Republic of the Philippines TIMBERWEALTH CORPORATION in the total amount of
SUPREME COURT P120,000.00, payment of which shall be made in the following
Manila
SECOND DIVISION
G.R. No. L-48194 March 15, 1990
JOSE M. JAVIER and ESTRELLA F. JAVIER, petitioners,
vs.
COURT OF APPEALS and LEONARDO TIRO, respondents.
Eddie Tamondong for petitioners.
Lope Adriano and Emmanuel Pelaez, Jr. for private respondent.
REGALADO, J.:
Petitioners pray for the reversal of the decision of respondent Court of Appeals in CA-
G.R. No. 52296-R, dated March 6, 1978, 1 the dispositive portion whereof decrees:
WHEREFORE, the judgment appealed from is hereby set aside
and another one entered ordering the defendants-appellees, jointly
and solidarily, to pay plaintiff-appellant the sum of P79,338.15 with
legal interest thereon from the filing of the complaint, plus attorney's
fees in the amount of P8,000.00. Costs against defendants-
appellees.2
As found by respondent court or disclosed by the records, 3 this case was generated
by the following antecedent facts.
Private respondent is a holder of an ordinary timber license issued by the Bureau of
Forestry covering 2,535 hectares in the town of Medina, Misamis Oriental. On
February 15, 1966 he executed a "Deed of Assignment" 4 in favor of herein petitioners
the material parts of which read as follows:
x x x           x x x          x x x
I, LEONARDO A. TIRO, of legal age, married and a resident of
Medina, Misamis Oriental, for and in consideration of the sum of
ONE HUNDRED TWENTY THOUSAND PESOS (P120,000.00),
Philippine Currency, do by these presents, ASSIGN, TRANSFER
AND CONVEY, absolutely and forever unto JOSE M. JAVIER and
ESTRELLA F. JAVIER, spouses, of legal age and a resident (sic) of
2897 F.B. Harrison, Pasay City, my shares of stocks in the
manner:
1. Twenty thousand (P20,000.00) Pesos upon
signing of this contract;
2. The balance of P100,000.00 shall be paid
P10,000.00 every shipment of export logs
actually produced from the forest concession of
Timberwealth Corporation.
That I hereby agree to sign and endorse the stock certificate in
favor of Mr. & Mrs. Jose M. Javier, as soon as stock certificates are
issued.
x x x           x x x          x x x
At the time the said deed of assignment was executed, private respondent had a
pending application, dated October 21, 1965, for an additional forest concession
covering an area of 2,000 hectares southwest of and adjoining the area of the
concession subject of the deed of assignment. Hence, on February 28, 1966, private
respondent and petitioners entered into another "Agreement" 5 with the following
stipulations:
x x x           x x x          x x x
1. That LEONARDO TIRO hereby agrees and binds himself to
transfer, cede and convey whatever rights he may acquire,
absolutely and forever, to TIMBERWEALTH CORPORATION, a
corporation duly organized and existing under the laws of the
Philippines, over a forest concession which is now pending
application and approval as additional area to his existing licensed
area under O.T. License No. 391-103166, situated at Medina,
Misamis Oriental;
2. That for and in consideration of the aforementioned transfer of
rights over said additional area to TIMBERWEALTH
CORPORATION, ESTRELLA F. JAVIER and JOSE M. JAVIER,
both directors and stockholders of said corporation, do hereby
undertake to pay LEONARDO TIRO, as soon as said additional
area is approved and transferred to TIMBERWEALTH
CORPORATION the sum of THIRTY THOUSAND PESOS
(P30,000.00), which amount of money shall form part of their paid
up capital stock in TIMBERWEALTH CORPORATION;
3. That this Agreement is subject to the approval of the members of
the Board of Directors of the TIMBERWEALTH CORPORATION.
 x x x           x x x          x x x
On November 18, 1966, the Acting Director of Forestry wrote private respondent that
his forest concession was renewed up to May 12, 1967 under O.T.L. No. 391-51267,
but since the concession consisted of only 2,535 hectares, he was therein informed
that:
In pursuance of the Presidential directive of May 13, 1966, you are
hereby given until May 12, 1967 to form an organization such as a
cooperative, partnership or corporation with other adjoining
licensees so as to have a total holding area of not less than 20,000
hectares of contiguous and compact territory and an aggregate
allowable annual cut of not less than 25,000 cubic meters,
otherwise, your license will not be further renewed. 6
Consequently, petitioners, now acting as timber license holders by virtue of the deed
of assignment executed by private respondent in their favor, entered into a Forest
Consolidation Agreement 7 on April 10, 1967 with other ordinary timber license
holders in Misamis Oriental, namely, Vicente L. De Lara, Jr., Salustiano R. Oca and
Sanggaya Logging Company. Under this consolidation agreement, they all agreed to
pool together and merge their respective forest concessions into a working unit, as
envisioned by the aforementioned directives. This consolidation agreement was
approved by the Director of Forestry on May 10, 1967. 8 The working unit was
subsequently incorporated as the North Mindanao Timber Corporation, with the
petitioners and the other signatories of the aforesaid Forest Consolidation Agreement
as incorporators. 9
On July 16, 1968, for failure of petitioners to pay the balance due under the two
deeds of assignment, private respondent filed an action against petitioners, based on
the said contracts, for the payment of the amount of P83,138.15 with interest at 6%
per annum from April 10, 1967 until full payment, plus P12,000.00 for attorney's fees
and costs.
On September 23, 1968, petitioners filed their answer admitting the due execution of
the contracts but interposing the special defense of nullity thereof since private
respondent failed to comply with his contractual obligations and, further, that the
conditions for the enforceability of the obligations of the parties failed to materialize.
As a counterclaim, petitioners sought the return of P55,586.00 which private
respondent had received from them pursuant to an alleged management agreement,
plus attorney's fees and costs.
On October 7, 1968, private respondent filed his reply refuting the defense of nullity of
the contracts in this wise:
What were actually transferred and assigned to the defendants
were plaintiff's rights and interest in a logging concession described
in the deed of assignment, attached to the complaint and marked
as Annex A, and agreement Annex E; that the "shares of stocks"
referred to in paragraph II of the complaint are terms used therein
merely to designate or identify those rights and interests in said
logging concession. The defendants actually made use of or
enjoyed not the "shares of stocks" but the logging concession itself;
that since the proposed Timberwealth Corporation was owned
solely and entirely by defendants, the personalities of the former
and the latter are one and the same. Besides, before the logging
concession of the plaintiff or the latter's rights and interests therein
were assigned or transferred to defendants, they never became the
property or assets of the Timberwealth Corporation which is at most
only an association of persons composed of the defendants. 10
and contending that the counterclaim of petitioners in the amount of P55,586.39 is
actually only a part of the sum of P69,661.85 paid by the latter to the former in partial
satisfaction of the latter's claim. 11
After trial, the lower court rendered judgment dismissing private respondent's
complaint and ordering him to pay petitioners the sum of P33,161.85 with legal
interest at six percent per annum from the date of the filing of the answer until
complete payment. 12
As earlier stated, an appeal was interposed by private respondent to the Court of
Appeals which reversed the decision of the court of a quo.
On March 28, 1978, petitioners filed a motion in respondent court for extension of
time to file a motion for reconsideration, for the reason that they needed to change
counsel. 13 Respondent court, in its resolution dated March 31, 1978, gave petitioners
fifteen (15) days from March 28, 1978 within which to file said motion for
reconsideration, provided that the subject motion for extension was filed on
time. 14 On April 11, 1978, petitioners filed their motion for reconsideration in the Court
of Appeals. 15 On April 21, 1978, private respondent filed a consolidated opposition to
said motion for reconsideration on the ground that the decision of respondent court
had become final on March 27, 1978, hence the motion for extension filed on March
28, 1978 was filed out of time and there was no more period to extend. However, this
was not acted upon by the Court of Appeals for the reason that on April 20, 1978,
prior to its receipt of said opposition, a resolution was issued denying petitioners'
motion for reconsideration, thus:
The motion for reconsideration filed on April 11, 1978 by counsel
for defendants-appellees is denied. They did not file any brief in this
case. As a matter of fact this case was submitted for decision
without appellees' brief. In their said motion, they merely tried to
refute the rationale of the Court in deciding to reverse the appealed
judgment. 16
Petitioners then sought relief in this Court in the present petition for review
on certiorari. Private respondent filed his comment, reiterating his stand that the
decision of the Court of Appeals under review is already final and executory.
Petitioners countered in their reply that their petition for review presents substantive
and fundamental questions of law that fully merit judicial determination, instead of
being suppressed on technical and insubstantial reasons. Moreover, the aforesaid
one (1) day delay in the filing of their motion for extension is excusable, considering
that petitioners had to change their former counsel who failed to file their brief in the
appellate court, which substitution of counsel took place at a time when there were
many successive intervening holidays.
On July 26, 1978, we resolved to give due course to the petition.
The one (1) day delay in the filing of the said motion for extension can justifiably be
excused, considering that aside from the change of counsel, the last day for filing the
said motion fell on a holiday following another holiday, hence, under such
circumstances, an outright dismissal of the petition would be too harsh. Litigations
should, as much as possible, be decided on their merits and not on technicalities. In a
number of cases, this Court, in the exercise of equity jurisdiction, has relaxed the
stringent application of technical rules in order to resolve the case on its
merits. 17 Rules of procedure are intended to promote, not to defeat, substantial
justice and, therefore, they should not be applied in a very rigid and technical sense.
We now proceed to the resolution of this case on the merits.
The assignment of errors of petitioners hinges on the central issue of whether the
deed of assignment dated February 15, 1966 and the agreement of February 28,
1966 are null and void, the former for total absence of consideration and the latter for
non-fulfillment of the conditions stated therein.
Petitioners contend that the deed of assignment conveyed to them the shares of
stocks of private respondent in Timberwealth Corporation, as stated in the deed itself.
Since said corporation never came into existence, no share of stocks was ever
transferred to them, hence the said deed is null and void for lack of cause or
consideration.
We do not agree. As found by the Court of Appeals, the true cause or consideration
of said deed was the transfer of the forest concession of private respondent to
petitioners for P120,000.00. This finding is supported by the following
considerations, viz:
1. Both parties, at the time of the execution of the deed of assignment knew that the
Timberwealth Corporation stated therein was non-existent. 18
2. In their subsequent agreement, private respondent conveyed to petitioners his
inchoate right over a forest concession covering an additional area for his existing
forest concession, which area he had applied for, and his application was then
pending in the Bureau of Forestry for approval.
3. Petitioners, after the execution of the deed of assignment, assumed the operation
of the logging concessions of private respondent. 19
4. The statement of advances to respondent prepared by petitioners stated:
"P55,186.39 advances to L.A. Tiro be applied to succeeding shipments. Based on the
agreement, we pay P10,000.00 every after (sic) shipment. We had only 2
shipments" 20
5. Petitioners entered into a Forest Consolidation Agreement with other holders of
forest concessions on the strength of the questioned deed of assignment. 21
The aforesaid contemporaneous and subsequent acts of petitioners and private
respondent reveal that the cause stated in the questioned deed of assignment is
false. It is settled that the previous and simultaneous and subsequent acts of the
parties are properly cognizable indica of their true intention. 22 Where the parties to a
contract have given it a practical construction by their conduct as by acts in partial
performance, such construction may be considered by the court in construing the
contract, determining its meaning and ascertaining the mutual intention of the parties
at the time of contracting. 23 The parties' practical construction of their contract has
been characterized as a clue or index to, or as evidence of, their intention or meaning
and as an important, significant, convincing, persuasive, or influential factor in
determining the proper construction of the agreement. 24
The deed of assignment of February 15, 1966 is a relatively simulated contract which
states a false cause or consideration, or one where the parties conceal their true
agreement. 25 A contract with a false consideration is not null and void per
se. 26 Under Article 1346 of the Civil Code, a relatively simulated contract, when it
does not prejudice a third person and is not intended for any purpose contrary to law,
morals, good customs, public order or public policy binds the parties to their real
agreement.
The Court of Appeals, therefore, did not err in holding petitioners liable under the said
deed and in ruling that —
. . . In view of the analysis of the first and second assignment of
errors, the defendants-appellees are liable to the plaintiff-appellant
for the sale and transfer in their favor of the latter's forest
concessions. Under the terms of the contract, the parties agreed on
a consideration of P120,000.00. P20,000.00 of which was paid,
upon the signing of the contract and the balance of P100,000.00 to
be paid at the rate of P10,000.00 for every shipment of export logs
actually produced from the forest concessions of the appellant sold
to the appellees. Since plaintiff-appellant's forest concessions were
consolidated or merged with those of the other timber license
holders by appellees' voluntary act under the Forest Consolidation
Agreement (Exhibit D), approved by the Bureau of Forestry (Exhibit
D-3), then the unpaid balance of P49,338.15 (the amount of
P70,661.85 having been received by the plaintiff-appellant from the
defendants-appellees) became due and demandable. 27
As to the alleged nullity of the agreement dated February 28, 1966, we agree with
petitioners that they cannot be held liable thereon. The efficacy of said deed of
assignment is subject to the condition that the application of private respondent for an
additional area for forest concession be approved by the Bureau of Forestry. Since
private respondent did not obtain that approval, said deed produces no effect. When
a contract is subject to a suspensive condition, its birth or effectivity can take place
only if and when the event which constitutes the condition happens or is fulfilled. 28 If
the suspensive condition does not take place, the parties would stand as if the
conditional obligation had never existed. 29
The said agreement is a bilateral contract which gave rise to reciprocal obligations,
that is, the obligation of private respondent to transfer his rights in the forest
concession over the additional area and, on the other hand, the obligation of
petitioners to pay P30,000.00. The demandability of the obligation of one party
depends upon the fulfillment of the obligation of the other. In this case, the failure of
private respondent to comply with his obligation negates his right to demand
performance from petitioners. Delivery and payment in a contract of sale, are so
interrelated and intertwined with each other that without delivery of the goods there is
no corresponding obligation to pay. The two complement each other. 30
Moreover, under the second paragraph of Article 1461 of the Civil Code, the efficacy
of the sale of a mere hope or expectancy is deemed subject to the condition that the
thing will come into existence. In this case, since private respondent never acquired
any right over the additional area for failure to secure the approval of the Bureau of
Forestry, the agreement executed therefor, which had for its object the transfer of
said right to petitioners, never became effective or enforceable.
WHEREFORE, the decision of respondent Court of Appeals is hereby MODIFIED.
The agreement of the parties dated February 28, 1966 is declared without force and
effect and the amount of P30,000.00 is hereby ordered to be deducted from the sum
awarded by respondent court to private respondent. In all other respects, said
decision of respondent court is affirmed.
SO ORDERED. Melencio-Herrera, Paras, Padilla and Sarmiento JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-5267           October 27, 1953
LUZ HERMOSA, as administratrix of the Intestate Estate of Fernando Hermosa, Sr.,
and FERNANDO HERMOSA, JR., petitioners,
vs.
EPIFANIO M. LONGARA, respondent.
Manuel O. Chan for petitioners.
Jacinto R. Bohol for respondent.
LABRADOR, J.:
This is an appeal by way of certiorari against a decision of the Court of Appeals,
fourth division, approving certain claims presented by Epifanio M. Longara against the
testate estate of Fernando Hermosa, Sr. The claims are of three kinds, namely,
P2,341.41 representing credit advances made to the intestate from 1932 to 1944,
P12,924.12 made to his son Francisco Hermosa, and P3,772 made to his grandson,
Fernando Hermosa, Jr. from 1945 to 1947, after the death of the intestate, which
occurred in December, 1944. The claimant presented evidence and the Court of
Appeals found, in accordance therewith, that the intestate had asked for the said
credit advances for himself and for the members of his family "on condition that their
payment should be made by Fernando Hermosa, Sr. as soon as he receive funds
derived from the sale of his property in Spain." Claimant had testified without
opposition that the credit advances were to be "payable as soon as Fernando
Hermosa, Sr.'s property in Spain was sold and he receive money derived from the
sale." The Court of Appeals held that payment of the advances did not become due
until the administratrix received the sum of P20,000 from the buyer of the property.
Upon authorization of the probate court in October, 1947, and the same was paid for
subsequently. The Claim was filed on October 2, 1948.
It is contended on this appeal that the obligation contracted by the intestate was
subject to a condition exclusively dependent upon the will of the debtor (a condicion
potestativa) and therefore null and void, in accordance with article 1115 of the old
Civil Code. The case of Osmeña vs. Rama, (14 Phil. 99) is cited to support appellants
contention. In this case, this court seems to have filed that a promise to pay an
indebtedness "if a house of strong materials is sold" is an obligation the performance
of which depended on the will of the debtor. We have examined this case and we find
that the supposed ruling was merely an assumption and the same was not the actual
ruling of the case.
A careful consideration of the condition upon which payment of the sums advanced
was made to depend, "as soon as he (intestate) receive funds derived from the sale
of his property in Spain," discloses the fact that the condition in question does not
depend exclusively upon the will of the debtor, but also upon other circumstances
beyond his power or control. If the condition were "if he decides to sell his house." or
"if he likes to pay the sums advanced," or any other condition of similar import
implying that upon him (the debtor) alone payment would depend, the condition would
be  protestativa, dependent exclusively upon his will or discretion. In the form that the
condition was found by the Court of Appeals however the condition implies that the
intestate had already decided to sell his house, or at least that he had made his
creditors believe that he had done so, and that all that we needed to make his
obligation (to pay his indebtedness) demandable is that the sale be consummated
and the price thereof remitted to the islands. Note that if the intestate would prevent
or would have prevented the consummation of the sale voluntarily, the condition
would be or would have been deemed or considered complied with (article 1119, old
Civil Code).The will to sell on the part of the intestate was, therefore, present in fact,
or presumed legally to exist, although the price and other conditions thereof were still
within his discretion and final approval. But in addition of the sale to him (the
intestate-vendor), there were still other conditions that had no concur to effect the
sale, mainly that of the presence of a buyer, ready, able and willing to purchase the
property under the conditions demanded by the intestate. Without such a buyer the
sale could not be carried out or the proceeds thereof sent to the islands. It is evident,
therefore sent to the islands. It is evident, therefore, that the condition of the
obligation was not a purely protestative one, depending exclusively upon the will of
the intestate, but a mixed one, depending partly upon the will of intestate and partly
upon chance, i.e., the presence of a buyer of the property for the price and under the
conditions desired by the intestate. The obligation is clearly governed by the second
sentence of article 1115 of the old Civil Code (8 Manresa, 126). The condition is,
besides, a suspensive condition, upon the happening of which the obligation to pay is
made dependent. And upon the happening of the condition, the debt became
immediately due and demandable. (Article 1114, old Civil Code; 8 Manresa, 119).
One other point needs to be considered, and this is the fact that the sale was not
effected in the lifetime of the debtor (the intestate), but after his death and by his
administrator, the very wife of the claimant. On this last circumstance we must bear in
mind that the Court of Appeals found no evidence to show that the claim was the
product of a collusion or connivance between the administratrix and the claimant.
That there was really a promise made by the intestate to pay for the credit advances
maybe implied from the fact that the receipts thereof had been preserved. Had the
advances been made without intention of demanding their payment later, said
receipts would not have been preserved. Regularity of the advances and the close
relationship between the intestate and the claimant also support this conclusion.
As to the fact that the suspensive condition took place after the death of the debtor,
and that advances were made more than ten years before the sale, we supported in
our conclusion that the same is immaterial by Sanchez Roman, who says, among
other things, as to conditional obligations:
1a La obligacion contractual afectada por condicion suspensiva. no es
exigible hasta que se cumpla la condicion, . . .
2 a El cumplimiento de la condicion suspensiva retrotae los efectos del acto
juridico originario de la obligacion a que aquella afecta, al tiempo de
lacelebracion de este;
3 a La referida retroaccion, no solo tiene lugar cuando el cumplimiento de la
condicion se verifica en vida de los contrayentes, que tambien se produce
cuando aquel se realiza despues de la muerte de estos. (4 Sanchez Roman,
p. 122) (Emphasis supplied.)
As the obligation retroacts to the date when the contract was entered into, all
amounts advanced from the time of the agreement became due, upon the happening
of the suspensive condition. As the obligation to pay became due and demandable
only when the house was sold and the proceeds received in the islands, the action to
recover the same only accrued, within the meaning of the statute of limitations, on
date the money became available here hence the action to recover the advances has
not yet prescribed.
The above considerations dispose of the most important questions raised on this
appeal. It is also contended that the third group of claims, i.e., credits furnished the
intestate's grandson after his (intestate's) death in 1944, should have been allowed.
We find merit in this contention. Even if authorization to furnish necessaries to his
grandson may have been given, this authorization could not be made to extend after
his death, for two obvious reasons. First because the obligation to furnish support is
personal and is extinguished upon the death of the person obliged to give
support(article 150, old Civil Code), and second because upon the death of a
principal (the intestate in this case), his agent's authority or authorization is deemed
terminated (article 1732, old Civil Code). That part of the decision allowing this group
of claims, amounting to P3,772 should be reversed.
One last contention of the appellant is that the claims are barred by the statute of
non-claims. It does not appear from the record that this question was ever raised in
any of the courts below. We are, therefore, without authority under our rules to
consider this issue at this stage of the proceedings.
The judgment appealed from is hereby affirmed in so far as it approves the claims of
appellee in the amounts of P2,341 and P12,942.12, and reversed as to that of
P3,772. Without costs.
Bengzon, Padilla, Tuason, Montemayor, Reyes, Jugo, and Bautista Angelo,
JJ., concur.
Separate Opinions
PARAS, C. J.,  concurring and dissenting:
I concur in the majority decision insofar as it reverses the appealed judgment allowing
the claim for P3,772, but dissent therefrom insofar as it affirms the appealed judgment
approving appellee's other claims.
