SECOND DIVISION

G.R. No. 224466 (Formerly UDK-15574), March 27, 2019

KAREN NUÑEZ* VITO, LYNETTE** NUÑEZ MASINDA, WARREN NUÑEZ, AND

ALDEN***NUÑEZ, PETITIONERS, v. NORMA MOISES-PALMA, RESPONDENT.

DECISION

CAGUIOA, J.:

This is a Petition for Review on Certiorari1 (Petition) under Rule 45 of the Rules of Court
assailing the Decision2 dated July 31, 2015 and Resolution3 dated March 15, 2016 of the
Court of Appeals4 (CA) in CA-G.R. SP. No. 07390. The CA Decision affirmed with
modifications the Decision5 dated December 11, 2012 of the Regional Trial Court,
6th Judicial Region, Branch 21, Mambusao, Capiz (RTC) in Civil Case No. M-12-0360-07
AP. The RTC Decision, in turn, modified the Decision 6 dated June 8, 2012 of the
Municipal Trial Court, 6th Judicial Region, Mambusao, Capiz (MTC) in Civil Case No. 515.
The CA Resolution denied the motion for reconsideration filed by the petitioners.

Facts and Antecedent Proceedings

Petitioners' father, Vicentico Nuñez (Vicentico), was the original owner of Lot No. 2159-
A, with an area of 429 square meters, located in Mambusao, Capiz (subject lot) as
evidenced by Transfer Certificate of Title No. (TCT)T-16612. 7

Sometime in May 1992, Vicentico, who was then suffering from diabetes, borrowed
P30,000.00 from Rosita Moises (Rosita) and as security, executed a real estate
mortgage over his property (Lot No. 2159-A). Since Rosita had no money, the funds
came from Norma Moises-Palma (Norma), Rosita's daughter. According to petitioners,
the P30,000.00 loan of Vicentico was subsequently paid as evidenced by an Affidavit
Authorizing Release of Mortgage8 (AARM).9

Upon Vicentico's death on September 27, 1994, the subject lot was transmitted to his
heirs, namely: petitioners Karen Nuñez Vito (Karen), Warren Nuñez (Warren), Lynette
Nuñez Macinda (Lynette), Alden Nuñez (Alden) (collectively, petitioners) and Placida
Hisole10 Nuñez (Placida), Vicentico's surviving spouse.11 Each heir had an undivided 1/5
share in the subject lot equivalent to 85.812 square meters.13

Placida died on August 1, 1997 and her 1/5 share was inherited equally by her heirs.
Thus, petitioners each had a pro indiviso 1/4 share in the subject lot equivalent to
107.25 square meters.14

On June 28, 1995, Norma was able to have all petitioners, except Alden, sign a Deed of
Adjudication and Sale15 (DAS) wherein petitioners purportedly sold to Norma their
respective pro indiviso shares in the subject lot for P50,000.00, but the DAS reflected
P30,000.00 as the consideration in order to reduce the amount to be paid for capital
gains tax and documentary stamp tax. After the execution of the DAS, Norma
immediately took possession of the subject lot. 16

Instead of paying cash, Norma executed a Promissory Note 17 (PN) on July 1, 1995 in
favor of petitioners whereby she obligated herself to pay P50,000.00, which "amount
represents the cost of a parcel of land [Norma] bought from them described as follows:
TITLE NO. T-16612 Lot No 2159-A situated at Poblacion Tabuc Mambusao, Capiz[,]
[containing an area of FOUR HUNDRED TWENTY NINE (429) SQUARE METERS, more or
less"18 on or before July 1, 1998, without interest.19 Upon prodding of petitioners,
Norma executed an Acknowledgment of Debt20 (AOD) dated February 22, 2007,
whereby she admitted that she owed petitioners P50,000.00, representing the purchase
price of the DAS.21

Despite non-payment of the purchase price and the absence of Alden's signature on the
DAS, Norma was able to cause the registration of the document with the Register of
Deeds of Capiz and TCT T-3546022 was issued to her on August 2, 2005.23

On July 10, 2006, Alden instituted a case against respondent for Annulment of Transfer
Certificate of Title No. T-35460, Declaring Deed of Adjudication and Sale Null and Void,
Partition, Reconveyance and Recovery of Possession of a Portion of Land with
Damages24 docketed as Civil Case No. 499 before the MTC. During the pendency of this
case, Alden and Norma entered into a Compromise Agreement (Compromise
Agreement) on September 7, 2006, whereby Alden agreed to respect Norma's
ownership and possession of 85.8 square meters of the subject lot, the share being
claimed by him.25

About a year later, or on August 15, 2007, petitioners Karen, Warren and Lynette,
represented by their brother and attorney-in-fact Alden, filed against Norma a case
for Declaration of Nullity of Deed of Adjudication and Sale, Cancellation of Transfer
Certificate of Title No. T-35460, Recovery of Ownership and/or Possession of Lot No.
2159-A and Damages26 before the MTC. After trial on the merits, the MTC, on February
27, 2009 rendered a Decision in favor of petitioners. Norma filed a Notice of Appeal on
April 22, 2009 which was given due course by the MTC. On October 19, 2009, the RTC
rendered a Decision setting aside the MTC's Decision on the ground that Alden, who
was merely acting as attorney-in-fact of Karen, Warren and Lynette, was not included
as indispensable party. The RTC ordered the MTC to include Alden as an indispensable
party and to conduct further proceedings on the case. 27

On February 19, 2010, Karen, Warren and Lynette, through Alden, and Alden, in his
own capacity, filed an amended complaint before the MTC for Declaration of Nullity of
Deed of Adjudication and Sale, Cancellation of Transfer Certificate of Title No. T-35460,
Recovery of Ownership and/or Possession of Lot No. 2159-A and Damages.28 The
allegations of the amended complaint are basically the same as those of the original,
except the addition of Alden as an indispensable party.29 Even up to the filing of the
amended complaint, Norma was not able to pay the consideration of P50,000.00. 30

The MTC Ruling

After trial, the MTC rendered on June 8, 2012 a Decision 31 in favor of petitioners, the
dispositive portion of which states:
WHEREFORE, preponderance of evidence point in favor of plaintiffs and against
defendant, judgment is hereby rendered:

1.) DECLARING the Deed of Adjudication and Sale dated June

28, 1995 NULL AND VOID;
2.) ORDERING the CANCELLATION of Transfer Certificate
of Title No. T-35460 in the name of defendant Norma Moises
Palma and the REINSTATEMENT of Transfer Certificate of
Title No. T-16612 in the name of Vicentico Nuñez married to
Placida Hisole;
3.) DECLARING plaintiffs as the rightful owners of Lot No.
2159-A subject to the right of defendant Norma Moises Palma
with respect to the share of Alden Nuñez in the total area of
85.8 square meters;
4.) ORDERING defendant to turn over ownership and possession
of Lot No. 2159-A to plaintiffs except the share of Alden
Nuñez with an area of 85.8 square meters;
5.) ORDERING defendant Norma Moises Palma to pay plaintiffs
the following:
a.) Fifty Thousand
(Php50,000.00) pesos
as attorney's fees;
b.) Five Thousand
(Php5,000.00) pesos
as litigation expenses;
c.) Seventy-Five
Thousand
(Php75,000.00) pesos
as moral damages;
and
d.) Fifteen Thousand
(Php15,000.00) pesos
as exemplary
damages; and
6.) ORDERING defendant to pay the cost of the suit.

SO ORDERED.32
Norma appealed33 the MTC Decision to the RTC.

The RTC Ruling

The RTC in its Decision34 dated December 11, 2012 granted respondent's appeal. The
dispositive portion of the RTC Decision states:
WHEREFORE, premises considered, the decision of the Court a quo is hereby modified
as follows:

1. Ordering the defendant-appellant to pay the plaintiffs except Alden Nuñez,

the amount of P50,000.00 with legal interest rate of 12% starting on April
28, 1995 until the full amount price is paid;

2. Ordering defendant Norma Moises Palma to pay plaintiffs the following:

a.) Fifty Thousand (P50,000.00) pesos as attorney's fees;

b.) Five Thousand (P5,000.00) pesos as litigation expenses;
c.) Seventy Five Thousand (P75,000.00) pesos as moral damages; and
d.) Fifteen Thousand (P15,000.00) pesos as exemplary damages; and

3.
4. Declaring as valid the Deed of Adjudication and Sale, dated June 28,
1995, with judicial notice on the decision based on the Compromise
Agreement rendered by the Municipal Trial Court of Mambusao in Civil
Case No. 499, dated September 20, 2006, involving the share of Alden
Nuñez with an area of 85.8 square meters.

No pronouncement as to costs.

SO ORDERED.35
Dissatisfied, petitioners filed a petition for review under Rule 42 before the CA.

The CA Ruling

The CA in its Decision36 dated July 31, 2015 affirmed the RTC Decision with
modification. The dispositive portion of the CA Decision states:
WHEREFORE, the Decision dated December 11, 2012 of the RTC, Branch 21,
Mambusao, Capiz in Civil Case No. M-12-0360-07 AP is AFFIRMED with the
following MODIFICATION. The order directing respondent to pay petitioners the
amount of P50,000.00 as consideration for the sale is DELETED. The award of
attorney's fees, litigation expenses, moral damages and exemplary damages is
likewise DELETED. No pronouncement as to costs.

SO ORDERED.37
Petitioners filed a motion for reconsideration38 and pointed to the CA the AARM as proof
of payment of Vicentico's loan. The CA denied the motion for reconsideration. 39

Hence, the Petition. To date, Norma has not filed her Comment despite the
Resolution40 dated July 11, 2016 of the Court requiring her to comment on the Petition
within 10 days from receipt thereof; accordingly, she is deemed to have waived her
right to do so.

Issues

The petitioners raise the following issues in the Petition:

1. whether the CA, in ruling that the transaction between petitioners and Norma
is dacion en pago, erred in applying Article 1245 of the Civil Code; and

2. whether the CA erred in deleting the award of attorney's fees, litigation expenses,
moral damages and exemplary damages.41

The Court's Ruling

The general rule is that only questions of law may be raised in a Rule 45 petition
for certiorari.42There are, however, admitted exceptions. One of them is when the
findings of the CA are contrary to the trial court. 43

Indeed, the findings of the CA and the RTC with respect to the DAS dated June 28,
1995 are divergent, requiring a review of their factual findings.

The CA ruled that the transaction between the parties is in reality a dacion en
pago44 based on the following:
x x x First. Both parties agreed that Vicentico's pre-existing debt of P30,000.00 should
be considered as the consideration for the Deed of Adjudication and Sale. Notably too,
the dation in payment was not only with the creditor's consent, it was upon her
proposal. Second. There is no showing that other creditors would be prejudiced by the
agreement. Lastly, petitioners had not been judicially declared insolvent. Accordingly,
We uphold the validity of the Deed of Adjudication and Sale. 45
On the other hand, the RTC ruled that the DAS "showed that the consequent sale of the
lot in question was by way of constructive delivery x x x [and] the defendant-appellant
took possession of the property right after the execution of the Deed of Adjudication.
Clearly, there has been transfer of ownership x x x." 46 The RTC, thus, considered the
transaction of the parties as a valid contract of sale, notwithstanding the non-payment
of the consideration.47

The RTC in effect agreed with the MTC's finding that the DAS is a contract of sale. But,
it disagreed with the MTC's ruling that it is null and void. The MTC reasoned out as
follows:
By the testimonies of plaintiffs that no money or consideration was ever paid to them
by defendant despite repeated demands and coupled with the presentation [by]
plaintiffs of the Promissory Note (Exhibit "E") and the Acknowledgment of Debt (Exhibit
"F") all of which was executed by the defendant Norma Moises Palma, the burden of
proof x x x now has shifted on the shoulder of the defendant to prove that she paid the
consideration of the sale of Lot No. 2159-A, because the plaintiffs categorically testified
and told this Court that they did not receive even a single centavo from the defendant x
x x much so that the defendant never rebutted such testimony of plaintiffs. Likewise,
the execution of defendant of the Promissory Note (Exhibit "E") which expressly points
to Lot No. 2159-A as the subject of sale between plaintiffs and defendant, will add to
the belief of this Court that indeed no consideration was given to plaintiffs, because it is
very unnatural for defendant to still execute a Promissory Note (Exhibit "E"), whose
amount of Fifty Thousand (Php50,000.00) pesos is even greater than the amount of
Thirty Thousand (Php30,000.00) pesos as reflected in the Deed of Adjudication and
Sale (Exhibit "D"), had she already paid the latter amount to plaintiffs.

xxxx

In short, [the defendant failed to render proof that she paid the purchase price of lot
No. 2159-A, because, as] the burden of proof had already shifted [upon her] to prove
she [had] paid the [consideration], she failed to introduce [any evidence that would
tend] to prove [the payment of the purchase price.] x x x 48
Having ruled that no consideration was ever given to plaintiffs (herein petitioners) by
defendant (Norma), the DAS was considered by the MTC as null and void on the ground
that a contract of sale is void and produces no effect whatsoever where the price, which
appears thereon paid, has in fact never been paid by the vendee to the vendor. 49

The following documentary exhibits adduced and admitted are crucial in the resolution
of the first issue:

1. DAS - Deed of Adjudication and Sale50 dated June 28, 1995 (Exhibit "D" and "1"),
notarized on July 14, 1995, but inscribed as Entry No. 155331 51 on August 2, 2005 in
TCT T-16612. It provides:
We, PLACIDA HISOLE NUÑEZ, widow, KAREN NUÑEZ, single, WARREN NUÑEZ, single,
ALDIN NUÑEZ, single AND LYNETH NUÑEZ, single, all of legal ages, Filipinos and
residents of Mambusao, Capiz, do by these presents hereby declare:

1.) That a certain VICENTICO NUÑEZ died in Mambusao, Capiz on Sept. 27,
1994leaving as forced heirs the herein parties;

xxxx

3.) That upon his death he left Real Property hereunder described:
TITLE NO. T-16612

"A parcel of land (Lot 2159-A of the Subd. plan (LRC) Psd-213453, being a portion of
Lot 2159, Mambusao cadastre, LRC Cad. Record No. N-449), situated in the Barrio of
Municipality of Mambusao, province of Capiz, Island of Panay. x x x Containing an area
of FOUR HUNDRED TWENTY NINE (429) Square meters, more or less. x x x"
4.) That pursuant to the provision of Rule 74, Sec. 1 of the Rules of Court, We the
parties of these instrument do hereby adjudicate unto ourselves the above described
property in pro indiviso share;

5.) That for and in consideration of the sum of THIRTY THOUSAND PESOS
(P30,000.00), Philippine Currency which we have received from NORMA MOISES
PALMA, of legal age, widow and resident of Mambusao, Capiz, do by these presents
hereby CEDE, SELL, CONVEY and TRANSFER by way of Absolute Sale unto the above
named NORMA MOISES PALMA, her heirs and successors the above described property
free from all liens and encumbrances and whatever kind.
This instrument concerns a residential lot, hence, it is not within the provision of Land
Reform Code nor any tenancy contract.

By virtue of this instrument that certain Real Estate Mortgage executed before Jesus V.
Rivas dated May 19, 1992 and docketed in the Notarial Register as Doc. No. 112; Page
No. 57; Book No. 6; Series of 1992 is cancell (sic) and considered null and void and no
effect.

WITNESS our signature hereunder this 28th day of June 1995, at Roxas City.

