THIRD DIVISION
 In addition, he failed to slacken his
 
 
ROLITO CALANG and PHILTRANCO G.R. No. 190696
SERVICE ENTERPRISES, INC.,  
Petitioners, Present:
-         versus -     The CA added that the RTC correctly held Philtranco jointly and severally liable with
PEOPLE OF THE PHILIPPINES, Promulgated:
Respondent. -- -  
August 3, 2010
x-----------------------------------------------------------------------------------------x
 
RESOLUTION
 
BRION, J.:
 
We resolve the motion for reconsideration filed by the petitioners, Philtranco Service
Enterprises, Inc. (Philtranco) and Rolito Calang, to challenge our Resolution of February
17, 2010. Our assailed Resolution denied the petition for review on certiorari for failure
to show any reversible error sufficient to warrant the exercise of this Courts discretionary
appellate jurisdiction.
Antecedent Facts
At around 2:00 p.m. of April 22, 1989, Rolito Calang was driving Philtranco Bus No.
7001, owned by Philtranco along Daang Maharlika Highway in Barangay Lambao, Sta.
Margarita, Samar when its rear left side hit the front left portion of a Sarao jeep coming
from the opposite direction. As a result of the collision, Cresencio Pinohermoso, the jeeps
driver, lost control of the vehicle, and bumped and killed Jose Mabansag, a bystander
who was standing along the highways shoulder. The jeep turned turtle three (3) times
before finally stopping at about 25 meters from the point of impact. Two of the jeeps
passengers, Armando Nablo and an unidentified woman, were instantly killed, while the
other passengers sustained serious physical injuries.
 
The prosecution charged Calang with multiple homicide, multiple serious physical
injuries and damage to property thru reckless imprudence before the Regional Trial Court
(RTC), Branch 31, Calbayog City. The RTC, in its decision dated May 21, 2001, found
Calang guilty beyond reasonable doubt of reckless imprudence resulting to multiple
homicide, multiple physical injuries and damage to property, and sentenced him to suffer
an indeterminate penalty of thirty days of arresto menor, as minimum, to four years and
two months of prision correccional, as maximum. The RTC ordered Calang and
Philtranco, jointly and severally, to pay P50,000.00 as death indemnity to the heirs of
Armando; P50,000.00 as death indemnity to the heirs of Mabansag; and P90,083.93 as
actual damages to the private complainants.
 
The petitioners appealed the RTC decision to the Court of Appeals (CA), docketed as
CA-G.R. CR No. 25522. The CA, in its decision dated November 20, 2009, affirmed the
RTC decision in toto. The CA ruled that petitioner Calang failed to exercise due care and
precaution in driving the Philtranco bus. According to the CA, various eyewitnesses
testified that the bus was traveling fast and encroached into the opposite lane when it
1
evaded a pushcart that was on the side of the road.
speed, despite admitting that he had already seen the jeep coming from the opposite
direction when it was still half a kilometer away. The CA further ruled that Calang
demonstrated a reckless attitude when he drove the bus, despite knowing that it was
suffering from loose compression, hence, not roadworthy.
 
petitioner Calang, for failing to prove that it had exercised the diligence of a good father
of the family to prevent the accident.
 
The petitioners filed with this Court a petition for review on certiorari. In our Resolution
dated February 17, 2010, we denied the petition for failure to sufficiently show any
reversible error in the assailed decision to warrant the exercise of this Courts
discretionary appellate jurisdiction.
 
The Motion for Reconsideration
 
In the present motion for reconsideration, the petitioners claim that there was no basis to
hold Philtranco jointly and severally liable with Calang because the former was not a
party in the criminal case (for multiple homicide with multiple serious physical injuries
and damage to property thru reckless imprudence) before the RTC.
The petitioners likewise maintain that the courts below overlooked several relevant facts,
supported by documentary exhibits, which, if considered, would have shown that Calang
was not negligent, such as the affidavit and testimony of witness Celestina Cabriga; the
testimony of witness Rodrigo Bocaycay; the traffic accident sketch and report; and the
jeepneys registration receipt. The petitioners also insist that the jeeps driver had the last
clear chance to avoid the collision.
 
We partly grant the motion.
Liability of Calang
 We see no reason to overturn the lower courts finding on Calangs culpability. The
finding of negligence on his part by the trial court, affirmed by the CA, is a question of
fact that we cannot pass upon without going into factual matters touching on the finding
of negligence. In petitions for review on certiorari under Rule 45 of the Revised Rules of
Court, this Court is limited to reviewing only errors of law, not of fact, unless the factual
findings complained of are devoid of support by the evidence on record, or the assailed
judgment is based on a misapprehension of facts.
 
Liability of Philtranco
 
We, however, hold that the RTC and the CA both erred in holding Philtranco jointly and
severally liable with Calang. We emphasize that Calang was charged criminally before
the RTC. Undisputedly, Philtranco was not a direct party in this case. Since the cause of
action against Calang was based on delict, both the RTC and the CA erred in holding
Philtranco jointly and severally liable with Calang, based on quasi-delict under Articles
2176[1] and 2180[2] of the Civil Code. Articles 2176 and 2180 of the Civil Code pertain to
the vicarious liability of an employer for quasi-delicts that an employee has committed.
Such provision of law does not apply to civil liability arising from delict.
 
If at all, Philtrancos liability may only be subsidiary. Article 102 of the Revised Penal
Code states the subsidiary civil liabilities of innkeepers, tavernkeepers and proprietors of
establishments, as follows:
 
In default of the persons criminally liable, innkeepers, tavernkeepers, and any other
persons or corporations shall be civilly liable for crimes committed in their
establishments, in all cases where a violation of municipal ordinances or some general or
special police regulations shall have been committed by them or their employees.
 
Innkeepers are also subsidiary liable for the restitution of goods taken by robbery or theft
within their houses from guests lodging therein, or for the payment of the value thereof,
provided that such guests shall have notified in advance the innkeeper himself, or the
person representing him, of the deposit of such goods within the inn; and shall
furthermore have followed the directions which such innkeeper or his representative may
have given them with respect to the care of and vigilance over such goods. No liability
shall attach in case of robbery with violence against or intimidation of persons unless
committed by the innkeepers employees.
 
The foregoing subsidiary liability applies to employers, according to Article 103 of the
Revised Penal Code, which reads:
 
The subsidiary liability established in the next preceding article shall also apply to
employers, teachers, persons, and corporations engaged in any kind of industry for
felonies committed by their servants, pupils, workmen, apprentices, or employees in the
discharge of their duties.
 
The provisions of the Revised Penal Code on subsidiary liability Articles 102 and 103 are
deemed written into the judgments in cases to which they are applicable. Thus, in the
dispositive portion of its decision, the trial court need not expressly pronounce
the subsidiary liability of the employer.[3] Nonetheless, before the employers
subsidiary liability is enforced, adequate evidence must exist establishing that (1) they are
indeed the employers of the convicted employees; (2) they are engaged in some kind of
industry; (3) the crime was committed by the employees in the discharge of their duties;
and (4) the execution against the latter has not been satisfied due to insolvency. The
determination of these conditions may be done in the same criminal action in which the
employees liability, criminal and civil, has been pronounced, in a hearing set for that
precise purpose, with due notice to the employer, as part of the proceedings for the
execution of the judgment.[4]
 
WHEREFORE, we PARTLY GRANT the present motion. The Court of Appeals
decision that affirmed in toto the RTC decision, finding Rolito Calang guilty beyond
reasonable doubt of reckless imprudence resulting in multiple homicide, multiple serious
physical injuries and damage to property, is AFFIRMED, with
the MODIFICATIONthat Philtrancos liability should only be subsidiary. No costs.
 
SO ORDERED.
 
2
FIRST DIVISION
G.R. No. 204866               January 21, 2015
RUKS KONSULT AND CONSTRUCTION, Petitioner, vs. ADWORLD SIGN AND
ADVERTISING CORPORATION* and TRANSWORLD MEDIA ADS,
INC., Respondents.
DECISION
PERLAS-BERNABE, J.:
Assailed in this petition for review on certiorari1 are the Decision2 dated November 16,
2011 and the Resolution3dated December 10, 2012 of the Court of Appeals (CA) in CA-
G.R. CV No. 94693 which affirmed the Decision4dated August 25, 2009 of the Regional
Trial Court of Makati City, Branch 142 (RTC) in Civil Case No. 03-1452 holding, inter
alia, petitioner Ruks Konsult and Construction (Ruks) and respondent Transworld Media
Ads, Inc. (Transworld) jointly and severally liable to respondent Adworld Sign and
Advertising Corporation (Adworld) for damages.
The Facts
The instant case arose from a complaint for damages filed by Adworld against
Transworld and Comark International Corporation (Comark) before the RTC.5 In the
complaint, Adworld alleged that it is the owner of a 75 ft. x 60 ft. billboard structure
located at EDSA Tulay, Guadalupe, Barangka Mandaluyong, which was misaligned and
its foundation impaired when, on August 11, 2003, the adjacent billboard structure owned
by Transworld and used by Comark collapsed and crashed against it. Resultantly, on
August 19, 2003, Adworld sent Transworld and Comark a letter demanding payment for
the repairs of its billboard as well asloss of rental income. On August 29, 2003,
Transworld sent its reply, admitting the damage caused by its billboard structure on
Adworld’s billboard, but nevertheless, refused and failed to pay the amounts demanded
by Adworld. As Adworld’s final demand letter also went unheeded, it was constrained to
file the instant complaint, praying for damages in the aggregate amount of ₱474,204.00,
comprised of ₱281,204.00 for materials, ₱72,000.00 for labor, and ₱121,000.00 for
indemnity for loss of income.6
In its Answer with Counterclaim, Transworld averred that the collapse of its billboard
structure was due to extraordinarily strong winds that occurred instantly and
unexpectedly, and maintained that the damage caused to Adworld’s billboard structure
was hardly noticeable. Transworld likewise filed a Third-Party Complaint against Ruks,
the company which built the collapsed billboard structure in the former’s
favor.1âwphi1 It was alleged therein that the structure constructed by Ruks had a weak
and poor foundation not suited for billboards, thus, prone to collapse, and as such, Ruks
should ultimately be held liable for the damages caused to Adworld’s billboard structure.7
For its part, Comark denied liability for the damages caused to Adworld’s billboard
structure, maintaining that it does not have any interest on Transworld’s collapsed
billboard structure as it only contracted the use of the same. In this relation, Comark
prayed for exemplary damages from Transworld for unreasonably includingit as a party-
defendant in the complaint.8
Lastly, Ruks admitted that it entered into a contract with Transworld for the construction
of the latter’s billboard structure, but denied liability for the damages caused by its
collapse. It contended that when Transworld hired its services, there was already an
existing foundation for the billboard and that it merely finished the structure according to
the terms and conditions of its contract with the latter.9
The RTC Ruling
In a Decision10 dated August 25, 2009, the RTC ultimately ruled in Adworld’s favor, and
accordingly, declared, inter alia, Transworld and Ruks jointly and severally liable to
Adworld in the amount of ₱474,204.00 as actual damages, with legal interest from the
date of the filing of the complaint until full payment thereof, plus attorney’s fees in the
amount of ₱50,000.00.11 The RTC found both Transworld and Ruks negligent in the
construction of the collapsed billboard as they knew that the foundation supporting the
same was weak and would pose danger to the safety of the motorists and the other
adjacent properties, such as Adworld’s billboard, and yet, they did not do anything to
remedy the situation.12 In particular, the RTC explained that Transworld was made aware
by Ruks that the initial construction of the lower structure of its billboard did not have the
proper foundation and would require additional columns and pedestals to support the
structure. Notwithstanding, however, Ruks proceeded with the construction of the
billboard’s upper structure and merely assumed that Transworld would reinforce its lower
structure.13 The RTC then concluded that these negligent acts were the direct and
proximate cause of the damages suffered by Adworld’s billboard.14
Aggrieved, both Transworld and Ruks appealed to the CA. In a Resolution dated
February 3, 2011, the CA dismissed Transworld’s appeal for its failure to file an
appellant’s brief on time.15 Transworld elevated its case before the Court, docketed as
G.R. No. 197601.16 However, in a Resolution17 dated November 23, 2011, the Court
declared the case closed and terminated for failure of Transworld to file the intended
petition for review on certiorariwithin the extended reglementary period. Subsequently,
the Court issued an Entry of Judgment18 dated February 22, 2012 in G.R. No. 197601
declaring the Court’s November 23, 2011 Resolution final and executory.
The CA Ruling
In a Decision19 dated November 16, 2011, the CA denied Ruks’s appeal and affirmed the
ruling of the RTC. It adhered to the RTC’s finding of negligence on the part of
Transworld and Ruks which brought about the damage to Adworld’s billboard. It found
that Transworld failed to ensure that Ruks will comply with the approved plans and
specifications of the structure, and that Ruks continued to install and finish the billboard
structure despite the knowledge that there were no adequate columns to support the
same.20
Dissatisfied, Ruks moved for reconsideration,21 which was, however, denied in a
Resolution22 dated December 10, 2012,hence, this petition.
On the other hand, Transworld filed another appeal before the Court, docketed as G.R.
No. 205120.23 However, the Court denied outright Transworld’s petition in a
Resolution24 dated April 15, 2013, holding that the same was already bound by the
dismissal of its petition filed in G.R. No. 197601.
The Issue Before the Court
The primordial issue for the Court’s resolution is whether or not the CA correctly
affirmed the ruling of the RTC declaring Ruks jointly and severally liable with
Transworld for damages sustained by Adworld.
The Court’s Ruling
The petition is without merit.
At the outset, it must be stressed that factual findings of the RTC, when affirmed by the
CA, are entitled to great weight by the Court and are deemed final and conclusive when
supported by the evidence on record.25 Absent any exceptions to this rule – such as when
it is established that the trial court ignored, overlooked, misconstrued, or misinterpreted
cogent facts and circumstances that, if considered, would change the outcome of the
case26 – such findings must stand.
3
After a judicious perusal of the records, the Court sees no cogent reason to deviate from
the findings of the RTC and the CA and their uniform conclusion that both Transworld
and Ruks committed acts resulting in the collapse of the former’s billboard, which in
turn, caused damage to the adjacent billboard of Adworld.
Jurisprudence defines negligence as the omission to do something which a reasonable
man, guided by those considerations which ordinarily regulate the conduct of human
affairs, would do, or the doing of something which a prudent and reasonable man would
not do.27 It is the failure to observe for the protection of the interest of another person that
degree of care, precaution, and vigilance which the circumstances justly demand,
whereby such other person suffers injury.28
In this case, the CA correctly affirmed the RTC’s finding that Transworld’s initial
construction of its billboard’s lower structure without the proper foundation, and that of
Ruks’s finishing its upper structure and just merely assuming that Transworld would
reinforce the weak foundation are the two (2) successive acts which were the direct and
proximate cause of the damages sustained by Adworld. Worse, both Transworld and
Ruks were fully aware that the foundation for the former’s billboard was weak; yet,
neither of them took any positive step to reinforce the same. They merely relied on each
other’s word that repairs would be done to such foundation, but none was done at all.
Clearly, the foregoing circumstances show that both Transworld and Ruks are guilty of
negligence in the construction of the former’s billboard, and perforce, should be held
liable for its collapse and the resulting damage to Adworld’s billboard structure. As joint
tortfeasors, therefore, they are solidarily liable to Adworld. Verily, "[j]oint tortfeasors are
those who command, instigate, promote, encourage, advise, countenance, cooperate in,
aid or abet the commission of a tort, or approve of it after it is done, if done for their
benefit. They are also referred to as those who act together in committing wrong or
whose acts, if independent of each other, unite in causing a single injury. Under Article
219429 of the Civil Code, joint tortfeasors are solidarily liable for the resulting damage. In
other words, joint tortfeasors are each liable as principals, to the same extent and in the
same manner as if they had performed the wrongful act themselves."30 The Court’s
pronouncement in People v. Velasco31 is instructive on this matter, to wit:32
Where several causes producing an injury are concurrent and each is an efficient cause
without which the injury would not have happened, the injury may be attributed to all or
any of the causes and recovery may be had against any or all of the responsible persons
although under the circumstances of the case, it may appear that one of them was more
culpable, and that the duty owed by them to the injured person was not same. No actor's
negligence ceases to be a proximate cause merely because it does not exceed the
negligence of other actors. Each wrongdoer is responsible for the entire result and is
liable as though his acts were the sole cause of the injury.
There is no contribution between joint [tortfeasors] whose liability is solidary since both
of them are liable for the total damage.1âwphi1 Where the concurrent or successive
negligent acts or omissions of two or more persons, although acting independently, are in
combination the direct and proximate cause of a single injury to a third person, it is
impossible to determine in what proportion each contributed to the injury and either of
them is responsible for the whole injury. x x x. (Emphases and underscoring supplied)
In conclusion, the CA correctly affirmed the ruling of the RTC declaring Ruks jointly and
severally liable with Transworld for damages sustained by Adworld.
WHEREFORE, the petition is DENIED. The Decision dated November 16, 2011 and the
Resolution dated December 10, 2012 of the Court of Appeals in CA-G.R. CV No. 94693
are hereby AFFIRMED.
SO ORDERED.

