,
public order or public policy. Likewise, it is settled that if
the terms of the contract clearly express the intention of the
contracting parties, the literal meaning of the stipulations
would be controlling.[10]
In this case, Article XX of the parties Contract of Lease
provides in part as follows:
XX. BREACH OR DEFAULT
a) The LESSEE agrees that all the terms, conditions
and/or covenants herein contained shall be deemed
essential conditions of this contract, and in the event of
default or breach of any of such terms, conditions and/or
covenants, or should the LESSEE become bankrupt, or
insolvent, or compounds with his creditors, the LESSOR
shall have the right to terminate and cancel this contract by
giving them fifteen (15 days) prior notice delivered at the
leased premises or posted on the main door thereof. Upon
such termination or cancellation, the LESSOR may
forthwith lock the premises and exclude the LESSEE
therefrom, forcefully or otherwise, without incurring any civil
or criminal liability. During the fifteen (15) days notice, the
LESSEE may prevent the termination of lease by curing the
events or causes of termination or cancellation of the lease.
b) x x x
xxx
xxx
c) Moreover, the LESSEE shall be fully liable to the
LESSOR for the rentals corresponding to the remaining
term of the lease as well as for any and all damages, actual
or consequential resulting from such default and
termination of this contract.
d) x x x
xxx
x x x. (Italics
supplied)

The above provisions leave no doubt that the parties have

covenanted 1) to give PPC the right to terminate and
cancel the Contract in the event of a default or breach by
the lessee; and 2) to make PAGCOR fully liable for rentals
for the remaining term of the lease, despite the exercise of
such right to terminate. Plainly, the parties have voluntarily
bound themselves to require strict compliance with the
provisions of the Contract by stipulating that a default or
breach, among others, shall give the lessee the termination
option, coupled with the lessors liability for rentals for the
remaining term of the lease.
For sure, these stipulations are valid and are not contrary to
law, morals, good customs, public order or public
policy. Neither is there anything objectionable about the
inclusion in the Contract of mandatory provisions
concerning the rights and obligations of the
parties.[11] Being the primary law between the parties, it
governs the adjudication of their rights and obligations. A
court has no alternative but to enforce the contractual
stipulations in the manner they have been agreed upon and
written.[12] It is well to recall that courts, be they trial or
appellate, have no power to make or modify
contracts.[13] Neither can they save parties from
disadvantageous provisions.
Termination or Rescission?
Well-taken is petitioners insistence that it had the right to
ask for termination plus the full payment of future rentals
under the provisions of the Contract, rather than
just rescission under Article 1659 of the Civil Code. This
Court is not unmindful of the fact
that termination and rescission are terms that have been
used loosely and interchangeably in the past. But
distinctions ought to be made, especially in this
controversy, in which the terms mean differently and lead to
equally different consequences.
The term rescission is found in 1) Article 1191[14] of the
Civil Code, the general provision on rescission of reciprocal
obligations; 2) Article 1659,[15] which authorizes rescission
as an alternative remedy, insofar as the rights and
obligations of the lessor and the lessee in contracts of
lease are concerned; and 3) Article 1380[16] with regard to
the rescission of contracts.
In his Concurring Opinion in Universal Food Corporation v.
CA,[17] Justice J. B. L. Reyes differentiated rescission under
Article 1191 from that under Article 1381 et seq. as follows:
x x x. The rescission on account of breach of stipulations is
not predicated on injury 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 to 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 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
detre as well as the measure of the right to rescind. x x
x.[18]
Relevantly, it has been pointed out that resolution was
originally used in Article 1124 of the old Civil Code, and that
the term became the basis forrescission under Article 1191
(and, conformably, also Article 1659).[19]
Now, as to the distinction
between termination (or cancellation) and rescission (more
properly, resolution), Huibonhoa v. CA[20] held that, where
the action prayed for the payment of rental arrearages, the
aggrieved party actually sought the partial enforcement of a
lease contract. Thus, the remedy was not rescission, but
termination or cancellation, of the contract. The Court
explained:
x x x. By the allegations of the complaint, the Gojoccos
aim was to cancel or terminate the contract because they
sought its partial enforcement in praying for rental
arrearages. There is a distinction in law between
cancellation of a contract and its rescission. To rescind is to
declare a contract void in its inception and to put an end to
it as though it never were. It is not merely to terminate it
and release parties from further obligations to each other
but to abrogate it from the beginning and restore the parties
to relative positions which they would have occupied had
no contract ever been made.
x x x. The termination or cancellation of a contract would
necessarily entail enforcement of its terms prior to the
declaration of its cancellation in the same way that before a
lessee is ejected under a lease contract, he has to fulfill his
obligations thereunder that had accrued prior to his
ejectment. However, termination of a contract need not
undergo judicial intervention. x x x.[21] (Italics supplied)