The principal question is whether the stipulation to pay the advances "on condition
that their payment should be made by Fernando Hermosa, Sr. as soon as he receives
funds derived from the sale of his property in Spain, and making said advances
"payable as soon as Fernando Hermosa, Sr.'s property in Spain was sold and he
received money derived from the sale," condicion potestativa and therefore null and
void in accordance with article 1115 of the old Civil Code. My answer is in the
affirmative, because it is very obvious that the matter of the sale of the house rested
on the sole will of the debtor, unaffected by any outside consideration or influence.
The majority admit that if the condition were "if he decides to sell his house" or "if he
likes to pay the sums advanced, the same would be potestative. I think a mere play or
words is invoked, as I cannot see any substantial difference. Under the condition
imposed by Fernando Hermosa, Sr., it is immaterial whether or not he had already
decided to sell his house, since there is no pretence that acceptable conditions of the
sale had been made the subject of an agreement, such that if such conditions
presented themselves the debtor would be bound to proceed with the sale. In the
case at bar, the terms are still subject to the sale judgment — if not whims and
caprice — of Fernando Hermosa, Sr. In fact no sale was effected during his lifetime.
As the condition above referred to is null and void, the debt resulting from the
advances made to Fernando Hermosa, Sr. became either immediately demandable
or payable within a term to be fixed by the court. In both cases the action has
prescribed after the lapse of ten years. In the case of Gonzales vs. De Jose (66 Phil.,
369, 371), this court already held as follows:
We hold that the two promissory notes are governed by article 1128
because under the terms thereof the plaintiff intended to grant the defendant
a period within which to pay his debts. As the promissory notes do not affix
this period, it is for the court to fix the same. (Citing cases.) The action to ask
the court to fix the period has already prescribed in accordance with section
43 (1) of the Code of Civil Procedure. This period of prescription is ten years,
which has already elapsed from the execution of the promissory notes until
the filing of the action on June 1, 1934. The action which should be brought
in accordance with articles 1128 is different from the action for the recovery
of the amount of the notes, although the effects of both are the same, being,
like other civil actions, subject to the rules of prescription.
The majority also contend that the condition in question depended on other factors
than the sole will of the debtor, and cite the presence of a buyer, ready, able and
willing to purchase the property. This is of no moment, because, as already stated, in
the absence of any contract setting forth the minimum or maximum terms which
would be acceptable to the debtor, nobody could legally compel Fernando Hermosa,
Sr. to make any sale.
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 146839               March 23, 2011
ROLANDO T. CATUNGAL, JOSE T. CATUNGAL, JR., CAROLYN T. CATUNGAL
and ERLINDA CATUNGAL-WESSEL, Petitioners,
vs.
ANGEL S. RODRIGUEZ, Respondent.
DECISION
LEONARDO-DE CASTRO, J.:
Before the Court is a Petition for Review on Certiorari, assailing the following
issuances of the Court of Appeals in CA-G.R. CV No. 40627 consolidated with CA-
G.R. SP No. 27565: (a) the August 8, 2000 Decision,1 which affirmed the
Decision2 dated May 30, 1992 of the Regional Trial Court (RTC), Branch 27 of Lapu-
lapu City, Cebu in Civil Case No. 2365-L, and (b) the January 30, 2001
Resolution,3 denying herein petitioners’ motion for reconsideration of the August 8,
2000 Decision.
The relevant factual and procedural antecedents of this case are as follows:
This controversy arose from a Complaint for Damages and Injunction with Preliminary
Injunction/Restraining Order4 filed on December 10, 1990 by herein respondent Angel
S. Rodriguez (Rodriguez), with the RTC, Branch 27, Lapu-lapu City, Cebu, docketed
as Civil Case No. 2365-L against the spouses Agapita and Jose Catungal (the
spouses Catungal), the parents of petitioners.
In the said Complaint, it was alleged that Agapita T. Catungal (Agapita) owned a
parcel of land (Lot 10963) with an area of 65,246 square meters, covered by Original
Certificate of Title (OCT) No. 1055 in her name situated in the Barrio of Talamban,
Cebu City. The said property was allegedly the exclusive paraphernal property of
Agapita.
On April 23, 1990, Agapita, with the consent of her husband Jose, entered into a
Contract to Sell6 with respondent Rodriguez. Subsequently, the Contract to Sell was
purportedly "upgraded" into a Conditional Deed of Sale7 dated July 26, 1990 between
the same parties. Both the Contract to Sell and the Conditional Deed of Sale were
annotated on the title.
The provisions of the Conditional Deed of Sale pertinent to the present dispute are
quoted below:
1. The VENDOR for and in consideration of the sum of TWENTY[-]FIVE MILLION
PESOS (₱25,000,000.00) payable as follows:
a. FIVE HUNDRED THOUSAND PESOS (₱500,000.00) downpayment upon
the signing of this agreement, receipt of which sum is hereby acknowledged
in full from the VENDEE.
b. The balance of TWENTY[-]FOUR MILLION FIVE HUNDRED THOUSAND
PESOS (₱24,500,000.00) shall be payable in five separate checks, made to
the order of JOSE Ch. CATUNGAL, the first check shall be for FOUR
MILLION FIVE HUNDRED THOUSAND PESOS (₱4,500,000.00) and the
remaining balance to be paid in four checks in the amounts of FIVE
MILLION PESOS (₱5,000,000.00) each after the VENDEE have (sic)
successfully negotiated, secured and provided a Road Right of Way
consisting of 12 meters in width cutting across Lot 10884 up to the national
road, either by widening the existing Road Right of Way or by securing a
new Road Right of Way of 12 meters in width. If however said Road Right of
Way could not be negotiated, the VENDEE shall give notice to the VENDOR
for them to reassess and solve the problem by taking other options and
should the situation ultimately prove futile, he shall take steps to rescind or
cancel the herein Conditional Deed of Sale.
 c. That the access road or Road Right of Way leading to Lot 10963 shall be
the responsibility of the VENDEE to secure and any or all cost relative to the
acquisition thereof shall be borne solely by the VENDEE. He shall, however,
be accorded with enough time necessary for the success of his endeavor,
granting him a free hand in negotiating for the passage.
BY THESE PRESENTS, the VENDOR do hereby agree to sell by way of herein
CONDITIONAL DEED OF SALE to VENDEE, his heirs, successors and assigns, the
real property described in the Original Certificate of Title No. 105 x x x.
xxxx
5. That the VENDEE has the option to rescind the sale. In the event the VENDEE
exercises his option to rescind the herein Conditional Deed of Sale, the VENDEE
shall notify the VENDOR by way of a written notice relinquishing his rights over the
property. The VENDEE shall then be reimbursed by the VENDOR the sum of FIVE
HUNDRED THOUSAND PESOS (₱500,000.00) representing the downpayment,
interest free, payable but contingent upon the event that the VENDOR shall have
been able to sell the property to another party.8
In accordance with the Conditional Deed of Sale, Rodriguez purportedly secured the
necessary surveys and plans and through his efforts, the property was reclassified
from agricultural land into residential land which he claimed substantially increased
the property’s value. He likewise alleged that he actively negotiated for the road right
of way as stipulated in the contract.9
Rodriguez further claimed that on August 31, 1990 the spouses Catungal requested
an advance of ₱5,000,000.00 on the purchase price for personal reasons. Rodriquez
allegedly refused on the ground that the amount was substantial and was not due
under the terms of their agreement. Shortly after his refusal to pay the advance, he
purportedly learned that the Catungals were offering the property for sale to third
parties.10
Thereafter, Rodriguez received letters dated October 22, 1990,11 October 24,
199012 and October 29, 1990,13 all signed by Jose Catungal who was a lawyer,
essentially demanding that the former make up his mind about buying the land or
exercising his "option" to buy because the spouses Catungal allegedly received other
offers and they needed money to pay for personal obligations and for investing in
other properties/business ventures. Should Rodriguez fail to exercise his option to
buy the land, the Catungals warned that they would consider the contract cancelled
and that they were free to look for other buyers.
In a letter dated November 4, 1990,14 Rodriguez registered his objections to what he
termed the Catungals’ unwarranted demands in view of the terms of the Conditional
Deed of Sale which allowed him sufficient time to negotiate a road right of way and
granted him, the vendee, the exclusive right to rescind the contract. Still, on
November 15, 1990, Rodriguez purportedly received a letter dated November 9,
199015 from Atty. Catungal, stating that the contract had been cancelled and
terminated.
Contending that the Catungals’ unilateral rescission of the Conditional Deed of Sale
was unjustified, arbitrary and unwarranted, Rodriquez prayed in his Complaint, that:
1. Upon the filing of this complaint, a restraining order be issued enjoining
defendants [the spouses Catungal], their employees, agents,
representatives or other persons acting in their behalf from offering the
property subject of this case for sale to third persons; from entertaining
offers or proposals by third persons to purchase the said property; and, in
general, from performing acts in furtherance or implementation of
defendants’ rescission of their Conditional Deed of Sale with plaintiff
[Rodriguez].
2. After hearing, a writ of preliminary injunction be issued upon such
reasonable bond as may be fixed by the court enjoining defendants and
other persons acting in their behalf from performing any of the acts
mentioned in the next preceding paragraph.
3. After trial, a Decision be rendered:
a) Making the injunction permanent;
b) Condemning defendants to pay to plaintiff, jointly and solidarily:
Actual damages in the amount of ₱400,000.00 for their unlawful rescission of the
Agreement and their performance of acts in violation or disregard of the said
Agreement;
Moral damages in the amount of ₱200,000.00;
Exemplary damages in the amount of ₱200,000.00; Expenses of litigation and
attorney’s fees in the amount of ₱100,000.00; and
Costs of suit.16
On December 12, 1990, the trial court issued a temporary restraining order and set
the application for a writ of preliminary injunction for hearing on December 21, 1990
with a directive to the spouses Catungal to show cause within five days from notice
why preliminary injunction should not be granted. The trial court likewise ordered that
summons be served on them.17
Thereafter, the spouses Catungal filed their opposition18 to the issuance of a writ of
preliminary injunction and later filed a motion to dismiss19 on the ground of improper
venue. According to the Catungals, the subject property was located in Cebu City and
thus, the complaint should have been filed in Cebu City, not Lapu-lapu City.
Rodriguez opposed the motion to dismiss on the ground that his action was a
personal action as its subject was breach of a contract, the Conditional Deed of Sale,
and not title to, or possession of real property.20
In an Order dated January 17, 1991,21 the trial court denied the motion to dismiss and
ruled that the complaint involved a personal action, being merely for damages with a
prayer for injunction.
Subsequently, on January 30, 1991, the trial court ordered the issuance of a writ of
preliminary injunction upon posting by Rodriguez of a bond in the amount of
₱100,000.00 to answer for damages that the defendants may sustain by reason of
the injunction.
On February 1, 1991, the spouses Catungal filed their Answer with
Counterclaim22 alleging that they had the right to rescind the contract in view of (1)
Rodriguez’s failure to negotiate the road right of way despite the lapse of several
months since the signing of the contract, and (2) his refusal to pay the additional
amount of ₱5,000,000.00 asked by the Catungals, which to them indicated his lack of
funds to purchase the property. The Catungals likewise contended that Rodriguez did
not have an exclusive right to rescind the contract and that the contract, being
reciprocal, meant both parties had the right to rescind.23 The spouses Catungal
further claimed that it was Rodriguez who was in breach of their agreement and guilty
of bad faith which justified their rescission of the contract.24 By way of counterclaim,
the spouses Catungal prayed for actual and consequential damages in the form of
unearned interests from the balance (of the purchase price in the amount) of
₱24,500,000.00, moral and exemplary damages in the amount of ₱2,000,000.00,
attorney’s fees in the amount of ₱200,000.00 and costs of suits and litigation
expenses in the amount of ₱10,000.00.25 The spouses Catungal prayed for the
dismissal of the complaint and the grant of their counterclaim.
The Catungals amended their Answer twice,26 retaining their basic allegations but
amplifying their charges of contractual breach and bad faith on the part of Rodriguez
and adding the argument that in view of Article 1191 of the Civil Code, the power to
rescind reciprocal obligations is granted by the law itself to both parties and does not
need an express stipulation to grant the same to the injured party. In the Second
Amended Answer with Counterclaim, the spouses Catungal added a prayer for the
trial court to order the Register of Deeds to cancel the annotations of the two
contracts at the back of their OCT.27
On October 24, 1991, Rodriguez filed an Amended Complaint,28 adding allegations to
the effect that the Catungals were guilty of several misrepresentations which
purportedly induced Rodriguez to buy the property at the price of ₱25,000,000.00.
Among others, it was alleged that the spouses Catungal misrepresented that their Lot
10963 includes a flat portion of land which later turned out to be a separate lot (Lot
10986) owned by Teodora Tudtud who sold the same to one Antonio Pablo. The
Catungals also allegedly misrepresented that the road right of way will only traverse
two lots owned by Anatolia Tudtud and her daughter Sally who were their relatives
and who had already agreed to sell a portion of the said lots for the road right of way
at a price of ₱550.00 per square meter. However, because of the Catungals’ acts of
offering the property to other buyers who offered to buy the road lots for ₱2,500.00
per square meter, the adjacent lot owners were no longer willing to sell the road lots
to Rodriguez at ₱550.00 per square meter but were asking for a price of ₱3,500.00
per square meter. In other words, instead of assisting Rodriguez in his efforts to
negotiate the road right of way, the spouses Catungal allegedly intentionally and
maliciously defeated Rodriguez’s negotiations for a road right of way in order to justify
rescission of the said contract and enable them to offer the property to other buyers.
Despite requesting the trial court for an extension of time to file an amended
Answer,29 the Catungals did not file an amended Answer and instead filed an Urgent
Motion to Dismiss30 again invoking the ground of improper venue. In the meantime,
for failure to file an amended Answer within the period allowed, the trial court set the
case for pre-trial on December 20, 1991.
During the pre-trial held on December 20, 1991, the trial court denied in open court
the Catungals’ Urgent Motion to Dismiss for violation of the rules and for being
repetitious and having been previously denied.31 However, Atty. Catungal refused to
enter into pre-trial which prompted the trial court to declare the defendants in default
and to set the presentation of the plaintiff’s evidence on February 14, 1992.32
On December 23, 1991, the Catungals filed a motion for reconsideration33 of the
December 20, 1991 Order denying their Urgent Motion to Dismiss but the trial court
denied reconsideration in an Order dated February 3, 1992.34 Undeterred, the
Catungals subsequently filed a Motion to Lift and to Set Aside Order of Default35 but it
was likewise denied for being in violation of the rules and for being not
meritorious.36 On February 28, 1992, the Catungals filed a Petition for Certiorari and
Prohibition37 with the Court of Appeals, questioning the denial of their motion to
dismiss and the order of default. This was docketed as CA-G.R. SP No. 27565.
Meanwhile, Rodriguez proceeded to present his evidence before the trial court.
In a Decision dated May 30, 1992, the trial court ruled in favor of Rodriguez, finding
that: (a) under the contract it was complainant (Rodriguez) that had the option to
rescind the sale; (b) Rodriguez’s obligation to pay the balance of the purchase price
arises only upon successful negotiation of the road right of way; (c) he proved his
diligent efforts to negotiate the road right of way; (d) the spouses Catungal were guilty
of misrepresentation which defeated Rodriguez’s efforts to acquire the road right of
way; and (e) the Catungals’ rescission of the contract had no basis and was in bad
faith. Thus, the trial court made the injunction permanent, ordered the Catungals to
reduce the purchase price by the amount of acquisition of Lot 10963 which they
misrepresented was part of the property sold but was in fact owned by a third party
and ordered them to pay ₱100,000.00 as damages, ₱30,000.00 as attorney’s fees
and costs.
The Catungals appealed the decision to the Court of Appeals, asserting the
commission of the following errors by the trial court in their appellants’ brief38 dated
February 9, 1994:
I
THE COURT A QUO ERRED IN NOT DISMISSING OF (SIC) THE CASE ON THE
GROUNDS OF IMPROPER VENUE AND LACK OF JURISDICTION.
II
THE COURT A QUO ERRED IN CONSIDERING THE CASE AS A PERSONAL AND
NOT A REAL ACTION.
III
GRANTING WITHOUT ADMITTING THAT VENUE WAS PROPERLY LAID AND
THE CASE IS A PERSONAL ACTION, THE COURT A QUO ERRED IN
DECLARING THE DEFENDANTS IN DEFAULT DURING THE PRE-TRIAL WHEN
AT THAT TIME THE DEFENDANTS HAD ALREADY FILED THEIR ANSWER TO
THE COMPLAINT.
IV
THE COURT A QUO ERRED IN CONSIDERING THE DEFENDANTS AS HAVING
LOST THEIR LEGAL STANDING IN COURT WHEN AT MOST THEY COULD ONLY
BE CONSIDERED AS IN DEFAULT AND STILL ENTITLED TO NOTICES OF ALL
FURTHER PROCEEDINGS ESPECIALLY AFTER THEY HAD FILED THE MOTION
TO LIFT THE ORDER OF DEFAULT.
V Decision.
THE COURT A QUO ERRED IN ISSUING THE WRIT [OF] PRELIMINARY
INJUNCTION RESTRAINING THE EXERCISE OF ACTS OF OWNERSHIP AND
OTHER RIGHTS OVER REAL PROPERTY OUTSIDE OF THE COURT’S
TERRITORIAL JURISDICTION AND INCLUDING PERSONS WHO WERE NOT
BROUGHT UNDER ITS JURISDICTION, THUS THE NULLITY OF THE WRIT.
VI
THE COURT A QUO ERRED IN NOT RESTRAINING ITSELF MOTU PROP[R]IO
FROM CONTINUING WITH THE PROCEEDINGS IN THE CASE AND IN
RENDERING DECISION THEREIN IF ONLY FOR REASON OF COURTESY AND
FAIRNESS BEING MANDATED AS DISPENSER OF FAIR AND EQUAL JUSTICE
TO ALL AND SUNDRY WITHOUT FEAR OR FAVOR IT HAVING BEEN SERVED
EARLIER WITH A COPY OF THE PETITION FOR CERTIORARI QUESTIONING ITS
VENUE AND JURISDICTION IN CA-G.R. NO. SP 27565 IN FACT NOTICES FOR
THE FILING OF COMMENT THERETO HAD ALREADY BEEN SENT OUT BY THE
HONORABLE COURT OF APPEALS, SECOND DIVISION, AND THE COURT A
QUO WAS FURNISHED WITH COPY OF SAID NOTICE.
VII
THE COURT A QUO ERRED IN DECIDING THE CASE IN FAVOR OF THE
PLAINTIFF AND AGAINST THE DEFENDANTS ON THE BASIS OF EVIDENCE
WHICH ARE IMAGINARY, FABRICATED, AND DEVOID OF TRUTH, TO BE
STATED IN DETAIL IN THE DISCUSSION OF THIS PARTICULAR ERROR, AND,
THEREFORE, THE DECISION IS REVERSIBLE.39
On August 31, 1995, after being granted several extensions, Rodriguez filed his
appellee’s brief,40 essentially arguing the correctness of the trial court’s Decision
regarding the foregoing issues raised by the Catungals. Subsequently, the Catungals
filed a Reply Brief41 dated October 16, 1995.
From the filing of the appellants’ brief in 1994 up to the filing of the Reply Brief, the
spouses Catungal were represented by appellant Jose Catungal himself. However, a
new counsel for the Catungals, Atty. Jesus N. Borromeo (Atty. Borromeo), entered his
appearance before the Court of Appeals on September 2, 1997.42 On the same date,
Atty. Borromeo filed a Motion for Leave of Court to File Citation of Authorities43 and a
Citation of Authorities.44 This would be followed by Atty. Borromeo’s filing of an
Additional Citation of Authority and Second Additional Citation of Authority both on
November 17, 1997.45
During the pendency of the case with the Court of Appeals, Agapita Catungal passed
away and thus, her husband, Jose, filed on February 17, 1999 a motion for Agapita’s
substitution by her surviving children.46
On August 8, 2000, the Court of Appeals rendered a Decision in the consolidated
cases CA-G.R. CV No. 40627 and CA-G.R. SP No. 27565,47 affirming the trial court’s
In a Motion for Reconsideration dated August 21, 2000,48 counsel for the Catungals,
Atty. Borromeo, argued for the first time that paragraphs 1(b) and 549 of the
Conditional Deed of Sale, whether taken separately or jointly, violated the principle of
mutuality of contracts under Article 1308 of the Civil Code and thus, said contract was
void ab initio. He adverted to the cases mentioned in his various citations of
authorities to support his argument of nullity of the contract and his position that this
issue may be raised for the first time on appeal.
Meanwhile, a Second Motion for Substitution50 was filed by Atty. Borromeo in view of
the death of Jose Catungal.
In a Resolution dated January 30, 2001, the Court of Appeals allowed the substitution
of the deceased Agapita and Jose Catungal by their surviving heirs and denied the
motion for reconsideration for lack of merit
Hence, the heirs of Agapita and Jose Catungal filed on March 27, 2001 the present
petition for review,51 which essentially argued that the Court of Appeals erred in not
finding that paragraphs 1(b) and/or 5 of the Conditional Deed of Sale, violated the
principle of mutuality of contracts under Article 1308 of the Civil Code. Thus, said
contract was supposedly void ab initio and the Catungals’ rescission thereof was
superfluous.
In his Comment,52 Rodriguez highlighted that (a) petitioners were raising new matters
that cannot be passed upon on appeal; (b) the validity of the Conditional Deed of Sale
was already admitted and petitioners cannot be allowed to change theories on
appeal; (c) the questioned paragraphs of the Conditional Deed of Sale were valid;
and (d) petitioners were the ones who committed fraud and breach of contract and
were not entitled to relief for not having come to court with clean hands.