4
SECOND DIVISION
July 11, 2016
G.R. No. 194121
TORRES-MADRID BROKERAGE, INC., Petitioner  the loss. TMBI prayed that in the event it is held liable to Mitsui for the loss, it should be
vs.
FEB MITSUI MARINE INSURANCE CO., INC. and BENJAMIN P. MANALAST
AS, doing business under the name of BMT TRUCKING SERVICES, Respondents
DECISION
BRION, J.:
We resolve the petition for review on certiorari challenging the Court of
Appeals' (CA) October 14, 2010 decision in CA-G.R. CV No. 91829.1
The CA affirmed the Regional Trial Court's (RTC) decision in Civil Case No. 01-1596,
and found petitioner Torres-Madrid Brokerage, Inc. (TMBI) and respondent Benjamin P.
Manalastas jointly and solidarily liable to respondent FEB Mitsui Marine Insurance Co.,
Inc. (Mitsui) for damages from the loss of transported cargo.
Antecedents
On October 7, 2000, a shipment of various electronic goods from Thailand and Malaysia
arrived at the Port of Manila for Sony Philippines, Inc. (Sony). Previous to the arrival,
Sony had engaged the services of TMBI to facilitate, process, withdraw, and deliver the
shipment from the port to its warehouse in Biñan, Laguna.2
TMBI – who did not own any delivery trucks – subcontracted the services of Benjamin
Manalastas’ company, BMT Trucking Services (BMT), to transport the shipment from
the port to the Biñan warehouse.3 Incidentally, TMBI notified Sony who had no
objections to the arrangement.4
Four BMT trucks picked up the shipment from the port at about 11:00 a.m. of October 7,
2000. However, BMT could not immediately undertake the delivery because of the truck
ban and because the following day was a Sunday. Thus, BMT scheduled the delivery on
October 9, 2000.
In the early morning of October 9, 2000, the four trucks left BMT’s garage for
Laguna.5 However, only three trucks arrived at Sony’s Biñan warehouse.
At around 12:00 noon, the truck driven by Rufo Reynaldo Lapesura (NSF-391) was
found abandoned along the Diversion Road in Filinvest, Alabang, Muntinlupa City.6 Both
the driver and the shipment were missing.
Later that evening, BMT’s Operations Manager Melchor Manalastas informed Victor
Torres, TMBI’s General Manager, of the development.7 They went to Muntinlupa
together to inspect the truck and to report the matter to the police.8
Victor Torres also filed a complaint with the National Bureau of
Investigation (NBI) against Lapesura for "hijacking."9The complaint resulted in a
recommendation by the NBI to the Manila City Prosecutor’s Office to prosecute
Lapesura for qualified theft.10
TMBI notified Sony of the loss through a letter dated October 10, 2000.11 It also sent
BMT a letter dated March 29, 2001, demanding payment for the lost shipment. BMT
refused to pay, insisting that the goods were "hijacked."
In the meantime, Sony filed an insurance claim with the Mitsui, the insurer of the goods.
After evaluating the merits of the claim, Mitsui paid
Sony PHP7,293,386.23 corresponding to the value of the lost goods.12
After being subrogated to Sony’s rights, Mitsui sent TMBI a demand letter dated August
30, 2001 for payment of the lost goods. TMBI refused to pay Mitsui’s claim. As a result,
Mitsui filed a complaint against TMBI on November 6, 2001,
5
TMBI, in turn, impleaded Benjamin Manalastas, the proprietor of BMT, as a third-party
defendant. TMBI alleged that BMT’s driver, Lapesura, was responsible for the
theft/hijacking of the lost cargo and claimed BMT’s negligence as the proximate cause of
reimbursed by BMT.
At the trial, it was revealed that BMT and TMBI have been doing business with each
other since the early 80’s. It also came out that there had been a previous hijacking
incident involving Sony’s cargo in 1997, but neither Sony nor its insurer filed a
complaint against BMT or TMBI.13
On August 5, 2008, the RTC found TMBI and Benjamin Manalastas jointly and
solidarily liable to pay Mitsui PHP 7,293,386.23 as actual damages, attorney’s fees
equivalent to 25% of the amount claimed, and the costs of the suit.14 The RTC held that
TMBI and Manalastas were common carriers and had acted negligently.
Both TMBI and BMT appealed the RTC’s verdict.
TMBI denied that it was a common carrier required to exercise extraordinary diligence.
It maintains that it exercised the diligence of a good father of a family and should be
absolved of liability because the truck was "hijacked" and this was a fortuitous event.
BMT claimed that it had exercised extraordinary diligence over the lost shipment, and
argued as well that the loss resulted from a fortuitous event.
On October 14, 2010, the CA affirmed the RTC’s decision but reduced the award of
attorney’s fees to PHP 200,000.
The CA held: (1) that "hijacking" is not necessarily a fortuitous event because the term
refers to the general stealing of cargo during transit;15 (2) that TMBI is a common carrier
engaged in the business of transporting goods for the general public for a fee;16 (3) even if
the "hijacking" were a fortuitous event, TMBI’s failure to observe extraordinary diligence
in overseeing the cargo and adopting security measures rendered it liable for the
loss;17 and (4) even if TMBI had not been negligent in the handling, transport and the
delivery of the shipment, TMBI still breached its contractual obligation to Sony when it
failed to deliver the shipment.18
TMBI disagreed with the CA’s ruling and filed the present petition on December 3, 2010.
The Arguments
TMBI’s Petition
TMBI insists that the hijacking of the truck was a fortuitous event. It contests the CA’s
finding that neither force nor intimidation was used in the taking of the cargo.
Considering Lapesura was never found, the Court should not discount the possibility that
he was a victim rather than a perpetrator.19
TMBI denies being a common carrier because it does not own a single truck to transport
its shipment and it does not offer transport services to the public for compensation.20 It
emphasizes that Sony knew TMBI did not have its own vehicles and would subcontract
the delivery to a third-party.
Further, TMBI now insists that the service it offered was limited to the processing of
paperwork attendant to the entry of Sony’s goods. It denies that delivery of the shipment
was a part of its obligation.21
TMBI solely blames BMT as it had full control and custody of the cargo when it was
lost.22 BMT, as a common carrier, is presumed negligent and should be responsible for
the loss.
BMT’s Comment
BMT insists that it observed the required standard of care.23 Like the petitioner, BMT
maintains that the hijacking was a fortuitous event – a force majeure – that exonerates it
from liability.24 It points out that Lapesura has never been seen again and his fate remains
a mystery. BMT likewise argues that the loss of the cargo necessarily showed that the
taking was with the use of force or intimidation.25
If there was any attendant negligence, BMT points the finger on TMBI who failed to send
a representative to accompany the shipment.26 BMT further blamed TMBI for the latter’s
failure to adopt security measures to protect Sony’s cargo.27
Mitsui’s Comment
Mitsui counters that neither TMBI nor BMT alleged or proved during the trial that the
taking of the cargo was accompanied with grave or irresistible threat, violence, or
force.28 Hence, the incident cannot be considered "force majeure" and TMBI remains
liable for breach of contract.
Mitsui emphasizes that TMBI’s theory – that force or intimidation must have been used
because Lapesura was never found – was only raised for the first time before this
Court.29 It also discredits the theory as a mere conjecture for lack of supporting evidence.
Mitsui adopts the CA’s reasons to conclude that TMBI is a common carrier. It also points
out Victor Torres’ admission during the trial that TMBI’s brokerage service includes the
eventual delivery of the cargo to the consignee.30
Mitsui invokes as well the legal presumption of negligence against TMBI, pointing out
that TMBI simply entrusted the cargo to BMT without adopting any security measures
despite: (1) a previous hijacking incident when TMBI lost Sony’s cargo; and (2) TMBI’s
knowledge that the cargo was worth more than 10 million pesos.31
Mitsui affirms that TMBI breached the contract of carriage through its negligent handling
of the cargo, resulting in its loss.
The Court’s Ruling
A brokerage may be considered a
common carrier if it also undertakes to
deliver the goods for its customers
Common carriers are persons, corporations, firms or associations engaged in the business
of transporting passengers or goods or both, by land, water, or air, for compensation,
offering their services to the public.32 By the nature of their business and for reasons of
public policy, they are bound to observe extraordinary diligence in the vigilance over the
goods and in the safety of their passengers.33
In A.F. Sanchez Brokerage Inc. v. Court of Appeals,34we held that a customs broker –
whose principal business is the preparation of the correct customs declaration and the
proper shipping documents – is still considered a common carrier if it also undertakes to
deliver the goods for its customers. The law does not distinguish between one whose
principal business activity is the carrying of goods and one who undertakes this task only
as an ancillary activity.35 This ruling has been reiterated in Schmitz Transport &
Brokerage Corp. v. Transport Venture, Inc.,36Loadmasters Customs Services, Inc. v.
Glodel Brokerage Corporation,37and Westwind Shipping Corporation v. UCPB General
Insurance Co., Inc.38
Despite TMBI’s present denials, we find that the delivery of the goods is an integral,
albeit ancillary, part of its brokerage services. TMBI admitted that it was contracted to
facilitate, process, and clear the shipments from the customs authorities, withdraw them
from the pier, then transport and deliver them to Sony’s warehouse in Laguna.39
Further, TMBI’s General Manager Victor Torres described the nature of its services as
follows:
ATTY. VIRTUDAZO: Could you please tell the court what is the nature of the business
of [TMBI]?
6
Witness MR. Victor Torres of Torres Madrid: We are engaged in customs brokerage
business. We acquire the release documents from the Bureau of Customs and eventually
deliver the cargoes to the consignee’s warehouse and we are engaged in that kind of
business, sir.40
That TMBI does not own trucks and has to subcontract the delivery of its clients’ goods,
is immaterial. As long as an entity holds itself to the public for the transport of goods as a
business, it is considered a common carrier regardless of whether it owns the vehicle used
or has to actually hire one.41
Lastly, TMBI’s customs brokerage services – including the transport/delivery of the
cargo – are available to anyone willing to pay its fees. Given these circumstances, we
find it undeniable that TMBI is a common carrier.
Consequently, TMBI should be held responsible for the loss, destruction, or deterioration
of the goods it transports unless it results from:
(1) Flood, storm, earthquake, lightning, or other natural disaster or calamity;
(2) Act of the public enemy in war, whether international or civil;
(3) Act of omission of the shipper or owner of the goods;
(4) The character of the goods or defects in the packing or in the containers;
(5) Order or act of competent public authority.42
For all other cases - such as theft or robbery – a common carrier is presumed to have
been at fault or to have acted negligently, unless it can prove that it
observed extraordinary diligence.43
Simply put, the theft or the robbery of the goods is not considered a fortuitous event or
a force majeure. Nevertheless, a common carrier may absolve itself of liability for a
resulting loss: (1) if it proves that it exercised extraordinary diligence in transporting and
safekeeping the goods;44 or (2) if it stipulated with the shipper/owner of the goods to limit
its liability for the loss, destruction, or deterioration of the goods to a degree less than
extraordinary diligence.45
However, a stipulation diminishing or dispensing with the common carrier’s liability for
acts committed by thieves or robbers who do not act with grave or irresistible threat,
violence, or force is void under Article 1745 of the Civil Code for being contrary to
public policy.46 Jurisprudence, too, has expanded Article 1734’s five exemptions. De
Guzman v. Court of Appeals47 interpreted Article 1745 to mean that a robbery attended by
"grave or irresistible threat, violence or force" is a fortuitous event that absolves the
common carrier from liability.
In the present case, the shipper, Sony, engaged the services of TMBI, a common carrier,
to facilitate the release of its shipment and deliver the goods to its warehouse. In turn,
TMBI subcontracted a portion of its obligation – the delivery of the cargo – to another
common carrier, BMT.
Despite the subcontract, TMBI remained responsible for the cargo. Under Article 1736, a
common carrier’s extraordinary responsibility over the shipper’s goods lasts from the
time these goods are unconditionally placed in the possession of, and received by, the
carrier for transportation, until they are delivered, actually or constructively, by the
carrier to the consignee.48
That the cargo disappeared during transit while under the custody of BMT – TMBI’s
subcontractor – did not diminish nor terminate TMBI’s responsibility over the cargo.
Article 1735 of the Civil Code presumes that it was at fault.
Instead of showing that it had acted with extraordinary diligence, TMBI simply argued
that it was not a common carrier bound to observe extraordinary diligence. Its failure to
successfully establish this premise carries with it the presumption of fault or negligence, In the present case, Mitsui’s action is solely premised on TMBI’s breach of contract.
thus rendering it liable to Sony/Mitsui for breach of contract. Mitsui did not even sue BMT, much less prove any negligence on its part. If BMT has
Specifically, TMBI’s current theory – that the hijacking was attended by force or entered the picture at all, it is because TMBI sued it for reimbursement for the liability
intimidation – is untenable. that TMBI might incur from its contract of carriage with Sony/Mitsui. Accordingly, there
First, TMBI alleged in its Third Party Complaint against BMT that Lapesura was is no basis to directly hold BMT liable to Mitsui for quasi-delict.
responsible for hijacking the shipment.49 Further, Victor Torres filed a criminal complaint BMT is liable to TMBI for breach of their
against Lapesura with the NBI.50 These actions constitute direct and binding admissions contract of carriage
that Lapesura stole the cargo. Justice and fair play dictate that TMBI should not be We do not hereby say that TMBI must absorb the loss. By subcontracting the cargo
allowed to change its legal theory on appeal. delivery to BMT, TMBI entered into its own contract of carriage with a fellow common
Second, neither TMBI nor BMT succeeded in substantiating this theory through carrier.
evidence. Thus, the theory remained an unsupported allegation no better than The cargo was lost after its transfer to BMT' s custody based on its contract of carriage
speculations and conjectures. The CA therefore correctly disregarded the defense of force with TMBI. Following Article 1735, BMT is presumed to be at fault. Since BMT failed
majeure. to prove that it observed extraordinary diligence in the performance of its obligation to
TMBI and BMT are not solidarily liable TMBI, it is liable to TMBI for breach of their contract of carriage.
to Mitsui In these lights, TMBI is liable to Sony (subrogated by Mitsui) for breaching the contract
We disagree with the lower courts’ ruling that TMBI and BMT are solidarily liable to of carriage. In tum, TMBI is entitled to reimbursement from BMT due to the latter's own
Mitsui for the loss as joint tortfeasors. The ruling was based on Article 2194 of the Civil breach of its contract of carriage with TMBI. The proverbial buck stops with BMT who
Code: may either: (a) absorb the loss, or (b) proceed after its missing driver, the suspected
Art. 2194. The responsibility of two or more persons who are liable for quasi-delict is culprit, pursuant to Article 2181.55
solidary. WHEREFORE, the Court hereby ORDERS petitioner TorresMadrid Brokerage, Inc. to
Notably, TMBI’s liability to Mitsui does not stem from a quasi-delict (culpa aquiliana) pay the respondent FEB Mitsui Marine Insurance Co", Inc. the following:
but from its breach of contract (culpa contractual). The tie that binds TMBI with Mitsui a. Actual damages in the amount of PHP 7,293,386.23 plus legal interest from the time
is contractual, albeit one that passed on to Mitsui as a result of TMBI’s contract of the complaint was filed until it is fully paid;
carriage with Sony to which Mitsui had been subrogated as an insurer who had paid b. Attorney's foes in the amount of PHP 200,000.00; and
Sony’s insurance claim. The legal reality that results from this contractual tie precludes c. Costs of suit.
the application of quasi-delict based Article 2194. Respondent Benjamin P. Manalastas is in turn ORDERED to REIMBURSE Torres-
A third party may recover from a Madrid Brokerage, Inc. of the above-mentioned amounts.
common carrier for quasi-delict but must SO ORDERED.
prove actual negligence
We likewise disagree with the finding that BMT is directly liable to Sony/Mitsui for the
loss of the cargo. While it is undisputed that the cargo was lost under the actual custody
of BMT (whose employee is the primary suspect in the hijacking or robbery of the
shipment), no direct contractual relationship existed between Sony/Mitsui and BMT. If at
all, Sony/Mitsui’s cause of action against BMT could only arise from quasi-delict, as a
third party suffering damage from the action of another due to the latter’s fault or
negligence, pursuant to Article 2176 of the Civil Code.51
We have repeatedly distinguished between an action for breach of contract (culpa
contractual) and an action for quasi-delict (culpa aquiliana).
In culpa contractual, the plaintiff only needs to establish the existence of the contract and
the obligor’s failure to perform his obligation. It is not necessary for the plaintiff to prove
or even allege that the obligor’s non-compliance was due to fault or negligence because
Article 1735 already presumes that the common carrier is negligent. The common carrier
can only free itself from liability by proving that it observed extraordinary diligence. It
cannot discharge this liability by shifting the blame on its agents or servants.52
On the other hand, the plaintiff in culpa aquiliana must clearly establish the defendant’s
fault or negligence because this is the very basis of the action.53 Moreover, if the injury to
the plaintiff resulted from the act or omission of the defendant’s employee or servant, the
defendant may absolve himself by proving that he observed the diligence of a good father
of a family to prevent the damage.54