Rescission has likewise been defined as the unmaking of

a contract, or its undoing from the beginning, and not
merely its termination.Rescission may be effected by both
parties by mutual agreement; or unilaterally by one of them
declaring a rescission of contract without the consent of the
other, if a legally sufficient ground exists or if a decree of
rescission is applied for before the courts.[22] On the other
hand, termination refers to an end in time or existence; a
close, cessation or conclusion. With respect to a lease or
contract, it means an ending, usually before the end of the
anticipated term of such lease or contract, that may be
effected by mutual agreement or by one party exercising
one of its remedies as a consequence of the default of the
other.[23]
Thus, mutual restitution is required in a rescission (or
resolution), in order to bring back the parties to their original
situation prior to the inception of the contract.[24] Applying
this principle to this case, it means that PPC would reacquire possession of the leased premises, and PAGCOR
would get back the rentals it paid the former for the use of
the hotel space.
In contrast, the parties in a case of termination are not
restored to their original situation; neither is the contract
treated as if it never existed. Prior to its termination, the
parties are obliged to comply with their contractual
obligations. Only after the contract has been cancelled will
they be released from their obligations.
In this case, the actions and pleadings of petitioner show
that it never intended to rescind the Lease Contract from
the beginning. This fact was evident when it first sought to
collect the accrued rentals from September to November
1993 because, as previously stated, it actually demanded
the enforcement of the Lease Contract prior to
termination. Any intent to rescind was not shown, even
when it abrogated the Contract on November 25, 1993,
because such abrogation was not the rescission provided
for under Article 1659.
Future Rentals
As to the remaining sub-issue of future rentals, Rios v.
Jacinto[25] is inapplicable, because the remedy resorted to
by the lessors in that case was rescission, not
termination. The rights and obligations of the parties
in Rios were governed by Article 1659 of the Civil Code;
hence, the Court held that the damages to which the lessor
was entitled could not have extended to the lessees liability
for future rentals.

Upon the other hand, future rentals cannot be claimed as

compensation for the use or enjoyment of anothers
property after the termination of a contract. We stress that
by abrogating the Contract in the present case, PPC
released PAGCOR from the latters future obligations,
which included the payment of rentals. To grant that right
to the former is to unjustly enrich it at the latters expense.
However, it appears that Section XX (c) was intended to be
a penalty clause. That fact is manifest from a reading of
the mandatory provision under subparagraph (a) in
conjunction with subparagraph (c) of the Contract. A penal
clause is an accessory obligation which the parties attach
to a principal obligation for the purpose of insuring the
performance thereof by imposing on the debtor a special
prestation (generally consisting in the payment of a sum of
money) in case the obligation is not fulfilled or is irregularly
or inadequately fulfilled.[26]
Quite common in lease contracts, this clause functions to
strengthen the coercive force of the obligation and to
provide, in effect, for what could be the liquidated damages
resulting from a breach.[27] There is nothing immoral or
illegal in such indemnity/penalty clause, absent any
showing that it was forced upon or fraudulently foisted on
the obligor.[28]
In obligations with a penal clause, the general rule is that
the penalty serves as a substitute for the indemnity for
damages and the payment of interests in case of
noncompliance; that is, if there is no stipulation to the
contrary,[29] in which case proof of actual damages is not
necessary for the penalty to be demanded.[30] There are
exceptions to the aforementioned rule, however, as
enumerated in paragraph 1 of Article 1226 of the Civil
Code: 1) when there is a stipulation to the contrary, 2)
when the obligor is sued for refusal to pay the agreed
penalty, and 3) when the obligor is guilty of fraud. In these
cases, the purpose of the penalty is obviously to punish the
obligor for the breach. Hence, the obligee can recover from
the former not only the penalty, but also other damages
resulting from the nonfulfillment of the principal
obligation. [31]
In the present case, the first exception applies because
Article XX (c) provides that, aside from the payment of the
rentals corresponding to the remaining term of the lease,
the lessee shall also be liable for any and all damages,
actual or consequential, resulting from such default and
termination of this contract. Having entered into the
Contract voluntarily and with full knowledge of its