(SGD.) (SGD.)
PLACIDA HISOLE NUNEZ KAREN NUNEZ

(SGD.)
WARREN NUNEZ

(SGD.)
LYNETH NUNEZ52
2. PN - Promissory Note53 executed by Norma and notarized on July 1, 1995 (Exhibit
"E"), which provides:
That I, NORMA MOISES PALMA, of legal age, [FJilipino, widow and a resident of
Mambusao, Capiz by these presents promise to pay the heirs of VICENTICO NUÑEZ:
namely PLACIDA NIZOLE NUÑEZ, widow, KAREN NUNE[Z], single, WARREN NUÑEZ,
single, ALDIN NUÑEZ, single, and LYNETTE NUÑEZ, single x x x the sum of FIFTY
THOUSAND (P50,000.00) PESOS, Philippine Currency; on or before July 1, 1998. This
amount do (sic) not bear interest.

This amount represents the cost of a parcel of land I bought from them described as
follows: TITLE NO. T-16612 Lot No 2159-A situated at Poblacion Tabuc Mambusao,
Capiz. Containing an area of FOUR FIUNDRED TWENTY NINE (429) SQUARE METERS,
more or less.54
3. AOD - Acknowledgment of Debt55 notarized on February 22, 2007 (Exhibit "F")
executed by Norma which provides:
That I am indebted to KAREN NUÑEZ VITO, WARREN NUÑEZ AND LYNETTE
NUÑEZ x x x in the sum of FIFTY THOUSAND PESOS (PHP 50,000.00).

That I promise, to pay KAREN NUÑEZ VITO, WARREN NUÑEZ AND LYNETTE
NUÑEZ the amount of FIFTY THOUSAND PESOS (PHP 50,000.00) within a period
of five (5) days after I have sold my parcel of land, [Lot No. 2159-A of the Subdivision
plan (LRC) Psd-213453 being a portion of Lot 2159, Mambusao Cadastre, LRC Cad.
Record No. N-449] situated at Poblacion Tabuc, Mambusao, Capiz and covered by
Transfer Certificate of Title No. T-35460.56
4. AARM - Affidavit Authorizing Release of Mortgage57 dated July 8, 2005 (Exhibit "I"
and "6") which states:
WE, NORMA MOISES-PALMA, widow; CESAR N. MOISES, married; LACERIANO N.
MOISES, widower; JOSE N. MOISES, single; and GILDA MOISES FELONIA, widow,
Filipinos, all of legal ages, and all residents of Mambusao, Capiz, after having been duly
sworn to according to law, depose and say:

That we are the children of the late Rosita Nuñez Moises who died on May 09, 2003;

That during her lifetime, his brother, the late Vicentico Nuñez who died on September
27, 1994 was indebted to her in the amount of THIRTY THOUSAND PESOS
(P30,000.00) under and by virtue of Real Estate Mortgage notarized by Notary Public
Jesus V. Rivas under Doc. No. 112, Page No. 57, Book No. 6, Series of 1992, dated May
19, 1992 and inscribed by the Acting Register of Deeds, Paterno Kapunan on December
1, 1993 at 10:25 A.M.;

That by these presents, we are releasing this Real Estate Mortgage, the fact being that
the late Vicentico Nuñez had already paid our late mother indebtedness of THIRTY
THOUSAND PESOS (P30,000.00);

That we are executing this affidavit to attest further to the fact that the late Vicentico
Nuñez has paid his total obligation of THIRTY THOUSAND PESOS (P30,000.00) to our
late mother;

That furthermore, we are executing this affidavit absolving the late Vicentico Nuñez of
any liabilities whatsoever, thus releasing this Deed of Real Estate Mortgage.

IN WITNESS WHEREOF, We have hereunto set our hands 8 th day of July 2005, at Roxas
City[,] Philippines.

(SGD.) (SGD.)
NORMA M. PALMA CESAR N. MOISES
Affiant Affiant

(SGD.) (SGD.)
LACERIANO N. MOISES JOSE N. MOISES
Affiant Affiant

(SGD.)
GILDA M. FELONIA
Affiant58
5. TCT T-1661259 (Exhibit "B") registered in the name of "VICENTICO NUÑEZ, married
to Placeda Hesole" with the following annotations:60
Entry No. 118493 - Mortgage - executed by Vicentico Nuñez in favor of Rosita Nuñez
covering the whole parcel of land described in this title for the sum of THIRTY
THOUSAND PESOS (30,000.00) subject to all conditions stipulated therein and
acknowledged before Notary Public Jesus V. Rivas under Doc. No. 112, Page No. 57,
Book No. 6, Series of 1992. Date of document May 19, 1992. Inscription December 1,
1993 at 10:25 A.M.

xxxx

Entry No. 155188 - Affidavit Authorizing Release of Mortgage - executed by the children
of Rosita Nuñez Moises namely: Norma Moises-Palma; Cesar N. Moises, Lacer[ia]no N.
Moises; Jose N. Moises and Gilda Moises Felonia in favor of Vicentico Nuñez, affecting
Entry No. 118493. Subscribed by Notary Public Erico V. Abalajon under Doc. No. 405;
Page No. 82; Book No. XXXVIII; Series of 2005. Date of Doc. July 8, 2005. Inscription:
July 13, 2005 at 1:30 P.M.

xxxx

Entry No. 155331 - Deed of Adjudication and Sale - executed by the heirs of the late
Vicentico Nuñez, stating that they are the only heirs who survived the deceased,
namely: Placida Hisole Nuñez, Karen, Warren, and Lynette, all surnamed Nuñez, have
adjudicated and partitioned the parcel of land described in this title in pro indiviso equal
share and thereby sold to Norma Moises Palma for the sum of THIRTY THOUSAND
PESOS (P30,000.00). Acknowledged before Notary Public Eleuterio F. Martinez, under
Doc. No. 901; Page No. 84; Book No. II; Series of 1995. Date of Document: June 28,
1995. Inscription: August 2, 2005 at 10:55 A.M. This title is cancelled by TCT No. T-
3546061 .
6. Compromise Agreement62 dated September 7, 2006 executed by Alden and Norma in
connection with Civil Case No. 499, wherein they agreed as follows:
1. As settlement, the private defendant [Norma] undertakes to pay the amount of
Eighty Eight Thousand Pesos (Php88,000.00) Philippine Currency as payment for the
purchase of the 85.8 square meters undivided portion of Lot 2159-A, which amount
shall be delivered on or before January 31, 2007;

2. The plaintiff [Alden], in return, shall respect defendant's ownership and possession
over the same. He further waives and renounce (sic) his interest over Lot 2159-A in
favor of defendant.63
It can be gathered from the last paragraph of the DAS wherein the Real Estate
Mortgage (REM) which Vicentico executed was "cancell[ed] and considered null and
void and no effect" that a dation in payment might have been intended by the parties
therein. Under Article 1245 of the Civil Code, there is dation in payment when property
is alienated to the creditor in satisfaction of a debt in money and is governed by the law
of sales.

This scheme was affirmed by Laceriano N. Moises (Laceriano), the brother of Norma,
who testified on direct examination that his uncle Vicentico together with his wife
mortgaged Lot 2159-A, the subject lot, to his mother Rosita for the amount of
P30,000.00 and the source of the amount came from his younger sister Norma, 64 and
that since no payment was made regarding the P30,000.00, Vicentico and Placida offset
the subject lot for their indebtedness.65

While the DAS seems to suggest a dation in payment, the subsequent actuations of the
parties, especially Norma, negate the same or the contemplated offset. If the DAS was
intended to be a dation in payment, the execution of the PN and AOD by Norma as well
as the Compromise Agreement by Alden and Norma on September 7, 2006, whereby
Alden agreed, for an agreed consideration, to respect Norma's ownership and
possession of 85.8 square meters of the subject lot, the share being claimed by him,
shows an opposite declaration, i.e., there was no dation in payment or offset.

If the intention by the parties was that the heirs of Vicentico were ceding the subject lot
to Norma as payment of the P30,000.00 loan of their father to Rosita, it would be out of
the ordinary for Norma to execute a PN two days after the DAS, acknowledging her
indebtedness of the P50,000.00 to them, promising to pay the same within a specified
period, and declaring against her interest that the said amount represented the "cost"
of the land that she bought from them. Subsequently, in 2007, it would be unlikely for
her to execute the AOD wherein she acknowledged that she owed Karen, Warren and
Lynette P50,000.00 if the consideration of the DAS was Vicentico's indebtedness of
P30,000.00. Alden was no longer included because by then Norma had already paid the
P88,000.00 which she agreed to pay him pursuant to their Compromise Agreement.
And, Norma should have insisted in the case filed by Alden against her that there was
an offset of his father's loan to her, through Rosita, her mother.

Moreover, in the AARM, a duly notarized document which the heirs of Rosita executed
in July 2005, they acknowledged that: "[they] are releasing this Real Estate Mortgage,
the fact being that the late Vicentico Nuñez had already paid [their] late mother
indebtedness of THIRTY THOUSAND PESOS (P30,000.00) [and] absolving the late
Vicentico Nuñez of any liabilities whatsoever."66 Indeed, as claimed by petitioners in the
Petition, the P30,000.00 loan of their father Vicentico had been paid as duly
acknowledged in a registered public instrument by the heirs of Rosita, including Norma.

Thus, there is preponderant evidence that supports the finding that the DAS
was not intended by the parties to be a dation in payment. And, even assuming that
the DAS was a dation in payment, the documents that were subsequently executed had
the effect of novating the same.

Under Article 1291 of the Civil Code, obligations may be modified by: (1) changing their
object or principal conditions; (2) substituting the person of the debtor; and (3)
subrogating a third person in the rights of the creditor.

When Norma executed the PN, AOD and Compromise Agreement, she was
acknowledging that the principal condition or stipulation on the payment of the
purchase price in the DAS had been modified from the offset or cancellation of
Vicentico's indebtedness secured by the REM, without which would have amounted to a
dation in payment, to a loan payable within a certain period, which converted the
transaction to a sale on credit.

Given the foregoing, the CA erred in its finding that the transaction between the parties
is a dation in payment or dacion en pago. The MTC and RTC were, therefore, correct in
considering the transaction as a contract of sale.

A contract of sale is defined in Article 1458 of the Civil Code, to wit:

ART. 1458. By the contract of sale, one of the contracting parties obligates himself to
transfer the ownership of and to deliver a determinate thing, and the other to pay
therefor a price certain in money or its equivalent.

A contract of sale may be absolute or conditional.

The Court in Sps. Ramos v. Sps. Heruela67 (Ramos) differentiated an absolute sale from
a conditional sale as follows:
Article 1458 of the Civil Code provides that a contract of sale may be absolute or
conditional. A contract of sale is absolute when title to the property passes to the
vendee upon delivery of the thing sold.68 A deed of sale is absolute when there is no
stipulation in the contract that title to the property remains with the seller until full
payment of the purchase price.69 The sale is also absolute if there is no stipulation
giving the vendor the right to cancel unilaterally the contract the moment the vendee
fails to pay within a fixed period.70 In a conditional sale, as in a contract to sell,
ownership remains with the vendor and does not pass to the vendee until full payment
of the purchase price.71 The full payment of the purchase price partakes of a suspensive
condition, and non-fulfillment of the condition prevents the obligation to sell from
arising.72
Pursuant to Ramos, the DAS is an absolute sale because there is no stipulation in the
contract that title to the property remains with the sellers until full payment of the
purchase price and there is no stipulation giving the vendors the right to cancel
unilaterally the contract the moment the vendee fails to pay within a fixed period. It will
be recalled that after the execution of the DAS, Norma immediately took possession of
the subject lot73 and there was no retention of ownership by the heirs of Vicentico until
full payment of the purchase price by Norma that was stipulated in the DAS.

What then is the legal effect of the non-payment of the purchase price of
P50,000.0074 by Norma to petitioners?

Pursuant to Article 1458 of the Civil Code, a contract of sale is a reciprocal obligation to
give; and the prestation or obligation of the seller or vendor is "to transfer the
ownership of and to deliver a determinate thing" while the prestation or obligation of
the buyer or vendee is "to pay therefor a price certain in money or its equivalent." The
full payment of the purchase price is the buyer's prestation.

The non-payment of the purchase price by the buyer after the seller has delivered the
object of the sale to the buyer constitutes a breach of the buyer's prestation in a
contract of sale. The buyer has contravened the very tenor of the contract.

Generally, under Article 1594 of the Civil Code, "[a]ctions for breach of the contract of
sale of goods shall be governed particularly by the provisions of this Chapter [Chapter 6
on 'Actions for Breach of Contract of Sale of Goods'], and as to matters not specifically
provided for herein, by other applicable provisions of this Title [Title VI on 'Sales']."

One remedy is provided in Article 1595, to wit:

ART. 1595. Where, under a contract of sale, the ownership of the goods has passed to
the buyer, and he wrongfully neglects or refuses to pay for the goods according to the
terms of the contract of sale, the seller may maintain an action against him for the
price of the goods.
In addition, the buyer may be held liable for damages under Article 1596, to wit:
ART. 1596. Where the buyer wrongfully neglects or refuses to accept and pay for the
goods, the seller may maintain an action against him for damages for nonacceptance.

The measure of damages is the estimated loss directly and naturally resulting in the
ordinary course of events from the buyer's breach of contract.
Also, an unpaid seller, who is deemed as such "[w]hen the whole of the price has not
been paid or tendered" as provided in Article 1525(1), has the right to rescind the sale
under Article 1526.

With respect to the sale of immovable properties, the remedies of the vendor are
provided in the following Civil Code provisions:
ART. 1591. Should the vendor have reasonable grounds to fear the loss of immovable
property sold and its price, he may immediately sue for the rescission of the sale:

Should such ground not exist, the provisions of Article 1191 shall be observed.

ART. 1592. In the sale of immovable property, even though it may have been stipulated
that upon failure to pay the price at the time agreed upon the rescission of the contract
shall of right take place, the vendee may pay, even after the expiration of the period,
as long as no demand for rescission of the contract has been made upon him either
judicially or by a notarial act. After the demand, the court may not grant him a new
term.

xxxx

ART. 2242. With reference to specific immovable property and real rights of the debtor,
the following claims, mortgages and liens shall be preferred, and shall constitute an
encumbrance on the immovable or real right:

xxxx

(2) For the unpaid price of real property sold, upon the immovable sold[.] 75
The above remedies in case of breach of a contract of sale mirror the rights of a
creditor in an obligation to give a determinate thing, as in the sale of a specific real
property, which are:
(1) To compel specific performance. This right is expressly recognized by the first
paragraph of Art. 1165 of the Code which states that the creditor may compel the
debtor to make the delivery. x x x

(2) To recover damages for breach of the obligation. Besides the right to compel
specific performance, the creditor has also the right to recover damages from the
debtor in case of breach of the obligation through delay, fraud, negligence or
contravention of the tenor thereof.76
With respect to reciprocal obligations, rescission or more appropriately resolution is
another remedy pursuant to Article 1191 of the Civil Code, to wit:
ART. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of
the obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the
obligation, with the payment of damages in either case. He may also seek rescission,
even after he has chosen fulfillment, if the latter should become impossible.

The court shall decree the rescission claimed, unless there be just cause authorizing the
fixing of a period.

