Bus. Org.

I Cases – Page 5 Syllabus

FIRST DIVISION
G.R. No. 126751       March 28, 2001
SAFIC ALCAN & CIE, petitioner, 
vs.
IMPERIAL VEGETABLE OIL CO., INC., respondent.
YNARES-SANTIAGO, J.:

Petitioner Safic Alcan & Cie (hereinafter, "Safic") is a French corporation engaged in the international purchase, sale and
trading of coconut oil. It filed with the Regional Trial Court of Manila, Branch XXV, a complaint dated February 26,
1987 against private respondent Imperial Vegetable Oil Co., Inc. (hereinafter, "IVO"), docketed as Civil Case No. 87-
39597. Petitioner Safic alleged that on July 1, 1986 and September 25, 1986, it placed purchase orders with IVO for 2,000
long tons of crude coconut oil, valued at US$222.50 per ton, covered by Purchase Contract Nos. A601446 and A601655,
respectively, to be delivered within the month of January 1987. Private respondent, however, failed to deliver the said
coconut oil and, instead, offered a "wash out" settlement, whereby the coconut oil subject of the purchase contracts were
to be "sold back" to IVO at the prevailing price in the international market at the time of wash out. Thus, IVO bound itself
to pay to Safic the difference between the said prevailing price and the contract price of the 2,000 long tons of crude
coconut oil, which amounted to US$293,500.00. IVO failed to pay this amount despite repeated oral and written demands.
Under its second cause of action, Safic alleged that on eight occasions between April 24, 1986 and October 31, 1986, it
placed purchase orders with IVO for a total of 4,750 tons of crude coconut oil, covered by Purchase Contract Nos.
A601297A/B, A601384, A601385, A601391, A601415, A601681, A601683 and A601770A/B/C/. When IVO failed to
honor its obligation under the wash out settlement narrated above, Safic demanded that IVO make marginal deposits
within forty-eight hours on the eight purchase contracts in amounts equivalent to the difference between the contract price
and the market price of the coconut oil, to compensate it for the damages it suffered when it was forced to acquire coconut
oil at a higher price. IVO failed to make the prescribed marginal deposits on the eight contracts, in the aggregate amount
of US$391,593.62, despite written demand therefor.
The demand for marginal deposits was based on the customs of the trade, as governed by the provisions of the standard
N.I.O.P. Contract arid the FOSFA Contract, to wit:
N.I.O.P. Contract, Rule 54 - If the financial condition of either party to a contract subject to these rules becomes
so impaired as to create a reasonable doubt as to the ability of such party to perform its obligations under the
contract, the other party may from time to time demand marginal deposits to be made within forty-eight (48)
hours after receipt of such demand, such deposits not to exceed the difference between the contract price and the
market price of the goods covered by the contract on the day upon which such demand is made, such deposit to
bear interest at the prime rate plus one percent (1%) per annum. Failure to make such deposit within the time
specified shall constitute a breach of contract by the party upon whom demand for deposit is made, and all losses
and expenses resulting from such breach shall be for the account of the party upon whom such demand is made.
(Underscoring ours.)1
FOSFA Contract, Rule 54 - BANKRUPTCY/INSOLVENCY: If before the fulfillment of this contract either party
shall suspend payment, commit an act of bankruptcy, notify any of his creditors that he is unable to meet his debts
or that he has suspended payment or that he is about to suspend payment of his debts, convene, call or hold a
meeting either of his creditors or to pass a resolution to go into liquidation (except for a voluntary winding up of a
solvent company for the purpose of reconstruction or amalgamation) or shall apply for an official moratorium,
have a petition presented for winding up or shal1i have a Receiver appointed, the contract shall forthwith be
closed either at the market price then current for similar goods or, at the option of the other party at a price to be
ascertained by repurchase or resale and the difference between the contract price and such closing-out price shall
be the amount which the other party shall be entitled to claim  shall be liable to account for under this
contract (sic). Should either party be dissatisfied with the price, the matter shall be referred to arbitration. Where
no such resale or repurchase takes place, the closing-out price shall be fixed by a Price Settlement Committee
appointed by the Federation. (Underscoring ours.) 2
Hence, Safic prayed that IVO be ordered to pay the sums of US$293,500.00 and US$391,593.62, plus attorney's fees and
litigation expenses. The complaint also included an application for a writ of preliminary attachment against the properties
of IVO.
Upon Safic's posting of the requisite bond, the trial court issued a writ of preliminary attachment. Subsequently, the trial
court ordered that the assets of IVO be placed under receivership, in order to ensure the preservation of the same.
In its answer, IVO raised the following special affirmative defenses: Safic had no legal capacity to sue because it was
doing business in the Philippines without the requisite license or authority; the subject contracts were speculative
contracts entered into by IVO's then President, Dominador Monteverde, in contravention of the prohibition by the Board
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of Directors against engaging in speculative paper trading, and despite IVO's lack of the necessary license from Central
Bank to engage in such kind of trading activity; and that under Article 2018 of the Civil Code, if a contract which purports
to be for the delivery of goods, securities or shares of stock is entered into with the intention that the difference between
the price stipulated and the exchange or market price at the time of the pretended delivery shall be paid by the loser to the
winner, the transaction is null and void.1âwphi1.nêt
IVO set up counterclaims anchored on harassment, paralyzation of business, financial losses, rumor-mongering and
oppressive action. Later, IVO filed a supplemental counterclaim alleging that it was unable to operate its business
normally because of the arrest of most of its physical assets; that its suppliers were driven away; and that its major
creditors have inundated it with claims for immediate payment of its debts, and China Banking Corporation had
foreclosed its chattel and real estate mortgages.
During the trial, the lower court found that in 1985, prior to the date of the contracts sued upon, the parties had entered
into and consummated a number of contracts for the sale of crude coconut oil. In those transactions, Safic placed several
orders and IVO faithfully filled up those orders by shipping out the required crude coconut oil to Safic, totaling 3,500
metric tons. Anent the 1986 contracts being sued upon, the trial court refused to declare the same as gambling
transactions, as defined in Article 2018 of the Civil Code, although they involved some degree of speculation. After all,
the court noted, every business enterprise carries with it a certain measure of speculation or risk. However, the contracts
performed in 1985, on one hand, and the 1986 contracts subject of this case, on the other hand, differed in that under the
1985 contracts, deliveries were to be made within two months. This, as alleged by Safic, was the time needed for milling
and building up oil inventory. Meanwhile, the 1986 contracts stipulated that the coconut oil were to be delivered within
period ranging from eight months to eleven to twelve months after the placing of orders. The coconuts that were supposed
to be milled were in all likelihood not yet growing when Dominador Monteverde sold the crude coconut oil. As such, the
1986 contracts constituted trading in futures or in mere expectations.
The lower court further held that the subject contracts were ultra vires and were entered into by Dominador Monteverde
without authority from the Board of Directors. It distinguished between the 1985 contracts, where Safic likewise dealt
with Dominador Monteverde, who was presumably authorized to bind IVO, and the 1986 contracts, which were highly
speculative in character. Moreover, the 1985 contracts were covered by letters of credit, while the 1986 contracts were
payable by telegraphic transfers, which were nothing more than mere promises to pay once the shipments became ready.
For these reasons, the lower court held that Safic cannot invoke the 1985 contracts as an implied corporate sanction for the
high-risk 1986 contracts, which were evidently entered into by Monteverde for his personal benefit.
The trial court ruled that Safic failed to substantiate its claim for actual damages. Likewise, it rejected IVO's counterclaim
and supplemental counterclaim.
Thus, on August 28, 1992, the trial court rendered judgment as follows:
WHEREFORE, judgment is hereby rendered dismissing the complaint of plaintiff Safic Alcan & Cie, without
prejudice to any action it might subsequently institute against Dominador Monteverde, the former President of
Imperial Vegetable Oil Co., Inc., arising from the subject matter of this case. The counterclaim and supplemental
counterclaim of the latter defendant are likewise hereby dismissed for lack of merit. No pronouncement as to
costs.
The writ of preliminary attachment issued in this case as well as the order placing Imperial Vegetable Oil Co.,
Inc. under receivership are hereby dissolved and set aside. 3
Both IVO and Safic appealed to the Court of Appeals, jointly docketed as CA-G.R. CV No.40820.
IVO raised only one assignment of error, viz:
THE TRIAL COURT ERRED IN HOLDING 'I'HAT THE ISSUANCE OF THE WRIT OF PRELIMINARY
ATTACHMENT WAS NOT THE MAIN CAUSE OF THE DAMAGES SUFFERED BY DEFENDANT AND
IN NOT AWARDING DEFENDANT-APPELLANT SUCH DAMAGES.
For its part, Safic argued that:
THE TRIAL COURT ERRED IN HOLDING THAT IVO'S PRESIDENT, DOMINADOR MONTEVERDE,
ENTERED INTO CONTRACTS WHICH WERE ULTRA VIRES AND WHICH DID NOT BIND OR MAKE
IVO LIABLE.
THE TRIAL COURT ERRED IN HOLDING THA SAFIC WAS UNABLE TO PROVE THE DAMAGES
SUFFERED BY IT AND IN NOT AWARDING SUCH DAMAGES.
THE TRIAL COURT ERRED IN NOT HOLDING THAT IVO IS LIABLE UNDER THE WASH OUT
CONTRACTS.
On September 12, 1996, the Court of Appeals rendered the assailed Decision dismissing the, appeals and affirming the
judgment appealed from in toto.4
Hence, Safic filed the instant petition for review with this Court, substantially reiterating the errors it raised before the
Court of Appeals and maintaining that the Court of Appeals grievously erred when:
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a. it declared that the 1986 forward contracts (i.e., Contracts Nos. A601446 and A60155 (sic) involving 2,000
long tons of crude coconut oil, and Contracts Nos. A60l297A/B, A601385, A60l39l, A60l4l5, A601681. A601683
and A60l770A/B/C involving 4,500 tons of crude coconut oil) were unauthorized acts of Dominador Monteverde
which do not bind IVO in whose name they were entered into. In this connection, the Court of Appeals erred
when (i) it ignored its own finding that (a) Dominador Monteverde, as IVO's President, had "an implied authority
to make any contract necessary or appropriate to the contract of the ordinary business of the company"; and (b)
Dominador Monteverde had validly entered into similar forward contracts for and on behalf of IVO in 1985; (ii) it
distinguished between the 1986 forward contracts despite the fact that the Manila RTC has struck down IVO's
objection to the 1986 forward contracts (i.e. that they were highly speculative paper trading which the IVO Board
of Directors had prohibited Dominador Monteverde from engaging in because it is a form of gambling where the
parties do not intend actual delivery of the coconut oil sold) and instead found that the 1986 forward contracts
were not gambling; (iii) it relied on the testimony of Mr. Rodrigo Monteverde in concluding that the IVO Board
of Directors did not authorize its President, Dominador Monteverde, to enter into the 1986 forward contracts; and
(iv) it did not find IVO, in any case, estopped from denying responsibility for, and liability under, the 1986
forward contracts because IVO had recognized itself bound to similar forward contracts which Dominador
Monteverde entered into (for and on behalf of IVO) with Safic in 1985 notwithstanding that Dominador
Monteverde was (like in the 1986 forward contracts) not expressly authorized by the IVO Board of Directors to
enter into such forward contracts;
b. it declared that Safic was not able, to prove damages suffered by it, despite the fact that Safic had presented not
only testimonial, but also documentary, evidence which proved the higher amount it had to pay for crude coconut
oil (vis-à-vis the contract price it was to pay to IVO) when IVO refused to deliver the crude coconut oil bought by
Safic under the 1986 forward contracts; and
c. it failed to resolve the issue of whether or not IVO is liable to Safic under the wash out contracts involving
Contracts Nos. A601446 and A60155 (sic), despite the fact that Safic had properly raised the issue on its appeal,
and the evidence and the law support Safic's position that IVO is so liable to Safic.
In fine, Safic insists that the appellate court grievously erred when it did not declare that IVO's President, Dominador
Monteverde, validly entered into the 1986 contracts for and on behalf of IVO.
We disagree.
Article III, Section 3 [g] of the By-Laws5 of IVO provides, among others, that –
Section 3. Powers and Duties of the President. - The President shall be elected by the Board of Directors from
their own number .
He shall have the following duties:
xxxxxxxxx
[g] Have direct and active management of the business and operation of the corporation, conducting the same
according to, the orders, resolutions and instruction of the Board of Directors and according to his own discretion
whenever and wherever the same is not expressly limited by such orders, resolutions and instructions.
It can be clearly seen from the foregoing provision of IVO's By-laws that Monteverde had no blanket authority to bind
IVO to any contract. He must act according to the instructions of the Board of Directors. Even in instances when he was
authorized to act according to his discretion, that discretion must not conflict with prior Board orders, resolutions and
instructions. The evidence shows that the IVO Board knew nothing of the 1986 contracts 6 and that it did not authorize
Monteverde to enter into speculative contracts. 7 In fact, Monteverde had earlier proposed that the company engage in such
transactions but the IVO Board rejected his proposal. 8 Since the 1986 contracts marked a sharp departure from past IVO
transactions, Safic should have obtained from Monteverde the prior authorization of the IVO Board. Safic can not rely on
the doctrine of implied agency because before the controversial 1986 contracts, IVO did not enter into identical contracts
with Safic. The basis for agency is representation and a person dealing with an agent is put upon inquiry and must
discover upon his peril the authority of the agent. 9 In the case of Bacaltos Coal Mines v. Court of Appeals,10 we elucidated
the rule on dealing with an agent thus:
Every person dealing with an agent is put upon inquiry and must discover upon his peril the authority of the agent.
If he does not make such inquiry, he is chargeable with knowledge of the agent's authority, and his ignorance of
that authority will not be any excuse. Persons dealing with an assumed agent, whether the assumed agency be a
general or special one, are bound at their peril, if they would hold the principal, to ascertain not only the fact of
the agency but also the nature and extent of the authority, and in case either is controverted, the burden of proof is
upon them to establish it.11
The most prudent thing petitioner should have done was to ascertain the extent of the authority of Dominador
Monteverde. Being remiss in this regard, petitioner can not seek relief on the basis of a supposed agency.