provisions, PAGCOR must be held bound to its

obligations. It cannot evade further liability for liquidated
damages.
Reduction of Penalty
In certain cases, a stipulated penalty may nevertheless be
equitably reduced by the courts.[32] This power is explicitly
sanctioned by Articles 1229 and 2227 of the Civil Code,
which we quote:
Art. 1229. The judge shall equitably reduce the penalty
when the principal obligation has been partly or irregularly
complied with by the debtor. Even if there has been no
performance, the penalty may also be reduced by the
courts if it is iniquitous or unconscionable.
Art. 2227. Liquidated damages, whether intended as an
indemnity or a penalty, shall be equitably reduced if they
are iniquitous or unconscionable.
The question of whether a penalty is reasonable or
iniquitous is addressed to the sound discretion of the
courts. To be considered in fixing the amount of penalty
are factors such as -- but not limited to -- the type, extent
and purpose of the penalty; the nature of the obligation; the
mode of the breach and its consequences; the supervening
realities; the standing and relationship of the parties; and
the like.[33]
In this case, PAGCORs breach was occasioned by events
that, although not fortuitous in law, were in fact real and
pressing. From the CAs factual findings, which are not
contested by either party, we find that PAGCOR conducted
a series of negotiations and consultations before entering
into the Contract. It did so not only with the PPC, but also
with local government officials, who assured it that the
problems were surmountable. Likewise, PAGCOR took
pains to contest the ordinances[34] before the courts, which
consequently declared them unconstitutional. On top of
these developments, the gaming corporation was advised
by the Office of the President to stop the games in
Cagayan de Oro City, prompting the former to cease
operations prior to September 1993.
Also worth mentioning is the CAs finding that PAGCORs
casino operations had to be suspended for days on end
since their start in December 1992; and indefinitely from
July 15, 1993, upon the advice of the Office of President,
until the formal cessation of operations in September
1993. Needless to say, these interruptions and stoppages
meant that PAGCOR suffered a tremendous loss of
expected revenues, not to mention the fact that it had fully
operated under the Contract only for a limited time.

While petitioners right to a stipulated penalty is affirmed,

we consider the claim for future rentals to the tune
of P7,037,835.40 to be highly iniquitous. The amount
should be equitably reduced. Under the circumstances, the
advanced rental deposits in the sum of P687,289.50 should
be sufficient penalty for respondents breach.
WHEREFORE, the Petition is GRANTED in part. The
assailed Decision and Resolution are hereby MODIFIED to
include the payment of penalty. Accordingly, respondent is
ordered to pay petitioner the additional amount
of P687,289.50 as penalty, which may be set off or applied
against the formers advanced rental deposits. Meanwhile,
the CAs award to petitioner of actual damages
representing the accrued rentals for September to
November 1993 -- with interest and penalty at the rate of
two percent (2%) per month, from the date of filing of the
Complaint until the amount shall have been fully paid -- as
well as the P50,000 award for attorneys fees,
is AFFIRMED. No costs.
SO ORDERED.
THIRD DIVISION
ERMINDA F. FLORENTINO,
Petitioner,