This is understood to be without prejudice to the rights of third persons who have
acquired the thing, in accordance with Articles 1385 and 1388 and the Mortgage Law.
To recall, reciprocal obligations are those which are created or established at the same
time, out of the same cause, and which result in mutual relationships of creditor and
debtor between the parties; and their outstanding characteristic is reciprocity arising
from identity of cause by virtue of which one obligation is a correlative of the other. 77

Justice Eduardo P. Caguioa78 explained:

x x x A reciprocal obligation has been defined as that where each of the parties is a
promisee of a prestation and promises another in return as a counterpart or equivalent
of the other.79 Article 1191 refers to this kind of obligation. The most salient feature of
this obligation is reciprocity. In order that there be reciprocity, it is not sufficient that
two persons be mutually debtor and creditor of each other; the reciprocity must be so
perfect as to cause both relations to arise from the same source; each obligation being
correlative with the other, it not being possible to conceive one without the other. x x
x80
In a contract of sale, as in the DAS in this case, the obligation of the vendee to pay the
price is a correlative of the obligation of the vendor to deliver the thing sold. 81

Proceeding from the fact that the obligation of one party is the correlative of the
obligation of the other in reciprocal obligations, the Civil Code in the first paragraph of
Article 1191 has established the principle that if one of the parties fails to comply with
what is incumbent upon him, there is a right on the part of the other to rescind (or
"resolve" in accordance with accepted translations of the Spanish Civil Code) the
obligation.82 Since this condition, which is implied as a general rule in all reciprocal
obligations, has the effect of extinguishing rights which are already acquired or vested,
it is resolutory in character, thus a tacit resolutory condition. 83

In the words of Justice Eduardo P. Caguioa, "Article 1191 provides for the implied or
tacit resolutory condition even if there is no corresponding agreement between the
parties," unlike in unilateral obligations where the right to resolve the obligation must
always be express.84 He further opined that although the said Article uses the term
"rescind" the same should be understood in the sense of "resolve"; and distinguished
the two terms as follows:
x x x Between the two terms, there are several differences: (1) resolution can only be
availed of by a party to the obligation while rescission may be availed of by a third
person (creditor); (2) resolution can be obtained only on the ground of non-
performance by the other party while rescission may be based on fraud, lesion, etc.;
(3) resolution may be refused by the court on valid grounds while rescission may not be
refused by the court if all requisites are present; (4) resolution is a primary remedy
while rescission is subsidiary, available only when there is no other remedy; and (5)
resolution is based on mutuality of the parties while rescission is based on prejudice or
damage suffered.85
To summarize, the remedies of the unpaid seller, after ownership of the real property
not covered by Republic Act No. 655286 or the Maceda Law, has been vested to the
buyer, are:

1. To compel specific performance by filing an action against the buyer for the agreed
purchase price; or

2. To rescind or resolve the contract of sale either judicially or t|y a notarial act; and

3. In either (1) or (2), to recover damages for the breach of the contract.

Based on the amended complaint, petitioners seek to declare the DAS null and void ab
initio and non-existent since Norma, the vendee, did not pay the purchase price to
them pursuant to the doctrine that where the price which appears in the contract of
sale to have been paid but has in fact not or never been paid, the contract is void; and
the absence of Alden's signature in the DAS showed that he did not sign the same and
it lacked his consent.87 The DAS being null and void, TCT T-35460 that was issued in
the name of Norma should be cancelled; the ownership of the subject lot should be
reconveyed to the heirs of Vicentico; and possession thereof should be delivered to
them.88

Since the cause of action of Alden had been finally and fully settled in the Compromise
Agreement in Civil Case No. 499, he no longer has a cause of action against Norma with
respect to his pro indiviso right in the subject lot.

What is clear from the amended complaint is that the remedy of specific performance
was not availed of by petitioners. They do not seek to collect from Norma the purchase
price of P50,000.00. While they have not expressly sought the resolution of the DAS on
account of Norma's nonpayment of the purchase price, such remedy could be implied
when they sought the nullification of Norma's TCT, the reconveyance to them of the
subject lot and the return of the possession to them. When the remedy of resolution of
reciprocal obligations, as in rescission, is sought, "the obligation to return the things
which were the object of the contract, together with their fruits, and the price with its
interests" is created pursuant to Article 1385 of the Civil Code.

Aside from attorney's fees, litigation expenses, moral damages and exemplary
damages, they also seek from Norma in their amended complaint the "reasonable value
of the use of the premises in the estimated amount of at least P10,000.00 a year, the
property in question being a prime commercial lot," having been deprived thereof. 89

As to the ruling of the MTC, it erred when it concluded that the DAS could be considered
as not consummated because no consideration was effected or given by Norma; and,
thus, it is void and non-existent.90 The sale was partly consummated on account of the
transfer of ownership by the vendors to Norma. The DAS is not void for lack of
consideration, but it has been extinguished by the happening of the tacit resolutory
condition, which is judicial resolution or rescission of the sale.

Likewise, the RTC erred in ruling that the DAS is valid, notwithstanding the non-
payment of the consideration, because there was delivery pursuant to Article 1477 91 in
relation to Article 149892 of the Civil Code.93 It further erred when it ordered Norma to
pay the P50,000.00 with interest at the legal rate of 12% per annum starting on June
28, 1995 (DAS' date of execution) until the full amount is paid. 94 The error is because,
firstly, the remedy availed of by the vendors is not specific performance, and secondly,
under Article 1592 of the Civil Code, the court may not grant the buyer a new term
when a demand for rescission of the contract has been made upon him judicially.

The applicability of Article 1592 was discussed by the Court in Cabrera v. Ysaac:95
For the sale of immovable property, the following provision governs its rescission:
Article 1592. In the sale of immovable property, even though it may have been
stipulated that upon failure to pay the price at the time agreed upon the rescission of
the contract shall of right take place, the vendee may pay, even after the expiration of
the period, as long as no demand for rescission of the contract has been made upon
him either judicially or by notarial act. After the demand, the court may not grant him a
new term.
This provision contemplates (1) a contract of sale of an immovable property and (2) a
stipulation in the contract that failure to pay the price at the time agreed upon will
cause the rescission of the contract. The vendee or the buyer can still pay even after
the time agreed upon, if the agreement between the parties has these requisites. This
right of the vendee to pay ceases when the vendor or the seller demands the rescission
of the contract judicially or extrajudicially. In case of an extrajudicial demand to rescind
the contract, it should be notarized.

Hence, this provision does not apply if it is not a contract of sale of an immovable
property and merely a contract to sell an immovable property. A contract to sell is
"where the ownership or title is retained by the seller and is not to pass until the full
payment of the price, such payment being a positive suspensive condition and failure of
which is not a breach, casual or serious, but simply an event that prevented the
obligation of the vendor to convey title from acquiring binding force." 96
The Court is mindful of the opinion of Justice J.B.L. Reyes in the consolidated cases
of Sing, Yee & Cuan, Inc. v. Santos, et al.97 and Santos, et al. v. Sing Yee & Cuan,
Inc.98 (Sing, Yee & Cuan, Inc.), viz.:
x x x [I]t is nevertheless clear that a distinction must be made between a contract of
sale in which title passes to the buyer upon delivery of the thing sold and a contract to
sell (or of "exclusive right and privilege to purchase," as in this case) where by
agreement the ownership is reserved in the seller and is not to pass until the full
payment of the purchase price is made. In the first case, nonpayment of the price is a
negative resolutory condition; in the second place, full payment is a positive suspensive
condition. Being contraries, their effect in law can not be identical. In the first case, the
vendor has lost and can not recover the ownership of the land sold until and unless the
contract of sale is itself resolved and set aside. In the second case, however, the title
remains in the vendor if the vendee does not comply with the condition precedent of
making payment at the time specified in the contract. Hence, when the seller, because
of noncompliance with the suspensive condition stipulated, seeks to eject the buyer
from the land object of the agreement, said vendor is enforcing the contract and is not
resolving the same. That article 1504 [(of the Civil Code of Spain or old Civil Code, now
Article 1592 of the new Civil Code)] refers to nonpayment as a resolutory condition and
does not contemplate an agreement to sell in which title is reserved by the vendor until
the vendee has complied first with conditions specified, is clear from its terms:
"ART. 1504. In the sale of real property, even though it may have been stipulated that
in default of the payment of the price within the time agreed upon, the resolution of the
contract shall take place ipso jure, the purchaser may pay even after the expiration of
the period, at any time before demand has been made upon him either by suit or by
notarial act. After such demand has been made the judge cannot grant him further
time."99
Based on Justice J.B.L. Reyes' opinion in Sing, Yee & Cuan, Inc. that the non-payment
of the purchase price in a contract of sale is a negative resolutory condition, the
happening or fulfillment thereof will extinguish the obligation or the sale pursuant to
Article 1231 of the Civil Code, which provides that fulfillment of a resolutory condition is
another cause of extinguishment of obligations. Despite its extinguishment, since the
vendor has lost ownership of the land, the contract must itself be resolved and set
aside. It is noted, however, that the resolution of the sale is the tacit resolutory
condition under Article 1191, as discussed above, which is implied in reciprocal
obligations.

Consequently, the Court rules that the sale transaction in the DAS is deemed resolved.

Proceeding to the second issue, the MTC justified the award of damages in this wise:
It is an elementary rule that when a person causes injury to another by reason of a
breach of contract or by a wrongful act or negligent act or omission, the person injured
can recover damages for the injury he sustained from the one who causes it and that
the damages he may receive will be commensurate to the injuries he sustained.

It was testified to by the plaintiffs, particularly Karen Nuñez Vito and Lynette Nuñez
Macinda, that due to the non-payment of defendant Norma Moises Palma of the
purchase price of their property (Lot No. 2159-A) despite their demands and the
transfer of the defendant in her name the certificate of title over the subject property, it
causes them sleepless nights, serious anxiety and other sufferings because, they said,
they might lose their property to defendant for nothing. The plaintiff further testified
that they had no other choice but to protect their rights and hired the services of a
lawyer for thirty thousand (Php30,000.00) pesos.

It is already ruled by this Court that defendant Norma Moises Palma never paid
plaintiffs the purchase price of Lot No. 2159-A and as such, her action caused breached
(sic) of faith, which lead to the nullification of the Deed of Adjudication and Sale.
Defendant's action indeed caused apprehension to plaintiffs that their property will go
to waste considering that defendant had already registered and acquired in her name a
Transfer Certificate of Title. The worry of plaintiffs are real and justice and equity
dictates that moral damages be given to them just to alleviate and or (sic) compensate
their moral sufferings caused by the action of defendant Norma Moises Palma. Likewise,
the attitude of defendant, despite the lapse of twelve (12) years from the time the
Deed of Adjudication and Sale was executed (June 28, 1995) by the plaintiffs up to the
time of the filing of this case which was on August 15, 2007, in not paying plaintiffs,
shows that defendant acted in a wanton, fraudulent and even oppressive manner which
this Court will not countenance and therefore so as to give an example to similarly
minded persons, the award for exemplary damages is proper.

Plaintiffs action in filing a case against defendant was borne out of fear that they may
lose their property. They were forced to litigate and incurred expenses to protect their
rights, hence, an award of attorney's fees and litigation expenses is just and
equitable.100
The non-payment of the entire purchase price, despite repeated assurances by Norma
to pay the same clearly constitutes a substantial and fundamental breach as would
defeat the very object of the parties in making the agreement. 101

In contracts, the court may award exemplary damages if the defendant acted in a
wanton, fraudulent, reckless, oppressive, or malevolent manner pursuant to Article
2232 of the Civil Code. Under Article 2219, moral damages may be recovered with
respect to acts and actions referred to in Article 21: "Any person who willfully causes
loss or injury to another in a manner that is contrary to morals, good customs or public
policy shall compensate the latter for the damage." As provided in Article 2208, as to
attorney's fees and expenses of litigation, other than judicial costs, they cannot be
recovered in the absence of stipulation, except: when the defendant's act or omission
has compelled the plaintiff to incur expenses to protect his interest; where the
defendant acted in gross and evident bad faith in refusing to satisfy the plaintiffs plainly
valid, just and demandable claim; and in any other case where the court deems it just
and equitable that attorney's fees and expenses of litigation should be recovered. In all
cases, they must be reasonable.

The MTC Decision has adequately explained the award of damages and the Court is in
full agreement based on the statutory bases afore-cited.

The Court is aware that while petitioners alleged the amount of at least P10,000.00 a
year as reasonable value of the use of the premises in the amended complaint, 102 no
evidence was adduced by them to support such claim. Nonetheless, the Court deems it
just and equitable to award reasonable compensation in the amount as alleged by
petitioners for the use and occupation of the premises by Norma because petitioners
have been unjustly deprived of the use of the subject lot. 103 They are entitled to recover
possession of the subject lot because of the failure of Norma to pay the agreed
purchase price and she has not been paying any rental for her use and occupancy of
the premises. Under Article 1596, the measure of damages is the estimated loss
directly and naturally resulting in the ordinary course of events from the buyer's breach
of contract for refusing to pay the purchase price.

WHEREFORE, the Petition is hereby GRANTED. The Court of Appeals (Visayas Station)
Decision dated July 31, 2015 and Resolution dated March 15, 2016 in CA-G.R. SP No.
07390 are hereby REVERSED and SET ASIDE. Likewise, the Decision dated December
11, 2012 of the Regional Trial Court, 6th Judicial Region, Branch 21, Mambusao, Capiz in
Civil Case No. M-12-0360-07 AP is hereby REVERSED and SET ASIDE. The Decision
dated June 8, 2012 of the Municipal Trial Court, 6th Judicial Region, Mambusao, Capiz in
Civil Case No. 515 is REINSTATED and AFFIRMED with MODIFICATION as follows:
WHEREFORE, preponderance of evidence points in favor of plaintiffs and against
defendant, judgment is hereby rendered:

1.) DECLARING the Deed of Adjudication and Sale

dated June 28, 1995 RESOLVED in so far as the
sale in favor of Norma Moises Palma is
concerned;
2.) ORDERING the proper Register of Deeds
to CANCEL Transfer Certificate of Title No. T-
35460 in the name of defendant Norma Moises
Palma and, in lieu thereof, to ISSUE a new Transfer
Certificate of Title in the names of Placida Hisole
Nuñez, Karen Nuñez, Warren Nuñez, Lynette Nuñez
and Norma Moises Palma, as co-owners to the
extent of 1/5 pro indiviso each or 85.8 square meters
undivided portion;
3.) DECLARING plaintiffs as the rightful co-owners
of Lot No. 2159-A subject to the co-owner's right of
defendant Norma Moises Palma with respect to the
share of Alden Nuñez in the total area of 85.8 square
meters;
4.) ORDERING defendant Norma Moises Palma to
recognize and respect the rights of ownership and
possession of Placida Hisole Nuñez, Karen Nuñez,
Warren Nuñez and Lynette Nuñez as co-owners of
Lot No. 2159-A;
5.) ORDERING defendant Norma Moises Palma to
pay plaintiffs the following:
a.) Ten Thousand (Php10,000.00)
pesos per year from 1995 up to
the actual turnover of possession
of Lot No. 2159-A to plaintiffs
except the share of Alden Nuñez
with an area of 85.8 square
meters;
b.) Fifty Thousand (Php50,000.00)
pesos as attorney's fees;
c.) Five Thousand (Php5,000.00)
pesos as litigation expenses;
d.) Seventy-Five Thousand
(Php75,000.00) pesos as moral
damages; and
d.) Fifteen Thousand (P15,000.00)
pesos as exemplary damages;
with the foregoing amounts
bearing legal interest at 6% per
 annum from finality of this
Decision until full payment; and
6.) ORDERING defendant to pay the cost of the suit.
SO ORDERED.