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Under Article 189812 of the Civil Code, the acts of an agent beyond the scope of his authority do not bind the principal
unless the latter ratifies the same expressly or impliedly. It also bears emphasizing that when the third person knows that
the agent was acting beyond his power or authority, the principal can not be held liable for the acts of the agent. If the said
third person is aware of such limits of authority, he is to blame, and is not entitled to recover damages from the agent,
unless the latter undertook to secure the principal's ratification. 13
There was no such ratification in this case. When Monteverde entered into the speculative contracts with Safic, he did not
secure the Board's approval.14 He also did not submit the contracts to the Board after their consummation so there was, in
fact, no occasion at all for ratification. The contracts were not reported in IVO's export sales book and turn-out
book.15 Neither were they reflected in other books and records of the corporation. 16 It must be pointed out that the Board of
Directors, not Monteverde, exercises corporate power. 17 Clearly, Monteverde's speculative contracts with Safic never
bound IVO and Safic can not therefore enforce those contracts against IVO.
To bolster its cause, Safic raises the novel point that the IVO Board of Directors did not set limitations on the extent of
Monteverde's authority to sell coconut oil. It must be borne in mind in this regard that a question that was never raised in
the courts below can not be allowed to be raised for the first time on appeal without offending basic rules of fair play,
justice and due process.18 Such an issue was not brought to the fore either in the trial court or the appellate court, and
would have been disregarded by the latter tribunal for the reasons previously stated. With more reason, the same does not
deserve consideration by this Court.
Be that as it may, Safic's belated contention that the IVO Board of Directors did not set limitations on Monteverde's
authority to sell coconut oil is belied by what appears on the record. Rodrigo Monteverde, who succeeded Dominador
Monteverde as IVO President, testified that the IVO Board had set down the policy of engaging in purely physical trading
thus:
Q. Now you said that IVO is engaged in trading. With whom does, it usually trade its oil?
A. I am not too familiar with trading because as of March 1987, I was not yet an officer of the corporation,
although I was at the time already a stockholder, I think IVO is engaged in trading oil.
Q. As far as you know, what kind of trading was IVO engaged with?
A. It was purely on physical trading.
Q. How did you know this?
A. As a stockholder, rather as member of [the] Board of Directors, I frequently visited the plant and from my
observation, as I have to supervise and monitor purchases of copras and also the sale of the same, I observed that
the policy of the corporation is for the company to engaged (sic) or to purely engaged (sic) in physical trading.
Q. What do you mean by physical trading?
A. Physical Trading means - we buy and sell copras that are only available to us. We only have to sell the
available stocks in our inventory.
Q. And what is the other form of trading?
Atty. Fernando
No basis, your Honor.
Atty. Abad
Well, the witness said they are engaged in physical trading and what I am saying [is] if there are any other
kind or form of trading.
Court
Witness may answer if he knows.
Witness
A. Trading future[s] contracts wherein the trader commits a price and to deliver coconut oil in the future
in which he is yet to acquire the stocks in the future.
Atty. Abad
Q. Who established the so-called physical trading in IVO?
A. The Board of Directors, sir.
Atty. Abad.
Q. How did you know that?
A. There was a meeting held in the office at the factory and it was brought out and suggested by our former
president, Dominador Monteverde, that the company should engaged (sic) in future[s] contract[s] but it was
rejected by the Board of Directors. It was only Ador Monteverde who then wanted to engaged (sic) in this
future[s] contract[s].
Q. Do you know where this meeting took place?
A. As far as I know it was sometime in 1985.