The Court gave due course to the Petition53 and the parties filed their respective
Memoranda.
The issues to be resolved in the case at bar can be summed into two questions:
I. Are petitioners allowed to raise their theory of nullity of the Conditional
Deed of Sale for the first time on appeal?
II. Do paragraphs 1(b) and 5 of the Conditional Deed of Sale violate the
principle of mutuality of contracts under Article 1308 of the Civil Code?
On petitioners’ change of theory
Petitioners claimed that the Court of Appeals should have reversed the trial courts’
Decision on the ground of the alleged nullity of paragraphs 1(b) and 5 of the
Conditional Deed of Sale notwithstanding that the same was not raised as an error in
their appellants’ brief. Citing Catholic Bishop of Balanga v. Court of
Appeals,54 petitioners argued in the Petition that this case falls under the following
exceptions:
(3) Matters not assigned as errors on appeal but consideration of which is
necessary in arriving at a just decision and complete resolution of the case
or to serve the interest of justice or to avoid dispensing piecemeal justice;
(4) Matters not specifically assigned as errors on appeal but raised in the
trial court and are matters of record having some bearing on the issue
submitted which the parties failed to raise or which the lower court ignored;
(5) Matters not assigned as errors on appeal but closely related to an error
assigned; and
(6) Matters not assigned as errors but upon which the determination of a
question properly assigned is dependent.55
We are not persuaded.
This is not an instance where a party merely failed to assign an issue as an error in
the brief nor failed to argue a material point on appeal that was raised in the trial court
and supported by the record. Neither is this a case where a party raised an error
closely related to, nor dependent on the resolution of, an error properly assigned in
his brief. This is a situation where a party completely changes his theory of the case
on appeal and abandons his previous assignment of errors in his brief, which plainly
should not be allowed as anathema to due process.
Petitioners should be reminded that the object of pleadings is to draw the lines of
battle between the litigants and to indicate fairly the nature of the claims or defenses
of both parties.56 In Philippine National Construction Corporation v. Court of
Appeals,57 we held that "[w]hen a party adopts a certain theory in the trial court, he
will not be permitted to change his theory on appeal, for to permit him to do so would
not only be unfair to the other party but it would also be offensive to the basic rules of
fair play, justice and due process."58
We have also previously ruled that "courts of justice have no jurisdiction or power to
decide a question not in issue. Thus, a judgment that goes beyond the issues and
purports to adjudicate something on which the court did not hear the parties, is not
only irregular but also extrajudicial and invalid. The rule rests on the fundamental
tenets of fair play."59
During the proceedings before the trial court, the spouses Catungal never claimed
that the provisions in the Conditional Deed of Sale, stipulating that the payment of the
balance of the purchase price was contingent upon the successful negotiation of a
road right of way (paragraph 1[b]) and granting Rodriguez the option to rescind
(paragraph 5), were void for allegedly making the fulfillment of the contract dependent
solely on the will of Rodriguez.
On the contrary, with respect to paragraph 1(b), the Catungals did not aver in the
Answer (and its amended versions) that the payment of the purchase price was
subject to the will of Rodriguez but rather they claimed that paragraph 1(b) in relation
to 1(c) only presupposed a reasonable time be given to Rodriguez to negotiate the
road right of way. However, it was petitioners’ theory that more than sufficient time
had already been given Rodriguez to negotiate the road right of way. Consequently,
Rodriguez’s refusal/failure to pay the balance of the purchase price, upon demand,
was allegedly indicative of lack of funds and a breach of the contract on the part of
Rodriguez.
Anent paragraph 5 of the Conditional Deed of Sale, regarding Rodriguez’s option to
rescind, it was petitioners’ theory in the court a quo that notwithstanding such
provision, they retained the right to rescind the contract for Rodriguez’s breach of the
same under Article 1191 of the Civil Code.
Verily, the first time petitioners raised their theory of the nullity of the Conditional
Deed of Sale in view of the questioned provisions was only in their Motion for
Reconsideration of the Court of Appeals’ Decision, affirming the trial court’s judgment.
The previous filing of various citations of authorities by Atty. Borromeo and the Court
of Appeals’ resolutions noting such citations were of no moment. The citations of
authorities merely listed cases and their main rulings without even any mention of
their relevance to the present case or any prayer for the Court of Appeals to consider
them.1âwphi1 In sum, the Court of Appeals did not err in disregarding the citations of
authorities or in denying petitioners’ motion for reconsideration of the assailed August
8, 2000 Decision in view of the proscription against changing legal theories on
appeal.
Ruling on the questioned provisions of the Conditional Deed of Sale
Even assuming for the sake of argument that this Court may overlook the procedural
misstep of petitioners, we still cannot uphold their belatedly proffered arguments.
At the outset, it should be noted that what the parties entered into is a Conditional
Deed of Sale, whereby the spouses Catungal agreed to sell and Rodriguez agreed to
buy Lot 10963 conditioned on the payment of a certain price but the payment of the
purchase price was additionally made contingent on the successful negotiation of a
road right of way. It is elementary that "[i]n conditional obligations, the acquisition of
rights, as well as the extinguishment or loss of those already acquired, shall depend
upon the happening of the event which constitutes the condition."60
Petitioners rely on Article 1308 of the Civil Code to support their conclusion regarding
the claimed nullity of the aforementioned provisions. Article 1308 states that "[t]he
contract must bind both contracting parties; its validity or compliance cannot be left to
the will of one of them."
Article 1182 of the Civil Code, in turn, provides:
Art. 1182. When the fulfillment of the condition depends upon the sole will of the
debtor, the conditional obligation shall be void. If it depends upon chance or upon the
will of a third person, the obligation shall take effect in conformity with the provisions
of this Code.
In the past, this Court has distinguished between a condition imposed on the
perfection of a contract and a condition imposed merely on the performance of an
obligation. While failure to comply with the first condition results in the failure of a
contract, failure to comply with the second merely gives the other party the option to
either refuse to proceed with the sale or to waive the condition.61 This principle is
evident in Article 1545 of the Civil Code on sales, which provides in part:
Art. 1545. Where the obligation of either party to a contract of sale is subject to any
condition which is not performed, such party may refuse to proceed with the contract
or he may waive performance of the condition x x x.
Paragraph 1(b) of the Conditional Deed of Sale, stating that respondent shall pay the
balance of the purchase price when he has successfully negotiated and secured a
road right of way, is not a condition on the perfection of the contract nor on the validity
of the entire contract or its compliance as contemplated in Article 1308. It is a
condition imposed only on respondent’s obligation to pay the remainder of the
purchase price. In our view and applying Article 1182, such a condition is not purely
potestative as petitioners contend. It is not dependent on the sole will of the debtor
but also on the will of third persons who own the adjacent land and from whom the
road right of way shall be negotiated. In a manner of speaking, such a condition is
likewise dependent on chance as there is no guarantee that respondent and the third
party-landowners would come to an agreement regarding the road right of way. This
type of mixed condition is expressly allowed under Article 1182 of the Civil Code.
Analogous to the present case is Romero v. Court of Appeals,62 wherein the Court
interpreted the legal effect of a condition in a deed of sale that the balance of the
purchase price would be paid by the vendee when the vendor has successfully
ejected the informal settlers occupying the property. In Romero, we found that such a
condition did not affect the perfection of the contract but only imposed a condition on
the fulfillment of the obligation to pay the balance of the purchase price, to wit:
From the moment the contract is perfected, the parties are bound not only to the
fulfillment of what has been expressly stipulated but also to all the consequences
which, according to their nature, may be in keeping with good faith, usage and law.
Under the agreement, private respondent is obligated to evict the squatters on the
property. The ejectment of the squatters is a condition the operative act of which sets
into motion the period of compliance by petitioner of his own obligation, i.e., to pay the
balance of the purchase price. Private respondent's failure "to remove the squatters
from the property" within the stipulated period gives petitioner the right to either refuse
to proceed with the agreement or waive that condition in consonance with Article
1545 of the Civil Code. This option clearly belongs to petitioner and not to private
respondent.
We share the opinion of the appellate court that the undertaking required of private
respondent does not constitute a "potestative condition dependent solely on his will"
that might, otherwise, be void in accordance with Article 1182 of the Civil Code but a
"mixed" condition "dependent not on the will of the vendor alone but also of third
persons like the squatters and government agencies and personnel concerned." We
must hasten to add, however, that where the so-called "potestative condition" is
imposed not on the birth of the obligation but on its fulfillment, only the condition is
avoided, leaving unaffected the obligation itself.63 (Emphases supplied.)
From the provisions of the Conditional Deed of Sale subject matter of this case, it was
the vendee (Rodriguez) that had the obligation to successfully negotiate and secure
the road right of way. However, in the decision of the trial court, which was affirmed
by the Court of Appeals, it was found that respondent Rodriguez diligently exerted
efforts to secure the road right of way but the spouses Catungal, in bad faith,
contributed to the collapse of the negotiations for said road right of way. To quote
from the trial court’s decision:
It is therefore apparent that the vendee’s obligations (sic) to pay the balance of the
purchase price arises only when the road-right-of-way to the property shall have been
successfully negotiated, secured and provided. In other words, the obligation to pay
the balance is conditioned upon the acquisition of the road-right-of-way, in
accordance with paragraph 2 of Article 1181 of the New Civil Code. Accordingly, "an
obligation dependent upon a suspensive condition cannot be demanded until after the
condition takes place because it is only after the fulfillment of the condition that the
obligation arises." (Javier v[s] CA 183 SCRA) Exhibits H, D, P, R, T, FF and JJ show
that plaintiff [Rodriguez] indeed was diligent in his efforts to negotiate for a road-right-
of-way to the property. The written offers, proposals and follow-up of his proposals
show that plaintiff [Rodriguez] went all out in his efforts to immediately acquire an
access road to the property, even going to the extent of offering ₱3,000.00 per square
meter for the road lots (Exh. Q) from the original ₱550.00 per sq. meter. This Court
also notes that defendant (sic) [the Catungals] made misrepresentation in the
negotiation they have entered into with plaintiff [Rodriguez]. (Exhs. F and G) The
misrepresentation of defendant (sic) [the Catungals] as to the third lot (Lot 10986) to
be part and parcel of the subject property [(]Lot 10963) contributed in defeating the
plaintiff’s [Rodriguez’s] effort in acquiring the road-right-of-way to the property.
Defendants [the Catungals] cannot now invoke the non-fulfillment of the condition in
the contract as a ground for rescission when defendants [the Catungals] themselves
are guilty of preventing the fulfillment of such condition.
From the foregoing, this Court is of the considered view that rescission of the
conditional deed of sale by the defendants is without any legal or factual basis.64 x x
x. (Emphases supplied.)
In all, we see no cogent reason to disturb the foregoing factual findings of the trial
court.
Furthermore, it is evident from the language of paragraph 1(b) that the condition
precedent (for respondent’s obligation to pay the balance of the purchase price to
arise) in itself partly involves an obligation to do, i.e., the undertaking of respondent to
negotiate and secure a road right of way at his own expense.65 It does not escape our
notice as well, that far from disclaiming paragraph 1(b) as void, it was the Catungals’
contention before the trial court that said provision should be read in relation to
paragraph 1(c) which stated:
c. That the access road or Road Right of Way leading to Lot 10963 shall be the
responsibility of the VENDEE to secure and any or all cost relative to the acquisition
thereof shall be borne solely by the VENDEE. He shall, however, be accorded with
enough time necessary for the success of his endeavor, granting him a free hand in
negotiating for the passage.66 (Emphasis supplied.)
The Catungals’ interpretation of the foregoing stipulation was that Rodriguez’s
obligation to negotiate and secure a road right of way was one with a period and that
period, i.e., "enough time" to negotiate, had already lapsed by the time they
demanded the payment of ₱5,000,000.00 from respondent. Even assuming arguendo
that the Catungals were correct that the respondent’s obligation to negotiate a road
right of way was one with an uncertain period, their rescission of the Conditional Deed
of Sale would still be unwarranted. Based on their own theory, the Catungals had a
remedy under Article 1197 of the Civil Code, which mandates:
Art. 1197. If the obligation does not fix a period, but from its nature and the
circumstances it can be inferred that a period was intended, the courts may fix the
duration thereof.
The courts shall also fix the duration of the period when it depends upon the will of
the debtor.
In every case, the courts shall determine such period as may under the
circumstances have been probably contemplated by the parties. Once fixed by the
courts, the period cannot be changed by them.
What the Catungals should have done was to first file an action in court to fix the
period within which Rodriguez should accomplish the successful negotiation of the
road right of way pursuant to the above quoted provision. Thus, the Catungals’
demand for Rodriguez to make an additional payment of ₱5,000,000.00 was
premature and Rodriguez’s failure to accede to such demand did not justify the
rescission of the contract.
With respect to petitioners’ argument that paragraph 5 of the Conditional Deed of
Sale likewise rendered the said contract void, we find no merit to this theory.
Paragraph 5 provides:
5. That the VENDEE has the option to rescind the sale. In the event the VENDEE
exercises his option to rescind the herein Conditional Deed of Sale, the VENDEE
shall notify the VENDOR by way of a written notice relinquishing his rights over the
property. The VENDEE shall then be reimbursed by the VENDOR the sum of FIVE
HUNDRED THOUSAND PESOS (₱500,000.00) representing the downpayment,
interest free, payable but contingent upon the event that the VENDOR shall have
been able to sell the property to another party.67
Petitioners posited that the above stipulation was the "deadliest" provision in the
Conditional Deed of Sale for violating the principle of mutuality of contracts since it
purportedly rendered the contract subject to the will of respondent.
We do not agree.
It is petitioners’ strategy to insist that the Court examine the first sentence of
paragraph 5 alone and resist a correlation of such sentence with other provisions of
the contract. Petitioners’ view, however, ignores a basic rule in the interpretation of
contracts – that the contract should be taken as a whole.
Article 1374 of the Civil Code provides that "[t]he various stipulations of a contract
shall be interpreted together, attributing to the doubtful ones that sense which may
result from all of them taken jointly." The same Code further sets down the rule that
"[i]f some stipulation of any contract should admit of several meanings, it shall be
understood as bearing that import which is most adequate to render it effectual."68
Similarly, under the Rules of Court it is prescribed that "[i]n the construction of an
instrument where there are several provisions or particulars, such a construction is, if
possible, to be adopted as will give effect to all"69 and "for the proper construction of
an instrument, the circumstances under which it was made, including the situation of
the subject thereof and of the parties to it, may be shown, so that the judge may be
placed in the position of those whose language he is to interpret."70
Bearing in mind the aforementioned interpretative rules, we find that the first sentence
of paragraph 5 must be taken in relation with the rest of paragraph 5 and with the
other provisions of the Conditional Deed of Sale.
Reading paragraph 5 in its entirety will show that Rodriguez’s option to rescind the
contract is not absolute as it is subject to the requirement that there should be written
notice to the vendor and the vendor shall only return Rodriguez’s downpayment of
₱500,000.00, without interest, when the vendor shall have been able to sell the
property to another party. That what is stipulated to be returned is only the
downpayment of ₱500,000.00 in the event that Rodriguez exercises his option to
rescind is significant. To recall, paragraph 1(b) of the contract clearly states that the
installments on the balance of the purchase price shall only be paid upon successful
negotiation and procurement of a road right of way. It is clear from such provision that
the existence of a road right of way is a material consideration for Rodriguez to
purchase the property. Thus, prior to him being able to procure the road right of way,
by express stipulation in the contract, he is not bound to make additional payments to
the Catungals. It was further stipulated in paragraph 1(b) that: "[i]f however said road
right of way cannot be negotiated, the VENDEE shall give notice to the VENDOR for
them to reassess and solve the problem by taking other options and should the
situation ultimately prove futile, he [Rodriguez] shall take steps to rescind or [cancel]
the herein Conditional Deed of Sale." The intention of the parties for providing
subsequently in paragraph 5 that Rodriguez has the option to rescind the sale is
undeniably only limited to the contingency that Rodriguez shall not be able to secure
the road right of way. Indeed, if the parties intended to give Rodriguez the absolute
option to rescind the sale at any time, the contract would have provided for the return
of all payments made by Rodriguez and not only the downpayment. To our mind, the
reason only the downpayment was stipulated to be returned is that the vendee’s
option to rescind can only be exercised in the event that no road right of way is
secured and, thus, the vendee has not made any additional payments, other than his
downpayment.
In sum, Rodriguez’s option to rescind the contract is not purely potestative but rather
also subject to the same mixed condition as his obligation to pay the balance of the
purchase price – i.e., the negotiation of a road right of way. In the event the condition
is fulfilled (or the negotiation is successful), Rodriguez must pay the balance of the
purchase price. In the event the condition is not fulfilled (or the negotiation fails),
Rodriguez has the choice either (a) to not proceed with the sale and demand return of
his downpayment or (b) considering that the condition was imposed for his benefit, to
waive the condition and still pay the purchase price despite the lack of road access.
This is the most just interpretation of the parties’ contract that gives effect to all its
provisions.
In any event, even if we assume for the sake of argument that the grant to Rodriguez
of an option to rescind, in the manner provided for in the contract, is tantamount to a
potestative condition, not being a condition affecting the perfection of the contract,
only the said condition would be considered void and the rest of the contract will
remain valid. In Romero, the Court observed that "where the so-called ‘potestative
condition’ is imposed not on the birth of the obligation but on its fulfillment, only the
condition is avoided, leaving unaffected the obligation itself."71
It cannot be gainsaid that "contracts have the force of law between the contracting
parties and should be complied with in good faith."72 We have also previously ruled
that "[b]eing the primary law between the parties, the contract governs the
adjudication of their rights and obligations. A court has no alternative but to enforce
the contractual stipulations in the manner they have been agreed upon and
written."73 We find no merit in petitioners’ contention that their parents were merely
"duped" into accepting the questioned provisions in the Conditional Deed of Sale. We
note that although the contract was between Agapita Catungal and Rodriguez, Jose
Catungal nonetheless signed thereon to signify his marital consent to the same. We
concur with the trial court’s finding that the spouses Catungals’ claim of being misled
into signing the contract was contrary to human experience and conventional wisdom
since it was Jose Catungal who was a practicing lawyer while Rodriquez was a non-
lawyer.74 It can be reasonably presumed that Atty. Catungal and his wife reviewed the
provisions of the contract, understood and accepted its provisions before they affixed
their signatures thereon.
After thorough review of the records of this case, we have come to the conclusion that
petitioners failed to demonstrate that the Court of Appeals committed any reversible
error in deciding the present controversy. However, having made the observation that
it was desirable for the Catungals to file a separate action to fix the period for
respondent Rodriguez’s obligation to negotiate a road right of way, the Court finds it
necessary to fix said period in these proceedings. It is but equitable for us to make a
determination of the issue here to obviate further delay and in line with the judicial
policy of avoiding multiplicity of suits.
If still warranted, Rodriguez is given a period of thirty (30) days from the finality of this
decision to negotiate a road right of way. In the event no road right of way is secured
by Rodriquez at the end of said period, the parties shall reassess and discuss other
options as stipulated in paragraph 1(b) of the Conditional Deed of Sale and, for this
purpose, they are given a period of thirty (30) days to agree on a course of action.
Should the discussions of the parties prove futile after the said thirty (30)-day period,
immediately upon the expiration of said period for discussion, Rodriguez may (a)
exercise his option to rescind the contract, subject to the return of his downpayment,
in accordance with the provisions of paragraphs 1(b) and 5 of the Conditional Deed of
Sale or (b) waive the road right of way and pay the balance of the deducted purchase
price as determined in the RTC Decision dated May 30, 1992.
WHEREFORE, the Decision dated August 8, 2000 and the Resolution dated January
30, 2001 of the Court of Appeals in CA-G.R. CV No. 40627 consolidated with CA-
G.R. SP No. 27565 are AFFIRMED with the following modification:
If still warranted, respondent Angel S. Rodriguez is given a period of thirty (30) days
from the finality of this Decision to negotiate a road right of way. In the event no road
right of way is secured by respondent at the end of said period, the parties shall
reassess and discuss other options as stipulated in paragraph 1(b) of the Conditional
Deed of Sale and, for this purpose, they are given a period of thirty (30) days to agree
on a course of action. Should the discussions of the parties prove futile after the said
thirty (30)-day period, immediately upon the expiration of said period for discussion,
Rodriguez may (a) exercise his option to rescind the contract, subject to the return of
his downpayment, in accordance with the provisions of paragraphs 1(b) and 5 of the
Conditional Deed of Sale or (b) waive the road right of way and pay the balance of the
deducted purchase price as determined in the RTC Decision dated May 30, 1992.
No pronouncement as to costs.
SO ORDERED.
TERESITA J. LEONARDO-DE CASTRO
Associate Justice
WE CONCUR:
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-16449             August 31, 1962
PAUL SCHENKER, plaintiff-appellant,
vs.
WILLIAM F. GEMPERLE, defendant-appellee.
Campos, Mendoza & Hernandez, Jose C. Zulueta and A. R. Narvasa for plaintiff-
appellant.
Angel S. Gamboa for defendant-appellee.
PAREDES, J.:
The amended complaint, in a nutshell, avers that sometime in the summer of 1953, at
Zurich, Switzerland, plaintiff Paul Schenker and defendant William F. Gemperle
agreed to organize a Philippine Corporation, later named as "The Philippine Swiss
Trading Co., Inc.", and to divide the capital stock equally between themselves and/or
their associates. This verbal agreement was acknowledged and confirmed in writing
by defendant in his letter of September 14, 1953 (Annex A, amended complaint).
Defendant caused articles of incorporation to be drafted and sent to plaintiff at Zurich.