SECOND DIVISION

[G.R. NO. 163075 : January 23, 2006]

AYALA LIFE ASSURANCE, INC., Petitioner, v. RAY BURTON DEVELOPMENT

CORPORATION, Respondent.

DECISION

SANDOVAL-GUTIERREZ, J.:

Before us for resolution is the Petition for Review on Certiorari 1 assailing the
Decision2 dated January 21, 2004 of the Court of Appeals in CA-G.R. CV No. 74635, 3 as
well as its Resolution dated April 2, 2004 denying petitioner's motion for
reconsideration.

The facts are:

On December 22, 1995, Ayala Life Assurance, Inc., petitioner, and Ray Burton
Development Corporation, respondent, entered into a contract denominated as a
"Contract to Sell," with a "Side Agreement" of even date. In these contracts, petitioner
agreed to sell to respondent a parcel of land, with an area of 1,691 square meters,
situated at Madrigal Business Park, Ayala Alabang Village, Muntinlupa City, covered by
Transfer Certificate of Title No. 186485 of the Registry of Deeds of Makati City. The
purchase price of the land is P55,000.00 per square meter or a total of P93,005,000.00,
payable as follows:

(a) On contract date - P24,181,300.00 representing 26 percent of the purchase price,

inclusive of the P1,000,000.00 option money;

(b) Not later than January 6, 1996 - P3,720,200.00 representing 4 percent of the
purchase price to complete 30 percent down payment; and cralawlibrary

(c) In consecutive quarterly installments for a period of 5 years from December 22,
1995 - P65,103,500.00 representing the 70 percent balance of the purchase price. - '

The contract contains a stipulation in paragraphs 3 and 3.1 for an "Event of Default." It
provides that in case the purchaser (respondent) fails to pay any installment for any
reason not attributable to the seller (petitioner), the latter has the right to assess the
purchaser a late penalty interest on the unpaid installment at two (2%) percent per
month, computed from the date the amount became due until full payment thereof.
And if such default continues for a period of six (6) months, the seller has the right
to cancel the contract without need of court declaration by giving the purchaser a
written notice of cancellation. In case of such cancellation, the seller shall return to the
purchaser the amount he received, less penalties, unpaid charges and dues on the
property.

Respondent paid thirty (30%) down payment and the quarterly amortization, including
the one that fell due on June 22, 1998.

However, on August 12, 1998, respondent notified petitioner in writing that it will no
longer continue to pay due to the adverse effects of the economic crisis to its business.
Respondent then asked for the immediate cancellation of the contract and for a refund
of its previous payments as provided in the contract.

Petitioner refused to cancel the contract to sell. Instead, on November 25, 1999, it filed
with the Regional Trial Court, Branch 66, Makati City, a complaint for specific
performance against respondent, docketed as Civil Case No. 99-2014, demanding from
the latter the payment of the remaining unpaid quarterly installments beginning
September 21, 1999 in the total sum of P33,242,382.43, inclusive of interest and
penalties.

Respondent, in its answer, denied any further obligation to petitioner, asserting that on
August 12, 1998, it (respondent) notified the latter of its inability to pay the remaining
installments. Respondent invoked the provisions of paragraphs 3 and 3.1 of the
contract to sell providing for the refund to it of the amounts paid, less interest and the
sum of 25% of all sums paid as liquidated damages.

After pre-trial, petitioner moved for a summary judgment on the ground that
respondent's answer failed to tender any genuine issue as to any material fact, except
as to the amount of damages. The trial court granted the motion and ordered the
parties to submit their memoranda.

On December 10, 2001, the trial court rendered a Decision holding that respondent
transgressed the law in obvious bad faith. The dispositive portion reads:

WHEREFORE, defendant (now respondent) is hereby sentenced and ordered to pay

plaintiff (now petitioner) the sum of P33,242,383.43, representing the unpaid balance
of the principal amount owing under the contract, interest agreed upon, and penalties.
Defendant is further ordered to pay plaintiff the sum of P200,000.00 as attorney's fees
and the costs of suit.

Upon full payment of the aforementioned amounts by defendant, plaintiff shall, as it is

hereby ordered, execute the appropriate deed of absolute sale conveying and
transferring full title and ownership of the parcel of land subject of the sale to and in
favor of defendant.

On appeal, the Court of Appeals rendered a Decision dated January 21, 2004 in CA-G.R.
CV No. 74635, reversing the trial court's Decision, thus:
WHEREFORE, the decision appealed from is hereby REVERSED and SET ASIDE.
Ayala Life is hereby ordered to refund all sums paid under the Contract to Sell, with
interest of twelve percent (12%) per annum from 12 August 1998 until fully paid, less
the amount equivalent to 25% of the total amount paid as liquidated damages.

SO ORDERED.

The Court of Appeals ruled that the parties' transaction in question is in the nature of a
contract to sell, as distinguished from a contract of sale. Under their contract,
ownership of the land is retained by petitioner until respondent shall have fully paid the
purchase price. Its failure to pay the price in full is not a breach of contract but merely
an event that prevents petitioner from conveying the title to respondent. Under such a
situation, a cause of action for specific performance does not arise. What should govern
the parties' relation are the provisions of their contract on the "Event of Default" stated
earlier.

Hence, the instant Petition for Review on Certiorari .

Petitioner contends that the Court of Appeals committed a reversible error in holding
that: (a) the remedy of specific performance is not available in a contract to sell, such
as the one at bar; and (b) petitioner is liable to refund respondent all the sums the
latter paid under the contract to sell, with interest at 12% per annum from August 12,
1998 until fully paid, less the amount equivalent to 25% of the total amount paid as
liquidated damages.

Petitioner argues that by virtue of the contract to sell, it has the right to choose
between fulfillment and rescission of the contract, with damages in either case. Thus, it
is immaterial to determine whether the parties' subject agreement is a contract to sell
or a contract of sale.

In its comment, respondent disputed petitioner's allegations and prayed that the
petition be denied for lack of merit.

The issues are:

1. Whether respondent's non-payment of the balance of the purchase price gave rise to
a cause of action on the part of petitioner to demand full payment of the purchase
price; andcralawlibrary

2. Whether petitioner should refund respondent the amount the latter paid under the
contract to sell.

At the outset, it is significant to note that petitioner does not dispute that its December
22, 1995 transaction with respondent is a contract to sell. It bears stressing that the
exact nature of the parties' contract determines whether petitioner has the remedy of
specific performance.

It is thus imperative that we first determine the nature of the parties' contract.
The real nature of a contract may be determined from the express terms of the written
agreement and from the contemporaneous and subsequent acts of the contracting
parties.4 In the construction or interpretation of an instrument, the intention of the
parties is primordial and is to be pursued.5 If the terms of the contract are clear and
leave no doubt upon the intention of the contracting parties, the literal meaning of its
stipulations shall control.6 If the words appear to be contrary to the evident intention of
the parties, the latter shall prevail over the former. 7 The denomination or title given by
the parties in their contract is not conclusive of the nature of its contents. 8

Here, the questioned agreement clearly indicates that it is a contract to sell, not a
contract of sale. Paragraph 4 of the contract provides:

4. TITLE AND OWNERSHIP OF THE PROPERTY. - The title to the property shall transfer
to the PURCHASER upon payment of the balance of the Purchase Price and all
expenses, penalties and other costs which shall be due and payable hereunder or which
may have accrued thereto. Thereupon, the SELLER shall execute a Deed of Absolute
Sale in favor of the PURCHASER conveying all the SELLER'S rights, title and interest in
and to the Property to the PURCHASER.9

As correctly stated by the Court of Appeals in its assailed Decision, "The ruling of the
Supreme Court in Lim v. Court of Appeals (182 SCRA 564 [1990]) is most illuminating.
In the said case, a contract to sell and a contract of sale were clearly and thoroughly
distinguished from each other, with the High Tribunal stressing that in a contract of
sale, the title passes to the buyer upon the delivery of the thing sold. In a contract to
sell, the ownership is reserved in the seller and is not to pass until the full payment of
the purchase price is made. In the first case, non-payment of the price is a negative
resolutory condition; in the second case, full payment is a positive suspensive
condition. In the first case, the vendor has lost and cannot recover the ownership of the
property until and unless the contract of sale is itself resolved and set aside. In the
second case, the title remains in the vendor if the vendee does not comply with the
condition precedent of making payment at the time specified in the contract." 10

Considering that the parties' transaction is a contract to sell, can petitioner, as seller,
demand specific performance from respondent, as buyer? cralawlibrary

Black's Law Dictionary defined specific performance as "(t)he remedy of requiring exact
performance of a contract in the specific form in which it was made, or according to the
precise terms agreed upon. The actual accomplishment of a contract by a party bound
to fulfill it."11

Evidently, before the remedy of specific performance may be availed of, there must be
a breachof the contract.

Under a contract to sell, the title of the thing to be sold is retained by the seller until
the purchaser makes full payment of the agreed purchase price. Such payment is a
positive suspensive condition, the non-fulfillment of which is not a breach of
contractbut merely an event that prevents the seller from conveying title to the
purchaser. The non-payment of the purchase price renders the contract to sell
ineffective and without force and effect. Thus, a cause of action for specific performance
does not arise.
In Rayos v. Court of Appeals,12 we held:

x x x. Under the two contracts, the petitioners bound and obliged themselves to
execute a deed of absolute sale over the property and transfer title thereon to the
respondents after the payment of the full purchase price of the property, inclusive of
the quarterly installments due on the petitioners' loan with the PSB:

xxx

Construing the contracts together, it is evident that the parties executed a contract to
sell and not a contract of sale. The petitioners retained ownership without further
remedies by the respondents until the payment of the purchase price of the property in
full. Such payment is a positive suspensive condition, failure of which is not
really a breach, serious or otherwise, but an event that prevents the obligation
of the petitioners to convey title from arising, in accordance with Article 1184
of the Civil Code (Leano v. Court of Appeals, 369 SCRA 36 [2001]; Lacanilao v. Court
of Appeals, 262 SCRA 486 [1996]).

The non-fulfillment by the respondent of his obligation to pay, which is a

suspensive condition to the obligation of the petitioners to sell and deliver the
title to the property, rendered the contract to sell ineffective and without force
and effect (Agustin v. Court of Appeals, 186 SCRA 375 [1990]). The parties stand as
if the conditional obligation had never existed. Article 1191 13 of the New Civil
Code will not apply because it presupposes an obligation already
extant (Padilla v. Posadas, 328 SCRA 434 [2001]. There can be no rescission of an
obligation that is still non-existing, the suspensive condition not having happened (Rillo
v. Court of Appeals, 274 SCRA 461 [1997]). (Underscoring supplied) cralawlibrary

Here, the provisions of the contract to sell categorically indicate that respondent's
default in the payment of the purchase price is considered merely as an "event," the
happening of which gives rise to the respective obligations of the parties mentioned
therein, thus:

3. EVENT OF DEFAULT. The following event shall constitute an Event of Default under
this contract: the PURCHASER fails to pay any installment on the balance, for any
reason not attributable to the SELLER, on the date it is due, provided, however, that
the SELLER shall have the right to charge the PURCHASER a late penalty interest on the
said unpaid interest at the rate of 2% per month computed from the date the amount
became due and payable until full payment thereof.

3.1. If the Event of Default shall have occurred, then at any time thereafter, if any such
event shall then be continuing for a period of six (6) months, the SELLER shall have the
right to cancel this Contract without need of court declaration to that effect by giving
the PURCHASER a written notice of cancellation sent to the address of the PURCHASER
as specified herein by registered mail or personal delivery. Thereafter, the SELLER
shall return to the PURCHASER the aggregate amount that the SELLER shall have
received as of the cancellation of this Contract, less: (i) penalties accrued as of the date
of such cancellation, (ii) an amount equivalent to twenty five percent (25%) of the total
amount paid as liquidated damages, and (iii) any unpaid charges and dues on the
Property. Any amount to be refunded to the PURCHASER shall be collected by the
PURCHASER at the office of the SELLER. Upon notice to the PURCHASER of such
cancellation, the SELLER shall be free to dispose of the Property covered hereby as if
this Contract had not been executed. Notice to the PURCHASER sent by registered mail
or by personal delivery to its address stated in this Contract shall be considered as
sufficient compliance with all requirements of notice for purposes of this Contract. 14

Therefore, in the event of respondent's default in payment, petitioner, under the above
provisions of the contract, has the right to retain an amount equivalent to 25% of the
total payments. As stated by the Court of Appeals, petitioner having been informed in
writing by respondent of its intention not to proceed with the contract on August 12,
1998, or prior to incurring delay in payment of succeeding installments, 15 the provisions
in the contract relative to penalties and interest find no application.

The Court of Appeals further held that with respect to the award of interest, petitioner
is liable to pay interest of 12% per annum upon the net refundable amount due from
the time respondent made the extrajudicial demand upon it on August 12, 1998 to
refund payment under the Contract to Sell,16 pursuant to our ruling in Eastern Shipping
Lines, Inc. v. Court of Appeals.17

In sum, we find that the Court of Appeals, in rendering the assailed Decision and
Resolution, did not commit any reversible error.

WHEREFORE, the petition is DENIED. The assailed Decision and Resolution of the
Court of Appeals are AFFIRMED. Costs against petitioner.

SO ORDERED.

THIRD DIVISION

G.R. No. 232675, July 17, 2019

MUNICIPALITY OF DASMARIÑAS, PETITIONER, v. DR. PAULO C. CAMPOS,

SUBSTITUTED BY HIS CHILDREN JOSE PAULO CAMPOS, PAULO CAMPOS, JR.,
AND ENRIQUE CAMPOS, RESPONDENTS.

G.R. No. 233078, July 17, 2019

NATIONAL HOUSING AUTHORITY, PETITIONER, v. DR. PAULO C. CAMPOS,

SUBSTITUTED BY HIS CHILDREN JOSE PAULO CAMPOS, PAULO CAMPOS, JR.,
AND ENRIQUE CAMPOS, RESPONDENTS.

DECISION

REYES, A., JR., J.:

Before this Court are two separate Petitions for Review on Certiorari under Rule 45 of
the Rules of Court, which were ordered consolidated in a Resolution 1 dated September
20, 2017. These challenge the Decision2 dated November 10, 2016 and
Resolution3 dated July 3, 2017 of the Court of Appeals (CA) in CA-G.R. CV No. 100259,
which affirmed the Decision4 dated March 16, 2011 of the Regional Trial Court (RTC) of
Imus, Cavite, Branch 22, in Civil Case No. 2459-01, the latter dismissing the complaint
filed by the Municipality of Dasmariñas (now City of Dasmariñas) and the National
Housing Authority (NHA) (collectively, the petitioners) for lack of merit.