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Q. Do you know why the Board of Directors rejected the proposal of Dominador Monteverde that the company
should engaged (sic) in future[s] contracts?
Atty. Fernando
Objection, your Honor, no basis.
Court
Why don't you lay the basis?
Atty. Abad
Q. Were you a member of the board at the time?
A. In 1975, I am already a stockholder and a member.
Q. Then would [you] now answer my question?
Atty. Fernando
No basis, your Honor. What we are talking is about 1985.
Atty. Abad
Q. When you mentioned about the meeting in 1985 wherein the Board of Directors rejected the future[s]
contract[s], were you already a member of the Board of Directors at that time?
A. Yes, sir.
Q. Do you know the reason why the said proposal of Mr. Dominador Monteverde to engage in future[s]
contract[s] was rejected by the Board of Directors?
A. Because this future[s] contract is too risky and it partakes of gambling.
Q. Do you keep records of the Board meetings of the company?
A. Yes, sir.
Q. Do you have a copy of the minutes of your meeting in 1985?
A. Incidentally our Secretary of the Board of Directors, Mr. Elfren Sarte, died in 1987 or 1988, and despite [the]
request of our office for us to be furnished a copy he was not able to furnish us a copy. 19
xxxxxxxxx
Atty. Abad
Q. You said the Board of Directors were against the company engaging in future[s] contracts. As far as you know,
has this policy of the Board of Directors been observed or followed?
Witness
A. Yes, sir.
Q. How far has this Dominador Monteverde been using the name of I.V.0. in selling future contracts without the
proper authority and consent of the company's Board of Directors?
A. Dominador Monteverde never records those transactions he entered into in connection with these future[s]
contracts in the company's books of accounts.
Atty. Abad
Q. What do you mean by that the future[s] contracts were not entered into the books of accounts of the company?
Witness
A. Those were not recorded at all in the books of accounts of the company, sir. 20
xxxxxxxxx
Q. What did you do when you discovered these transactions?
A. There was again a meeting by the Board of Directors of the corporation and that we agreed to remove the
president and then I was made to replace him as president.
Q. What else?
A. And a resolution was passed disowning the illegal activities of the former president. 21
Petitioner next argues that there was actually no difference between the 1985 physical contracts and the 1986 futures
contracts.
The contention is unpersuasive for, as aptly pointed out by the trial court and sustained by the appellate court –
Rejecting IVO's position, SAFIC claims that there is no distinction between the 1985 and 1986 contracts, both of
which groups of contracts were signed or authorized by IVO's President, Dominador Monteverde. The 1986
contracts, SAFIC would bewail, were similarly with their 1985 predecessors, forward sales contracts in which
IVO had undertaken to deliver the crude coconut oil months after such contracts were entered into. The lead time
between the closing of the deal and the delivery of the oil supposedly allowed the seller to accumulate enough
copra to mill and to build up its inventory and so meet its delivery commitment to its foreign buyers. SAFIC
concludes that the 1986 contracts were equally binding, as the 1985 contracts were, on IVO.
Subjecting the evidence on both sides to close scrutiny, the Court has found some remarkable distinctions
between the 1985 and 1986 contracts. x x x
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1. The 1985 contracts were performed within an average of two months from the date of the sale. On the other
hand, the 1986 contracts were to be performed within an average of eight and a half months from the dates of the
sale. All the supposed performances fell in 1987. Indeed, the contract covered by Exhibit J was to be performed
11 to 12 months from the execution of the contract. These pattern (sic) belies plaintiffs contention that the lead
time merely allowed for milling and building up of oil inventory. It is evident that the 1986 contracts constituted
trading in futures or in mere expectations. In all likelihood, the coconuts that were supposed to be milled for oil
were not yet on their trees when Dominador Monteverde sold the crude oil to SAFIC.
2. The mode of payment agreed on by the parties in their 1985 contracts was uniformly thru the opening of a letter
of credit LC by SAFIC in favor of IVO. Since the buyer's letter of credit guarantees payment to the seller as soon
as the latter is able to present the shipping documents covering the cargo, its opening usually mark[s] the fact that
the transaction would be consummated. On the other hand, seven out of the ten 1986 contracts were to be paid by
telegraphic transfer upon presentation of the shipping documents. Unlike the letter of credit, a mere promise to
pay by telegraphic transfer gives no assurance of [the] buyer's compliance with its contracts. This fact lends an
uncertain element in the 1986 contracts.1âwphi1.nêt
3. Apart from the above, it is not disputed that with respect to the 1985 contracts, IVO faithfully complied with
Central Bank Circular No. 151 dated April 1, 1963, requiring a coconut oil exporter to submit a Report of Foreign
Sales within twenty-four (24) hours "after the closing of the relative sales contract" with a foreign buyer of
coconut oil. But with respect to the disputed 1986 contracts, the parties stipulated during the hearing that none of
these contracts were ever reported to the Central Bank, in violation of its above requirement. (See Stipulation of
Facts dated June 13, 1990). The 1986 sales were, therefore suspect.
4. It is not disputed that, unlike the 1985 contacts, the 1986 contracts were never recorded either in the 1986
accounting books of IVO or in its annual financial statement for 1986, a document that was prepared prior to the
controversy. (Exhibits 6 to 6-0 and 7 to 7-1). Emelita Ortega, formerly an assistant of Dominador Monteverde,
testified that they were strange goings-on about the 1986 contract. They were neither recorded in the books nor
reported to the Central Bank. What is more, in those unreported cases where profits were made, such profits were
ordered remitted to unknown accounts in California, U.S.A., by Dominador Monteverde.
xxxxxxxxx
Evidently, Dominador Monteverde made business or himself, using the name of IVO but concealing from it his
speculative transactions.
Petitioner further contends that both the trial and appellate courts erred in concluding that Safic was not able to prove its
claim for damages. Petitioner first points out that its wash out agreements with Monteverde where IVO allegedly agreed
to pay US$293,500.00 for some of the failed contracts was proof enough and, second, that it presented purchases of
coconut oil it made from others during the period of IVO's default.
We remain unconvinced. The so-called "wash out" agreements are clearly ultra vires and not binding on IVO.
Furthermore, such agreements did not prove Safic's actual losses in the transactions in question. The fact is that Safic did
not pay for the coconut oil that it supposedly ordered from IVO through Monteverede. Safic only claims that, since it was
ready to pay when IVO was not ready to deliver, Safic suffered damages to the extent that they had to buy the same
commodity from others at higher prices.
The foregoing claim of petitioner is not, however, substantiated by the evidence and only raises several questions, to wit:
1.] Did Safic commit to deliver the quantity of oil covered by the 1986 contracts to its own buyers? Who were these
buyers? What were the terms of those contracts with respect to quantity, price and date of delivery? 2.] Did Safic pay
damages to its buyers? Where were the receipts? Did Safic have to procure the equivalent oil from other sources? If so,
who were these sources? Where were their contracts and what were the terms of these contracts as to quantity, price and
date of delivery?
The records disclose that during the course of the proceedings in the trial court, IVO filed an amended motion 22 for
production and inspection of the following documents: a.] contracts of resale of coconut oil that Safic bought from IVO;
b.] the records of the pooling and sales contracts covering the oil from such pooling, if the coconut oil has been pooled
and sold as general oil; c.] the contracts of the purchase of oil that, according to Safic, it had to resort to in order to fill up
alleged undelivered commitments of IVO; d.] all other contracts, confirmations, invoices, wash out agreements and other
documents of sale related to (a), (b) and (c). This amended motion was opposed by Safic. 23The trial court, however, in its
September 16, 1988 Order ,24 ruled that:
From the analysis of the parties' respective positions, conclusion can easily be drawn therefrom that there is
materiality in the defendant's move: firstly, plaintiff seeks to recover damages from the defendant and these are
intimately related to plaintiffs alleged losses which it attributes to the default of the defendant in its contractual
commitments; secondly, the documents are specified in the amended motion. As such, plaintiff would entertain no
confusion as to what, which documents to locate and produce considering plaintiff to be (without doubt) a
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reputable going concern in the management of the affairs which is serviced by competent, industrious,
hardworking and diligent personnel; thirdly, the desired production and inspection of the documents was
precipitated by the testimony of plaintiffs witness (Donald O'Meara) who admitted, in open court, that they are
available. If the said witness represented that the documents, as generally described, are available, reason there
would be none for the same witness to say later that they could not be produced, even after they have been clearly
described.
Besides, if the Court may additionally dwell on the issue of damages, the production and inspection of the desired
documents would be of tremendous help in the ultimate resolution thereof. Plaintiff claims for the award of
liquidated or actual damages to the tune of US$391,593.62 which, certainly, is a huge amount in terms of pesos,
and which defendant disputes. As the defendant cannot be precluded in taking exceptions to the correctness and
validity of such claim which plaintiffs witness (Donald O'Meara) testified to, and as, by this nature of the
plaintiffs claim for damages, proof thereof is a must which can be better served, if not amply ascertained by
examining the records of the related sales admitted to be in plaintiffs possession, the amended motion for
production and inspection of the defendant is in order.
The interest of justice will be served best, if there would be a full disclosure by the parties on both sides of all
documents related to the transactions in litigation.
Notwithstanding the foregoing ruling of the trial court, Safic did not produce the required documents, prompting the
court a quo to assume that if produced, the documents would have been adverse to Safic's cause. In its efforts to bolster its
claim for damages it purportedly sustained, Safic suggests a substitute mode of computing its damages by getting the
average price it paid for certain quantities of coconut oil that it allegedly bought in 1987 and deducting this from the
average price of the 1986 contracts. But this mode of computation if flawed .because: 1.] it is conjectural since it rests on
average prices not on actual prices multiplied by the actual volume of coconut oil per contract; and 2.] it is based on the
unproven assumption that the 1987 contracts of purchase provided the coconut oil needed to make up for the failed 1986
contracts. There is also no evidence that Safic had contracted to supply third parties with coconut oil from the 1986
contracts and that Safic had to buy such oil from others to meet the requirement.
Along the same vein, it is worthy to note that the quantities of oil covered by its 1987 contracts with third parties do not
match the quantities of oil provided under the 1986 contracts. Had Safic produced the documents that the trial court
required, a substantially correct determination of its actual damages would have been possible. This, unfortunately, was
not the case. Suffice it to state in this regard that "[T]he power of the courts to grant damages and attorney's fees demands
factual, legal and equitable justification; its basis cannot be left to speculation and conjecture." 25
WHEREFORE, in view of all the foregoing, the petition is DENIED for lack of merit.
SO ORDERED.

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Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION

G.R. No. 125138 March 2, 1999

NICHOLAS Y. CERVANTES, petitioner, 
vs.
COURT OF APPEALS AND THE PHILIPPINE AIR LINES, INC., respondent.

PURISMA, J.:

This Petition for Review on certiorari assails the 25 July 1995 decision of the Court of Appeals 1 in CA GR CV No.
41407, entitled "Nicholas Y. Cervantes vs. Philippine Air Lines Inc.", affirming in toto the judgment of the trial court
dismissing petitioner's complaint for damages.
On March 27, 1989, the private respondent, Philippines Air Lines, Inc. (PAL), issued to the herein petitioner, Nicholas
Cervantes (Cervantes), a round trip plane ticket for Manila-Honolulu-Los Angeles-Honolulu-Manila, which ticket
expressly provided an expiry of date of one year from issuance, i.e., until March 27, 1990. The issuance of the said plane
ticket was in compliance with a Compromise Agreement entered into between the contending parties in two previous
suits, docketed as Civil Case Nos. 3392 and 3451 before the Regional Trial Court in Surigao City. 2
On March 23, 1990, four days before the expiry date of subject ticket, the petitioner used it. Upon his arrival in Los
Angeles on the same day, he immediately booked his Los Angeles-Manila return ticket with the PAL office, and it was
confirmed for the April 2, 1990 flight.
Upon learning that the same PAL plane would make a stop-over in San Francisco, and considering that he would be there
on April 2, 1990, petitioner made arrangements with PAL for him to board the flight In San Francisco instead of boarding
in Las Angeles.
On April 2, 1990, when the petitioner checked in at the PAL counter in San Francisco, he was not allowed to board. The
PAL personnel concerned marked the following notation on his ticket: "TICKET NOT ACCEPTED DUE EXPIRATION
OF VALIDITY."
Aggrieved, petitioner Cervantes filed a Complaint for Damages, for breach of contract of carriage docketed as Civil Case
No. 3807 before Branch 32 of the Regional Trial Court of Surigao del Norte in Surigao City. But the said complaint was
dismissed for lack of merit. 3
On September 20, 1993, petitioner interposed an appeal to the Court of Appeals, which came out with a Decision, on July
25, 1995, upholding the dismissal of the case.
On May 22, 1996, petitioner came to this Court via the Petition for Review under consideration.
The issues raised for resolution are: (1) Whether or not the act of the PAL agents in confirming subject ticket extended the
period of validity of petitioner's ticket; (2) Whether or not the defense of lack of authority was correctly ruled upon; and
(3) Whether or not the denial of the award for damages was proper.
To rule on the first issue, there is a need to quote the findings below. As a rule, conclusions and findings of fact arrived at
by the trial court are entitled to great weight on appeal and should not be disturbed unless for strong and cogent reasons. 4
The facts of the case as found by the lower court 5 are, as follows:
The plane ticket itself (Exhibit A for plaintiff; Exhibit 1 for defendant) provides that it is not valid after
March 27, 1990. (Exhibit 1-F). It is also stipulated in paragraph 8 of the Conditions of Contract (Exhibit
1, page 2) as follows:
8. This ticket is good for carriage for one year from date of issue, except as otherwise
provided in this ticket, in carrier's tariffs, conditions of carriage, or related regulations.
The fare for carriage hereunder is subject to change prior to commencement of carriage.
Carrier may refuse transportation if the applicable fare has not been paid. 6
The question on the validity of subject ticket can be resolved in light of the ruling in the case of Lufthansa vs. Court of
Appeals. 7 In the said case, the Tolentinos were issued first class tickets on April 3, 1982, which will be valid until April
10, 1983. On June 10, 1982, they changed their accommodations to economy class but the replacement tickets still
contained the same restriction. On May 7, 1983, Tolentino requested that subject tickets be extended, which request was
refused by the petitioner on the ground that the said tickets had already expired. The non-extension of their tickets
prompted the Tolentinos to bring a complaint for breach of contract of carriage against the petitioner. In ruling against the
award of damages, the Court held that the "ticket constitute the contract between the parties. It is axiomatic that when the