7
SECOND DIVISION
January 11, 2016
G.R. No. 167615
SPOUSES ALEXANDER AND JULIE LAM, Doing Business Under the Name and
Style "COLORKWIK LABORATORIES" AND "COLORKWIK PHOTO
SUPPLY", Petitioners,  also rescinded the contract through the letter dated November 18, 1992 on account of
vs.
KODAK PHILIPPINES, LTD., Respondent.
DECISION
LEONEN, J.:
This is a Petition for Review on Certiorari filed on April 20, 2005 assailing the March 30,
2005 Decision1 and September 9, 2005 Amended Decision2 of the Court of Appeals,
which modified the February 26, 1999 Decision3 of the Regional Trial Court by reducing
the amount of damages awarded to petitioners Spouses Alexander and Julie Lam (Lam
Spouses).4 The Lam Spouses argue that respondent Kodak Philippines, Ltd.’s breach of
their contract of sale entitles them to damages more than the amount awarded by the
Court of Appeals.5
I separate generator set.22 Based on this Decision, Kodak Philippines, Ltd. was able to
On January 8, 1992, the Lam Spouses and Kodak Philippines, Ltd. entered into an
agreement (Letter Agreement) for the sale of three (3) units of the Kodak Minilab System
22XL6 (Minilab Equipment) in the amount of ₱1,796,000.00 per unit,7 with the following
terms:
This confirms our verbal agreement for Kodak Phils., Ltd. To provide Colorkwik
Laboratories, Inc. with three (3) units Kodak Minilab System 22XL . . . for your proposed
outlets in Rizal Avenue (Manila), Tagum (Davao del Norte), and your existing Multicolor
photo counter in Cotabato City under the following terms and conditions:
1. Said Minilab Equipment packages will avail a total of 19% multiple order discount
based on prevailing equipment price provided said equipment packages will be purchased
not later than June 30, 1992.
2. 19% Multiple Order Discount shall be applied in the form of merchandise and
delivered in advance immediately after signing of the contract.
* Also includes start-up packages worth P61,000.00.
3. NO DOWNPAYMENT.
4. Minilab Equipment Package shall be payable in 48 monthly installments at THIRTY
FIVE THOUSAND PESOS (P35,000.00) inclusive of 24% interest rate for the first 12
months; the balance shall be re-amortized for the remaining 36 months and the prevailing
interest shall be applied.
5. Prevailing price of Kodak Minilab System 22XL as of January 8, 1992 is at ONE
MILLION SEVEN HUNDRED NINETY SIX THOUSAND PESOS.
6. Price is subject to change without prior notice.
*Secured with PDCs; 1st monthly amortization due 45 days after installation[.]8
On January 15, 1992, Kodak Philippines, Ltd. delivered one (1) unit of the Minilab
Equipment in Tagum, Davao Province.9 The delivered unit was installed by Noritsu
representatives on March 9, 1992.10 The Lam Spouses issued postdated checks amounting
to ₱35,000.00 each for 12 months as payment for the first delivered unit, with the first
check due on March 31, 1992.11
The Lam Spouses requested that Kodak Philippines, Ltd. not negotiate the check dated
March 31, 1992 allegedly due to insufficiency of funds.12 The same request was made for
the check due on April 30, 1992. However, both checks were negotiated by Kodak
8
Philippines, Ltd. and were honored by the depository bank.13 The 10 other checks were
subsequently dishonored after the Lam Spouses ordered the depository bank to stop
payment.14
Kodak Philippines, Ltd. canceled the sale and demanded that the Lam Spouses return the
unit it delivered together with its accessories.15 The Lam Spouses ignored the demand but
Kodak Philippines, Ltd.’s failure to deliver the two (2) remaining Minilab Equipment
units.16
On November 25, 1992, Kodak Philippines, Ltd. filed a Complaint for replevin and/or
recovery of sum of money. The case was raffled to Branch 61 of the Regional Trial
Court, Makati City.17 The Summons and a copy of Kodak Philippines, Ltd.’s Complaint
was personally served on the Lam Spouses.18
The Lam Spouses failed to appear during the pre-trial conference and submit their pre-
trial brief despite being given extensions.19 Thus, on July 30, 1993, they were declared in
default.20 Kodak Philippines, Ltd. presented evidence ex-parte.21 The trial court issued the
Decision in favor of Kodak Philippines, Ltd. ordering the seizure of the Minilab
Equipment, which included the lone delivered unit, its standard accessories, and a
obtain a writ of seizure on December 16, 1992 for the Minilab Equipment installed at the
Lam Spouses’ outlet in Tagum, Davao Province.23 The writ was enforced on December
21, 1992, and Kodak Philippines, Ltd. gained possession of the Minilab Equipment unit,
accessories, and the generator set.24
The Lam Spouses then filed before the Court of Appeals a Petition to Set Aside the
Orders issued by the trial court dated July 30, 1993 and August 13, 1993. These Orders
were subsequently set aside by the Court of Appeals Ninth Division, and the case was
remanded to the trial court for pre-trial.25
On September 12, 1995, an Urgent Motion for Inhibition was filed against Judge
Fernando V. Gorospe, Jr.,26 who had issued the writ of seizure.27 The ground for the
motion for inhibition was not provided. Nevertheless, Judge Fernando V. Gorospe Jr.
inhibited himself, and the case was reassigned to Branch 65 of the Regional Trial Court,
Makati City on October 3, 1995.28
In the Decision dated February 26, 1999, the Regional Trial Court found that Kodak
Philippines, Ltd. defaulted in the performance of its obligation under its Letter
Agreement with the Lam Spouses.29 It held that Kodak Philippines, Ltd.’s failure to
deliver two (2) out of the three (3) units of the Minilab Equipment caused the Lam
Spouses to stop paying for the rest of the installments.30 The trial court noted that while
the Letter Agreement did not specify a period within which the delivery of all units was
to be made, the Civil Code provides "reasonable time" as the standard period for
compliance:
The second paragraph of Article 1521 of the Civil Code provides:
Where by a contract of sale the seller is bound to send the goods to the buyer, but no time
for sending them is fixed, the seller is bound to send them within a reasonable time.
What constitutes reasonable time is dependent on the circumstances availing both on the
part of the seller and the buyer. In this case, delivery of the first unit was made five (5)
days after the date of the agreement. Delivery of the other two (2) units, however, was
never made despite the lapse of at least three (3) months.31
Kodak Philippines, Ltd. failed to give a sufficient explanation for its failure to deliver all
three (3) purchased units within a reasonable time.32
The trial court found:
Kodak would have the court believe that it did not deliver the other two (2) units due to
the failure of defendants to make good the installments subsequent to the second. The
court is not convinced. First of all, there should have been simultaneous delivery on
account of the circumstances surrounding the transaction. . . . Even after the first delivery
. . . no delivery was made despite repeated demands from the defendants and despite the
fact no installments were due. Then in March and in April (three and four months
respectively from the date of the agreement and the first delivery) when the installments
due were both honored, still no delivery was made.
Second, although it might be said that Kodak was testing the waters with just one
delivery - determining first defendants’ capacity to pay - it was not at liberty to do so. It
is implicit in the letter agreement that delivery within a reasonable time was of the
essence and failure to so deliver within a reasonable time and despite demand would
render the vendor in default.
....
Third, at least two (2) checks were honored. If indeed Kodak refused delivery on account
of defendants’ inability to pay, non-delivery during the two (2) months that payments
were honored is unjustified.33
Nevertheless, the trial court also ruled that when the Lam Spouses accepted delivery of
the first unit, they became liable for the fair value of the goods received:
On the other hand, defendants accepted delivery of one (1) unit. Under Article 1522 of
the Civil Code, in the event the buyer accepts incomplete delivery and uses the goods so
delivered, not then knowing that there would not be any further delivery by the seller, the
buyer shall be liable only for the fair value to him of the goods received. In other words,
the buyer is still liable for the value of the property received. Defendants were under
obligation to pay the amount of the unit. Failure of delivery of the other units did not
thereby give unto them the right to suspend payment on the unit delivered. Indeed, in
incomplete deliveries, the buyer has the remedy of refusing payment unless delivery is
first made. In this case though, payment for the two undelivered units have not even
commenced; the installments made were for only one (1) unit.
Hence, Kodak is right to retrieve the unit delivered.34
The Lam Spouses were under obligation to pay for the amount of one unit, and the failure
to deliver the remaining units did not give them the right to suspend payment for the unit
already delivered.35 However, the trial court held that since Kodak Philippines, Ltd. had
elected to cancel the sale and retrieve the delivered unit, it could no longer seek payment
for any deterioration that the unit may have suffered while under the custody of the Lam
Spouses.36
As to the generator set, the trial court ruled that Kodak Philippines, Ltd. attempted to
mislead the court by claiming that it had delivered the generator set with its accessories to
the Lam Spouses, when the evidence showed that the Lam Spouses had purchased it from
Davao Ken Trading, not from Kodak Philippines, Ltd.37 Thus, the generator set that
Kodak Philippines, Ltd. wrongfully took from the Lam Spouses should be replaced.38
The dispositive portion of the Regional Trial Court Decision reads:
PREMISES CONSIDERED, the case is hereby dismissed. Plaintiff is ordered to pay the
following:
1) PHP 130,000.00 representing the amount of the generator set, plus legal interest at
12% per annum from December 1992 until fully paid; and
2) PHP 1,300,000.00 as actual expenses in the renovation of the Tagum, Davao and Rizal
Ave., Manila outlets.
SO ORDERED.39
9
On March 31, 1999, the Lam Spouses filed their Notice of Partial Appeal, raising as an
issue the Regional Trial Court’s failure to order Kodak Philippines, Ltd. to pay: (1)
₱2,040,000 in actual damages; (2) ₱50,000,000 in moral damages; (3) ₱20,000,000 in
exemplary damages; (4) ₱353,000 in attorney’s fees; and (5) ₱300,000 as litigation
expenses.40 The Lam Spouses did not appeal the Regional Trial Court’s award for the
generator set and the renovation expenses.41
Kodak Philippines, Ltd. also filed an appeal. However, the Court of Appeals42 dismissed
it on December 16, 2002 for Kodak Philippines, Ltd.’s failure to file its appellant’s brief,
without prejudice to the continuation of the Lam Spouses’ appeal.43 The Court of
Appeals’ December 16, 2002 Resolution denying Kodak Philippines, Ltd.’s appeal
became final and executory on January 4, 2003.44
In the Decision45 dated March 30, 2005, the Court of Appeals Special Fourteenth
Division modified the February 26, 1999 Decision of the Regional Trial Court:
WHEREFORE, PREMISES CONSIDERED, the Assailed Decision dated 26 February
1999 of the Regional Trial Court, Branch 65 in Civil Case No. 92-3442 is
hereby MODIFIED. Plaintiff-appellant is ordered to pay the following:
1. P130,000.00 representing the amount of the generator set, plus legal interest at 12%
per annum from December 1992 until fully paid; and
2. P440,000.00 as actual damages;
3. P25,000.00 as moral damages; and
4. P50,000.00 as exemplary damages.
SO ORDERED.46 (Emphasis supplied)
The Court of Appeals agreed with the trial court’s Decision, but extensively discussed the
basis for the modification of the dispositive portion.
The Court of Appeals ruled that the Letter Agreement executed by the parties showed
that their obligations were susceptible of partial performance. Under Article 1225 of the
New Civil Code, their obligations are divisible:
In determining the divisibility of an obligation, the following factors may be considered,
to wit: (1) the will or intention of the parties, which may be expressed or presumed; (2)
the objective or purpose of the stipulated prestation; (3) the nature of the thing; and (4)
provisions of law affecting the prestation.
Applying the foregoing factors to this case, We found that the intention of the parties is
to be bound separately for each Minilab Equipment to be delivered as shown by the
separate purchase price for each of the item, by the acceptance of Sps. Lam of separate
deliveries for the first Minilab Equipment and for those of the remaining two and the
separate payment arrangements for each of the equipment. Under this premise, Sps. Lam
shall be liable for the entire amount of the purchase price of the Minilab
Equipment delivered considering that Kodak had already completely fulfilled its
obligation to deliver the same. . . .
Third, it is also evident that the contract is one that is severable in character as
demonstrated by the separate purchase price for each of the minilab equipment. "If the
part to be performed by one party consists in several distinct and separate items and the
price is apportioned to each of them, the contract will generally be held to be severable.
In such case, each distinct stipulation relating to a separate subject matter will be treated
as a separate contract." Considering this, Kodak's breach of its obligation to deliver the
other two (2) equipment cannot bar its recovery for the full payment of the equipment
already delivered. As far as Kodak is concerned, it had already fully complied with its
separable obligation to deliver the first unit of Minilab Equipment. 47 (Emphasis supplied)
The Court of Appeals held that the issuance of a writ of replevin is proper insofar as the
delivered Minilab Equipment unit and its standard accessories are concerned, since
Kodak Philippines, Ltd. had the right to possess it:48
The purchase price of said equipment is P1,796,000.00 which, under the agreement is
payable with forty eight (48) monthly amortization. It is undisputed that Sps. Lam made
payments which amounted to Two Hundred Seventy Thousand Pesos (P270,000.00)
through the following checks: Metrobank Check Nos. 00892620 and 00892621 dated 31
March 1992 and 30 April 1992 respectively in the amount of Thirty Five Thousand Pesos
(P35,000.00) each, and BPI Family Check dated 31 July 1992 amounting to Two
Hundred Thousand Pesos (P200,000.00). This being the case, Sps. Lam are still liable to
Kodak in the amount of One Million Five Hundred Twenty Six Thousand Pesos
(P1,526,000.00), which is payable in several monthly amortization, pursuant to the Letter
Agreement. However, Sps. Lam admitted that sometime in May 1992, they had already
ordered their drawee bank to stop the payment on all the other checks they had issued to
Kodak as payment for the Minilab Equipment delivered to them. Clearly then, Kodak
ha[d] the right to repossess the said equipment, through this replevin suit. Sps. Lam
cannot excuse themselves from paying in full the purchase price of the equipment
delivered to them on account of Kodak’s breach of the contract to deliver the other two
(2) Minilab Equipment, as contemplated in the Letter Agreement. 49(Emphasis supplied)
Echoing the ruling of the trial court, the Court of Appeals held that the liability of the
Lam Spouses to pay the remaining balance for the first delivered unit is based on the
second sentence of Article 1592 of the New Civil Code.50 The Lam Spouses’ receipt and
use of the Minilab Equipment before they knew that Kodak Philippines, Ltd. would not
deliver the two (2) remaining units has made them liable for the unpaid portion of the
purchase price.51
The Court of Appeals noted that Kodak Philippines, Ltd. sought the rescission of its
contract with the Lam Spouses in the letter dated October 14, 1992.52 The rescission was
based on Article 1191 of the New Civil Code, which provides: "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."53 In its letter, Kodak Philippines, Ltd. demanded that
the Lam Spouses surrender the lone delivered unit of Minilab Equipment along with its
standard accessories.54
The Court of Appeals likewise noted that the Lam Spouses rescinded the contract through
its letter dated November 18, 1992 on account of Kodak Philippines, Inc.’s breach of the
parties’ agreement to deliver the two (2) remaining units.55
As a result of this rescission under Article 1191, the Court of Appeals ruled that "both
parties must be restored to their original situation, as far as practicable, as if the contract
was never entered into."56 The Court of Appeals ratiocinated that Article 1191 had the
effect of extinguishing the obligatory relation as if one was never created:57
To rescind is to declare a contract void in its inception and to put an end to it as though it
never were. It is not merely to terminate it and to release parties from further obligations
to each other but abrogate it from the beginning and restore parties to relative positions
which they would have occupied had no contract been made.58
The Lam Spouses were ordered to relinquish possession of the Minilab Equipment unit
and its standard accessories, while Kodak Philippines, Ltd. was ordered to return the
amount of ₱270,000.00, tendered by the Lam Spouses as partial payment.59
As to the actual damages sought by the parties, the Court of Appeals found that the Lam
Spouses were able to substantiate the following:
10
Incentive fee paid to Mr. Ruales in the amount of P100,000.00; the rider to the contract of
lease which made the Sps. Lam liable, by way of advance payment, in the amount of
P40,000.00, the same being intended for the repair of the flooring of the leased premises;
and lastly, the payment of P300,000.00, as compromise agreement for the pre-termination
of the contract of lease with Ruales.60
The total amount is ₱440,000.00. The Court of Appeals found that all other claims made
by the Lam Spouses were not supported by evidence, either through official receipts or
check payments.61
As regards the generator set improperly seized from Kodak Philippines, Ltd. on the basis
of the writ of replevin, the Court of Appeals found that there was no basis for the Lam
Spouses’ claim for reasonable rental of ₱5,000.00. It held that the trial court’s award of
12% interest, in addition to the cost of the generator set in the amount of ₱130,000.00, is
sufficient compensation for whatever damage the Lam Spouses suffered on account of its
improper seizure.62
The Court of Appeals also ruled on the Lam Spouses’ entitlement to moral and
exemplary damages, as well as attorney’s fees and litigation expenses:
In seeking recovery of the Minilab Equipment, Kodak cannot be considered to have
manifested bad faith and malevolence because as earlier ruled upon, it was well within its
right to do the same. However, with respect to the seizure of the generator set, where
Kodak misrepresented to the court a quo its alleged right over the said item, Kodak’s bad
faith and abuse of judicial processes become self-evident. Considering the off-setting
circumstances attendant, the amount of P25,000.00 by way of moral damages is
considered sufficient.
In addition, so as to serve as an example to the public that an application for replevin
should not be accompanied by any false claims and misrepresentation, the amount of
P50,000.00 by way of exemplary damages should be pegged against Kodak.
With respect to the attorney’s fees and litigation expenses, We find that there is no basis
to award Sps. Lam the amount sought for.63
Kodak Philippines, Ltd. moved for reconsideration of the Court of Appeals Decision, but
it was denied for lack of merit.64 However, the Court of Appeals noted that the Lam
Spouses’ Opposition correctly pointed out that the additional award of ₱270,000.00 made
by the trial court was not mentioned in the decretal portion of the March 30, 2005
Decision:
Going over the Decision, specifically page 12 thereof, the Court noted that, in addition to
the amount of Two Hundred Seventy Thousand (P270,000.00) which plaintiff-appellant
should return to the defendantsappellants, the Court also ruled that defendants-appellants
should, in turn, relinquish possession of the Minilab Equipment and the standard
accessories to plaintiff-appellant. Inadvertently, these material items were not mentioned
in the decretal portion of the Decision. Hence, the proper correction should herein be
made.65
The Lam Spouses filed this Petition for Review on April 14, 2005. On the other hand,
Kodak Philippines, Ltd. filed its Motion for Reconsideration66 before the Court of
Appeals on April 22, 2005.
While the Petition for Review on Certiorari filed by the Lam Spouses was pending before
this court, the Court of Appeals Special Fourteenth Division, acting on Kodak
Philippines, Ltd.’s Motion for Reconsideration, issued the Amended Decision67 dated
September 9, 2005. The dispositive portion of the Decision reads:
WHEREFORE, premises considered, this Court resolved that:
A. Plaintiff-appellant’s Motion for Reconsideration is hereby DENIED for lack of merit.
B. The decretal portion of the 30 March 2005 Decision should now read as follows:
"WHEREFORE, PREMISES CONSIDERED, the Assailed Decision dated 26 February
1999 of the Regional Trial Court, Branch 65 in Civil Cases No. 92-3442 is
hereby MODIFIED. Plaintiff-appellant is ordered to pay the following:
a. P270,000.00 representing the partial payment made on the Minilab equipment.
b. P130,000.00 representing the amount of the generator set, plus legal interest at 12%
per annum from December 1992 until fully paid;
c. P440,000.00 as actual damages;
d. P25,000.00 as moral damages; and
e. P50,000.00 as exemplary damages.
Upon the other hand, defendants-appellants are hereby ordered to return to plaintiff-
appellant the Minilab equipment and the standard accessories delivered by plaintiff-
appellant.
SO ORDERED."
SO ORDERED.68 (Emphasis in the original)
Upon receiving the Amended Decision of the Court of Appeals, Kodak Philippines, Ltd.
filed a Motion for Extension of Time to File an Appeal by Certiorari under Rule 45 of the
1997 Rules of Civil Procedure before this court.69
This was docketed as G.R. No. 169639. In the Motion for Consolidation dated November
2, 2005, the Lam Spouses moved that G.R. No. 167615 and G.R. No. 169639 be
consolidated since both involved the same parties, issues, transactions, and essential facts
and circumstances.70
In the Resolution dated November 16, 2005, this court noted the Lam Spouses’
September 23 and September 30, 2005 Manifestations praying that the Court of Appeals’
September 9, 2005 Amended Decision be considered in the resolution of the Petition for
Review on Certiorari.71 It also granted the Lam Spouses’ Motion for Consolidation.72
In the Resolution73 dated September 20, 2006, this court deconsolidated G.R No. 167615
from G.R. No. 169639 and declared G.R. No. 169639 closed and terminated since Kodak
Philippines, Ltd. failed to file its Petition for Review.
II
We resolve the following issues:
First, whether the contract between petitioners Spouses Alexander and Julie Lam and
respondent Kodak Philippines, Ltd. pertained to obligations that are severable, divisible,
and susceptible of partial performance under Article 1225 of the New Civil Code; and
Second, upon rescission of the contract, what the parties are entitled to under Article
1190 and Article 1522 of the New Civil Code.
Petitioners argue that the Letter Agreement it executed with respondent for three (3)
Minilab Equipment units was not severable, divisible, and susceptible of partial
performance. Respondent’s recovery of the delivered unit was unjustified.74
Petitioners assert that the obligations of the parties were not susceptible of partial
performance since the Letter Agreement was for a package deal consisting of three (3)
units.75 For the delivery of these units, petitioners were obliged to pay 48 monthly
payments, the total of which constituted one debt.76 Having relied on respondent’s
assurance that the three units would be delivered at the same time, petitioners
simultaneously rented and renovated three stores in anticipation of simultaneous
operations.77 Petitioners argue that the divisibility of the object does not necessarily
determine the divisibility of the obligation since the latter is tested against its
susceptibility to a partial performance.78 They argue that even if the object is susceptible
11
of separate deliveries, the transaction is indivisible if the parties intended the realization
of all parts of the agreed obligation.79
Petitioners support the claim that it was the parties’ intention to have an indivisible
agreement by asserting that the payments they made to respondent were intended to be
applied to the whole package of three units.80 The postdated checks were also intended as
initial payment for the whole package.81 The separate purchase price for each item was
merely intended to particularize the unit prices, not to negate the indivisible nature of
their transaction.82 As to the issue of delivery, petitioners claim that their acceptance of
separate deliveries of the units was solely due to the constraints faced by respondent, who
had sole control over delivery matters.83
With the obligation being indivisible, petitioners argue that respondent’s failure to
comply with its obligation to deliver the two (2) remaining Minilab Equipment units
amounted to a breach. Petitioners claim that the breach entitled them to the remedy of
rescission and damages under Article 1191 of the New Civil Code.84
Petitioners also argue that they are entitled to moral damages more than the ₱50,000.00
awarded by the Court of Appeals since respondent’s wrongful act of accusing them of
non-payment of their obligations caused them sleepless nights, mental anguish, and
wounded feelings.85 They further claim that, to serve as an example for the public good,
they are entitled to exemplary damages as respondent, in making false allegations, acted
in evident bad faith and in a wanton, oppressive, capricious, and malevolent manner.86
Petitioners also assert that they are entitled to attorney’s fees and litigation expenses
under Article 2208 of the New Civil Code since respondent’s act of bringing a suit
against them was baseless and malicious. This prompted them to engage the services of a
lawyer.87
Respondent argues that the parties’ Letter Agreement contained divisible obligations
susceptible of partial performance as defined by Article 1225 of the New Civil Code.88 In
respondent’s view, it was the intention of the parties to be bound separately for each
individually priced Minilab Equipment unit to be delivered to different outlets:89
The three (3) Minilab Equipment are intended by petitioners LAM for install[a]tion at
their Tagum, Davao del Norte, Sta. Cruz, Manila and Cotabato City outlets. Each of these
units [is] independent from one another, as many of them may perform its own job
without the other. Clearly the objective or purpose of the prestation, the obligation is
divisible.
The nature of each unit of the three (3) Minilab Equipment is such that one can perform
its own functions, without awaiting for the other units to perform and complete its job. So
much so, the nature of the object of the Letter Agreement is susceptible of partial
performance, thus the obligation is divisible.90
With the contract being severable in character, respondent argues that it performed its
obligation when it delivered one unit of the Minilab Equipment.91 Since each unit could
perform on its own, there was no need to await the delivery of the other units to complete
its job.92 Respondent then is of the view that when petitioners ordered the depository bank
to stop payment of the issued checks covering the first delivered unit, they violated their
obligations under the Letter Agreement since respondent was already entitled to full
payment.93
Respondent also argues that petitioners benefited from the use of the Minilab Equipment
for 10 months—from March to December 1992— despite having paid only two (2)
monthly installments.94 Respondent avers that the two monthly installments amounting to
₱70,000.00 should be the subject of an offset against the amount the Court of Appeals
awarded to petitioners.95
Respondent further avers that petitioners have no basis for claiming damages since the
seizure and recovery of the Minilab Equipment was not in bad faith and respondent was
well within its right.96
III
The Letter Agreement contained an indivisible obligation.
Both parties rely on the Letter Agreement97 as basis of their respective obligations.
Written by respondent’s Jeffrey T. Go and Antonio V. Mines and addressed to petitioner
Alexander Lam, the Letter Agreement contemplated a "package deal" involving three (3)
units of the Kodak Minilab System 22XL, with the following terms and conditions:
This confirms our verbal agreement for Kodak Phils., Ltd. to provide Colorkwik
Laboratories, Inc. with three (3) units Kodak Minilab System 22XL . . . for your proposed
outlets in Rizal Avenue (Manila), Tagum (Davao del Norte), and your existing Multicolor
photo counter in Cotabato City under the following terms and conditions:
1. Said Minilab Equipment packages will avail a total of 19% multiple order discount
based on prevailing equipment price provided said equipment packages will be purchased
not later than June 30, 1992.
2. 19% Multiple Order Discount shall be applied in the form of merchandise and
delivered in advance immediately after signing of the contract.
* Also includes start-up packages worth P61,000.00.
3. NO DOWNPAYMENT.
4. Minilab Equipment Package shall be payable in 48 monthly installments at THIRTY
FIVE THOUSAND PESOS (P35,000.00) inclusive of 24% interest rate for the first 12
months; the balance shall be re-amortized for the remaining 36 months and the prevailing
interest shall be applied.
5. Prevailing price of Kodak Minilab System 22XL as of January 8, 1992 is at ONE
MILLION SEVEN HUNDRED NINETY SIX THOUSAND PESOS.
6. Price is subject to change without prior notice.
*Secured with PDCs; 1st monthly amortization due 45 days after installation[.]98
Based on the foregoing, the intention of the parties is for there to be a single transaction
covering all three (3) units of the Minilab Equipment. Respondent’s obligation was to
deliver all products purchased under a "package," and, in turn, petitioners’ obligation was
to pay for the total purchase price, payable in installments.
The intention of the parties to bind themselves to an indivisible obligation can be further
discerned through their direct acts in relation to the package deal. There was only one
agreement covering all three (3) units of the Minilab Equipment and their accessories.
The Letter Agreement specified only one purpose for the buyer, which was to obtain
these units for three different outlets. If the intention of the parties were to have a
divisible contract, then separate agreements could have been made for each Minilab
Equipment unit instead of covering all three in one package deal. Furthermore, the 19%
multiple order discount as contained in the Letter Agreement was applied to all three
acquired units.99 The "no downpayment" term contained in the Letter Agreement was also
applicable to all the Minilab Equipment units. Lastly, the fourth clause of the Letter
Agreement clearly referred to the object of the contract as "Minilab Equipment Package."
In ruling that the contract between the parties intended to cover divisible obligations, the
Court of Appeals highlighted: (a) the separate purchase price of each item; (b)
petitioners’ acceptance of separate deliveries of the units; and (c) the separate payment
arrangements for each unit.100 However, through the specified terms and conditions, the
tenor of the Letter Agreement indicated an intention for a single transaction. This intent
12
must prevail even though the articles involved are physically separable and capable of
being paid for and delivered individually, consistent with the New Civil Code:
Article 1225. For the purposes of the preceding articles, obligations to give definite
things and those which are not susceptible of partial performance shall be deemed to be
indivisible.
When the obligation has for its object the execution of a certain number of days of work,
the accomplishment of work by metrical units, or analogous things which by their nature
are susceptible of partial performance, it shall be divisible.
However, even though the object or service may be physically divisible, an obligation is
indivisible if so provided by law or intended by the parties. (Emphasis supplied)
In Nazareno v. Court of Appeals,101 the indivisibility of an obligation is tested against
whether it can be the subject of partial performance:
An obligation is indivisible when it cannot be validly performed in parts, whatever may
be the nature of the thing which is the object thereof. The indivisibility refers to the
prestation and not to the object thereof. In the present case, the Deed of Sale of January
29, 1970 supposedly conveyed the six lots to Natividad. The obligation is clearly
indivisible because the performance of the contract cannot be done in parts, otherwise the
value of what is transferred is diminished. Petitioners are therefore mistaken in basing the
indivisibility of a contract on the number of obligors.102 (Emphasis supplied, citation
omitted)
There is no indication in the Letter Agreement that the units petitioners ordered were
covered by three (3) separate transactions. The factors considered by the Court of
Appeals are mere incidents of the execution of the obligation, which is to deliver three
units of the Minilab Equipment on the part of respondent and payment for all three on the
part of petitioners. The intention to create an indivisible contract is apparent from the
benefits that the Letter Agreement afforded to both parties. Petitioners were given the
19% discount on account of a multiple order, with the discount being equally applicable
to all units that they sought to acquire. The provision on "no downpayment" was also
applicable to all units. Respondent, in turn, was entitled to payment of all three Minilab
Equipment units, payable by installments.
IV
With both parties opting for rescission of the contract under Article 1191, the Court of
Appeals correctly ordered for restitution.
The contract between the parties is one of sale, where one party obligates himself or
herself to transfer the ownership and deliver a determinate thing, while the other pays a
certain price in money or its equivalent.103 A contract of sale is perfected upon the
meeting of minds as to the object and the price, and the parties may reciprocally demand
the performance of their respective obligations from that point on.104
The Court of Appeals correctly noted that respondent had rescinded the parties’ Letter
Agreement through the letter dated October 14, 1992.105 It likewise noted petitioners’
rescission through the letter dated November 18, 1992.106This rescission from both parties
is founded on Article 1191 of the New Civil Code:
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 fulfilment and the rescission of the obligation,
with the payment of damages in either case. He may also seek rescission, even after he
has chosen fulfilment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the
fixing of a period.
Rescission under Article 1191 has the effect of mutual restitution.107 In Velarde v. Court
of Appeals:108
Rescission abrogates the contract from its inception and requires a mutual restitution of
benefits received.
....
Rescission creates the obligation to return the object of the contract. It can be carried
out only when the one who demands rescission can return whatever he may be obliged to
restore. To rescind is to declare a contract void at its inception and to put an end to it as
though it never was. It is not merely to terminate it and release the parties from further
obligations to each other, but to abrogate it from the beginning and restore the parties to
their relative positions as if no contract has been made.109 (Emphasis supplied, citations
omitted)
The Court of Appeals correctly ruled that both parties must be restored to their original
situation as far as practicable, as if the contract was never entered into. Petitioners must
relinquish possession of the delivered Minilab Equipment unit and accessories, while
respondent must return the amount tendered by petitioners as partial payment for the unit
received. Further, respondent cannot claim that the two (2) monthly installments should
be offset against the amount awarded by the Court of Appeals to petitioners because the
effect of rescission under Article 1191 is to bring the parties back to their original
positions before the contract was entered into. Also in Velarde:
As discussed earlier, the breach committed by petitioners was the nonperformance of a
reciprocal obligation, not a violation of the terms and conditions of the mortgage
contract. Therefore, the automatic rescission and forfeiture of payment clauses stipulated
in the contract does not apply. Instead, Civil Code provisions shall govern and regulate
the resolution of this controversy.
Considering that the rescission of the contract is based on Article 1191 of the Civil Code,
mutual restitution is required to bring back the parties to their original situation prior to
the inception of the contract. Accordingly, the initial payment of ₱800,000 and the
corresponding mortgage payments in the amounts of ₱27,225, ₱23,000 and ₱23,925
(totaling ₱874,150.00) advanced by petitioners should be returned by private
respondents, lest the latter unjustly enrich themselves at the expense of the
former.110 (Emphasis supplied)
When rescission is sought under Article 1191 of the Civil Code, it need not be judicially
invoked because the power to resolve is implied in reciprocal obligations.111 The right to
resolve allows an injured party to minimize the damages he or she may suffer on account
of the other party’s failure to perform what is incumbent upon him or her.112 When a
party fails to comply with his or her obligation, the other party’s right to resolve the
contract is triggered.113 The resolution immediately produces legal effects if the non-
performing party does not question the resolution.114 Court intervention only becomes
necessary when the party who allegedly failed to comply with his or her obligation
disputes the resolution of the contract.115 Since both parties in this case have exercised
their right to resolve under Article 1191, there is no need for a judicial decree before the
resolution produces effects.
V derived some benefit for his use of the ₱17,000.00, it is just that he should account for the
The issue of damages is a factual one. A petition for review on certiorari under Rule 45
shall only pertain to questions of law.116 It is not the duty of this court to re-evaluate the
evidence adduced before the lower courts.117Furthermore, unless the petition clearly
shows that there is grave abuse of discretion, the findings of fact of the trial court as
13
affirmed by the Court of Appeals are conclusive upon this court.118 In Lorzano v.
Tabayag, Jr.:119
For a question to be one of law, the same must not involve an examination of the
probative value of the evidence presented by the litigants or any of them. The resolution
of the issue must rest solely on what the law provides on the given set of
circumstances. Once it is clear that the issue invites a review of the evidence presented,
the question posed is one of fact.
....
For the same reason, we would ordinarily disregard the petitioner’s allegation as to the
propriety of the award of moral damages and attorney’s fees in favor of the respondent
as it is a question of fact. Thus, questions on whether or not there was a preponderance
of evidence to justify the award of damages or whether or not there was a causal
connection between the given set of facts and the damage suffered by the private
complainant or whether or not the act from which civil liability might arise exists are
questions of fact.
Essentially, the petitioner is questioning the award of moral damages and attorney’s fees
in favor of the respondent as the same is supposedly not fully supported by evidence.
However, in the final analysis, the question of whether the said award is fully supported
by evidence is a factual question as it would necessitate whether the evidence adduced in
support of the same has any probative value. For a question to be one of law, it must
involve no examination of the probative value of the evidence presented by the litigants
or any of them.120 (Emphasis supplied, citations omitted)
The damages awarded by the Court of Appeals were supported by documentary
evidence.121 Petitioners failed to show any reason why the factual determination of the
Court of Appeals must be reviewed, especially in light of their failure to produce receipts
or check payments to support their other claim for actual damages.122
Furthermore, the actual damages amounting to ₱2,040,000.00 being sought by
petitioners123 must be tempered on account of their own failure to pay the rest of the
installments for the delivered unit. This failure on their part is a breach of their
obligation, for which the liability of respondent, for its failure to deliver the remaining
units, shall be equitably tempered on account of Article 1192 of the New Civil
Code.124 In Central Bank of the Philippines v. Court of Appeals:125
Since both parties were in default in the performance of their respective reciprocal
obligations, that is, Island Savings Bank failed to comply with its obligation to furnish
the entire loan and Sulpicio M. Tolentino failed to comply with his obligation to pay his
₱17,000.00 debt within 3 years as stipulated, they are both liable for damages.
Article 1192 of the Civil Code provides that in case both parties have committed a
breach of their reciprocal obligations, the liability of the first infractor shall be equitably
tempered by the courts. WE rule that the liability of Island Savings Bank for damages in
not furnishing the entire loan is offset by the liability of Sulpicio M. Tolentino for
damages, in the form of penalties and surcharges, for not paying his overdue ₱17,000.00
debt. The liability of Sulpicio M. Tolentino for interest on his ₱17,000.00 debt shall not
be included in offsetting the liabilities of both parties. Since Sulpicio M. Tolentino
interest thereon.126 (Emphasis supplied)
The award for moral and exemplary damages also appears to be sufficient. Moral
damages are granted to alleviate the moral suffering suffered by a party due to an act of
another, but it is not intended to enrich the victim at the defendant’s expense.127 It is not
meant to punish the culpable party and, therefore, must always be reasonable vis-a-vis the
injury caused.128 Exemplary damages, on the other hand, are awarded when the injurious
act is attended by bad faith.129 In this case, respondent was found to have misrepresented
its right over the generator set that was seized. As such, it is properly liable for exemplary
damages as an example to the public.130
However, the dispositive portion of the Court of Appeals Amended Decision dated
September 9, 2005 must be modified to include the recovery of attorney’s fees and costs
of suit in favor of petitioners. In Sunbanun v. Go:131
Furthermore, we affirm the award of exemplary damages and attorney’s fees. Exemplary
damages may be awarded when a wrongful act is accompanied by bad faith or when the
defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner
which would justify an award of exemplary damages under Article 2232 of the Civil
Code. Since the award of exemplary damages is proper in this case, attorney’s fees and
cost of the suit may also be recovered as provided under Article 2208 of the Civil
Code.132 (Emphasis supplied, citation omitted)
Based on the amount awarded for moral and exemplary damages, it is reasonable to
award petitioners ₱20,000.00 as attorney’s fees.
WHEREFORE, the Petition is DENIED. The Amended Decision dated September 9,
2005 is AFFIRMED with MODIFICATION. Respondent Kodak Philippines, Ltd. is
ordered to pay petitioners Alexander and Julie Lam:
(a) P270,000.00, representing the partial payment made on the Minilab Equipment;
(b) P130,000.00, representing the amount of the generator set, plus legal interest at
12% .per annum from December 1992 until fully paid;
(c) P440,000.00 as actual damages;
(d) P25,000.00 as moral damages;
(e) P50,000.00 as exemplary damages; and
(f) P20,000.00 as attorney's fees.
Petitioners are ordered to return the Kodak Minilab System 22XL unit and its standard
accessories to respondent.
SO ORDERED.