Petitioner Municipality of Dasmariñas is a local government unit, while co-petitioner

NHA is a government instrumentality created pursuant to Presidential Decree (P.D.) No.
757.5Respondent, the late Dr. Paulo C. Campos (Dr. Campos), substituted by his
children-heirs Jose Paulo Campos, Paulo Campos, Jr. and Enrique Campos
(respondents-heirs), was the former registered owner of the property subject of the
case at bar who first filed a Petition for Revocation of Donation. 6

The Facts

Dr. Campos was the absolute owner of certain parcels of land situated in Dasmariñas,
Cavite, covered by Transfer Certificate of Title (TCT) Nos. T-69124, T-69125, T-76195,
and [T-17736].7On July 28, 1976, Dr. Campos executed a Deed of Donation (First Deed
of Donation) in favor of the NHA, involving a parcel of land with an area of 12,798
square meters.8

Under the Deed of Donation, the donee NHA was to construct a 36-meter-wide access
road from Highway 17 to the Dasmariñas Resettlement Project. 9 The pertinent
provisions of the Deed of Donation state:
B. WHEREAS, the DONOR has agreed to donate in favor of the DONEE portions of the
above listed properties to be traversed by the 36 meter wide access road to be
constructed by the National Housing Authority from Highway 17 to the Dasmariñas
Resettlement Project which are particularly described in the technical descriptions x x
x[.]

xxxx

NOW, THEREFORE, for and in consideration of the foregoing premises, the DONOR by
these presents hereby convey and transfer by way of donation in favor of the DONEE,
the parcels of land described in Annexes "A", "B", "C" and "D" which will be traversed
by the [36] meter wide access road to be constructed by the National Housing Authority
from Highway 17 to the Dasmariñas Resettlement Project and designated as Lots 2-C-
1; 2-D-2; 2-B-1-A and 1-B, all situated in the Municipality of Dasmariñas, Province of
Cavite, containing a total area of TWELVE THOUSAND SEVEN HUNDRED NINETY EIGHT
(12,798) square meters, more or less[.] x x x

It is hereby stipulated that should the DONEE fail to use the area or part of it for the 36
meter access road, or should its development be delayed, the DONOR reserves the
right to use it until such a time that DONEE is in a position to use the said parcel of
properties.10
In an attempt to comply with the provisions of the Deed of Donation, the NHA
constructed a 20-m-wide access road, in lieu of the stipulated 36-m-wide access
road.11 The NHA reasoned that the volume of the traffic at that time did not justify the
outright construction of the 36-m-wide access road, and that it had reserved the
remaining 16 m for road widening purposes. The NHA also promised that the property
had not been diverted or used for any other purpose. 12

However, on June 13, 1993, without any notice to Dr. Campos, the NHA donated the
subject property to the Municipality of Dasmariñas. This was done allegedly pursuant to
Section 31 of P.D. No. 957.13 The pertinent provisions of the Deed of Donation and
Acceptance (Second Deed of Donation) executed between the petitioners read, to wit:
WHEREAS, the DONOR being the registered owner and developer of Dasmariñas
Bagong Bayan Resettlement Project has made possible the concreting of road networks
containing an aggregate land area of 219,765.60 sq. meters more or less[.]

xxxx

WHEREAS, pursuant to Section 31 of [P.D.] No. 957, as amended by Section 2 of [P.D.]

No. 1216, the owner or developer of a subdivision shall provide adequate roads, alleys,
sidewalks and open spaces for public purposes, the donation of which to the City or
Municipality where the same belongs and the acceptance of said donation is mandatory.

WHEREAS, pursuant to Board Resolution No. 2696 dated June 2, 1993, a copy of which
is hereto attached as Annex "E", the DONOR has agreed to donate in favor of the
DONEE the above-stated road works.

WHEREAS, the DONEE under Resolution No. 65-S-88 dated June 20, 1988 of its
Sangguniang Bayan. attached hereto as Annex "F", has agreed to the donation by the
DONOR of all roads in the Project.

NOW, THEREFORE, for and in consideration of the foregoing premises, the DONOR by
these presents does hereby cede, transfer and convey by way of donation in favor of
the DONEE the abovementioned roads, containing a total area of 219,765.60 square
meters, more or less, all situated at Dasmariñas Bagong Bayan Resettlement Project,
the as-built-plan of which are attached as Annexes "A", "B", "C" and "D", subject to the
following conditions:
1.) The donated concreted roads shall be used exclusively for public purpose as roads and
shall not be converted to other uses;
2.) The expenses to be incurred in the maintenance and repair of such roads shall be
shouldered solely by the DONEE;
3.) Appropriate traffic precautionary measures shall be implemented by the DONEE on the
subject roads.
The DONOR has reserved sufficient properties in its full possession and ' enjoyment in
accordance with the provisions of its Charter.14
Due to the failure of the NHA to fully comply with the provisions in the Deed of
Donation despite the long lapse of time, and due to the foregoing transaction between
the petitioners, on November 13, 2001, Dr. Campos filed an action for Revocation of
Donation against the NHA with the RTC of Dasmariñas, Branch 90. 15 Dr. Campos
claimed that the NHA failed to comply with the condition attached to the donation and
construct the 36-m-wide access road. He also alleged that the NHA further violated the
parties' agreement by subsequently donating the subject property to the Municipality of
Dasmariñas.16

Proceedings in the Trial Court

In the RTC Branch 90, the Municipality of Dasmariñas and the NHA filed their Answers
to Dr. Campos' claim on December 19, 2001 and January 31, 2002, respectively. 17 The
case was re-raffled to the RTC, Branch 22, which directed the parties to submit their
respective memoranda.

On June 2, 2007, Dr. Campos passed away. As a result, the respondents-heirs

submitted a Notice of Death with Manifestation, as well as a Motion for Substitution,
which was granted by the RTC.18

On March 16, 2011, the RTC handed its Decision,19 partially granting the action for
Revocation of Donation against the petitioners.20 The dispositive portion of the RTC
decision reads:
WHEREFORE, the petition is hereby partially granted in that:

(a) The Deed of Donation dated July 28, 1976 involving 12,798 square meters of land
covered by [TCT] Nos. T-69124, T-69125, T-76195 and T-17786 is declared partially
revoked to the extent of the area of the property not included in the 20-meter wide
access road;

(b) The Deed of Donation and Acceptance dated 1993 is declared without legal effect to
the extent of the area of the property not included in the 20-meter wide access road
referred to in paragraph (a) above;

(c) [Dr. Campos], as represented by his legal heirs, is declared the rightful owner of the
area of the property not included in the 20-meter wide access road referred to in
paragraphs (a) and (b) above and reconveyance of the said area is hereby ordered in
favor of [Dr. Campos] as represented by his legal heirs; and,

(d) [The petitioners] are ordered to immediately turn over the possession and control of
the subject property in favor of [Dr. Campos'] legal heirs.

[Dr. Campos'] claims for moral damages, attorney's fees and cost of suit are denied.

SO ORDERED.21
The Motion for Reconsideration filed by the NHA was denied by the RTC on August 12,
2011.22Both the petitioners, thus, filed their Notices of Appeal. 23

Proceedings in the CA

On November 10, 2016, the CA rendered its Decision, denying the petitioners' Appeal
and affirming the RTC Decision dated March 16, 2011. 24

In affirming the decision of the RTC, the CA agreed with the lower court that the
donation is one that is onerous in nature, as it contained a condition imposed upon the
NHA.25 Since the donation was onerous, any action for the revocation of the same
should be brought within 10 years from accrual of the right of action. The CA held that
this was timely effected by Dr. Campos.

The CA also found that the NHA violated the terms of the Deed of Donation and failed
to fulfill its obligation to build a 36-m-wide access road. 26 The CA stated that the
evidence on record indisputably showed that the NHA only built a 20-m-wide access
road despite the more than 25 years since the donation was perfected. It was held,
thus, that the NHA's omission was not merely a casual breach as advocated by the
petitioners, but a substantial one.

Likewise, the CA found that the reason behind the subsequent donation of the subject
property by the NHA to the Municipality of Dasmariñas was unjustified. It was held that
P.D. No. 957 refers to the transfer of a condominium or a subdivision project, and since
the Dasmariñas Resettlement Project is not classified as either a condominium or a
subdivision project under the law, then the provisions of P.D. No. 957 cannot be used
as justifiable reason to donate the same.27

The dispositive portion of the CA decision, affirming the findings of the lower court,
reads, to wit:
WHEREFORE, the appeal is DENIED. The decision issued by the [RTC] of Imus, Cavite
Br. 22 dated March 16, 2011 in Civil Case No 2459-01 is AFFIRMED. 28
The petitioners' respective Motions for Reconsideration were likewise denied by the CA
in a Resolution29 dated July 3, 2017, prompting the petitioners to file with the Court the
instant consolidated Petition.

In the interim, the Municipality of Dasmariñas commenced construction and road

widening works along Governor Mangubat Avenue, in the vicinity of the portion
adjudged for reconveyance to the respondents-heirs. 30 Accordingly, the respondents-
heirs wrote a letter to the Municipality of Dasmariñas on January 18, 2018, seeking
clarification as to how the construction and road widening works would affect the
property subject of the consolidated case, as well as praying that the parties keep the
status quo and defer any further works until final resolution of the Court. 31

In a letter-response32 dated February 12, 2018, the Municipality of Dasmariñas, through

City Engineer Florante Timbang, replied that it intended to proceed with the
construction and road widening works on the subject property, notwithstanding the
pendency of the petitions. The letter response stated:
For all intents and purposes, at present, the City of Dasmariñas is still the owner of the
36 meter wide access road which includes the donated lot of [Dr. Campos]. Being the
owner of the 36 meter access road, the local government can make the necessary road
works including the road widening that the City of Dasmariñas is currently undertaking.

Moreover, if the City will exclude the portion donated by [Dr. Campos] to the road
widening and construction of drainage in Governor Mangubat Avenue, the portion
starting from the exit ramp of the DLSLJ-HIS going towards the 7-Eleven convenience
store near the creek the road will be having an uneven width instead of the six (6)
lanes as originally planned. There will be no drainage in that area and flooding will
occur which shall not only unduly prejudice the occupants of nearby establishments but
also those who are passing in the area.

In the event that the Supreme Court shall rule in favor of the revocation of the
donation, for the promotion of general welfare and considering that Governor Mangubat
is the primary road from Aguinaldo Highway going to Congressional Avenue in Kadiwa
linking the town proper to different barangays in the Dasmariñas Bagong Bayan, the
City of Dasmariñas shall be constrained and left without any alternative but to exercise
its power of eminent domain and expropriate the property. 33
On August 8, 2018, the respondents-heirs filed a Motion for Early Resolution, 34 praying
for the Court to resolve the subject Petitions at the earliest opportunity.

The Municipality of Dasmariñas subsequently filed a Manifestation 35 dated August 24,

2018, likewise stating that, given the supervening events, it would also appreciate the
earlier resolution of the instant case.

With the foregoing factual antecedents in mind, the Court will now proceed to rule on
this consolidated Petition.

The Issues

The issues in this case are as follows:

First, as to the procedural aspect of the case, whether or not the action to revoke the
Deed of Donation has prescribed and/or is barred by laches.

Second, as to the substantial merits, whether or not the CA gravely erred when it
affirmed the decision of the RTC that the NHA violated the terms of the Deed of
Donation, said violations authorizing the partial revocation of the property donated,
specifically the unused 16 m, and whether or not petitioners have proffered any valid
justification to show any infirmity in the decision.

The Arguments of the Parties

The petitioners allege that the CA erred when it held that the action to revoke the Deed
of Donation had not yet prescribed pursuant to Article 1144 of the Civil Code, 36 the
latter provision stating that an action upon a written contract must be brought within
10 years from the time the right of action accrued. 37 In this case, the CA stated that the
right of action accrued when the NHA donated the subject property to the Municipality
of Dasmariñas.38 The petitioners allege that the reckoning point should be at the time
the late Dr. Campos discovered that the NHA only constructed a 20-m-wide access road
instead of the stipulated 36-m-wide access road,39 which means that the right to file
had long prescribed when Dr. Campos filed an action to revoke the donation on
November 13, 2001.

Finally, the NHA also alleges that the respondents-heirs, particularly Dr. Campos, are
guilty of laches.40 In particular, Dr. Campos allegedly had known ever since that the
NHA constructed a 20-m-wide access road instead of one that was 36-m-wide,
however, he "slept on his rights and waited for a period of 25 years before filing the
action for revocation."41

On the substantial aspect, despite the fact that 16 m of the donated property remain
unused for the stipulated purpose to this day, the petitioners allege that the NHA
actually complied with the condition imposed by Dr. Campos pertaining to the
construction of the access road.42 The petitioners advocate their side that there was full
compliance with the condition stipulated in the Deed of Donation, as there was actual
construction of the access road, albeit only 20 m wide, and the remaining 16 m was
reserved for road widening purposes.43 While ultimately only a 20-m-wide access road
was constructed by the NHA, the petitioners allege that the unpaved portion of the
donated property remained to be part of the latter, and was not used for any other
purpose. The petitioners state that the reason for this was the high volume of traffic
that, at that time, would not allow outright construction and completion of the road. 44

For the petitioners, the fact that the donated property, up to the present, remains to be
part of the access road from Aguinaldo Highway up to the Dasmariñas Resettlement
Project, and the fact that the access road is more developed thus neighboring
properties of the respondents-heirs, as well as other pedestrians, have
benefited,45 these lend credence to their allegation that there was no breach of the
condition.

The petitioners likewise point to paragraph C of the Deed of Donation, which states that
any delay in the development for the avowed purposes would only allow the donor
(respondents-heirs in the case) to reserve the right to use the property until such time
that the donee (NFIA) is in a position to use the property, and not allow the revocation
of the Deed of Donation.46 The paragraph is reiterated as follows:
It is hereby stipulated that should the donee fail to use the area or part of it for the
36[-]meter access road, or should its development be delayed, the donor reserves the
right to use it until such time that the donee is in a position to use the property. 47
The petitioners also state that even assuming that there was a breach of the condition
imposed, the same does not warrant the revocation of the donation, as this constituted
merely a casual breach of the Deed of Donation, and not a substantial breach that
would warrant the rescission of the same.48

On the side of the respondents-heirs, they disagree that their right of action had not
yet prescribed. The respondents-heirs agree with the CA that Article 1144 of the Civil
Code is the applicable legal provision, pursuant to jurisprudence that states that
donations with an onerous clause are governed by the rules on contracts and the
general rules on prescription apply in the said revocation, and pursuant to the
aforecited Article 1144 which states that all actions upon a written contract shall be
brought within 10 years from accrual of the right of action. 49 The respondents-heirs
argue that since the right of action accrued in 1993 (the year when the NHA donated
the subject property to the Municipality of Dasmariñas), the action to revoke the Deed
of Donation had not yet prescribed when the Complaint was filed on November 13,
2001.50

For the respondents-heirs, it is crystal clear that the NHA clearly failed to comply with
the agreement between the parties as clearly stated in the Deed of Donation which can
be readily observed in the fact that a 20-m-wide access road was built instead of the
agreed upon 36-m-wide one.51 This, according to the respondents-heirs, is not a mere
casual breach as the petitioners would argue, as the 16 m difference is more than
substantial and would definitely warrant the revocation of the donation. The
respondents-heirs state that the fact that the NHA donated the property means that the
missing 16 m will never be devoted for road widening or as an access
road.52 Subsequent donation also contravenes the provision in the initial Deed of
Donation that "the donor (Dr. Campos) reserves the right to use it until such time that
the done[e] (NHA) is in a position to use the property," such provision now being an
impossibility because it was not reproduced in the second deed. 53

Ruling of the Court

After a perusal of the pleadings and arguments of the parties, the Court finds that the
consolidated petition is bereft of merit.