In a moment of indiscretion and mistaken trust, according to him, the plaintiff signed
and remitted to the defendant at Manila, the said articles which placed in the name of
plaintiff only 24% of the total subscription and the balance of 76% being in the name
of defendant and his relatives. Explaining the discrepancy between the articles and
their verbal covenant, the defendant stated in said letter Annex A, that "Temporarily, I
had to place in my name 75% of the shares because there is a local law which
provides that when one intends to make contracts with the government, 75% of the
subscribed capital has to be Filipino as otherwise the Flag Law will be applied." In the
same letter, how ever defendant assured the plaintiff that he would give the latter
"exactly the same share holding as I have". The plaintiff paid to the defendant the
sum of P7,000. for his subscription. In view of the consistent refusal of the defendant
to live up to their agreement, notwithstanding repeated demands, the plaintiff filed the
present complaint, praying that defendant be condemned:
(a) upon the first cause of action, to transfer or cause to be transferred or
assigned to the plaintiff 26% of the entire capital stock issued and
subscribed, as of the date he obeys said judgment, of Philippine Swiss
Trading Co., Inc., or enough thereof to make the plaintiff's interest and
participation in said corporation total 50% of said entire capital stock issued
an subscribed, which ever may be more;
(b) upon the second cause of action, to return to the plaintiff or properly
account to him for the unexpended balance, in the sum of P2,000.00,
Philippine Currency, of the remittance alleged in paragraph 18(a) of the
complaint;
(c) Upon the third cause of action, to pay the plaintiff the sum of P25,000.00,
Philippine Currency, by way of recompense for business lost, profits
unrealized and goodwill impaired or destroyed; and
(d) upon all three causes of actions, to pay the plaintiff the additional sum of
P100,000.00, Philippine Currency, .... The plaintiff also prays for costs, and
for such other an further relief as to the Court may appear just and equitable.
An Answer was filed, with the customary admissions an denials and with
affirmative defenses and counterclaims.
On November 21, 1958, the defendant filed a pleading styled "manifestation and
motion to dismiss" (Section 10 Rule 9) — alleging that — "With reference to the first
cause of action, the amended complaint states no cause of action".
In support of the motion to dismiss, defendant claimed that
There is no allegation in the amended complaint that the alleged obligation
of the defendant to have the plaintiff's share holding in the capital stock
subscribed in Articles of Incorporation in the proportion of 50% thereof
is already due.1äwphï1.ñët
Such being the situation, the demands allegedly made upon the defendant
for his compliance with the obligation sued upon have been futile, because
legally the alleged obligation is not yet due. It not having fixed a period for its
compliance, there has been no default thereof.
xxx     xxx     xxx
In his opposition to the motion to dismiss, filed on November 3, 1958, plaintiff
contended that the oral agreement was the actual as well as the expressed basis of
plaintiff's cause of action; the letter Annex A, was not the agreement but only an
evidence of it and if the references of Annex A were deleted from the amended
complaint, the latter would not, for that reason alone, cease to state a cause of action;
the obligation being pure, it is demandable immediately (Art. 1179, Civil Code); the
filing of the complaint itself constituted a judicial demand for performance, thereby
making the defendant's obligation to become due; even if Annex A is considered as
the basis of the action, it is still a pure obligation, because it says "will give you,
however, exactly the same share holding as I have" — which imparts an
unconditional promise; and supposing that from the allegations of the complaint, it
may reasonably be inferred that it was intended to give the defendant time to fulfill his
obligation, the present action can be considered one for the fixing of such time (Art.
1197, Civil Code).
On September 30, 1959; the trial court granted the motion to dismiss in so far as the
first cause of action is concerned, predicating its ruling upon the following
considerations: that the agreement did not fix the time within which the defendant
sought to perform its alleged promise and, therefore, the obligation was not due and
the action for its compliance was premature (Barreto v. City of Manila, 7 Phil. 416-
420); that the obligation is not pure, because its compliance is dependent upon a
future or uncertain event; that the alleged oral agreement had been novated, after the
execution of the articles of incorporation, and that the action being for specific
performance and there being a need to fix the period for compliance of the agreement
and the present complaint does not allege facts or lacks the characteristics for an
action to fix the period, a separate action to that effect should have been filed,
because the action to that effect be brought in order to have a term fixed is different
from the action to enforce the obligation; thus conveying the notion that the fixing of
the period is incompatible with an action for specific performance. Plaintiff appealed
questions of law.
Article 1197 of the Civil Code, provides —
If the obligation does not fix a period, but from its nature and the
circumstances it can be inferred that a period was intended, the courts may
fix the duration thereof.
The courts shall also fix the duration of the period when it depends upon the
will of the debtor.
In every case, the courts shall determine such period may under the
circumstances have been probably contemplate by the parties. Once fixed
by the courts, the period cannot be changed by them.
The ultimate facts to be alleged in a complaint to properly and adequately plead the
right of action granted the above quoted provision of law are (1) Facts showing that a
contract was entered into, imposing on one the parties an obligation or obligations in
favor of the other; (2) Facts showing that the performance of the obligation was left to
the will of the obligor or clean showing or from which an inference may reasonably
drawn, that a period was intended by the parties. The first cause of action, under
consideration, sets out fact describing an obligation with an indefinite period, there by
bringing the case within the pale of the article above quoted, albeit it fails to
specifically and categorically demand that the court fix the duration of the period.
Under the circumstances, the court could render judgment granting the remedy
indicated in said article 1197, notwithstanding standing the fact that the complaint
does not positive and by explicit expression ask for such relief. What determines the
nature and character of an action is not the prayer but the essential basic allegations
of fact set forth in the pertinent pleading. A judgment may grant the relief to which a
party in whose favor it is entered is entitled, even if the party has not demanded such
relief in his pleadings (Sec. 9, Rule 35; Baguioro v. Barrios, 77 Phil. 120). The
amended complaint in question moreover, "prays for . . . such other and further relief
as the Court may appear just and equitable" which is broad and comprehensive
enough, to justify the extension of a remedy different from or together with, the
right  to be declared owner or to recover the ownership or the possession of Twenty-
six (26%) percent of the capital stock of the Philippine Swiss Trading Co., Inc.
presently in the name of the defendant. The case of Barrette v. City of Manila, supra,
cited by the trial court, is of little help to the defendant-appellee. It strengthens rather
the plaintiff-appellant's position. In the Barreto case as in the present, the essential
allegations of the pleadings made out an obligation subject to an indefinite period. In
the Barretto case, like the one at bar, the complaint did not risk for the fixing of the
period, but for immediate and more positive relief, yet this Court remanded the said
case to the court of origin "for determination of the time within which the contiguous
property must be acquired by the city in order to comply with the condition of the
donation" — all of which go to show that the fixing of the period in the case at bar,
may and/or could be properly undertaken by the trial court.
Even discarding the above considerations, still there is no gainsaying the fact that the
obligation in question, is pure, because "its performance does not depend upon a
future or uncertain event or upon a past event unknown to the parties" and as such,
"is demandable at once" (Art. 1179, New York Code). It was so understood and
treated by the defendant-appellee himself. The immediate payment by the plaintiff-
appellant of his subscriptions, after the organization of the corporation, can only mean
that the obligation should be immediately fulfilled. giving the defendant only such time
as might reasonably be necessary for its actual fulfillment. The contract was to
organize the corporation and to divide equally, after its organization, its capital stock.
IN VIEW HEREOF, the order appealed from is reversed and the case remanded to
the court of origin, for further and appropriate proceedings. No costs.
Bengzon, C.J., Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Barrera,
Dizon, Regala and Makalintal, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. L-55665 February 8, 1989
DELTA MOTOR CORPORATION, petitioner,
vs.
EDUARDA SAMSON GENUINO, JACINTO S. GENUINO, Jr., VICTOR S.
GENUINO, HECTOR S. GENUINO, EVELYN S. GENUINO, and The COURT OF
APPEALS, respondents.
Alcasid, Villanueva & Associates for petitioner.
Luna, Puruganan, Sison & Ongkiko for respondents.

CORTES,  J.:
Petitioner, through this petition for review by certiorari, appeals from the decision of
respondent appellate court in CA-G.R. No. 59848-R entitled "Eduarda Samson
Genuino, et al. v. Delta Motor Corporation" promulgated on October 27, 1980.
The facts are as follows:
Petitioner Delta Motor Corporation (hereinafter referred to as Delta) is a corporation
duly organized and existing under Philippine laws.
On the other hand, private respondents are the owners of an iceplant and cold
storage located at 1879 E. Rodriguez Sr. Avenue, Quezon City doing business under
the name "España Extension Iceplant and Cold Storage."
In July 1972, two letter-quotations were submitted by Delta to Hector Genuino offering
to sell black iron pipes. T
The letter dated July 3, 1972 quoted Delta's selling price for 1,200 length of black iron
pipes schedule 40, 2" x 20' including delivery at P66,000.00 with the following terms
of payment:
a. 20% of the net contract price or P13,200.00 will be due and
payable upon signing of the contract papers.
b. 20% of the net contract price or P13,200.00 will be due and
payable before commencement of delivery.
c. The balance of 60% of the net contract price or P39,600.00 with
8% financing charge per annum will be covered by a Promissory
Note bearing interest at the rate of 14% per annum and payable in
TWELVE (12) equal monthly installment (sic), the first of which will
become due thirty (30) days after the completion of delivery.
Additional 14% will be charged for all delayed payments. [Exh. "A";
Exh. 1.]
The second letter-quotation dated July 18, 1972 provides for the selling price of 150
lengths of black iron pipes schedule 40, 1 1/4" x 20' including delivery at P5,400.00
with the following terms of payment:
a. 50% of the net contract price or P 2,700.00 will be due and
payable upon signing of the contract papers.
b. 50% of the net contract price or P 2,700.00 will be due and
payable before commencement of delivery. [Exh. "C"; Exh. "2".]
Both letter-quotations also contain the following stipulations as to delivery and price
offer:
DELIVERY
Ex-stock subject to prior sales.
xxx xxx xxx
Our price offer indicated herein shall remain firm within a period of
thirty (30) days from the date hereof. Any order placed after said
period will be subject to our review and confirmation. [Exh. "A" and
"C"; Exhs. "l" and "2".]
Hector Genuino was agreeable to the offers of Delta hence, he manifested his
conformity thereto by signing his name in the space provided on July 17, 1972 and
July 24, 1972 for the first and second letter-quotations, respectively.
It is undisputed that private respondents made initial payments on both contracts —
for the first contract, P13,200.00 and, for the second, P2,700.00 — for a total sum of
P15,900.00 on July 28, 1972 (Exhs. "B" and "D"].
Likewise unquestionable are the following. the non-delivery of the iron pipes by Delta;
the non-payment of the subsequent installments by the Genuinos; and the non-
execution by the Genuinos of the promissory note called for by the first contract.
The evidence presented in the trial court also showed that sometime in July 1972
Delta offered to deliver the iron pipes but the Genuinos did not accept the offer
because the construction of the ice plant building where the pipes were to be installed
was not yet finished.
Almost three years later, on April 15, 1975, Hector Genuino, in behalf of España
Extension Ice Plant and Cold Storage, asked Delta to deliver the iron pipes within
thirty (30) days from its receipt of the request. At the same time private respondents
manifested their preparedness to pay the second installment on both contracts upon
notice of Delta's readiness to deliver.
Delta countered that the black iron pipes cannot be delivered on the prices quoted as
of July 1972. The company called the attention of the Genuinos to the stipulation in
their two (2) contracts that the quoted prices were good only within thirty (30) days
from date of offer. Whereupon Delta sent new price quotations to the Genuinos based
on its current price of black iron pipes, as follows:
P241,800.00 for 1,200 lengths of black iron pjpes schedule 40, 2" x
20' [Exh. "G-1".]
 P17,550.00 for 150 lengths of black iron pipes schedule 40, 1 1/4" x
20' [Exh. "G-2".]
The Genuinos rejected the new quoted prices and instead filed a complaint for
specific performance with damages seeking to compel Delta to deliver the pipes.
Delta, in its answer prayed for rescission of the contracts pursuant to Art. 1191 of the
New Civil Code. The case was docketed as Civil Case No. Q-20120 of the then Court
of First Instance of Rizal, Branch XVIII, Quezon City.
After trial the Court of First Instance ruled in favor of Delta,the dispositive portion of its
decision reading as follows:
WHEREFORE, premises considered, judgment is rendered:
1. Declaring the contracts, Annexes "A" and "C" of the complaint
rescinded;
2. Ordering defendant to refund to plaintiffs the sum of P15,900.00
delivered by the latter as downpayments on the aforesaid contracts;
3. Ordering plaintiffs to pay defendant the sum of P10,000.00 as
attorney's fees; and,
4. To pay the costs of suit. [CFI Decision, pp. 13-14; Rollo, pp. 53-
54.]
On appeal, the Court of Appeals reversed and ordered private respondents to make
the payments specified in "Terms of Payment — (b)" of the contracts and to execute
the promissory note required in the first contract and thereafter, Delta should
immediately commence delivery of the black iron pipes.* [CA Decision, p. 20; Rollo, p.
75.]
The Court of Appeals cited two main reasons why it reversed the trial court, namely:
1. As Delta was the one who prepared the contracts and
admittedly, it had knowledge of the fact that the black iron pipes
would be used by the Genuinos in their cold storage plant which
was then undergoing construction and therefore, would require
sometime before the Genuinos would require delivery, Delta should
have included in said contracts a deadline for delivery but it did not.
As a matter of fact neither did it insist on delivery when the
Genuinos refused to accept its offer of delivery. [CA Decision, pp.
16-17; Rollo, pp. 71-72.]
2. Delta's refusal to make delivery in 1975 unless the Genuinos pay
a price very much higher than the prices it previously quoted would
mean an amendment of the contracts. It would be too unfair for the
plaintiffs if they will be made to bear the increase in prices of the
black iron pipes when they had already paid quite an amount for
said items and defendant had made use of the advance payments.
That would be unjust enrichment on the part of the defendant at the
expense of the plaintiffs and is considered an abominable business
practice. [CA Decision, pp. 18-19; Rollo, pp. 73-74.]
Respondent court denied Delta's motion for reconsideration hence this petition for
review praying for the reversal of the Court of Appeals decision and affirmance of that
of the trial court.
Petitioner argues that its obligation to deliver the goods under both contracts is
subject to conditions required of private respondents as vendees. These conditions
are: payment of 20% of the net contract price or P13,200.00 and execution of a
promissory note called for by the first contract; and payment of 50% of the net
contract price or P2,700.00 under the second contract. These, Delta posits, are
suspensive conditions and only upon their performance or compliance would its
obligation to deliver the pipes arise [Petition, pp. 9-12; Rollo, pp. 1720.] Thus, when
private respondents did not perform their obligations; when they refused to accept
petitioner's offer to deliver the goods; and, when it took them three (3) long years
before they demanded delivery of the iron pipes that in the meantime, great and
sudden fluctuation in market prices have occurred; Delta is entitled to rescind the two
(2) contracts.
Delta relies on the following provision of law on rescission:
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.
In construing Art. 1191, the Supreme Court has stated that, "[r]escission will be
ordered only where the breach complained of is substantial as to defeat the object of
the parties in entering into the agreement. It will not be granted where the breach is
slight or casual." [Phil. Amusement Enterprises, Inc. v. Natividad, G.R. No. L-21876,
September 29, 1967, 21 SCRA 284, 290.] Further, "[t]he question of whether a
breach of a contract is substantial depends upon the attendant circumstances."
[Universal Food Corporation v. Court of Appeals, G. R. No. L-29155, May 13,1970,33
SCRA 1, 18].
In the case at bar, the conduct of Delta indicates that the Genuinos' non-performance
of its obligations was not a substantial breach, let alone a breach of contract, as
would warrant rescission.
Firstly, it is undisputed that a month after the execution of the two (2) contracts,
Delta's offer to deliver the black iron pipes was rejected by the Genuinos who were
"not ready to accept delivery because the cold storage rooms have not been
constructed yet. Plaintiffs (private respondents herein) were short-funded, and did not
have the space to accommodate the pipes they ordered" [CFI Decision, p. 9; Rollo, p.
49].
Given this answer to its offer, Delta did not do anything. As testified by Crispin
Villanueva, manager of the Technical Service department of petitioner:
Q You stated that you sent a certain Evangelista
to the España Extension and Cold Storage to
offer the delivery subject matter of the contract
and then you said that Mr. Evangelista reported
(sic) to you that plaintiff would not accept
delivery, is that correct, as a summary of your
statement?
A A Yes, sir.
Q Now, what did you do in the premises (sic)?
A Yes, well, we take the word of Mr. Evangelista.
We could not deliver the said black iron pipes,
because as per information the Ice Plant is not
yet finished.
Q Did you not report that fact to ... any other
defendant-officials of the Delta Motor
Corporation?
A No.
Q And you did not do anything after that?
A Because taking the word of my Engineer we
did not do anything. [TSN, December 8, 1975,
pp. 18-19.]
xxx xxx xxx
And secondly, three (3) years later when the Genuinos offered to make payment
Delta did not raise any argument but merely demanded that the quoted prices be
increased. Thus, in its answer to private respondents' request for delivery of the
pipes, Delta countered:
Thank you for your letter dated April 15, 1975, requesting for
delivery of Black Iron pipes;.
We regret to say, however, that we cannot base our price on our
proposals dated July 3 and July 18, 1972 as per the following
paragraph quoted on said proposal:
Our price offer indicated herein shall remain firm
within a period of thirty (30) days from the date
hereof. Any order placed after said period will be
subject to our review and confirmation.
We are, therefore, enclosing our re-quoted proposal based on our
current price. [Exh. "G".]
Moreover, the power to rescind under Art. 1191 is not absolute. "[T]he 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." [University of the Phils. v. De
los Angeles, G. R. No. L-28602, September 29, 1970, 35 SCRA 102, 107; Emphasis
supplied.]
In the instant case, Delta made no manifestation whatsoever that it had opted to
rescind its contracts with f-he Genuinos. It only raised rescission as a defense when it
was sued for specific performance by private respondents.
Further, it would be highly inequitable for petitioner Delta to rescind the two (2)
contracts considering the fact that not only does it have in its possession and
ownership the black iron pipes, but also the P15,900.00 down payments private
respondents have paid. And if petitioner Delta claims the right to rescission, at the
very least, it should have offered to return the P15,900.00 down payments [See Art.
1385, Civil Code and Hodges v. Granada, 59 Phil. 429 (1934)].
It is for these same reasons that while there is merit in Delta's claim that the sale is
subject to suspensive conditions, the Court finds that it has, nevertheless, waived
performance of these conditions and opted to go on with the contracts although at a
much higher price. Art. 1545 of the Civil Code provides:
Art. 1545. Where the obligation of either party to a contract of sale
is subject to any condition which is not performed, such party may
refuse to proceed with the contract or he may waived performance
of the condition. . . . [Emphasis supplied.]
Finally, Delta cannot ask for increased prices based on the price offer stipulation in
the contracts and in the increase in the cost of goods. Reliance by Delta on the price
offer stipulation is misplaced. Said stipulation makes reference to Delta's price offer
as remaining firm for thirty (30) days and thereafter, will be subject to its review and
confirmation. The offers of Delta, however, were accepted by the private respondents
within the thirty (30)-day period. And as stipulated in the two (2) letter-quotations,
acceptance of the offer gives rise to a contract between the parties:
In the event that this proposal is acceptable to you, please indicate
your conformity by signing the space provided herein below which
also serves as a contract of this proposal. [Exhs. "A" and "C"; Exhs.
"1" and "2".]
And as further provided by the Civil Code:
Art. 1319. Consent is manifested by the meeting of the offer and
the acceptance upon the thing and the cause which are to
constitute the contract.
Art. 1475. The contract of sale is perfected at the moment there is a
meeting of minds upon thing which is the object of the contract and
upon the price.
Thus, the moment private respondents accepted the offer of Delta, the contract of
sale between them was perfected and neither party could change the terms thereof.
Neither could petitioner Delta rely on the fluctuation in the market price of goods to
support its claim for rescission. As testified to by petitioner's Vice-President of
Marketing for the Electronics, Airconditioning and Refrigeration division, Marcelino
Caja, the stipulation in the two (2) contracts as to delivery, ex-stock subject to prior
sales, means that "the goods have not been delivered and that there are no
prior commitments other than the sale covered by the contracts.. . once the offer is
accepted, the company has no more option to change the price." [CFI Decision, p. 5;
Rollo, p. 45; Emphasis supplied.] Thus, petitioner cannot claim for higher prices for
the black iron pipes due to the increase in the cost of goods. Based on the foregoing,
petitioner Delta and private respondents Genuinos should comply with the original
terms of their contracts.
WHEREFORE, the decision of the Court of Appeals is hereby AFFIRMED.
SO ORDERED.
Fernan, C.J., Gutierrez, Jr., Feliciano and Bidin, JJ., concur.
 
Footnotes
* The Court of Appeals decision was penned by Justice German.
Justice de la Fuente wrote a separate concurring opinion. Justice
Cenzon concurred both with Justice German's decision and Justice
de la Fuente's opinion. Justice Gancayco, however, wrote a
separate dissenting opinion to which Justice Patajo concurred.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 73345. April 7, 1993.
SOCIAL SECURITY SYSTEM, petitioner,
vs.
MOONWALK DEVELOPMENT & HOUSING CORPORATION, ROSITA U.
ALBERTO, ROSITA U. ALBERTO, JMA HOUSE, INC., MILAGROS SANCHEZ
SANTIAGO, in her capacity as Register of Deeds for the Province of Cavite,
ARTURO SOLITO, in his capacity as Register of Deeds for Metro Manila District IV,
Makati, Metro Manila and the INTERMEDIATE APPELLATE COURT, respondents.