14
EN BANC The judgment appealed from ordered the defendants and the intervenor to pay plaintiff in
G.R. No. L-28497             November 6, 1928 case 28497 the sum of P7,732.09 with interest at the rate of 12 per cent per annum from
THE BACHRACH MOTOR CO., INC., plaintiff-appellee,  May 1, 1926 until fully paid, and 25 per cent thereof in addition as penalty. In case
vs. 28498, the trial court ordered the defendant and the intervenor to pay plaintiff the sum of
FAUSTINO ESPIRITU, defendant-appellant. P4,208.28 with interest at 12 per cent per annum from December 1, 1925 until fully paid,
------------------------------ and 25 per cent thereon as penalty.
G.R. No. L-28498             November 6, 1928 The appellants contend that trucks 77197 and 92744 were not mortgaged, because, when
THE BACHRACH MOTOR CO., INC., plaintiff-appellee,  the defendant signed the mortgage deeds these trucks were not included in those
vs. documents, and were only put in later, without defendant's knowledge. But there is
FAUSTINO ESPIRITU, defendant-appellant, and  positive proof that they were included at the time the defendant signed these documents.
ROSARIO ESPIRITU, intervenor-appellant. Besides, there were presented two of defendant's letters to Hidalgo, an employee of the
Ernesto Zaragoza and Simeon Ramos for defendant-appellant.  plaintiff's written a few days before the transaction, acquiescing in the inclusion of all
Benito Soliven and Jose Varela Calderon for intervenor-appellant.  his White trucks already paid for, in the mortgage (Exhibit H-I).
B. Francisco for appellee. Appellants also alleged that on February 4, 1925, the defendant sold his rights in said
trucks Nos. 77197 and 92744 to the intervenor, and that as the latter did not sign the
mortgage deeds, such trucks cannot be considered as mortgaged. But the evidence shows
AVANCEÑA, C. J.: that while the intervenor Rosario Espiritu did not sign the two mortgage deeds (Exhibits
These two cases, Nos. 28497 and 28948, were tried together. A and C), yet, together with the defendants Faustino Espiritu, he signed the two
It appears, in connection with case 28497; that on July 28, 1925 the defendant Faustino promissory notes (Exhibits B and D) secured by these two mortgages. All these
Espiritu purchased of the plaintiff corporation a two-ton White truck for P11,983.50, instruments were executed at the same time, and when the trucks 77197 and 92744 were
paying P1,000 down to apply on account of this price, and obligating himself to pay the included in the mortgages, the intervenor Rosario Espiritu was aware of it and consented
remaining P10,983.50 within the periods agreed upon. To secure the payment of this to such inclusion. These facts are supported by the testimony of Bachrach, manager of the
sum, the defendants mortgaged the said truck purchased and, besides, three others, two of plaintiff corporation, of Agustin Ramirez, who witnessed the execution of all these
which are numbered 77197 and 92744 respectively, and all of the White make (Exhibit documents, and of Angel Hidalgo, who witnessed the execution of Exhibits B and D.
A). These two trucks had been purchased from the same plaintiff and were fully paid for We do not find the statement of the intervenor Rosario Espiritu that he did not sign
by the defendant and his brother Rosario Espiritu. The defendant failed to pay P10,477.82 promissory notes Exhibits B and C to be sufficient to overthrow this evidence. A
of the price secured by this mortgage. comparison of his genuine signature on Exhibit AA with those appearing on promissory
In connection with case 28498, it appears that on February 18, 1925 the defendant bought notes B and C, convinces us that the latter are his signatures. And such is our conclusion,
a one-ton White truck of the plaintiff corporation for the sum of P7,136.50, and after notwithstanding the evidence presented to establish that on the date when Exhibits B
having deducted the P500 cash payment and the 12 per cent annual interest on the unpaid appears to have been signed, that is July 25, 1925, the intervenor was in Batac, Ilocos
principal, obligated himself to make payment of this sum within the periods agreed upon. Norte, many miles away from Manila. And the fact that on the 24th of said month of July,
To secure this payment the defendant mortgaged to the plaintiff corporation the said truck the plaintiff sent some truck accessory parts by rail to Ilocos for the intervenor does not
purchased and two others, numbered 77197 and 92744, respectively, the same that were necessarily prove that the latter could not have been in Manila on the 25th of that month.
mortgaged in the purchase of the other truck referred to in the other case. The defendant In view of his conclusion that the intervenor signed the promissory notes secured by
failed to pay P4,208.28 of this sum. trucks 77197 and 92744 and consented to the mortgage of the same, it is immaterial
In both sales it was agreed that 12 per cent interest would be paid upon the unpaid portion whether he was or was not the exclusive owner thereof.
of the price at the executon of the contracts, and in case of non-payment of the total debt It is finally contended that the 25 per cent penalty upon the debt, in addition to the
upon its maturity, 25 per cent thereon, as penalty. interest of 12 per cent per annum, makes the contract usurious. Such a contention is not
In addition to the mortagage deeds referred to, which the defendant executed in favor of well founded. Article 1152 of the Civil Code permits the agreement upon a penalty apart
the plaintiff, the defendant at the same time also signed a promissory note solidarily with from the interest. Should there be such an agreemnet, the penalty, as was held in the case
his brother Rosario Espiritu for the several sums secured by the two mortgages (Exhibits of Lopez vs. Hernaez (32 Phil., 631), does not include the interest, and which may be
B and D). demamded separetely. According to this, the penalty is not to be added to the interest for
Rosario Espiritu appeared in these two cases as intervenor, alleging to be the exclusive the determination of whether the interest exceeds the rate fixed by the law, since said rate
owner of the two White trucks Nos. 77197 and 92744, which appear to have been was fixed only for the interest. But considering that the obligation was partly performed,
mortgaged by the defendants to the plaintiff. lawphi1.net and making use of the power given to the court by article 1154 of the Civil Code, this
While these two cases were pending in the lower court the mortgaged trucks were sold by penalty is reduced to 10 per cent of the unpaid debt.
virtue of the mortgage, all of them together bringing in, after deducting the sheriff's fees With the sole modification that instead of 25 per cent upon the sum owed, the defendants
and transportation charges to Manila, the net sum of P3,269.58. need pay only 10 per cent thereon as penalty, the judgment appealed from is affired in all
other respects without special pronouncement as to costs. So ordered.

15
16
FIRST DIVISION
[G.R. No. L-41093. October 30, 1978.]
ROBES-FRANCISCO REALTY & DEVELOPMENT CORPORATION, Petitioner,
v. COURT OF FIRST INSTANCE OF RIZAL (BRANCH XXXIV), and LOLITA
MILLAN, Respondents.
Purugganan & Bersamin for Petitioner.
Salvador N. Beltran for Respondent.
SYNOPSIS
Private respondent bought a lot from petitioner realty corporation in May, 1962, and paid
in full her installments on December 22, 1971, but it was only on March 2, 1973, that a
deed of absolute sale was executed in her favor. Notwithstanding the lapse of almost
three years since she made her last payment, petitioner still failed to convey the
corresponding transfer certificate of title to private respondent who accordingly was
compelled to file a complaint for specific performance. The case was submitted for
decision on the pleadings. The trial court awarded nominal damages for P20,000.
On appeal, the Supreme Court held that the trial court did not err in awarding nominal
damages; however, the circumstances of the case warrant a reduction of the amount to
P10,000.
SYLLABUS
1. CIVIL LAW; OBLIGATIONS AND CONTRACTS; DAMAGES; STIPULATION IN
A CONTRACT TO PAY 4% INTEREST IN CASE OF FAILURE TO PERFORM AN
OBLIGATION NOT PENAL IN CHARACTER. — A stipulation in a deed of absolute
sale that should the vendor fail to issue the transfer certificate of title within six months
from date of full payment, the vendor shall refund to the vendee the total amount cannot
be considered a penal clause in contemplation of Article 1226 of the New Civil Code as
to preclude recovery of damages. For obvious reasons, the clause does not convey any
penalty, for even without it, pursuant to Article 2209 of the Civil Code, the vendee would
still recover the amount paid by her with legal rate of interest which is even more than the
4% provided for in the clause.
2. ID.; ID.; ID.; NOMINAL DAMAGES, NATURE OF. — Under Articles 2221 and
2222 of the New Civil Code, nominal damages are not intended as indemnification for
the loss suffered but for the vindication or recognition of a right violated or invaded.
They are recoverable where some injury has been done the amount of which the evidence
fails to show, the assessment of damages being left to the discretion of the court. Nominal
damages are by their very nature small sums fixed by the court without regard to the
extent of the harm done to the injured party. A nominal damage is a substantial claim if
based upon the violation of a legal right; in such case the law presumes a damage,
although actual or compensatory damages are not proven; in truth, nominal damages are
damages in name only, and not in fact and are allowed, not as an equivalent of a wrong
inflicted, but simply in recognition of the existence of a technical injury. It cannot co-
17
exist with compensatory or exemplary damages.
3. ID.; ID.; ID.; CIRCUMSTANCES IN EACH PARTICULAR CASE DETERMINES
AMOUNT OF NOMINAL DAMAGES. — The Circumstances of a particular case
determine whether or not the amount assessed as nominal damages is within the scope or
intention of Article 2221 of the Civil Code.
4. ID.; ID.; ID.; BAD FAITH NOT PRESUMED. — Bad faith is not to be presumed.
Thus, the fact that the reality corporation failed to convey a transfer certificate of title to
the buyer because the subdivision property was mortgaged does not itself show that there
was bad faith or fraud; especially where the vendor expected that arrangements were
possible from the mortgagee to make partial releases of the subdivision lots from the
overall real estate mortgage but the vendor did not simply succeed in that regard.
5. ID.; ID., ID.; NOMINAL DAMAGES NOT CONSIDERED AS EXEMPLARY
DAMAGES. — The amount of P20,000 awarded as nominal damages against realty
corporation for failure to convey a transfer certificate of title to the buyer who had fully
paid the purchase price of the lot is excessive. Nor may such award be considered in the
nature of exemplary damages where the failure to convey the transfer certificate of title
was not attended by fraud or bad faith, because in breach of a contract exemplary
damages are awarded if the guilty party acted in wanton, fraudulent, reckless, oppressive
or malevolent manner. Exemplary or corrective damages are imposed by way of example
or correction for the public good only if the injured party has shown that he is entitled to
recover moral, temperate or compensatory damages.
DECISION
MUÑOZ PALMA, J.:
This is a direct appeal on questions of law from a decision of the Court of First Instance
of Rizal, Branch XXXIV, presided by the Honorable Bernardo P. Pardo, the dispositive
portion of which reads:jgc:chanrobles.com.ph
"WHEREFORE, judgment is hereby rendered commanding the defendant to register the
deed of absolute sale it had executed in favor of plaintiff with the Register of Deeds of
Caloocan City and secure the corresponding title in the name of plaintiff within ten (10)
days after finality of this decision; if, for any reason, this is not possible, defendant is
hereby sentenced to pay plaintiff the sum of P5,193.63 with interest at 4% per annum
from June 22, 1972 until fully paid.
"In either case, defendant is sentenced to pay plaintiff nominal damages in the amount of
P20,000.00 plus attorney’s fee in the amount of P5,000.00 and costs.
"SO ORDERED.
"Caloocan City, February 11, 1975."cralaw virtua1aw library
(rollo, p. 21)
Petitioner corporation questions the award for nominal damages of P20,000.00 and
attorney’s fee of P5,000.00 which are allegedly excessive and unjustified.
In the Court’s resolution of October 20, 1975, We gave due course to the Petition only as
regards the portion of the decision awarding nominal damages. 1  answer. 7
The following incidents are not in dispute:chanrob1es virtual 1aw library
In May 1962 Robes-Francisco Realty & Development Corporation, now petitioner,
agreed to sell to private respondent Lolita Millan for and in consideration of the sum of
P3,864.00, payable in installments, a parcel of land containing an area of approximately
276 square meters, situated in Barrio Camarin, Caloocan City, known as Lot No. 20,
Block No. 11 of its Franville Subdivision. 2  1 and 2 of this Decision.
Millan complied with her obligation under the contract and paid the installments
stipulated therein, the final payment having been made on December 22, 1971. The
vendee made a total payment of P5,193.63 including interests and expenses for
registration of title. 3 
Thereafter, Lolita Millan made repeated demands upon the corporation for the execution
of the final deed of sale and the issuance to her of the transfer certificate of title over the
lot. On March 2, 1973, the parties executed a deed of absolute sale of the aforementioned
parcel of land. The deed of absolute sale contained, among others, this particular
provision:chanrobles.com:cralaw:red
"That the VENDOR further warrants that the transfer certificate of title of the above
described parcel of land shall be transferred in the name of the VENDEE within the
period of six (6) months from the date of full payment and in case the VENDOR fails to
issue said transfer certificate of title, it shall bear the obligation to refund to the VENDEE
the total amount already paid for, plus an interest at the rate of 4% per annum." (record
on appeal, p. 9).
Notwithstanding the lapse of the above-mentioned stipulated period of six (6) months, the
corporation failed to cause the issuance of the corresponding transfer certificate of title
over the lot sold to Millan, hence, the latter filed on August 14, 1974 a complaint for
specific performance and damages against Robes-Francisco Realty & Development
Corporation in the Court of First Instance of Rizal, Branch XXXIV, Caloocan City,
docketed therein as Civil Case No. C-3268. 4  petitioner if the clause in question were to be considered as a penal clause. Nevertheless,
The complaint prayed for judgment (1) ordering the reformation of the deed of absolute
sale; (2) ordering the defendant to deliver to plaintiff the certificate of title over the lot
free from any lien or encumbrance; or, should this be not possible, to pay plaintiff the
value of the lot which should not be less than P27,600.00 (allegedly the present estimated
value of the lot); and (3) ordering the defendant to pay plaintiff damages, corrective and
actual in the sum of P15,000.00. 5  clause which will preclude an award of damages to the vendee Millan. In fact the clause
The corporation in its answer prayed that the complaint be dismissed alleging that the
18
deed of absolute sale was voluntarily executed between the parties and the interest of the
plaintiff was amply protected by the provision in said contract for payment of interest at
4% per annum of the total amount paid, for the delay in the issuance of the title. 6 
At the pretrial conference the parties agreed to submit the case for decision on the
pleadings after defendant further made certain admissions of facts not contained in its
 
Finding that the realty corporation failed to cause the issuance of the corresponding
transfer certificate of title because the parcel of land conveyed to Millan was included
among other properties of the corporation mortgaged to the GSIS to secure an obligation
of P10 million and that the owner’s duplicate certificate of title of the subdivision was in
the possession of the Government Service Insurance System (GSIS), the trial court, on
February 11, 1975, rendered judgment the dispositive portion of which is quoted in pages
We hold that the trial court did not err in awarding nominal damages; however, the
circumstances of the case warrant a reduction of the amount of P20,000.00 granted to
private respondent Millan.
There can be no dispute in this case under the pleadings and the admitted facts that
petitioner corporation was guilty of delay, amounting to nonperformance of its
obligation, in issuing the transfer certificate of title to vendee Millan who had fully paid
up her installments on the lot bought by her. Article 1170 of the Civil Code expressly
provides that those who in the performance of their obligations are guilty of fraud,
negligence, or delay, and those who in any manner contravene the tenor thereof are liable
for damages.
Petitioner contends that the deed of absolute sale executed between the parties stipulates
that should the vendor fail to issue the transfer certificate of title within six months from
the date of full payment, it shall refund to the vendee the total amount paid for with
interest at the rate of 4% per annum, hence, the vendee is bound by the terms of the
provision and cannot recover more than what is agreed upon. Presumably, petitioner in
invoking Article 1226 of the Civil Code which provides that in obligations with a penal
clause, the penalty shall substitute the indemnity for damages and the payment of
interests in case of noncompliance, if there is no stipulation to the
contrary.chanroblesvirtualawlibrary
The foregoing argument of petitioner is totally devoid of merit. We would agree with
for very obvious reasons, said clause does not convey any penalty, for even without it,
pursuant to Article 2209 of the Civil Code, the vendee would be entitled to recover the
amount paid by her with legal rate of interest which is even more than the 4% provided
for in the clause. 7 
It is therefore inconceivable that the aforecited provision in the deed of sale is a penal
is so worded as to work to the advantage of petitioner corporation.
Unfortunately, the vendee, now private respondent, submitted her case below without
presenting evidence on the actual damages suffered by her as a result of the
nonperformance of petitioner’s obligation under the deed of sale. Nonetheless, the facts
show that the right of the vendee to acquire title to the lot bought by her was violated by
petitioner and this entitles her at the very least to nominal damages.
The pertinent provisions of our Civil Code follow:jgc:chanrobles.com.ph
"Art. 2221. Nominal damages are adjudicated in order that a right of the plaintiff, which
has been violated or invaded by the defendant, may be vindicated or recognized, and not
for the purpose of indemnifying the plaintiff for any loss suffered by him."cralaw
virtua1aw library
"Art. 2222. The court may award nominal damages in every obligation arising from any
source enumerated in article 1157, or in every case where any property right has been
invaded."cralaw virtua1aw library
Under the foregoing provisions nominal damages are not intended for indemnification of
loss suffered but for the vindication or recognition of a right violated or invaded. They
are recoverable where some injury has been done the amount of which the evidence fails
to show, the assessment of damages being left to the discretion of the court according to
the circumstances of the case. 8 
It is true as petitioner claims that under American jurisprudence nominal damages by
their very nature are small sums fixed by the court without regard to the extent of the
harm done to the injured party.
"It is generally held that a nominal damage is a substantial claim, if based upon the
violation of a legal right; in such case, the law presumes a damage, although actual or
compensatory damages are not proven; in truth nominal damages are damages in name
only and not in fact, and are allowed, not as an equivalent of a wrong inflicted, but simply
in recognition of the existence of a technical injury." (Fouraker v. Kidd Springs Boating
and Fishing Club, 65 S. W. 2d 796-797, citing 17 C.J. 720, and a number of authorities).
9 
In this jurisdiction, in Vda. de Medina, Et. Al. v. Cresencia, Et. Al. 1956, which was an
action for damages arising out of a vehicular accident, this Court had occasion to
eliminate an award of P10,000.00 imposed by way of nominal damages, the Court stating
inter alia that the amount cannot, in common sense, be deemed "nominal" 10  executed in her favor, and notwithstanding the lapse of almost three years since she made
In a subsequent case, viz: Northwest Airlines, Inc. v. Nicolas L. Cuenca, 1965, this Court,
however, through then Justice Roberto Concepcion who later became Chief Justice of
this Court, sustained an award of P20,000.00 as nominal damages in favor of respondent
Cuenca. The Court there found special reasons for considering P20,000.00 as "nominal",
Cuenca who was the holder of a first class ticket from Manila to Tokyo was rudely
compelled by an agent of petitioner Airlines to move to the tourist class notwithstanding
its knowledge that Cuenca as Commissioner of Public Highways of the Republic of the
Philippines was travelling in his official capacity as a delegate of the country to a
conference in Tokyo. 11 
19
Actually, as explained in the Court’s decision in Northwest Airlines, there is no conflict
between that case and Medina, for in the latter, the P10,000.00 award for nominal
damages was eliminated principally because the aggrieved party had already been
awarded P6,000.00 as compensatory damages, P30,000.00 as moral damages and
P10,000.00 as exemplary damages, and "nominal damages cannot coexist with
compensatory damages," while in the case of Commissioner Cuenca, no such
compensatory, moral, or exemplary damages were granted to the latter. 12 
At any rate, the circumstances of a particular case will determine whether or not the
amount assessed as nominal damages is within the scope or intent of the law, more
particularly, Article 2221 of the Civil Code.
In the situation now before Us, We are of the view that the amount of P20,000.00 is
excessive. The admitted fact that petitioner corporation failed to convey a transfer
certificate of title to respondent Millan because the subdivision property was mortgaged
to the GSIS does not in itself show that there was bad faith or fraud. Bad faith is not to be
presumed. Moreover, there was the expectation of the vendor that arrangements were
possible for the GSIS to make partial releases of the subdivision lots from the overall real
estate mortgage. It was simply unfortunate that petitioner did not succeed in that
regard.chanrobles lawlibrary : rednad
For that reason We cannot agree with respondent Millan that the P20,000.00 award may
be considered in the nature of exemplary damages.
In case of breach of contract, exemplary damages may be awarded if the guilty party
acted in wanton, fraudulent, reckless, oppressive or malevolent manner. 13 Furthermore,
exemplary or corrective damages are to be imposed by way of example or correction for
the public good, only if the injured party has shown that he is entitled to recover moral,
temperate or compensatory damages. 14 
Here, respondent Millan did not submit below any evidence to prove that she suffered
actual or compensatory damages.
To conclude, We hold that the sum of Ten Thousand Pesos (P10,000.00) by way of
nominal damages is fair and just under the following circumstances, viz: respondent
Millan bought the lot from petitioner in May, 1962, and paid in full her installments on
December 22, 1971, but it was only on March 2, 1973, that a deed of absolute sale was
her last payment, petitioner still failed to convey the corresponding transfer certificate of
title to Millan who accordingly was compelled to file the instant complaint in August of
1974.
PREMISES CONSIDERED, We modify the decision of the trial court and reduce the
nominal damages to Ten Thousand Pesos (P10,000.00). In all other respects the aforesaid
decision stands.
Without pronouncement as to costs.