- versus -

CHICO-NAZARIO, J.:
Before this Court is a Petition for Review
on Certiorari under Rule 45 of the Revised Rules of Court,
filed by petitioner Erminda F.Florentino, seeking to reverse
and set aside the Decision,[1] dated 10 October 2003 and
the Resolution,[2] dated 19 April 2006 of the Court of
Appeals in CA-G.R. CV No. 73853. The appellate court, in
its assailed Decision and Resolution, modified the Decision
dated 30 April 2001 of the Regional Trial Court (RTC)
of Makati, Branch 57, in Civil Case No. 00-1015, finding the
respondent Supervalue, Inc., liable for the sum
of P192,000.00, representing the security deposits made by
the petitioner upon the commencement of their Contract of
Lease. Thedispositive portion of the assailed appellate
courts Decision thus reads:
WHEREFORE, premises considered, the appeal is
PARTLY GRANTED. The April 30, 2001 Decision of the
Regional Trial Court of Makati, Branch 57 is therefore
MODIFIED to wit: (a) the portion ordering the [herein
respondent] to pay the amount of P192,000.00
representing
the security deposits and P50,000.00 as
G.R.
No. 172384
attorneys fees in favor of the [herein petitioner] as well
as giving [respondent] the option to reimburse [petitioner]
Present:
of the value of the improvements introduced by the
YNARES-SANTIAGO,
[petitioner]
on the leased [premises] should [respondent]
Chairperson,
choose
to
appropriate
AUSTRIA-MARTINEZ, itself or require the [petitioner] to
remove the improvements, is hereby REVERSED and SET
CHICO-NAZARIO,
ASIDE; andand
(b) the portion ordering the return to [petitioner]
NACHURA,
the
properties
seized by [respondent] after the former
REYES, JJ.
settled her obligation with the latter is however
MAINTAINED.[3]

Promulgated:
The factual and procedural antecedents of the instant
petition are as follows:
September 12, 2007
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Petitioner is doing business under the business name
Empanada Royale, a sole proprietorship engaged in the
- - - - - - - - -x
retail of empanada with outlets in different malls and
business establishments within Metro Manila.[4]
DECISION
Respondent, on the other hand, is a domestic corporation
engaged in the business of leasing stalls and commercial
SUPERVALUE, INC.,
Respondent.

store spaces located inside SM Malls found all throughout

the country.[5]
On 8 March 1999, petitioner and respondent
executed three Contracts of Lease containing similar terms
and conditions over the cart-type stalls at SM
North Edsa and SM Southmall and a store space at
SM Megamall. The term of each contract is for a period of
four months and may be renewed upon agreement of the
parties.[6]
Upon the expiration of the original Contracts of
Lease, the parties agreed to renew the same by extending
their terms until 31 March 2000.[7]
Before the expiration of said Contracts of Lease, or
on 4 February 2000, petitioner received two letters from the
respondent, both dated14 January 2000, transmitted
through facsimile transmissions.[8]
In the first letter, petitioner was charged with violating
Section 8 of the Contracts of Lease by not opening on 16
December 1999 and26 December 1999.[9]
Respondent also charged petitioner with selling a new
variety of empanada called mini-embutido and of
increasing the price of her merchandise from P20.00
to P22.00, without the prior approval of the respondent.[10]
Respondent observed that petitioner was frequently closing
earlier than the usual mall hours, either because of nondelivery or delay in the delivery of stocks to her outlets,
again in violation of the terms of the contract. A stern
warning was thus given to petitioner to refrain from
committing similar infractions in the future in order to avoid
the termination of the lease contract.[11]
In the second letter, respondent informed the
petitioner that it will no longer renew the Contracts of Lease
for the three outlets, upon their expiration on 31 March
2000.[12]
In a letter-reply dated 11 February 2000, petitioner
explained that the mini-embutido is not a new variety
of empanada but had similar fillings, taste and ingredients
as those of pork empanada; only, its size was reduced in
order to make it more affordable to the buyers.[13]