As to the Issues on Prescription and Laches

There is no question that Dr. Campos properly filed the action for Revocation of
Donation within the allowable time under the law. The first donation between Dr.
Campos and the NHA was a donation of an onerous nature, as it contained the
stipulation to build the 36-m-wide access road. Jurisprudence, including the C-J Yulo &
Sons, Inc. v. Roman Catholic Bishop of San Pablo, Inc. 54 case cited by the petitioners
themselves, is clear that donations of an onerous type are governed by the law on
contracts, and not by the law on donations.55 Being as such, under Article 1144 of the
New Civil Code, all actions upon a written contract shall be brought within 10 years
from accrual of the right of action, and herein, the respondents-heirs' right of action
only accrued when the NHA donated the subject property to the Municipality of
Dasmariñas, as this transfer effectively removed not only NHA's ability to complete the
access road based on the stipulation, but also precluded any move on the part of the
NHA to compel the transferee to finish the same.

If the Municipality of Dasmariñas chooses not to honor the previous agreement between
the NHA and the respondents-heirs, there would be nothing to compel the Municipality
of Dasmariñas from doing so. This is a clear concern for the respondents-heirs, which
could have only realistically been raised as a red flag at the onset of the second
donation and after a perusal of the contents therein. Thus, the CA correctly ruled that
the prescriptive period could only start running from the time of the second donation
between the petitioners.

There is likewise no merit to the assertion that the laches doctrine applies as a ground
to overturn the CA ruling. While laches is principally a question of equity, and
necessarily, there is no absolute rule as to what constitutes laches or staleness of
demand, each case is to be determined according to its particular circumstances. 56 The
question of laches is addressed to the sound discretion of the court and since laches is
an equitable doctrine, its application is controlled by equitable considerations. 57

Jurisprudence, however, has set established requisites for laches, viz.:

(1) Conduct on the part of the defendant or one under whom he claims, giving rise to
the situation of which complaint is made and for which the complainant seeks a
remedy;

(1) Conduct on the part of the defendant or one under whom he claims, giving rise to the
situation of which complaint is made and for which the complainant seeks a remedy;
(2) Delay in asserting the complainant's right, the complainant having had knowledge or
notice of defendant's conduct and having been afforded an opportunity to institute a suit;
(3) Lack of knowledge or notice on the part of the defendant that the complainant would
assert the right on which he bases his claim; and
(4) Injury or prejudice to the defendant in the event relief accorded to the complainant, or
the suit is not held barred.58
In this case, it cannot be said that Dr. Campos slept on his rights and is guilty of laches,
as the second requisite of delay is factually and legally absent. Dr. Campos had shown
patience in allowing the NHA the time to finish its obligation despite the long period that
was starting to elapse, and filed the case only when it was clear that the NHA could no
longer fulfill its obligation.

In addition, the fact that the case was filed within the prescriptive period of 10 years
aptly removes the case from the clutches of possible laches.

In Agra v. Philippine National Bank,59 the Court held:

The second element cannot be deemed to exist. Although the collection suit was filed
more than seven years after the obligation of the sureties became due, the lapse was
within the prescriptive period for filing an action. In this light, we find immaterial
petitioners1 insistence that the cause of action accrued on December 31, 1968, when
the obligation became due, and not on August 30, 1976, when the judicial demand was
made. In either case, both submissions fell within the ten-year prescriptive period. In
any event, "the fact of delay, standing alone, is insufficient to constitute laches."

Petitioners insist that the delay of seven years was unreasonable and unexplained,
because demand was not necessary. Again we point that, unless reasons of inequitable
proportions are adduced, a delay within the prescriptive period is sanctioned by law and
is not considered to be a delay that would bar relief. x x x
Thus, where the claim was filed within the three-year statutory period, recovery
therefore cannot be barred by laches.60 (Citations omitted)
To note, the petitioners themselves point out that nothing in the Deed of Donation
gives an exact timeline for the NHA to complete the building of the access road, saying
that "[t]he construction of the exactly [36-m-wide] access road is not time-
bound,"61 which means that, for the time NHA was in control of the property, the
respondents-heirs' cause of action could not have arisen. This would explain the
relatively long period before which the late Dr. Campos filed a complaint for Revocation
of Donation, because before the subsequent donation to the Municipality of Dasmariñas,
the respondents-heirs, in their generosity, gave the NHA leeway to hopefully deliver on
its pledge to complete the construction. Unfortunately, the second donation completely
eradicated any vestiges of hope that would be fulfilled, prompting respondents to take
action, well within the time allowed by the statute.

As to the Revocation of the Deed of Donation

Even notwithstanding the procedural aspects of the case, on the substantial merits on
whether or not the NHA committed a substantial breach that would justify the partial
revocation of the Deed of Donation, as well as the facts of the case, the petitioners'
arguments fall flat. At the onset, the Court notes that the factual findings that the NHA
failed to comply with the express stipulations contained in the Deed of Donation are
consistent and parallel with that of the trial court, as well as the CA. Thus, these
findings of fact are binding on the Court of last resort unless there was an oversight or
misinterpretation on the part of the lower courts.62

As held in The Secretary of Education v. Heirs of Rufino Dulay, Sr.:63

Under Rule 45 of the 1997 Rules of Civil Procedure, only questions of law may be raised
in a petition for review on certiorari, for the simple reason that this Court is not a trier
of facts. It is not for the Court to calibrate the evidence on record, as this is the
function of the trial court. Although there are well-defined exceptions to the rule,
nevertheless, after a review of the records, we find no justification to depart
therefrom. Moreover, the trial courts' findings of facts, as affirmed by the
appellate court on appeal, are binding on this Court, unless the trial and
appellate courts overlooked, misconstrued or misinterpreted facts and
circumstances of substance which, if considered, would change the outcome of
the case.64 (Emphasis and underscoring Ours)
The Court finds that the petitioners were unable to prove the presence of any possible
oversight that would create doubt on the findings of fact of the trial court and the CA.
The Court's own review of the evidence on record will show that indeed, a substantial
breach, and not just a slight breach, was committed by the NHA that would validate a
revocation of the donation and a rescission of the subject contract between the NHA
and the respondents-heirs necessitating the immediate return of the unused property
back to the respondents-heirs.

Axiomatically, the general rule is that rescission will not be permitted for a slight or
casual breach of the contract, but only for such breaches as are so substantial and
fundamental as to defeat the object of the parties in making the
agreement.65 Substantial breaches, unlike slight or casual breaches of contract, are
fundamental breaches that defeat the object of the parties in entering into an
agreement,66 and the question of whether the breach is slight or substantial is largely
determined by the attendant circumstances.67

Based on the foregoing, and for a myriad of reasons, a substantial breach of contract
was committed by the NHA when it only built a 20-m-wide access road, and not a mere
casual breach which the petitioners allege would render nugatory the revocation of the
donation.

As gleaned from the provisions, the object of the agreement is clearly the construction
of a 36-m-wide access road from Highway 17 to the Dasmariñas Resettlement Project,
which was reiterated no less than three times in the Deed of Donation. There was no
allowance for any deviation from that number, as stipulated or in the nature of the
undertaking. The failure to construct the access road with the expressly mentioned
specifications is unmistakably a breach of the same.

The Court does not agree with the contention of the petitioners that the condition
pertaining to the construction of the access road was complied with because the
unpaved 16-m portion was still reserved to be completed. 68 The stipulation in the Deed
of Donation is clear that the entire 36-m property must be used for actual
construction of the access road, and non-usage of even a portion would constitute
contravention of the Deed of Donation, especially in this case when a substantial
portion of the property ultimately remained unused for the stated purpose and object of
the donation. Law69 and jurisprudence consistently hold that if the terms of a contract
are clear and leave no doubt upon the intention of the contracting parties, the literal
meaning of its stipulations shall control.70

In Century Properties, Inc. v. Babiano, et al.,71 citing Norton Resources and Dev't. Corp.
v. All Asia Bank Corp.,72 the Court held:
The rule is that where the language of a contract is plain and unambiguous, its
meaning should be determined without reference to extrinsic facts or aids. The
intention of the parties must be gathered from that language, and from that language
alone. Stated differently, where the language of a written contract is elear and
unambiguous, the contract must be taken to mean that which, on its face, it
purports to mean, unless some good reason can be assigned to show that the
words should be understood in a different sense.Courts cannot make for the
parties better or more equitable agreements than they themselves have been satisfied
to make, or rewrite contracts because they operate harshly or inequitably as to one of
the parties, or alter them for the benefit of one party and to the detriment of the other,
or by construction, relieve one of the parties from the terms which he voluntarily
consented to, or impose on him those which he did not. 73 (Emphasis and underscoring
Ours)
Thus, any assertions that there was compliance with the provisions of the Deed of
Donation are simply and completely spurious in light of the fact that there was clear
failure to build the access road despite the long period of time given for the NHA to do
so. The NHA's contention that outside factors, such as the volume of traffic at that
time,74 were to blame for any apparent breach do not offer a semblance of validity.
Even assuming that this was true, almost two decades had lapsed from the time the
property was donated, to the subsequent donation from the NHA to the Municipality of
Dasmariñas. It is simply inconceivable that in that lengthy span of time, the NHA would
have not been able to address the problem of traffic and/or found a way to alleviate
that specific obstacle in order to complete the construction of the access road. The
NHA's failure to do so indicates the lack of prioritizing on its part to comply with the
agreement, and it cannot now use extraneous factors as justification for its own lack of
diligence.

The contemporaneous and subsequent actions of the NHA and the Municipality of
Dasmariñas exacerbate the breach committed, and take it firmly out of the realm of
slightness. The petitioners' invocation of C-J Yulo & Sons, Inc.75 case as analogous to
their case in actuality highlights their erroneous actions because the circumstances in
the cited case and the case at bar are drastically different.

In the C-J Yulo & Sons, Inc. case, a condition for the donation between the parties was
the construction of a home for the aged and the infirm, and that, except with prior
written consent of the donor or its successor, the donee shall not use the land except
for the purpose as provided.76 The donee, however, leased a portion of the property
without the prior written consent of the donor, alleging however that this was to
generate funds for the realization of the stated purpose.

The Court, in C-J Yulo & Sons, Inc., looked at the fact that the subsequent donations
were to protect the property and fulfill the object of the donation, which was to build a
home for the aged, something the donee was able to adequately prove. The Court
explained, thus:
The Court, however, understands that such a condition was written with a specific
purpose in mind, which is, to ensure that the primary objective for which the donation
was intended is achieved. A reasonable construction of such condition rather than
totally striking it would, therefore, be more in accord with the spirit of the donation.
Thus, for as long as the contracts of lease do not detract from the purpose for which
the donation was made, the complained acts of the donee will not be deemed as
substantial breaches of the terms and conditions of the deed of donation to merit a
valid revocation thereof by the donor.

Finally, anent petitioner's contention that the [CA] failed to consider that respondent
had abandoned the idea of constructing a home for the aged and infirm, the
explanation in respondent's comment is enlightening. Petitioner relies on Bishop
Bantigues letter dated June 21. 1990 as its basis for claiming that the donee had
altogether abandoned the idea of constructing a home for the aged and the infirm on
the property donated. Respondent, however, explains that the Bishop, in his letter,
written in the vernacular, expressed his concern that the surrounding area was being
considered to be re-classified into an industrial zone where factories are expected to be
put up. There is no question that this will definitely be disadvantageous to the health of
the aged and the infirm. Thus, the Bishop asked permission from the donor for a
possible exchange or sale of the donated property to ultimately pursue the purpose for
which the donation was intended in another location that is more appropriate.

The Court sees the wisdom, prudence and good judgment of the Bishop on this point,
to which it conforms completely. We cannot accede to petitioner's view, which
attributed the exact opposite meaning to the Bishop's letter seeking permission to sell
or exchange the donated property.77
As mentioned, substantial, unlike slight or casual breaches of contract are fundamental
breaches that defeat the object of the parties in entering into an agreement. 78 Thus, the
object of the parties is a vital indicator in determining whether the breach is
substantial, or merely casual and minor. The stark difference in the C-J Yulo & Sons,
Inc. case with the one advocated by the petitioners is that the subsequent acts of the
donee, which would have constituted material breaches of the provisions of the
donation contract should they be considered in isolation sans the purpose, were held to
be casual breaches as they were actually done in furtherance for the avowed purpose to
construct a home for the aged.

In the case herein, the NHA failed to show any concrete proof that it was bent on
fulfilling its obligation to complete the construction of the access road. The mere
allegation that it "reserved" the remaining portion is inconsistent with its simultaneous
and concurrent acts, which include failing to build despite the long period with the
opportunity to do so. In fact, the current state of the property, which has now seen
developments started and completed by the Municipality of Dasmariñas, would readily
show that the remaining portion has obviously not been reserved, a situation that
prompted respondents to file a Motion for Early Resolution in order to preserve the
property which had been made the subject of development by the Municipality of
Dasmariñas despite the pendency of its appeal. This clearly shows bad faith on the part
of the petitioners, and proves that the NHA's contention that the remaining portion
meant to be converted into an access road remained to be reserved is a sham.

The NHA's flimsy attempts to show that the non-fulfillment of the condition was out of
its hands and that it had every intention of completing the road, are contradicted by its
own actions, not the least of it was the subsequent donation to the Municipality of
Dasmariñas. The petitioners cannot also find solace in the provision stating that any
delay in the development for the avowed purposes would only allow the respondents-
heirs to reserve the right to use the property until such time that the original done, the
NHA, is in a position to use the property. The act of transferring the subject property to
the Municipality of Dasmariñas, in effect, decimated any opportunity for the NHA to
comply with the condition stated in the Deed of Donation and, as such, the NHA will
never be in a position to utilize the property. The Court takes particular notice of the
fact that nothing in the subsequent transfer agreement between the petitioners
reiterates the condition that the access road be completed according to the
specifications laid out in the original Deed of Donation, which means that there is no
legal obligation on the part of the Municipality of Dasmariñas to complete the road, nor
a way for the NHA to compel the same. As the condition can no longer be completed,
the trial court's act of revoking the donation was proper.

It is likewise untrue, as the petitioners allege, that the subsequent donation of the
subject property from the NHA to the Municipality of Dasmariñas was required by law,
particularly Section 31 of P.D. No. 957. This reads, to wit:
Sec. 31. Donations of roads and open spaces to local government. The registered
owner or developer of the subdivision or condominium project, upon completion of the
development of said project may, at his option, convey by way of donation the roads
and open spaces found within the project to the city or municipality wherein the project
is located. Upon acceptance of the donation by the city or municipality concerned, no
portion of the area donated shall thereafter be converted to any other purpose or
purposes unless after hearing, the proposed conversion is approved by the Authority.
This provision is inapplicable and cannot be used to justify the subsequent transfer for
the simple reason that the Dasmariñas Resettlement Project is neither a subdivision
project nor a condominium project, either of which would legally mandate a transfer.
Under the same P.D. No. 957, a subdivision project, as well as a condominium project,
is respectively defined as such:
15(d) Subdivision project. "Subdivision project" shall mean a tract or a parcel of land
registered under Act No. 496 which is partitioned primarily for residential purposes into
individual lots with or without improvements thereon, and offered to the public for sale,
in case or in installment terms. It shall include all residential, commercial, industrial and
recreational areas as well as open spaces and other community and public areas in the
project.

xxxx

Condominium project. "Condominium project" shall mean the entire parcel of real
property divided or to be divided primarily for residential purposes into condominium
units, including all structures thereon.
In the mind of this Court, and in agreement with the CA, the Dasmariñas Resettlement
Project does not constitute a subdivision nor a condominium project that would
necessitate the transfer. The onus was on the petitioners to prove that the project was
classified as such, but they were not able to produce any evidence aside from their bare
assertions. Perforce, this justification cannot stand even as to show a possibility that
the transfer was effected in good faith.
As a final note, the Court is well-aware of the long period from the inception of the case
up to the present. Since the time the case was filed back in 2001, more than a decade
ago, a myriad of supervening events has taken place, including, as mentioned by both
parties, the construction of buildings and the commencement of infrastructure projects
directly or indirectly involving the subject property. Indeed, as emphasized by the
petitioners in their pleadings, the current structures will be affected by the upholding of
the revocation and the return of the affected property to the respondents-heirs.

