Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 185129 June 17, 2013

ABELARDO JANDUSAY, Petitioner,

vs.
PEOPLE OF THE PHILIPPINES, Respondent.

RESOLUTION

REYES, J.:

Before the Court is a petition for review on certiorari1 under Rule 45 of the Rules of Court, assailing
the Decision2 dated March 4, 2008 and Resolution3 dated October 23, 2008 of the Court of Appeals
(CA) in CA G.R. CR No. 29850 which affirmed the Decision4 dated August 12, 2005 of the Regional
Trial Court (RTC) of Valenzuela City, Branch 172 in Criminal Case No. 278-V-02 convicting Abelardo
Jandusay (petitioner) for estafa.

The courts a quo arrived at similar factual findings, viz:

In the year 1999, petitioner was elected as the treasurer of Canumay, Lawang Bato, Punturin, Paso
de Blas Tricycle Operators and Driver’s Association, Inc. (CALAPUPATODA), herein referred as
"association", a duly registered non-stock association of tricycle operators and drivers in Valenzuela
City. He was re-elected to the same position in the year 2000.

According to the association’s by-laws, the petitioner’s position as treasurer entailed being "in charge
of the funds, moneys, valuables, receipts and disbursements of the association, ‘the books of
accounts’, ‘an account of financial condition’, and of all transactions made by him as
treasurer."5 Relative thereto, he maintained a "blue book" which reflected the association’s income
derived from membership dues, motor and driver’s fees and the butaw, an amount collected from
members on a daily basis. It also indicates the expenses of the association.

Consequent to the election of the new set of officers for the year 2001, a turnover meeting was held
between the outgoing and incoming officers on April 3, 2001. During the meeting, the petitioner
turned over to the incoming officers the so-called "blue book" which contained entries of the income
and expenses of the association for the year 2000. Based thereon, the net remaining funds of the
association for the year 2000 is ₱661,015.00 which, the petitioner, however failed to turn-over
despite written and verbal demands.

On March 4, 2002, the petitioner was formally charged with estafa or violation of paragraph 1(b),
Article 315 of the Revised Penal Code (RPC) before the RTC.

During trial, the prosecution presented a copy of the minutes of the April 3, 2001 meeting which
contained an undertaking signed by the petitioner that he will return the ₱661,015.00 by the end of
September 2001.
The petitioner denied signing the undertaking and claimed that the same was merely inserted on top
of his signature when he was asked to sign the minutes. He averred that finances of the association
were never subjected to audit. He also endeavored to establish that it was the association’s
President, Dionisio Delina (Delina) and not him who handled the funds of the association for the year
2000 as shown by the Memorandum issued by Delina himself in January 2000. Apparently, Delina
assumed such responsibility because the petitioner then had a pending criminal case for estafa in
relation to the association’s funds in 1999.

The RTC accorded merit to the minutes presented by the prosecution, and together with the other
evidence proffered, found the petitioner guilty of misappropriating the association’s funds. The RTC
rejected the petitioner’s contentions and held that an examination of the minutes show that there is
no indication that the undertaking reflected therein was merely inserted after the petitioner signed
the same. There is no logical explanation for the petitioner to sign at least ten (10) line spaces below
the last entry. Anent the memorandum allegedly issued by Delina, the RTC found the same to be of
dubious origin and at best only self-serving. Thus, in its Decision6 dated August 12, 2005, the RTC
disposed as follows:

WHEREFORE, judgment is hereby rendered finding accused ABELARDO JANDUSAY guilty beyond
reasonable doubt and as principal of the crime of estafa as defined in and penalized under Article
315, par. 1(b), of the Revised Penal Code without any attending mitigating or aggravating
circumstance and, applying the Indeterminate Sentence Law, hereby sentences him to suffer the
indeterminate penalty of EIGHT (8) YEARS and ONE (1) DAY of prision mayor as minimum to
FOURTEEN (14) YEARS, EIGHT (8) MONTHS and ONE (1) DAY of reclusion temporal as
maximum. Further, the accused is sentenced to pay the CALAPUPATODA the amount of
₱661,015.00 without subsidiary imprisonment in case of insolvency. Finally, the accused is
sentenced to pay the costs of suit.

SO ORDERED.7

The CA affirmed the petitioner’s conviction, but modified the penalty imposed by the lower court. In
its Decision8 dated March 4, 2008, the CA thus held:

WHEREFORE, premises considered, the Decision of the RTC of Valenzuela City, Branch 172, dated
August 12, 2005, in Criminal Case No. 278-V-02, is hereby AFFIRMED with MODIFICATION.
Accused-appellant ABELARDO JANDUSAY is hereby sentenced to an indeterminate penalty of 2
years and 11 months of prision correccional as minimum, to 8 years of prision mayor as maximum,
plus 1 year for every ₱10,000.00 in excess of ₱22,000.00 but not to exceed 20 years, or the
maximum of 20 years. The rest of the Decision stands.

SO ORDERED.9

The appellate court agreed with the RTC that the elements of the crime of estafa were adequately
established by the prosecution. In an attempt to overturn the decision of the CA, petitioner filed a
Motion for Reconsideration on April 14, 2008 and a Motion for New Trial on May 18, 2008. The CA
denied both motions in a Resolution dated October 23, 2008.

The Issue

The petitioner raises the issue of whether the CA committed a reversible error in affirming the
judgment of the RTC finding him guilty of estafa beyond reasonable doubt.

The Court’s Ruling

The petition is devoid of merit.

The petitioner argues that the prosecution failed to sufficiently prove the first element of estafa – that
he received the money or funds of the association for the year 2000.

We disagree. The petitioner’s allegations are nothing but feeble reiteration of the arguments
unsuccessfully raised before the RTC and CA. It must be emphasized that the grounds raised by the
petitioner involve factual issues already passed upon by the abovementioned courts, and are
inappropriate in a petition for review on certiorari under Rule 45. The Court accords respect to the
finding of the RTC that the bare denial of the petitioner cannot prevail over the evidence of the
prosecution consisting not only of testimonies of witnesses but also documents establishing the guilt
of the petitioner beyond reasonable doubt. It is a well-entrenched rule that the findings of facts of the
CA affirming those of the trial court are binding on the Court.10

At any rate, the Court concurs with the remark of the RTC that the memorandum whereby Delina
admitted to have handled the association’s funds for the year 2000 is highly specious as to its
authenticity in reflecting the actual dynamics between the petitioner and Delina as officers of the
association.

The courts a quo were correct in convicting the petitioner of estafa. Under Article 315, paragraph
1âwphi1

1(b) of the RPC, the elements of estafa with abuse of confidence are as follows: (1) that the money,
goods or other personal property is received by the offender in trust or on commission, or for
administration, or under any other obligation involving the duty to make delivery of, or to return, the
same; (2) that there be misappropriation or conversion of such money or property by the offender, or
denial on his part of such receipt; (3) that such misappropriation or conversion or denial is to the
prejudice of another; and (4) that there is demand by the offended party to the offender.11 As
correctly found by the CA:

In the case at bar, the aforementioned elements have been sufficiently established by the
prosecution. It cannot be denied that accused-appellant, as Treasurer of CALAPUPATODA,
received and held money for administration and in trust for the association. He was thus under an
obligation to turnover the same upon conclusion of his term as Treasurer. Instead, however, he
misappropriated the same to the prejudice of the association and, despite demand, failed to account
for or return them. Such failure to account, upon demand, of funds or property held in trust is
circumstantial evidence of misappropriation.12 (Citation omitted)

In addition, misappropriation or conversion may be proved by the prosecution by direct evidence or

by circumstantial evidence. The "failure to account upon demand, for funds or property held in trust,
is circumstantial evidence of misappropriation."13 As mentioned, the petitioner failed to account for,
upon demand, the funds of the association of the year 2000 which were received by him in trust.
This already constitutes circumstantial evidence of misappropriation or conversion of said properties
to petitioner’s own personal use.

The penalty imposed by the CA ought to be modified to conform to prevailing jurisprudence. The
maximum indeterminate penalty when the amount defrauded exceeds ₱22,000.00 is pegged at
prision mayor in its minimum period or anywhere within the range of six (6) years and one (1) day to
eight (8) years, plus one year for every ₱10,000.00 in excess of ₱22,000.00 of the amount
defrauded but not to exceed twenty (20) years. In turn, the minimum indeterminate penalty shall be
one degree lower from the prescribed penalty for estafa, which in this case is anywhere within the
range of prision correccional in its minimum and medium periods or six (6) months and one (1) day
to four (4) years and two (2) months.14 While the minimum indeterminate penalty meted out by the
CA is within this range, recent jurisprudence of similar factual backdrop are uniform in imposing four
(4) years and two (2) months as the minimum indeterminate penalty.15 Likewise, the maximum
indeterminate penalty must be spelled out to mean twenty (20) years of reclusion temporal.

WHEREFORE, premises considered, the petition is hereby DENIED. The Decision dated March 4,
2008 and Resolution dated October 23, 2008 of the Court of Appeals in CA-G.R. CR No. 29850 are
AFFIRMED except as to the indeterminate sentence imposed upon Abelardo Jandusay which is
hereby MODIFIED to four (4) years and two (2) months of prision correccional as minimum to twenty
(20) years of reclusion temporal as maximum.

SO ORDERED.
 SECOND DIVISION

G.R. No. 225033, August 15, 2018

SPOUSES ANTONIO BELTRAN AND FELISA BELTRAN, Petitioners, v. SPOUSES

APOLONIO CANGAYDA, JR. AND LORETA E. CANGAYDA, Respondents.

DECISION

CAGUIOA, J.:

The Case

This is a Petition for Review on Certiorari (Petition) filed under Rule 45 of the Rules of
Court against the Decision1 dated October 19, 2015 (assailed Decision) and
Resolution2 dated May 17, 2016 (assailed Resolution) in CA-G.R. CV No. 03414-MIN
rendered by the Court of Appeals-Cagayan de Oro City (CA) Twenty-First Division and
Special Former Twenty-First Division, respectively.

The assailed Decision and Resolution stem from an appeal from the Decision3 dated July
15, 2013 issued by the Regional Trial Court (RTC), 11th Judicial Region, Davao del
Norte, Branch 31 in Civil Case No. 4020, directing petitioners Antonio and Felisa Beltran
(collectively, petitioners) to vacate a 300-square-meter residential lot situated in
Barangay Magugpo, Tagum City, Davao del Norte (disputed property) registered in the
name of respondents Apolonio, Jr. and Loreta Cangayda (collectively, respondents)
under TCT No. T-74907.

The Facts

Sometime in August 1989,4 respondents verbally agreed to sell the disputed property to
petitioners for P35,000.00. After making an initial payment,5 petitioners took
possession of the disputed property and built their family home thereon.6 Petitioners
subsequently made additional payments, which, together with their initial payment,
collectively amounted to P29,690.00.7

However, despite respondents' repeated demands, petitioners failed to pay their

remaining balance of P5,310.00.8 This prompted respondents to refer the matter to the
Office of the Barangay Chairman of Barangay Magugpo, Tagum City (OBC).9

Before the OBC, the parties signed an Amicable Settlement dated August 24, 1992,
bearing the following terms:
3. That herein [petitioner Antonio] have already (sic) paid the amount of x x x
P29,690.00 x x x to [respondent Apolonio, Jr.] and [there is a] remaining balance of x x
x P5,310.00 x x x;

4. That herein [petitioner Antonio] promise(s) to pay the aforesaid balance to

[respondent Apolonio, Jr.] [within a] one week period (sic) to start AUGUST 24, 1992
(Monday);

5. That herein [petitioner Antonio] is willing to pay the all (sic) expenses of the titling of
the aforesaid lot; and

6. That herein [respondent Apolonio, Jr.] is also willing to signed (sic) a deed
of sale agreement after [petitioner Antonio] were (sic) able to pay the
remaining balance x x x.

Failure to comply on (sic) the said agreement[,] the [OBC] is willing to indorse (sic) this
case to the higher court for proper legal action.10 (Emphasis supplied)

Petitioners failed to pay within the period set forth in the Amicable Settlement.11

On January 14, 2009, or nearly 17 years after the expiration of petitioners' period to
pay their remaining balance, respondents served upon petitioners a "Last and Final
Demand" to vacate the disputed property within 30 days from notice. This demand was
left unheeded.12

RTC Proceedings

Consequently, on March 12, 2009, respondents filed a complaint for recovery of

possession and damages (Complaint) before the RTC.13 Respondents alleged, among
others, that petitioners had been occupying the disputed property without authority,
and without payment of rental fees.14

In their Answer, petitioners admitted that they failed to settle their unpaid balance of
P5,310.00 within the period set in the Amicable Settlement. However, petitioners
alleged that when they later attempted to tender payment two days after said
deadline,15 respondents refused to accept their payment, demanding, instead, for an
additional payment of P50,000.00.16

On July 15, 2013, the RTC issued a Decision, the dispositive portion of which reads:

WHEREFORE, premises considered, [petitioners], their heirs, successors-in-interest

and/or assigns are ordered to vacate the portion of Lot No. 11 presently occupied by
them within [60 days] from receipt of x x x this Decision.

However, as there was no express agreement between the parties that [respondents]
may retain the sum of P29,600.00 already paid to them by
[petitioners], [respondents] are hereby ordered to return the said sum to
[petitioners], likewise within [60] days from receipt of this
Decision.17 (Emphasis supplied)
In so ruling, the RTC characterized the oral agreement between the parties as a
contract to sell. The RTC held that the consummation of this contract to sell was
averted due to petitioners' failure to pay the purchase price in full.18 Hence the RTC
held that ownership over the disputed property never passed to petitioners.19

Petitioners filed a Motion for Reconsideration, which the RTC denied.20

CA Proceedings

Aggrieved, petitioners brought the case to the CA via ordinary appeal. Therein,
petitioners argued that the oral agreement they had entered into with respondents was
not a contract to sell but rather, a contract of sale which had the effect of transferring
ownership of the disputed property upon its delivery.21

Petitioners also raised, for the first time on appeal, that the sale of the disputed
property constitutes a sale on installment covered by Republic Act (R.A.) No.
6552,22 otherwise known as the Maceda Law. Corollarily, petitioners argued that
respondents should not be granted relief, since they failed to comply with the specific
procedure for rescission of sales of real estate on installment basis set forth under the
statute.23

On October 19, 2015, the CA rendered the assailed Decision, disposing the appeal as
follows:

WHEREFORE, the appeal is DISMISSED. The July 15, 2013 Decision of the [RTC],
Branch 31, 11th Judicial Region, Tagum City, Davao del Norte, in Civil Case No. 4020 is
AFFIRMED.24

The CA affirmed the findings of the RTC anent the nature of the contract entered into
by the parties.25 In addition, it rejected petitioners' invocation of the Maceda
Law. According to the CA, to allow petitioners to seek protection under said law for the
first time on appeal would violate the tenets of due process and fair play.26

Petitioners filed a Motion for Reconsideration which was later denied through the
assailed Resolution.

Thus, the present Petition now prays that the Court: (i) reverse the judgment of the CA
and RTC; and (ii) direct respondents to allow them to settle their remaining balance of
P5,310.00 and, subsequently, convey the disputed property in their favor.

Petitioners maintain, as they did before the CA, that the oral agreement they entered
into with respondents is a contract of sale, and that, as a necessary incident of such
contract, ownership over the disputed property had been transferred in their favor
when they took possession and built improvements thereon.27

Further, petitioners argue that respondents are not entitled to recover possession of the
disputed property since they failed to cancel their oral agreement by way of a notarial
act, in accordance with the provisions of the Maceda Law.28

Finally, petitioners aver that respondents' Complaint is an action upon a written

agreement, as it is based on the Amicable Settlement. Thus, petitioners conclude that
respondents' action already prescribed, since it was filed more than 10 years after the
lapse of petitioners' period to pay their outstanding balance. Petitioners further argue
that the Complaint is also barred by laches, considering that respondents allowed
petitioners to continue staying in the disputed property for a period of 17 years after
such failure to pay.29

The Issues

The Petition calls on the Court to resolve the following issues:

1. Whether the CA erred when it affirmed the RTC Decision characterizing the oral
agreement between the parties as a contract to sell;

2. Whether the oral agreement between the parties is covered by the Maceda
Law; and

3. Whether respondents' action for recovery of possession should have been

dismissed on the ground of prescription and/or laches.