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terms are clear and leave no doubt as to the intention of the contracting parties, contracts are to be interpreted according to
their literal meaning."
In his effort to evade this inevitable conclusion, petitioner theorized that the confirmation by the PAL's agents in Los
Angeles and San Francisco changed the compromise agreement between the parties.
As aptly by the appellate court:
. . . on March 23, 1990, he was aware of the risk that his ticket could expire, as it did,
before he returned to the Philippines.' (pp. 320-321, Original Records) 8
The question is: "Did these two (2) employees, in effect, extend the validity or lifetime of
the ticket in question? The answer is in the negative. Both had no authority to do so.
Appellant knew this from the very start when he called up the Legal Department of
appellee in the Philippines before he left for the United States of America. He had first
hand knowledge that the ticket in question would expire on March 27, 1990 and that to
secure an extension, he would have to file a written request for extension at the PAL's
office in the Philippines (TSN, Testimony of Nicholas Cervantes, August 2, 1991, pp. 20-
23). Despite this knowledge, appellant persisted to use the ticket in question." 9
From the aforestated facts, it can be gleaned that the petitioner was fully aware that there was a need to send a letter to the
legal counsel of PAL for the extension of the period of validity of his ticket.
Since the PAL agents are not privy to the said Agreement and petitioner knew that a written request to the legal counsel of
PAL was necessary, he cannot use what the PAL agents did to his advantage. The said agents, according to the Court of
Appeals, 10 acted without authority when they confirmed the flights of the petitioner.
Under Article 1989 11 of the New Civil Code, the acts an agent beyond the scope of his authority do not bind the principal,
unless the latter ratifies the same expressly or impliedly. Furthermore, when the third person (herein petitioner) knows that
the agent was acting beyond his power or authority, the principal cannot be held liable for the acts of the agent. If the said
third person is aware of such limits of authority, he is to blame, and is not entitled to recover damages from the agent,
unless the latter undertook to secure the principal's ratification. 12
Anent the second issue, petitioner's stance that the defense of lack of authority on the part of the PAL employees was
deemed waived under Rule 9, Section 2 of the Revised Rules of Court, is unsustainable. Thereunder, failure of a party to
put up defenses in their answer or in a motion to dismiss is a waiver thereof.
Petitioner stresses that the alleged lack of authority of the PAL employees was neither raised in the answer nor in the
motion to dismiss. But records show that the question of whether there was authority on the part of the PAL employees
was acted upon by the trial court when Nicholas Cervantes was presented as a witness and the depositions of the PAL
employees, Georgina M. Reyes and Ruth Villanueva, were presented.
The admission by Cervantes that he was told by PAL's legal counsel that he had to submit a letter requesting for an
extension of the validity of subject tickets was tantamount to knowledge on his part that the PAL employees had no
authority to extend the validity of subject tickets and only PAL's legal counsel was authorized to do so.
However, notwithstanding PAL's failure to raise the defense of lack of authority of the said PAL agents in its answer or in
a motion to dismiss, the omission was cured since the said issue was litigated upon, as shown by the testimony of the
petitioner in the course of trial. Rule 10, Section 5 of the 1997 Rules of Civil Procedure provides:
Sec. 5. Amendment to conform, or authorize presentation of evidence. — When issues not raised by the
pleadings are tried with express or implied consent of the parties, as if they had been raised in the
pleadings. Such amendment of the pleadings as may be necessary to cause them to conform to the
evidence and to raise these issues may be made upon motion of any party at any time, even after
judgment; but failure to amend does not affect the result of the trial of these issues. . . .
Thus, "when evidence is presented by one party, with the express or implied consent of the adverse party, as to issues not
alleged in the pleadings, judgment may be rendered validly as regards the said issue, which shall be treated as if they have
been raised in the pleadings. There is implied consent to the evidence thus presented when the adverse party fails to object
thereto." 13
Re: the third issue, an award of damages is improper because petitioner failed to show that PAL acted in bad faith in
refusing to allow him to board its plane in San Francisco.
In awarding moral damages for breach of contract of carriage, the breach must be wanton and deliberately injurious or the
one responsible acted fraudulently or with malice or bad faith. 14 Petitioner knew there was a strong possibility that he
could not use the subject ticket, so much so that he bought a back-up ticket to ensure his departure. Should there be a
finding of bad faith, we are of the opinion that it should be on the petitioner. What the employees of PAL did was one of
simple negligence. No injury resulted on the part of petitioner because he had a back-up ticket should PAL refuse to
accommodate him with the use of subject ticket.

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Neither can the claim for exemplary damages be upheld. Such kind of damages is imposed by way of example or
correction for the public good, and the existence of bad faith is established. The wrongful act must be accompanied by bad
faith, and an award of damages would be allowed only if the guilty party acted in a wanton, fraudulent, reckless or
malevolent manner. 15 Here, there is no showing that PAL acted in such a manner. An award for attorney's fees is also
improper.
WHEREFORE, the Petition is DENIED and the decision of the Court of Appeals dated July 25, 1995 AFFIRMED in toto.
No pronouncement as to costs.
SO ORDERED.

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Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION

G.R. No. 77356             July 15, 1991

TRAVEL WIDE ASSOCIATED SALES (PHILS.), INC., and TRANS WORLD AIRLINES, INC., petitioners, 
vs.
COURT OF APPEALS, DECISION SYSTEMS CORPORATION and MANUEL A. ALCUAZ, JR., respondents.
Guerrero and Torres for petitioner Trans World Airlines, Inc.
Santos, Calcetas-Santos & Associates for Travel World Associated Sales (Phils.), Inc.
Carpio, Villaraza & Cruz for respondent Manuel Alcuaz.
Marius V. Sanqui for private respondent DSC.

CRUZ, J.:

What started out as an ordinary complaint for damages has developed into a controversy on procedure over which the
Regional Trial Court and the Court of Appeals have not agreed. The petitioners are now before us and ask that the issue be
resolved.
The material facts are briefly related.
Sometime in March 1975, Decision Systems Corporation and its President, Manuel A. Alcuaz, Jr., filed a complaint in the
Regional Trial Court of Manila alleging that defendants Travel Wide Associated Sales (Phils.), Inc. and Trans World
Airlines, Inc. had failed to comply with their obligations under Travel Pass '73 U.S.A., a package deal consisting of a
TWA ticket to Los Angeles, New York and Boston, in the United States, and hotel accommodations, for which the
plaintiffs had made the corresponding payment in Manila.
Acting on a motion to dismiss filed by TWA on May 16, 1975, on the ground that the complaint did not state a cause of
action, the trial court ordered the plaintiffs to amend their complaint and particularize their averments. The plaintiffs
complied on June 27, 1975. On July 7, 1975, and July 11, 1975, respectively, TWA and Travel Wide filed separate
motions to dismiss on the ground that the amended complaint still did not state a cause of action. Both motions were
denied on July 11, 1975, the trial court holding that the allegations were now "sufficiently particular."
On September 5, 1975, the defendants filed a joint answer in which they alleged the special defense that they were not the
real parties-in-interest because they had acted only as agents of a disclosed principal. They reiterated this argument at the
pre-trial held on October 27, 1975. Subsequently, they filed a Joint Motion for Preliminary Hearing of Special Defense,
which was opposed by the Plaintiffs on the ground that the special defense was barred, not having been raised in the two
motions to dismiss the amended complaint. The joint motion was nevertheless granted.
After the preliminary hearing, Judge Bernardo P. Fernandez issued his order dated September 13, 1976, dismissing the
complaint.1 His finding was that Travel Wide was only the general agent of TWA and that the latter was only an agent of
a disclosed principal, namely, Tour Services, Inc. As neither of the defendants was a real party-in-interest, there could be
no cause of action against them.
The motion for its reconsideration having been denied, the order was elevated to the then Intermediate Appellate Court,
which, on June 30, 1983, reversed the trial court. 2 The record does not show why the separate motions for reconsideration
filed by the appellees were resolved only on January 27, 1987. At any rate, the petitioners have seasonably come to this
Court to ask for the reversal instead of the respondent court and the reinstatement of the order of the trial court.
We find that the Court of Appeals did not err in setting aside the order of dismissal and remanding the case for further
proceedings. We disagree, however, with the reason for its decision.
The respondent court held that the appellees should have pleaded the special defense that they were not real parties-in-
interest in their motion to dismiss, conformably to the omnibus motion rule. Not having done so, they are deemed to have
waived that ground, which therefore could not be used as the basis of the motion to dismiss.
The omnibus motion rule embodied in Rule 15, Section 8, of the Rules of Court reads as follows:
Sec. 8. Omnibus motion. — A motion attacking a pleading or a proceeding shall include all objections then
available, and all objections not so included shall be deemed waived.
This is reiterated in Rule 9, Section 2, which also provides for the exceptions thus:
Sec. 2. Defenses and objections not pleaded deemed waived. — Defenses and objections not pleaded either in a
motion to dismiss or in an answer are deemed waived, except the failure to state a cause of action which may be
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alleged in a latter pleading, if one is permitted, or by motion for judgment on the pleadings, or at the trial on the
merits; but in the last instance, the motion shall be disposed of as provided in section 5, Rule 10 in the light of any
evidence which may have been received. Whenever it appears that the court has no jurisdiction over the subject
matter, it shall dismiss the action.
The petitioners invoke Rule 16, Section 1, of the Rules of Court and argue that "the defense of not being a real party-in-
interest" is not one of the grounds enumerated therein for a motion to dismiss. Consequently, they could not have pleaded
it in their motion to dismiss but only in their answer as a special defense.
There seems to be a misconception here of the term "real party-in-interest."
As defined, a real party-in-interest is the party who stands to be benefited or injured by the judgment in the suit, or the
party entitled to the avails of the suit.3 Rule 3, Section 2, of the Rules of Court provides explicitly that "every action must
be prosecuted and defended in the name of the real party-in- interest." The party-in-interest is one who prosecutes or
defends and is benefited or injured. The term applies not only to the plaintiff but to the defendant, and the suit may be
dismissed if neither of them is a real party-in-interest. 4 If the suit is not brought in the name of or against the real party-in-
interest, a motion to dismiss may be filed on the ground that the complaint states no cause of action. 5
Indeed, even if the special defense was not invoked in the motion to dismiss, it would still not be deemed waived because
it is one of the two exceptions mentioned in Rule 9, Section 2, to the omnibus motion rule. The first is lack of jurisdiction,
which can be invoked any time, even on appeal. The second is lack of a cause of action, which can be raised even during
the trial on the merits.
It is understandable if in granting the motion for a preliminary hearing on the special defense, the trial judge relied on
Rule 16, Section 5, of the Rules of Court, providing as follows:
Section 5. Pleading grounds as affirmative defenses. — Any of the grounds for dismissal provided for in this rule,
except improper venue, may be pleaded as an affirmative defense, and a preliminary hearing may be had thereon
as if a motion to dismiss had been filed.
However, the following doctrine laid down in The Heirs of Juliana Clavano v. Genato6 should have guided him to the
contrary, and correct, conclusion:
Besides, under this section a preliminary hearing may be had on the affirmative defenses as if a motion to dismiss
had been filed. During such preliminary hearing evidence may be admitted. Nevertheless, We believe that the
respondent Judge committed an error in conducting a preliminary hearing on the private respondent's affirmative
defenses. It is a well-settled rule that in a motion to dismiss based on the ground that the complaint fails to state a
cause of action, the question submitted to the court for determination is the sufficiency of the allegations in the
complaint itself. Whether those allegations are true or not is beside the point, for their truth is hypothetically
admitted by the motion. The issue rather is: admitting them to be true, may the court render a valid judgment in
accordance with the prayer of the complaint? Stated otherwise, the sufficiency of the cause of action must appear
on the face of the complaint in order to sustain a dismissal on this ground. No extraneous matter may be
considered nor facts not alleged, which would require evidence and therefore must be raised as defenses and await
the trial. In other words, to determine the sufficiency of the cause of action, only the facts alleged in the
complaint, and no others should be considered.
The respondent Judge departed from this rule in conducting a hearing and in receiving evidence in support of the
private respondent's affirmative defense, that is, lack of cause of action.
But despite all the foregoing observations, we feel that the trial court may also have erred in holding that the petitioners
were mere agents of a disclosed principal and so could not be held liable on the complaint.
In disclaiming liability, the petitioners point to the stipulation on Responsibility in the Travel Pass '73 Plan brochure that
"Tour Services, Inc. and/or their agents" are acting "as agents for the passengers." They stress further that the
Miscellaneous Charge Order issued to Alcuaz indicated that the amount of $218.00 was payable to Tour Services, Inc. and
not to either of them. This would mean that, if at all, they were acting as agents of Tour Services, Inc. and not as principal
obligors.
Without arriving at any factual conclusion, the Court believes it would be useful to make a careful appraisal of the
evidence, particularly the terms and conditions of the brochure distributed by the petitioners and the significance of the
Miscellaneous Charges Order which was issued by TWA. We note that even the trial court observed the active
participation of TWA in the promotion of the travel pass plan as an additional source of revenue for its airline business.
It is also worth noting that if the petitioners were indeed acting as agents of the passengers, as the brochure stipulates, they
could still be held liable under Article 1909 of the Civil Code, which provides:
The agent is responsible not only for fraud, but also for negligence, which shall be judged with more or less rigor
by the courts, according to whether the agency was or was not for a compensation.
The private respondent * is entitled to prove that the petitioners did not provide adequately for the pre-paid hotel
accommodations of Alcuaz, who had to incur additional expenses and was compelled to cut short his business trip because
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of his depleted dollar allocation. It was not established that the petitioners received any confirmation of the hotel
reservations they sent and yet they did not follow up their request nor did they inform Alcuaz that they had not received
confirmation. This procedure should have been followed by the petitioners as so provided in the Travel Pass '73 USA
We sustain the respondent court in ruling that the trial court should not have dismissed the complaint, albeit nor for the
reasons given in the challenged decision. Our finding is that, because the petitioners are real parties-in-interest as
defendants in the suit below, the motion to dismiss for lack of a cause of action should not have been granted.
WHEREFORE, the petition is DENIED, with costs against the petitioners. It is so ordered.