The Solicitor General for petitioner.
K.V. Faylona & Associates for private respondents.
DECISION
CAMPOS, JR., J p:
Before Us is a petition for review on certiorari of decision 1 of the then Intermediate
Appellate Court affirming in toto the decision of the former Court of First Instance of
Rizal, Seventh Judicial District, Branch XXIX, Pasay City.
The facts as found by the Appellate Court are as follows:
"On February 20, 1980, the Social Security System, SSS for brevity, filed a complaint
in the Court of First Instance of Rizal against Moonwalk Development & Housing
Corporation, Moonwalk for short, alleging that the former had committed an error in
failing to compute the 12% interest due on delayed payments on the loan of
Moonwalk — resulting in a chain of errors in the application of payments made by
Moonwalk and, in an unpaid balance on the principal loan agreement in the amount of
P7,053.77 and, also in not reflecting in its statement or account an unpaid balance on
the said penalties for delayed payments in the amount of P7,517,178.21 as of
October 10, 1979.
Moonwalk answered denying SSS' claims and asserting that SSS had the opportunity
to ascertain the truth but failed to do so.
The trial court set the case for pre-trial at which pre-trial conference, the court issued
an order giving both parties thirty (30) days within which to submit a stipulation of
facts.
The Order of October 6, 1980 dismissing the complaint followed the submission by
the parties on September 19, 1980 of the following stipulation of Facts:
"1. On October 6, 1971, plaintiff approved the application of defendant Moonwalk for
an interim loan in the amount of THIRTY MILLION PESOS (P30,000,000.00) for the
purpose of developing and constructing a housing project in the provinces of Rizal
and Cavite;
"2. Out of the approved loan of THIRTY MILLION PESOS (P30,000,000.00), the sum
of P9,595,000.00 was released to defendant Moonwalk as of November 28, 1973;
"3. A third Amended Deed of First Mortgage was executed on December 18, 1973
Annex `D' providing for restructuring of the payment of the released amount of
P9,595,000.00.
"4. Defendants Rosita U. Alberto and Rosita U. Alberto, mother and daughter
respectively, under paragraph 5 of the aforesaid Third Amended Deed of First
Mortgage substituted Associated Construction and Surveys Corporation, Philippine
Model Homes Development Corporation, Mariano Z. Velarde and Eusebio T. Ramos,
as solidary obligors;
"5. On July 23, 1974, after considering additional releases in the amount of
P2,659,700.00, made to defendant Moonwalk, defendant Moonwalk delivered to the
plaintiff a promissory note for TWELVE MILLION TWO HUNDRED FIFTY FOUR
THOUSAND SEVEN HUNDRED PESOS (P12,254,700.00) Annex `E', signed by
Eusebio T. Ramos, and the said Rosita U. Alberto and Rosita U. Alberto;
"6. Moonwalk made a total payment of P23,657,901.84 to SSS for the loan principal
of P12,254,700.00 released to it. The last payment made by Moonwalk in the amount
of P15,004,905.74 were based on the Statement of Account, Annex "F" prepared by
plaintiff SSS for defendant;
"7. After settlement of the account stated in Annex 'F' plaintiff issued to defendant
Moonwalk the Release of Mortgage for Moonwalk's mortgaged properties in Cavite
and Rizal, Annexes 'G' and 'H' on October 9, 1979 and October 11, 1979
respectively.
"8. In letters to defendant Moonwalk, dated November 28, 1979 and followed up by
another letter dated December 17, 1979, plaintiff alleged that it committed an honest
mistake in releasing defendant.
"9. In a letter dated December 21, 1979, defendant's counsel told plaintiff that it had
completely paid its obligations to SSS;
"10. The genuineness and due execution of the documents marked as Annex (sic) 'A'
to 'O' inclusive, of the Complaint and the letter dated December 21, 1979 of the
defendant's counsel to the plaintiff are admitted.
"Manila for Pasay City, September 2, 1980." 2
On October 6, 1990, the trial court issued an order dismissing the complaint on the
ground that the obligation was already extinguished by the payment by Moonwalk of
its indebtedness to SSS and by the latter's act of cancelling the real estate mortgages
executed in its favor by defendant Moonwalk. The Motion for Reconsideration filed by
SSS with the trial court was likewise dismissed by the latter.
These orders were appealed to the Intermediate Appellate Court. Respondent Court
reduced the errors assigned by the SSS into this issue: ". . . are defendants-
appellees, namely, Moonwalk Development and Housing Corporation, Rosita U.
Alberto, Rosita U. Alberto, JMA House, Inc. still liable for the unpaid penalties as
claimed by plaintiff-appellant or is their obligation extinguished?" 3 As We have stated
earlier, the respondent Court held that Moonwalk's obligation was extinguished and
affirmed the trial court.
Hence, this Petition wherein SSS raises the following grounds for review:
"First, in concluding that the penalties due from Moonwalk are "deemed waived
and/or barred," the appellate court disregarded the basic tenet that waiver of a right
must be express, made in a clear and unequivocal manner. There is no evidence in
the case at bar to show that SSS made a clear, positive waiver of the penalties, made
with full knowledge of the circumstances.
Second, it misconstrued the ruling that SSS funds are trust funds, and SSS, being a
mere trustee, cannot perform acts affecting the same, including condonation of
penalties, that would diminish property rights of the owners and beneficiaries thereof.
(United Christian Missionary Society v. Social Security Commission, 30 SCRA 982,
988 [1969]).
Third, it ignored the fact that penalty at the rate of 12% p.a. is not inequitable.
Fourth, it ignored the principle that equity will cancel a release on the ground of
mistake of fact." 4
The same problem which confronted the respondent court is presented before Us: Is
the penalty demandable even after the extinguishment of the principal obligation?
The former Intermediate Appellate Court, through Justice Eduard P. Caguioa, held in
the negative. It reasoned, thus:
"2. As we have explained under No. 1, contrary to what the plaintiff-appellant states in
its Brief, what is sought to be recovered in this case is not the 12% interest on the
loan but the 12% penalty for failure to pay on time the amortization. What is sought to
be enforced therefore is the penal clause of the contract entered into between the
parties.
Now, what is a penal clause. A penal clause has been defined as
"an accessory obligation which the parties attach to a principal obligation for the
purpose of insuring the performance thereof by imposing on the debtor a special
presentation (generally consisting in the payment of a sum of money) in case the
obligation is not fulfilled or is irregularly or inadequately fulfilled" (3 Castan 8th Ed. p.
118).
Now an accessory obligation has been defined as that attached to a principal
obligation in order to complete the same or take its place in the case of breach (4
Puig Peña Part 1 p. 76). Note therefore that an accessory obligation is dependent for
its existence on the existence of a principal obligation. A principal obligation may exist
without an accessory obligation but an accessory obligation cannot exist without a
principal obligation. For example, the contract of mortgage is an accessory obligation
to enforce the performance of the main obligation of indebtedness. An indebtedness
can exist without the mortgage but a mortgage cannot exist without the indebtedness,
which is the principal obligation. In the present case, the principal obligation is the
loan between the parties. The accessory obligation of a penal clause is to enforce the
main obligation of payment of the loan. If therefore the principal obligation does not
exist the penalty being accessory cannot exist.
Now then when is the penalty demandable? A penalty is demandable in case of non
performance or late performance of the main obligation. In other words in order that
the penalty may arise there must be a breach of the obligation either by total or partial
non fulfillment or there is non fulfillment in point of time which is called mora or delay.
The debtor therefore violates the obligation in point of time if there is mora or delay.
Now, there is no mora or delay unless there is a demand. It is noteworthy that in the
present case during all the period when the principal obligation was still subsisting,
although there were late amortizations there was no demand made by the creditor,
plaintiff-appellant for the payment of the penalty. Therefore up to the time of the letter
of plaintiff-appellant there was no demand for the payment of the penalty, hence the
debtor was no in mora in the payment of the penalty.
However, on October 1, 1979, plaintiff-appellant issued its statement of account
(Exhibit F) showing the total obligation of Moonwalk as P15,004,905.74, and forthwith
demanded payment from defendant-appellee. Because of the demand for payment,
Moonwalk made several payments on September 29, October 9 and 19, 1979
respectively, all in all totalling P15,004,905.74 which was a complete payment of its
obligation as stated in Exhibit F. Because of this payment the obligation of Moonwalk
was considered extinguished, and pursuant to said extinguishment, the real estate
mortgages given by Moonwalk were released on October 9, 1979 and October 10,
1979 (Exhibits G and H). For all purposes therefore the principal obligation of
defendant-appellee was deemed extinguished as well as the accessory obligation of
real estate mortgage; and that is the reason for the release of all the Real Estate
Mortgages on October 9 and 10, 1979 respectively.
Now, besides the Real Estate Mortgages, the penal clause which is also an
accessory obligation must also be deemed extinguished considering that the principal
obligation was considered extinguished, and the penal clause being an accessory
obligation. That being the case, the demand for payment of the penal clause made by
plaintiff-appellant in its demand letter dated November 28, 1979 and its follow up
letter dated December 17, 1979 (which parenthetically are the only demands for
payment of the penalties) are therefore ineffective as there was nothing to demand. It
would be otherwise, if the demand for the payment of the penalty was made prior to
the extinguishment of the obligation because then the obligation of Moonwalk would
consist of: 1) the principal obligation 2) the interest of 12% on the principal obligation
and 3) the penalty of 12% for late payment for after demand, Moonwalk would be in
mora and therefore liable for the penalty.
Let it be emphasized that at the time of the demand made in the letters of November
28, 1979 and December 17, 1979 as far as the penalty is concerned, the defendant-
appellee was not in default since there was no mora prior to the demand. That being
the case, therefore, the demand made after the extinguishment of the principal
obligation which carried with it the extinguishment of the penal clause being merely
an accessory obligation, was an exercise in futility.
3. At the time of the payment made of the full obligation on October 10, 1979 together
with the 12% interest by defendant-appellee Moonwalk, its obligation was
extinguished. It being extinguished, there was no more need for the penal clause.
Now, it is to be noted that penalty at anytime can be modified by the Court. Even
substantial performance under Art. 1234 authorizes the Court to consider it as
complete performance minus damages. Now, Art, 1229 Civil Code of the Philippines
provides:
"ART. 1229. The judge shall equitably reduce the penalty when the principal
obligation has been partly or irregularly complied with by the debtor. Even if there has
been no performance, the penalty may also be reduced by the courts if it is iniquitous
or unconscionable."
If the penalty can be reduced after the principal obligation has been partly or
irregularly complied with by the debtor, which is nonetheless a breach of the
obligation, with more reason the penal clause is not demandable when full obligation
has been complied with since in that case there is no breach of the obligation. In the
present case, there has been as yet no demand for payment of the penalty at the time
of the extinguishment of the obligation, hence there was likewise an extinguishment
of the penalty.
Let Us emphasize that the obligation of defendant-appellee was fully complied with by
the debtor, that is, the amount loaned together with the 12% interest has been fully
paid by the appellee. That being so, there is no basis for demanding the penal clause
since the obligation has been extinguished. Here there has been a waiver of the
penal clause as it was not demanded before the full obligation was fully paid and
extinguished. Again, emphasis must be made on the fact that plaintiff-appellant has
not lost anything under the contract since in got back in full the amount loan (sic) as
well as the interest thereof. The same thing would have happened if the obligation
was paid on time, for then the penal clause, under the terms of the contract would not
apply. Payment of the penalty does not mean gain or loss of plaintiff-appellant since it
is merely for the purpose of enforcing the performance of the main obligation has
been fully complied with and extinguished, the penal clause has lost its raison d'
entre." 5
We find no reason to depart from the appellate court's decision. We, however,
advance the following reasons for the denial of this petition.
Article 1226 of the Civil Code provides:
"Art. 1226. In obligations with a penal clause, he penalty shall substitute the indemnity
for damages and the payment of interests in case of noncompliance, if there is no
stipulation to the contrary. Nevertheless, damages shall be paid if the obligor refuses
to pay the penalty or is guilty of fraud in the fulfillment of the obligation.
The penalty may be enforced only when it is demandable in accordance with the
provisions of this Code." (Emphasis Ours.)
A penal clause is an accessory undertaking to assume greater liability in case of
breach. 6 It has a double function: (1) to provide for liquidated damages, and (2) to
strengthen the coercive force of the obligation by the threat of greater responsibility in
the event of breach. 7 From the foregoing, it is clear that a penal clause is intended to
prevent the obligor from defaulting in the performance of his obligation. Thus, if there
should be default, the penalty may be enforced. One commentator of the Civil Code
wrote:
"Now when is the penalty deemed demandable in accordance with the provisions of
the Civil Code? We must make a distinction between a positive and a negative
obligation. With regard to obligations which are positive (to give and to do), the
penalty is demandable when the debtor is in mora; hence, the necessity of demand
by the debtor unless the same is excused . . ." 8
When does delay arise? Under the Civil Code, delay begins from the time the obligee
judicially or extrajudicially demands from the obligor the performance of the
obligation.
"Art. 1169. Those obliged to deliver or to do something incur in delay from the time
the obligee judicially or extrajudicially demands from them the fulfillment of their
obligation."
There are only three instances when demand is not necessary to render the obligor in
default. These are the following:
"(1) When the obligation or the law expressly so declares;
(2) When from the nature and the circumstances of the obligation it appears that the
designation of the time when the thing is to be delivered or the service is to be
rendered was a controlling motive for the establishment of the contract; or
(3) When the demand would be useless, as when the obligor has rendered it beyond
his power to perform." 9
This case does not fall within any of the established exceptions. Hence, despite the
provision in the promissory note that "(a)ll amortization payments shall be made every
first five (5) days of the calendar month until the principal and interest on the loan or
any portion thereof actually released has been fully paid," 10 petitioner is not excused
from making a demand. It has been established that at the time of payment of the full
obligation, private respondent Moonwalk has long been delinquent in meeting its
monthly arrears and in paying the full amount of the loan itself as the obligation
matured sometime in January, 1977. But mere delinquency in payment does not
necessarily mean delay in the legal concept. To be in default ". . . is different from
mere delay in the grammatical sense, because it involves the beginning of a special
condition or status which has its own peculiar effects or results." 11 In order that the
debtor may be in default it is necessary that the following requisites be present: (1)
that the obligation be demandable and already liquidated; (2) that the debtor delays
performance; and (3) that the creditor requires the performance judicially and
extrajudicially. 12 Default generally begins from the moment the creditor demands the
performance of the obligation. 13
Nowhere in this case did it appear that SSS demanded from Moonwalk the payment
of its monthly amortizations. Neither did it show that petitioner demanded the
payment of the stipulated penalty upon the failure of Moonwalk to meet its monthly
amortization. What the complaint itself showed was that SSS tried to enforce the
obligation sometime in September, 1977 by foreclosing the real estate mortgages
executed by Moonwalk in favor of SSS. But this foreclosure did not push through
upon Moonwalk's requests and promises to pay in full. The next demand for payment
happened on October 1, 1979 when SSS issued a Statement of Account to
Moonwalk. And in accordance with said statement, Moonwalk paid its loan in full.
What is clear, therefore, is that Moonwalk was never in default because SSS never
compelled performance. Though it tried to foreclose the mortgages, SSS itself
desisted from doing so upon the entreaties of Moonwalk. If the Statement of Account
could properly be considered as demand for payment, the demand was complied with
on time. Hence, no delay occurred and there was, therefore, no occasion when the
penalty became demandable and enforceable. Since there was no default in the
performance of the main obligation — payment of the loan — SSS was never entitled
to recover any penalty, not at the time it made the Statement of Account and
certainly, not after the extinguishment of the principal obligation because then, all the
more that SSS had no reason to ask for the penalties. Thus, there could never be any
occasion for waiver or even mistake in the application for payment because there was
nothing for SSS to waive as its right to enforce the penalty did not arise.
SSS, however, in buttressing its claim that it never waived the penalties, argued that
the funds it held were trust funds and as trustee, the petitioner could not perform acts
affecting the funds that would diminish property rights of the owners and beneficiaries
thereof. To support its claim, SSS cited the case of United Christian Missionary
Society v. Social Security Commission. 14
We looked into the case and found out that it is not applicable to the present case as
it dealt not with the right of the SSS to collect penalties which were provided for in
contracts which it entered into but with its right to collect premiums and its duty to
collect the penalty for delayed payment or non-payment of premiums. The Supreme
Court, in that case, stated:
"No discretion or alternative is granted respondent Commission in the enforcement of
the law's mandate that the employer who fails to comply with his legal obligation to
remit the premiums to the System within the prescribed period shall pay a penalty of
three (3%) per month. The prescribed penalty is evidently of a punitive character,
provided by the legislature to assure that employers do not take lightly the State's
exercise of the police power in the implementation of the Republic's declared policy
"to develop, establish gradually and perfect a social security system which shall be
suitable to the needs of the people throughout the Philippines and (to) provide
protection to employers against the hazards of disability, sickness, old age and
death . . ."
Thus, We agree with the decision of the respondent court on the matter which We
quote, to wit:
"Note that the above case refers to the condonation of the penalty for the non
remittance of the premium which is provided for by Section 22(a) of the Social
Security Act . . . In other words, what was sought to be condoned was the penalty
provided for by law for non remittance of premium for coverage under the Social
Security Act.
The case at bar does not refer to any penalty provided for by law nor does it refer to
the non remittance of premium. The case at bar refers to a contract of loan entered
into between plaintiff and defendant Moonwalk Development and Housing
Corporation. Note, therefore, that no provision of law is involved in this case, nor is
there any penalty imposed by law nor a case about non-remittance of premium
required by law. The present case refers to a contract of loan payable in installments
not provided for by law but by agreement of the parties. Therefore, the ratio decidendi
of the case of United Christian Missionary Society vs. Social Security Commission
which plaintiff-appellant relies is not applicable in this case; clearly, the Social
Security Commission, which is a creature of the Social Security Act cannot condone a
mandatory provision of law providing for the payment of premiums and for penalties
for non remittance. The life of the Social Security Act is in the premiums because
these are the funds from which the Social Security Act gets the money for its
purposes and the non-remittance of the premiums is penalized not by the Social
Security Commission but by law.
xxx xxx xxx
It is admitted that when a government created corporation enters into a contract with
private party concerning a loan, it descends to the level of a private person. Hence,
the rules on contract applicable to private parties are applicable to it. The argument
therefore that the Social Security Commission cannot waive or condone the penalties
which was applied in the United Christian Missionary Society cannot apply in this
case. First, because what was not paid were installments on a loan but premiums
required by law to be paid by the parties covered by the Social Security Act.
Secondly, what is sought to be condoned or waived are penalties not imposed by law
for failure to remit premiums required by law, but a penalty for non payment provided
for by the agreement of the parties in the contract between them . . ." 15
WHEREFORE, in view of the foregoing, the petition is DISMISSED and the decision
of the respondent court is AFFIRMED. LLpr
SO ORDERED.
Narvasa, C .J ., Padilla, Regalado and Nocon, JJ ., concur.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
 
G.R. No. L-29155 May 13, 1970
UNIVERSAL FOOD CORPORATION, petitioner,
vs.
THE COURT OF APPEALS, MAGDALO V. FRANCISCO, SR., and VICTORIANO
N. FRANCISCO, respondents.
Wigberto E. Tañada for petitioner.
Teofilo Mendoza for respondents.
 
CASTRO, J.:
Petition for certiorari  by the Universal Food Corporation against the decision of the
Court of Appeals of February 13, 1968 in CA-G.R. 31430-R (Magdalo V. Francisco,
Sr. and Victoriano V. Francisco, plaintiffs-appellants vs. Universal Food Corporation,
defendant-appellee), the dispositive portion of which reads as follows: "WHEREFORE
the appealed decision is hereby reversed; the BILL OF ASSIGNMENT marked Exhibit
A is hereby rescinded, and defendant is hereby ordered to return to plaintiff Magdalo
V. Francisco, Sr., his Mafran sauce trademark and formula subject-matter of Exhibit
A, and to pay him his monthly salary of P300.00 from December 1, 1960, until the
return to him of said trademark and formula, plus attorney's fees in the amount of
P500.00, with costs against defendant."1
On February 14, 1961 Magdalo V. Francisco, Sr. and Victoriano V. Francisco filed
with the Court of First Instance of Manila, against, the Universal Food Corporation, an
action for rescission of a contract entitled "Bill of Assignment." The plaintiffs prayed
the court to adjudge the defendant as without any right to the use of the Mafran
trademark and formula, and order the latter to restore to them the said right of user; to
order the defendant to pay Magdalo V. Francisco, Sr. his unpaid salary from
December 1, 1960, as well as damages in the sum of P40,000, and to pay the costs
of suit.1
On February 28, the defendant filed its answer containing admissions and denials.
Paragraph 3 thereof "admits the allegations contained in paragraph 3 of plaintiffs'
complaint." The answer further alleged that the defendant had complied with all the
terms and conditions of the Bill of Assignment and, consequently, the plaintiffs are not
entitled to rescission thereof; that the plaintiff Magdalo V. Francisco, Sr. was not
dismissed from the service as permanent chief chemist of the corporation as he is still
its chief chemist; and, by way of special defenses, that the aforesaid plaintiff is
estopped from questioning 1) the contents and due execution of the Bill of
Assignment, 2) the corporate acts of the petitioner, particularly the resolution adopted
by its board of directors at the special meeting held on October 14, 1960, to suspend
operations to avoid further losses due to increase in the prices of raw materials, since
the same plaintiff was present when that resolution was adopted and even took part
in the consideration thereof, 3) the actuations of its president and general manager in
enforcing and implementing the said resolution, 4) the fact that the same plaintiff was
negligent in the performance of his duties as chief chemist of the corporation, and 5)
the further fact that the said plaintiff was delinquent in the payment of his subscribed
shares of stock with the corporation. The defendant corporation prayed for the
dismissal of the complaint, and asked for P750 as attorney's fees and P5,000 in
exemplary or corrective damages.