The Court's Ruling

The Petition is meritorious.

The agreement between the parties is

an oral contract of sale. As a
consequence, ownership of the
disputed property passed to
petitioners upon its delivery.

The CA characterized the parties' agreement as a contract to sell primarily on the basis
of respondent Loreta's testimony which purportedly confirms their intent to reserve
ownership of the disputed property until full payment of the purchase price. The CA
held:

At trial, [respondent Loreta] testified thus —

[x x x x]

Q: Now, if any, tell us who are in possession of the [disputed property] x x x?

A: [Petitioners] and their children who are also married.

Q: Now, if you know, how did [petitioners] and their children occupied (sic) the land
you have just mentioned?
A: I know because we have [an oral] agreement with [petitioners] that they
will buy [the disputed property].

Q: Tell us what happened to the [oral] agreement of (sic) [petitioners] if you can recall?
A: Our [oral] agreement with [petitioner Antonio] that about 300 square
meters lot (sic) that they will pay P35,000.00 to us but [petitioner Antonio]
told us that they will pay the amount of P35,000.00 when [their] house will be
sold, then they will pay us.

Q: If you can recall, did [petitioners] comply with the [oral] agreement to pay you
P35,000.00?
A: At that time, [petitioners] gave me only P15,000.00.

Q: Other than the P15,000.00 (sic) if you can recall, did they pay you?
A: x x x [Petitioners] has a rattan furniture, they made us a chair and it costs about
P14,600.00.

Q: In short, Miss witness, please tell us how much amount (sic) [petitioners] paid you?
A: According to their total, they paid me P29,690.00

[Respondent Loreta's] testimony — that at the moment the [oral] agreement

was entered into by the parties, [petitioners] "will buy that property" —
suggests that the contract of sale was expected to be entered into at some
future date when a condition has been fulfilled. In this case, that condition
appears to be the full payment of the purchase price. The Court notes that this
testimony was not controverted. In their Brief, [petitioners] merely counter with the
bare insistence that what the parties entered into verbally was a contract of
sale.30 (Emphasis supplied.)

According to the CA, the foregoing finding is further bolstered by clause 6 of the
Amicable Settlement, to which petitioner Antonio expressed his assent. Clause 6 reads:

That herein [respondent Apolonio, Jr.] is also willing to signed (sic) a deed of sale
agreement after [petitioner Antonio] were (sic) able to pay the remaining balance x x
x.31

The CA's finding is erroneous.

Article 1458 of the Civil Code defines a contract of sale:

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

"[A] contract to sell, [on the other hand], is defined as a bilateral contract whereby the
prospective seller, while expressly reserving the ownership of the subject property
despite its delivery to the prospective buyer, commits to sell the property exclusively to
the prospective buyer"32 upon full payment of the purchase price.

Jurisprudence defines the distinctions between a contract of sale and a contract to sell
to be as follows:

In a contract of sale, title passes to the vendee upon the delivery of the thing
sold; whereas in a contract to sell, by agreement the ownership is reserved in
the vendor and is not to pass until the full payment of the price. In a contract
of sale, the vendor has lost and cannot recover ownership until and unless the
contract is resolved or rescinded; whereas in a contract to sell, title is retained by
the vendor until the full payment of the price, x x x.33 (Emphasis supplied)

Based on the foregoing distinctions, the Court finds, and so holds, that the oral
agreement entered into by the parties constitutes a contract of sale and not a contract
to sell.

A contract of sale is consensual in nature, and is perfected upon the concurrence of its
essential requisites,34 thus:

The essential requisites of a contract under Article 1318 of the New Civil Code
are: (1) consent of the contracting parties; (2) object certain which is the
subject matter of the contract; and (3) cause of the obligation which is
established. Thus, contracts, other than real contracts are perfected by mere consent
which is manifested by the meeting of the offer and the acceptance upon the thing and
the cause which are to constitute the contract. Once perfected, they bind other
contracting parties and the obligations arising therefrom have the force of law between
the parties and should be complied with in good faith. The parties are bound not only to
the fulfillment of what has been expressly stipulated but also to the consequences
which, according to their nature, may be in keeping with good faith, usage and law.

Being a consensual contract, sale is perfected at the moment there is a

meeting of minds upon the thing which is the object of the contract and upon
the price. From that moment, the parties may reciprocally demand performance,
subject to the provisions of the law governing the form of contracts. A perfected
contract of sale imposes reciprocal obligations on the parties whereby the vendor
obligates himself to transfer the ownership of and to deliver a determinate thing to the
buyer who, in turn, is obligated to pay a price certain in money or its equivalent. Failure
of either party to comply with his obligation entitles the other to rescission as the power
to rescind is implied in reciprocal obligations.35 (Emphasis supplied)

Contrary to the CA's findings, neither respondent Loreta's testimony nor clause 6 of the
Amicable Settlement supports the conclusion that the parties' agreement is not a
contract of sale, but only a contract to sell — the reason being that it is not evident
from said testimony and clause 6 that there was an express agreement to reserve
ownership despite delivery of the disputed property.

A plain reading of respondent Loreta's testimony shows that the parties' oral agreement
constitutes a meeting of the minds as to the sale of the disputed property and its
purchase price. Respondent Loreta's statements do not in any way suggest that the
parties intended to enter into a contract of sale at a later time. Such statements only
pertain to the time at which petitioners expected, or at least hoped, to acquire the
sufficient means to pay the purchase price agreed upon. For emphasis, the Court
reproduces the relevant statements relied upon by the CA:

Our [oral] agreement with [petitioner Antonio] that about 300 square meters lot (sic)
that they will pay P35,000.00 to us but [petitioner Antonio] told us that they will
pay the amount of P35,000.00 when [their] house will be sold, then they will
pay us.36 (Emphasis supplied)

Clause 6 of the Amicable Settlement merely states respondent Apolonio, Jr.'s

commitment to formalize and reduce the oral agreement of the parties into a public
instrument upon payment of petitioners' outstanding balance. It bears emphasizing that
a formal document is not necessary for the sale transaction to acquire binding
effect.37 Hence, the subsequent execution of a formal deed of sale does not negate the
perfection of the parties' oral contract of sale which had already taken place upon the
meeting of the parties' minds as to the subject of the transaction and its purchase
price.

In a contract of sale, ownership of a thing sold shall pass to the buyer upon actual or
constructive delivery thereof in the absence of any stipulation to the
contrary.38 Reference to Articles 1477 and 1478 of the Civil Code is in order:

Article 1477. The ownership of the thing sold shall be transferred to the vendee upon
the actual or constructive delivery thereof.

Article 1478. The parties may stipulate that ownership in the thing shall not pass to the
purchaser until he has fully paid the price.

In accordance with the cited provisions, ownership of the disputed property passed to
petitioners when its possession was transferred in their favor, as no reservation to the
contrary had been made.

Considering that respondents' Complaint is anchored upon their alleged ownership of

the disputed property, their prayer to recover possession thereof as a consequence of
such alleged ownership cannot prosper.

Slight delay is not sufficient to justify

rescission.

Article 1191 of the Civil Code39 lays down the remedies that the injured party may
resort to in case of breach of a reciprocal obligation — fulfillment of the
obligation or rescission thereof, with damages in either case.

Thus, in a contract of sale, the vendor's failure to pay the price agreed
upon generally constitutes breach, and extends to the vendor the right to demand the
contract's fulfillment or rescission.40
It is important to stress, however, that the right of rescission granted to the injured
party under Article 1191 is predicated on a breach of faith by the other party who
violates the reciprocity between them.41 Stated otherwise, rescission may not be
resorted to in the absence of breach of faith.

In this connection, Article 1592 extends to the vendee in a sale of immovable property
the right to effect payment even after expiration of the period agreed upon, as long as
no demand for rescission has been made upon him by the vendor. The provision states:

Article 1592. In the sale of immovable property, even though it may have been
stipulated that upon failure to pay the price at the time agreed upon the rescission of
the contract shall of right take place, the vendee may 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 a notarial act. After the demand, the court may not grant him
a new term.

A reading of Article 1592 in conjunction with Article 1191 thus suggests that in the
absence of any stipulation to the contrary, the vendor's failure to pay within the period
agreed upon shall not constitute a breach of faith, so long as payment is made before
the vendor demands for rescission, either judicially, or by notarial act.

Hence, in Taguba v. Peralta,42 (Taguba) the Court held that slight delay in the
payment of the purchase price does not serve as a sufficient ground for the
rescission of a sale of real property:

Despite the denomination of the deed as a "Deed of Conditional Sale" a reading of the
conditions x x x therein set forth reveals the contrary. Nowhere in the said contract in
question could we find a proviso or stipulation to the effect that title to the property
sold is reserved in the vendor until full payment of the purchase price. There is also no
stipulation giving the vendor (petitioner Taguba) the right to unilaterally rescind the
contract the moment the vendee (private respondent de Leon) fails to pay within a
fixed period x x x.

Considering, therefore, the nature of the transaction between petitioner Taguba and
private respondent, which We affirm and sustain to be a contract of sale, absolute in
nature the applicable provision is Article 1592 of the New Civil Code x x x.

xxxx

In the case at bar, it is undisputed that petitioner Taguba never notified private
respondent by notarial act that he was rescinding the contract, and neither had he filed
a suit in court to rescind the sale.

Finally, it has been ruled that "where time is not of the essence of the
agreement, a slight delay on the part of one party in the performance of his
obligation is not a sufficient ground for the rescission of the agreement".
Considering that in the instant case, private respondent had already actually
paid the sum of P12,500.00 of the total stipulated purchase price of
P18,000.00 and had tendered payment of the balance of P5,500.00 within the
grace period of six months from December 31, 1972, equity and justice
mandate that she be given additional period within which to complete
payment of the purchase price.43 (Emphasis supplied)

The Court applied the foregoing principles in the subsequent case of Dignos v. Court of
Appeals,44 (Dignos) where it resolved to grant respondent therein an additional period
within which to settle his outstanding balance of P4,000.00, considering that he "was
delayed in payment only for one month."45 It is worth noting that in Dignos, the Court
granted the vendee an additional period to pay the balance, despite the fact that no
grace period had been stipulated upon by the parties therein, as in Taguba.

Here, petitioners acknowledge that they failed to settle the purchase price of the
disputed property in full within the deadline set by the Amicable Settlement.
Nevertheless, the Court does not lose sight of the fact that petitioners have already
paid more than three-fourths of the purchase price agreed upon. Further, petitioners
have constituted their family home on the disputed property in good faith, and have
lived thereon for 17 years without protest.

In addition, respondents do not dispute that petitioners offered to settle their

outstanding balance of P5,310.00 "two (2) days after the deadline [set by the Amicable
Settlement] and a few times thereafter,"46 which offers respondents refused to
accept.47 Respondents also do not claim to have made a demand for rescission at any
time before petitioners made such offers to pay, either through judicial or extra-judicial
means, such as through a notarial act.

Thus, pursuant to Article 1592, and consistent with the Court's rulings
in Taguba and Dignos, the Court deems it proper to grant petitioners a period of 30
days from notice of this Decision to settle their outstanding balance.

Assuming that petitioners' failure to

pay constitutes breach, respondents'
cause of action is already barred by
prescription.

Respondents hinge their cause of action on petitioners' failure to pay within the period
set by the Amicable Settlement. Hence, this would mean that respondents' action is one
that proceeds from a breach of a written agreement, which, under Article 1144 of the
Civil Code, prescribes in 10 years.48

Respondents' Complaint was filed 17 years after the expiration of the payment period
stipulated in the Amicable Settlement. Assuming that petitioners' failure to pay within
said period constitutes sufficient breach which gives rise to a cause of action, such
action has clearly prescribed.

Considering the foregoing, the Court deems it unnecessary to delve into the other
issues raised in the Petition.

WHEREFORE, the Petition is GRANTED. The Decision and Resolution respectively

dated October 19, 2015 and May 17, 2016 rendered by the Court of Appeals-Cagayan
de Oro City in CA-G.R. CV No. 03414-MIN, and the Decision dated July 15, 2013 issued
by the Regional Trial Court, Branch 31, 11th Judicial Region, Davao del Norte (RTC) in
Civil Case No. 4020 are REVERSED and SET ASIDE.

Petitioners Antonio and Felisa Beltran are ORDERED to pay respondents Apolonio
Cangayda, Jr. and Loreta E. Cangayda the sum of P5,310.00, representing their
outstanding balance, within 30 days from notice of this Decision. In case of refusal or
inability on the part of respondents to receive said amount, petitioners
are DIRECTED to deposit the same with the RTC for the account of respondents. The
sum due shall earn interest at the rate of six percent (6%) per annum from the date of
finality of this Decision until full payment, in accordance with the Court's ruling in Nacar
v. Gallery Frames49.

Upon receipt of the foregoing sum, or the deposit of such sum with the RTC,
respondents are DIRECTED to EXECUTE a Deed of Absolute Sale in favor of petitioners
for the purpose of formalizing the oral contract of sale concerning the 300-square-
meter residential lot situated in Barangay Magugpo, Tagum City, Davao del Norte,
covered by TCT No. T-74907, and DELIVER to petitioners the original owner's duplicate
copy of TCT No. T-74907. In case of refusal or inability on the part of respondents to
execute a Deed of Absolute Sale and/or deliver said owner's duplicate copy, this
Decision shall be sufficient to grant the proper Registrar of Deeds the necessary
authority to cancel TCT No. T-74907 and issue a new title in the name of petitioners.

SO ORDERED.
 SECOND DIVISION

G.R. No. 185765, September 28, 2016

PHILIPPINE ECONOMIC ZONE AUTHORITY, Petitioner, v. PILHINO SALES

CORPORATION, Respondent.

DECISION

LEONEN, J.:

Although the provisions of a contract are legally null and void, the stipulated method of
computing liquidated damages may be accepted as evidence of the intent of the
parties. The provisions, therefore, can be basis for finding a factual anchor for
liquidated damages. The liable party may nevertheless present better evidence to
establish a more accurate basis for awarding damages. In this case, the respondent
failed to do so.

This resolves a Petition for Review on Certiorari1 praying that the assailed May 2, 2008
Decision2 and November 25, 2008 Resolution3 of the Court of Appeals in CA G.R. CV No.
86406 be reversed and set aside and that the Decision4 dated November 2, 2005 of
Branch 108 of the Regional Trial Court of Pasay City in Civil Case No. 00-0343 be
reinstated.

The Regional Trial Court's November 2, 2005 Decision ruled in favor of petitioner
Philippine Economic Zone Authority, which, as plaintiff, brought an action for rescission
of contract and damages against the defendant, now respondent Pilhino Sales
Corporation (Pilhino).5 chanrobl eslaw

The assailed Court of Appeals Decision partly granted Pilhino's appeal by reducing the
amount of liquidated damages due from it to the Philippine Economic Zone Authority,
and by deleting the forfeiture of its performance bond.6 The assailed Court of Appeals
Resolution denied the Philippine Economic Zone Authority's Motion for
Reconsideration.7 chanrobles law

The facts are not disputed, and all that is in issue is the consequence of Pilhino's
contractual breach.