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Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 88866             February 18, 1991
METROPOLITAN BANK & TRUST COMPANY, petitioner, 
vs.
COURT OF APPEALS, GOLDEN SAVINGS & LOAN ASSOCIATION, INC., LUCIA CASTILLO, MAGNO
CASTILLO and GLORIA CASTILLO, respondents.
Angara, Abello, Concepcion, Regala & Cruz for petitioner.
Bengzon, Zarraga, Narciso, Cudala, Pecson & Bengson for Magno and Lucia Castillo.
Agapito S. Fajardo and Jaime M. Cabiles for respondent Golden Savings & Loan Association, Inc.

CRUZ, J.:

This case, for all its seeming complexity, turns on a simple question of negligence. The facts, pruned of all non-essentials,
are easily told.
The Metropolitan Bank and Trust Co. is a commercial bank with branches throughout the Philippines and even abroad.
Golden Savings and Loan Association was, at the time these events happened, operating in Calapan, Mindoro, with the
other private respondents as its principal officers.
In January 1979, a certain Eduardo Gomez opened an account with Golden Savings and deposited over a period of two
months 38 treasury warrants with a total value of P1,755,228.37. They were all drawn by the Philippine Fish Marketing
Authority and purportedly signed by its General Manager and countersigned by its Auditor. Six of these were directly
payable to Gomez while the others appeared to have been indorsed by their respective payees, followed by Gomez as
second indorser.1
On various dates between June 25 and July 16, 1979, all these warrants were subsequently indorsed by Gloria Castillo as
Cashier of Golden Savings and deposited to its Savings Account No. 2498 in the Metrobank branch in Calapan, Mindoro.
They were then sent for clearing by the branch office to the principal office of Metrobank, which forwarded them to the
Bureau of Treasury for special clearing. 2
More than two weeks after the deposits, Gloria Castillo went to the Calapan branch several times to ask whether the
warrants had been cleared. She was told to wait. Accordingly, Gomez was meanwhile not allowed to withdraw from his
account. Later, however, "exasperated" over Gloria's repeated inquiries and also as an accommodation for a "valued
client," the petitioner says it finally decided to allow Golden Savings to withdraw from the proceeds of the
warrants.3
The first withdrawal was made on July 9, 1979, in the amount of P508,000.00, the second on July 13, 1979, in the amount
of P310,000.00, and the third on July 16, 1979, in the amount of P150,000.00. The total withdrawal was P968.000.00. 4
In turn, Golden Savings subsequently allowed Gomez to make withdrawals from his own account, eventually collecting
the total amount of P1,167,500.00 from the proceeds of the apparently cleared warrants. The last withdrawal was made on
July 16, 1979.
On July 21, 1979, Metrobank informed Golden Savings that 32 of the warrants had been dishonored by the Bureau of
Treasury on July 19, 1979, and demanded the refund by Golden Savings of the amount it had previously withdrawn, to
make up the deficit in its account.
The demand was rejected. Metrobank then sued Golden Savings in the Regional Trial Court of Mindoro. 5 After trial,
judgment was rendered in favor of Golden Savings, which, however, filed a motion for reconsideration even as
Metrobank filed its notice of appeal. On November 4, 1986, the lower court modified its decision thus:
ACCORDINGLY, judgment is hereby rendered:
1. Dismissing the complaint with costs against the plaintiff;
2. Dissolving and lifting the writ of attachment of the properties of defendant Golden Savings and Loan
Association, Inc. and defendant Spouses Magno Castillo and Lucia Castillo;
3. Directing the plaintiff to reverse its action of debiting Savings Account No. 2498 of the sum of P1,754,089.00
and to reinstate and credit to such account such amount existing before the debit was made including the amount
of P812,033.37 in favor of defendant Golden Savings and Loan Association, Inc. and thereafter, to allow
defendant Golden Savings and Loan Association, Inc. to withdraw the amount outstanding thereon before the
debit;