On June 25, 1962 the lower court dismissed the plaintiffs' complaint as well as the
defendant's claim for damages and attorney's fees, with costs against the former, who
promptly appealed to the Court of Appeals. On February 13, 1969 the appellate court
rendered the judgment now the subject of the present recourse.
The Court of Appeals arrived at the following "uncontroverted" findings of fact:
That as far back as 1938, plaintiff Magdalo V. Francisco, Sr.
discovered or invented a formula for the manufacture of a food
seasoning (sauce) derived from banana fruits popularly known as
MAFRAN sauce; that the manufacture of this product was used in
commercial scale in 1942, and in the same year plaintiff registered
his trademark in his name as owner and inventor with the Bureau of
Patents; that due to lack of sufficient capital to finance the
expansion of the business, in 1960, said plaintiff secured the
financial assistance of Tirso T. Reyes who, after a series of
negotiations, formed with others defendant Universal Food
Corporation eventually leading to the execution on May 11, 1960 of
the aforequoted "Bill of Assignment" (Exhibit A or 1).
Conformably with the terms and conditions of Exh. A, plaintiff
Magdalo V. Francisco, Sr. was appointed Chief Chemist with a
salary of P300.00 a month, and plaintiff Victoriano V. Francisco was
appointed auditor and superintendent with a salary of P250.00 a
month. Since the start of the operation of defendant corporation,
plaintiff Magdalo V. Francisco, Sr., when preparing the secret
materials inside the laboratory, never allowed anyone, not even his
own son, or the President and General Manager Tirso T. Reyes, of
defendant, to enter the laboratory in order to keep the formula
secret to himself. However, said plaintiff expressed a willingness to
give the formula to defendant provided that the same should be
placed or kept inside a safe to be opened only when he is already
incapacitated to perform his duties as Chief Chemist, but defendant
never acquired a safe for that purpose. On July 26, 1960, President
and General Manager Tirso T. Reyes wrote plaintiff requesting him
to permit one or two members of his family to observe the
preparation of the 'Mafran Sauce' (Exhibit C), but said request was
denied by plaintiff. In spite of such denial, Tirso T. Reyes did not
compel or force plaintiff to accede to said request. Thereafter,
however, due to the alleged scarcity and high prices of raw
materials, on November 28, 1960, Secretary-Treasurer Ciriaco L.
de Guzman of defendant issued a Memorandum (Exhibit B), duly
approved by the President and General Manager Tirso T. Reyes
that only Supervisor Ricardo Francisco should be retained in the
factory and that the salary of plaintiff Magdalo V. Francisco, Sr.,
should be stopped for the time being until the corporation should
resume its operation. Some five (5) days later, that is, on December
3, 1960, President and General Manager Tirso T. Reyes, issued a
memorandom to Victoriano Francisco ordering him to report to the
factory and produce "Mafran Sauce" at the rate of not less than 100
cases a day so as to cope with the orders of the corporation's
various distributors and dealers, and with instructions to take only
the necessary daily employees without employing permanent
employees (Exhibit B). Again, on December 6, 1961, another
memorandum was issued by the same President and General
Manager instructing the Assistant Chief Chemist Ricardo Francisco,
to recall all daily employees who are connected in the production of
Mafran Sauce and also some additional daily employees for the
production of Porky Pops (Exhibit B-1). On December 29, 1960,
another memorandum was issued by the President and General
Manager instructing Ricardo Francisco, as Chief Chemist, and
Porfirio Zarraga, as Acting Superintendent, to produce Mafran
Sauce and Porky Pops in full swing starting January 2, 1961 with
further instructions to hire daily laborers in order to cope with the
full blast protection (Exhibit S-2). Plaintiff Magdalo V. Francisco, Sr.
received his salary as Chief Chemist in the amount of P300.00 a
month only until his services were terminated on November 30,
 1960. On January 9 and 16, 1961, defendant, acting thru its
President and General Manager, authorized Porfirio Zarraga and
Paula de Bacula to look for a buyer of the corporation including its
trademarks, formula and assets at a price of not less than
P300,000.00 (Exhibits D and D-1). Due to these successive
memoranda, without plaintiff Magdalo V. Francisco, Sr. being
recalled back to work, the latter filed the present action on February
14, 1961. About a month afterwards, in a letter dated March 20,
1961, defendant, thru its President and General Manager,
requested said plaintiff to report for duty (Exhibit 3), but the latter
declined the request because the present action was already filed
in court (Exhibit J).
1. The petitioner's first contention is that the respondents are not entitled to
rescission. It is argued that under article 1191 of the new Civil Code, the right to
rescind a reciprocal obligation is not absolute and can be demanded only if one is
ready, willing and able to comply with his own obligation and the other is not; that
under article 1169 of the same Code, in reciprocal obligations, neither party incurs in
delay if the other does not comply or is not ready to comply in a proper manner with
what is incumbent upon him; that in this case the trial court found that the
respondents not only have failed to show that the petitioner has been guilty of default
in performing its contractual obligations, "but the record sufficiently reveals the fact
that it was the plaintiff Magdalo V. Francisco who had been remiss in the compliance
of his contractual obligation to cede and transfer to the defendant the formula for
Mafran sauce;" that even the respondent Court of Appeals found that as "observed by
the lower court, 'the record is replete with the various attempt made by the defendant
(herein petitioner) to secure the said formula from Magdalo V. Francisco to no avail;
and that upon the foregoing findings, the respondent Court of Appeals unjustly
concluded that the private respondents are entitled to rescind the Bill of Assignment.
The threshold question is whether by virtue of the terms of the Bill of Assignment the
respondent Magdalo V. Francisco, Sr. ceded and transferred to the petitioner
corporation the formula for Mafran sauce.2
The Bill of Assignment sets forth the following terms and conditions:
THAT the Party of the First Part [Magdalo V. Francisco, Sr.] is the
sole and exclusive owner of the MAFRAN trade-mark and the
formula for MAFRAN SAUCE;
THAT for and in consideration of the royalty of TWO (2%) PER
CENTUM of the net annual profit which the PARTY OF THE
Second Part [Universal Food Corporation] may realize by and/or
out of its production of MAFRAN SAUCE and other food products
and from other business which the Party of the Second Part may
engage in as defined in its Articles of Incorporation, and which its
Board of Directors shall determine and declare, said Party of the
First Part hereby assign, transfer, and convey all its property rights
and interest over said Mafran trademark and formula for MAFRAN
SAUCE unto the Party of the Second Part;
THAT the payment for the royalty of TWO (2%) PER CENTUM of
the annual net profit which the Party of the Second Part obligates
itself to pay unto the Party of the First Part as founder and as owner
of the MAFRAN trademark and formula for MAFRAN SAUCE, shall
be paid at every end of the Fiscal Year after the proper accounting
and inventories has been undertaken by the Party of the Second
Part and after a competent auditor designated by the Board of
Directors shall have duly examined and audited its books of
accounts and shall have certified as to the correctness of its
Financial Statement;
THAT it is hereby understood that the Party of the First Part, to
improve the quality of the products of the Party of the First Part and
to increase its production, shall endeavor or undertake such
research, study, experiments and testing, to invent or cause to
invent additional formula or formulas, the property rights and
interest thereon shall likewise be assigned, transferred, and
conveyed unto the Party of the Second Part in consideration of the
foregoing premises, covenants and stipulations:
THAT in the operation and management of the Party of the First
Part, the Party of the First Part shall be entitled to the following
Participation:
(a) THAT Dr. MAGDALO V. FRANCISCO shall be appointed
Second Vice-President and Chief Chemist of the Party of the
Second Part, which appointments are permanent in character and
Mr. VICTORIANO V. FRANCISCO shall be appointed Auditor
thereof and in the event that the Treasurer or any officer who may
have the custody of the funds, assets and other properties of the
Party of the Second Part comes from the Party of the First Part,
then the Auditor shall not be appointed from the latter; furthermore
should the Auditor be appointed from the Party representing the
majority shares of the Party of the Second Part, then the Treasurer
shall be appointed from the Party of the First Part;
(b) THAT in case of death or other disabilities they should become
incapacitated to discharge the duties of their respective position,
then, their shares or assigns and who may have necessary
qualifications shall be preferred to succeed them;
(c) That the Party of the First Part shall always be entitled to at
least two (2) membership in the Board of Directors of the Party of
the Second Part;
(d) THAT in the manufacture of MAFRAN SAUCE and other food
products by the Party of the Second Part, the Chief Chemist shall
have and shall exercise absolute control and supervision over the
laboratory assistants and personnel and in the purchase and
 safekeeping of the Chemicals and other mixtures used in the
preparation of said products;
THAT this assignment, transfer and conveyance is absolute and
irrevocable in no case shall the PARTY OF THE First Part ask,
demand or sue for the surrender of its rights and interest over said
MAFRAN trademark and mafran formula, except when a dissolution
of the Party of the Second Part, voluntary or otherwise, eventually
arises, in which case then the property rights and interests over
said trademark and formula shall automatically revert the Party of
the First Part.
Certain provisions of the Bill of Assignment would seem to support the petitioner's
position that the respondent patentee, Magdalo V. Francisco, Sr. ceded and
transferred to the petitioner corporation the formula for Mafran sauce. Thus, the last
part of the second paragraph recites that the respondent patentee "assign, transfer
and convey all its property rights and interest over said Mafran trademark and
formula for MAFRAN SAUCE unto the Party of the Second Part," and the last
paragraph states that such "assignment, transfer and conveyance is absolute and
irrevocable (and) in no case shall the PARTY OF THE First Part ask, demand or sue
for the surrender of its rights and interest over said MAFRAN trademark and mafran
formula."
However, a perceptive analysis of the entire instrument and the language employed
therein3 would lead one to the conclusion that what was actually  ceded and
transferred was only the use  of the Mafran sauce formula. This was the precise
intention of the parties,4 as we shall presently show.
Firstly, one of the principal considerations of the Bill of Assignment is the payment of
"royalty  of TWO (2%) PER CENTUM of the net annual profit" which the petitioner
corporation may realize by and/or out of its production of Mafran sauce and other
food products, etc. The word "royalty," when employed in connection with a license
under a patent, means the compensation paid for the use of a patented invention.
'Royalty,' when used in connection with a license under a patent,
means the compensation paid by the licensee to the licensor for
the use of the licensor's patented invention." (Hazeltine Corporation
vs. Zenith Radio Corporation, 100 F. 2d 10, 16.)5
Secondly, in order to preserve the secrecy of the Mafran formula and to prevent its
unauthorized proliferation, it is provided in paragraph 5-(a) of the Bill that the
respondent patentee was to be appointed "chief chemist ... permanent in character,"
and that in case of his "death or other disabilities," then his "heirs or assigns who may
have necessary qualifications shall be preferred to succeed" him as such chief
chemist. It is further provided in paragraph 5-(d) that the same respondent shall have
and shall exercise absolute control and supervision over the laboratory assistants and
personnel and over the purchase and safekeeping of the chemicals and other
mixtures used in the preparation of the said product. All these provisions of the Bill of
Assignment clearly show that the intention of the respondent patentee at the time of
its execution was to part, not with the formula for Mafran sauce, but only its use, to
preserve the monopoly and to effectively prohibit anyone from availing of the
invention.6
Thirdly, pursuant to the last paragraph of the Bill, should dissolution of the Petitioner
corporation eventually take place, "the property rights and interests over said
trademark and formula shall automatically revert to the respondent patentee. This
must be so, because there could be no reversion of the trademark and formula in this
case, if, as contended by the petitioner, the respondent patentee assigned, ceded
and transferred the trademark and formula — and not merely the right to use it — for
then such assignment passes the property in such patent right to the petitioner
corporation to which it is ceded, which, on the corporation becoming insolvent, will
become part of the property in the hands of the receiver thereof.7
Fourthly, it is alleged in paragraph 3 of the respondents' complaint that what was
ceded and transferred by virtue of the Bill of Assignment is the "use of the formula"
(and not the formula itself). This incontrovertible fact is admitted without equivocation
in paragraph 3 of the petitioner's answer. Hence, it does "not require proof and cannot
be contradicted."8 The last part of paragraph 3 of the complaint and paragraph 3 of
the answer are reproduced below for ready reference:
3. — ... and due to these privileges, the plaintiff in return assigned
to said corporation his interest and rights over the said trademark
and formula so that the defendant corporation could use the
formula in the preparation and manufacture of the mafran sauce,
and the trade name for the marketing of said project, as appearing
in said contract ....
3. — Defendant admits the allegations contained in paragraph 3 of
plaintiff's complaint.
Fifthly, the facts of the case compellingly demonstrate continued possession of the
Mafran sauce formula by the respondent patentee.
Finally, our conclusion is fortified by the admonition of the Civil Code that a
conveyance should be interpreted to effect "the least transmission of right,"9 and is
there a better example of least transmission of rights than allowing or permitting only
the use, without transfer of ownership, of the formula for Mafran sauce.
The foregoing reasons support the conclusion of the Court of Appeals 10 that what
was actually ceded and transferred by the respondent patentee Magdalo V.
Francisco, Sr. in favor of the petitioner corporation was only the use of the formula.
Properly speaking, the Bill of Assignment vested in the petitioner corporation no title
to the formula. Without basis, therefore, is the observation of the lower court that the
respondent patentee "had been remiss in the compliance of his contractual obligation
to cede and transfer to the defendant the formula for Mafran sauce."
2. The next fundamental question for resolution is whether the respondent Magdalo
V. Francisco, Sr. was dismissed from his position as chief chemist of the corporation
without justifiable cause, and in violation of paragraph 5-(a) of the Bill of Assignment
which in part provides that his appointment is "permanent in character."
The petitioner submits that there is nothing in the successive memoranda issued by
the corporate officers of the petitioner, marked exhibits B, B-1 and B-2, from which
can be implied that the respondent patentee was being dismissed from his position as
chief chemist of the corporation. The fact, continues the petitioner, is that at a special
meeting of the board of directors of the corporation held on October 14, 1960, when
the board decided to suspend operations of the factory for two to four months and to
retain only a skeletal force to avoid further losses, the two private respondents were
present, and the respondent patentee was even designated as the acting
superintendent, and assigned the mission of explaining to the personnel of the factory
why the corporation was stopping operations temporarily and laying off personnel.
The petitioner further submits that exhibit B indicates that the salary of the respondent
patentee would not be paid only during the time that the petitioner corporation was
idle, and that he could draw his salary as soon as the corporation resumed
operations. The clear import of this exhibit was allegedly entirely disregarded by the
respondent Court of Appeals, which concluded that since the petitioner resumed
partial production of Mafran sauce without notifying the said respondent formally, the
latter had been dismissed as chief chemist, without considering that the petitioner had
to resume partial operations only to fill its pending orders, and that the respondents
were duly notified of that decision, that is, that exhibit B-1 was addressed to Ricardo
Francisco, and this was made known to the respondent Victoriano V. Francisco.
Besides, the records will show that the respondent patentee had knowledge of the
resumption of production by the corporation, but in spite of such knowledge he did not
report for work.
The petitioner further submits that if the respondent patentee really had unqualified
interest in propagating the product he claimed he so dearly loved, certainly he would
not have waited for a formal notification but would have immediately reported for
work, considering that he was then and still is a member of the corporation's board of
directors, and insofar as the petitioner is concerned, he is still its chief chemist; and
because Ricardo Francisco is a son of the respondent patentee to whom had been
entrusted the performance of the duties of chief chemist, while the respondent
Victoriano V. Francisco is his brother, the respondent patentee could not feign
ignorance of the resumption of operations.
The petitioner finally submits that although exhibit B-2 is addressed to Ricardo
Francisco, and is dated December 29, 1960, the records will show that the petitioner
was set to resume full capacity production only sometime in March or April, 1961, and
the respondent patentee cannot deny that in the very same month when the petitioner
was set to resume full production, he received a copy of the resolution of its board of
directors, directing him to report immediately for duty; that exhibit H, of a later vintage
as it is dated February 1, 1961, clearly shows that Ricardo Francisco was merely the
acting chemist, and this was the situation on February 1, 1961, thirteen days before
the filing of the present action for rescission. The designation of Ricardo Francisco as
the chief chemist carried no weight because the president and general manager of
the corporation had no power to make the designation without the consent of the
corporation's board of directors. The fact of the matter is that although the respondent
Magdalo V. Francisco, Sr. was not mentioned in exhibit H as chief chemist, this same
exhibit clearly indicates that Ricardo Francisco was merely the acting chemist as he
was the one assisting his father.
In our view, the foregoing submissions cannot outweigh the uncontroverted facts. On
November 28, 1960 the secretary-treasurer of the corporation issued a memorandum
(exh. B), duly approved by its president and general manager, directing that only
Ricardo Francisco be retained in the factory and that the salary of respondent
patentee, as chief chemist, be stopped for the time being until the corporation
resumed operations. This measure was taken allegedly because of the scarcity and
high prices of raw materials. Five days later, however, or on December 3, the
president and general manager issued a memorandum (exh. B-1) ordering the
respondent Victoria V. Francisco to report to the factory and to produce Mafran sauce
at the rate of no less than 100 cases a day to cope with the orders of the various
distributors and dealers of the corporation, and instructing him to take only the
necessary daily employees without employing permanent ones. Then on December
6, the same president and general manager issued yet another memorandum (exh.
B-2), instructing Ricardo Francisco, as assistant chief chemist, to recall all daily
employees connected with the production of Mafran sauce and to hire additional daily
employees for the production of Porky Pops. Twenty-three days afterwards, or on
December 29, the same president and general manager issued still another
memorandum (exh. S-2), directing "Ricardo Francisco, as Chief Chemist" and Porfirio
Zarraga, as acting superintendent, to produce Mafran sauce and, Porky Pops in full
swing, starting January 2, 1961, with the further instruction to hire daily laborers in
order to cope with the full blast production. And finally, at the hearing held on October
24, 1961, the same president and general manager admitted that "I consider that the
two months we paid him (referring to respondent Magdalo V. Francisco, Sr.) is
the separation pay."
The facts narrated in the preceding paragraph were the prevailing milieu on February
14, 1961 when the complaint for rescission of the Bill of Assignment was filed. They
clearly prove that the petitioner, acting through its corporate officers, 11 schemed and
maneuvered to ease out, separate and dismiss the said respondent from the service
as permanent chief chemist, in flagrant violation of paragraph 5-(a) and (b) of the Bill
of Assignment. The fact that a month after the institution of the action for rescission,
the petitioner corporation, thru its president and general manager, requested the
respondent patentee to report for duty (exh. 3), is of no consequence. As the Court of
Appeals correctly observed, such request was a "recall to placate said plaintiff."
3. We now come to the question of rescission of the Bill of Assignment. In this
connection, we quote for ready reference the following articles of the new Civil Code
governing rescission of contracts:
ART. 1191. The power to rescind obligations is implied in reciprocal
ones, in case one of the obligors should not comply with what is
incumbent upon him.
The injured party may choose between the fulfillment and the
rescission of the obligation, with the payment of damages in either
case. He may also seek rescission even after he has chosen
fulfillment, if the latter should become impossible.
 The court shall decree the rescission claimed, unless there be just
cause authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third
persons who have acquired the thing, in accordance with articles
1385 and 1388 of the Mortgage Law.
ART. 1383. The action for rescission is subsidiary; it cannot be
instituted except when the party suffering damage has no other
legal means to obtain reparation for the same.
ART. 1384. Rescission shall be only to the extent necessary to
cover the damages caused.
At the moment, we shall concern ourselves with the first two paragraphs of article
1191. The power to rescind obligations is implied in reciprocal ones, in case one of
the obligors should not comply with what is incumbent upon him. The injured party
may choose between fulfillment and rescission of the obligation, with payment of
damages in either case.
In this case before us, there is no controversy that the provisions of the Bill of
Assignment are reciprocal in nature. The petitioner corporation violated the Bill of
Assignment, specifically paragraph 5-(a) and (b), by terminating the services of the
respondent patentee Magdalo V. Francisco, Sr., without lawful and justifiable cause.
Upon the factual milieu, is rescission of the Bill of Assignment proper?
The general rule is that rescission of a contract will not be permitted for a slight or
casual breach, but only for such substantial and fundamental breach as would defeat
the very object of the parties in making the agreement. 12 The question of whether a
breach of a contract is substantial depends upon the attendant circumstances. 13 The
petitioner contends that rescission of the Bill of Assignment should be denied,
because under article 1383, rescission is a subsidiary remedy which cannot be
instituted except when the party suffering damage has no other legal means to obtain
reparation for the same. However, in this case the dismissal of the respondent
patentee Magdalo V. Francisco, Sr. as the permanent chief chemist of the corporation
is a fundamental and substantial breach of the Bill of Assignment. He was dismissed
without any fault or negligence on his part. Thus, apart from the legal principle that
the option — to demand performance or ask for rescission of a contract — belongs to
the injured party, 14 the fact remains that the respondents-appellees had no
alternative but to file the present action for rescission and damages. It is to be
emphasized that the respondent patentee would not have agreed to the other terms
of the Bill of Assignment were it not for the basic commitment of the petitioner
corporation to appoint him as its Second Vice-President and Chief Chemist on a
permanent basis; that in the manufacture of Mafran sauce and other food products he
would have "absolute control and supervision over the laboratory assistants and
personnel and in the purchase and safeguarding of said products;" and that only by
all these measures could the respondent patentee preserve effectively the secrecy of
the formula, prevent its proliferation, enjoy its monopoly, and, in the process afford
and secure for himself a lifetime job and steady income. The salient provisions of the
Bill of Assignment, namely, the transfer to the corporation of only the use of the
formula; the appointment of the respondent patentee as Second Vice-President and
chief chemist on a permanent status; the obligation of the said respondent patentee
to continue research on the patent to improve the quality of the products of the
corporation; the need of absolute control and supervision over the laboratory
assistants and personnel and in the purchase and safekeeping of the chemicals and
other mixtures used in the preparation of said product — all these provisions of the
Bill of Assignment are so interdependent that violation of one would result in virtual
nullification of the rest.