On October 4, 1997, the Philippine Economic Zone Authority published an invitation to

bid in the Business Daily for its acquisition of two (2) brand new fire truck units "with a
capacity of 4,000-5,000 liters [of] water and 500-1,000 liters [of chemical foam,] with
complete accessories."8 chan robles law

Three (3) companies participated in the bidding: Starbilt Enterprise, Inc., Shurway
Industries, Inc., and Pilhino.9 Pilhino secured the contract for the acquisition of the fire
trucks.10 The contract price was initially at P3,000,000.00 per truck, but this was
reduced after negotiation to P2,900,000.00 per truck.11 chanrobleslaw

The contract awarded to Pilhino stipulated that Pilhino was to deliver to the Philippine
Economic Zone Authority two (2) FF3HP brand fire trucks within 45 days of receipt of a
purchase order from the Philippine Economic Zone Authority.12 A further stipulation
stated that "[i]n case of fail[u]re to deliver the . . . good on the date specified . . . , the
Supplier agree[s] to pay penalty at the rate of 1/10 of 1% of the total contract price for
each days [sic] commencing on the first day after the date stipulated above."13 chanrobles law

The Philippine Economic Zone Authority furnished Pilhino with a purchase order dated
November 6, 1997.14 Pilhino failed to deliver the trucks as it had committed.15 This
prompted the Philippine Economic Zone Authority to make formal demands on Pilhino
on July 27, 199816 and on February 23, 1999.17 As Pilhino still failed to comply, the
Philippine Economic Zone Authority filed before the Regional Trial Court of Pasay City a
Complaint18 for rescission of contract and damages. This was docketed as Civil Case No.
00-0343 and raffled to Branch 108.19 chanrob leslaw

In its defense, Pilhino claimed that there was no starting date from which its obligation
to deliver could be reckoned, considering that the Complaint supposedly failed to allege
acceptance by Pilhino of the purchase order.20 Pilhino suggested that there was not
even a meeting of minds between it and the Philippine Economic Zone Authority.21 chanrobles law

In its November 2, 2005 Decision,22 the Regional Trial Court ruled for the Philippine
Economic Zone Authority. The dispositive portion of the Decision reads: ChanRoblesVirtualawl ibra ry

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the
defendant ordering the latter to:

1. Pay the plaintiff in liquidated damages a[t] the rate of 1/10 of 1% of the
total contract price of Php 5,800,000.00 for each day of delay
commencing from June 19, 1998.

2. Pay the plaintiff exemplary damages in the amount of Php 100,00[0].00.

3. That the contract be declared rescinded and the performance bond posted
by the defendant be forfeited in favor of the plaintiff.

4. For defendant to pay the cost of the suit.

SO ORDERED.23 chanrob lesvi rtual lawlib rary

Pilhino then appealed before the Court of Appeals.

In its assailed May 2, 2008 Decision,24 the Court of Appeals partly granted Pilhino's
appeal by deleting the forfeiture of Pilhino's performance bond and pegging the
liquidated damages due from it to the Philippine Economic Zone Authority in the
amount of P1,400,000.00.

The Court of Appeals debunked Pilhino's claim that there was no meeting of minds. It
emphasized that Pilhino "manifested its acquiescence . . . [to] the Purchase Order . . .
when it submitted to [the Philippine Economic Zone Authority] a Performance Bond
dated 02 June 1999 and Indemnity Agreement dated 09 June 1998 duly signed by its
Vice President."25 It added that in a subsequent letter dated March 29, 199926 "signed
cralawre d

by [Pilhino's] Hino Division Manager Edgar R. Santiago and noted by VP-Operations

Roberto R. Garcia, [Pilhino] admitted that it can no longer meet the requirements
regarding the specification on the two (2) units of fire truck[s]."27 chanroble slaw

In this March 29, 1999 letter, Pilhino not only acknowledged its inability to meet its
obligations but also proposed a modified arrangement with the Philippine Economic
Zone Authority: ChanRoblesVirtualawl ibra ry

[P]lease allow us to submit our new proposal for your consideration (please see
attached specifications). Our price for this new specification if P3,600,000.00/unit.
However, we are willing to shoulder the difference between the original price of
P2,900,000.00/unit and P3,600,000.00 in lieu of the penalty. May we also request your
good office to stop the accumulation of the penalty [.]28 chanroble svi rtual lawlib rary

In calibrating the amount of liquidated damages, the Court of Appeals cited Articles
122929 and 222730 of the Civil Code. It reasoned that through its March 29, 1999 letter,
Pilhino made an attempt at rectification or mitigation: ChanRoblesVi rtua lawlib rary

In the instant case, we consider the supervening reality that after appellant's failure to
deliver to appellee the two (2) brand new units of fire trucks in accordance with the
specifications previously agreed upon, appellant nevertheless tried to remedy the
situation by offering to appellee new specifications at P3,600,000.00 per unit; and
expressed willingness to shoulder the difference between the original price (based on
the contract) of P2,900,000.00 per unit and the price corresponding to the new
specifications. Further, it is undisputed that appellee has not paid any amount to
appellant in connection with said undelivered two (2) brand new units of fire trucks. We
thus equitably reduce said liquidated damages to P1,400,000.00, which is the difference
between the contract price of P5,800,000.00 and P7,200,000.00 based on the new
specifications for two (2) new units of fire trucks.31 chanroblesvi rt uallawl ibra ry

The Philippine Economic Zone Authority moved for reconsideration of the modifications
to the Regional Trial Court's award. As this Motion was denied in the Court of Appeals'
assailed November 25, 2008 Resolution,32 the Philippine Economic Zone Authority filed
the present Petition.

Petitioner asks for the reinstatement of the Regional Trial Court's award asserting that
it already suffered damage when respondent Pilhino Sales Corporation failed to deliver
the trucks on time;33 that the contractually stipulated penalty of 1/10 of 1% of the
contract price for every day of delay was neither unreasonable34 nor contrary to law,
morals, or public order;35 that the stipulation on liquidated damages was freely entered
into by it and respondent;36 and that the Court of Appeals' computation had no basis in
fact and law.37 Regarding respondent's supposed attempt at mitigation, petitioner notes
that by the time the offer was made, the Complaint for rescission and damages had
already been filed38 and was, therefore, inconsequential and hardly a remedy.

Commenting on petitioner's Petition,39 respondent raises the question of: ChanRoblesVirtualawl ibra ry

Whether or not a contract can be rescinded and declared void ab initio, and then thus
rescinded, can a stipulation for liquidated damages or penalty contained in that very
same contract be given separate life, force and effect, that is, separate and distinct
from the rescinded and voided contract itself?40chanro blesvi rt uallawl ibra ry
Therefore, respondent suggests that with the rescission of its contract with petitioner
must have come the negation of the contractual stipulation on liquidated damages and
the obliteration of its liability for such liquidated damages.41 chanroble slaw

We resolve the twin issues of:

First, the propriety of an award based on contractually stipulated liquidated damages

chanRoble svirtual Lawlib ra ry

notwithstanding the rescission of the same contract stipulating it; and cralawlawlib rary

Second, on the assumption that such award is proper, the propriety of the Court of
Appeals' reduction of the liquidated damages due to petitioner.

Respondent's intimation that with the rescission of a contract necessarily and

inexorably follows the obliteration of liability for what the same contracts stipulates as
liquidated damages42 is entirely misplaced.

A contract of. sale, such as that entered into by petitioner and respondent, entails
reciprocal obligations. As explained in Spouses Velarde v. Court of Appeals,43 "[i]n a
contract of sale, the seller obligates itself to transfer the ownership of and deliver a
determinate thing, and the buyer to pay therefor a price certain in money or its
equivalent."44 chanrob leslaw

Rescission on account of breach of reciprocal obligations is provided for in Article 1191

of the Civil Code: ChanRoblesVirtualawli bra ry

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 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.
(Emphasis supplied)
Respondent correctly notes that rescission under Article 1911 results in mutual
restitution. Jurisprudence has long settled that the restoration of the contracting parties
to their original state is the very essence of rescission. In Spouses Velarde: ChanRoblesVi rtua lawlib rary

Considering that the rescission of the contract is based on Article 1191 of the Civil
Code, mutual restitution is required to bring back the parties to their original situation
prior to the inception of the contract. Accordingly, the initial payment of P800,000 and
the corresponding mortgage payments . . . should be returned by private respondents,
lest the latter unjustly enrich themselves at the expense of the former.

Rescission creates the obligation to return the object of the contract. It can be carried
out only when the one who demands rescission can return whatever he may be obliged
to restore. To rescind is to declare a contract void at its inception and to put an end to
it as though it never was. It is not merely to terminate it and release the parties from
further obligations to each other, but to abrogate it from the beginning and restore the
parties to their relative positions as if no contract has been made.45 (Citations omitted)
Laperal v. Solid Homes, Inc.46 has explained how the restitution spoken of in rescission
under Article 1385 of the Civil Code equally holds true for rescission under Article 1191
of the Civil Code:ChanRoblesVirtualawli bra ry

Despite the fact that Article 1124 of the old Civil Code from whence Article 1191 was
taken, used the term "resolution", the amendment thereto (presently, Article 1191)
explicitly and clearly used the term "rescission". Unless Article 1191 is subsequently
amended to revert back to the term "resolution", this Court has no alternative but to
apply the law, as it is written.

Again, 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.

In Palay, Inc. vs. Clave, this Court applied Article 1385 in a case involving "resolution"
under Article 1191, thus: ChanRoblesVirtualawl ibra ry

Regarding the second issue on refund of the installment payments made by private
respondent. Article 1385 of the Civil Code provides: ChanRoblesVirtualawl ibra ry

"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 obliged 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."
As a consequence of the resolution by petitioners, rights to the lot should be restored to
private respondent or the same should be replaced by another acceptable lot. However,
considering that the property had already been sold to a third person and there is no
evidence on record that other lots are still available, private respondent is entitled to
the refund of installments paid plus interest at the legal rate of 12% computed from the
date of the institution of the action. It would be most inequitable if petitioners were to
be allowed to retain private respondent's payments and at the same time appropriate
the proceeds of the second sale to another.
Applying the clear language of the law and the consistent jurisprudence on the matter,
therefore, the Court rules that rescission under Article 1191 in the present case, carries
with it the corresponding obligation of restitution.47 (Citations omitted)
Contrary to respondent's assertion, mutual restitution under Article 1191 is, however,
no license for the negation of contractually stipulated liquidated damages.

Article 1191 itself clearly states that the options of rescission and specific performance
come with "with the payment of damages in either case." The very same breach or
delay in performance that triggers rescission is what makes damages due.

When the contracting parties, by their own free acts of will, agreed on what these
damages ought to be, they established the law between themselves. Their
contemplation of the consequences proper in the event of a breach has been
articulated. When courts are, thereafter, confronted with the need to award damages in
tandem with rescission, courts must not lose sight of how the parties have explicitly
stated, in their own language, these consequences. To uphold both Article 1191 of the
Civil Code and the parties' will, contractually stipulated liquidated damages must, as a
rule,48 be maintained.

What respondent purports to be the ensuing nullification of liquidated damages is not a

novel question in jurisprudence. This matter has been settled, and respondent's
position has been rebuked. In Laperal: ChanRoblesVirt ualawli bra ry

This notwithstanding, the Court does not agree with the Court of Appeals that, as a
consequence of the obligation of mutual restitution in this case, petitioners should
return the amount of P5,200,833.27 to respondent.

Article 1191 states that "the injured party may choose between fulfillment and
rescission of the obligation, with the payment of damages in either case." In other
words, while petitioners are indeed obliged to return the said amount to respondent
under Article 1385, assuming said figure is correct, respondent is at the same time
liable to petitioners in the same amount as liquidated damages by virtue of the
forfeiture/penalty clause as freely stipulated upon by the parties in the Addendum,
paragraphs 1 and 2 of which respectively read: ChanRoblesVi rtua lawlib rary

WHEREAS, included as part of said agreement are the following:

1. Further to the stipulations on paragraph 10, upon default of performances,

chanRoble svirtual Lawlib ra ry

violations and/or non-compliance with the terms and conditions herein agreed upon by
the DEVELOPER wherein it appears that the DEVELOPER deliberately abandoned or
discontinued the work on the project, said party shall lose any entitlement, if any, to
any refund and/or advances it may have incurred in connection with or relative to
previous development works in the subdivision; likewise, all improvements of whatever
nature and kind introduced by the DEVELOPER on the property, existing as of the date
of default or violation, shall automatically belong to the OWNER without obligation on
his part to pay for the costs thereof.

2. Similarly with the same condition of default or violation obtaining, as stated in

paragraph 10 of said agreement, all advances made and remittances of proceeds from
reservations and sales given by the DEVELOPER to the OWNER as provided for in this
agreement shall be deemed absolutely forfeited in favor of the OWNER, resulting to
waiver of DEVELOPER'S rights, if any, with respect to said amount(s).
If this Court recognized the right of the parties to stipulate on an extrajudicial rescission
under Article 1191, there is no reason why this Court will not allow the parties to
stipulate on the matter of damages in case of such rescission under Book IV, Title VIII,
Chapter 3, Section 2 of the Civil Code governing liquidated damages.49 (Citations
omitted)
We see no reason for departing from this. It is true that Laperal involved extrajudicial
rescission, while this case involves rescission through judicial action. The distinction
between judicial and extrajudicial rescission is in how extrajudicial rescission is possible
only when the contract has an express stipulation to that effect.50 This distinction does
not diminish the rights of a contracting party under Article 1191 of the Civil Code and is
immaterial for purposes of the availability of liquidated damages.

To sustain respondent's claim would be to sustain an absurdity and an injustice.

Respondent's position suggests that with rescission must necessarily come the
obliteration of the punitive consequence which, to begin with, was the product of its
own (along with the other contracting party's) volition. Its position turns delinquency
into a profitable enterprise, enabling contractual breach to itself be the means for
evading its own fallout. It is a position we cannot tolerate.

II

In calibrating the amount of liquidated damages, the Court of Appeals relied on how
respondent supposedly attempted to rectify things "by offering to [petitioner] new
specifications at P3,600,000.00 per unit; and expressed willingness to shoulder the
difference between the original price (based on the contract) of P2,900,000.00 per unit
and the price corresponding to the new specifications."51 chanrob leslaw

As underscored by petitioner, however, this offer was inconsequential and hardly a

remedy to the predicament it found itself in.

Petitioner already suffered damage by respondent's mere delay. Philippine Economic

Zone Authority Director General Lilia B. De Lima's internal memorandum to its Board of
Directors emphasized what was, at the time, the specific urgency of obtaining fire
trucks: ChanRoblesVirtualawl ibra ry

1. With the increase in the number of locator-enterprises at the regular zones, there is
a need for additional units of fire trucks to address any eventuality. The onset of the El
Niño phenomena further makes it imperative that PEZA be more prepared.