SO ORDERED.
SECOND DIVISION
G.R. No. L-26339 December 14, 1979
MARIANO C. PAMINTUAN, petitioner-appellant,  cases out of 352 cases. November 15, 1960 — 11 cases out of 352 cases. November 15,
vs.
COURT OF APPEALS and YU PING KUN CO., INC., respondent-appellees.
V. E. del Rosario & Associates for appellant.
Sangco & Sangalang for private respondent.
AQUINO, J.:
This case is about the recovery compensatory, damages for breach of a contract of sale in
addition to liquidated damages.
Mariano C. Pamintuan appealed from the judgment of the Court of Appeals wherein he
was ordered to deliver to Yu Ping Kun Co., Inc. certain plastic sheetings and, if he could
not do so, to pay the latter P100,559.28 as damages with six percent interest from the date
of the filing of the complaint. The facts and the findings of the Court of Appeals are as
follows:
In 1960, Pamintuan was the holder of a barter license wherein he was authorized to
export to Japan one thousand metric tons of white flint corn valued at forty-seven
thousand United States dollars in exchange for a collateral importation of plastic
sheetings of an equivalent value.
By virtue of that license, he entered into an agreement to ship his corn to Tokyo Menka
Kaisha, Ltd. of Osaka, Japan in exchange for plastic sheetings. He contracted to sell the
plastic sheetings to Yu Ping Kun Co., Inc. for two hundred sixty-five thousand five
hundred fifty pesos. The company undertook to open an irrevocable domestic letter of
credit for that amount in favor of Pamintuan.
It was further agreed that Pamintuan would deliver the plastic sheetings to the company
at its bodegas in Manila or suburbs directly from the piers "within one month upon arrival
of" the carrying vessels. Any violation of the contract of sale would entitle the aggreived
party to collect from the offending party liquidated damages in the sum of ten thousand
pesos (Exh. A).
On July 28, 1960, the company received a copy of the letter from the Manila branch of
Toyo Menka Kaisha, Ltd. confirming the acceptance by Japanese suppliers of firm offers
for the consignment to Pamintuan of plastic sheetings valued at forty-seven thousand
dollars. Acting on that information, the company lost no time in securing in favor of
Pamintuan an irrevocable letter of credit for two hundred sixty-five thousand five
hundred fifty pesos.
Pamintuan was apprised by the bank on August 1, 1960 of that letter of credit which
made reference to the delivery to Yu Ping Kun Co., Inc. on or before October 31, 1960 of
336, 360 yards of plastic sheetings (p. 21, Record on Appeal).
On September 27 and 30 and October 4, 1960, the Japanese suppliers shipped to
Pamintuan, through Toyo Menka Kaisha, Ltd., the plastic sheetings in four shipments to
wit: (1) Firm Offer No. 327 for 50,000 yards valued at $9,000; (2) Firm Offer No. 328 for
70,000 yards valued at $8,050; (3) Firm Offers Nos. 329 and 343 for 175,000 and 18,440
yards valued at $22,445 and $2,305, respectively, and (4) Firm Offer No. 330 for 26,000
yards valued at $5,200, or a total of 339,440 yards with an aggregate value of $47,000
(pp. 4-5 and 239-40, Record on Appeal).
20
The plastic sheetings arrived in Manila and were received by Pamintuan. Out of the
shipments, Pamintuan delivered to the company's warehouse only the following
quantities of plastic sheetings:
November 11, 1960 — 140 cases, size 48 inches by 50 yards. November 14, 1960 — 258
1960 — 10 cases out of 100 cases. November 15, 1960 — 30 cases out of 100 cases.
Pamintuan withheld delivery of (1) 50 cases of plastic sheetings containing 26,000 yards
valued at $5,200; (2) 37 cases containing 18,440 yards valued at $2,305; (3) 60 cases
containing 30,000 yards valued at $5,400 and (4) 83 cases containing 40,850 yards
valued at $5,236.97. While the plastic sheetings were arriving in Manila, Pamintuan
informed the president of Yu Ping Kun Co., Inc. that he was in dire need of cash with
which to pay his obligations to the Philippine National Bank. Inasmuch as the
computation of the prices of each delivery would allegedly be a long process, Pamintuan
requested that he be paid immediately.
Consequently, Pamintuan and the president of the company, Benito Y.C. Espiritu, agreed
to fix the price of the plastic sheetings at P0.782 a yard, regardless of the kind, quality or
actual invoice value thereof. The parties arrived at that figure by dividing the total price
of P265,550 by 339,440 yards, the aggregate quantity of the shipments.
After Pamintuan had delivered 224,150 yards of sheetings of interior quality valued at
P163,.047.87, he refused to deliver the remainder of the shipments with a total value of
P102,502.13 which were covered by (i) Firm Offer No. 330, containing 26,000 yards
valued at P29,380; (2) Firm Offer No. 343, containing 18,440 yards valued at
P13,023.25; (3) Firm Offer No. 217, containing 30,000 yards valued at P30,510 and (4)
Firm Offer No. 329 containing 40,850 yards valued at P29,588.88 (See pp. 243-2, Record
on Appeal).
As justification for his refusal, Pamintuan said that the company failed to comply with
the conditions of the contract and that it was novated with respect to the price.
On December 2, 1960, the company filed its amended complaint for damages against
Pamintuan. After trial, the lower court rendered the judgment mentioned above but
including moral damages.
The unrealized profits awarded as damages in the trial court's decision were computed as
follows (pp. 248-9, Record on Appeal):
(1) 26,000 yards with a contract price of Pl.13 per yard and a selling price at the time of
delivery of Pl.75 a yard........................................................... P16,120.00
(2) 18,000 yards with a contract price of P0.7062 per yard and selling price of Pl.20 per
yard at the time of delivery......................................... 9,105.67
(3) 30,000 yards with a contract price of Pl.017 per yard and a selling price of Pl.70 per
yard. 20,490.00
(4) 40,850 yards with a contract price of P0.7247 per yard and a selling price of P1.25 a
yard at the time of delivery.............................................. 21,458.50 Total unrealized
profits....................... P67,174.17
The overpayment of P12,282.26 made to Pamintuan by Yu Ping Kun Co., Inc. for the
224,150 yards, which the trial court regarded as an item of damages suffered by the
company, was computed as follows (p. 71, Record on Appeal):
Liquidation value of 224,150 yards at P0.7822 a
yard .............................................................................. P175,330.13
Actual peso value of 224,150 yards as per firm offers or as per
contract............................................163,047.87
Overpayment................................................................ P 12,282.26
To these two items of damages (P67,174.17 as unrealized profits and P12,282.26 as
overpayment), the trial court added (a) P10,000 as stipulated liquidated damages, (b)
P10,000 as moral damages, (c) Pl,102.85 as premium paid by the company on the bond
of P102,502.13 for the issuance of the writ of preliminary attachment and (d) P10,000 as
attorney's fees, or total damages of P110,559.28) p. 250, Record on Appeal). The Court
of Appeals affirmed that judgment with the modification that the moral damages were
disallowed (Resolution of June 29, 1966).
Pamintuan appealed. The Court of Appeals in its decision of March 18, 1966 found that
the contract of sale between Pamintuan and the company was partly consummated. The
company fulfilled its obligation to obtain the Japanese suppliers' confirmation of their
acceptance of firm offers totalling $47,000. Pamintuan reaped certain benefits from the
contract. Hence, he is estopped to repudiate it; otherwise, he would unjustly enrich
himself at the expense of the company.
The Court of Appeals found that the writ of attachment was properly issued. It also found
that Pamintuan was guilty of fraud because (1) he was able to make the company agree to
change the manner of paying the price by falsely alleging that there was a delay in
obtaining confirmation of the suppliers' acceptance of the offer to buy; (2) he caused the
plastic sheetings to be deposited in the bonded warehouse of his brother and then required
his brother to make him Pamintuan), his attorney-in-fact so that he could control the
disposal of the goods; (3) Pamintuan, as attorney-in-fact of the warehouseman, endorsed
to the customs broker the warehouse receipts covering the plastic sheetings withheld by
him and (4) he overpriced the plastic sheetings which he delivered to the company.
The Court of Appeals described Pamintuan as a man "who, after having succeeded in
getting another to accommodate him by agreeing to liquidate his deliveries on the basis of
P0.7822 per yard, irrespective of invoice value, on the pretense that he would deliver
what in the first place he ought to deliver anyway, when he knew all the while that he had
no such intention, and in the process delivered only the poorer or cheaper kind or those
which he had predetermined to deliver and did not conceal in his brother's name and thus
deceived the unwary party into overpaying him the sum of P 1 2,282.26 for the said
deliveries, and would thereafter refuse to make any further delivery in flagrant violation
of his plighted word, would now ask us to sanction his actuation" (pp. 61-62, Rollo).
The main contention of appellant Pamintuan is that the buyer, Yu Ping Kun Co., Inc., is
entitled to recover only liquidated damages. That contention is based on the stipulation
"that any violation of the provisions of this contract (of sale) shall entitle the aggrieved
party to collect from the offending party liquidated damages in the sum of P10,000 ".
Pamintuan relies on the rule that a penalty and liquidated damages are the same (Lambert
vs. Fox 26 Phil. 588); that "in obligations with a penal clause, the penalty shall substitute
the indemnity for damages and the payment of interests in case of non-compliance, if
there is no stipulation to the contrary " (1st sentence of Art. 1226, Civil Code) and, it is
argued, there is no such stipulation to the contrary in this case and that "liquidated
damages are those agreed upon by the parties to a contract, to be paid in case of breach
thereof" (Art. 2226, Civil Code).
We hold that appellant's contention cannot be sustained because the second sentence of
article 1226 itself provides that I nevertheless, damages shall be paid if the obligor ... is
guilty of fraud in the fulfillment of the obligation". "Responsibility arising from fraud is
demandable in all obligations" (Art. 1171, Civil Code). "In case of fraud, bad faith,
malice or wanton attitude, the obligor shall be responsible for an damages which may be
reasonably attributed to the non-performance of the obligation" (Ibid, art. 2201).
21
The trial court and the Court of Appeals found that Pamintuan was guilty of fraud
because he did not make a complete delivery of the plastic sheetings and he overpriced
the same. That factual finding is conclusive upon this Court.
There is no justification for the Civil Code to make an apparent distinction between
penalty and liquidated damages because the settled rule is that there is no difference
between penalty and liquidated damages insofar as legal results are concerned and that
either may be recovered without the necessity of proving actual damages and both may
be reduced when proper (Arts. 1229, 2216 and 2227, Civil Code. See observations of
Justice J.B.L. Reyes, cited in 4 Tolentino's Civil Code, p. 251).
Castan Tobeñas notes that the penal clause in an obligation has three functions: "1. Una
funcion coercitiva o de garantia, consistente en estimular al deudor al complimiento de la
obligacion principal, ante la amenaza de tener que pagar la pena. 2. Una
funcion liquidadora del daño, o sea la de evaluar por anticipado los perjuicios que habria
de ocasionar al acreedor el incumplimiento o cumplimiento inadecuado de la obligacion.
3. Una funcion estrictamente penal, consistente en sancionar o castigar dicho
incumplimiento o cumplimiento inadecuado, atribuyendole consecuencias mas onerosas
para el deudor que las que normalmente lleva aparejadas la infraccion contractual. " (3
Derecho Civil Espanol, 9th Ed., p. 128).
The penalty clause is strictly penal or cumulative in character and does not partake of the
nature of liquidated damages (pena sustitutiva) when the parties agree "que el acreedor
podra pedir, en el supuesto incumplimiento o mero retardo de la obligacion principal,
ademas de la pena, los danos y perjuicios. Se habla en este caso de pena cumulativa, a
differencia de aquellos otros ordinarios, en que la pena es sustitutiva de la reparacion
ordinaria." (Ibid, Castan Tobenas, p. 130).
After a conscientious consideration of the facts of the case, as found by Court of Appeals
and the trial court, and after reflecting on the/tenor of the stipulation for liquidated
damages herein, the true nature of which is not easy to categorize, we further hold that
justice would be adequately done in this case by allowing Yu Ping Kun Co., Inc. to
recover only the actual damages proven and not to award to it the stipulated liquidated
damages of ten thousand pesos for any breach of the contract. The proven damages
supersede the stipulated liquidated damages.
This view finds support in the opinion of Manresa (whose comments were the bases of
the new matter found in article 1226, not found in article 1152 of the old Civil Code) that
in case of fraud the difference between the proven damages and the stipulated penalty
may be recovered (Vol. 8, part. 1, Codigo Civil, 5th Ed., 1950, p. 483).
Hence, the damages recoverable by the firm would amount to ninety thousand five
hundred fifty-nine pesos and twenty-eight centavos (P90,559.28), with six percent
interest a year from the filing of the complaint.
With that modification the judgment of the Court of Appeals is affirmed in all respects.
No costs in this instance.
SO ORDERED.
THIRD DIVISION
G.R. No. 196118               July 30, 2014
LEONARDO C. CASTILLO, represented by LENNARD V.
CASTILLO, Petitioner, vs.
SECURITY BANK CORPORATION, JRC POULTRY FARMS or SPOUSES
LEON C. CASTILLO, JR., and TERESITA FLORESCASTILLO, Respondents.
DECISION
PERALTA, J.:
This is a Petition for Review questioning the Decision1 of the Court of Appeals (CA)
dated November 26, 2010, as well as its Resolution2 dated March 17, 2011 in CA-G.R.
CV No. 88914. The CA reversed and set aside the Decision3 of the Regional Trial Court
(RTC) of San Pablo City, Laguna, Branch 32, dated October 16, 2006 in Civil Case No.
SP-5882 (02), and consequently, upheld the validity of the real estate mortgage entered
into by respondents spouses Leon C. Castillo, Jr. and Teresita Flores-Castillo, and
Security Bank Corporation (SBC).
The facts, as culled from the records, are as follows:
Petitioner Leonardo C. Castillo and respondent Leon C. Castillo, Jr. are siblings. Leon
and Teresita Flores-Castillo (the Spouses Castillo) were doing business under the name
of JRC Poultry Farms. Sometime in 1994, the Spouses Castillo obtained a loan from
respondent SBC in the amount of ₱45,000,000.00. To secure said loan, they executed a
real estate mortgage on August 5, 1994 over eleven (11) parcels of land belonging to
different members of the Castillo family and which are all located in San Pablo
City.4 They also procured a second loan5 amounting to ₱2,500,000.00, which was covered
by a mortgage on a land in Pasay City. Subsequently, the Spouses Castillo failed to settle
the loan, prompting SBC to proceed with the foreclosure of the properties. SBC was then
adjudged as the winning bidder in the foreclosure sale held on July 29, 1999. Thereafter,
they were able to redeem the foreclosed properties, withthe exception of the lots covered
by Torrens Certificate of Title(TCT) Nos. 28302 and 28297.
On January 30, 2002, Leonardo filed a complaint for the partial annulment of the real
estate mortgage. He alleged that he owns the property covered by TCT No. 28297 and
that the Spouses Castillo used it as one of the collaterals for a loan without his consent.
He contested his supposed Special Power of Attorney (SPA) in Leon’s favor, claiming
that it is falsified. According to him, the date of issuance of his Community Tax
Certificate (CTC) as indicated on the notarization of said SPA is January 11, 1993, when
he only secured the same on May 17, 1993. He also assailed the foreclosure of the lots
under TCT Nos.20030 and 10073 which were still registered in the name of their
deceased father. Lastly, Leonardo attacked SBC’s imposition of penalty and interest on
the loans as being arbitrary and unconscionable.
On the other hand, the Spouses Castillo insisted on the validity of Leonardo’s SPA. They
alleged that they incurred the loan not only for themselves, but also for the other
members of the Castillo family who needed money at that time. Upon receipt of the
proceeds of the loan, they distributed the same to their family members, as agreed upon.
However, when the loan became due, their relatives failed to pay their respective shares
such that Leon was forced to use his own money until SBC had to finally foreclose the
mortgage over the lots.6
In a Decision dated October 16, 2006, the RTC of San Pablo City ruled in Leonardo’s
favor, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff Leonardo C.
Castillo and against the defendants SECURITY BANK CORPORATION, and JRC
22
POULTRY FARMS or SPS. LEON C. CASTILLO, JR. and TERESITA FLORES-
CASTILLO declaring as null and void the Real Estate Mortgage dated August 5, 1994,
the Memorandum of Agreement dated October 28, 1997 and the Certificate of Sale dated
August 27, 1999 insofar as plaintiff’s property with Transfer Certificate of Title No. T-
28297 is concerned. The Security Bank Corporation is likewise ordered to return the
ownership of the Transfer Certificate of Title No. T-28297 to plaintiff Leonardo Castillo.
Likewise, defendants spouses Leon C. Castillo, Jr. and Teresita Flores-Castillo are hereby
ordered to pay plaintiff moral damages in the total amount of ₱500,000.00 and exemplary
damages of ₱20,000.00. All other claims for damages and attorney’s fees are DENIED
for insufficiency of evidence.
SO ORDERED.7
Both parties elevated the case to the CA. On November 26, 2010, the CA denied
Leonardo’s appeal and granted that of the Spouses Castillo and SBC. It reversed and set
aside the RTC Decision, essentially ruling that the August 5, 1994 real estate mortgage
isvalid. Leonardo filed a Motion for Reconsideration, but the same was denied for lack of
merit.
Hence, Leonardo brought the case to the Court and filed the instant Petition for
Review.1âwphi1 The main issue soughtto be resolved here is whether or not the real
estate mortgage constituted over the property under TCT No. T-28297 is valid and
binding.
The Court finds the petition to be without merit.
As a rule, the jurisdiction of the Court over appealed cases from the CA is limited to the
review and revision of errors of law it allegedly committed, as its findings of fact are
deemed conclusive. Thus, the Court is not duty-bound to evaluate and weigh the evidence
all over again which were already considered in the proceedings below, except when, as
in this case, the findings of fact of the CAare contrary to the findings and conclusions of
the trial court.8
The following are the legal requisites for a mortgage to be valid:
(1) It must be constituted to secure the fulfillment of a principal obligation;
(2) The mortgagor must be the absolute owner of the thing mortgaged;
(3) The persons constituting the mortgage must have the free disposal of their property,
and in the absence thereof, they should be legally authorized for the purpose.9
Leonardo asserts that his signature inthe SPA authorizing his brother, Leon, to mortgage
his property covered by TCT No. T-28297 was falsified. He claims that he was in
America at the time of its execution. As proof of the forgery, he focuses on his alleged
CTC used for the notarization10 of the SPA on May 5, 1993 and points out that it appears
to have been issued on January 11, 1993 when, in fact, he only obtained it on May 17,
1993. But it is a settled rule that allegations of forgery, like all other allegations, must be
proved by clear, positive, and convincing evidence by the party alleging it. It should not
be presumed, but must beestablished by comparing the alleged forged signature with the
genuine signatures.11 Here, Leonardo simply relied on his self-serving declarations and
refused to present further corroborative evidence, saying that the falsified document itself
is the best evidence.12 He did not even bother comparing the alleged forged signature on
the SPA with samples of his real and actual signature. What he consistently utilized as
lone support for his allegation was the supposed discrepancy on the date of issuance of
his CTC as reflectedon the subject SPA’s notarial acknowledgment. On the contrary, in
view of the great ease with which CTCs are obtained these days,13 there is reasonable
ground to believe that, as the CA correctly observed, the CTC could have been issued
with the space for the date left blank and Leonardo merelyfilled it up to accommodate his
assertions. Also, upon careful examination, the handwriting appearing on the space for
the date of issuance is different from that on the computation of fees, which in turn was
consistent with the rest of the writings on the document.14 He did not likewise attempt to
show any evidence that would back up his claim that at the time of the execution of the
SPA on May 5, 1993, he was actually in America and therefore could not have possibly
appeared and signed the document before the notary.
And even if the Court were to assume, simply for the sake of argument, that Leonardo
indeed secured his CTC only on May 17, 1993, this does not automatically render the
SPA invalid. The appellate court aptly held that defective notarization will simply strip
the document of its public character and reduce it to a private instrument, but nonetheless,
binding, provided its validity is established by preponderance of evidence.15 Article 1358
of the Civil Code requires that the form of a contract that transmits or extinguishes real
rights over immovable property should be in a public document, yet the failure to
observethe proper form does not render the transaction invalid.16 The necessity of a
public document for said contracts is only for convenience; it is not essential for validity
or enforceability.17 Even a sale of real property, though notcontained in a public
instrument or formal writing, is nevertheless valid and binding, for even a verbal contract
of sale or real estate produceslegal effects between the parties.18 Consequently, when
there is a defect in the notarization of a document, the clear and convincing evidentiary
standard originally attached to a dulynotarized document is dispensed with, and the
measure to test the validity of such document is preponderance of evidence.19
Here, the preponderance ofevidence indubitably tilts in favor of the respondents, still
making the SPA binding between the parties even with the aforementioned assumed
irregularity.1âwphi1 There are several telling circumstances that would clearly
demonstrate that Leonardo was aware of the mortgage and he indeed executed the SPA to
entrust Leon with the mortgage of his property. Leon had inhis possession all the titles
covering the eleven (11) properties mortgaged, including that of Leonardo.20 Leonardo
and the rest of their relatives could not have just blindly ceded their respective TCTs to
Leon.21 It is likewise ridiculous how Leonardo seemed to have been totally oblivious to
the status of his property for eight (8) long years, and would only find outabout the
mortgage and foreclosure from a nephew who himself had consented to the mortgage of
his own lot.22 Considering the lapse of time from the alleged forgery on May 5, 1993 and
the mortgage on August 5, 1994, to the foreclosure on July 29, 1999, and to the supposed
discovery in 2001, it appears that the suit is a mere afterthought or a last-ditch effort on
Leonardo’s part to extend his hold over his property and to prevent SBC from
consolidating ownership over the same. More importantly, Leonardo himself admitted on
cross-examination that he granted Leon authority to mortgage, only that, according to
him, he thought it was going to be with China Bank, and not SBC.23 But as the CA noted,
there is no mention of a certainbank in the subject SPA with which Leon must
specifically deal. Leon, therefore, was simply acting within the bounds of the SPA’s
authority when hemortgaged the lot to SBC.
True, banks and other financing institutions, in entering into mortgage contracts, are
expected to exercise due diligence.24 The ascertainment of the status or condition of a
property offered to it as security for a loan must be a standard and indispensable part of
its operations.25 In this case, however, no evidence was presented to show that SBC was
remiss in the exercise of the standard care and prudence required of it or that it was
negligent in accepting the mortgage.26 SBC could not likewise befaulted for relying on
the presumption of regularity of the notarized SPA when it entered into the subject
mortgage agreement.
23
Finally, the Court finds that the interest and penalty charges imposed by SBC are just,
and not excessive or unconscionable.
Section 47 of The General Banking Law of 200027 thus provides:
Section 47. Foreclosure of Real Estate Mortgage.- In the event of foreclosure, whether
judicially or extra-judicially, of any mortgage on real estate which is security for any loan
or other credit accommodation granted, the mortgagor or debtor whose real property has
been sold for the full or partial payment of his obligation shall have the right within one
year after the sale of the real estate, to redeem the property by paying the amount due
under the mortgage deed, with interest thereon at the rate specified in the mortgage, and
all the costs and expenses incurred by the bank or institutionfrom the sale and custody of
said property less the income derived therefrom. However,the purchaser at the auction
sale concerned whether in a judicial or extra-judicial foreclosure shall have the right to
enter upon and take possession of such property immediately after the date of the
confirmation of the auction sale and administer the same in accordance with law. Any
petition in court to enjoin or restrain the conduct of foreclosure proceedings instituted
pursuant to this provision shall be given due course only upon the filing by the petitioner
of a bond in an amount fixed by the court conditioned that he will pay all the damages
which the bank may suffer by the enjoining or the restraint of the foreclosure proceeding.
Notwithstanding Act 3135, juridical persons whose property is being sold pursuant to an
extrajudicial foreclosure, shall have the right to redeem the property in accordance with
this provision until, but not after, the registration of the certificate of foreclosure sale with
the applicable Register of Deeds which in no case shall be more than three (3) months
after foreclosure, whichever is earlier. Owners of property that has been sold in a
foreclosure sale prior to the effectivity of this Act shall retain their redemption rights
until their expiration.28 Verily, the redemption price comprises not only the total amount
due under the mortgage deed, but also with interest at the rate specified in the mortgage,
and all the foreclosure expenses incurred by the mortgagee bank.
To sustain Leonardo's claim that their payment of ₱45,000,000.00 had already
extinguished their entire obligation with SBC would mean that no interest ever accrued
from 1994, when the loan was availed, up to the time the payment of ₱45,000,000.00 was
made in 2000-2001.
SBC's 16% rate of interest is not computed per month, but rather per annum or only
1.33% per month. In Spouses Bacolor v. Banco Filipino Savings and Mortgage Bank,
Dagupan City Branch,29 the Court held that the interest rate of 24% per annum on a loan
of ₱244,000.00 is not considered as unconscionable and excessive. As such, the Court
ruled that the debtors cannot renege on their obligation to comply with what is incumbent
upon them under the contract of loan as they are bound by its stipulations. Also, the 24o/o
per annum rate or 2% per month for the penalty charges imposed on account of default,
cannot be considered as skyrocketing. The enforcement of penalty can be demanded by
the creditor in case of non-performance due to the debtor's fault or fraud. The
nonperformance gives rise to the presumption of fault and in order to avoid the penalty,
the debtor has the burden of proving that the failure of the performance was due to either
force majeure or the creditor's own acts.30 In the instant case, petitioner failed to
discharge said burden and thus cannot avoid the payment of the penalty charge agreed
upon.
WHEREFORE, premises considered, the petition is DENIED. The Decision of the Court
of Appeals, dated November 26, 2010, as well as its Resolution dated March 17, 2011 in
CA-G.R. CV No. 88914, are hereby AFFIRMED.
SO ORDERED.
FIRST DIVISION
G.R. No. 183794, June 13, 2016
SPOUSES JAIME AND MATILDE POON, Petitioners, v. PRIME SAVINGS
BANK REPRESENTED BY THE PHILIPPINE DEPOSIT INSURANCE
CORPORATION AS STATUTORY LIQUIDATOR, Respondent.
DECISION
SERENO, C.J.:
Before this Court is a Petition for Review on Certiorari1 assailing the Court of Appeals
(CA) Decision2which affirmed the Decision3 issued by Branch 21, Regional Trial Court
(RTC) of Naga City.
The RTC ordered the partial rescission of the penal clause in the lease contract over the
commercial building of Spouses Jaime and Matilde Poon (petitioners). It directed
petitioners to return to Prime Savings Bank (respondent) the sum of P1,740,000,
representing one-half of the unused portion of its advance rentals, in view of the closure
of respondent's business upon order by the Bangko Sentral ng Pilipinas (BSP).
Antecedent Facts
The facts are undisputed.
Petitioners owned a commercial building in Naga City, which they used for their bakery
business. On 3 November 2006, Matilde Poon and respondent executed a 10-year
Contract of Lease4 (Contract) over the building for the latter's use as its branch office in
Naga City. They agreed to a fixed monthly rental of P60,000, with an advance payment
of the rentals for the first 100 months in the amount of P6,000,000. As agreed, the
advance payment was to be applied immediately, while the rentals for the remaining
period of the Contract were to be paid on a monthly basis.5chanrobleslaw
In addition, paragraph 24 of the Contract provides:ChanRoblesVirtualawlibrary
24. Should the lease[d] premises be closed, deserted or vacated by the LESSEE, the
LESSOR shall have the right to terminate the lease without the necessity of serving a
court order and to immediately repossess the leased premises. Thereafter the LESSOR
shall open and enter the leased premises in the presence of a representative of the
LESSEE (or of the proper authorities) for the purpose of taking a complete inventory of
all furniture, fixtures, equipment and/or other materials or property found within the
leased premises.
The LESSOR shall thereupon have the right to enter into a new contract with another
party. All advanced rentals shall be forfeited in favor of the
LESSOR.6chanroblesvirtuallawlibrary
Barely three years later, however, the BSP placed respondent under the receivership of
the Philippine Deposit Insurance Corporation (PDIC) by virtue of BSP Monetary Board
Resolution No. 22,7 which reads:ChanRoblesVirtualawlibrary
On the basis of the report of Mr. Candon B. Guerrero, Director of Thrift Banks and Non-
Bank Financial Institutions (DTBNBF1), in his memorandum dated January 3, 2000,
which report showed that the Prime Savings Bank, Inc. (a) is unable to pay its liabilities
as they became due in the ordinary course of business; (b) has insufficient realizable
assets as determined by the Bangko Sentral ng Pilipinas to meet its liabilities; (c) cannot
continue in business without involving probable losses to its depositors and creditors;
24
and (d) has wilfully violated cease and desist orders under Section 37 that has
become final, involving acts or transactions which amount to fraud or a dissipation
of the assets of the institution; x x x.8 (Emphasis supplied)
The BSP eventually ordered respondent's liquidation under Monetary Board Resolution
No. 664.9chanrobleslaw
On 12 May 2000, respondent vacated the leased premises and surrendered them to
petitioners.10Subsequently, the PDIC issued petitioners a demand letter11 asking for the
return of the unused advance rental amounting to P3,480,000 on the ground that
paragraph 24 of the lease agreement had become inoperative, because respondent's
closure constituted force majeure. The PDIC likewise invoked the principle of rebus sic
stantibus under Article 1267 of Republic Act No. 386 (Civil Code) as alternative legal
basis for demanding the refund.
Petitioners, however, refused the PDIC's demand.12 They maintained that they were
entitled to retain the remainder of the advance rentals following paragraph 24 of their
Contract.
Consequently, respondent sued petitioners before the RTC of Naga City for a partial
rescission of contract and/or recovery of a sum of money.
The RTC Ruling
After trial, the RTC ordered the partial rescission of the lease agreement, disposing as
follows:ChanRoblesVirtualawlibrary
WHEREFORE, judgment is hereby entered ordering the partial rescission of the Contract
of Lease dated November 3, 1996 particularly the second paragraph of Par. 24 thereof
and directing the defendant-spouses Jaime and Matilde Poon to return or refund to the
Plaintiff the sum of One Million Seven Hundred Forty Thousand Pesos (P1,740,000)
representing one-half of the unused portion of the advance rentals.
Parties' respective claims for damages and attorney's fees are dismissed.
No costs.13chanroblesvirtuallawlibrary
The trial court ruled that the second clause in paragraph 24 of the Contract was penal in
nature, and that the clause was a valid contractual agreement.14 Citing Provident Savings
Bank v. CA15 as legal precedent, it ruled that the premature termination of the lease due to
the BSP's closure of respondent's business was actually involuntary. Consequently, it
would be iniquitous for petitioners to forfeit the entire amount of P 3,480,000.16 Invoking
its equity jurisdiction under Article 1229 of the Civil Code,17 the trial court limited the
forfeiture to only one-half of that amount to answer for respondent's unpaid utility bills
and E-VAT, as well as petitioner's lost business opportunity from its former bakery
business.18chanrobleslaw
The CA Ruling
On appeal, the CA affirmed the RTC Decision,19 but had a different rationale for applying
Article 1229. The appellate court ruled that the closure of respondent's business was not a
fortuitous event. Unlike Provident Savings Bank,20 the instant case was one in which
respondent was found to have committed fraudulent acts and transactions. Lacking,
therefore, was the first requisite of a fortuitous event, i.e, that the cause of the breach of
obligation must be independent of the will of the debtor.21chanrobleslaw
Still, the CA sustained the trial court's interpretation of the proviso on the forfeiture of
advance rentals as a penal clause and the consequent application of Article 1229. The
appellate court found that the forfeiture clause in the Contract was intended to prevent
respondent from defaulting on the latter's obligation to finish the term of the lease. It
further found that respondent had partially performed that obligation and, therefore, the
reduction of the penalty was only proper. Similarly, it ruled that the RTC had properly
denied petitioners' claims for actual and moral damages for lack of basis.22chanrobleslaw
On 10 July 2008,23 the CA denied petitioners' Motion for Reconsideration. Hence, this
Petition.
Issues
The issues to be resolved are whether (1) respondent may be released from its contractual
obligations to petitioners on grounds of fortuitous event under Article 1174 of the Civil
Code and unforeseen event under Article 1267 of the Civil Code; (2) the proviso in the
parties' Contract allowing the forfeiture of advance rentals was a penal clause; and (3) the
penalty agreed upon by the parties may be equitably reduced under Article 1229 of the
Civil Code.
COURT RULING
We DENY the Petition.
Preliminarily, we address petitioners' claim that respondent had no cause of action for
rescission, because this case does not fall under any of the circumstances enumerated in
Articles 138124 and 138225cralawred of the Civil Code.
The legal remedy of rescission, however, is by no means limited to the situations covered
by the above provisions. The Civil Code uses rescission in two different contexts,
namely: (1) rescission on account of breach of contract under Article 1191; and (2)
rescission by reason of lesion or economic prejudice under Article 1381.26 While the term
"rescission" is used in Article 1191, "resolution" was the original term used in the old
Civil Code, on which the article was based. Resolution is a principal action based on a
breach by a party, while rescission under Article 1383 is a subsidiary action limited to
cases of rescission for lesion under Article 1381 of the New Civil Code.27chanrobleslaw
It is clear from the allegations in paragraphs 12 and 13 of the Complaint28 that
respondent's right of action rested on the alleged abuse by petitioners of their right under
paragraph 24 of the Contract. Respondent's theory before the trial court was that the
tenacious enforcement by petitioners of their right to forfeit the advance rentals was
tainted with bad faith, because they knew that respondent was already insolvent. In other
words, the action instituted by respondent was for the rescission of reciprocal obligations
under Article 1191. The lower courts, therefore, correctly ruled that Articles 1381 and
1382 were inapposite.
We now resolve the main issues.
The closure of respondent's business was neither a fortuitous nor an unforeseen event
25
that rendered the lease agreement functus officio.
Respondent posits that it should be released from its contract with petitioners, because the
closure of its business upon the BSP's order constituted a fortuitous event as the Court
held in Provident Savings Bank.29chanrobleslaw
The cited case, however, must always be read in the context of the earlier Decision
in Central Bank v. Court of Appeals.30 The Court ruled in that case that the Monetary
Board had acted arbitrarily and in bad faith in ordering the closure of Provident Savings
Bank. Accordingly, in the subsequent case of Provident Savings Bank it was held
that fuerza mayor had interrupted the prescriptive period to file an action for the
foreclosure of the subject mortgage.31chanrobleslaw
In contrast, there is no indication or allegation that the BSP's action in this case was
tainted with arbitrariness or bad faith. Instead, its decision to place respondent under
receivership and liquidation proceedings was pursuant to Section 30 of Republic Act No.
7653.32 Moreover, respondent was partly accountable for the closure of its banking
business. It cannot be said, then, that the closure of its business was independent of its
will as in the case of Provident Savings Bank. The legal effect is analogous to that
created by contributory negligence in quasi-delict actions.
The period during which the bank cannot do business due to insolvency is not a fortuitous
event,33 unless it is shown that the government's action to place a bank under receivership
or liquidation proceedings is tainted with arbitrariness, or that the regulatory body has
acted without jurisdiction.34chanrobleslaw
As an alternative justification for its premature termination of the Contract, respondent
lessee invokes the doctrine of unforeseen event under Article 1267 of the Civil Code,
which provides:ChanRoblesVirtualawlibrary
Art. 1267. When the service has become so difficult as to be manifestly beyond the
contemplation of the parties, the obligor may also be released therefrom, in whole or in
part.
The theory of rebus sic stantibus in public international law is often cited as the basis of
the above article. Under this theory, the parties stipulate in light of certain prevailing
conditions, and the theory can be made to apply when these conditions cease to
exist.35 The Court, however, has once cautioned that Article 1267 is not an absolute
application of the principle of rebus sic stantibus, otherwise, it would endanger the
security of contractual relations. After all, parties to a contract are presumed to have
assumed the risks of unfavorable developments. It is only in absolutely exceptional
changes of circumstance, therefore, that equity demands assistance for the
debtor.36chanrobleslaw
Tagaytay Realty Co., Inc. v. Gacutan37 lays down the requisites for the application of
Article 1267, as follows:
chanRoblesvirtualLawlibrary1. The event or change in circumstance could not have been
foreseen at the time of the execution of the contract.
2. It makes the performance of the contract extremely difficult but not impossible.
 A. Yes, Sir.
3. It must not be due to the act of any of the parties.
Q. What was the amount?
4. The contract is for a future prestation.38chanrobleslaw
A. She asked first if how much I demand for the price.
The difficulty of performance should be such that the party seeking to be released from a Q. What did you tell her?
contractual obligation would be placed at a disadvantage by the unforeseen event. Mere
inconvenience, unexpected impediments, increased expenses,39 or even pecuniary A. I told her, if they can give me P100,000.00 for the rental, I will give up the place.
inability to fulfil an engagement,40 will not relieve the obligor from an undertaking that it
has knowingly and freely contracted. Q. What do you mean P100,000.00 rental?
A. That is only for the establishment [concerned].
The law speaks of "service." This term should be understood as referring to the
performance of an obligation or a prestation.41 A prestation is the object of the contract; Q. What was the period to be covered by the P100,000.00 rental?
i.e., it is the conduct (to give, to do or not to do) required of the parties.42 In a reciprocal
contract such as the lease in this case, one obligation of respondent as the lessee was to A. That is monthly basis.
pay the agreed rents for the whole contract period.43 It would be hard-pressed to complete
Q. So after telling Mrs. Lauang that you can be amenable to lease the place for
the lease term since it was already out of business only three and a half years into the 10-
P100,000.00 monthly, what if any, did Mrs. Lauang tell you?
year contract period. Without a doubt, the second and the fourth requisites mentioned
above are present in this case. A. She told me it is very high. And then she asked me if it is still negotiable, I
answered, yes.
The first and the third requisites, however, are lacking. It must be noted that the lease
agreement was for 10 years. As shown by the unrebutted testimony of Jaime Poon during Q. So, what happened after your clarified to her that [it is] still negotiable?
trial, the parties had actually considered the possibility of a deterioration or loss of
A. She asked me if there is other condition, and I answered her, yes, if your client can
respondent's business within that period:ChanRoblesVirtualawlibrary
give me advances I can lease my property.
ATTY. SALES
xxxx
Q. Now to the offer of that real estate broker for possible lease of your property at No.
38 General Luna Street, Naga City which was then the Madam Poon Bakery, what Q. So what is your answer when you were asked for the amount of the advances?
did you tell your real estate broker?
A. I told her I need 7 million pesos because I need to pay my debts.
WITNESS (JAIME POON)
xx
A. When Mrs. Lauang approached me, she told me that she has a client who wants to xx
lease a property in Naga City.
Q. Who was with her when she came over?
Q. Did she disclose to you the identity of her client?
A. A certain guy name Ricci and said that he is the assistant manager of the Prime
A. Yes, Sir. Savings Bank.