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4. Ordering the plaintiff to pay the defendant Golden Savings and Loan Association, Inc. attorney's fees and
expenses of litigation in the amount of P200,000.00.
5. Ordering the plaintiff to pay the defendant Spouses Magno Castillo and Lucia Castillo attorney's fees and
expenses of litigation in the amount of P100,000.00.
SO ORDERED.
On appeal to the respondent court, 6 the decision was affirmed, prompting Metrobank to file this petition for review on the
following grounds:
1. Respondent Court of Appeals erred in disregarding and failing to apply the clear contractual terms and
conditions on the deposit slips allowing Metrobank to charge back any amount erroneously credited.
(a) Metrobank's right to charge back is not limited to instances where the checks or treasury warrants are
forged or unauthorized.
(b) Until such time as Metrobank is actually paid, its obligation is that of a mere collecting agent which
cannot be held liable for its failure to collect on the warrants.
2. Under the lower court's decision, affirmed by respondent Court of Appeals, Metrobank is made to pay for
warrants already dishonored, thereby perpetuating the fraud committed by Eduardo Gomez.
3. Respondent Court of Appeals erred in not finding that as between Metrobank and Golden Savings, the latter
should bear the loss.
4. Respondent Court of Appeals erred in holding that the treasury warrants involved in this case are not negotiable
instruments.
The petition has no merit.
From the above undisputed facts, it would appear to the Court that Metrobank was indeed negligent in giving Golden
Savings the impression that the treasury warrants had been cleared and that, consequently, it was safe to allow Gomez to
withdraw the proceeds thereof from his account with it. Without such assurance, Golden Savings would not have allowed
the withdrawals; with such assurance, there was no reason not to allow the withdrawal. Indeed, Golden Savings might
even have incurred liability for its refusal to return the money that to all appearances belonged to the depositor, who could
therefore withdraw it any time and for any reason he saw fit.
It was, in fact, to secure the clearance of the treasury warrants that Golden Savings deposited them to its account with
Metrobank. Golden Savings had no clearing facilities of its own. It relied on Metrobank to determine the validity of the
warrants through its own services. The proceeds of the warrants were withheld from Gomez until Metrobank allowed
Golden Savings itself to withdraw them from its own deposit. 7 It was only when Metrobank gave the go-signal that
Gomez was finally allowed by Golden Savings to withdraw them from his own account.
The argument of Metrobank that Golden Savings should have exercised more care in checking the personal circumstances
of Gomez before accepting his deposit does not hold water. It was Gomez who was entrusting the warrants, not Golden
Savings that was extending him a loan; and moreover, the treasury warrants were subject to clearing, pending which the
depositor could not withdraw its proceeds. There was no question of Gomez's identity or of the genuineness of his
signature as checked by Golden Savings. In fact, the treasury warrants were dishonored allegedly because of the forgery
of the signatures of the drawers, not of Gomez as payee or indorser. Under the circumstances, it is clear that Golden
Savings acted with due care and diligence and cannot be faulted for the withdrawals it allowed Gomez to make.
By contrast, Metrobank exhibited extraordinary carelessness. The amount involved was not trifling — more than one and
a half million pesos (and this was 1979). There was no reason why it should not have waited until the treasury warrants
had been cleared; it would not have lost a single centavo by waiting. Yet, despite the lack of such clearance — and
notwithstanding that it had not received a single centavo from the proceeds of the treasury warrants, as it now repeatedly
stresses — it allowed Golden Savings to withdraw — not once, not twice, but thrice — from the uncleared treasury
warrants in the total amount of P968,000.00
Its reason? It was "exasperated" over the persistent inquiries of Gloria Castillo about the clearance and it also wanted to
"accommodate" a valued client. It "presumed" that the warrants had been cleared simply because of "the lapse of one
week."8 For a bank with its long experience, this explanation is unbelievably naive.
And now, to gloss over its carelessness, Metrobank would invoke the conditions printed on the dorsal side of the deposit
slips through which the treasury warrants were deposited by Golden Savings with its Calapan branch. The conditions read
as follows:
Kindly note that in receiving items on deposit, the bank obligates itself only as the depositor's collecting agent,
assuming no responsibility beyond care in selecting correspondents, and until such time as actual payment shall
have come into possession of this bank, the right is reserved to charge back to the depositor's account any
amount previously credited, whether or not such item is returned. This also applies to checks drawn on local
banks and bankers and their branches as well as on this bank, which are unpaid due to insufficiency of funds,
forgery, unauthorized overdraft or any other reason. (Emphasis supplied.)
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According to Metrobank, the said conditions clearly show that it was acting only as a collecting agent for Golden Savings
and give it the right to "charge back to the depositor's account any amount previously credited, whether or not such item is
returned. This also applies to checks ". . . which are unpaid due to insufficiency of funds, forgery, unauthorized overdraft
of any other reason." It is claimed that the said conditions are in the nature of contractual stipulations and became binding
on Golden Savings when Gloria Castillo, as its Cashier, signed the deposit slips.
Doubt may be expressed about the binding force of the conditions, considering that they have apparently been imposed by
the bank unilaterally, without the consent of the depositor. Indeed, it could be argued that the depositor, in signing the
deposit slip, does so only to identify himself and not to agree to the conditions set forth in the given permit at the back of
the deposit slip. We do not have to rule on this matter at this time. At any rate, the Court feels that even if the deposit slip
were considered a contract, the petitioner could still not validly disclaim responsibility thereunder in the light of the
circumstances of this case.
In stressing that it was acting only as a collecting agent for Golden Savings, Metrobank seems to be suggesting that as a
mere agent it cannot be liable to the principal. This is not exactly true. On the contrary, Article 1909 of the Civil Code
clearly provides that —
Art. 1909. — The agent is responsible not only for fraud, but also for negligence, which shall be judged 'with
more or less rigor by the courts, according to whether the agency was or was not for a compensation.
The negligence of Metrobank has been sufficiently established. To repeat for emphasis, it was the clearance given by it
that assured Golden Savings it was already safe to allow Gomez to withdraw the proceeds of the treasury warrants he had
deposited Metrobank misled Golden Savings. There may have been no express clearance, as Metrobank insists (although
this is refuted by Golden Savings) but in any case that clearance could be implied from its allowing Golden Savings to
withdraw from its account not only once or even twice but three times. The total withdrawal was in excess of its original
balance before the treasury warrants were deposited, which only added to its belief that the treasury warrants had indeed
been cleared.
Metrobank's argument that it may recover the disputed amount if the warrants are not paid for any reason is not
acceptable. Any reason does not mean no reason at all. Otherwise, there would have been no need at all for Golden
Savings to deposit the treasury warrants with it for clearance. There would have been no need for it to wait until the
warrants had been cleared before paying the proceeds thereof to Gomez. Such a condition, if interpreted in the way the
petitioner suggests, is not binding for being arbitrary and unconscionable. And it becomes more so in the case at bar when
it is considered that the supposed dishonor of the warrants was not communicated to Golden Savings before it made its
own payment to Gomez.
The belated notification aggravated the petitioner's earlier negligence in giving express or at least implied clearance to the
treasury warrants and allowing payments therefrom to Golden Savings. But that is not all. On top of this, the supposed
reason for the dishonor, to wit, the forgery of the signatures of the general manager and the auditor of the drawer
corporation, has not been established. 9 This was the finding of the lower courts which we see no reason to disturb. And as
we said in MWSS v. Court of Appeals:10
Forgery cannot be presumed (Siasat, et al. v. IAC, et al., 139 SCRA 238). It must be established by clear, positive
and convincing evidence. This was not done in the present case.
A no less important consideration is the circumstance that the treasury warrants in question are not negotiable instruments.
Clearly stamped on their face is the word "non-negotiable." Moreover, and this is of equal significance, it is indicated that
they are payable from a particular fund, to wit, Fund 501.
The following sections of the Negotiable Instruments Law, especially the underscored parts, are pertinent:
Sec. 1. — Form of negotiable instruments. — An instrument to be negotiable must conform to the following
requirements:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with
reasonable certainty.
x x x           x x x          x x x
Sec. 3. When promise is unconditional. — An unqualified order or promise to pay is unconditional within the
meaning of this Act though coupled with —
(a) An indication of a particular fund out of which reimbursement is to be made or a particular account to be
debited with the amount; or
(b) A statement of the transaction which gives rise to the instrument judgment.
But an order or promise to pay out of a particular fund is not unconditional.
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The indication of Fund 501 as the source of the payment to be made on the treasury warrants makes the order or promise
to pay "not unconditional" and the warrants themselves non-negotiable. There should be no question that the exception on
Section 3 of the Negotiable Instruments Law is applicable in the case at bar. This conclusion conforms to Abubakar vs.
Auditor General11 where the Court held:
The petitioner argues that he is a holder in good faith and for value of a negotiable instrument and is entitled to
the rights and privileges of a holder in due course, free from defenses. But this treasury warrant is not within the
scope of the negotiable instrument law. For one thing, the document bearing on its face the words "payable from
the appropriation for food administration, is actually an Order for payment out of "a particular fund," and is not
unconditional and does not fulfill one of the essential requirements of a negotiable instrument (Sec. 3 last
sentence and section [1(b)] of the Negotiable Instruments Law).
Metrobank cannot contend that by indorsing the warrants in general, Golden Savings assumed that they were "genuine
and in all respects what they purport to be," in accordance with Section 66 of the Negotiable Instruments Law. The simple
reason is that this law is not applicable to the non-negotiable treasury warrants. The indorsement was made by Gloria
Castillo not for the purpose of guaranteeing the genuineness of the warrants but merely to deposit them with Metrobank
for clearing. It was in fact Metrobank that made the guarantee when it stamped on the back of the warrants: "All prior
indorsement and/or lack of endorsements guaranteed, Metropolitan Bank & Trust Co., Calapan Branch."
The petitioner lays heavy stress on Jai Alai Corporation v. Bank of the Philippine Islands, 12 but we feel this case is
inapplicable to the present controversy.1âwphi1 That case involved checks whereas this case involves treasury warrants.
Golden Savings never represented that the warrants were negotiable but signed them only for the purpose of depositing
them for clearance. Also, the fact of forgery was proved in that case but not in the case before us. Finally, the Court found
the Jai Alai Corporation negligent in accepting the checks without question from one Antonio Ramirez notwithstanding
that the payee was the Inter-Island Gas Services, Inc. and it did not appear that he was authorized to indorse it. No similar
negligence can be imputed to Golden Savings.
We find the challenged decision to be basically correct. However, we will have to amend it insofar as it directs the
petitioner to credit Golden Savings with the full amount of the treasury checks deposited to its account.
The total value of the 32 treasury warrants dishonored was P1,754,089.00, from which Gomez was allowed to withdraw
P1,167,500.00 before Golden Savings was notified of the dishonor. The amount he has withdrawn must be charged not to
Golden Savings but to Metrobank, which must bear the consequences of its own negligence. But the balance of
P586,589.00 should be debited to Golden Savings, as obviously Gomez can no longer be permitted to withdraw this
amount from his deposit because of the dishonor of the warrants. Gomez has in fact disappeared. To also credit the
balance to Golden Savings would unduly enrich it at the expense of Metrobank, let alone the fact that it has already been
informed of the dishonor of the treasury warrants.
WHEREFORE, the challenged decision is AFFIRMED, with the modification that Paragraph 3 of the dispositive portion
of the judgment of the lower court shall be reworded as follows:
3. Debiting Savings Account No. 2498 in the sum of P586,589.00 only and thereafter allowing defendant Golden
Savings & Loan Association, Inc. to withdraw the amount outstanding thereon, if any, after the debit.
SO ORDERED.

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EN BANC
A.C. No. 5182             August 12, 2004
SUSANA DE GUZMAN BUADO and NENA LISING, complainants, 
vs.
ATTY. EUFRACIO T. LAYAG, respondent.

RESOLUTION

PER CURIAM:

The instant case arose from a verified Letter-Complaint1 for malpractice filed with this Court on December 9, 1999,
against respondent Atty. Eufracio T. Layag by Susana de Guzman Buado and Nena Lising. The complaint stated that de
Guzman Buado and Lising had instituted a criminal action for estafa 2 against Atty. Layag with the Office of the City
Prosecutor of Caloocan City and that the City Prosecutor had resolved that there was prima facie evidence to justify the
filing in court of informations for two (2) counts of estafa against Atty. Layag. 3 Accordingly, two cases for estafa,
docketed as Criminal Cases Nos. C-58087 and C-58088 were filed with the Regional Trial Court (RTC) of Caloocan City,
Branch 124.4
In our Resolution of January 31, 2000, we directed that Atty. Layag be furnished a copy of the complaint for his
comment.
In his Comment dated April 11, 2000, Atty. Layag denied committing any malpractice, saying that he merely complied
with the wishes of his client, the late Rosita de Guzman, to deliver any money judgment in Civil Case No. C-14265 before
the RTC of Caloocan City, Branch 121, to her attorney-in-fact, one Marie Paz P. Gonzales. Respondent prayed that the
complaint be dismissed for want of merit.
Thereafter, this Court resolved on July 10, 2000 to refer the matter to the Integrated Bar of the Philippines (IBP) for
investigation, report, and recommendation.5
As culled from the report and recommendation 6 dated September 25, 2003 of the IBP Investigating Commissioner, Atty.
Milagros V. San Juan, the facts in this case are as follows:
Herein complainant Lising and her sister, Rosita de Guzman (mother of herein complainant Susana de Guzman Buado),
were the plaintiffs in Civil Case No. C-14265, entitled Rosita de Guzman, et al., v. Inland Trailways, Inc.,which was
decided by the RTC of Caloocan City, Branch 121, in favor of the plaintiffs on May 16, 1991. Both Lising and de
Guzman were represented in said case by herein respondent, Atty. Layag. The losing party, Inland Trailways, Inc.,
appealed the trial court's judgment to the Court of Appeals, said appeal being docketed as CA-G.R. CV No. 34012.
In its decision dated January 5, 1995, the appellate court affirmed the judgment of the trial court. However, on July 3,
1993, or while CA-G.R. CV No. 34012 was pending before the appellate court, de Guzman died.
Pursuant to the judgment against it, Inland Trailways, Inc., issued the following checks: (1) Traders Royal Bank Check
No. 0000790549 dated February 15, 1996 for P15,000 payable to Atty. Layag; (2) Traders Royal Bank Check No.
0000790548 dated March 8, 1996 in the amount of P30,180 payable to Lising; and (3) Traders Royal Bank Check No.
0000790547 dated March 8, 1996 for the sum of P49,000 payable to de Guzman who had by then already passed away.
The aforementioned checks were received by respondent lawyer from Pablo Gernale, Jr., the deputy sheriff of the RTC in
February 1996. Atty. Layag did not inform Lising and the heirs of de Guzman about the checks. Instead he gave the
checks to one Marie Paz Gonzales for encashment on the strength of a Special Power of Attorney, purportedly executed
by de Guzman constituting Gonzales as her attorney-in-fact. The Special Power of Attorney supposedly authorized
Gonzales, among others, to encash, indorse, and/or deposit any check or bill of exchange received in settlement of Civil
Case No. C-14265.
It was only in February 1998 that Lising and de Guzman Buado, while checking the status of Civil Case No. C-14265,
found that judgment had been rendered in the said case and that the losing party had paid the damages awarded by issuing
checks which were received by their counsel, Atty. Layag, two years earlier. De Guzman Buado and Lising then made
demands upon Atty. Layag to give them the proceeds of the checks, but to no avail. Marie Paz Gonzales eventually gave
Lising P10,000. No further amounts were remitted to either Lising or de Guzman Buado despite demands by them.
After the parties presented their oral and documentary evidence before the IBP Commissioner, the matter was deemed
submitted for resolution. On September 25, 2003, the IBP Investigating Commissioner made the following
recommendations:
It is submitted that respondent has betrayed the trust of her (sic) clients. It is recommended that respondent be
suspended from the practice of law for the maximum period allowed under the law and that he be ordered to turn
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over to the Complainants the amounts he received in behalf of the complainants Susana de Guzman Buado and
Nena Lising.
Respectfully submitted.7
The IBP Investigating Commissioner, in her recommendation, found that in giving the checks to a party not entitled to
them, Atty. Layag disregarded the rights and interests of his clients in violation of Canons 15, 8 16,9 and 1710 of the Code of
Professional Responsibility.
On the Special Power of Attorney11 purportedly executed by Rosita de Guzman in favor of Marie Paz Gonzales, the
Investigating Commissioner held that even assuming arguendo that there was indeed a Special Power of Attorney, it
nonetheless had no force and effect after the death of Rosita de Guzman. Hence, any authority she had conferred upon
Gonzales was already extinguished. According to the IBP Investigating Commissioner, since respondent represented de
Guzman in Civil Case No. C-14265, upon her death, respondent had the obligation to preserve whatever benefits accrued
to the decedent on behalf of and for the benefit of her lawful heirs.
On October 25, 2003, the IBP Board of Governors passed its resolution on the case, affirming with modification the
recommendation by the Investigating Commissioner, thus:
RESOLVED to ADOPT and APPROVE, as it is hereby ADOPTED and APPROVED, the Report and
Recommendation of the Investigating Commissioner of the above-entitled case, herein made part of this
Resolution/Decision as Annex "A"; and, finding the recommendation fully supported by the evidence on record
and the applicable laws and rules, with modification, and considering that Respondent has betrayed the trust of
her (sic) clients in violation of Canon 15, 16 and 17 of the Code of Professional Responsibility, Atty. Eufracio T.
Layag is hereby DISBARRED and Ordered to turn over immediately to the Complainants the amounts received
in their behalf.12
Respondent then moved for reconsideration of the foregoing resolution before this Court. In view of the recommended
penalty of disbarment, the Court En Banc accepted the respondent's motion for our consideration.
Placed in issue are: (1) the sufficiency of the evidence to prove the respondent's liability for violation of the Code of
Professional Responsibility; and (2) the propriety of the recommended penalty.
After careful scrutiny of the proceedings conducted by the IBP Investigating Commissioner, we find that the factual
findings made in her report and recommendation are well supported by the evidence on record. Respondent Atty. Layag
does not deny receiving the checks in question, but he claimed he turned over said checks to Marie Paz Gonzales,
pursuant to the alleged Special Power of Attorney executed by Rosita de Guzman in favor of Gonzales, authorizing the
latter to encash, indorse, or deposit any check received as a result of the judgment in Civil Case No. C-14265. Respondent
contended that in so doing, he was being true to the wishes and desires of his client, the late Rosita de Guzman.
The respondent's arguments fail to persuade us. As a lawyer, with more than thirty (30) years in practice, respondent is
charged with knowledge of the law. He should know that it was error for him to rely on a Special Power of Attorney after
the death of the principal, Rosita de Guzman. As pointed out by the IBP Investigating Commissioner, even assuming there
was a Special Power of Attorney, although respondent could not produce a copy nor prove its existence, when de Guzman
died that document ceased to be operative. This is clear from Article 1919 13 of the Civil Code. While there are instances,
as provided in Article 1930, 14 where the agency is not extinguished by the death of the principal, the instant case does not
fall under the exceptions. Clearly, at the time Atty. Layag received and turned over the checks corresponding to the award
of damages in Civil Case No. C-14265 in February 1996, there was no longer any valid Special Power of Attorney. Again,
as pointed out by the IBP Investigating Commissioner, respondent's duty when the award of damages was made, was to
preserve and deliver the amount received to the heirs of his client, de Guzman, and not to any other person.
With respect to the check from Inland Trailways, Inc., and made payable to Lising, respondent should have delivered it
directly to Lising. The Special Power of Attorney, which he keeps on harping on, did not cover Lising's case. Its coverage
-- assuming again that the document existed -- pertained only to de Guzman. Respondent certainly could not take refuge
in any provision of said Special Power of Attorney insofar as Lising's check is concerned.
Respondent now denies any attorney-client relationship with Lising because, as he insists, he was only engaged by de
Guzman. But in his Comment to the Complaint, respondent admits that he included Lising when they filed suit against
Inland Trailways, Inc., before the RTC of Caloocan City, upon the request of de Guzman. Absent any showing on record
that Lising was represented by another counsel in Civil Case No. C-14265 and the subsequent appeal, CA-G.R. CV No.
34012, the only conclusion we could reach is that she was also represented by Atty. Layag. But even if granted the
opposite conclusion that he was not Lising's lawyer, it cannot exonerate the respondent with respect to Lising's check. It
would only make things worse for him, for it would show that he misappropriated the monetary award of a party whom he
did not represent. In our view, respondent's insistence that Lising was not his client is more damaging to his cause.
In the course of his professional relationship with his client, a lawyer may receive money or property for or from the
client. He shall hold such property in trust, and he is under obligation to make an accounting thereof as required by Rule
16.0115 of the Code of Professional Responsibility. This obligation to hold property in trust includes money received by a
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lawyer as a result of a judgment favorable to his client. 16 In the present case, Atty. Layag did not make an accounting of
the judgment awards he received and the checks he allegedly turned over to Marie Paz Gonzales. Further, when
complainants demanded that he deliver to them the checks pertaining to de Guzman Buado and Lising for the judgment in
Civil Case No. C-14265, Atty. Layag did not do so, in violation of Rule 16.03. 17
The inescapable conclusion we can make, given the circumstances in this case, is that by his actions, respondent failed to
observe the utmost good faith, loyalty, candor and fidelity required of an attorney in his dealings with his clients. His acts
of misappropriating the money of his clients are grossly immoral and unprofessional. There is no doubt in our mind that
he deserves severe punishment.
But is disbarment the proper penalty for Atty. Layag?
Disbarment is the most severe form of disciplinary sanction. The power to disbar must always be exercised with great
caution, for only the most imperative reasons, 18 and in clear cases of misconduct affecting the standing and moral
character of the lawyer as an officer of the court and a member of the bar. 19 Accordingly, disbarment should not be
decreed where any punishment less severe – such as a reprimand, suspension, or fine - would accomplish the end
desired.20 In the instant case, what we seek to exact from the respondent is strict compliance and fidelity with his duties to
his clients. Accordingly, we agree with the recommendation of the IBP Investigating Commissioner that suspension,
rather than disbarment, of respondent would suffice. In our view, however, such suspension should be indefinite, subject
to further orders by this Court.
WHEREFORE, the IBP Board of Governors Resolution No. XVI-2003-230 in Administrative Case No. 5182 finding
respondent LIABLE for violation of the Canons 15, 16, and 17 of the Code of Professional Responsibility is hereby
AFFIRMED with the MODIFICATION that instead of the recommended penalty of disbarment, respondent Atty.
Eufracio T. Layag is hereby INDEFINITELY SUSPENDED from the practice of law. Respondent is further DIRECTED
to immediately turn over to complainants Susana de Guzman Buado and Nena Lising the amounts of  P49,000.00
and P30,180.00, respectively, as well as all other amounts if any, he might have received for and on their behalf.
Respondent is also ORDERED to REPORT to the Office of the Bar Confidant his compliance within fifteen (15) days
from receipt hereof. Let a copy of this Resolution be attached to the personal record of Atty. Eufracio T. Layag and copies
be furnished the Integrated Bar of the Philippines and the Office of the Court Administrator for dissemination to all lower
courts. This Resolution is immediately executory.
SO ORDERED.

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FIRST DIVISION
G.R. No. 155541             January 27, 2004
ESTATE OF THE LATE JULIANA DIEZ VDA. DE GABRIEL, petitioner, 
vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.
DECISION
YNARES-SANTIAGO, J.:

This petition for review on certiorari assails the decision of the Court of Appeals in CA-G.R. CV No. 09107, dated
September 30, 2002,1 which reversed the November 19, 1995 Order of Regional Trial Court of Manila, Branch XXXVIII,
in Sp. Proc. No. R-82-6994, entitled "Testate Estate of Juliana Diez Vda. De Gabriel". The petition was filed by the Estate
of the Late Juliana Diez Vda. De Gabriel, represented by Prudential Bank as its duly appointed and qualified
Administrator.
As correctly summarized by the Court of Appeals, the relevant facts are as follows:
During the lifetime of the decedent, Juliana Vda. De Gabriel, her business affairs were managed by the Philippine
Trust Company (Philtrust). The decedent died on April 3, 1979. Two days after her death, Philtrust, through its
Trust Officer, Atty. Antonio M. Nuyles, filed her Income Tax Return for 1978. The return did not indicate that the
decedent had died.
On May 22, 1979, Philtrust also filed a verified petition for appointment as Special Administrator with the Regional Trial
Court of Manila, Branch XXXVIII, docketed as Sp. Proc. No. R-82-6994. The court a quo appointed one of the heirs as
Special Administrator. Philtrust’s motion for reconsideration was denied by the probate court.
On January 26, 1981, the court a quo issued an Order relieving Mr. Diez of his appointment, and appointed Antonio
Lantin to take over as Special Administrator. Subsequently, on July 30, 1981, Mr. Lantin was also relieved of his
appointment, and Atty. Vicente Onosa was appointed in his stead.
In the meantime, the Bureau of Internal Revenue conducted an administrative investigation on the decedent’s tax liability
and found a deficiency income tax for the year 1977 in the amount of P318,233.93. Thus, on November 18, 1982, the BIR
sent by registered mail a demand letter and Assessment Notice No. NARD-78-82-00501 addressed to the decedent "c/o
Philippine Trust Company, Sta. Cruz, Manila" which was the address stated in her 1978 Income Tax Return. No response
was made by Philtrust. The BIR was not informed that the decedent had actually passed away.
In an Order dated September 5, 1983, the court a quo appointed Antonio Ambrosio as the Commissioner and Auditor Tax
Consultant of the Estate of the decedent.
On June 18, 1984, respondent Commissioner of Internal Revenue issued warrants of distraint and levy to enforce
collection of the decedent’s deficiency income tax liability, which were served upon her heir, Francisco Gabriel. On
November 22, 1984, respondent filed a "Motion for Allowance of Claim and for an Order of Payment of Taxes" with the
court a quo. On January 7, 1985, Mr. Ambrosio filed a letter of protest with the Litigation Division of the BIR, which was
not acted upon because the assessment notice had allegedly become final, executory and incontestable.
On May 16, 1985, petitioner, the Estate of the decedent, through Mr. Ambrosio, filed a formal opposition to the BIR’s
Motion for Allowance of Claim based on the ground that there was no proper service of the assessment and that the filing
of the aforesaid claim had already prescribed. The BIR filed its Reply, contending that service to Philippine Trust
Company was sufficient service, and that the filing of the claim against the Estate on November 22, 1984 was within the
five-year prescriptive period for assessment and collection of taxes under Section 318 of the 1977 National Internal
Revenue Code (NIRC).
On November 19, 1985, the court a quo issued an Order denying respondent’s claim against the Estate, 2 after finding that
there was no notice of its tax assessment on the proper party. 3
On July 2, 1986, respondent filed an appeal with the Court of Appeals, docketed as CA-G.R. CV No. 09107, 4assailing the
Order of the probate court dated November 19, 1985. It was claimed that Philtrust, in filing the decedent’s 1978 income
tax return on April 5, 1979, two days after the taxpayer’s death, had "constituted itself as the administrator of the estate of
the deceased at least insofar as said return is concerned." 5 Citing Basilan Estate Inc. v. Commissioner of Internal
Revenue,6 respondent argued that the legal requirement of notice with respect to tax assessments 7 requires merely that the
Commissioner of Internal Revenue release, mail and send the notice of the assessment to the taxpayer at the address stated
in the return filed, but not that the taxpayer actually receive said assessment within the five-year prescriptive
period.8 Claiming that Philtrust had been remiss in not notifying respondent of the decedent’s death, respondent therefore
argued that the deficiency tax assessment had already become final, executory and incontestable, and that petitioner Estate
was liable therefor.
On September 30, 2002, the Court of Appeals rendered a decision in favor of the respondent. Although acknowledging
that the bond of agency between Philtrust and the decedent was severed upon the latter’s death, it was ruled that the
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administrator of the Estate had failed in its legal duty to inform respondent of the decedent’s death, pursuant to Section
104 of the National Internal Revenue Code of 1977. Consequently, the BIR’s service to Philtrust of the demand letter and
Notice of Assessment was binding upon the Estate, and, upon the lapse of the statutory thirty-day period to question this
claim, the assessment became final, executory and incontestable. The dispositive portion of said decision reads:
WHEREFORE, finding merit in the appeal, the appealed decision is REVERSED AND SET ASIDE. Another one
is entered ordering the Administrator of the Estate to pay the Commissioner of Internal Revenue the following:
a. The amount of P318,223.93, representing the deficiency income tax liability for the year 1978, plus
20% interest per annum from November 2, 1982 up to November 2, 1985 and in addition thereto 10%
surcharge on the basic tax of P169,155.34 pursuant to Section 51(e)(2) and (3) of the Tax Code as
amended by PD 69 and 1705; and
b. The costs of the suit.
SO ORDERED.9
Hence, the instant petition, raising the following issues:
1. Whether or not the Court of Appeals erred in holding that the service of deficiency tax assessment against
Juliana Diez Vda. de Gabriel through the Philippine Trust Company was a valid service in order to bind the
Estate;
2. Whether or not the Court of Appeals erred in holding that the deficiency tax assessment and final demand was
already final, executory and incontestable.
Petitioner Estate denies that Philtrust had any legal personality to represent the decedent after her death. As such,
petitioner argues that there was no proper notice of the assessment which, therefore,  never became final, executory and
incontestable.10 Petitioner further contends that respondent’s failure to file its claim against the Estate within the proper
period prescribed by the Rules of Court is a fatal error, which forever bars its claim against the Estate. 11
Respondent, on the other hand, claims that because Philtrust filed the decedent’s income tax return subsequent to her
death, Philtrust was the de facto administrator of her Estate. 12 Consequently, when the Assessment Notice and demand
letter dated November 18, 1982 were sent to Philtrust, there was proper service on the Estate. 13Respondent further asserts
that Philtrust had the legal obligation to inform petitioner of the decedent’s death, which requirement is found in Section
104 of the NIRC of 1977. 14 Since Philtrust did not, respondent contends that petitioner Estate should not be allowed to
profit from this omission.15 Respondent further argues that Philtrust’s failure to protest the aforementioned assessment
within the 30-day period provided in Section 319-A of the NIRC of 1977 meant that the assessment had already become
final, executory and incontestable.16
The resolution of this case hinges on the legal relationship between Philtrust and the decedent, and, by extension, between
Philtrust and petitioner Estate. Subsumed under this primary issue is the sub-issue of whether or not service on Philtrust of
the demand letter and Assessment Notice No. NARD-78-82-00501 was valid service on petitioner, and the issue of
whether Philtrust’s inaction thereon could bind petitioner. If both sub-issues are answered in the affirmative, respondent’s
contention as to the finality of Assessment Notice No. NARD-78-82-00501 must be answered in the affirmative. This is
because Section 319-A of the NIRC of 1977 provides a clear 30-day period within which to protest an assessment. Failure
to file such a protest within said period means that the assessment ipso jure becomes final and unappealable, as a
consequence of which legal proceedings may then be initiated for collection thereof.
We find in favor of the petitioner.
The first point to be considered is that the relationship between the decedent and Philtrust was one of  agency, which is a
personal relationship between agent and principal. Under Article 1919 (3) of the Civil Code, death of the agent or
principal automatically terminates the agency. In this instance, the death of the decedent on April 3, 1979 automatically
severed the legal relationship between her and Philtrust, and such could not be revived by the mere fact that Philtrust
continued to act as her agent when, on April 5, 1979, it filed her Income Tax Return for the year 1978.
Since the relationship between Philtrust and the decedent was automatically severed at the moment of the Taxpayer’s
death, none of Philtrust’s acts or omissions could bind the estate of the Taxpayer. Service on Philtrust of the demand letter
and Assessment Notice No. NARD-78-82-00501 was improperly done.
It must be noted that Philtrust was never appointed as the administrator of the Estate of the decedent, and, indeed, that the
court a quo twice rejected Philtrust’s motion to be thus appointed. As of November 18, 1982, the date of the demand letter
and Assessment Notice, the legal relationship between the decedent and Philtrust had already been non-existent for  three
years.
Respondent claims that Section 104 of the National Internal Revenue Code of 1977 imposed the legal obligation on
Philtrust to inform respondent of the decedent’s death. The said Section reads:
SEC. 104. Notice of death to be filed. – In all cases of transfers subject to tax or where, though exempt from tax,
the gross value of the estate exceeds three thousand pesos, the executor, administrator, or any of the legal heirs, as

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the case may be, within two months after the decedent’s death, or within a like period after qualifying as such
executor or administrator, shall give written notice thereof to the Commissioner of Internal Revenue.
The foregoing provision falls in Title III, Chapter I of the National Internal Revenue Code of 1977, or the chapter
on Estate Tax, and pertains to "all cases of transfers subject to tax" or where the "gross value of the estate exceeds
three thousand pesos". It has absolutely no applicability to a case for deficiency income tax, such as the case at
bar. It further lacks applicability since Philtrust was never the executor, administrator of the decedent’s estate,
and, as such, never had the legal obligation, based on the above provision, to inform respondent of her death.
Although the administrator of the estate may have been remiss in his legal obligation to inform respondent of the
decedent’s death, the consequences thereof, as provided in Section 119 of the National Internal Revenue Code of
1977, merely refer to the imposition of certain penal sanctions on the administrator. These do not include the
indefinite tolling of the prescriptive period for making deficiency tax assessments, or the waiver of the notice
requirement for such assessments.
Thus, as of November 18, 1982, the date of the demand letter and Assessment Notice No. NARD-78-82-00501,
there was absolutely no legal obligation on the part of Philtrust to either (1) respond to the demand letter and
assessment notice, (2) inform respondent of the decedent’s death, or (3) inform petitioner that it had received said
demand letter and assessment notice. This lack of legal obligation was implicitly recognized by the Court of
Appeals, which, in fact, rendered its assailed decision on grounds of "equity". 17
Since there was never any valid notice of this assessment, it could not have become final, executory and incontestable,
and, for failure to make the assessment within the five-year period provided in Section 318 of the National Internal
Revenue Code of 1977, respondent’s claim against the petitioner Estate is barred. Said Section 18 reads:
SEC. 318. Period of limitation upon assessment and collection. – Except as provided in the succeeding section,
internal revenue taxes shall be assessed within five years after the return was filed, and no proceeding in court
without assessment for the collection of such taxes shall be begun after the expiration of such period. For the
purpose of this section, a return filed before the last day prescribed by law for the filing thereof shall be
considered as filed on such last day: Provided, That this limitation shall not apply to cases already investigated
prior to the approval of this Code.
Respondent argues that an assessment is deemed made for the purpose of giving effect to such assessment when the notice
is released, mailed or sent to the taxpayer to effectuate the assessment, and there is no legal requirement that the taxpayer
actually receive said notice within the five-year period. 18 It must be noted, however, that the foregoing rule requires that
the notice be sent to the taxpayer, and not merely to a disinterested party. Although there is no specific requirement that
the taxpayer should receive the notice within the said period, due process requires at the very least that such notice
actually be received. In Commissioner of Internal Revenue v. Pascor Realty and Development Corporation, 19 we had
occasion to say:
An assessment contains not only a computation of tax liabilities, but also a demand for payment within a
prescribed period. It also signals the time when penalties and interests begin to accrue against the taxpayer. To
enable the taxpayer to determine his remedies thereon, due process requires that it must be served on and received
by the taxpayer.
In Republic v. De le Rama, 20 we clarified that, when an estate is under administration, notice must be sent to the
administrator of the estate, since it is the said administrator, as representative of the estate, who has the legal obligation to
pay and discharge all debts of the estate and to perform all orders of the court. In that case, legal notice of the assessment
was sent to two heirs, neither one of whom had any authority to represent the estate. We said:
The notice was not sent to the taxpayer for the purpose of giving effect to the assessment, and said notice could
not produce any effect. In the case of Bautista and Corrales Tan v. Collector of Internal Revenue … this Court
had occasion to state that "the assessment is deemed made when the notice to this effect is released, mailed or sent
to the taxpayer for the purpose of giving effect to said assessment." It appearing that the person liable for the
payment of the tax did not receive the assessment, the assessment could not become final and
executory. (Citations omitted, emphasis supplied.)
In this case, the assessment was served not even on an heir of the Estate, but on a completely disinterested third party.
This improper service was clearly not binding on the petitioner.
By arguing that (1) the demand letter and assessment notice were served on Philtrust, (2) Philtrust was remiss in its
obligation to respond to the demand letter and assessment notice, (3) Philtrust was remiss in its obligation to inform
respondent of the decedent’s death, and (4) the assessment notice is therefore binding on the Estate, respondent is arguing
in circles. The most crucial point to be remembered is that Philtrust had absolutely no legal relationship to the deceased,
or to her Estate. There was therefore no assessment served on the Estate as to the alleged underpayment of tax. Absent this
assessment, no proceedings could be initiated in court for the collection of said tax, 21 and respondent’s claim for

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Bus. Org. I Cases – Page 5 Syllabus

collection, filed with the probate court only on November 22, 1984, was barred for having been made beyond the five-
year prescriptive period set by law.
WHEREFORE, the petition is GRANTED. The Decision of the Court of Appeals in CA-G.R. CV No. 09107, dated
September 30, 2002, is REVERSED and SET ASIDE. The Order of the Regional Trial Court of Manila, Branch
XXXVIII, in Sp. Proc. No. R-82-6994, dated November 19, 1985, which denied the claim of the Bureau of Internal
Revenue against the Estate of Juliana Diez Vda. De Gabriel for the deficiency income tax of the decedent for the year
1977 in the amount of P318,223.93, is AFFIRMED.
No pronouncement as to costs.
SO ORDERED.

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