2. At present, there are only six (6) units of serviceable fire trucks distributed as
follows:
chanRoble svirtual Lawlib ra ry

Bataan EZ 2
Baguio City EZ 1
Cavite EZ 1
Mactan EZ 252 (Emphasis supplied)
The Court of Appeals itself recognized that "time was of the essence when the contract
. . . was awarded to [respondent] and the non-compliance therewith exposed
[petitioner's] operations [at] risk."53 chanrob leslaw

Respondent's attempt at rectification came too late and under such circumstances that
petitioner was no longer even in a position to accept respondent's offer. As petitioner
notes, by the time respondent made its offer, the Complaint for rescission and damages
had already been filed before the Regional-Trial Court of Pasay City.54 If at all, the offer
was nothing more than a belated reaction to undercut litigation.
By the time respondent made its attempt at rectification, petitioner was no longer
capable of accommodating contractual modifications. Jurisprudence has established the
impropriety of modifying awarded contracts that were previously subjected to public
bidding, such as that between petitioner and respondent: ChanRoblesVi rtua lawlib rary

An essential element of a publicly bidded contract is that all bidders must be on equal
footing. Not simply in terms of application of the procedural rules and regulations
imposed by the relevant government agency, but more importantly, on the contract
bidded upon. Each bidder must be able to bid on the same thing. The rationale is
obvious. If the winning bidder is allowed to later include or modify certain provisions in
the contract awarded such that the contract is altered in any material respect, then the
essence of fair competition in the public bidding is destroyed. A public bidding would
indeed be a farce if after the contract is awarded, the winning bidder may modify the
contract and include provisions which are favorable to it that were not previously made
available to the other bidders. Thus: ChanRoblesVi rtua lawlib rary

It is inherent in public biddings that there shall be a fair competition among the bidders.
The specifications in such biddings provide the common ground or basis for the bidders.
The specifications should, accordingly, operate equally or indiscriminately upon all
bidders.
The same rule was restated by Chief Justice Stuart of the Supreme Court of
Minnesota: ChanRoblesVi rtua lawlib rary

The law is well settled that where, as in this case, municipal authorities can only let a
contract for public work to the lowest responsible bidder, the proposals and
specifications therefore must be so framed as to permit free and full competition. Nor
can they enter into a contract with the best bidder containing substantial provisions
beneficial to him, not included or contemplated in the terms and specifications upon
which the bids were invited.55 (Emphasis supplied)
By definition, liquidated damages are a penalty, meant to impress upon defaulting
obligors the graver consequences of their own culpability. Liquidated damages must
necessarily make non-compliance more cumbersome than compliance. Otherwise,
contracts might as well make no threat of a penalty at all: ChanRoblesVi rtua lawlib rary

Liquidated damages are those that the parties agree to be paid in case of a breach. As
worded, the amount agreed upon answers for damages suffered by the owner due to
delays in the completion of the project. Under Philippine laws, these damages take the
nature of penalties. A penal clause is an accessory undertaking to assume greater
liability in case of a breach. It is attached to an obligation in order to ensure
performance.56 (Citations omitted)
Respondent cannot now balk at the natural result of its own breach. As for the Court of
Appeals, we find it to be in error in frustrating the express terms of the contract that
respondent actively endeavored to be awarded to it. The exigencies that impelled
petitioner to obtain fire trucks made it imperative for respondent to act with dispatch.
Instead, it dragged its feet, left petitioner with inadequate means for addressing the
very emergencies that engendered the need for fire trucks, and forced it into litigation
to enforce its rights.

WHEREFORE, the Petition is GRANTED. The assailed May 2, 2008 Decision and
November 25, 2008 Resolution of the Court of Appeals in CA G.R. CV No. 86406
are REVERSED and SET ASIDE. The Decision dated November 2, 2005 of Branch 108
of the Regional Trial Court of Pasay City in Civil Case No. 00-0343 is REINSTATED.

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 181983 November 13, 2013

CONSOLIDATED INDUSTRIAL GASES, INC., Petitioner,

vs.
ALABANG MEDICAL CENTER, Respondent.

DECISION

REYES, J.:

This is a petition for review on Certiorari1 under Rule 45 of the Rules of Court seeking to annul and
set aside the Amended Decision2 dated March 4, 2008 of the Court of Appeals CA) in CA-G.R. CV
No. 84988 which, among others, reversed the Decision3 dated June 30, 2004 of the Regional Trial
Court (RTC) of Mandaluyong City, Branch 213, finding respondent Alabang Medical Center (AMC) to
have breached its contract with petitioner Consolidated Industrial Gases, Inc. (CIGI).

The Antecedents

CIGI is a domestic corporation engaged in the business of selling industrial gases (i.e., oxygen,
hydrogen and acetylene) and installing centralized medical and vacuum pipeline system.
Respondent AMC, on the other hand, is a domestic corporation operating a hospital business.

On August 14, 1995, CIGI, as contractor and AMC, as owner, entered into a contract4 whereby the
former bound itself to provide labor and materials for the installation of a medical gas pipeline
system for the first, second and third floors (Phase 1 installation project) of the hospital for the
contract price of Nine Million Eight Hundred Fifty-Six Thousand Seven Hundred Twenty-Five Pesos
and 18/100 (₱9,856,725.18) which AMC duly paid in full.

The herein legal controversy arose after the parties entered into another agreement on October 3,
1996 this time for the continuation of the centralized medical oxygen and vacuum pipeline system in
the hospital’s fourth & fifth floors (Phase 2 installation project) at the cost of Two Million Two
Hundred Sixty-Seven Thousand Three Hundred Forty-Four Pesos and 42/100 (₱2,267,344.42). This
second contract followed the same terms and conditions of the contract for the Phase 1 installation
project. CIGI forthwith commenced installation works for Phase 2 while AMC paid the partial amount
of One Million Pesos (₱1,000,000.00) with the agreement that the balance shall be paid through
progress billing and within fifteen (15) days from the date of receipt of the original invoice sent by
CIGI.5

On August 4, 1997, CIGI sent AMC Charge Sales Invoice No. 125847 as completion billing for the
unpaid balance of ₱1,267,344.42 for the Phase 2 installation project. When the sales invoice was left
unheeded, CIGI sent a demand letter to AMC on January 7, 1998. AMC, however, still failed to pay
thus prompting CIGI to file a collection suit before the RTC on September 15, 1998.6

CIGI claimed that AMC’s obligation to pay the outstanding balance of the contract price for the
Phase 2 installation project is already due and demandable pursuant to Article II, page 4 of the
contract stating that the project shall be paid through progress billing within fifteen (15) days from the
date of receipt of original invoice.

In its Answer with Counterclaim,7 AMC averred that its obligation to pay the balance of the contract
price has not yet accrued because CIGI still has not turned over a complete and functional medical
oxygen and vacuum pipeline system. AMC alleged that CIGI has not yet tested Phases 1 and 2
which constitute one centralized medical oxygen and vacuum pipeline system of the hospital despite
substantial payments already made. As counterclaim, AMC prayed for actual, moral and exemplary
damages, and attorney’s fees.

During trial, CIGI presented the testimonies of its officers, James Rodriguez Gillego (Gillego), Credit
Manager and Marcelino Tolentino (Tolentino), Installation Manager. Gillego confirmed the unpaid
balance of AMC as well as its additional liabilities for interest and penalty charges at 17% per annum
and 2% per month, respectively.8

Tolentino, on the other hand, declared that CIGI failed to test the installed system because AMC did
not supply the necessary electrical power.9 He claimed that they finished the installation project in
October 1997 or within the period specified in the contract.10 CIGI verbally notified Dr. Anita Ty (Dr.
Ty), AMC’s Medical Director, on the need for electrical power for the test run but she did not
respond. On August 23, 1999, they put the request in writing.11

Tolentino also stated that Phase 2 is an extension of the Phase 1 installation project such that both
phases are not independent of each other. If Phase 2 is not subjected to test run, Phase 1 will not
run.12 It was Mr. Gavino Pineda (Pineda), his supervisor, and not him, who personally informed Dr.
Ty that CIGI is ready to conduct a test run.13

Tolentino admitted that, contrary to what was agreed in the contract, CIGI has not conducted
commissioning and lecture on the proper operation and preventive maintenance of the installed
system and that the said seminar/orientation does not require the use of electricity.14 However, the
seminar can only be conducted once they have already fully turned over the system which can only
happen after they have performed a test run, which likewise did not materialize because AMC did
not supply the necessary electrical power.15

AMC presented Dr. Ty and Melinda Constantino (Constantino), account and administrative officer of
AMC. Dr. Ty testified that the payment of the unpaid balance is not yet due because the project is
incomplete, defective and non-functional.16 She claimed that CIGI failed to comply with its obligation
under paragraph 12 of the October 3, 1996 contract for Phase 2 installation project stating that the
scope of CIGI’s work shall include pressure drop, leak testing, painting/color coding and test run of
the installed centralized medical oxygen and vacuum pipeline system.17 On cross-examination, Dr.
Ty asserted that as agreed, the balance of the contract price shall be paid once CIGI finishes its
work under the contract.18 She denied receiving any request from CIGI regarding the installation of
electricity for purposes of test run. She claimed that CIGI brought up the matter on electricity when it
was already collecting the unpaid balance but no such request was made prior to their demand for
payment.19 Before the hospital became operational, it was equipped with electrical facilities for
construction which can adequately support the power need of a mere test run.20

Constantino testified on the total payments already made by AMC to CIGI in the sum of
₱10,856,000.00 as shown by several Metropolitan Bank (Metrobank) checks payable to CIGI
marked as Exhibits "5" to "5-1".21

CIGI submitted in evidence photographs of allegedly defective and incomplete parts of the installed
medical oxygen and vacuum pipeline system, such as: (a) a rusting pendant which is supposed to
be stainless and anti-rust; (b) incomplete assembly of alarm system; (c) incomplete assembly of
isolation valve; and (d) incomplete electrical wiring of Pegasus and leaking oil.22

On June 11, 2003, AMC filed a Motion for Leave of Court to Admit Amended Answer with
Counterclaims23 seeking, in addition, the rescission of the subject contracts, return of its payment of
₱10,856,000.00 for an unfinished project. AMC also asked that it be recompensed in the sum of
₱17,220,084.90 for interest expense on the loans obtained from Metrobank which were used to fund
the installation projects. It further averred that CIGI’s failure to complete the system is shown not
only in its failure to conduct the agreed test run and orientation/seminar but also in the patently
defective and incomplete parts of the installation.

In its Order24 dated September 11, 2003, the RTC denied the motion because its admission will
compel CIGI to substantially alter the presentation of its evidence and thus delay the resolution of
the case. The RTC further reasoned that AMC’s failure to amend its answer will not affect the result
of the trial.

Ruling of the RTC

After the parties have submitted their respective memorandum, the RTC rendered its
Decision25 dated June 30, 2004, wherein it adjudged AMC to have breached the contract for failure to
perform its obligation of paying the remaining balance of the contract price. CIGI, on the other hand,
was found to have faithfully complied with its contractual obligations. In so ruling, the RTC relied on
Tolentino’s testimony that they were unable to test run the installed system because AMC failed to
provide the necessary electrical power despite repeated requests made to Dr. Ty.26 AMC’s
counterclaim for damages was dismissed. Accordingly, the decision disposed as follows:

Prescinding from the foregoing considerations, judgment is hereby rendered in favor of the
[petitioner] CONSOLIDATED INDUSTRIAL GASES, INC., and against the [respondent] ALABANG
MEDICAL CENTER represented by its owner/Chairman of the Board Anita Ty. The counterclaim is
likewise, accordingly ordered D[IS]MISSED.

As PRAYED FOR, the [respondent] is hereby ordered:

[a] To pay the amount of ONE MILLION TWO HUNDRED SIXTY[-]SEVEN THOUSAND
THREE HUNDRED FORTY[-]FOUR AND 42/100 [Php 1,267,344.42] Philippine Currency,
representing the balance of the principal obligations.

[b] To pay the corresponding legal interest until said obligation shall have been paid and
settled and cost of suit.

SO ORDERED.27

Ruling of the CA

AMC appealed to the CA which in its Decision28 dated September 14, 2007 granted the appeal and
reversed the RTC judgment. The CA ruled that it was CIGI who breached the contract when it failed
to complete the project and to turn over a fully functional centralized medical oxygen and vacuum
pipeline system. Consequently, the CA declared the complaint dismissed and ordered CIGI to
correct/replace the defective parts installed. AMC was adjudged entitled to attorney’s fees for CIGI’s
unfounded action. AMC’s counterclaim for ₱17,220,084.90 as actual damages representing alleged
interest payments on the loans it obtained from Metrobank was denied for lack of factual and legal
basis. The decretal portion of the Decision reads:

WHEREFORE, the decision of the Regional Trial Court dated June 30, 2004 is hereby REVERSED
and SET ASIDE. The complaint is hereby dismissed and CIGI is hereby ordered to pay AMC the
sum of ₱50,000.00 by way of attorney’s fees plus costs.

SO ORDERED.29

AMC moved for partial reconsideration raising the propriety of its counterclaim for the refund of the
₱10,856,725.18 paid to CIGI since the project never became operational.30

In its Comment31 and own Motion for Reconsideration32, CIGI countered that a refund will amount to
rescission, an issue which was denied deliberation by the RTC. As such, the same cannot be raised
and threshed out for the first time on appeal. CIGI shifted the blame to AMC and claims that it could
have easily conducted a test run on the system if the latter supplied the electricity needed in
accordance with the contract. Anent the alleged defective parts, CIGI asserted that it is highly
suspect for AMC to raise the same four years after the filing of the complaint. CIGI also stated that
being idle and exposed to various elements, the condition of certain parts of the system will definitely
deteriorate.

The CA re-examined its earlier decision and issued an Amended Decision33 dated March 4, 2008. It
took into consideration AMC’s manifestation that it is willing to pay the balance of ₱1,267,344.42 on
the condition that CIGI will turn over a fully functional centralized medical oxygen and vacuum
pipeline system.34 The CA found that CIGI reneged on its obligation under the contract when it failed
to test run the installed system. The Amended Decision disposed as follows, viz:

WHEREFORE, this Amended Decision is rendered [PARTIALLY] GRANTING AMC’s Partial Motion
for Reconsideration dated 25 September 2007. Accordingly, CIGI is given a reasonable period of
sixty (60) days from the finality of this Decision to correct and/or replace the defective parts
mentioned in this Decision and turn over a fully functional centralized medical oxygen and vacuum
pipeline system. AMC, in turn, is directed to provide the required facilities such as water and
electricity during installation free of charge and to pay within five (5) days from the turn over the
unpaid balance in the sum of ₱1,267,344.42 to CIGI. Failure of CIGI to turn over a fully functional
centralized medical oxygen and vacuum pipeline system will result to the rescission of the contract.
As a legal consequence, within ten (10) days from the rescission of the contract CIGI should return
the sum of ₱10,856,725.18 to AMC and remove the materials and equipments it installed at AMC
within ninety (90) days from the rescission of the contract, at its own expense. The motion for
reconsideration dated 08 October 2007 filed by CIGI is DENIEDfor lack of merit. The Decision dated
30 June 2004 of the Regional Trial Court is hereby REVERSED and SET ASIDE. The complaint is
dismissed and CIGI is ordered to pay AMC the sum of ₱50,000.00 by way of attorney’s fees plus
costs.

SO ORDERED.35

Dismayed, CIGI interposed the present recourse alleging, in the main, that the CA committed
misapprehension of facts. CIGI maintained that AMC refused to provide the necessary electrical
facilities for the test run and that under the contract, CIGI was merely required to provide labor and
materials. CIGI averred that the CA erred in relying on the testimony of Tolentino because he never
specifically declared that CIGI did not complete the project. CIGI prayed that the decision of the RTC
ordering AMC to pay the balance of the contract price be reinstated.
 The Issue

The core issue for resolution is whether or not CIGI’s demand for payment upon AMC is proper.

Ruling of the Court

Primarily, the arguments proffered by CIGI involve questions of fact which are beyond the scope of
the Court’s judicial review under Rule 45 of the Rules of Court. It is a settled rule that the Court
examines only questions of law on appeal and not questions of facts. However, jurisprudence has
recognized several exceptions in which factual issues may be resolved by the Court, such as when
the factual findings of the courts a quo are conflicting,36 as in this case.

The incongruity in the findings of the RTC and CA is conspicuous. On one hand, the RTC granted
CIGI’s complaint for sum of money and adjudged AMC as the defaulting party. On the other hand,
the CA, while sustaining AMC’s liability for CIGI’s monetary claim, held the latter as the party who
breached the installation contracts. A review of the contradicting findings of the courts a quo is thus
in order so as to finally settle the conflicting claims of the parties.

The subject installation contracts

bear the features of reciprocal
obligations.