Q. What was the name of her client? Q. What did you and Mr. Ricci talk about?

A. That is the Prime Savings Bank. A. I told him the same story as I talked with Mrs. Lauang.

Q. After you have known that it was the Prime Savings Bank that [wanted] to lease Q. Was the agreement finally reached between you and Mr. Ricci?
your property located at No. 38 General Luna St., Naga City, what did you tell Mrs.
Lauang[?] A. Not yet, Sir.

A. I told her that if the price is good, I am willing to give up the place where this bakery Q. What happened after that?
of mine is situated. A. He said that he [will discuss] the matter with his higher officer, the branch manager
Q. So, did Mrs. Lauang give you the quotation as to the price? in the person of Henry Lee.

26
Q. Were you able to meet this Henry Lee? Q. What was your protection as to the 6 million payment made by the plaintiff?
A. After a week later. A. That is the protection for me because during that time I have my bakery and I myself
[spent] 2 million for the improvement of that bakery and I have sacrificed that for
Q. Who was with Henry Lee? the sake of the offer of lease.
A. Mrs. Lauang. Q. In what manner that you are being protected for that 6 million pesos?
Q. Was there a final agreement on the day when you and Henry Lee met? A. They said that if in case the bank will be closed that advance of 6 million pesos
A. Not yet, he offered to reduce the rental and also the advances. Finally I gave way will be forfeited in my favor.
after 2 or 3 negotiations. Q. And that is what is found in paragraph 24 of the Contract of Lease which I
Q. What happened after 2 or 3 negotiations? asked you to read?

A. We arrived at P60,000.00 for monthly rentals and P6,000,000.00 advances for 100 A. That is true.44
months. Clearly, the closure of respondent's business was not an unforeseen event. As the lease
was long-term, it was not lost on the parties that such an eventuality might occur, as it
Q. Was the agreement between you and the representative of the Prime Savings Bank was in fact covered by the terms of their Contract. Besides, as We have previously
reduced into writing? discussed, the event was not independent of respondent's will.
A. Yes Sir.
The forfeiture clause in the Contract is penal in nature.
xx
xx Petitioners claim that paragraph 24 was not intended as a penal clause. They add that
respondent has not even presented any proof of that intent. It was, therefore, a reversible
Q. Now, Mr. Poon, I would like to direct your attention to paragraphs 4 and 5 of the error on the part of the CA to construe its forfeiture provision of the Contract as penal in
contract of lease which I read: Inasmuch as the leased property is presently nature.
mortgaged with the PCI Bank, the Lessor and the Lessee hereby agree that another
property with a clean title shall serve as security for herein Lessee; Provided that the It is settled that a provision is a penal clause if it calls for the forfeiture of any remaining
mortgaged property with PCI Bank is cancelled, the Lessee agrees that the above- deposit still in the possession of the lessor, without prejudice to any other obligation still
mentioned property shall be released to herein Lessor; paragraph 5 says: It is hereby owing, in the event of the termination or cancellation of the agreement by reason of the
stipulated that should the leased property be foreclosed by the PCI Bank or any other lessee's violation of any of the terms and conditions thereof. This kind of agreement may
banking or financial institution, all unused rentals shall be returned by the Lessor to be validly entered into by the parties. The clause is an accessory obligation meant to
the Lessee. Now, my question is: Who asked or requested that paragraphs 4 and 5 be ensure the performance of the principal obligation by imposing on the debtor a special
incorporated in the contract of lease? prestation in case of nonperformance or inadequate performance of the principal
obligation.45chanrobleslaw
A. Mr. Lee himself.
Q. The representative of the plaintiff? It is evident from the above-quoted testimony of Jaime Poon that the stipulation on the
forfeiture of advance rentals under paragraph 24 is a penal clause in the sense that it
A. Yes, Sir. provides for liquidated damages.
Q. Q. For what purpose did Mr. Lee ask these matters to be incorporated?
Notably, paragraph 5 of the Contract also provides:ChanRoblesVirtualawlibrary
A. Because they are worried that my building might be foreclosed because it is 5. It is hereby stipulated that should the leased property be foreclosed by PCI Bank or any
under [mortgage] with the PCI Bank, that is why I gave them protection of a other banking or financial institution, all unused rentals shall be returned by the LESSOR
clean title. But I also asked them, what will happen to me, in case your bank to the LESSEE; x x x.46chanroblesvirtuallawlibrary
will be closed? In effect, the penalty for the premature termination of the Contract works both ways. As
the CA correctly found, the penalty was to compel respondent to complete the 10-year
Q. When you asked that question, what did Mr. Lee tell you? term of the lease. Petitioners, too, were similarly obliged to ensure the peaceful use of
their building by respondent for the entire duration of the lease under pain of losing the
A. He told me that I don't have to worry I will have P6,000,000 advances.
remaining advance rentals paid by the latter.

27
The forfeiture clauses of the Contract, therefore, served the two functions of a penal
clause, i.e., (1) to provide for liquidated damages and (2) to strengthen the coercive force
of the obligation by the threat of greater responsibility in case of breach.47 As the CA
correctly found, the prestation secured by those clauses was the parties' mutual obligation
to observe the fixed term of the lease. For this reason, We sustain the lower courts'
finding that the forfeiture clause in paragraph 24 is a penal clause, even if it is not
expressly labelled as such.
A reduction of the penalty agreed upon by the parties is warranted under Article 1129
of the Civil Code.
We have no reason to doubt that the forfeiture provisions of the Contract were
deliberately and intelligently crafted. Under Article 1196 of the Civil Code,48 the period
of the lease contract is deemed to have been set for the benefit of both parties. Its
continuance, effectivity or fulfillment cannot be made to depend exclusively upon the
free and uncontrolled choice of just one party.49 Petitioners and respondent freely and
knowingly committed themselves to respecting the lease period, such that a breach by
either party would result in the forfeiture of the remaining advance rentals in favor of the
aggrieved party.
If this were an ordinary contest of rights of private contracting parties, respondent lessee
would be obligated to abide by its commitment to petitioners. The general rule is that
courts have no power to ease the burden of obligations voluntarily assumed by parties,
just because things did not turn out as expected at the inception of the
contract.50chanrobleslaw
It must be noted, however, that this case was initiated by the PDIC in furtherance of its
statutory role as the fiduciary of Prime Savings Bank.51 As the state-appointed receiver
and liquidator, the PDIC is mandated to recover and conserve the assets of the foreclosed
bank on behalf of the latter's depositors and creditors.52 In other words, at stake in this
case are not just the rights of petitioners and the correlative liabilities of respondent
lessee. Over and above those rights and liabilities is the interest of innocent debtors and
creditors of a delinquent bank establishment. These overriding considerations justify the
50% reduction of the penalty agreed upon by petitioners and respondent lessee in keeping
with Article 1229 of the Civil Code, which provides:ChanRoblesVirtualawlibrary
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.
The reasonableness of a penalty depends on the circumstances in each case, because what
is iniquitous and unconscionable in one may be totally just and equitable in another.53 In
resolving this issue, courts may consider factors including but not limited to the type,
extent and purpose of the penalty; the nature of the obligation; the mode of the breach
and its consequences; the supervening realities; and the standing and relationship of the
parties.54chanrobleslaw
putting their building to other profitable uses, since respondent surrendered the premises
immediately after the closure of its business. Strict adherence to the doctrine of freedom
of contracts, at the expense of the rights of innocent creditors and investors, will only
work injustice rather than promote justice in this case.55 Such adherence may even be
misconstrued as condoning profligate bank operations. We cannot allow this to happen.
We are a Court of both law and equity; We cannot sanction grossly unfair results without
doing violence to Our solemn obligation to administer justice fairly and equally to all
who might be affected by our decisions.56chanrobleslaw
Neither do We find any error in the trial court's denial of the damages and attorney's fees
claimed by petitioners. No proof of the supposed expenses they have incurred for the
improvement of the leased premises and the payment of respondent's unpaid utility bills
can be found in the records. Actual and compensatory damages must be duly proven with
a reasonable degree of certainty.57chanrobleslaw
To recover moral and exemplary damages where there is a breach of contract, the breach
must be palpably wanton, reckless, malicious, in bad faith, oppressive, or abusive.
Attorney's fees are not awarded even if a claimant is compelled to litigate or to incur
expenses where no sufficient showing of bad faith exists.58 None of these circumstances
have been shown in this case.
Finally, in line with prevailing jurisprudence,59 legal interest at the rate of 6% per annum
is imposed on the monetary award computed from the finality of this Decision until full
payment.
WHEREFORE, premises considered, the Petition for Review on Certiorari is DENIED.
The Court of Appeals Decision dated 29 November 2007 and its Resolution dated 10 July
2008 in CA-G.R. CV No. 75349 are hereby MODIFIED in that legal interest at the rate
of 6% per annum is imposed on the monetary award computed from the finality of this
Decision until full payment.
No costs.
SO ORDERED.chanRoblesvirtualLawlibrary

Under the circumstances, it is neither fair nor reasonable to deprive depositors and
creditors of what could be their last chance to recoup whatever bank assets or receivables
the PDIC can still legally recover. Besides, nothing has prevented petitioners from