4. The petitioner further contends that it was error for the Court of Appeals to hold that
the respondent patentee is entitled to payment of his monthly salary of P300 from
December 1, 1960, until the return to him of the Mafran trademark and formula,
arguing that under articles 1191, the right to specific performance is not conjunctive
with the right to rescind a reciprocal contract; that a plaintiff cannot ask for both
remedies; that the appellate court awarded the respondents both remedies as it held
that the respondents are entitled to rescind the Bill of Assignment and also that the
respondent patentee is entitled to his salary aforesaid; that this is a gross error of law,
when it is considered that such holding would make the petitioner liable to pay
respondent patentee's salary from December 1, 1960 to "kingdom come," as the said
holding requires the petitioner to make payment until it returns the formula which, the
appellate court itself found, the corporation never had; that, moreover, the fact is that
the said respondent patentee refused to go back to work, notwithstanding the call for
him to return — which negates his right to be paid his back salaries for services which
he had not rendered; and that if the said respondent is entitled to be paid any back
salary, the same should be computed only from December 1, 1960 to March 31,
1961, for on March 20, 1961 the petitioner had already formally called him back to
work.
The above contention is without merit. Reading once more the Bill of Assignment in
its entirety and the particular provisions in their proper setting, we hold that the
contract placed the use  of the formula for Mafran sauce with the petitioner, subject to
defined limitations. One of the considerations for the transfer of the use thereof was
the undertaking on the part of the petitioner corporation to employ the respondent
patentee as the Second Vice-President and Chief Chemist on a permanent status, at
a monthly salary of P300, unless "death or other disabilities supervened. Under these
circumstances, the petitioner corporation could not escape liability to pay the private
respondent patentee his agreed monthly salary, as long as the use, as well as the
right to use, the formula for Mafran sauce remained with the corporation.
5. The petitioner finally contends that the Court of Appeals erred in ordering the
corporation to return to the respondents the trademark and formula for Mafran sauce,
when both the decision of the appellate court and that of the lower court state that the
corporation is not aware nor is in possession of the formula for Mafran sauce, and the
respondent patentee admittedly never gave the same to the corporation. According to
the petitioner these findings would render it impossible to carry out the order to return
the formula to the respondent patentee. The petitioner's predicament is
understandable. Article 1385 of the new Civil Code provides that rescission creates
the obligation to return the things which were the object of the contract. But that as it
may, it is a logical inference from the appellate court's decision that what was meant
to be returned to the respondent patentee is not the formula itself, but only its use and
the right to such use. Thus, the respondents in their complaint for rescission
specifically and particularly pray, among others, that the petitioner corporation be
adjudged as "without any right to use said trademark and formula."
ACCORDINGLY, conformably with the observations we have above made, the
judgment of the Court of Appeals is modified to read as follows: "Wherefore the
appealed decision is reversed. The Bill of Assignment (Exhibit A) is hereby rescinded,
and the defendant corporation is ordered to return and restore to the plaintiff Magdalo
V. Francisco, Sr. the right to the use of his Mafran sauce trademark and formula,
subject-matter of the Bill of Assignment, and to this end the defendant corporation
and all its assigns and successors are hereby permanently enjoined, effective
immediately, from using in any manner the said Mafran sauce trademark and formula.
The defendant corporation shall also pay to Magdalo V. Francisco, Sr. his monthly
salary of P300 from December 1, 1960, until the date of finality of this judgment,
inclusive, the total amount due to him to earn legal interest from the date of the finality
of this judgment until it shall have been fully paid, plus attorney's fees in the amount
of P500, with costs against the defendant corporation." As thus modified, the said
judgment is affirmed, with costs against the petitioner corporation.
Concepcion, C.J., Dizon, Makalintal, Zaldivar, Fernando, Barredo and Villamor, JJ.,
concur.
Teehankee J., took no part.
Separate Opinions
REYES, J.B.L., J.,  concurring:
I concur with the opinion penned by Mr. Justice Fred Ruiz Castro, but I would like to
add that the argument of petitioner, that the rescission demanded by the respondent-
appellee, Magdalo Francisco, should be denied because under Article 1383 of the
Civil Code of the Philippines rescission can not be demanded except when the party
suffering damage has no other legal means to obtain reparation, is predicated on a
failure to distinguish between a rescission for breach of contract under Article 1191 of
the Civil Code and a rescission by reason of lesion or economic prejudice, under
Article 1381, et seq. The rescission on account of breach of stipulations is not
predicated on injury to economic interests of the party plaintiff but on the breach of
faith by the defendant, that violates the reciprocity between the parties. It is not a
subsidiary action, and Article 1191 may be scanned without disclosing anywhere that
the action for rescission thereunder is subordinated to anything other than the
culpable breach of his obligations by the defendant. This rescission is in principal
action retaliatory in character, it being unjust that a party be held bound to fulfill his
promises when the other violates his. As expressed in the old Latin aphorism: "Non
servanti fidem, non est fides servanda." Hence, the reparation of damages for the
breach is purely secondary.
On the contrary, in the rescission by reason of lesion  or economic prejudice, the
cause of action is subordinated to the existence of that prejudice, because it is
the raison d'etre as well as the measure of the right to rescind. Hence, where the
defendant makes good the damages caused, the action cannot be maintained or
continued, as expressly provided in Articles 1383 and 1384. But the operation of
these two articles is limited to the cases of rescission for lesion  enumerated in Article
1381 of the Civil Code of the Philippines, and does not, apply to cases under Article
1191.
It is probable that the petitioner's confusion arose from the defective technique of the
new Code that terms both instances as rescission without distinctions between them;
unlike the previous Spanish Civil Code of 1889, that differentiated "resolution" for
breach of stipulations from "rescission" by reason of lesion or damage.1 But the
terminological vagueness does not justify confusing one case with the other,
considering the patent difference in causes and results of either action.
G.R. No. 147839             June 8, 2006
GAISANO CAGAYAN, INC. Petitioner,
vs.
INSURANCE COMPANY OF NORTH AMERICA, Respondent.
DECISION
AUSTRIA-MARTINEZ, J.:
Before the Court is a petition for review on certiorari of the Decision1 dated October
11, 2000 of the Court of Appeals (CA) in CA-G.R. CV No. 61848 which set aside the
Decision dated August 31, 1998 of the Regional Trial Court, Branch 138, Makati
(RTC) in Civil Case No. 92-322 and upheld the causes of action for damages of
Insurance Company of North America (respondent) against Gaisano Cagayan, Inc.
(petitioner); and the CA Resolution dated April 11, 2001 which denied petitioner's
motion for reconsideration.
The factual background of the case is as follows:
Intercapitol Marketing Corporation (IMC) is the maker of Wrangler Blue Jeans. Levi
Strauss (Phils.) Inc. (LSPI) is the local distributor of products bearing trademarks
owned by Levi Strauss & Co.. IMC and LSPI separately obtained from respondent fire
insurance policies with book debt endorsements. The insurance policies provide for
coverage on "book debts in connection with ready-made clothing materials which
have been sold or delivered to various customers and dealers of the Insured
anywhere in the Philippines."2 The policies defined book debts as the "unpaid account
still appearing in the Book of Account of the Insured 45 days after the time of the loss
covered under this Policy."3 The policies also provide for the following conditions:
1. Warranted that the Company shall not be liable for any unpaid account in
respect of the merchandise sold and delivered by the Insured which are
outstanding at the date of loss for a period in excess of six (6) months from
 the date of the covering invoice or actual delivery of the merchandise
whichever shall first occur.
2. Warranted that the Insured shall submit to the Company within twelve (12)
days after the close of every calendar month all amount shown in their books
of accounts as unpaid and thus become receivable item from their
customers and dealers. x x x4
xxxx
Petitioner is a customer and dealer of the products of IMC and LSPI. On February 25,
1991, the Gaisano Superstore Complex in Cagayan de Oro City, owned by petitioner,
was consumed by fire. Included in the items lost or destroyed in the fire were stocks
of ready-made clothing materials sold and delivered by IMC and LSPI.
On February 4, 1992, respondent filed a complaint for damages against petitioner. It
alleges that IMC and LSPI filed with respondent their claims under their respective fire
insurance policies with book debt endorsements; that as of February 25, 1991, the
unpaid accounts of petitioner on the sale and delivery of ready-made clothing
materials with IMC was P2,119,205.00 while with LSPI it was P535,613.00; that
respondent paid the claims of IMC and LSPI and, by virtue thereof, respondent was
subrogated to their rights against petitioner; that respondent made several demands
for payment upon petitioner but these went unheeded.5
In its Answer with Counter Claim dated July 4, 1995, petitioner contends that it could
not be held liable because the property covered by the insurance policies were
destroyed due to fortuities event or force majeure; that respondent's right of
subrogation has no basis inasmuch as there was no breach of contract committed by
it since the loss was due to fire which it could not prevent or foresee; that IMC and
LSPI never communicated to it that they insured their properties; that it never
consented to paying the claim of the insured.6
At the pre-trial conference the parties failed to arrive at an amicable
settlement.7 Thus, trial on the merits ensued.
On August 31, 1998, the RTC rendered its decision dismissing respondent's
complaint.8 It held that the fire was purely accidental; that the cause of the fire was
not attributable to the negligence of the petitioner; that it has not been established
that petitioner is the debtor of IMC and LSPI; that since the sales invoices state that "it
is further agreed that merely for purpose of securing the payment of purchase price,
the above-described merchandise remains the property of the vendor until the
purchase price is fully paid", IMC and LSPI retained ownership of the delivered goods
and must bear the loss.
Dissatisfied, petitioner appealed to the CA.9 On October 11, 2000, the CA rendered
its decision setting aside the decision of the RTC. The dispositive portion of the
decision reads:
WHEREFORE, in view of the foregoing, the appealed decision is REVERSED and
SET ASIDE and a new one is entered ordering defendant-appellee Gaisano
Cagayan, Inc. to pay:
1. the amount of P2,119,205.60 representing the amount paid by the
plaintiff-appellant to the insured Inter Capitol Marketing Corporation, plus
legal interest from the time of demand until fully paid;
2. the amount of P535,613.00 representing the amount paid by the plaintiff-
appellant to the insured Levi Strauss Phil., Inc., plus legal interest from the
time of demand until fully paid.
With costs against the defendant-appellee.
SO ORDERED.10
The CA held that the sales invoices are proofs of sale, being detailed statements of
the nature, quantity and cost of the thing sold; that loss of the goods in the fire must
be borne by petitioner since the proviso contained in the sales invoices is an
exception under Article 1504 (1) of the Civil Code, to the general rule that if the thing
is lost by a fortuitous event, the risk is borne by the owner of the thing at the time the
loss under the principle of res perit domino; that petitioner's obligation to IMC and
LSPI is not the delivery of the lost goods but the payment of its unpaid account and
as such the obligation to pay is not extinguished, even if the fire is considered a
fortuitous event; that by subrogation, the insurer has the right to go against petitioner;
that, being a fire insurance with book debt endorsements, what was insured was the
vendor's interest as a creditor.11
Petitioner filed a motion for reconsideration12 but it was denied by the CA in its
Resolution dated April 11, 2001.13
Hence, the present petition for review on certiorari anchored on the following
Assignment of Errors:
THE COURT OF APPEALS ERRED IN HOLDING THAT THE INSURANCE IN THE
INSTANT CASE WAS ONE OVER CREDIT.
THE COURT OF APPEALS ERRED IN HOLDING THAT ALL RISK OVER THE
SUBJECT GOODS IN THE INSTANT CASE HAD TRANSFERRED TO PETITIONER
UPON DELIVERY THEREOF.
THE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS AUTOMATIC
SUBROGATION UNDER ART. 2207 OF THE CIVIL CODE IN FAVOR OF
RESPONDENT.14
Anent the first error, petitioner contends that the insurance in the present case cannot
be deemed to be over credit since an insurance "on credit" belies not only the nature
of fire insurance but the express terms of the policies; that it was not credit that was
insured since respondent paid on the occasion of the loss of the insured goods to fire
and not because of the non-payment by petitioner of any obligation; that, even if the
insurance is deemed as one over credit, there was no loss as the accounts were not
yet due since no prior demands were made by IMC and LSPI against petitioner for
payment of the debt and such demands came from respondent only after it had
already paid IMC and LSPI under the fire insurance policies.15
As to the second error, petitioner avers that despite delivery of the goods, petitioner-
buyer IMC and LSPI assumed the risk of loss when they secured fire insurance
policies over the goods.
Concerning the third ground, petitioner submits that there is no subrogation in favor of
respondent as no valid insurance could be maintained thereon by IMC and LSPI
since all risk had transferred to petitioner upon delivery of the goods; that petitioner
was not privy to the insurance contract or the payment between respondent and its
insured nor was its consent or approval ever secured; that this lack of privity
forecloses any real interest on the part of respondent in the obligation to pay, limiting
its interest to keeping the insured goods safe from fire.
For its part, respondent counters that while ownership over the ready- made clothing
materials was transferred upon delivery to petitioner, IMC and LSPI have insurable
interest over said goods as creditors who stand to suffer direct pecuniary loss from its
destruction by fire; that petitioner is liable for loss of the ready-made clothing
materials since it failed to overcome the presumption of liability under Article 126516 of
the Civil Code; that the fire was caused through petitioner's negligence in failing to
provide stringent measures of caution, care and maintenance on its property because
electric wires do not usually short circuit unless there are defects in their installation
or when there is lack of proper maintenance and supervision of the property; that
petitioner is guilty of gross and evident bad faith in refusing to pay respondent's valid
claim and should be liable to respondent for contracted lawyer's fees, litigation
expenses and cost of suit.17
As a general rule, in petitions for review, the jurisdiction of this Court in cases brought
before it from the CA is limited to reviewing questions of law which involves no
examination of the probative value of the evidence presented by the litigants or any of
them.18 The Supreme Court is not a trier of facts; it is not its function to analyze or
weigh evidence all over again.19 Accordingly, findings of fact of the appellate court are
generally conclusive on the Supreme Court.20
Nevertheless, jurisprudence has recognized several exceptions in which factual
issues may be resolved by this Court, such as: (1) when the findings are grounded
entirely on speculation, surmises or conjectures; (2) when the inference made is
manifestly mistaken, absurd or impossible; (3) when there is grave abuse of
discretion; (4) when the judgment is based on a misapprehension of facts; (5) when
the findings of facts are conflicting; (6) when in making its findings the CA went
beyond the issues of the case, or its findings are contrary to the admissions of both
the appellant and the appellee; (7) when the findings are contrary to the trial court; (8)
when the findings are conclusions without citation of specific evidence on which they
are based; (9) when the facts set forth in the petition as well as in the petitioner's
main and reply briefs are not disputed by the respondent; (10) when the findings of
fact are premised on the supposed absence of evidence and contradicted by the
evidence on record; and (11) when the CA manifestly overlooked certain relevant
facts not disputed by the parties, which, if properly considered, would justify a
different conclusion.21 Exceptions (4), (5), (7), and (11) apply to the present petition.
At issue is the proper interpretation of the questioned insurance policy. Petitioner
claims that the CA erred in construing a fire insurance policy on book debts as one
covering the unpaid accounts of IMC and LSPI since such insurance applies to loss of
the ready-made clothing materials sold and delivered to petitioner.
The Court disagrees with petitioner's stand.
It is well-settled that when the words of a contract are plain and readily understood,
there is no room for construction.22 In this case, the questioned insurance policies
provide coverage for "book debts in connection with ready-made clothing materials
which have been sold or delivered to various customers and dealers of the Insured
anywhere in the Philippines."23 ; and defined book debts as the "unpaid account still
appearing in the Book of Account of the Insured 45 days after the time of the loss
covered under this Policy."24 Nowhere is it provided in the questioned insurance
policies that the subject of the insurance is the goods sold and delivered to the
customers and dealers of the insured.
Indeed, when the terms of the agreement are clear and explicit that they do not justify
an attempt to read into it any alleged intention of the parties, the terms are to be
understood literally just as they appear on the face of the contract.25 Thus, what were
insured against were the accounts of IMC and LSPI with petitioner which remained
unpaid 45 days after the loss through fire, and not the loss or destruction of the goods
delivered.
Petitioner argues that IMC bears the risk of loss because it expressly reserved
ownership of the goods by stipulating in the sales invoices that "[i]t is further agreed
that merely for purpose of securing the payment of the purchase price the above
described merchandise remains the property of the vendor until the purchase price
thereof is fully paid."26
The Court is not persuaded.
The present case clearly falls under paragraph (1), Article 1504 of the Civil Code:
ART. 1504. Unless otherwise agreed, the goods remain at the seller's risk until the
ownership therein is transferred to the buyer, but when the ownership therein is
transferred to the buyer the goods are at the buyer's risk whether actual delivery has
been made or not,  except that:
(1) Where delivery of the goods has been made to the buyer or to a bailee for the
buyer, in pursuance of the contract and the ownership in the goods has been retained
by the seller merely to secure performance by the buyer of his obligations under the
contract, the goods are at the buyer's risk from the time of such delivery; (Emphasis
supplied)
 xxxx
Thus, when the seller retains ownership only to insure that the buyer will pay its debt,
the risk of loss is borne by the buyer.27 Accordingly, petitioner bears the risk of loss of
the goods delivered.
IMC and LSPI did not lose complete interest over the goods. They have an insurable
interest until full payment of the value of the delivered goods. Unlike the civil law
concept of res perit domino, where ownership is the basis for consideration of who
bears the risk of loss, in property insurance, one's interest is not determined by
concept of title, but whether insured has substantial economic interest in the
property.28
Section 13 of our Insurance Code defines insurable interest as "every interest in
property, whether real or personal, or any relation thereto, or liability in respect
thereof, of such nature that a contemplated peril might directly damnify the insured."
Parenthetically, under Section 14 of the same Code, an insurable interest in property
may consist in: (a) an existing interest; (b) an inchoate interest founded on existing
interest; or (c) an expectancy, coupled with an existing interest in that out of which the
expectancy arises.
Therefore, an insurable interest in property does not necessarily imply a property
interest in, or a lien upon, or possession of, the subject matter of the insurance, and
neither the title nor a beneficial interest is requisite to the existence of such an
interest, it is sufficient that the insured is so situated with reference to the property
that he would be liable to loss should it be injured or destroyed by the peril against
which it is insured.29 Anyone has an insurable interest in property who derives a
benefit from its existence or would suffer loss from its destruction.30 Indeed, a vendor
or seller retains an insurable interest in the property sold so long as he has any
interest therein, in other words, so long as he would suffer by its destruction, as
where he has a vendor's lien.31 In this case, the insurable interest of IMC and LSPI
pertain to the unpaid accounts appearing in their Books of Account 45 days after the
time of the loss covered by the policies.
The next question is: Is petitioner liable for the unpaid accounts?
Petitioner's argument that it is not liable because the fire is a fortuitous event under
Article 117432 of the Civil Code is misplaced. As held earlier, petitioner bears the loss
under Article 1504 (1) of the Civil Code.
Moreover, it must be stressed that the insurance in this case is not for loss of goods
by fire but for petitioner's accounts with IMC and LSPI that remained unpaid 45 days
after the fire. Accordingly, petitioner's obligation is for the payment of money. As
correctly stated by the CA, where the obligation consists in the payment of money,
the failure of the debtor to make the payment even by reason of a fortuitous event
shall not relieve him of his liability.33 The rationale for this is that the rule that an
obligor should be held exempt from liability when the loss occurs thru a fortuitous
event only holds true when the obligation consists in the delivery of a determinate
thing and there is no stipulation holding him liable even in case of fortuitous event. It
does not apply when the obligation is pecuniary in nature.34
Under Article 1263 of the Civil Code, "[i]n an obligation to deliver a generic thing, the
loss or destruction of anything of the same kind does not extinguish the obligation." If
the obligation is generic in the sense that the object thereof is designated merely by
its class or genus without any particular designation or physical segregation from all
others of the same class, the loss or destruction of anything of the same kind even
without the debtor's fault and before he has incurred in delay will not have the effect
of extinguishing the obligation.35 This rule is based on the principle that the genus of a
thing can never perish. Genus nunquan perit.36 An obligation to pay money is generic;
therefore, it is not excused by fortuitous loss of any specific property of the debtor.37
Thus, whether fire is a fortuitous event or petitioner was negligent are matters
immaterial to this case. What is relevant here is whether it has been established that
petitioner has outstanding accounts with IMC and LSPI.
With respect to IMC, the respondent has adequately established its claim. Exhibits
"C" to "C-22"38 show that petitioner has an outstanding account with IMC in the
amount of P2,119,205.00. Exhibit "E"39 is the check voucher evidencing payment to
IMC. Exhibit "F"40 is the subrogation receipt executed by IMC in favor of respondent
upon receipt of the insurance proceeds. All these documents have been properly
identified, presented and marked as exhibits in court. The subrogation receipt, by
itself, is sufficient to establish not only the relationship of respondent as insurer and
IMC as the insured, but also the amount paid to settle the insurance claim. The right
of subrogation accrues simply upon payment by the insurance company of the
insurance claim.41 Respondent's action against petitioner is squarely sanctioned by
Article 2207 of the Civil Code which provides:
Art. 2207. If the plaintiff's property has been insured, and he has received indemnity
from the insurance company for the injury or loss arising out of the wrong or breach of
contract complained of, the insurance company shall be subrogated to the rights of
the insured against the wrongdoer or the person who has violated the contract. x x x
Petitioner failed to refute respondent's evidence.