"Reciprocal obligations are those which arise from the same cause, and in which each party is a
debtor and a creditor of the other, such that the obligation of one is dependent upon the obligation of
the other. They are to be performed simultaneously, so that the performance of one is conditioned
upon the simultaneous fulfillment of the other."37 In reciprocal obligations, neither party incurs in
delay if the other does not comply or is not ready to comply in a proper manner with what is
incumbent upon him. From the moment one of the parties fulfils his obligation, delay by the other
begins.38

Under the subject contracts, CIGI as contractor bound itself to install a centralized medical oxygen
and vacuum pipeline system for the first to fifth floors of AMC, which in turn, undertook to pay the
contract price therefor in the manner prescribed in the contract. Being reciprocal in nature, the
respective obligations of AMC and CIGI are dependent upon the performance of the other of its end
of the deal such that any claim of delay or non-performance can only prosper if the complaining
party has faithfully complied with its own obligation.

Here, CIGI complains that AMC refused to abide by its undertaking of full payment. While AMC does
not dispute its liability to pay the balance of ₱1,267,344.42 being claimed by CIGI, it asserts,
however that the same is not yet due because CIGI still has not turned over a complete and
functional medical oxygen and vacuum pipeline system. CIGI is yet to conduct a test run of the
installation and an orientation/seminar of AMC employees who will be involved in the operation of
the system. CIGI, on the other hand, does not deny that it failed to conduct the agreed
orientation/seminar and test run but it blames AMC for such omission and asserts that the latter
failed to heed CIGI’s request for electrical facilities necessary for the test run. CIGI also contends
that its obligation is merely to provide labor and installation.

The Court has painstakingly evaluated the records of the case and based thereon, there can be no
other conclusion than that CIGI’s allegations failed to muster merit. The Court finds that CIGI did not
faithfully complete its prestations and hence, its demand for payment cannot prosper based on the
following grounds: (a) under the two installation contracts, CIGI was bound to perform more
prestations than merely supplying labor and materials; and (b) CIGI failed to prove by substantial
evidence that it requested AMC for electrical facilities as such, its failure to conduct a test run and
orientation/seminar is unjustified.

A. Under the installation

contracts, CIGI was bound to
perform more prestations than
merely supplying labor and
materials.

It is hornbook doctrine in the law on contracts that the parties are bound by the stipulations, clauses,
terms and conditions they have agreed to provided that such stipulations, clauses, terms and
conditions are not contrary to law, morals, public order or public policy.39 In the present case, we find
no legal proscription infringed by the terms and conditions of the contracts between AMC and CIGI.
As such, the said terms and conditions must be held to be the law between them40 and the parties
are bound to fulfill what has been stipulated.

Both of the installation contracts clearly show that CIGI undertook to carry out more prestations than
merely supplying labor and materials for the medical oxygen and vacuum pipeline system. CIGI
agreed also: (a) to perform a pressure drop, leak testing, test run, painting/color coding of the
installed centralized medical oxygen, vacuum and nitrous oxide pipeline system; and (b) to conduct
orientation, seminars and training for the AMC employees who will be involved in the operation of
the centralized pipeline system before the formal turnover of the project. This is evident from the
herein reproduced provisions of the installation contracts.

Article I of the Phase 1 installation contract enumerates the following undertakings of CIGI, viz:

1.1 Preparation and delivery of materials, tools and equipment from CIGI, Mandaluyong, to
Alabang Medical Center’s site of installation.

1.2 Degreasing and proper cleaning of deoxidized hard seamless copper tubes, fittings,
valves and other parts prior to installations.

1.3 Supply, fabrication and installation of necessary brackets and clamps to comply with the
standard Medical gas pipeline and other equipment installation.

1.4 Chiseling, boring and re-plastering of affected concrete walls for pipeline route.

[1.5 -1. 23 Supply and installation of various structures and parts of the medical oxygen and
vacuum pipeline system].

1.24 Pressure drop, leak testing, test-run, painting/color coding of the installed centralized
medical oxygen, vacuum and nitrous oxide pipeline system.41 (Emphasis ours)

Meanwhile, Phase 2 installation contract, which follows the same terms and conditions of the Phase
1 installation contract, itemizes the prestations due from CIGI as follows:

1. Preparation and delivery of materials, tools and equipment from CIGI-Head Office to
Alabang Medical Center site of installation.

2. Degreasing and proper cleaning of deoxidized hard seamless copper tubes, fittings,
valves and other parts prior to installation.
 3. Chiselling, boring and replastering of affected concrete walls for pipeline route.

4. Supply, fabrication and installation necessary brackets and clamps to comply with the
standard medical gases pipeline and other equipment installation.

5. Supply, layout and installation of deoxidized hard seamless copper tubes and fittings and
to be tapped from the existing riser of medical oxygen and vacuum pipeline system installed
at third floor.

6. Supply and installation of two (2) units OHMEDA flush mount wall type isolation valve
panel, each equipped with shut-off valve for oxygen and vacuum pipeline with corresponding
pressure indicator.

7. Supply and installation of sixty[-]nine (69) sets OHMEDA flush mount wall type medical
Oxygen and Vacuum Outlets, each consist of rough-in and finish assembly.

xxxx

8. Supply and installation of sixty[-]nine (69) sets MEDAES DISS III flush mount wall type
medical vacuum outlets, each consists of rough in and finish assembly.

9. Supply and installation of sixty[-]nine (69) sets MEDAES stainless steel surface mount wall
type vacuum bottle slides each complete with stainless mounting screw.

10. Supply and installation of two (2) sets MEDAES Area Line Pressure Alarm for Oxygen
and Vacuum Pipeline System, each equipped with pressure switch, pressure indicator, lights
indicator for each gas supply status and necessary electrical wiring materials which are to be
installed at the Nurses station of Fourth Floor.

11. Supply of [certain] secondary equipments.

xxxx

12. Pressure drop, leak testing, painting/color coding and test run of the installed centralized
medical oxygen and vacuum pipeline system.42 (Emphasis ours)

Anent the conduct of orientation/seminar on the operation of the centralized medical oxygen and
vacuum pipeline system, both contracts state:

Article 10 of Phase 1 installation contract:

10. SEMINARS/TRAINING:

The CONTRACTOR shall conduct orientation, seminars and training to the center’s employees
involved in the operation of the centralized pipeline system before the formal turn-over of the project.
Such training includes proper operation and preventive maintenance of the system.43

Articles VI(c) and VII(3) of Phase 2 installation contract:

c. Seminars/Training
CIGI shall conduct orientation, seminars and training to AMC’s employees involved in the operation
of the centralized pipeline system before the formal turn-over of the project. Such training includes
proper operation and preventive [sic]

xxxx

3. CIGI to execute all necessary commissioning and lecture re-proper operation and preventive
maintenance of the installed system and shall hand-over to Alabang Medical Center fully
operational.44

Clearly, CIGI’s reciprocal obligation was not merely to supply labor and materials for the project. It is
unmistakable from the foregoing contractual provisions that CIGI agreed to carry out a test run of the
installation as well as to conduct an orientation/seminar of AMC employees who will be involved in
its operation. CIGI cannot be permitted to disregard the binding effect of the contracts it voluntarily
assumed by conveniently renouncing its above-mentioned contractual commitments. Otherwise, the
sanctity of its contracts with AMC will be defiled.

B. CIGI failed to prove by

substantial evidence that it
requested AMC for electrical
facilities as such, its failure to
conduct a test run and
orientation/seminar is unjustified.

CIGI failed to amply support its allegation that it requested for electrical facilities from AMC.
Tolentino, CIGI’s installation manager, testified that on August 23, 1999 they requested in writing for
the electrical facilities but no evidence of such document was submitted. It is but a self-serving
allegation, which by law is not equivalent to proof.45 In addition, Pineda, the one who actually sent the
request was not presented as witness thereby making Tolentino’s statement mere hearsay evidence
bearing no probative value.

Settled is the rule that a witness can testify only to those facts which he knows of his personal
knowledge, which means those facts which are derived from his own perception. A witness may not
testify as to what he merely learned from others either because he was told or read or heard the
same. Such testimony is considered hearsay and may not be received as proof of the truth of what
he has learned.46

While Tolentino’s testimony may be considered as independently relevant statement and may be
admitted as to the fact that Pineda made utterances to him about the request for electricity, it is still
inadequate to support the claim that AMC reneged on its obligation to provide electrical facilities.
Admissibility of testimony should not be equated with its weight and sufficiency. Admissibility of
evidence depends on its relevance and competence, while the weight of evidence pertains to
evidence already admitted and its tendency to convince and persuade.47 Here, the Court finds no
reason to doubt and overturn the CA’s evaluation of Tolentino’s testimony.

Even assuming that CIGI indeed made such request, it is unbelievable for AMC not to furnish
electrical facilities. As correctly observed by the CA, it is unlikely for AMC not to spend minimal
amount for the test run and risk the completion of its multi-million peso medical oxygen and vacuum
pipeline system. Further, the language of Article VII(2) of the Phase 2 installation contract, which
embodies AMC’s duty to provide electrical facilities for the test run, indicates the availability of
electrical facilities in the installation site such that AMC needed only to allow CIGI
personnel/technicians to use or access the same, viz:
2. Alabang Medical Center to allow CIGI personnel/technicians to utilize the required facilities such
as water and power during installation free of charge.48

It is thus highly improbable for AMC to deny CIGI personnel and technicians mere access to already
existing electrical facilities and thereby jeopardize the operations of the hospital.

From the foregoing, it is clear

that AMC’s obligation to pay
and CIGI’s right to demand the
unpaid balance for the Phase 2
installation project have not yet
accrued.

For failure to prove that it requested for electrical facilities from AMC, the undisputed matter remains
– CIGI failed to conduct the stipulated test run and seminar/orientation. Consequently, the dismissal
of CIGI’s collection suit is imperative as the balance of the contract price is not yet demandable. For
having failed to perform its correlative obligation to AMC under their reciprocal contract, CIGI cannot
unilaterally demand for the payment of the remaining balance by simply sending an invoice and
billing statement to the former. Its right to demand for and collect payment will only arise upon its
completion of ALL its prestations under the subject contracts.

In reciprocal obligations, before a party can demand the performance of the obligation of the other,
the former must also perform its own obligation.49 For its failure to turn over a complete project in
accordance with the terms and conditions of the installation contracts, CIGI cannot demand for the
payment of the contract price balance from AMC, which, in turn, cannot legally be ordered to pay.
Otherwise, AMC will be effectively forced to accept an incomplete performance contrary to Article
1248 of the Civil Code which states that "(u)nless there is an express stipulation to that effect, the
creditor cannot be compelled partially to receive the prestations in which the obligation consists."

Considering that AMC’s obligation to pay the balance of the contract price did not accrue, the
stipulated interest thereon also did not begin to run.

CIGI also failed to fully comply

with its prestations under the
Phase 1 installation contract.

It must be noted that, although Phases 1 and 2 installation projects are covered by separate
contracts, they nonetheless comprise one centralized medical oxygen system such that the agreed
test run and seminar/orientation under the Phase 1 contract cannot be performed unless and until
the Phase 2 installation project is finished and completed.50 In other words, both phases will have to
undergo a single and simultaneous test run and orientation on their manner of operation.

As such, while the subject of the herein complaint for sum of money pertained only to the Phase 2
installation contract, the violations committed by CIGI that prevented its cause of action to accrue
broadly affected the initially non-issue Phase 1 contract.

It having been established that CIGI’s avowed but infringed duty to perform a test run and
orientation/seminar was contained in both Phases 1 and 2 installation contracts, it is imperative to
declare that it is liable not only for the herein subject Phase 2 contract but under the Phase 1
contract as well so as to arrive at an absolute and comprehensive resolution of the impasse between
the parties.
Hence, regardless of whether or not the Phases 1 and 2 installation projects are independent of
each other, CIGI violated the terms of the individual contracts for both.
The foregoing pronouncement
notwithstanding, the Court finds
that the breach committed by CIGI
does not justify the rescission of the
installation contracts.

The denial of AMC’s amended counterclaim specifically praying for rescission does not bar a
discussion of such issue on appeal. Rescission was pleaded in AMC’s original Answer with
Counterclaim when it implored the RTC for "other reliefs and remedies consistent with law and
equity are prayed for."51 The standing rule is that "[t]he prayer in the complaint for other reliefs
equitable and just in the premises justifies the grant of a relief not otherwise specifically prayed
for."52 This rule conveys the inference that reliefs not specifically pleaded but included in a general
prayer for other equitable reliefs may be threshed out by the courts.

The Court, however, finds that AMC has no legal basis to demand the rescission of the installation
contracts. "[R]escission of a contract will not be permitted for a slight or casual breach, but only for
such substantial and fundamental violations as would defeat the very object of the parties in making
the agreement. Whether a breach is substantial is largely determined by the attendant
circumstances."53 The provisions on the test run of and seminar on the medical oxygen system are
not essential parts of the installation contracts as they do not constitute a vital fragment/part of the
centralized medical oxygen system.

Further, the allegedly defective and incomplete parts cannot substantiate rescission. The
photographs submitted by AMC are not adequate to establish that certain parts of the installed
system are indeed defective or incomplete especially so that the installation never became
operational. Unless and until the medical oxygen and vacuum pipeline actually runs, there is no way
of conclusively verifying that some of its parts are defective or incomplete. In addition, AMC failed to
allege much less show whether the alleged defects and incomplete components were caused by
factory defect, negligence on the part of CIGI or ordinary wear and tear.

At any rate, the parties have specified clauses in the subject contracts to answer for such
contingency. Article VI(b) of the Phase 2 installation contract provides:
1awp++i1

VI. CONDITIONS:

xxxx

b. Warranty

CIGI guarantees all materials involved against factory defect for one (1) year period from the date of
project completion. CIGI shall also provide maintenance services for this pipeline project after the
one (1) year warranty period provided that Alabang Medical Center shall purchase its Medical Gases
requirements exclusively to CIGI. [sic]

During the lifetime of the Supply of Medical Gases Contract, CIGI shall undertake the maintenance
of the system on a semi-annual basis which shall include visual leak testing and minor repairs and
spare parts for replacement shall be "Free of Charge". Major repairs and spare parts for replacement
shall be charged to [A]labang Medical Center on a cost plus basis.54 [sic]

Article 4.1 of the Phase 1 installation contract contains similar terms, viz:
4.1 The CONTRACTOR guarantees all materials involved against factory defect for one (1) year
period from the date of project completion. CONTRACTOR shall also provide maintenance services
for this pipeline project after the one (1) year warranty period provided that the ‘OWNER" shall
purchase its Medical gases requirements exclusively to the CONTRACTOR. [sic]

During the lifetime of the SUPPLY CONTRACT, the CONTRACTOR shall undertake the
maintenance of the system on semi-annual basis which shall include visual leak testing and minor
repairs which shall be "Free of Charge". Major repairs and spare parts for replacement shall be
charged to Customer on a cost plus basis.55

Since, as discussed above, the agreed test run and orientation/seminar for both Phases 1 and 2
installation projects were yet to be performed, both projects are not yet complete and the one year
warranty period has not yet commenced to run.

In view of the fact that rescission is not permissible, the installation contracts of the parties stand and
the terms thereof must be duly fulfilled. CIGI is obliged to comply with its undertakings to conduct a
test run and hold a seminar/orientation of concerned AMC employees, after which, turn over the
system fully functional and operational to AMC. Simultaneously with the turnover, AMC shall pay the
remaining balance of ₱1,267,344.42 to CIGI.

Also, the Court finds it proper that after CIGI has turned over a complete and functional medical
oxygen and vacuum pipeline system, it must be given the opportunity to inspect the allegedly
defective and incomplete parts. The results of such inspection will in turn determine which part of the
aforementioned warranty clauses shall govern.