28
SECOND DIVISION
G.R. No. 204702               January 14, 2015
RICARDO C. HONRADO, Petitioner,  credence to petitioner’s defense that he replaced Evangeline Katorse with Winasak na
vs.
GMA NETWORK FILMS, INC., Respondent.
DECISION
CARPIO, J.:
The Case
We review1 the Decision2 of the Court of Appeals (CA) ordering petitioner Ricardo C.
Honrado (petitioner) to pay a sum of money to respondent GMA Network Films, Inc. for
breach of contract and breach of trust.
The Facts
On 11December 1998, respondent GMA Network Films, Inc. (GMA Films) entered into
a "TV Rights Agreement" (Agreement) with petitioner under which petitioner, as licensor
of 36 films, granted to GMA Films, for a fee of ₱60.75 million, the exclusive right to
telecast the 36 films for a period of three years. Under Paragraph 3 of the Agreement, the
parties agreed that "all betacam copies of the [films] should pass through broadcast
quality test conducted by GMA-7," the TV station operated by GMA Network, Inc.
(GMA Network), an affiliate of GMA Films. The parties also agreed to submit the films
for review by the Movie and Television Review and Classification Board (MTRCB) and
stipulated on the remedies in the event that MTRCB bans the telecasting ofany of the
films (Paragraph 4):
The PROGRAMME TITLES listed above shall be subject to approval by the Movie and
Television Review and Classification Board (MTRCB) and, in the event of disapproval,
LICENSOR [Petitioner] will either replace the censored PROGRAMME TITLES with
another title which is mutually acceptable to both parties or, failure to do such, a
proportionate reduction from the total price shall either be deducted or refunded
whichever is the case by the LICENSOR OR LICENSEE [GMA Films].3 (Emphasis
supplied)
Two of the films covered by the Agreement were Evangeline Katorse and Bubot for
which GMA Films paid ₱1.5 million each.
In 2003, GMA Films sued petitioner in the Regional Trial Court of Quezon City (trial
court) to collect ₱1.6 million representing the fee it paid for Evangeline Katorse (₱1.5
million) and a portion of the fee it paid for Bubot (₱350,0004). GMA Films alleged that it
rejected Evangeline Katorse because "its running time was too short for telecast"5 and
petitioner only remitted ₱900,000 to the owner of Bubot (Juanita Alano [Alano]), keeping
for himself the balance of ₱350,000. GMA Films prayed for the return of such amount on
the theory that an implied trust arose between the parties as petitioner fraudulently kept it
for himself.6
Petitioner denied liability, counter-alleging that after GMA Films rejected Evangeline
Katorse, he replaced it with another film, Winasak na Pangarap, which GMA Films
accepted. As proof of such acceptance, petitioner invoked a certification of GMA
Network, dated 30 March 1999, attesting that such film "is of good broadcast
quality"7 (Film Certification). Regarding the fee GMA Films paid for Bubot, petitioner
alleged that he had settled his obligation to Alano. Alternatively, petitioner alleged that
GMA Films, being a stranger to the contracts he entered into with the owners of the films
in question, has no personality to question his compliance with the terms of such
contracts. Petitioner counterclaimed for attorney’s fees.
The Ruling of the Trial Court
29
The trial court dismissed GMA Films’ complaint and, finding merit in petitioner’s
counterclaim, ordered GMA Films to pay attorney’s fees (₱100,000). The trial court gave
Pangarap. On the disposal of the fee GMA Films paid for Bubot, the trial court rejected
GMA Films’ theory of implied trust, finding insufficient GMA Films’ proof that
petitioner pocketed any portion of the fee in question.
GMA Films appealed to the CA.
The Ruling of the Court of Appeals
The CA granted GMA Films’ appeal, set aside the trial court’s ruling, and ordered
respondent to pay GMA Films ₱2 million8 as principal obligation with 12% annual
interest, exemplary damages (₱100,000), attorney’s fees (₱200,000), litigation expenses
(₱100,000) and the costs. Brushing aside the trial court’s appreciation of the evidence, the
CA found that (1) GMA Films was authorized under Paragraph 4 of the Agreement to
reject Evangeline Katorse, and (2) GMA Films never accepted Winasak na Pangarap as
replacement because it was a "bold" film.9
On petitioner’s liability for the fee GMA Films paid for Bubot, the CA sustained GMA
Films’ contention that petitioner was under obligation to turn over to the film owners the
fullamount GMA Films paid for the films as "nowhere in the TV Rights Agreement does
it provide that the licensor is entitled to any commission x x x [hence] x x x [petitioner]
Honrado cannot claim any portion of the purchase price paid for by x x x GMA
Films."10 The CA concluded that petitioner’s retention of a portion of the fee for Bubot
gave rise to an implied trust between him and GMA Films, obligating petitioner, as
trustee, to return to GMA Films, as beneficiary, the amount claimed by the latter.
Hence, this petition. Petitioner prays for the reinstatement of the trial court’s ruling while
GMA Films attacks the petition for lack of merit.
The Issue
The question is whether the CA erred in finding petitioner liable for breach of the
Agreement and breach of trust.
The Ruling of the Court
We grant the petition. We find GMA Films’ complaint without merit and accordingly
reinstate the trial court’s ruling dismissing it with the modification that the award of
attorney’s fees is deleted. Petitioner Committed No Breach of Contract or Trust
MTRCB Disapproval the Stipulated
Basis for Film Replacement
The parties do not quarrel on the meaning of Paragraph 4 of the Agreement which states:
The PROGRAMME TITLES listed [in the Agreement] x x x shall be subject to approval
by the Movie and Television Review and Classification Board (MTRCB) and, in the
event of disapproval, LICENSOR [Petitioner] will either replace the censored
PROGRAMME TITLES with another title which is mutually acceptable to both parties
or, failure to do such, a proportionate reduction from the total price shall either be
deducted or refunded whichever is the case by the LICENSOR OR LICENSEE [GMA
Films].11(Emphasis supplied)
Under this stipulation, what triggersthe rejection and replacement of any film listed in the
Agreement is the "disapproval" of its telecasting by MTRCB.
Nor is there any dispute that GMA Films rejected Evangeline Katorse not because it was
disapproved by MTRCB but because the film’s total running time was too short for
telecast (undertime). Instead of rejecting GMA Films’ demand for falling outside of the
terms of Paragraph 4, petitioner voluntarily acceded to it and replaced such film with
Winasak na Pangarap. What is disputed is whether GMA Films accepted the replacement Films is no more entitled to complain of any breach by petitioner of his contracts with the
film offered by petitioner. film owners than the film owners are for any breach by GMA Films of its Agreement
Petitioner maintains that the Film Certification issued by GMA Network attesting to the with petitioner.
"good broadcast quality" of Winasak na Pangarap amounted to GMA Films’ acceptance We find it unnecessary to pass upon the question whether an implied trust arose between
of such film. On the other hand, GMA Films insists that such clearance pertained only to the parties, as held by the CA.1âwphi1 Such conclusion was grounded on the erroneous
the technical quality of the film but not to its content which it rejected because it found assumption that GMA Films holds an interest in the disposition of the licensing fees it
the film as "bomba" (bold).12 The CA, working under the assumption that the ground paid to petitioner.
GMA Films invoked to reject Winasak na Pangarap was sanctioned under the Award of Attorney's Fees to Petitioner Improper
Agreement, found merit in the latter’s claim. We hold that regardless of the import of the The trial court awarded attorney's fees to petitioner as it "deemed it just and
Film Certification, GMA Films’ rejection of Winasak na Pangarap finds no basis in the reasonable"17 to do so, using the amount provided by petitioner on the witness stand
Agreement. (₱100,000). Undoubtedly, attorney's fees may be awarded if the trial court "deems it just
In terms devoid of any ambiguity, Paragraph 4 of the Agreement requires the intervention and equitable."18 Such ground, however, must be fully elaborated in the body of the
of MTRCB, the state censor, before GMA Films can reject a film and require its ruling.19Its mere invocation, without more, negates the nature of attorney's fees as a form
replacement. Specifically, Paragraph 4 requires that MTRCB, after reviewing a film of actual damages.
listed in the Agreement, disapprove or X-rate it for telecasting. GMA Films does not WHEREFORE, we GRANT the petition. The Decision, dated 30 April 2012 and
allege, and we find no proof on record indicating, that MTRCB reviewed Winasak na Resolution, dated 19 November 2012, of the Court of Appeals are SET ASIDE. The
Pangarap and X-rated it. Indeed, GMA Films’ own witness, Jose Marie Abacan Decision, dated 5 December 2008, of the Regional Trial Court of Quezon City (Branch
(Abacan), then Vice-President for Program Management of GMA Network, testified 223) is REINSTATED with the MODIFICATION that the award of attorney's fees is
during trial that it was GMA Network which rejected Winasak na Pangarap because the DELETED.
latter considered the film "bomba."13 In doing so, GMA Network went beyond its SO ORDERED.
assigned role under the Agreement of screening films to test their broadcast quality and
assumed the function of MTRCB to evaluate the films for the propriety of their content.
This runs counter to the clear terms of Paragraphs 3 and 4 of the Agreement.
Disposal of the Fees Paid to
Petitioner Outside of the Terms
of the Agreement
GMA Films also seeks refund for the balance of the fees it paid to petitioner for Bubot
which petitioner allegedly failed to turn-over to the film’s owner, Alano.14 Implicit in
GMA Films’ claim is the theory that the Agreement obliges petitioner to give to the film
owners the entire amount he received from GMA Films and that his failure to do so gave
rise to an implied trust, obliging petitioner to hold whatever amount he kept in trust for
GMA Films. The CA sustained GMA Films’ interpretation, noting that the Agreement
"does not provide that the licensor is entitled to any commission."15
This is error.
The Agreement, as its full title denotes ("TV Rights Agreement"), is a licensing contract,
the essence of which is the transfer by the licensor (petitioner) to the licensee (GMA
Films), for a fee, of the exclusive right to telecast the films listed in the Agreement.
Stipulations for payment of "commission" to the licensor is incongruous to the nature of
such contracts unless the licensor merely acted as agent of the film owners. Nowhere in
the Agreement, however, did the parties stipulate that petitioner signed the contract in
such capacity. On the contrary, the Agreement repeatedly refers to petitioner as "licensor"
and GMA Films as "licensee." Nor did the parties stipulate that the fees paid by GMA
Films for the films listed in the Agreement will be turned over by petitioner to the film
owners. Instead, the Agreement merely provided that the total fees will be paid in three
installments (Paragraph 3).16
We entertain no doubt that petitioner forged separate contractual arrangements with the
owners of the films listed in the Agreement, spelling out the terms of payment to the
latter. Whether or not petitioner complied with these terms, however, is a matter to which
GMA Films holds absolutely no interest. Being a stranger to such arrangements, GMA

30
SECOND DIVISION
G.R. No. 204702               January 14, 2015
RICARDO C. HONRADO, Petitioner,  credence to petitioner’s defense that he replaced Evangeline Katorse with Winasak na
vs.
GMA NETWORK FILMS, INC., Respondent.
DECISION
CARPIO, J.:
The Case
We review1 the Decision2 of the Court of Appeals (CA) ordering petitioner Ricardo C.
Honrado (petitioner) to pay a sum of money to respondent GMA Network Films, Inc. for
breach of contract and breach of trust.
The Facts
On 11December 1998, respondent GMA Network Films, Inc. (GMA Films) entered into
a "TV Rights Agreement" (Agreement) with petitioner under which petitioner, as licensor
of 36 films, granted to GMA Films, for a fee of ₱60.75 million, the exclusive right to
telecast the 36 films for a period of three years. Under Paragraph 3 of the Agreement, the
parties agreed that "all betacam copies of the [films] should pass through broadcast
quality test conducted by GMA-7," the TV station operated by GMA Network, Inc.
(GMA Network), an affiliate of GMA Films. The parties also agreed to submit the films
for review by the Movie and Television Review and Classification Board (MTRCB) and
stipulated on the remedies in the event that MTRCB bans the telecasting ofany of the
films (Paragraph 4):
The PROGRAMME TITLES listed above shall be subject to approval by the Movie and
Television Review and Classification Board (MTRCB) and, in the event of disapproval,
LICENSOR [Petitioner] will either replace the censored PROGRAMME TITLES with
another title which is mutually acceptable to both parties or, failure to do such, a
proportionate reduction from the total price shall either be deducted or refunded
whichever is the case by the LICENSOR OR LICENSEE [GMA Films].3 (Emphasis
supplied)
Two of the films covered by the Agreement were Evangeline Katorse and Bubot for
which GMA Films paid ₱1.5 million each.
In 2003, GMA Films sued petitioner in the Regional Trial Court of Quezon City (trial
court) to collect ₱1.6 million representing the fee it paid for Evangeline Katorse (₱1.5
million) and a portion of the fee it paid for Bubot (₱350,0004). GMA Films alleged that it
rejected Evangeline Katorse because "its running time was too short for telecast"5 and
petitioner only remitted ₱900,000 to the owner of Bubot (Juanita Alano [Alano]), keeping
for himself the balance of ₱350,000. GMA Films prayed for the return of such amount on
the theory that an implied trust arose between the parties as petitioner fraudulently kept it
for himself.6
Petitioner denied liability, counter-alleging that after GMA Films rejected Evangeline
Katorse, he replaced it with another film, Winasak na Pangarap, which GMA Films
accepted. As proof of such acceptance, petitioner invoked a certification of GMA
Network, dated 30 March 1999, attesting that such film "is of good broadcast
quality"7 (Film Certification). Regarding the fee GMA Films paid for Bubot, petitioner
alleged that he had settled his obligation to Alano. Alternatively, petitioner alleged that
GMA Films, being a stranger to the contracts he entered into with the owners of the films
in question, has no personality to question his compliance with the terms of such
contracts. Petitioner counterclaimed for attorney’s fees.
The Ruling of the Trial Court
31
The trial court dismissed GMA Films’ complaint and, finding merit in petitioner’s
counterclaim, ordered GMA Films to pay attorney’s fees (₱100,000). The trial court gave
Pangarap. On the disposal of the fee GMA Films paid for Bubot, the trial court rejected
GMA Films’ theory of implied trust, finding insufficient GMA Films’ proof that
petitioner pocketed any portion of the fee in question.
GMA Films appealed to the CA.
The Ruling of the Court of Appeals
The CA granted GMA Films’ appeal, set aside the trial court’s ruling, and ordered
respondent to pay GMA Films ₱2 million8 as principal obligation with 12% annual
interest, exemplary damages (₱100,000), attorney’s fees (₱200,000), litigation expenses
(₱100,000) and the costs. Brushing aside the trial court’s appreciation of the evidence, the
CA found that (1) GMA Films was authorized under Paragraph 4 of the Agreement to
reject Evangeline Katorse, and (2) GMA Films never accepted Winasak na Pangarap as
replacement because it was a "bold" film.9
On petitioner’s liability for the fee GMA Films paid for Bubot, the CA sustained GMA
Films’ contention that petitioner was under obligation to turn over to the film owners the
fullamount GMA Films paid for the films as "nowhere in the TV Rights Agreement does
it provide that the licensor is entitled to any commission x x x [hence] x x x [petitioner]
Honrado cannot claim any portion of the purchase price paid for by x x x GMA
Films."10 The CA concluded that petitioner’s retention of a portion of the fee for Bubot
gave rise to an implied trust between him and GMA Films, obligating petitioner, as
trustee, to return to GMA Films, as beneficiary, the amount claimed by the latter.
Hence, this petition. Petitioner prays for the reinstatement of the trial court’s ruling while
GMA Films attacks the petition for lack of merit.
The Issue
The question is whether the CA erred in finding petitioner liable for breach of the
Agreement and breach of trust.
The Ruling of the Court
We grant the petition. We find GMA Films’ complaint without merit and accordingly
reinstate the trial court’s ruling dismissing it with the modification that the award of
attorney’s fees is deleted. Petitioner Committed No Breach of Contract or Trust
MTRCB Disapproval the Stipulated
Basis for Film Replacement
The parties do not quarrel on the meaning of Paragraph 4 of the Agreement which states:
The PROGRAMME TITLES listed [in the Agreement] x x x shall be subject to approval
by the Movie and Television Review and Classification Board (MTRCB) and, in the
event of disapproval, LICENSOR [Petitioner] will either replace the censored
PROGRAMME TITLES with another title which is mutually acceptable to both parties
or, failure to do such, a proportionate reduction from the total price shall either be
deducted or refunded whichever is the case by the LICENSOR OR LICENSEE [GMA
Films].11(Emphasis supplied)
Under this stipulation, what triggersthe rejection and replacement of any film listed in the
Agreement is the "disapproval" of its telecasting by MTRCB.
Nor is there any dispute that GMA Films rejected Evangeline Katorse not because it was
disapproved by MTRCB but because the film’s total running time was too short for
telecast (undertime). Instead of rejecting GMA Films’ demand for falling outside of the
terms of Paragraph 4, petitioner voluntarily acceded to it and replaced such film with
Winasak na Pangarap. What is disputed is whether GMA Films accepted the replacement Films is no more entitled to complain of any breach by petitioner of his contracts with the
film offered by petitioner. film owners than the film owners are for any breach by GMA Films of its Agreement
Petitioner maintains that the Film Certification issued by GMA Network attesting to the with petitioner.
"good broadcast quality" of Winasak na Pangarap amounted to GMA Films’ acceptance We find it unnecessary to pass upon the question whether an implied trust arose between
of such film. On the other hand, GMA Films insists that such clearance pertained only to the parties, as held by the CA.1âwphi1 Such conclusion was grounded on the erroneous
the technical quality of the film but not to its content which it rejected because it found assumption that GMA Films holds an interest in the disposition of the licensing fees it
the film as "bomba" (bold).12 The CA, working under the assumption that the ground paid to petitioner.
GMA Films invoked to reject Winasak na Pangarap was sanctioned under the Award of Attorney's Fees to Petitioner Improper
Agreement, found merit in the latter’s claim. We hold that regardless of the import of the The trial court awarded attorney's fees to petitioner as it "deemed it just and
Film Certification, GMA Films’ rejection of Winasak na Pangarap finds no basis in the reasonable"17 to do so, using the amount provided by petitioner on the witness stand
Agreement. (₱100,000). Undoubtedly, attorney's fees may be awarded if the trial court "deems it just
In terms devoid of any ambiguity, Paragraph 4 of the Agreement requires the intervention and equitable."18 Such ground, however, must be fully elaborated in the body of the
of MTRCB, the state censor, before GMA Films can reject a film and require its ruling.19Its mere invocation, without more, negates the nature of attorney's fees as a form
replacement. Specifically, Paragraph 4 requires that MTRCB, after reviewing a film of actual damages.
listed in the Agreement, disapprove or X-rate it for telecasting. GMA Films does not WHEREFORE, we GRANT the petition. The Decision, dated 30 April 2012 and
allege, and we find no proof on record indicating, that MTRCB reviewed Winasak na Resolution, dated 19 November 2012, of the Court of Appeals are SET ASIDE. The
Pangarap and X-rated it. Indeed, GMA Films’ own witness, Jose Marie Abacan Decision, dated 5 December 2008, of the Regional Trial Court of Quezon City (Branch
(Abacan), then Vice-President for Program Management of GMA Network, testified 223) is REINSTATED with the MODIFICATION that the award of attorney's fees is
during trial that it was GMA Network which rejected Winasak na Pangarap because the DELETED.
latter considered the film "bomba."13 In doing so, GMA Network went beyond its SO ORDERED.
assigned role under the Agreement of screening films to test their broadcast quality and
assumed the function of MTRCB to evaluate the films for the propriety of their content.
This runs counter to the clear terms of Paragraphs 3 and 4 of the Agreement.
Disposal of the Fees Paid to
Petitioner Outside of the Terms
of the Agreement
GMA Films also seeks refund for the balance of the fees it paid to petitioner for Bubot
which petitioner allegedly failed to turn-over to the film’s owner, Alano.14 Implicit in
GMA Films’ claim is the theory that the Agreement obliges petitioner to give to the film
owners the entire amount he received from GMA Films and that his failure to do so gave
rise to an implied trust, obliging petitioner to hold whatever amount he kept in trust for
GMA Films. The CA sustained GMA Films’ interpretation, noting that the Agreement
"does not provide that the licensor is entitled to any commission."15
This is error.
The Agreement, as its full title denotes ("TV Rights Agreement"), is a licensing contract,
the essence of which is the transfer by the licensor (petitioner) to the licensee (GMA
Films), for a fee, of the exclusive right to telecast the films listed in the Agreement.
Stipulations for payment of "commission" to the licensor is incongruous to the nature of
such contracts unless the licensor merely acted as agent of the film owners. Nowhere in
the Agreement, however, did the parties stipulate that petitioner signed the contract in
such capacity. On the contrary, the Agreement repeatedly refers to petitioner as "licensor"
and GMA Films as "licensee." Nor did the parties stipulate that the fees paid by GMA
Films for the films listed in the Agreement will be turned over by petitioner to the film
owners. Instead, the Agreement merely provided that the total fees will be paid in three
installments (Paragraph 3).16
We entertain no doubt that petitioner forged separate contractual arrangements with the
owners of the films listed in the Agreement, spelling out the terms of payment to the
latter. Whether or not petitioner complied with these terms, however, is a matter to which
GMA Films holds absolutely no interest. Being a stranger to such arrangements, GMA