Such explanation notwithstanding, respondent still

refused to renew its Contracts of Lease with the
petitioner. To the contrary, respondent took possession of
the store space in SM Megamall and confiscated the
equipment and personal belongings of the petitioner found
therein after the expiration of the lease contract.[14]
In a letter dated 8 May 2000, petitioner demanded
that the respondent release the equipment and personal
belongings it seized from the SM Megamall store space
and return the security deposits, in the sum
of P192,000.00, turned over by the petitioner upon signing
of the Contracts of Lease. On 15 June 2000, petitioner
sent respondent another letter reiterating her previous
demands, but the latter failed or refused to comply
therewith. [15]
On 17 August 2000, an action for Specific
Performance, Sum of Money and Damages was filed by the
petitioner against the respondent before the RTC of Makati,
Branch 57.[16]
In her Complaint docketed as Civil Case No. 00-1015,
petitioner alleged that the respondent made verbal
representations that the Contracts of Lease will be renewed
from time to time and, through the said representations, the
petitioner was induced to introduce improvements upon the
store space at SM Megamall in the sum of P200,000.00,
only to find out a year later that the respondent will no
longer renew her lease contracts for all three outlets.[17]
In addition, petitioner alleged that the respondent,
without justifiable cause and without previous demand,
refused to return the security deposits in the amount
of P192,000.00.[18]
Further, petitioner claimed that the respondent
seized her equipment and personal belongings found inside
the store space in SMMegamall after the lease contract for
the said outlet expired and despite repeated written
demands from the petitioner, respondent continuously
refused to return the seized items.[19]
Petitioner thus prayed for the award of actual
damages in the sum of P472,000.00, representing the sum
of security deposits, cost of improvements and the value of

the personal properties seized. Petitioner also asked for

the award of P300,000.00 as moral damages;P50,000.00
as exemplary damages; and P80,000.00 as attorneys fees
and expenses of litigation.[20]
For its part, respondent countered that petitioner
committed several violations of the terms of their Contracts
of Lease by not opening from 16 December 1999 to 26
December 1999, and by introducing a new variety
of empanada without the prior consent of the respondent,
as mandated by the provision of Section 2 of the Contract
of Lease. Respondent also alleged that petitioner infringed
the lease contract by frequently closing earlier than the
agreed closing hours. Respondent finally averred that
petitioner is liable for the amount P106,474.09,
representing the penalty for selling a new variety
of empanada, electricity and water bills, and rental
adjustment, among other charges incidental to the lease
agreements. Respondent claimed that the seizure of
petitioners personal belongings and equipment was in the
exercise of its retaining lien, considering that the petitioner
failed to settle the said obligations up to the time the
complaint was filed.[21]

The [respondent] is likewise ordered to return to the

[petitioner] the various properties seized by the former after
settling her account with the [respondent].
Lastly, the [respondent] may choose either to reimburse the
[petitioner] one half (1/2) of the value of the improvements
introduced by the plaintiff at SM Megamall should
[respondent] choose to appropriate the improvements to
itself or require the [petitioner] to remove the
improvements, even though the principal thing may suffer
damage thereby. [Petitioner] shall not, however, cause
anymore impairment upon the said leased premises than is
necessary.
The other damages claimed by the plaintiff are denied for
lack of merit.
Aggrieved, the respondent appealed the adverse
RTC Judgment to the Court of Appeals.

In a Decision[23] dated 10 October 2003, the Court of

Appeals modified the RTC Judgment and found that the
respondent was justified in forfeiting the security deposits
Considering that petitioner already committed several and was not liable to reimburse the petitioner for the value
breaches of contract, the respondent thus opted not to
of the improvements introduced in the leased premises and
renew its Contracts of Lease with her anymore. The
to pay for attorneys fees. In modifying the findings of the
security deposits were made in order to ensure faithful
lower court, the appellate court declared that in view of the
compliance with the terms of their lease agreements; and
breaches of contract committed by the petitioner, the
since petitioner committed several infractions thereof,
respondent is justified in forfeiting the security
respondent was justified in forfeiting the security deposits in deposits. Moreover, since the petitioner did not obtain the
the latters favor.
consent of the respondent before she introduced
improvements on the SM Megamall store space, the
On 30 April 2001, the RTC rendered a
respondent has therefore no obligation to reimburse the
Judgment[22] in favor of the petitioner and found that the
petitioner for the amount expended in connection with the
physical takeover by the respondent of the leased premises said improvements.[24] The Court of Appeals, however,
and the seizure of petitioners equipment and personal
maintained the order of the trial court for respondent to
belongings without prior notice were
return to petitioner her properties after she has settled her
illegal. The decretal part of the RTC Judgment reads:
obligations to the respondent. The appellate court denied
petitioners Motion for Reconsideration in a
WHEREFORE, premises duly considered, judgment is
Resolution[25] dated 19 April 2006.
hereby rendered ordering the [herein respondent] to pay
[herein petitioner] the amount of P192,000.00 representing
Hence, this instant Petition for Review
the security deposits made by the [petitioner]
on Certiorari[26] filed by the petitioner assailing the Court of
and P50,000.00 as and for attorneys fees.
Appeals Decision. For the resolution of this Court are the
following issues:

I.
Whether or not the respondent is liable to return the
security deposits to the petitions.
II. Whether or not the respondent is liable to reimburse
the petitioner for the sum of the improvements she
introduced in the leased premises.
III. Whether or not the respondent is liable for attorneys
fees.[27]
The appellate court, in finding that the respondent is
authorized to forfeit the security deposits, relied on the
provisions of Sections 5 and 18 of the Contract of Lease, to
wit:
Section 5. DEPOSIT. The LESSEE shall make a
cash deposit in the sum of SIXTY THOUSAND PESOS
(P60,000.00) equivalent to three (3) months rent as
security for the full and faithful performance to each
and every term, provision, covenant and condition of
this lease and not as a pre-payment of rent. If at any
time during the term of this lease the rent is increased[,] the
LESSEE on demand shall make an additional deposit equal
to the increase in rent. The LESSOR shall not be required
to keep the deposit separate from its general funds and the
deposit shall not be entitled to interest. The deposit shall
remain intact during the entire term and shall not be applied
as payment for any monetary obligations of the LESSEE
under this contract. If the LESSEE shall faithfully perform
every provision of this lease[,] the deposit shall be refunded
to the LESSEE upon the expiration of this Lease and upon
satisfaction of all monetary obligation to the LESSOR.
xxxx
Section 18. TERMINATION. Any breach, nonperformance or non-observance of the terms and
conditions herein provided shall constitute default
which shall be sufficient ground to terminate this
lease, its extension or renewal. In which event, the
LESSOR shall demand that LESSEE immediately vacate
the premises, and LESSOR shall forfeit in its favor the
deposit tendered without prejudice to any such other
appropriate action as may be legally authorized.[28]

Since it was already established by the trial court that the

petitioner was guilty of committing several breaches of
contract, the Court of Appeals decreed that she cannot
therefore rightfully demand the return of the security
deposits for the same are deemed forfeited by reason of
evident contractual violations.
It is undisputed that the above-quoted provision
found in all Contracts of Lease is in the nature of a penal
clause to ensure petitioners faithful compliance with the
terms and conditions of the said contracts.
A penal clause is an accessory undertaking to
assume greater liability in case of breach. It is attached to
an obligation in order to insure performance and has a
double function: (1) to provide for liquidated damages, and
(2) to strengthen the coercive force of the obligation by the
threat of greater responsibility in the event of
breach.[29] The obligor would then be bound to pay the
stipulated indemnity without the necessity of proof of the
existence and the measure of damages caused by the
breach.[30] Article 1226 of the Civil Code states:
Art. 1226. In obligations with a penal clause, the penalty
shall substitute the indemnity for damages and the payment
of interests in case of noncompliance, if there is no
stipulation to the contrary. Nevertheless, damages shall be
paid if the obligor refuses to pay the penalty or is guilty of
fraud in the fulfillment of the obligation.
The penalty may be enforced only when it is demandable in
accordance with the provisions of this Code.
As a general rule, courts are not at liberty to ignore
the freedoms of the parties to agree on such terms and
conditions as they see fit as long as they are not contrary to
law, morals, good customs, public order or public
policy. Nevertheless, courts may equitably reduce a
stipulated penalty in the contracts in two instances: (1) if
the principal obligation has been partly or irregularly
complied with; and (2) even if there has been no
compliance if the penalty is iniquitous or unconscionable in
accordance with Article 1229 of the Civil Code which clearly
provides:

Art. 1229. The judge shall equitably reduce the penalty

when the principal obligation has been partly or
irregularly complied with by the debtor. Even if there has
been no performance, the penalty may also be reduced by
the courts if it is iniquitous or unconscionable.[31]
In ascertaining whether the penalty is
unconscionable or not, this court set out the following
standard in Ligutan v. Court of Appeals,[32] to wit:
The question of whether a penalty is reasonable or
iniquitous can be partly subjective and partly objective. Its
resolution would depend on such factor as, but not
necessarily confined to, the type, extent and purpose of the
penalty, the nature of the obligation, the mode of breach
and its consequences, the supervening realities, the
standing and relationship of the parties, and the like, the
application of which, by and large, is addressed to the
sound discretion of the court. xxx.
In the instant case, the forfeiture of the entire amount of the
security deposits in the sum of P192,000.00 was excessive
and unconscionable considering that the gravity of the
breaches committed by the petitioner is not of such degree
that the respondent was unduly prejudiced thereby. It is
but equitable therefore to reduce the penalty of the
petitioner to 50% of the total amount of security deposits.
It is in the exercise of its sound discretion that this court
tempered the penalty for the breaches committed by the
petitioner to 50% of the amount of the security
deposits. The forfeiture of the entire sum of P192,000.00 is
clearly a usurious and iniquitous penalty for the
transgressions committed by the petitioner. The
respondent is therefore under the obligation to return the
50% of P192,000.00 to the petitioner.
Turning now to the liability of the respondent to
reimburse the petitioner for one-half of the expenses
incurred for the improvements on the leased store space at
SM Megamall, the following provision in the Contracts of
Lease will enlighten us in resolving this issue:
Section 11. ALTERATIONS, ADDITIONS,
IMPROVEMENTS, ETC. The LESSEE shall not make any
alterations, additions, or improvements without the prior

written consent of LESSOR; and all alterations, additions or

improvements made on the leased premises, except
movable or fixtures put in at LESSEEs expense and which
are removable, without defacing the buildings or damaging
its floorings, shall becomeLESSORs property without
compensation/reimbursement but the LESSOR reserves
the right to require the removal of the said alterations,
additions or improvements upon expiration of the lease.
The foregoing provision in the Contract of Lease
mandates that before the petitioner can introduce any
improvement on the leased premises, she should first
obtain respondents consent. In the case at bar, it was not
shown that petitioner previously secured the consent of the
respondent before she made the improvements on the
leased space in SM Megamall. It was not even alleged by
the petitioner that she obtained such consent or she at
least attempted to secure the same. On the other hand,
the petitioner asserted that respondent allegedly
misrepresented to her that it would renew the terms of the
contracts from time to time after their expirations, and that
the petitioner was so induced thereby that she expended
the sum of P200,000.00 for the improvement of the store
space leased.
This argument was squarely addressed by this court
in Fernandez v. Court of Appeals,[33] thus:
The Court ruled that the stipulation of the parties in their
lease contract to be renewable at the option of both
parties stresses that the faculty to renew was given not to
the lessee alone nor to the lessor by himself but to the two
simultaneously; hence, both must agree to renew if a new
contract is to come about.
Petitioners contention that respondents had verbally
agreed to extend the lease indefinitely is inadmissible to
qualify the terms of the written contract under the parole
evidence rule, and unenforceable under the statute of
frauds.[34]
Moreover, it is consonant with human experience
that lessees, before occupying the leased premises,
especially store spaces located inside malls and big
commercial establishments, would renovate the place and