However, it must be stressed that any dire effects of the revocation of the donation are
solely on the account of the petitioners. The petitioners' allegations that the access road
is more developed and that the neighboring properties have been benefited cannot hold
up against the clear breach of the contract committed by the NHA, and subsequently
allowed by both the petitioners. Even if proven, the apparent showings of pedestrian
and city benefits are non sequitur, and clearly it is an immense leap of the imagination
to correlate the petitioners' act with the clear failure to comply with the condition
despite the extended period for doing so.

Clearly, bad faith is attendant on the part of both the petitioners. The NHA showed bad
faith by donating the property without substantially complying with the condition that
was the purpose for the donation in the first place, as well as failing to reproduce the
condition in the second donation contract. The Municipality of Dasmariñas showed bad
faith in the acquisition and its overall conduct in this case, by introducing structures and
developing the land even with the knowledge that there was not only a pending appeal,
but with the understanding that both the RTC and the CA ruled in favor of revoking the
donation. If this Court were to reward the Municipality of Dasmariñas with the granting
of its petition solely because existing structures would be affected, then it would
encourage entities to build in bad faith hoping that the impracticality would sway the
Court towards ruling in favor of keeping the status quo. Suffice it to say, that sort of
precedent cannot and will never be set by this Court in the interest of justice, law, and
fair play.

There is, however, an equitable recourse, which the petitioners themselves recognize.
To save the developments already made, the petitioners may choose to exercise the
powers of eminent domain to keep the subject property and continue their
infrastructure-based improvements. But the Court, in the interest of justice, will not
grant the petitioners an easy way out of the hole they are in, when it was they who
opened it in the first place.

WHEREFORE, the consolidated petition is DENIED for lack of merit.

SO ORDERED.

Peralta, (Chairperson), Leonen, Hernando, and Inting, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION
G.R. No. 185440 July 13, 2011

VICELET LALICON and VICELEN LALICON, Petitioners,

vs.
NATIONAL HOUSING AUTHORITY, Respondent.

DECISION

ABAD, J.:

This case is about (a) the right of the National Housing Authority to seek annulment of sales made
by housing beneficiaries of lands they bought from it within the prohibited period and (b) the
distinction between actions for rescission instituted under Article 1191 of the Civil Code and those
instituted under Article 1381 of the same code.

The Facts and the Case

On November 25, 1980 the National Housing Authority (NHA) executed a Deed of Sale with
Mortgage over a Quezon City lot1 in favor of the spouses Isidro and Flaviana Alfaro (the Alfaros). In
due time, the Quezon City Registry of Deeds issued Transfer Certificate of Title (TCT) 277321 in the
name of the Alfaros. The deed of sale provided, among others, that the Alfaros could sell the land
within five years from the date of its release from mortgage without NHA’s prior written consent.
Thus:

x x x. 5. Except by hereditary succession, the lot herein sold and conveyed, or any part thereof,
cannot be alienated, transferred or encumbered within five (5) years from the date of release of
herein mortgage without the prior written consent and authority from the VENDOR-MORTGAGEE
(NHA). x x x.2 (Emphasis supplied)

The mortgage and the restriction on sale were annotated on the Alfaros’ title on April 14, 1981.

About nine years later or on November 30, 1990, while the mortgage on the land subsisted, the
Alfaros sold the same to their son, Victor Alfaro, who had taken in a common-law wife, Cecilia, with
whom he had two daughters, petitioners Vicelet and Vicelen Lalicon (the Lalicons). Cecilia, who had
the means, had a house built on the property and paid for the amortizations. After full payment of the
loan or on March 21, 1991 the NHA released the mortgage. Six days later or on March 27 Victor
transferred ownership of the land to his illegitimate daughters.

About four and a half years after the release of the mortgage or on October 4, 1995, Victor
registered the November 30, 1990 sale of the land in his favor, resulting in the cancellation of his
parents’ title. The register of deeds issued TCT 140646 in Victor’s name. On December 14, 1995
Victor mortgaged the land to Marcela Lao Chua, Rosa Sy, Amparo Ong, and Ida See. Subsequently,
on February 14, 1997 Victor sold the property to Chua, one of the mortgagees, resulting in the
cancellation of his TCT 140646 and the issuance of TCT N-172342 in Chua’s name.

A year later or on April 10, 1998 the NHA instituted a case before the Quezon City Regional Trial
Court (RTC) for the annulment of the NHA’s 1980 sale of the land to the Alfaros, the latter’s 1990
sale of the land to their son Victor, and the subsequent sale of the same to Chua, made in violation
of NHA rules and regulations.
On February 12, 2004 the RTC rendered a decision in the case. It ruled that, although the Alfaros
clearly violated the five-year prohibition, the NHA could no longer rescind its sale to them since its
right to do so had already prescribed, applying Article 1389 of the New Civil Code. The NHA and the
Lalicons, who intervened, filed their respective appeals to the Court of Appeals (CA).

On August 1, 2008 the CA reversed the RTC decision and found the NHA entitled to rescission. The
CA declared TCT 277321 in the name of the Alfaros and all subsequent titles and deeds of sale null
and void. It ordered Chua to reconvey the subject land to the NHA but the latter must pay the
Lalicons the full amount of their amortization, plus interest, and the value of the improvements they
constructed on the property.

The Issues Presented

The issues in this case are:

1. Whether or not the CA erred in holding that the Alfaros violated their contract with the
NHA;

2. Whether or not the NHA’s right to rescind has prescribed; and

3. Whether or not the subsequent buyers of the land acted in good faith and their rights,
therefore, cannot be affected by the rescission.

The Rulings of the Court

First. The contract between the NHA and the Alfaros forbade the latter from selling the land within
five years from the date of the release of the mortgage in their favor. 3 But the Alfaros sold the
property to Victor on November 30, 1990 even before the NHA could release the mortgage in their
favor on March 21, 1991. Clearly, the Alfaros violated the five-year restriction, thus entitling the NHA
to rescind the contract.

The Lalicons contend, however, that the Alfaros did not violate the five-year restriction against resale
since what the contract between the parties barred was a transfer of the property within five years
from the release of the mortgage, not a transfer of the same prior to such release.

But the Lalicons are trying to be clever. The restriction clause is more of a condition on the sale of
the property to the Alfaros rather than a condition on the mortgage constituted on it. Indeed, the
prohibition against resale remained even after the land had been released from the mortgage. The
five-year restriction against resale, counted from the release of the property from the NHA mortgage,
measures out the desired hold that the government felt it needed to ensure that its objective of
providing cheap housing for the homeless is not defeated by wily entrepreneurs.

The Lalicons claim that the NHA unreasonably ignored their letters that asked for consent to the
resale of the subject property. They also claim that their failure to get NHA’s prior written consent
was not such a substantial breach that warranted rescission.

But the NHA had no obligation to grant the Lalicons’ request for exemption from the five-year
restriction as to warrant their proceeding with the sale when such consent was not immediately
forthcoming. And the resale without the NHA’s consent is a substantial breach. The essence of the
government’s socialized housing program is to preserve the beneficiary’s ownerships for a
reasonable length of time, here at least within five years from the time he acquired it free from any
encumbrance.

Second. Invoking the RTC ruling, the Lalicons claim that under Article 1389 of the Civil Code the
"action to claim rescission must be commenced within four years" from the time of the commission of
the cause for it.

But an action for rescission can proceed from either Article 1191 or Article 1381. It has been held
that Article 1191 speaks of rescission in reciprocal obligations within the context of Article 1124 of
the Old Civil Code which uses the term "resolution." Resolution applies only to reciprocal obligations
such that a breach on the part of one party constitutes an implied resolutory condition which entitles
the other party to rescission. Resolution grants the injured party the option to pursue, as principal
actions, either a rescission or specific performance of the obligation, with payment of damages in
either case.

Rescission under Article 1381, on the other hand, was taken from Article 1291 of the Old Civil Code,
which is a subsidiary action, not based on a party’s breach of obligation. 4 The four-year prescriptive
period provided in Article 1389 applies to rescissions under Article 1381.

Here, the NHA sought annulment of the Alfaros’ sale to Victor because they violated the five-year
restriction against such sale provided in their contract. Thus, the CA correctly ruled that such
violation comes under Article 1191 where the applicable prescriptive period is that provided in Article
1144 which is 10 years from the time the right of action accrues. The NHA’s right of action accrued
1avvphi1

on February 18, 1992 when it learned of the Alfaros’ forbidden sale of the property to Victor. Since
the NHA filed its action for annulment of sale on April 10, 1998, it did so well within the 10-year
prescriptive period.

Third. The Court also agrees with the CA that the Lalicons and Chua were not buyers in good faith.
Since the five-year prohibition against alienation without the NHA’s written consent was annotated
on the property’s title, the Lalicons very well knew that the Alfaros’ sale of the property to their father,
Victor, even before the release of the mortgage violated that prohibition.

As regards Chua, she and a few others with her took the property by way of mortgage from Victor in
1995, well within the prohibited period. Chua knew, therefore, based on the annotated restriction on
the property, that Victor had no right to mortgage the property to her group considering that the
Alfaros could not yet sell the same to him without the NHA’s consent. Consequently, although Victor
later sold the property to Chua after the five-year restriction had lapsed, Chua cannot claim lack of
awareness of the illegality of Victor’s acquisition of the property from the Alfaros.

Lastly, since mutual restitution is required in cases involving rescission under Article 1191, 5 the NHA
must return the full amount of the amortizations it received for the property, plus the value of the
improvements introduced on the same, with 6% interest per annum from the time of the finality of
this judgment. The Court will no longer dwell on the matter as to who has a better right to receive the
amount from the NHA: the Lalicons, who paid the amortizations and occupied the property, or Chua,
who bought the subject lot from Victor and obtained for herself a title to the same, as this matter was
not raised as one of the issues in this case. Chua’s appeal to the Court in a separate case 6 having
been denied due course and NHA failing to file its own petition for review, the CA decision ordering
the restitution in favor of the Lalicons has now become final and binding against them.

WHEREFORE, the Court AFFIRMS the Decision of the Court of Appeals in CA-G.R. CV 82298
dated August 1, 2008.
SO ORDERED.

ROBERTO A. ABAD
Associate Justice

FIRST DIVISION

G.R. No. 150843 March 14, 2003

CATHAY PACIFIC AIRWAYS, LTD., petitioner,

vs.
SPOUSES DANIEL VAZQUEZ and MARIA LUISA MADRIGAL VAZQUEZ, respondents.

DAVIDE, JR., C.J.:

Is an involuntary upgrading of an airline passenger’s accommodation from one class to a more

superior class at no extra cost a breach of contract of carriage that would entitle the passenger to an
award of damages? This is a novel question that has to be resolved in this case.

The facts in this case, as found by the Court of Appeals and adopted by petitioner Cathay Pacific
Airways, Ltd., (hereinafter Cathay) are as follows:

Cathay is a common carrier engaged in the business of transporting passengers and goods by air.
Among the many routes it services is the Manila-Hongkong-Manila course. As part of its marketing
strategy, Cathay accords its frequent flyers membership in its Marco Polo Club. The members enjoy
several privileges, such as priority for upgrading of booking without any extra charge whenever an
opportunity arises. Thus, a frequent flyer booked in the Business Class has priority for upgrading to
First Class if the Business Class Section is fully booked.

Respondents-spouses Dr. Daniel Earnshaw Vazquez and Maria Luisa Madrigal Vazquez are
frequent flyers of Cathay and are Gold Card members of its Marco Polo Club. On 24 September
1996, the Vazquezes, together with their maid and two friends Pacita Cruz and Josefina Vergel de
Dios, went to Hongkong for pleasure and business.

For their return flight to Manila on 28 September 1996, they were booked on Cathay’s Flight CX-905,
with departure time at 9:20 p.m. Two hours before their time of departure, the Vazquezes and their
companions checked in their luggage at Cathay’s check-in counter at Kai Tak Airport and were given
their respective boarding passes, to wit, Business Class boarding passes for the Vazquezes and
their two friends, and Economy Class for their maid. They then proceeded to the Business Class
passenger lounge.

When boarding time was announced, the Vazquezes and their two friends went to Departure Gate
No. 28, which was designated for Business Class passengers. Dr. Vazquez presented his boarding
pass to the ground stewardess, who in turn inserted it into an electronic machine reader or computer
at the gate. The ground stewardess was assisted by a ground attendant by the name of Clara Lai
Han Chiu. When Ms. Chiu glanced at the computer monitor, she saw a message that there was a
"seat change" from Business Class to First Class for the Vazquezes.

Ms. Chiu approached Dr. Vazquez and told him that the Vazquezes’ accommodations were
upgraded to First Class. Dr. Vazquez refused the upgrade, reasoning that it would not look nice for
them as hosts to travel in First Class and their guests, in the Business Class; and moreover, they
were going to discuss business matters during the flight. He also told Ms. Chiu that she could have
other passengers instead transferred to the First Class Section. Taken aback by the refusal for
upgrading, Ms. Chiu consulted her supervisor, who told her to handle the situation and convince the
Vazquezes to accept the upgrading. Ms. Chiu informed the latter that the Business Class was fully
booked, and that since they were Marco Polo Club members they had the priority to be upgraded to
the First Class. Dr. Vazquez continued to refuse, so Ms. Chiu told them that if they would not avail
themselves of the privilege, they would not be allowed to take the flight. Eventually, after talking to
his two friends, Dr. Vazquez gave in. He and Mrs. Vazquez then proceeded to the First Class Cabin.

Upon their return to Manila, the Vazquezes, in a letter of 2 October 1996 addressed to Cathay’s
Country Manager, demanded that they be indemnified in the amount of P1million for the "humiliation
and embarrassment" caused by its employees. They also demanded "a written apology from the
management of Cathay, preferably a responsible person with a rank of no less than the Country
Manager, as well as the apology from Ms. Chiu" within fifteen days from receipt of the letter.

In his reply of 14 October 1996, Mr. Larry Yuen, the assistant to Cathay’s Country Manager Argus
Guy Robson, informed the Vazquezes that Cathay would investigate the incident and get back to
them within a week’s time.

On 8 November 1996, after Cathay’s failure to give them any feedback within its self-imposed
deadline, the Vazquezes instituted before the Regional Trial Court of Makati City an action for
damages against Cathay, praying for the payment to each of them the amounts of P250,000 as
temperate damages; P500,000 as moral damages; P500,000 as exemplary or corrective damages;
and P250,000 as attorney’s fees.

In their complaint, the Vazquezes alleged that when they informed Ms. Chiu that they preferred to
stay in Business Class, Ms. Chiu "obstinately, uncompromisingly and in a loud, discourteous and
harsh voice threatened" that they could not board and leave with the flight unless they go to First
Class, since the Business Class was overbooked. Ms. Chiu’s loud and stringent shouting annoyed,
embarrassed, and humiliated them because the incident was witnessed by all the other passengers
waiting for boarding. They also claimed that they were unjustifiably delayed to board the plane, and
when they were finally permitted to get into the aircraft, the forward storage compartment was
already full. A flight stewardess instructed Dr. Vazquez to put his roll-on luggage in the overhead
storage compartment. Because he was not assisted by any of the crew in putting up his luggage, his
bilateral carpal tunnel syndrome was aggravated, causing him extreme pain on his arm and wrist.
The Vazquezes also averred that they "belong to the uppermost and absolutely top elite of both
Philippine Society and the Philippine financial community, [and that] they were among the wealthiest
persons in the Philippine[s]."