AMC is not entitled to actual damages. AMC is not entitled to actual damages representing interest
payments on the loan it obtained from Metrobank in order to fund the installation projects. For
damages to be recovered, the best evidence obtainable by the injured party must be presented.
Actual or compensatory damages cannot be presumed, but must be proved with reasonable degree
of certainty. The Court cannot rely on speculation, conjecture or guesswork as to the fact and
amount of damages, but must depend upon competent proof that they have been suffered and on
evidence of the actual amount. If the proof is flimsy and unsubstantial, no damages will be
awarded.56

AMC failed to prove by substantial evidence any direct correlation between the interest charges on
its loan and CIGI’s failure to perform a test run of, conduct seminar on and turn over the oxygen
system. AMC presented no evidence except bare allegations, which by law, do not amount to
competent proof of actual pecuniary loss.57 What is actually borne out by the records is that the
interest charges are imposed on the loan and were payable by AMC regardless of the progress of
the installation projects.

Moreover, the CA was correct in finding that such loan was not exclusively devoted to the installation
projects but was also utilized in financing the construction and air-conditioning system of AMC. It
would be certainly unfair to reimburse AMC for such interest payments absent any factual proof of its
fraction that pertains to the installation projects themselves. "[O]ne is entitled to an adequate
compensation only for such pecuniary loss suffered by him as he has duly proved."58

WHEREFORE, all the foregoing considered, the Amended Decision dated March 4, 2008 of the
Court of Appeals in CA-G.R. CV No. 84988 s SET ASIDE. Consolidated Industrial Gases, Inc. is
hereby ORDERED to faithfully comply, within a period of sixty (60) days, with ALL its obligations
under the installation contracts, including but not limited to the following: (a) perform a pressure
drop, leak testing, test run, painting/color coding of the installed centralized medical oxygen, vacuum
and nitrous oxide pipeline system; (b) conduct orientation, seminars and training of Alabang Medical
Center employees who will be involved in the operation of the centralized medical oxygen, vacuum
and nitrous oxide pipeline system; and (c) turn over a fully functional and fully operational centralized
medical oxygen, vacuum and nitrous oxide pipeline system to Alabang Medical Center.

Alabang Medical Center is hereby ORDERED to (a) allow the personnel/technicians of Consolidated
Industrial Gases, Inc. to access and utilize, free of charge, the hospital's electrical facilities in such a
manner and quantity necessary for he complete performance of its above-enumerated undertakings,
and (b) pay the balance of ₱1,267,344.42 upon and simultaneously with the turnover of a fully
functional and fully operational centralized medical oxygen, vacuum and nitrous oxide pipeline
system by Consolidated Industrial Gases, Inc.

The award of attorney's fees in favor of Alabang Medical Center is deleted.

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 190080 June 11, 2014

GOLDEN VALLEY EXPLORATION, INC., Petitioner,

vs.
PINKIAN MINING COMPANY and COPPER VALLEY, INC., Respondents.

DECISION

PERLAS-BERNABE, J.:

Assailed in this petition for review on certiorari1 are the Decision2 dated July 23, 2009 and the
Resolution3 dated October 23, 2009 of the Court of Appeals (CA) in CA-G.R. CV. No. 90682 which
reversed the Decision4 dated August 18, 2006 of the Regional Trial Court of Makati City, Branch 145
(RTC) in Civil Case No. 01-324 and, consequently, affirmed the validity of the rescission of the
Operating Agreement between petitioner Golden Valley Exploration, Inc. (GVEI) and respondent
Pinkian Mining Company (PMC) covering various mining claims in Kayapa, Nueva Vizcaya, as well
as the Memorandum of Agreement between PMC and respondent Copper Valley, Inc. (CVI).

The Facts

PMC is the owner of 81 mining claims located in Kayapa, Nueva Vizcaya, 15 of which were covered
by Mining Lease Contract (MLC) No. MRD-56,5 while the remaining 66 had pending applications for
lease.6 On October 30, 1987, PMC entered into an Operating Agreement7 (OA) with GVEI, granting
the latter "full, exclusive and irrevocable possession, use, occupancy , and control over the [mining
claims], and every matter pertaining to the examination, exploration, development and mining of the
[mining claims] and the processing and marketing of the products x x x ,"8 for a period of 25 years.9

In a Letter10 dated June 8, 1999, PMC extra-judicially rescinded the OA upon GVEI’s violation of
Section 5.01,11 Article V thereof. Cited as further justification for its action were reasons such as: (a)
violation of Section 2.03, Article II of the OA, or the failure of GVEI to advance the actual cost for the
perfection of the mining claims or for the acquisition of mining rights, cost of lease applications, lease
surveys and legal expenses incidental thereto; (b) GVEI’s non-reimbursement of the expenses
incurred by PMC General Manager Benjamin Saguid in connection with the visit of a financier to the
mineral property in 1996; (c) its non-remittance of the US$300,000.00 received from Excelsior
Resources, Ltd.; (d) its nondisclosure of contracts entered into with other mining companies with
respect to the mining claims; (e) its being a mere "promoter/broker" of PMC’s mining claims instead
of being the operator thereof; and (f) its nonperformance of the necessary works on the mining
claims.12

GVEI contested PMC’s extra-judicial rescission of the OA through a Letter dated December 7, 1999,
averring therein that its obligation to pay royalties to PMC arises only when the mining claims are
placed in commercial production which condition has not yet taken place. It also reminded PMC of
its prior payment of the amount of ₱185,000.00 as future royalties in exchange for PMC’s express
waiver of any breach or default on the part of GVEI.13
PMC no longer responded to GVEI’s letter. Instead, it entered into a Memorandum of Agreement
dated May 2, 2000 (MOA) with CVI, whereby the latter was granted the right to "enter, possess,
occupy and control the mining claims" and "to explore and develop the mining claims, mine or
extract the ores, mill, process and beneficiate and/or dispose the mineral products in any method or
process," among others, for a period of 25 years.14

Due to the foregoing, GVEI filed a Complaint15 for Specific Performance, Annulment of Contract and
Damages against PMC and CVI before the RTC, docketed as Civil Case No. 01-324.

The RTC Ruling

On August 18, 2006, the RTC rendered a Decision16 in favor of GVEI, holding that since the mining
claims have not been placed in commercial production, there is no demandable obligation yet for
GVEI to pay royalties to PMC. It further declared that no fault or negligence may be attributed to
GVEI for the delay in the commercial production of the mining claims because the non-issuance of
the requisite Mineral Production Sharing Agreement (MPSA) and other government permits,
licenses, and consent were all affected by factors beyond GVEI’s control.17 The RTC, thus, declared
the rescission of the OA void and the execution of the MOA between PMC and CVI without force
and effect. In this relation, it ordered PMC to comply with the terms and conditions of the OA until the
expiration of its period.18

At odds with the RTC’s ruling, PMC elevated the case on appeal to the CA.

The CA Ruling

In a Decision19 dated July 23, 2009, the CA reversed the RTC ruling, finding that while the OA gives
PMC the right to rescind only on the ground of (GVEI’s) failure to pay the stipulated royalties, Article
1191 of the Civil Code allows PMC the right to rescind the agreement based on a breach of any of
its provisions.20 It further held that the inaction of GVEI for a period of more than seven (7) years to
operate the areas that were already covered by a perfected mining lease contract and to acquire the
necessary permits and licenses amounted to a substantial breach of the OA, the very purpose of
which was the mining and commercial distribution of derivative products that may be recovered from
the mining property.21 For the foregoing reasons, the CA upheld the validity of PMC’s rescission of
the OA and its subsequent execution of the MOA with CVI.22

Dissatisfied with the CA’s ruling, GVEI filed a motion for reconsideration which was, however, denied
by the CA in a Resolution23 dated October 23, 2009, hence, this petition.

The Issue Before the Court

The central issue for the Court’s resolution is whether or not there was a valid rescission of the OA.

The Court’s Ruling

The Court resolves the issue in the affirmative.

In reciprocal obligations, either party may rescind the contract upon the other’s substantial breach of
the obligation/s he had assumed thereunder. The basis therefor is Article 1191 of the Civil Code
which states as follows:
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.

More accurately referred to as resolution, the right of rescission under Article 1191 is predicated on a
breach of faith that violates the reciprocity between parties to the contract.24 This retaliatory remedy
is given to the contracting party who suffers the injurious breach on the premise that it is "unjust that
a party be held bound to fulfill his promises when the other violates his."25

As a general rule, the power to rescind an obligation must be invoked judicially and cannot be
exercised solely on a party’s own judgment that the other has committed a breach of the
obligation.26 This is so because rescission of a contract will not be permitted for a slight or casual
breach, but only for such substantial and fundamental violations as would defeat the very object of
the parties in making the agreement.27 As a well-established exception, however, an injured party
need not resort to court action in order to rescind a contract when the contract itself provides that it
may be revoked or cancelled upon violation of its terms and conditions.28 As elucidated in Froilan v.
Pan Oriental Shipping Co.,29 "there is x x x nothing in the law that prohibits the parties from entering
into agreement that violation of the terms of the contract would cause cancellation thereof, even
without court intervention."30 Similarly, in Dela Rama Steamship Co., Inc. v. Tan,31 it was held that
judicial permission to rescind an obligation is not necessary if a contract contains a special provision
granting the power of cancellation to a party.32

With this in mind, the Court therefore affirms the correctness of the CA’s Decision upholding PMC’s
unilateral rescission of the OA due to GVEI’s non-payment of royalties considering the parties’
express stipulation in the OA that said agreement may be cancelled on such ground. This is found in
Section 8.01, Article VIII33 in relation to Section 5.01, Article V34 of the OA which provides:

ARTICLE VIII
CANCELLATION/TERMINATION OF AGREEMENT

8.01 This Agreement may be cancelled or terminated prior to the expiration of the period, original or
renewal mentioned in the next preceding Section only in either of the following ways:

a. By written advance notice of sixty (60) days from OPERATOR to PINKIAN with or without
cause by registered mail or personal delivery of the notice to PINKIAN.

b. By written notice from PINKIAN by registered or personal deliver of the notice to

OPERATOR based on the failure to OPERATOR to make any payments determined to be
due PINKIAN under Section 5.01 hereof after written demand for payment has been made
on OPERATOR: Provided that OPERATOR shall have a grace period of ninety (90) days
from receipt of such written demand within which to make the said payments to PINKIAN.
 ARTICLE V
ROYALTIES

5.01 Should the PROPERTIES be placed in commercial production the PINKIAN shall be entitled to
a Royalty computed as follows:

(a) For gold – 3.0 percent of net realizable value of gold

(b) For copper and others – 2.0 percent of net realizable value

"Net REALIZABLE Value" is gross value less the sum of the following:

(1) marketing expenses including freight and insurance;

(2) all smelter charges and deductions;

(3) royalty payments to the government;

(4) ad valorem and export taxes, if any, paid to the government.

The aforesaid royalties shall be paid to PINKIAN within five (5) days after receipt of the smelter or
refinery returns. (Emphases and underscoring supplied)

By expressly stipulating in the OA that GVEI’s non-payment of royalties would give PMC sufficient
cause to cancel or rescind the OA, the parties clearly had considered such violation to be a
substantial breach of their agreement. Thus, in view of the above-stated jurisprudence on the matter,
PMC’s extra-judicial rescission of the OA based on the said ground was valid.

In this relation, the Court finds it apt to clarify that the following defenses raised by GVEI in its
petition would not impel a different conclusion:

First, GVEI cannot excuse its non-payment of royalties on the argument that no commercial mining
was yet in place. This is precisely because the obligation to develop the mining areas and put them
in commercial operation also belonged to GVEI as it expressly undertook "to explore, develop, and
equip the Claims to mine and beneficiate the ore thereof by any method or process"35 and "to enter
into contract, agreement, assignments, conveyances and understandings of any kind whatsoever
with reference to the exploration, development, equipping and operation of the Claims, and the
mining and beneficiation of the ore derived therefrom, and marketing the resulting marketable
products."36

Records reveal that when the OA was signed on October 30, 1987, 15 mining claims were already
covered by a perfected mining lease contract, i.e., MLC No. MRD-56, granting to the holder thereof
"the right to extract all mineral deposits found on or underneath the surface of his mining claims x x
x; to remove, process and otherwise utilize the mineral deposits for his own benefit."37 This meant
that GVEI could have immediately extracted mineral deposits from the covered mineral land and
carried out commercial mining operations from the very start. However, despite earlier demands
made by PMC, no meaningful steps were taken by GVEI towards the commercial production of the
15 perfected mining claims and the beneficial exploration of those remaining. Consequently, seven
years into the life of the OA, no royalties were paid to PMC. Compounding its breach, GVEI not only
failed to pay royalties to PMC but also did not carry out its obligation to conduct operations on and/or
commercialize the mining claims already covered by MLC No. MRD-56. Truth be told, GVEI’s non-
performance of the latter obligation under the OA actually made the payment of royalties to PMC
virtually impossible. Hence, GVEI cannot blame anyone but itself for its breach of the OA, which, in
turn, gave PMC the right to unilaterally rescind the same.

Second, neither can GVEI successfully oppose PMC’s rescission of the OA on the argument that the
ground to rescind the OA was only limited to its non-payment of royalties precisely because said
ground was actually among the reasons for PMC’s rescission thereof. Considering the stipulations
above-cited, the ground for non-payment of royalties was in itself sufficient for PMC to extra-judicially
rescind the OA.

In any event, even discounting the ground of non-payment of royalties, PMC still had the right to
rescind the OA based on the other grounds it had invoked therefor, namely, (a) violation of Section
2.03, Article II of the OA, or the failure of GVEI to advance the actual cost for the perfection of the
mining claims or for the acquisition of mining rights, cost of lease applications, lease surveys and
legal expenses incidental thereto, (b) GVEI’s non-reimbursement of the expenses incurred by PMC
General Manager Benjamin Saguid in connection with the visit of a financier to the mineral property
in 1996, (c) its non-remittance of the US$300,000.00 received from Excelsior Resources, Ltd., (d) its
non-disclosure of contracts entered into with other mining companies with respect to the mining
claims, (e) its being a mere "promoter/broker" of PMC’s mining claims instead of being the operator
thereof, and (f) its non-performance of the necessary works on the mining claims, albeit the said
grounds should have been invoked judicially since the court would still need to determine if the same
would constitute substantial breach and not merely a slight or casual breach of the contract. While
Section 8.01, Article VIII of the OA as above-cited appears to expressly restrict the availability of an
extra-judicial rescission only to the grounds stated thereunder, the Court finds that the said
stipulation does not negate PMC’s implied statutory right to judicially rescind the contract for other
unspecified acts that may actually amount to a substantial breach of the contract. This is based on
Article 1191 of the Civil Code (also above-cited) which pertinently provides that 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" and that "[t]he court shall decree the rescission claimed, unless there be just
cause authorizing the fixing of a period."

While it remains apparent that PMC had not judicially invoked the other grounds to rescind in this
case, the only recognizable effect, however, is with respect to the reckoning point as to when the
contract would be formally regarded as rescinded. Where parties agree to a stipulation allowing
extra-judicial rescission, no judicial decree is necessary for rescission to take place; the extra-judicial
rescission immediately releases the party from its obligation under the contract, subject only to court
reversal if found improper. On the other hand, without a stipulation allowing extra-judicial rescission,
1âwphi1

it is the judicial decree that rescinds, and not the will of the rescinding party. This may be gathered
from previous Court rulings on the matter.

For instance, in Ocejo, Perez & Co. v. International Banking Corporation,38 where the seller, without
having reserved title to the thing sold, sought to re-possess the subject matter of the sale through an
action for replevin after the buyer failed to pay its purchase price, the Court ruled that the action of
replevin (which operates on the assumption that the plaintiff is the owner of the thing subject of the
suit) "will not lie upon the theory that the rescission has already taken place and that the seller has
recovered title to the thing sold." It held that the title which had already passed by delivery to the
buyer is not ipso facto re-vested in the seller upon the latter’s own determination to rescind the sale
because it is the judgment of the court that produces the rescission.