As to LSPI, respondent failed to present sufficient evidence to prove its cause of
action. No evidentiary weight can be given to Exhibit "F Levi Strauss",42 a letter dated
April 23, 1991 from petitioner's General Manager, Stephen S. Gaisano, Jr., since it is
not an admission of petitioner's unpaid account with LSPI. It only confirms the loss of
Levi's products in the amount of P535,613.00 in the fire that razed petitioner's building
on February 25, 1991.
Moreover, there is no proof of full settlement of the insurance claim of LSPI; no
subrogation receipt was offered in evidence. Thus, there is no evidence that
respondent has been subrogated to any right which LSPI may have against petitioner.
Failure to substantiate the claim of subrogation is fatal to petitioner's case for
recovery of the amount of P535,613.00.
WHEREFORE, the petition is partly GRANTED. The assailed Decision dated October
11, 2000 and Resolution dated April 11, 2001 of the Court of Appeals in CA-G.R. CV
No. 61848 are AFFIRMED with the MODIFICATION that the order to pay the amount
of P535,613.00 to respondent is DELETED for lack of factual basis.
No pronouncement as to costs. SO ORDERED.
MA. ALICIA AUSTRIA-MARTINEZ
Associate Justice
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
 
G.R. No. 117190 January 2, 1997
JACINTO TANGUILIG doing business under the name and style J.M.T.
ENGINEERING AND GENERAL MERCHANDISING, petitioner,
vs.
COURT OF APPEALS and VICENTE HERCE JR., respondents.
BELLOSILLO, J.:
This case involves the proper interpretation of the contract entered into between the
parties.
Sometime in April 1987 petitioner Jacinto M. Tanguilig doing business under the
name and style J.M.T. Engineering and General Merchandising proposed to
respondent Vicente Herce Jr. to construct a windmill system for him. After some
negotiations they agreed on the construction of the windmill for a consideration of
P60,000.00 with a one-year guaranty from the date of completion and acceptance by
respondent Herce Jr. of the project. Pursuant to the agreement respondent paid
petitioner a down payment of P30,000.00 and an installment payment of P15,000.00,
leaving a balance of P15,000.00.
On 14 March 1988, due to the refusal and failure of respondent to pay the balance,
petitioner filed a complaint to collect the amount. In his Answer before the trial court
respondent denied the claim saying that he had already paid this amount to the San
Pedro General Merchandising Inc. (SPGMI) which constructed the deep well to which
the windmill system was to be connected. According to respondent, since the deep
well formed part of the system the payment he tendered to SPGMI should be credited
to his account by petitioner. Moreover, assuming that he owed petitioner a balance of
P15,000.00, this should be offset by the defects in the windmill system which caused
the structure to collapse after a strong wind hit their place.1
Petitioner denied that the construction of a deep well was included in the agreement
to build the windmill system, for the contract price of P60,000.00 was solely for the
windmill assembly and its installation, exclusive of other incidental materials needed
for the project. He also disowned any obligation to repair or reconstruct the system
and insisted that he delivered it in good and working condition to respondent who
accepted the same without protest. Besides, its collapse was attributable to a
typhoon, a force majeure, which relieved him of any liability.
In finding for plaintiff, the trial court held that the construction of the deep well was not
part of the windmill project as evidenced clearly by the letter proposals submitted by
petitioner to respondent.2 It noted that "[i]f the intention of the parties is to include the
construction of the deep well in the project, the same should be stated in the
proposals. In the absence of such an agreement, it could be safely concluded that the
construction of the deep well is not a part of the project undertaken by the
plaintiff."3 With respect to the repair of the windmill, the trial court found that "there is
no clear and convincing proof that the windmill system fell down due to the defect of
the construction."4
The Court of Appeals reversed the trial court. It ruled that the construction of the deep
well was included in the agreement of the parties because the term "deep well" was
mentioned in both proposals. It also gave credence to the testimony of respondent's
witness Guillermo Pili, the proprietor of SPGMI which installed the deep well, that
petitioner Tanguilig told him that the cost of constructing the deep well would be
deducted from the contract price of P60,000.00. Upon these premises the appellate
court concluded that respondent's payment of P15,000.00 to SPGMI should be
applied to his remaining balance with petitioner thus effectively extinguishing his
contractual obligation. However, it rejected petitioner's claim of force majeure and
ordered the latter to reconstruct the windmill in accordance with the stipulated one-
year guaranty.
His motion for reconsideration having been denied by the Court of Appeals, petitioner
now seeks relief from this Court. He raises two issues: firstly, whether the agreement
to construct the windmill system included the installation of a deep well and, secondly,
whether petitioner is under obligation to reconstruct the windmill after it collapsed.
We reverse the appellate court on the first issue but sustain it on the second.
The preponderance of evidence supports the finding of the trial court that the
installation of a deep well was not included in the proposals of petitioner to construct
a windmill system for respondent. There were in fact two (2) proposals: one dated 19
May 1987 which pegged the contract price at P87,000.00 (Exh. "1"). This was
rejected by respondent. The other was submitted three days later, i.e., on 22 May
1987 which contained more specifications but proposed a lower contract price of
P60,000.00 (Exh. "A"). The latter proposal was accepted by respondent and the
construction immediately followed. The pertinent portions of the first letter-proposal
(Exh. "1") are reproduced hereunder —
 In connection with your Windmill System and Installation, we would like to P60
quote to you as follows: ,000
.00
One (1) Set — Windmill suitable for 2 inches diameter
deepwell, 2 HP, capacity, 14 feet in diameter, with 20 Notably, nowhere in either proposal is the installation of a deep well mentioned, even
pieces blade, Tower 40 feet high, including mechanism remotely. Neither is there an itemization or description of the materials to be used in
which is not advisable to operate during extra-intensity constructing the deep well. There is absolutely no mention in the two (2) documents
wind. Excluding cylinder pump. that a deep well pump is a component of the proposed windmill system. The contract
prices fixed in both proposals cover only the features specifically described therein
UNI and no other. While the words "deep well" and "deep well pump" are mentioned in
T both, these do not indicate that a deep well is part of the windmill system. They
CO merely describe the type of deep well pump for which the proposed windmill would be
NT suitable. As correctly pointed out by petitioner, the words "deep well" preceded by the
RA prepositions "for" and "suitable for" were meant only to convey the idea that the
CT proposed windmill would be appropriate for a deep well pump with a diameter of 2 to
PRI 3 inches. For if the real intent of petitioner was to include a deep well in the
CE agreement to construct a windmill, he would have used instead the conjunctions
P87 "and" or "with." Since the terms of the instruments are clear and leave no doubt as to
,000 their meaning they should not be disturbed.
.00
Moreover, it is a cardinal rule in the interpretation of contracts that the intention of the
The second letter-proposal (Exh. "A") provides as follows: parties shall be accorded primordial consideration5 and, in case
of doubt, their contemporaneous and subsequent acts shall be principally
considered.6 An examination of such contemporaneous and subsequent acts of
In connection with your Windmill system, Supply of Labor Materials and respondent as well as the attendant circumstances does not persuade us to uphold
Installation, operated water pump, we would like to quote to you as him.
follows —
Respondent insists that petitioner verbally agreed that the contract price of
One (1) set — Windmill assembly for 2 inches or 3 inches P60,000.00 covered the installation of a deep well pump. He contends that since
deep-well pump, 6 Stroke, 14 feet diameter, 1-lot blade petitioner did not have the capacity to install the pump the latter agreed to have a
materials, 40 feet Tower complete with standard third party do the work the cost of which was to be deducted from the contract price.
appurtenances up to Cylinder pump, shafting U.S. To prove his point, he presented Guillermo Pili of SPGMI who declared that petitioner
adjustable International Metal. Tanguilig approached him with a letter from respondent Herce Jr. asking him to build
a deep well pump as "part of the price/contract which Engineer (Herce) had with Mr.
One (1) lot — Angle bar, G.I. pipe, Reducer Coupling, Tanguilig."7
Elbow Gate valve, cross Tee coupling.
We are disinclined to accept the version of respondent. The claim of Pili that Herce Jr.
One (1) lot — Float valve. wrote him a letter is unsubstantiated. The alleged letter was never presented in court
by private respondent for reasons known only to him. But granting that this written
One (1) lot — Concreting materials foundation. communication existed, it could not have simply contained a request for Pili to install
a deep well; it would have also mentioned the party who would pay for the
undertaking. It strains credulity that respondent would keep silent on this matter and
F. leave it all to petitioner Tanguilig to verbally convey to Pili that the deep well was part
O. of the windmill construction and that its payment would come from the contract price
B. of P60,000.00.
Lag
una
Con We find it also unusual that Pili would readily consent to build a deep well the
tract payment for which would come supposedly from the windmill contract price on the
Pric mere representation of petitioner, whom he had never met before, without a written
e commitment at least from the former. For if indeed the deep well were part of the
windmill project, the contract for its installation would have been strictly a matter
between petitioner and Pili himself with the former assuming the obligation to pay the
price. That it was respondent Herce Jr. himself who paid for the deep well by handing
over to Pili the amount of P15,000.00 clearly indicates that the contract for the deep
well was not part of the windmill project but a separate agreement between
respondent and Pili. Besides, if the price of P60,000.00 included the deep well, the
obligation of respondent was to pay the entire amount to petitioner without prejudice
to any action that Guillermo Pili or SPGMI may take, if any, against the latter.
Significantly, when asked why he tendered payment directly to Pili and not to
petitioner, respondent explained, rather lamely, that he did it "because he has (sic)
the money, so (he) just paid the money in his possession."8
Can respondent claim that Pili accepted his payment on behalf of petitioner? No.
While the law is clear that "payment shall be made to the person in whose favor the
obligation has been constituted, or his successor in interest, or any person authorized
to receive it,"9 it does not appear from the record that Pili and/or SPGMI was so
authorized.
Respondent cannot claim the benefit of the law concerning "payments made by a
third person."10 The Civil Code provisions do not apply in the instant case because no
creditor-debtor relationship between petitioner and Guillermo Pili and/or SPGMI has
been established regarding the construction of the deep well. Specifically, witness Pili
did not testify that he entered into a contract with petitioner for the construction of
respondent's deep well. If SPGMI was really commissioned by petitioner to construct
the deep well, an agreement particularly to this effect should have been entered into.
The contemporaneous and subsequent acts of the parties concerned
effectively belie respondent's assertions. These circumstances only show
that the construction of the well by SPGMI was for the sole account of
respondent and that petitioner merely supervised the installation of the well
because the windmill was to be connected to it. There is no legal nor factual
basis by which this Court can impose upon petitioner an obligation he did not
expressly assume nor ratify.
11
The second issue is not a novel one. In a long line of cases   this Court has
consistently held that in order for a party to claim exemption from liability by
reason of fortuitous event under Art. 1174 of the Civil Code the event should
be the sole and proximate cause of the loss or destruction of the object of
the contract. In Nakpil vs. Court of Appeals,12 four (4) requisites must
concur: (a) the cause of the breach of the obligation must be independent of
the will of the debtor; (b) the event must be either unforeseeable or
unavoidable; (c) the event must be such as to render it impossible for the
debtor to fulfill his obligation in a normal manner; and, (d) the debtor must be
free from any participation in or aggravation of the injury to the creditor.
Petitioner failed to show that the collapse of the windmill was due solely to a
fortuitous event. Interestingly, the evidence does not disclose that there was
actually a typhoon on the day the windmill collapsed. Petitioner merely
stated that there was a "strong wind." But a strong wind in this case cannot
be fortuitous — unforeseeable nor unavoidable. On the contrary, a strong
wind should be present in places where windmills are constructed, otherwise
the windmills will not turn.
The appellate court correctly observed that "given the newly-constructed
windmill system, the same would not have collapsed had there been no
inherent defect in it which could only be attributable to the appellee."13 It
emphasized that respondent had in his favor the presumption that "things
have happened according to the ordinary course of nature and the ordinary
habits of life."14 This presumption has not been rebutted by petitioner.
Finally, petitioner's argument that private respondent was already in default
in the payment of his outstanding balance of P15,000.00 and hence should
bear his own loss, is untenable. 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.15 When the windmill failed to
function properly it became incumbent upon petitioner to institute the proper
repairs in accordance with the guaranty stated in the contract. Thus,
respondent cannot be said to have incurred in delay; instead, it is petitioner
who should bear the expenses for the reconstruction of the windmill. Article
1167 of the Civil Code is explicit on this point that if a person obliged to do
something fails to do it, the same shall be executed at his cost.
WHEREFORE, the appealed decision is MODIFIED. Respondent VICENTE
HERCE JR. is directed to pay petitioner JACINTO M. TANGUILIG the
balance of P15,000.00 with interest at the legal rate from the date of the
filing of the complaint. In return, petitioner is ordered to "reconstruct subject
defective windmill system, in accordance with the one-year guaranty"16 and
to complete the same within three (3) months from the finality of this
decision.
SO ORDERED.
Padilla, Vitug, Kapunan and Hermosisima, Jr., JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
 
G.R. No. 124922 June 22, 1998
JIMMY CO, doing business under the name & style DRAGON METAL
MANUFACTURING, petitioner,
vs.
COURT OF APPEALS and BROADWAY MOTOR SALES
CORPORATION, respondents.
MARTINEZ, J.:
On July 18, 1990, petitioner entrusted his Nissan pick-up car 1988 model 1 to private
respondent — which is engaged in the sale, distribution and repair of motor
vehicles — for the following job repair services and supply of parts:
— Bleed injection pump and all nozzles;
— Adjust valve tappet;
— Change oil and filter;
— Open up and service four wheel brakes, clean and adjust;
— Lubricate accelerator linkages;
— Replace aircon belt; and
— Replace battery 2
Private respondent undertook to return the vehicle on July 21, 1990 fully
serviced and supplied in accordance with the job contract. After petitioner paid
in full the repair bill in the amount of P1,397.00 3 private respondent issued to
him a gate pass for the release of the vehicle on said date. But came July 21,
1990, the latter could not release the vehicle as its battery was weak and was
not yet replaced. Left with no option, petitioner himself bought a new battery
nearby and delivered it to private respondent for installation on the same day.
However, the battery was not installed and the delivery of the car was
rescheduled to July 24, 1990 or three (3) days later. When petitioner sought to
reclaim his car in the afternoon of July 24, 1990, he was told that it was
carnapped earlier that morning while being road-tested by private respondent's
employee along Pedro Gil and Perez Streets in Paco, Manila. Private
respondent said that the incident was reported to the police.
Having failed to recover his car and its accessories or the value thereof,
petitioner filed a suit for damages against private respondent anchoring his
claim on the latter's alleged negligence. For its part, private respondent
contended that it has no liability because the car was lost as result of a
fortuitous event — the carnapping. During pre-trial, the parties agreed that:
(T)he cost of the Nissan Pick-up four (4) door when the plaintiff
purchased it from the defendent is P332,500.00 excluding
accessories which were installed in the vehicle by the plaintiff
consisting of four (4) brand new tires, magwheels, stereo
speaker, amplifier which amount all to P20,000.00. It is agreed
that the vehicle was lost on July 24, 1990 "approximately two
(2) years and five (5) months from the date of the purchase." It
was agreed that the plaintiff paid the defendant the cost of
service and repairs as early as July 21, 1990 in the amount of
P1,397.00 which amount was received and duly receipted by
the defendant company. It was also agreed that the present
value of a brand new vehicle of the same type at this time is
P425,000.00 without accessories. 4
They likewise agreed that the sole issue for trial was who between the parties
shall bear the loss of the vehicle which necessitates the resolution of whether
private respondent was indeed negligent. 5 After trial, the court a quo found
private respondent guilty of delay in the performance of its obligation and held
it liable to petitioner for the value of the lost vehicle and its accessories plus
interest and attorney's fees. 6 On appeal, the Court of Appeals (CA) reversed the
ruling of the lower court and ordered the dismissal of petitioner's damage
suit. 7 The CA ruled that: (1) the trial court was limited to resolving the issue of
negligence as agreed during pre-trial; hence it cannot pass on the issue of
delay; and (2) the vehicle was lost due to a fortuitous event.
In a petition for review to this Court, the principal query raised is whether a
repair shop can be held liable for the loss of a customer's vehicle while the
same is in its custody for repair or other job services?
The Court resolves the query in favor of the customer. First, on the technical
aspect involved. Contrary to the CA' s pronouncement, the rule that the
determination of issues at a pre-trial conference bars the consideration of other
issues on appeal, except those that may involve privilege or impeaching
matter, 8 is inapplicable to this case. The question of delay, though not
specifically mentioned as an issue at the pre-trial may be tackled by the court
considering that it is necessarily intertwined and intimately connected with the
principal issue agreed upon by the parties, i.e., who will bear the loss and
whether there was negligence. Petitioner's imputation of negligence to private
respondent is premised on delay which is the very basis of the former's
complaint. Thus, it was unavoidable for the court to resolve the case,
particularly the question of negligence without considering whether private
respondent was guilty of delay in the performance of its obligation.
On the merits. It is a not defense for a repair shop of motor vehicles to escape
liability simply because the damage or loss of a thing lawfully placed in its
possession was due to carnapping. Carnapping  per se cannot be considered
as a fortuitous event. The fact that a thing was unlawfully and forcefully taken
from another's rightful possession, as in cases of carnapping, does not
automatically give rise to a fortuitous event. To be considered as such,
carnapping entails more than the mere forceful taking of another's property. It
must be proved and established that the event was an act of God or was done
solely by third parties and that neither the claimant nor the person alleged to be
negligent has any participation. 9 In accordance with the Rules of evidence, the
burden of proving that the loss was due to a fortuitous event rests on him who
invokes it 10 — which in this case is the private respondent. However, other
than the police report of the alleged carnapping incident, no other evidence
was presented by private respondent to the effect that the incident was not due
to its fault. A police report of an alleged crime, to which only private respondent
is privy, does not suffice to establish the carnapping. Neither does it prove that
there was no fault on the part of private respondent notwithstanding the
parties' agreement at the pre-trial that the car was carnapped. Carnapping does
not foreclose the pissibility of fault or negligence on the part of private
respondent.
which he loses immediate control. An owner who cannot exercise the seven
(7)  juses or attributes of ownership — the right to possess, to use and enjoy, to
abuse or consume, to accessories, to dispose or alienate, to recover or
vindicate and to the fruits — 18 is a crippled owner. Failure of the repair shop to
provide security to a motor vehicle owner would leave the latter at the mercy of
the former. Moreover, on the assumption that private respondent's repair
business is duly registered, it presupposes that its shop is covered by
insurance from which it may recover the loss. If private respondent can recover
from its insurer, then it would be unjustly enriched if it will not compensate
petitioner to whom no fault can be attributed. Otherwise, if the shop is not
registered, then the presumption of negligence applies.

Even assuming arguendo that carnapping was duly established as a fortuitous One last thing. With respect to the value of the lost vehicle and its accessories
event, still private respondent cannot escape liability. Article 1165 11 of the New for which the repair shop is liable, it should be based on the fair market value
Civil Code makes an obligor who is guilty of delay responsible even for a that the property would command at the time it was entrusted to it or such
fortuitous event until he has effected the delivery. In this case, private other value as agreed upon by the parties subsequent to the loss. Such
respondent was already in delay as it was supposed to deliver petitioner's car recoverable value is fair and reasonable considering that the value of the
three (3) days before it was lost. Petitioner's agreement to the rescheduled vehicle depreciates. This value may be recovered without prejudice to such
delivery does not defeat his claim as private respondent had already breached other damages that a claimant is entitled under applicable laws.
its obligation. Moreover, such accession cannot be construed as waiver of
petitioner's right to hold private respondent liable because the car was WHEREFORE, premises considered, the decision of the Court Appeals is
unusable and thus, petitioner had no option but to leave it. REVERSED and SET ASIDE and the decision of the court a quo is
REINSTATED.
Assuming further that there was no delay, still working against private
respondent is the legal presumption under Article 1265 that its possession of SO ORDERED.
the thing at the time it was lost was due to its fault. 12 This presumption is
reasonable since he who has the custody and care of the thing can easily
explain the circumstances of the loss. The vehicle owner has no duty to show Regalado, Puno and Mendoza, JJ., concur.
that the repair shop was at fault. All that petitioner needs to prove, as claimant,
is the simple fact that private respondent was in possession of the vehicle at Melo, J., is on leave.
the time it was lost. In this case, private respondent's possession at the time of
the loss is undisputed. Consequently, the burden shifts to the possessor who
needs to present controverting evidence sufficient enough to overcome that
presumption. Moreover, the exempting circumstances — earthquake, flood,
storm or other natural calamity — when the presumption of fault is not
applicable 13 do not concur in this case. Accordingly, having failed to rebut the
presumption and since the case does not fall under the exceptions, private
respondent is answerable for the loss.

It must likewise be emphasized that pursuant to Articles 1174 and 1262 of the
New Civil Code, liability attaches even if the loss was due to a fortuitous event
if "the nature of the obligation requires the assumption of risk". 14 Carnapping
is a normal business risk for those engaged in the repair of motor vehicles. For
just as the owner is exposed to that risk so is the repair shop since the car was
entrusted to it. That is why, repair shops are required to first register with the
Department of Trade and Industry (DTI) 15 and to secure an insurance policy for
the "shop covering the property entrusted by its customer for repair, service or
maintenance" as a pre-requisite for such registration/accreditation. 16 Violation
of this statutory duty constitutes negligence  per se.17 Having taken custody of
the vehicle private respondent is obliged not only to repair the vehicle but must
also provide the customer with some form of security for his property over