32
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 206806               June 25, 2014
ARCO PULP AND PAPER CO., INC. and CANDIDA A. SANTOS, Petitioners,  Arco Pulp and Paper’s obligation to Dan T. Lim.17
vs.
DAN T. LIM, doing business under the name and style of QUALITY PAPERS &
PLASTIC PRODUCTS ENTERPRISES, Respondent.
DECISION
LEONEN, J.:
Novation must be stated in clear and unequivocal terms to extinguish an obligation. It
cannot be presumed and may be implied only if the old and new contracts are
incompatible on every point.
Before us is a petition for review on certiorari1 assailing the Court of Appeals’
decision2 in CA-G.R. CV No. 95709, which stemmed from a complaint3 filed in the
Regional Trial Court of Valenzuela City, Branch 171, for collection of sum of money.
The facts are as follows:
Dan T. Lim works in the business of supplying scrap papers, cartons, and other raw
materials, under the name Quality Paper and Plastic Products, Enterprises, to factories
engaged in the paper mill business.4 From February 2007 to March 2007, he delivered
scrap papers worth 7,220,968.31 to Arco Pulp and Paper Company, Inc. (Arco Pulp and
Paper) through its Chief Executive Officer and President, Candida A. Santos.5 The parties
allegedly agreed that Arco Pulp and Paper would either pay Dan T. Lim the value of the
raw materials or deliver to him their finished products of equivalent value.6
Dan T. Lim alleged that when he delivered the raw materials, Arco Pulp and Paper issued
a post-dated check dated April 18, 20077 in the amount of 1,487,766.68 as partial
payment, with the assurance that the check would not bounce.8 When he deposited the
check on April 18, 2007, it was dishonored for being drawn against a closed account.9
On the same day, Arco Pulp and Paper and a certain Eric Sy executed a memorandum of
agreement10 where Arco Pulp and Paper bound themselves to deliver their finished
products to Megapack Container Corporation, owned by Eric Sy, for his account.
According to the memorandum, the raw materials would be supplied by Dan T. Lim,
through his company, Quality Paper and Plastic Products. The memorandum of
agreement reads as follows:
Per meeting held at ARCO, April 18, 2007, it has been mutually agreed between Mrs.
Candida A. Santos and Mr. Eric Sy that ARCO will deliver 600 tons Test Liner 150/175
GSM, full width 76 inches at the price of ₱18.50 per kg. to Megapack Container for Mr.
Eric Sy’s account. Schedule of deliveries are as follows:
....
It has been agreed further that the Local OCC materials to be used for the production of
the above Test Liners will be supplied by Quality Paper & Plastic Products Ent., total of
600 Metric Tons at ₱6.50 per kg. (price subject to change per advance notice). Quantity
of Local OCC delivery will be based on the quantity of Test Liner delivered to Megapack
Container Corp. based on the above production schedule.11
On May 5, 2007, Dan T.Lim sent a letter12 to Arco Pulp and Paper demanding payment of
the amount of 7,220,968.31, but no payment was made to him.13
Dan T. Lim filed a complaint14 for collection of sum of money with prayer for attachment
with the Regional Trial Court, Branch 171, Valenzuela City, on May 28, 2007. Arco Pulp
33
and Paper filed its answer15 but failed to have its representatives attend the pre-trial
hearing. Hence, the trial court allowed Dan T. Lim to present his evidence ex parte.16
On September 19, 2008, the trial court rendered a judgment in favor of Arco Pulp and
Paper and dismissed the complaint, holding that when Arco Pulp and Paper and Eric Sy
entered into the memorandum of agreement, novation took place, which extinguished
Dan T. Lim appealed18 the judgment with the Court of Appeals. According to him,
novation did not take place since the memorandum of agreement between Arco Pulp and
Paper and Eric Sy was an exclusive and private agreement between them. He argued that
if his name was mentioned in the contract, it was only for supplying the parties their
required scrap papers, where his conformity through a separate contract was
indispensable.19
On January 11, 2013, the Court of Appeals20 rendered a decision21 reversing and setting
aside the judgment dated September 19, 2008 and ordering Arco Pulp and Paper to
jointly and severally pay Dan T. Lim the amount of ₱7,220,968.31 with interest at 12%
per annum from the time of demand; ₱50,000.00 moral damages; ₱50,000.00 exemplary
damages; and ₱50,000.00 attorney’s fees.22
The appellate court ruled that the facts and circumstances in this case clearly showed the
existence of an alternative obligation.23 It also ruled that Dan T. Lim was entitled to
damages and attorney’s fees due to the bad faith exhibited by Arco Pulp and Paper in not
honoring its undertaking.24
Its motion for reconsideration25 having been denied,26 Arco Pulp and Paper and its
President and Chief Executive Officer, Candida A. Santos, bring this petition for review
on certiorari.
On one hand, petitioners argue that the execution of the memorandum of agreement
constituted a novation of the original obligation since Eric Sy became the new debtor of
respondent. They also argue that there is no legal basis to hold petitioner Candida A.
Santos personally liable for the transaction that petitioner corporation entered into with
respondent. The Court of Appeals, they allege, also erred in awarding moral and
exemplary damages and attorney’s fees to respondent who did not show proof that he was
entitled to damages.27
Respondent, on the other hand, argues that the Court of Appeals was correct in ruling that
there was no proper novation in this case. He argues that the Court of Appeals was
correct in ordering the payment of 7,220,968.31 with damages since the debt of
petitioners remains unpaid.28 He also argues that the Court of Appeals was correct in
holding petitioners solidarily liable since petitioner Candida A. Santos was "the prime
mover for such outstanding corporate liability."29 In their reply, petitioners reiterate that
novation took place since there was nothing in the memorandum of agreement showing
that the obligation was alternative. They also argue that when respondent allowed them to
deliver the finished products to Eric Sy, the original obligation was novated.30
A rejoinder was submitted by respondent, but it was noted without action in view of A.M.
No. 99-2-04-SC dated November 21, 2000.31
The issues to be resolved by this court are as follows:
1. Whether the obligation between the parties was extinguished by novation
2. Whether Candida A. Santos was solidarily liable with Arco Pulp and Paper Co., Inc.
3. Whether moral damages, exemplary damages, and attorney’s fees can be awarded
The petition is denied.
The obligation between the
parties was an alternative
obligation
The rule on alternative obligations is governed by Article 1199 of the Civil Code, which
states:
Article 1199. A person alternatively bound by different prestations shall completely
perform one of them.
The creditor cannot be compelled to receive part of one and part of the other undertaking.
"In an alternative obligation, there is more than one object, and the fulfillment of one is
sufficient, determined by the choice of the debtor who generally has the right of
election."32 The right of election is extinguished when the party who may exercise that
option categorically and unequivocally makes his or her choice known.33
The choice of the debtor must also be communicated to the creditor who must receive
notice of it since: The object of this notice is to give the creditor . . . opportunity to
express his consent, or to impugn the election made by the debtor, and only after said
notice shall the election take legal effect when consented by the creditor, or if impugned
by the latter, when declared proper by a competent court.34
According to the factual findings of the trial court and the appellate court, the original
contract between the parties was for respondent to deliver scrap papers worth
₱7,220,968.31 to petitioner Arco Pulp and Paper. The payment for this delivery became
petitioner Arco Pulp and Paper’s obligation. By agreement, petitioner Arco Pulp and
Paper, as the debtor, had the option to either (1) pay the price or(2) deliver the finished
products of equivalent value to respondent.35
The appellate court, therefore, correctly identified the obligation between the parties as an
alternative obligation, whereby petitioner Arco Pulp and Paper, after receiving the raw
materials from respondent, would either pay him the price of the raw materials or, in the
alternative, deliver to him the finished products of equivalent value.
When petitioner Arco Pulp and Paper tendered a check to respondent in partial payment
for the scrap papers, they exercised their option to pay the price. Respondent’s receipt of
the check and his subsequent act of depositing it constituted his notice of petitioner Arco
Pulp and Paper’s option to pay.
This choice was also shown by the terms of the memorandum of agreement, which was
executed on the same day. The memorandum declared in clear terms that the delivery of
petitioner Arco Pulp and Paper’s finished products would be to a third person, thereby
extinguishing the option to deliver the finished products of equivalent value to
respondent.
The memorandum of
agreement did not constitute
a novation of the original
contract
The trial court erroneously ruled that the execution of the memorandum of agreement
constituted a novation of the contract between the parties. When petitioner Arco Pulp and
Paper opted instead to deliver the finished products to a third person, it did not novate the
original obligation between the parties.
The rules on novation are outlined in the Civil Code, thus:
Article 1291. Obligations may be modified by:
(1) Changing their object or principal conditions;
(2) Substituting the person of the debtor;
(3) Subrogating a third person in the rights of the creditor. (1203)
34
Article 1292. In order that an obligation may be extinguished by another which substitute
the same, it is imperative that it be so declared in unequivocal terms, or that the old and
the new obligations be on every point incompatible with each other. (1204)
Article 1293. Novation which consists in substituting a new debtor in the place of the
original one, may be made even without the knowledge or against the will of the latter,
but not without the consent of the creditor. Payment by the new debtor gives him the
rights mentioned in Articles 1236 and 1237. (1205a)
Novation extinguishes an obligation between two parties when there is a substitution of
objects or debtors or when there is subrogation of the creditor. It occurs only when the
new contract declares so "in unequivocal terms" or that "the old and the new obligations
be on every point incompatible with each other."36
Novation was extensively discussed by this court in Garcia v. Llamas:37
Novation is a mode of extinguishing an obligation by changing its objects or principal
obligations, by substituting a new debtor in place of the old one, or by subrogating a third
person to the rights of the creditor. Article 1293 of the Civil Code defines novation as
follows:
"Art. 1293. Novation which consists in substituting a new debtor in the place of the
original one, may be made even without the knowledge or against the will of the latter,
but not without the consent of the creditor. Payment by the new debtor gives him rights
mentioned in articles 1236 and 1237."
In general, there are two modes of substituting the person of the debtor: (1) expromision
and (2) delegacion. In expromision, the initiative for the change does not come from —
and may even be made without the knowledge of — the debtor, since it consists of a third
person’s assumption of the obligation. As such, it logically requires the consent of the
third person and the creditor. In delegacion, the debtor offers, and the creditor accepts, a
third person who consents to the substitution and assumes the obligation; thus, the
consent of these three persons are necessary. Both modes of substitution by the debtor
require the consent of the creditor.
Novation may also be extinctive or modificatory. It is extinctive when an old obligation
is terminated by the creation of a new one that takes the place of the former. It is merely
modificatory when the old obligation subsists to the extent that it remains compatible
with the amendatory agreement. Whether extinctive or modificatory, novation is made
either by changing the object or the principal conditions, referred to as objective or real
novation; or by substituting the person of the debtor or subrogating a third person to the
rights of the creditor, an act known as subjective or personal novation. For novation to
take place, the following requisites must concur:
1) There must be a previous valid obligation.
2) The parties concerned must agree to a new contract.
3) The old contract must be extinguished.
4) There must be a valid new contract.
Novation may also be express or implied. It is express when the new obligation declares
in unequivocal terms that the old obligation is extinguished. It is implied when the new
obligation is incompatible with the old one on every point. The test of incompatibility is
whether the two obligations can stand together, each one with its own independent
existence.38 (Emphasis supplied)
Because novation requires that it be clear and unequivocal, it is never presumed, thus:
In the civil law setting, novatio is literally construed as to make new. So it is deeply
rooted in the Roman Law jurisprudence, the principle — novatio non praesumitur —that
novation is never presumed.At bottom, for novation tobe a jural reality, its animus must
be ever present, debitum pro debito — basically extinguishing the old obligation for the
new one.39 (Emphasis supplied) There is nothing in the memorandum of agreement that
states that with its execution, the obligation of petitioner Arco Pulp and Paper to
respondent would be extinguished. It also does not state that Eric Sy somehow
substituted petitioner Arco Pulp and Paper as respondent’s debtor. It merely shows that
petitioner Arco Pulp and Paper opted to deliver the finished products to a third person
instead.
The consent of the creditor must also be secured for the novation to be valid:
Novation must be expressly consented to. Moreover, the conflicting intention and acts of
the parties underscore the absence of any express disclosure or circumstances with which
to deduce a clear and unequivocal intent by the parties to novate the old
agreement.40 (Emphasis supplied)
In this case, respondent was not privy to the memorandum of agreement, thus, his
conformity to the contract need not be secured. This is clear from the first line of the
memorandum, which states:
Per meeting held at ARCO, April 18, 2007, it has been mutually agreed between Mrs.
Candida A. Santos and Mr. Eric Sy. . . .41
If the memorandum of agreement was intended to novate the original agreement between
the parties, respondent must have first agreed to the substitution of Eric Sy as his new
debtor. The memorandum of agreement must also state in clear and unequivocal terms
that it has replaced the original obligation of petitioner Arco Pulp and Paper to
respondent. Neither of these circumstances is present in this case.
Petitioner Arco Pulp and Paper’s act of tendering partial payment to respondent also
conflicts with their alleged intent to pass on their obligation to Eric Sy. When respondent
sent his letter of demand to petitioner Arco Pulp and Paper, and not to Eric Sy, it showed
that the former neither acknowledged nor consented to the latter as his new debtor. These
acts, when taken together, clearly show that novation did not take place. Since there was
no novation, petitioner Arco Pulp and Paper’s obligation to respondent remains valid and
existing. Petitioner Arco Pulp and Paper, therefore, must still pay respondent the full
amount of ₱7,220,968.31.
Petitioners are liable for
damages
Under Article 2220 of the Civil Code, moral damages may be awarded in case of breach
of contract where the breach is due to fraud or bad faith:
Art. 2220. Willfull injury to property may be a legal ground for awarding moral damages
if the court should find that, under the circumstances, such damages are justly due. The
same rule applies to breaches of contract where the defendant acted fraudulently or in bad
faith. (Emphasis supplied)
Moral damages are not awarded as a matter of right but only after the party claiming it
proved that the breach was due to fraud or bad faith. As this court stated:
Moral damages are not recoverable simply because a contract has been breached. They
are recoverable only if the party from whom it is claimed acted fraudulently or in bad
faith or in wanton disregard of his contractual obligations. The breach must be wanton,
reckless, malicious or in bad faith, and oppressive or abusive.42
Further, the following requisites must be proven for the recovery of moral damages:
An award of moral damages would require certain conditions to be met, to wit: (1)first,
there must be an injury, whether physical, mental or psychological, clearly sustained by
the claimant; (2) second, there must be culpable act or omission factually established; (3)
third, the wrongful act or omission of the defendant is the proximate cause of the injury
35
sustained by the claimant; and (4) fourth, the award of damages is predicated on any of
the cases stated in Article 2219 of the Civil Code.43
Here, the injury suffered by respondent is the loss of ₱7,220,968.31 from his business.
This has remained unpaid since 2007. This injury undoubtedly was caused by petitioner
Arco Pulp and Paper’s act of refusing to pay its obligations.
When the obligation became due and demandable, petitioner Arco Pulp and Paper not
only issued an unfunded check but also entered into a contract with a third person in an
effort to evade its liability. This proves the third requirement.
As to the fourth requisite, Article 2219 of the Civil Code provides that moral damages
may be awarded in the following instances:
Article 2219. Moral damages may be recovered in the following and analogous cases:
(1) A criminal offense resulting in physical injuries;
(2) Quasi-delicts causing physical injuries;
(3) Seduction, abduction, rape, or other lascivious acts;
(4) Adultery or concubinage;
(5) Illegal or arbitrary detention or arrest;
(6) Illegal search;
(7) Libel, slander or any other form of defamation;
(8) Malicious prosecution;
(9) Acts mentioned in Article 309;
(10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34, and 35.
Breaches of contract done in bad faith, however, are not specified within this
enumeration. When a party breaches a contract, he or she goes against Article 19 of the
Civil Code, which states: Article 19. Every person must, in the exercise of his rights and
in the performance of his duties, act with justice, give everyone his due, and observe
honesty and good faith.
Persons who have the right to enter into contractual relations must exercise that right with
honesty and good faith. Failure to do so results in an abuse of that right, which may
become the basis of an action for damages. Article 19, however, cannot be its sole basis:
Article 19 is the general rule which governs the conduct of human relations. By itself, it
is not the basis of an actionable tort. Article 19 describes the degree of care required so
that an actionable tort may arise when it is alleged together with Article 20 or Article
21.44
Article 20 and 21 of the Civil Code are as follows:
Article 20. Every person who, contrary to law, wilfully or negligently causes damage to
another, shall indemnify the latter for the same.
Article 21.Any person who wilfully causes loss or injury to another in a manner that is
contrary to morals, good customs or public policy shall compensate the latter for the
damage.
To be actionable, Article 20 requires a violation of law, while Article 21 only concerns
with lawful acts that are contrary to morals, good customs, and public policy:
Article 20 concerns violations of existing law as basis for an injury. It allows recovery
should the act have been willful or negligent. Willful may refer to the intention to do the
act and the desire to achieve the outcome which is considered by the plaintiff in tort
action as injurious. Negligence may refer to a situation where the act was consciously
done but without intending the result which the plaintiff considers as injurious.
Article 21, on the other hand, concerns injuries that may be caused by acts which are not
necessarily proscribed by law. This article requires that the act be willful, that is, that
there was an intention to do the act and a desire to achieve the outcome. In cases under
Article 21, the legal issues revolve around whether such outcome should be considered a
legal injury on the part of the plaintiff or whether the commission of the act was done in
violation of the standards of care required in Article 19.45
When parties act in bad faith and do not faithfully comply with their obligations under
contract, they run the risk of violating Article 1159 of the Civil Code:
Article 1159. Obligations arising from contracts have the force of law between the
contracting parties and should be complied with in good faith.
Article 2219, therefore, is not an exhaustive list of the instances where moral damages
may be recovered since it only specifies, among others, Article 21. When a party reneges
on his or her obligations arising from contracts in bad faith, the act is not only contrary to
morals, good customs, and public policy; it is also a violation of Article 1159. Breaches
of contract become the basis of moral damages, not only under Article 2220, but also
under Articles 19 and 20 in relation to Article 1159.
Moral damages, however, are not recoverable on the mere breach of the contract. Article
2220 requires that the breach be done fraudulently or in bad faith. In Adriano v. Lasala:46
To recover moral damages in an action for breach of contract, the breach must be
palpably wanton, reckless and malicious, in bad faith, oppressive, or abusive. Hence, the
person claiming bad faith must prove its existence by clear and convincing evidence for
the law always presumes good faith.
Bad faith does not simply connote bad judgment or negligence. It imports a dishonest
purpose or some moral obliquity and conscious doing of a wrong, a breach of known duty
through some motive or interest or ill will that partakes of the nature of fraud. It is,
therefore, a question of intention, which can be inferred from one’s conduct and/or
contemporaneous statements.47 (Emphasis supplied)
Since a finding of bad faith is generally premised on the intent of the doer, it requires an
examination of the circumstances in each case.
When petitioner Arco Pulp and Paper issued a check in partial payment of its obligation
to respondent, it was presumably with the knowledge that it was being drawn against a
closed account. Worse, it attempted to shift their obligations to a third person without the
consent of respondent.
Petitioner Arco Pulp and Paper’s actions clearly show "a dishonest purpose or some
moral obliquity and conscious doing of a wrong, a breach of known duty through some
motive or interest or ill will that partakes of the nature of fraud."48 Moral damages may,
therefore, be awarded.
Exemplary damages may also be awarded. Under the Civil Code, exemplary damages are
due in the following circumstances:
Article 2232. In contracts and quasi-contracts, the court may award exemplary damages if
the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner.
Article 2233. Exemplary damages cannot be recovered as a matter of right; the court will
decide whether or not they should be adjudicated.
Article 2234. While the amount of the exemplary damages need not be proven, the
plaintiff must show that he is entitled to moral, temperate or compensatory damages
before the court may consider the question of whether or not exemplary damages should
be awarded.
In Tankeh v. Development Bank of the Philippines,49 we stated that:
The purpose of exemplary damages is to serve as a deterrent to future and subsequent
parties from the commission of a similar offense. The case of People v. Ranteciting
People v. Dalisay held that:
36
Also known as ‘punitive’ or ‘vindictive’ damages, exemplary or corrective damages are
intended to serve as a deterrent to serious wrong doings, and as a vindication of undue
sufferings and wanton invasion of the rights of an injured or a punishment for those
guilty of outrageous conduct. These terms are generally, but not always, used
interchangeably. In common law, there is preference in the use of exemplary damages
when the award is to account for injury to feelings and for the sense of indignity and
humiliation suffered by a person as a result of an injury that has been maliciously and
wantonly inflicted, the theory being that there should be compensation for the hurt caused
by the highly reprehensible conduct of the defendant—associated with such
circumstances as willfulness, wantonness, malice, gross negligence or recklessness,
oppression, insult or fraud or gross fraud—that intensifies the injury. The terms punitive
or vindictive damages are often used to refer to those species of damages that may be
awarded against a person to punish him for his outrageous conduct. In either case, these
damages are intended in good measure to deter the wrongdoer and others like him from
similar conduct in the future.50 (Emphasis supplied; citations omitted)
The requisites for the award of exemplary damages are as follows:
(1) they may be imposed by way of example in addition to compensatory damages, and
only after the claimant's right to them has been established;
(2) that they cannot be recovered as a matter of right, their determination depending upon
the amount of compensatory damages that may be awarded to the claimant; and
(3) the act must be accompanied by bad faith or done in a wanton, fraudulent, oppressive
or malevolent manner.51
Business owners must always be forthright in their dealings. They cannot be allowed to
renege on their obligations, considering that these obligations were freely entered into by
them. Exemplary damages may also be awarded in this case to serve as a deterrent to
those who use fraudulent means to evade their liabilities.
Since the award of exemplary damages is proper, attorney’s fees and cost of the suit may
also be recovered.
Article 2208 of the Civil Code states:
Article 2208. In the absence of stipulation, attorney's fees and expenses of litigation,
other than judicial costs, cannot be recovered, except:
(1) When exemplary damages are awarded[.]
Petitioner Candida A. Santos
is solidarily liable with
petitioner corporation
Petitioners argue that the finding of solidary liability was erroneous since no evidence
was adduced to prove that the transaction was also a personal undertaking of petitioner
Santos. We disagree.
In Heirs of Fe Tan Uy v. International Exchange Bank,52 we stated that:
Basic is the rule in corporation law that a corporation is a juridical entity which is vested
with a legal personality separate and distinct from those acting for and in its behalf and,
in general, from the people comprising it. Following this principle, obligations incurred
by the corporation, acting through its directors, officers and employees, are its sole
liabilities. A director, officer or employee of a corporation is generally not held
personally liable for obligations incurred by the corporation. Nevertheless, this legal
fiction may be disregarded if it is used as a means to perpetrate fraud or an illegal act, or
as a vehicle for the evasion of an existing obligation, the circumvention of statutes, or to
confuse legitimate issues.
....
Before a director or officer of a corporation can be held personally liable for corporate
obligations, however, the following requisites must concur: (1) the complainant must
allege in the complaint that the director or officer assented to patently unlawful acts of
the corporation, or that the officer was guilty of gross negligence or bad faith; and (2) the
complainant must clearly and convincingly prove such unlawful acts, negligence or bad
faith.
While it is true that the determination of the existence of any of the circumstances that
would warrant the piercing of the veil of corporate fiction is a question of fact which
cannot be the subject of a petition for review on certiorari under Rule 45, this Court can
take cognizance of factual issues if the findings of the lower court are not supported by
the evidence on record or are based on a misapprehension of facts.53 (Emphasis supplied)
As a general rule, directors, officers, or employees of a corporation cannot be held
personally liable for obligations incurred by the corporation. However, this veil of
corporate fiction may be pierced if complainant is able to prove, as in this case, that (1)
the officer is guilty of negligence or bad faith, and (2) such negligence or bad faith was
clearly and convincingly proven.
Here, petitioner Santos entered into a contract with respondent in her capacity as the
President and Chief Executive Officer of Arco Pulp and Paper. She also issued the check
in partial payment of petitioner corporation’s obligations to respondent on behalf of
petitioner Arco Pulp and Paper. This is clear on the face of the check bearing the account
name, "Arco Pulp & Paper, Co., Inc."54 Any obligation arising from these acts would not,
ordinarily, be petitioner Santos’ personal undertaking for which she would be solidarily
liable with petitioner Arco Pulp and Paper.
We find, however, that the corporate veil must be pierced. In Livesey v. Binswanger
Philippines:55
Piercing the veil of corporate fiction is an equitable doctrine developed to address
situations where the separate corporate personality of a corporation is abused or used for
wrongful purposes. Under the doctrine, the corporate existence may be disregarded where
the entity is formed or used for non-legitimate purposes, such as to evade a just and due
obligation, or to justify a wrong, to shield or perpetrate fraud or to carry out similar or
inequitable considerations, other unjustifiable aims or intentions, in which case, the
fiction will be disregarded and the individuals composing it and the two corporations will
be treated as identical.56 (Emphasis supplied)
According to the Court of Appeals, petitioner Santos was solidarily liable with petitioner
Arco Pulp and Paper, stating that:
In the present case, We find bad faith on the part of the [petitioners] when they
unjustifiably refused to honor their undertaking in favor of the [respondent]. After the
check in the amount of 1,487,766.68 issued by [petitioner] Santos was dishonored for
being drawn against a closed account, [petitioner] corporation denied any privity with
[respondent]. These acts prompted the [respondent] to avail of the remedies provided by
law in order to protect his rights.57
We agree with the Court of Appeals. Petitioner Santos cannot be allowed to hide behind
the corporate veil.1âwphi1 When petitioner Arco Pulp and Paper’s obligation to
respondent became due and demandable, she not only issued an unfunded check but also
contracted with a third party in an effort to shift petitioner Arco Pulp and Paper’s
liability. She unjustifiably refused to honor petitioner corporation’s obligations to
respondent. These acts clearly amount to bad faith. In this instance, the corporate veil
may be pierced, and petitioner Santos may be held solidarily liable with petitioner Arco
Pulp and Paper.
37
The rate of interest due on
the obligation must be
reduced in view of Nacar v.
Gallery Frames58
In view, however, of the promulgation by this court of the decision dated August 13,
2013 in Nacar v. Gallery Frames,59 the rate of interest due on the obligation must be
modified from 12% per annum to 6% per annum from the time of demand.
Nacar effectively amended the guidelines stated in Eastern Shipping v. Court of
Appeals,60 and we have laid down the following guidelines with regard to the rate of legal
interest:
To recapitulate and for future guidance, the guidelines laid down in the case of Eastern
Shipping Linesare accordingly modified to embody BSP-MB Circular No. 799, as
follows:
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts
or quasi-delicts is breached, the contravenor can be held liable for damages. The
provisions under Title XVIII on "Damages" of the Civil Code govern in determining the
measure of recoverable damages.
II. With regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof, is imposed, as
follows:
1. When the obligation is breached, and it consists in the payment of a sum of money,
i.e., a loan or forbearance of money, the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the
time it is judicially demanded. In the absence of stipulation, the rate of interest shall be
6% per annum to be computed from default, i.e., from judicial or extrajudicial demand
under and subject to the provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an
interest on the amount of damages awarded may be imposed at the discretion of the court
at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated
claims or damages, except when or until the demand can be established with reasonable
certainty. Accordingly, where the demand is established with reasonable certainty, the
interest shall begin to run from the time the claim is made judicially or extrajudicially
(Art. 1169, Civil Code), but when such certainty cannot be so reasonably established at
the time the demand is made, the interest shall begin to run only from the date the
judgment of the court is made (at which time the quantification of damages may be
deemed to have been reasonably ascertained). The actual base for the computation of
legal interest shall, in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph
2, above, shall be 6% per annum from such finality until its satisfaction, this interim
period being deemed to be by then an equivalent to a forbearance of credit.
And, in addition to the above, judgments that have become final and executory prior to
July 1, 2013, shall not be disturbed and shall continue to be implemented applying the
rate of interest fixed therein.61 (Emphasis supplied; citations omitted.)
According to these guidelines, the interest due on the obligation of ₱7,220,968.31 should
now be at 6% per annum, computed from May 5, 2007, when respondent sent his letter of
demand to petitioners. This interest shall continue to be due from the finality of this
decision until its full satisfaction.
WHEREFORE, the petition is DENIED in part. The decision in CA-G.R. CV No. 95709
is AFFIRMED.
Petitioners Arco Pulp & Paper Co., Inc. and Candida A. Santos are hereby ordered
solidarily to pay respondent Dan T. Lim the amount of ₱7,220,968.31 with interest of 6%
per annum at the time of demand until finality of judgment and its full satisfaction, with
moral damages in the amount of ₱50,000.00, exemplary damages in the amount of
₱50,000.00, and attorney's fees in the amount of ₱50,000.00.
SO ORDERED.
MARVIC MARIO VICTOR F.

38