On the other hand, in De Luna v. Abrigo39 (De Luna), the Court upheld the validity of a stipulation
providing for the automatic reversion of donated property to the donor upon non-compliance of
certain conditions therefor as the same was akin to an agreement granting a party the right to extra-
judicially rescind the contract in case of breach. The Court ruled, in effect, that a subsequent court
judgment does not rescind the contract but merely declares the fact that the same has been
rescinded, viz.:

[J]udicial intervention is necessary not for purposes of obtaining a judicial declaration rescinding a
contract already deemed rescinded by virtue of an agreement providing for rescission even without
judicial intervention, but in order to determine whether or not the rescission was proper.40 (Emphases
and underscoring supplied)

A similar agreement in Roman Catholic Archbishop of Manila v. CA41 allowing the ipso facto
reversion of the donated property upon noncompliance with the conditions was likewise upheld, with
the Court reiterating De Luna and declaring in unmistakable terms that:42

Where [the propriety of the automatic rescission] is sustained, the decision of the court will be merely
declaratory of the revocation, but it is not in itself the revocatory act. (Emphasis and underscoring
supplied)

This notwithstanding, jurisprudence still indicates that an extra-judicial rescission based on grounds
not specified in the contract would not preclude a party to treat the same as rescinded. The
rescinding party, however, by such course of action, subjects himself to the risk of being held liable
for damages when the extra-judicial rescission is questioned by the opposing party in court. This
was made clear in the case of U.P. v. De Los Angeles,43 wherein the Court held as follows:

Of course, it must be understood that the act of a party in treating a contract as cancelled or
resolved on account of infractions by the other contracting party must be made known to the other
and is always provisional, being ever subject to scrutiny and review by the proper court. If the other
party denies that rescission is justified, it is free to resort to judicial action in its own behalf, and bring
the matter to court. Then, should the court, after due hearing, decide that the resolution of the
contract was not warranted, the responsible party will be sentenced to damages; in the contrary
case, the resolution will be affirmed, and the consequent indemnity awarded to the party prejudiced.

In other words, the party who deems the contract violated may consider it resolved or rescinded, and
act accordingly, without previous court action, but it proceeds at its own risk. For it is only the final
judgment of the corresponding court that will conclusively and finally settle whether the action taken
was or was not correct in law. x x x.44 (Emphases and underscoring supplied)

The pronouncement, which was also reiterated in the case of Angeles v. Calasanz,45 sought to
explain various rulings that continued to require judicial confirmation even in cases when the
rescinding party has a proven contractual right to extra-judicially rescind the contract. The
observation then was mainly on the practical effect of a stipulation allowing extra-judicial rescission
being merely "to transfer to the defaulter the initiative on instituting suit, instead of the rescinder."46

Proceeding from the foregoing, the Court has determined that the other grounds raised by PMC in its
Letter dated June 8, 1999 to GVEI (the existence of which had not been convincingly disputed
herein) amounts to the latter's substantial breach of the OA. To the Court's mind, said infractions,
when taken together, ultimately resulted in GVEI's failure to faithfully perform its primordial obligation
under the OA to explore and develop PMC's mining claims as well as to put the same into
commercial operation. Accordingly, PMC's rescission of the OA on the foregoing grounds, in addition
to the ground of non-payment of royalties, is equally valid.

Finally, the Court cannot lend credence to GVEI's contention that when PMC entered into an
agreement with CVI covering the mining claims, it was committing a violation of the terms and
conditions of the OA. As above-explained, the invocation of a stipulation allowing extra-judicial
rescission effectively puts an end to the contract and, thus, releases the parties from the obligations
thereunder, notwithstanding the lack of a judicial decree for the purpose. In the case at bar, PMC,
through its Letter dated June 8, 1999 to GVEI, invoked Section 8.01, Article VIII in relation to Section
5.01, Article V of the OA which allows it to extra-judicially rescind the contract for GVEI's non-
payment of royalties. Thus, at that point in time, PMC had effectively rescinded the OA and was then
considered to have been released from its legal effects. Accordingly, there stood no legal
impediment so as to hinder PMC from entering into a contract with CVI covering the same mining
claims subject of this case.

In fine, the Court denies the instant petition and affirms the assailed CA Decision and Resolution.
WHEREFORE, the petition is DENIED. The Decision dated July 23, 2009 and the Resolution dated
October 23, 2009 of the Court of Appeals in CA-G.R. CV. No. 90682 are hereby AFFIRMED.

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 206806 June 25, 2014

ARCO PULP AND PAPER CO., INC. and CANDIDA A. SANTOS, Petitioners,
vs.
DAN T. LIM, doing business under the name and style of QUALITY PAPERS & PLASTIC
PRODUCTS ENTERPRISES, Respondent.

DECISION

LEONEN, J.:

Novation must be stated in clear and unequivocal terms to extinguish an obligation. It cannot be
presumed and may be implied only if the old and new contracts are incompatible on every point.

Before us is a petition for review on certiorari1 assailing the Court of Appeals’ decision2 in CA-G.R.
CV No. 95709, which stemmed from a complaint3 filed in the Regional Trial Court of Valenzuela City,
Branch 171, for collection of sum of money.

The facts are as follows:

Dan T. Lim works in the business of supplying scrap papers, cartons, and other raw materials, under
the name Quality Paper and Plastic Products, Enterprises, to factories engaged in the paper mill
business.4 From February 2007 to March 2007, he delivered scrap papers worth 7,220,968.31 to
Arco Pulp and Paper Company, Inc. (Arco Pulp and Paper) through its Chief Executive Officer and
President, Candida A. Santos.5 The parties allegedly agreed that Arco Pulp and Paper would either
pay Dan T. Lim the value of the raw materials or deliver to him their finished products of equivalent
value.6

Dan T. Lim alleged that when he delivered the raw materials, Arco Pulp and Paper issued a post-
dated check dated April 18, 20077 in the amount of 1,487,766.68 as partial payment, with the
assurance that the check would not bounce.8 When he deposited the check on April 18, 2007, it was
dishonored for being drawn against a closed account.9

On the same day, Arco Pulp and Paper and a certain Eric Sy executed a memorandum of
agreement10 where Arco Pulp and Paper bound themselves to deliver their finished products to
Megapack Container Corporation, owned by Eric Sy, for his account. According to the
memorandum, the raw materials would be supplied by Dan T. Lim, through his company, Quality
Paper and Plastic Products. The memorandum of agreement reads as follows:

Per meeting held at ARCO, April 18, 2007, it has been mutually agreed between Mrs. Candida A.
Santos and Mr. Eric Sy that ARCO will deliver 600 tons Test Liner 150/175 GSM, full width 76 inches
at the price of ₱18.50 per kg. to Megapack Container for Mr. Eric Sy’s account. Schedule of
deliveries are as follows:

....
It has been agreed further that the Local OCC materials to be used for the production of the above
Test Liners will be supplied by Quality Paper & Plastic Products Ent., total of 600 Metric Tons at
₱6.50 per kg. (price subject to change per advance notice). Quantity of Local OCC delivery will be
based on the quantity of Test Liner delivered to Megapack Container Corp. based on the above
production schedule.11

On May 5, 2007, Dan T.Lim sent a letter12 to Arco Pulp and Paper demanding payment of the
amount of 7,220,968.31, but no payment was made to him.13

Dan T. Lim filed a complaint14 for collection of sum of money with prayer for attachment with the
Regional Trial Court, Branch 171, Valenzuela City, on May 28, 2007. Arco Pulp and Paper filed its
answer15 but failed to have its representatives attend the pre-trial hearing. Hence, the trial court
allowed Dan T. Lim to present his evidence ex parte.16

On September 19, 2008, the trial court rendered a judgment in favor of Arco Pulp and Paper and
dismissed the complaint, holding that when Arco Pulp and Paper and Eric Sy entered into the
memorandum of agreement, novation took place, which extinguished Arco Pulp and Paper’s
obligation to Dan T. Lim.17

Dan T. Lim appealed18 the judgment with the Court of Appeals. According to him, novation did not
take place since the memorandum of agreement between Arco Pulp and Paper and Eric Sy was an
exclusive and private agreement between them. He argued that if his name was mentioned in the
contract, it was only for supplying the parties their required scrap papers, where his conformity
through a separate contract was indispensable.19

On January 11, 2013, the Court of Appeals20 rendered a decision21 reversing and setting aside the
judgment dated September 19, 2008 and ordering Arco Pulp and Paper to jointly and severally pay
Dan T. Lim the amount of ₱7,220,968.31 with interest at 12% per annum from the time of demand;
₱50,000.00 moral damages; ₱50,000.00 exemplary damages; and ₱50,000.00 attorney’s fees.22

The appellate court ruled that the facts and circumstances in this case clearly showed the existence
of an alternative obligation.23 It also ruled that Dan T. Lim was entitled to damages and attorney’s
fees due to the bad faith exhibited by Arco Pulp and Paper in not honoring its undertaking.24

Its motion for reconsideration25 having been denied,26 Arco Pulp and Paper and its President and
Chief Executive Officer, Candida A. Santos, bring this petition for review on certiorari.

On one hand, petitioners argue that the execution of the memorandum of agreement constituted a
novation of the original obligation since Eric Sy became the new debtor of respondent. They also
argue that there is no legal basis to hold petitioner Candida A. Santos personally liable for the
transaction that petitioner corporation entered into with respondent. The Court of Appeals, they
allege, also erred in awarding moral and exemplary damages and attorney’s fees to respondent who
did not show proof that he was entitled to damages.27

Respondent, on the other hand, argues that the Court of Appeals was correct in ruling that there was
no proper novation in this case. He argues that the Court of Appeals was correct in ordering the
payment of 7,220,968.31 with damages since the debt of petitioners remains unpaid.28 He also
argues that the Court of Appeals was correct in holding petitioners solidarily liable since petitioner
Candida A. Santos was "the prime mover for such outstanding corporate liability."29 In their reply,
petitioners reiterate that novation took place since there was nothing in the memorandum of
agreement showing that the obligation was alternative. They also argue that when respondent
allowed them to deliver the finished products to Eric Sy, the original obligation was novated.30
A rejoinder was submitted by respondent, but it was noted without action in view of A.M. No. 99-2-
04-SC dated November 21, 2000.31

The issues to be resolved by this court are as follows:

1. Whether the obligation between the parties was extinguished by novation

2. Whether Candida A. Santos was solidarily liable with Arco Pulp and Paper Co., Inc.

3. Whether moral damages, exemplary damages, and attorney’s fees can be awarded

The petition is denied.

The obligation between the

parties was an alternative
obligation

The rule on alternative obligations is governed by Article 1199 of the Civil Code, which states:

Article 1199. A person alternatively bound by different prestations shall completely perform one of
them.

The creditor cannot be compelled to receive part of one and part of the other undertaking.

"In an alternative obligation, there is more than one object, and the fulfillment of one is sufficient,
determined by the choice of the debtor who generally has the right of election."32 The right of election
is extinguished when the party who may exercise that option categorically and unequivocally makes
his or her choice known.33

The choice of the debtor must also be communicated to the creditor who must receive notice of it
since: The object of this notice is to give the creditor . . . opportunity to express his consent, or to
impugn the election made by the debtor, and only after said notice shall the election take legal effect
when consented by the creditor, or if impugned by the latter, when declared proper by a competent
court.34

According to the factual findings of the trial court and the appellate court, the original contract
between the parties was for respondent to deliver scrap papers worth ₱7,220,968.31 to petitioner
Arco Pulp and Paper. The payment for this delivery became petitioner Arco Pulp and Paper’s
obligation. By agreement, petitioner Arco Pulp and Paper, as the debtor, had the option to either (1)
pay the price or(2) deliver the finished products of equivalent value to respondent.35

The appellate court, therefore, correctly identified the obligation between the parties as an
alternative obligation, whereby petitioner Arco Pulp and Paper, after receiving the raw materials from
respondent, would either pay him the price of the raw materials or, in the alternative, deliver to him
the finished products of equivalent value.

When petitioner Arco Pulp and Paper tendered a check to respondent in partial payment for the
scrap papers, they exercised their option to pay the price. Respondent’s receipt of the check and his
subsequent act of depositing it constituted his notice of petitioner Arco Pulp and Paper’s option to
pay.
This choice was also shown by the terms of the memorandum of agreement, which was executed on
the same day. The memorandum declared in clear terms that the delivery of petitioner Arco Pulp and
Paper’s finished products would be to a third person, thereby extinguishing the option to deliver the
finished products of equivalent value to respondent.

The memorandum of
agreement did not constitute
a novation of the original
contract

The trial court erroneously ruled that the execution of the memorandum of agreement constituted a
novation of the contract between the parties. When petitioner Arco Pulp and Paper opted instead to
deliver the finished products to a third person, it did not novate the original obligation between the
parties.

The rules on novation are outlined in the Civil Code, thus:

Article 1291. Obligations may be modified by:

(1) Changing their object or principal conditions;

(2) Substituting the person of the debtor;

(3) Subrogating a third person in the rights of the creditor. (1203)

Article 1292. In order that an obligation may be extinguished by another which substitute the same, it
is imperative that it be so declared in unequivocal terms, or that the old and the new obligations be
on every point incompatible with each other. (1204)

Article 1293. Novation which consists in substituting a new debtor in the place of the original one,
may be made even without the knowledge or against the will of the latter, but not without the consent
of the creditor. Payment by the new debtor gives him the rights mentioned in Articles 1236 and 1237.
(1205a)

Novation extinguishes an obligation between two parties when there is a substitution of objects or
debtors or when there is subrogation of the creditor. It occurs only when the new contract declares
so "in unequivocal terms" or that "the old and the new obligations be on every point incompatible
with each other."36

Novation was extensively discussed by this court in Garcia v. Llamas:37

Novation is a mode of extinguishing an obligation by changing its objects or principal obligations, by

substituting a new debtor in place of the old one, or by subrogating a third person to the rights of the
creditor. Article 1293 of the Civil Code defines novation as follows:

"Art. 1293. Novation which consists in substituting a new debtor in the place of the original one, may
be made even without the knowledge or against the will of the latter, but not without the consent of
the creditor. Payment by the new debtor gives him rights mentioned in articles 1236 and 1237."

In general, there are two modes of substituting the person of the debtor: (1) expromision and (2)
delegacion. In expromision, the initiative for the change does not come from — and may even be
made without the knowledge of — the debtor, since it consists of a third person’s assumption of the
obligation. As such, it logically requires the consent of the third person and the creditor. In
delegacion, the debtor offers, and the creditor accepts, a third person who consents to the
substitution and assumes the obligation; thus, the consent of these three persons are necessary.
Both modes of substitution by the debtor require the consent of the creditor.

Novation may also be extinctive or modificatory. It is extinctive when an old obligation is terminated
by the creation of a new one that takes the place of the former. It is merely modificatory when the old
obligation subsists to the extent that it remains compatible with the amendatory agreement. Whether
extinctive or modificatory, novation is made either by changing the object or the principal conditions,
referred to as objective or real novation; or by substituting the person of the debtor or subrogating a
third person to the rights of the creditor, an act known as subjective or personal novation. For
novation to take place, the following requisites must concur:

1) There must be a previous valid obligation.

2) The parties concerned must agree to a new contract.

3) The old contract must be extinguished.

4) There must be a valid new contract.

Novation may also be express or implied. It is express when the new obligation declares in
unequivocal terms that the old obligation is extinguished. It is implied when the new obligation is
incompatible with the old one on every point. The test of incompatibility is whether the two
obligations can stand together, each one with its own independent existence.38 (Emphasis supplied)

Because novation requires that it be clear and unequivocal, it is never presumed, thus:

In the civil law setting, novatio is literally construed as to make new. So it is deeply rooted in the
Roman Law jurisprudence, the principle — novatio non praesumitur —that novation is never
presumed.At bottom, for novation tobe a jural reality, its animus must be ever present, debitum pro
debito — basically extinguishing the old obligation for the new one.39 (Emphasis supplied) There is
nothing in the memorandum of agreement that states that with its execution, the obligation of
petitioner Arco Pulp and Paper to respondent would be extinguished. It also does not state that Eric
Sy somehow substituted petitioner Arco Pulp and Paper as respondent’s debtor. It merely shows
that petitioner Arco Pulp and Paper opted to deliver the finished products to a third person instead.