introduce improvements thereon according to the needs

and nature of their business and in harmony with their
trademark designs as part of their marketing ploy to attract
customers. Certainly, no inducement or misrepresentation
from the lessor is necessary for this purpose, for it is not
only a matter of necessity that a lessee should re-design its
place of business but a business strategy as well.
In ruling that the respondent is liable to reimburse
petitioner one half of the amount of improvements made on
the leased store space should it choose to appropriate the
same, the RTC relied on the provision of Article 1678 of the
Civil Code which provides:
Art. 1678. If the lessee makes, in good faith, useful
improvements which are suitable to the use for which the
lease is intended, without altering the form or substance of
the property leased, the lessor upon the termination of the
lease shall pay the lessee one-half of the value of the
improvements at that time. Should the lessor refuse to
reimburse said amount, the lessee may remove the
improvements, even though the principal thing may suffer
damage thereby. He shall not, however, cause any more
impairment upon the property leased than is necessary.
While it is true that under the above-quoted provision
of the Civil Code, the lessor is under the obligation to pay
the lessee one-half of the value of the improvements made
should the lessor choose to appropriate the improvements,
Article 1678 however should be read together with Article
448 and Article 546 of the same statute, which provide:
Art. 448. The owner of the land on which anything has
been built, sown or planted in good faith, shall have the
right to appropriate as his own the works, sowing or
planting, after payment of the indemnity provided for in
articles 546 and 548, or to oblige the one who built or
planted to pay the price of the land, and the one who
sowed, the proper rent. However, the builder or planter
cannot be obliged to buy the land if its value is considerably
more than that of the building or trees. In such case, he
shall pay reasonable rent, if the owner of the land does not
choose to appropriate the building or trees after proper
indemnity. The parties shall agree upon the terms of the
lease and in case of disagreement, the court shall fix the
terms thereof.
xxxx

Art. 546. Necessary expenses shall be refunded to

every possessor; but only possessor in good faith may
retain the thing until he has been reimbursed therefor.
Useful expenses shall be refunded only to the
possessor in good faith with the same right of retention, the
person who has defeated him in the possession having the
option of refunding the amount of the expenses or of paying
the increase in value which the thing may have acquired by
reason thereof.
Thus, to be entitled to reimbursement for improvements
introduced on the property, the petitioner must be
considered a builder in good faith. Further, Articles 448
and 546 of the Civil Code, which allow full reimbursement
of useful improvements and retention of the premises until
reimbursement is made, apply only to a possessor in good
faith, i.e., one who builds on land with the belief that he is
the owner thereof. A builder in good faith is one who is
unaware of any flaw in his title to the land at the time he
builds on it.[35] In this case, the petitioner cannot claim that
she was not aware of any flaw in her title or was under the
belief that she is the owner of the subject premises for it is
a settled fact that she is merely a lessee thereof.
In Geminiano v. Court of Appeals,[36] this Court was
emphatic in declaring that lessees are not possessors or
builders in good faith, thus:
Being mere lessees, the private respondents knew that
their occupation of the premises would continue only
for the life of the lease. Plainly, they cannot be
considered as possessors nor builders in good faith.
In a plethora of cases, this Court has held that Article 448
of the Civil Code, in relation to Article 546 of the same
Code, which allows full reimbursement of useful
improvements and retention of the premises until
reimbursement is made, applies only to a possessor in
good faith, i.e., one who builds on land with the belief that
he is the owner thereof. It does not apply where one's
only interest is that of a lessee under a rental contract;
otherwise, it would always be in the power of the
tenant to "improve" his landlord out of his property.

Since petitioners interest in the store space is merely

that of the lessee under the lease contract, she cannot
therefore be considered a builder in good
faith. Consequently, respondent may appropriate the
improvements introduced on the leased premises without
any obligation to reimburse the petitioner for the sum
expended.
Anent the claim for attorneys fees, we resolve to
likewise deny the award of the same. Attorneys fees may
be awarded when a party is compelled to litigate or to incur
expenses to protect its interest by reason of unjustified act
of the other.[37]
In the instant petition, it was not shown that the respondent
unjustifiably refused to grant the demands of the petitioner
so as to compel the latter to initiate legal action to enforce
her right. As we have found herein, there is basis for
respondents refusal to return to petitioner the security
deposits and to reimburse the costs of the improvements in
the leased premises. The award of attorneys fees is
therefore not proper in the instant case.
WHEREFORE, premises considered, the instant
Petition is PARTLY GRANTED. The Court of Appeals
Decision dated 10 October 2003 in CA-G.R. CV No. 73853
is hereby AFFIRMED with the MODIFICATION that the
respondent may forfeit only 50% of the total amount of the
security deposits in the sum of P192,000.00, and must
return the remaining 50% to the petitioner. No costs.
SO ORDERED.