The consent of the creditor must also be secured for the novation to be valid:

Novation must be expressly consented to. Moreover, the conflicting intention and acts of the parties
underscore the absence of any express disclosure or circumstances with which to deduce a clear
and unequivocal intent by the parties to novate the old agreement.40 (Emphasis supplied)

In this case, respondent was not privy to the memorandum of agreement, thus, his conformity to the
contract need not be secured. This is clear from the first line of the memorandum, which states:

Per meeting held at ARCO, April 18, 2007, it has been mutually agreed between Mrs. Candida A.
Santos and Mr. Eric Sy. . . .41
If the memorandum of agreement was intended to novate the original agreement between the
parties, respondent must have first agreed to the substitution of Eric Sy as his new debtor. The
memorandum of agreement must also state in clear and unequivocal terms that it has replaced the
original obligation of petitioner Arco Pulp and Paper to respondent. Neither of these circumstances is
present in this case.

Petitioner Arco Pulp and Paper’s act of tendering partial payment to respondent also conflicts with
their alleged intent to pass on their obligation to Eric Sy. When respondent sent his letter of demand
to petitioner Arco Pulp and Paper, and not to Eric Sy, it showed that the former neither
acknowledged nor consented to the latter as his new debtor. These acts, when taken together,
clearly show that novation did not take place. Since there was no novation, petitioner Arco Pulp and
Paper’s obligation to respondent remains valid and existing. Petitioner Arco Pulp and Paper,
therefore, must still pay respondent the full amount of ₱7,220,968.31.

Petitioners are liable for

damages

Under Article 2220 of the Civil Code, moral damages may be awarded in case of breach of contract
where the breach is due to fraud or bad faith:

Art. 2220. Willfull injury to property may be a legal ground for awarding moral damages if the court
should find that, under the circumstances, such damages are justly due. The same rule applies to
breaches of contract where the defendant acted fraudulently or in bad faith. (Emphasis supplied)

Moral damages are not awarded as a matter of right but only after the party claiming it proved that
the breach was due to fraud or bad faith. As this court stated:

Moral damages are not recoverable simply because a contract has been breached. They are
recoverable only if the party from whom it is claimed acted fraudulently or in bad faith or in wanton
disregard of his contractual obligations. The breach must be wanton, reckless, malicious or in bad
faith, and oppressive or abusive.42

Further, the following requisites must be proven for the recovery of moral damages:

An award of moral damages would require certain conditions to be met, to wit: (1)first, there must be
an injury, whether physical, mental or psychological, clearly sustained by the claimant; (2) second,
there must be culpable act or omission factually established; (3) third, the wrongful act or omission of
the defendant is the proximate cause of the injury sustained by the claimant; and (4) fourth, the
award of damages is predicated on any of the cases stated in Article 2219 of the Civil Code.43

Here, the injury suffered by respondent is the loss of ₱7,220,968.31 from his business. This has
remained unpaid since 2007. This injury undoubtedly was caused by petitioner Arco Pulp and
Paper’s act of refusing to pay its obligations.

When the obligation became due and demandable, petitioner Arco Pulp and Paper not only issued
an unfunded check but also entered into a contract with a third person in an effort to evade its
liability. This proves the third requirement.

As to the fourth requisite, Article 2219 of the Civil Code provides that moral damages may be
awarded in the following instances:
Article 2219. Moral damages may be recovered in the following and analogous cases:

(1) A criminal offense resulting in physical injuries;

(2) Quasi-delicts causing physical injuries;

(3) Seduction, abduction, rape, or other lascivious acts;

(4) Adultery or concubinage;

(5) Illegal or arbitrary detention or arrest;

(6) Illegal search;

(7) Libel, slander or any other form of defamation;

(8) Malicious prosecution;

(9) Acts mentioned in Article 309;

(10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34, and 35.

Breaches of contract done in bad faith, however, are not specified within this enumeration. When a
party breaches a contract, he or she goes against Article 19 of the Civil Code, which states: Article
19. 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.

Persons who have the right to enter into contractual relations must exercise that right with honesty
and good faith. Failure to do so results in an abuse of that right, which may become the basis of an
action for damages. Article 19, however, cannot be its sole basis:

Article 19 is the general rule which governs the conduct of human relations. By itself, it is not the
basis of an actionable tort. Article 19 describes the degree of care required so that an actionable tort
may arise when it is alleged together with Article 20 or Article 21.44

Article 20 and 21 of the Civil Code are as follows:

Article 20. Every person who, contrary to law, wilfully or negligently causes damage to another, shall
indemnify the latter for the same.

Article 21.Any person who wilfully causes loss or injury to another in a manner that is contrary to
morals, good customs or public policy shall compensate the latter for the damage.

To be actionable, Article 20 requires a violation of law, while Article 21 only concerns with lawful acts
that are contrary to morals, good customs, and public policy:

Article 20 concerns violations of existing law as basis for an injury. It allows recovery should the act
have been willful or negligent. Willful may refer to the intention to do the act and the desire to
achieve the outcome which is considered by the plaintiff in tort action as injurious. Negligence may
refer to a situation where the act was consciously done but without intending the result which the
plaintiff considers as injurious.

Article 21, on the other hand, concerns injuries that may be caused by acts which are not
necessarily proscribed by law. This article requires that the act be willful, that is, that there was an
intention to do the act and a desire to achieve the outcome. In cases under Article 21, the legal
issues revolve around whether such outcome should be considered a legal injury on the part of the
plaintiff or whether the commission of the act was done in violation of the standards of care required
in Article 19.45

When parties act in bad faith and do not faithfully comply with their obligations under contract, they
run the risk of violating Article 1159 of the Civil Code:

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

Article 2219, therefore, is not an exhaustive list of the instances where moral damages may be
recovered since it only specifies, among others, Article 21. When a party reneges on his or her
obligations arising from contracts in bad faith, the act is not only contrary to morals, good customs,
and public policy; it is also a violation of Article 1159. Breaches of contract become the basis of
moral damages, not only under Article 2220, but also under Articles 19 and 20 in relation to Article
1159.

Moral damages, however, are not recoverable on the mere breach of the contract. Article 2220
requires that the breach be done fraudulently or in bad faith. In Adriano v. Lasala:46

To recover moral damages in an action for breach of contract, the breach must be palpably wanton,
reckless and malicious, in bad faith, oppressive, or abusive. Hence, the person claiming bad faith
must prove its existence by clear and convincing evidence for the law always presumes good faith.

Bad faith does not simply connote bad judgment or negligence. It imports a dishonest purpose or
some moral obliquity and conscious doing of a wrong, a breach of known duty through some motive
or interest or ill will that partakes of the nature of fraud. It is, therefore, a question of intention, which
can be inferred from one’s conduct and/or contemporaneous statements.47 (Emphasis supplied)

Since a finding of bad faith is generally premised on the intent of the doer, it requires an examination
of the circumstances in each case.

When petitioner Arco Pulp and Paper issued a check in partial payment of its obligation to
respondent, it was presumably with the knowledge that it was being drawn against a closed account.
Worse, it attempted to shift their obligations to a third person without the consent of respondent.

Petitioner Arco Pulp and Paper’s actions clearly show "a dishonest purpose or some moral obliquity
and conscious doing of a wrong, a breach of known duty through some motive or interest or ill will
that partakes of the nature of fraud."48 Moral damages may, therefore, be awarded.

Exemplary damages may also be awarded. Under the Civil Code, exemplary damages are due in
the following circumstances:

Article 2232. In contracts and quasi-contracts, the court may award exemplary damages if the
defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner.
Article 2233. Exemplary damages cannot be recovered as a matter of right; the court will decide
whether or not they should be adjudicated.

Article 2234. While the amount of the exemplary damages need not be proven, the 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.

In Tankeh v. Development Bank of the Philippines,49 we stated that:

The purpose of exemplary damages is to serve as a deterrent to future and subsequent parties from
the commission of a similar offense. The case of People v. Ranteciting People v. Dalisay held that:

Also known as ‘punitive’ or ‘vindictive’ damages, exemplary or corrective damages are intended to
serve as a deterrent to serious wrong doings, and as a vindication of undue sufferings and wanton
invasion of the rights of an injured or a punishment for those guilty of outrageous conduct. These
terms are generally, but not always, used interchangeably. In common law, there is preference in the
use of exemplary damages when the award is to account for injury to feelings and for the sense of
indignity and humiliation suffered by a person as a result of an injury that has been maliciously and
wantonly inflicted, the theory being that there should be compensation for the hurt caused by the
highly reprehensible conduct of the defendant—associated with such circumstances as willfulness,
wantonness, malice, gross negligence or recklessness, oppression, insult or fraud or gross fraud—
that intensifies the injury. The terms punitive or vindictive damages are often used to refer to those
species of damages that may be awarded against a person to punish him for his outrageous
conduct. In either case, these damages are intended in good measure to deter the wrongdoer and
others like him from similar conduct in the future.50 (Emphasis supplied; citations omitted)

The requisites for the award of exemplary damages are as follows:

(1) they may be imposed by way of example in addition to compensatory damages, and only
after the claimant's right to them has been established;

(2) that they cannot be recovered as a matter of right, their determination depending upon
the amount of compensatory damages that may be awarded to the claimant; and

(3) the act must be accompanied by bad faith or done in a wanton, fraudulent, oppressive or
malevolent manner.51

Business owners must always be forthright in their dealings. They cannot be allowed to renege on
their obligations, considering that these obligations were freely entered into by them. Exemplary
damages may also be awarded in this case to serve as a deterrent to those who use fraudulent
means to evade their liabilities.

Since the award of exemplary damages is proper, attorney’s fees and cost of the suit may also be
recovered.

Article 2208 of the Civil Code states:

Article 2208. In the absence of stipulation, attorney's fees and expenses of litigation, other than
judicial costs, cannot be recovered, except:
(1) When exemplary damages are awarded[.]
Petitioner Candida A. Santos
is solidarily liable with
petitioner corporation

Petitioners argue that the finding of solidary liability was erroneous since no evidence was adduced
to prove that the transaction was also a personal undertaking of petitioner Santos. We disagree.

In Heirs of Fe Tan Uy v. International Exchange Bank,52 we stated that:

Basic is the rule in corporation law that a corporation is a juridical entity which is vested with a legal
personality separate and distinct from those acting for and in its behalf and, in general, from the
people comprising it. Following this principle, obligations incurred by the corporation, acting through
its directors, officers and employees, are its sole liabilities. A director, officer or employee of a
corporation is generally not held personally liable for obligations incurred by the corporation.
Nevertheless, this legal fiction may be disregarded if it is used as a means to perpetrate fraud or an
illegal act, or as a vehicle for the evasion of an existing obligation, the circumvention of statutes, or
to confuse legitimate issues.

....

Before a director or officer of a corporation can be held personally liable for corporate obligations,
however, the following requisites must concur: (1) the complainant must allege in the complaint that
the director or officer assented to patently unlawful acts of the corporation, or that the officer was
guilty of gross negligence or bad faith; and (2) the complainant must clearly and convincingly prove
such unlawful acts, negligence or bad faith.

While it is true that the determination of the existence of any of the circumstances that would warrant
the piercing of the veil of corporate fiction is a question of fact which cannot be the subject of a
petition for review on certiorari under Rule 45, this Court can take cognizance of factual issues if the
findings of the lower court are not supported by the evidence on record or are based on a
misapprehension of facts.53 (Emphasis supplied)

As a general rule, directors, officers, or employees of a corporation cannot be held personally liable
for obligations incurred by the corporation. However, this veil of corporate fiction may be pierced if
complainant is able to prove, as in this case, that (1) the officer is guilty of negligence or bad faith,
and (2) such negligence or bad faith was clearly and convincingly proven.

Here, petitioner Santos entered into a contract with respondent in her capacity as the President and
Chief Executive Officer of Arco Pulp and Paper. She also issued the check in partial payment of
petitioner corporation’s obligations to respondent on behalf of petitioner Arco Pulp and Paper. This is
clear on the face of the check bearing the account name, "Arco Pulp & Paper, Co., Inc."54 Any
obligation arising from these acts would not, ordinarily, be petitioner Santos’ personal undertaking for
which she would be solidarily liable with petitioner Arco Pulp and Paper.

We find, however, that the corporate veil must be pierced. In Livesey v. Binswanger Philippines:55

Piercing the veil of corporate fiction is an equitable doctrine developed to address situations where
the separate corporate personality of a corporation is abused or used for wrongful purposes. Under
the doctrine, the corporate existence may be disregarded where the entity is formed or used for non-
legitimate purposes, such as to evade a just and due obligation, or to justify a wrong, to shield or
perpetrate fraud or to carry out similar or inequitable considerations, other unjustifiable aims or
intentions, in which case, the fiction will be disregarded and the individuals composing it and the two
corporations will be treated as identical.56 (Emphasis supplied)

According to the Court of Appeals, petitioner Santos was solidarily liable with petitioner Arco Pulp
and Paper, stating that:

In the present case, We find bad faith on the part of the [petitioners] when they unjustifiably refused
to honor their undertaking in favor of the [respondent]. After the check in the amount of 1,487,766.68
issued by [petitioner] Santos was dishonored for being drawn against a closed account, [petitioner]
corporation denied any privity with [respondent]. These acts prompted the [respondent] to avail of
the remedies provided by law in order to protect his rights.57

We agree with the Court of Appeals. Petitioner Santos cannot be allowed to hide behind the
corporate veil. When petitioner Arco Pulp and Paper’s obligation to respondent became due and
1âw phi 1

demandable, she not only issued an unfunded check but also contracted with a third party in an
effort to shift petitioner Arco Pulp and Paper’s liability. She unjustifiably refused to honor petitioner
corporation’s obligations to respondent. These acts clearly amount to bad faith. In this instance, the
corporate veil may be pierced, and petitioner Santos may be held solidarily liable with petitioner Arco
Pulp and Paper.

The rate of interest due on

the obligation must be
reduced in view of Nacar v.
Gallery Frames58

In view, however, of the promulgation by this court of the decision dated August 13, 2013 in Nacar v.
Gallery Frames,59 the rate of interest due on the obligation must be modified from 12% per annum to
6% per annum from the time of demand.

Nacar effectively amended the guidelines stated in Eastern Shipping v. Court of Appeals,60 and we
have laid down the following guidelines with regard to the rate of legal interest:

To recapitulate and for future guidance, the guidelines laid down in the case of Eastern Shipping
Linesare accordingly modified to embody BSP-MB Circular No. 799, as follows:

I. 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 damages. The provisions under Title XVIII
on "Damages" of the Civil Code govern in determining the measure of recoverable damages.

II. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:

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 6% 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 6% per annum from such finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of credit.

And, in addition to the above, judgments that have become final and executory prior to July 1, 2013,
shall not be disturbed and shall continue to be implemented applying the rate of interest fixed
therein.61 (Emphasis supplied; citations omitted.)

According to these guidelines, the interest due on the obligation of ₱7,220,968.31 should now be at
6% per annum, computed from May 5, 2007, when respondent sent his letter of demand to
petitioners. This interest shall continue to be due from the finality of this decision until its full
satisfaction.

WHEREFORE, the petition is DENIED in part. The decision in CA-G.R. CV No. 95709 is
AFFIRMED.

Petitioners Arco Pulp & Paper Co., Inc. and Candida A. Santos are hereby ordered solidarily to pay
respondent Dan T. Lim the amount of ₱7,220,968.31 with interest of 6% per annum at the time of
demand until finality of judgment and its full satisfaction, with moral damages in the amount of
₱50,000.00, exemplary damages in the amount of ₱50,000.00, and attorney's fees in the amount of
₱50,000.00.

SO ORDERED.