In its answer, Cathay alleged that it is a practice among commercial airlines to upgrade passengers
to the next better class of accommodation, whenever an opportunity arises, such as when a certain
section is fully booked. Priority in upgrading is given to its frequent flyers, who are considered
favored passengers like the Vazquezes. Thus, when the Business Class Section of Flight CX-905
was fully booked, Cathay’s computer sorted out the names of favored passengers for involuntary
upgrading to First Class. When Ms. Chiu informed the Vazquezes that they were upgraded to First
Class, Dr. Vazquez refused. He then stood at the entrance of the boarding apron, blocking the
queue of passengers from boarding the plane, which inconvenienced other passengers. He shouted
that it was impossible for him and his wife to be upgraded without his two friends who were traveling
with them. Because of Dr. Vazquez’s outburst, Ms. Chiu thought of upgrading the traveling
companions of the Vazquezes. But when she checked the computer, she learned that the
Vazquezes’ companions did not have priority for upgrading. She then tried to book the Vazquezes
again to their original seats. However, since the Business Class Section was already fully booked,
she politely informed Dr. Vazquez of such fact and explained that the upgrading was in recognition
of their status as Cathay’s valued passengers. Finally, after talking to their guests, the Vazquezes
eventually decided to take the First Class accommodation.

Cathay also asserted that its employees at the Hong Kong airport acted in good faith in dealing with
the Vazquezes; none of them shouted, humiliated, embarrassed, or committed any act of disrespect
against them (the Vazquezes). Assuming that there was indeed a breach of contractual obligation,
Cathay acted in good faith, which negates any basis for their claim for temperate, moral, and
exemplary damages and attorney’s fees. Hence, it prayed for the dismissal of the complaint and for
payment of P100,000 for exemplary damages and P300,000 as attorney’s fees and litigation
expenses.

During the trial, Dr. Vazquez testified to support the allegations in the complaint. His testimony was
corroborated by his two friends who were with him at the time of the incident, namely, Pacita G. Cruz
and Josefina Vergel de Dios.

For its part, Cathay presented documentary evidence and the testimonies of Mr. Yuen; Ms. Chiu;
Norma Barrientos, Comptroller of its retained counsel; and Mr. Robson. Yuen and Robson testified
on Cathay’s policy of upgrading the seat accommodation of its Marco Polo Club members when an
opportunity arises. The upgrading of the Vazquezes to First Class was done in good faith; in fact, the
First Class Section is definitely much better than the Business Class in terms of comfort, quality of
food, and service from the cabin crew. They also testified that overbooking is a widely accepted
practice in the airline industry and is in accordance with the International Air Transport Association
(IATA) regulations. Airlines overbook because a lot of passengers do not show up for their flight.
With respect to Flight CX-905, there was no overall overbooking to a degree that a passenger was
bumped off or downgraded. Yuen and Robson also stated that the demand letter of the Vazquezes
was immediately acted upon. Reports were gathered from their office in Hong Kong and immediately
forwarded to their counsel Atty. Remollo for legal advice. However, Atty. Remollo begged off
because his services were likewise retained by the Vazquezes; nonetheless, he undertook to solve
the problem in behalf of Cathay. But nothing happened until Cathay received a copy of the complaint
in this case. For her part, Ms. Chiu denied that she shouted or used foul or impolite language against
the Vazquezes. Ms. Barrientos testified on the amount of attorney’s fees and other litigation
expenses, such as those for the taking of the depositions of Yuen and Chiu.

In its decision1 of 19 October 1998, the trial court found for the Vazquezes and decreed as follows:

WHEREFORE, finding preponderance of evidence to sustain the instant complaint, judgment

is hereby rendered in favor of plaintiffs Vazquez spouses and against defendant Cathay
Pacific Airways, Ltd., ordering the latter to pay each plaintiff the following:

a) Nominal damages in the amount of P100,000.00 for each plaintiff;

b) Moral damages in the amount of P2,000,000.00 for each plaintiff;

c) Exemplary damages in the amount of P5,000,000.00 for each plaintiff;

d) Attorney’s fees and expenses of litigation in the amount of P1,000,000.00 for each
plaintiff; and

e) Costs of suit.
 SO ORDERED.

According to the trial court, Cathay offers various classes of seats from which passengers are
allowed to choose regardless of their reasons or motives, whether it be due to budgetary constraints
or whim. The choice imposes a clear obligation on Cathay to transport the passengers in the class
chosen by them. The carrier cannot, without exposing itself to liability, force a passenger to
involuntarily change his choice. The upgrading of the Vazquezes’ accommodation over and above
their vehement objections was due to the overbooking of the Business Class. It was a pretext to
pack as many passengers as possible into the plane to maximize Cathay’s revenues. Cathay’s
actuations in this case displayed deceit, gross negligence, and bad faith, which entitled the
Vazquezes to awards for damages.

On appeal by the petitioners, the Court of Appeals, in its decision of 24 July 2001, 2 deleted the
award for exemplary damages; and it reduced the awards for moral and nominal damages for each
of the Vazquezes to P250,000 and P50,000, respectively, and the attorney’s fees and litigation
expenses to P50,000 for both of them.

The Court of Appeals ratiocinated that by upgrading the Vazquezes to First Class, Cathay novated
the contract of carriage without the former’s consent. There was a breach of contract not because
Cathay overbooked the Business Class Section of Flight CX-905 but because the latter pushed
through with the upgrading despite the objections of the Vazquezes.

However, the Court of Appeals was not convinced that Ms. Chiu shouted at, or meant to be
discourteous to, Dr. Vazquez, although it might seemed that way to the latter, who was a member of
the elite in Philippine society and was not therefore used to being harangued by anybody. Ms. Chiu
was a Hong Kong Chinese whose fractured Chinese was difficult to understand and whose manner
of speaking might sound harsh or shrill to Filipinos because of cultural differences. But the Court of
Appeals did not find her to have acted with deliberate malice, deceit, gross negligence, or bad faith.
If at all, she was negligent in not offering the First Class accommodations to other passengers.
Neither can the flight stewardess in the First Class Cabin be said to have been in bad faith when she
failed to assist Dr. Vazquez in lifting his baggage into the overhead storage bin. There is no proof
that he asked for help and was refused even after saying that he was suffering from "bilateral carpal
tunnel syndrome." Anent the delay of Yuen in responding to the demand letter of the Vazquezes, the
Court of Appeals found it to have been sufficiently explained.

The Vazquezes and Cathay separately filed motions for a reconsideration of the decision, both of
which were denied by the Court of Appeals.

Cathay seasonably filed with us this petition in this case. Cathay maintains that the award for moral
damages has no basis, since the Court of Appeals found that there was no "wanton, fraudulent,
reckless and oppressive" display of manners on the part of its personnel; and that the breach of
contract was not attended by fraud, malice, or bad faith. If any damage had been suffered by the
Vazquezes, it was damnum absque injuria, which is damage without injury, damage or injury inflicted
without injustice, loss or damage without violation of a legal right, or a wrong done to a man for
which the law provides no remedy. Cathay also invokes our decision in United Airlines, Inc. v. Court
of Appeals3 where we recognized that, in accordance with the Civil Aeronautics Board’s Economic
Regulation No. 7, as amended, an overbooking that does not exceed ten percent cannot be
considered deliberate and done in bad faith. We thus deleted in that case the awards for moral and
exemplary damages, as well as attorney’s fees, for lack of proof of overbooking exceeding ten
percent or of bad faith on the part of the airline carrier.
On the other hand, the Vazquezes assert that the Court of Appeals was correct in granting awards
for moral and nominal damages and attorney’s fees in view of the breach of contract committed by
Cathay for transferring them from the Business Class to First Class Section without prior notice or
consent and over their vigorous objection. They likewise argue that the issuance of passenger
tickets more than the seating capacity of each section of the plane is in itself fraudulent, malicious
and tainted with bad faith.

The key issues for our consideration are whether (1) by upgrading the seat accommodation of the
Vazquezes from Business Class to First Class Cathay breached its contract of carriage with the
Vazquezes; (2) the upgrading was tainted with fraud or bad faith; and (3) the Vazquezes are entitled
to damages.

We resolve the first issue in the affirmative.

A contract is a meeting of minds between two persons whereby one agrees to give something or
render some service to another for a consideration. There is no contract unless the following
requisites concur: (1) consent of the contracting parties; (2) an object certain which is the subject of
the contract; and (3) the cause of the obligation which is established.4 Undoubtedly, a contract of
carriage existed between Cathay and the Vazquezes. They voluntarily and freely gave their consent
to an agreement whose object was the transportation of the Vazquezes from Manila to Hong Kong
and back to Manila, with seats in the Business Class Section of the aircraft, and whose cause or
consideration was the fare paid by the Vazquezes to Cathay.

The only problem is the legal effect of the upgrading of the seat accommodation of the Vazquezes.
Did it constitute a breach of contract?

Breach of contract is defined as the "failure without legal reason to comply with the terms of a
contract."5 It is also defined as the "[f]ailure, without legal excuse, to perform any promise which
forms the whole or part of the contract."6

In previous cases, the breach of contract of carriage consisted in either the bumping off of a
passenger with confirmed reservation or the downgrading of a passenger’s seat accommodation
from one class to a lower class. In this case, what happened was the reverse. The contract between
the parties was for Cathay to transport the Vazquezes to Manila on a Business Class
accommodation in Flight CX-905. After checking-in their luggage at the Kai Tak Airport in Hong
Kong, the Vazquezes were given boarding cards indicating their seat assignments in the Business
Class Section. However, during the boarding time, when the Vazquezes presented their boarding
passes, they were informed that they had a seat change from Business Class to First Class. It
turned out that the Business Class was overbooked in that there were more passengers than the
number of seats. Thus, the seat assignments of the Vazquezes were given to waitlisted passengers,
and the Vazquezes, being members of the Marco Polo Club, were upgraded from Business Class to
First Class.

We note that in all their pleadings, the Vazquezes never denied that they were members of Cathay’s
Marco Polo Club. They knew that as members of the Club, they had priority for upgrading of their
seat accommodation at no extra cost when an opportunity arises. But, just like other privileges, such
priority could be waived. The Vazquezes should have been consulted first whether they wanted to
avail themselves of the privilege or would consent to a change of seat accommodation before their
seat assignments were given to other passengers. Normally, one would appreciate and accept an
upgrading, for it would mean a better accommodation. But, whatever their reason was and however
odd it might be, the Vazquezes had every right to decline the upgrade and insist on the Business
Class accommodation they had booked for and which was designated in their boarding passes.
They clearly waived their priority or preference when they asked that other passengers be given the
upgrade. It should not have been imposed on them over their vehement objection. By insisting on
the upgrade, Cathay breached its contract of carriage with the Vazquezes.

We are not, however, convinced that the upgrading or the breach of contract was attended by fraud
or bad faith. Thus, we resolve the second issue in the negative.

Bad faith and fraud are allegations of fact that demand clear and convincing proof. They are serious
accusations that can be so conveniently and casually invoked, and that is why they are never
presumed. They amount to mere slogans or mudslinging unless convincingly substantiated by
whoever is alleging them.

Fraud has been defined to include an inducement through insidious machination. Insidious
machination refers to a deceitful scheme or plot with an evil or devious purpose. Deceit exists where
the party, with intent to deceive, conceals or omits to state material facts and, by reason of such
omission or concealment, the other party was induced to give consent that would not otherwise have
been given.7

Bad faith does not simply connote bad judgment or negligence; it imports a dishonest purpose or
some moral obliquity and conscious doing of a wrong, a breach of a known duty through some
motive or interest or ill will that partakes of the nature of fraud. 8

We find no persuasive proof of fraud or bad faith in this case. The Vazquezes were not induced to
agree to the upgrading through insidious words or deceitful machination or through willful
concealment of material facts. Upon boarding, Ms. Chiu told the Vazquezes that their
accommodations were upgraded to First Class in view of their being Gold Card members of
Cathay’s Marco Polo Club. She was honest in telling them that their seats were already given to
other passengers and the Business Class Section was fully booked. Ms. Chiu might have failed to
consider the remedy of offering the First Class seats to other passengers. But, we find no bad faith
in her failure to do so, even if that amounted to an exercise of poor judgment.

Neither was the transfer of the Vazquezes effected for some evil or devious purpose. As testified to
by Mr. Robson, the First Class Section is better than the Business Class Section in terms of comfort,
quality of food, and service from the cabin crew; thus, the difference in fare between the First Class
and Business Class at that time was $250.9Needless to state, an upgrading is for the better condition
and, definitely, for the benefit of the passenger.

We are not persuaded by the Vazquezes’ argument that the overbooking of the Business Class
Section constituted bad faith on the part of Cathay. Section 3 of the Economic Regulation No. 7 of
the Civil Aeronautics Board, as amended, provides:

Sec 3. Scope. – This regulation shall apply to every Philippine and foreign air carrier with
respect to its operation of flights or portions of flights originating from or terminating at, or
serving a point within the territory of the Republic of the Philippines insofar as it denies
boarding to a passenger on a flight, or portion of a flight inside or outside the Philippines, for
which he holds confirmed reserved space. Furthermore, this Regulation is designed to cover
only honest mistakes on the part of the carriers and excludes deliberate and willful acts of
non-accommodation. Provided, however, that overbooking not exceeding 10% of the seating
capacity of the aircraft shall not be considered as a deliberate and willful act of non-
accommodation.
It is clear from this section that an overbooking that does not exceed ten percent is not considered
deliberate and therefore does not amount to bad faith.10 Here, while there was admittedly an
overbooking of the Business Class, there was no evidence of overbooking of the plane beyond ten
percent, and no passenger was ever bumped off or was refused to board the aircraft.

Now we come to the third issue on damages.

The Court of Appeals awarded each of the Vazquezes moral damages in the amount of P250,000.
Article 2220 of the Civil Code provides:

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

Moral damages include physical suffering, mental anguish, fright, serious anxiety, besmirched
reputation, wounded feelings, moral shock, social humiliation, and similar injury. Although incapable
of pecuniary computation, moral damages may be recovered if they are the proximate result of the
defendant’s wrongful act or omission.11 Thus, case law establishes the following requisites for the
award of moral damages: (1) there must be an injury clearly sustained by the claimant, whether
physical, mental or psychological; (2) there must be a culpable act or omission factually established;
(3) the wrongful act or omission of the defendant is the proximate cause of the injury sustained by
the claimant; and (4) the award for damages is predicated on any of the cases stated in Article 2219
of the Civil Code.12

Moral damages predicated upon a breach of contract of carriage may only be recoverable in
instances where the carrier is guilty of fraud or bad faith or where the mishap resulted in the death of
a passenger.13 Where in breaching the contract of carriage the airline is not shown to have acted
fraudulently or in bad faith, liability for damages is limited to the natural and probable consequences
of the breach of the obligation which the parties had foreseen or could have reasonably foreseen. In
such a case the liability does not include moral and exemplary damages.14

In this case, we have ruled that the breach of contract of carriage, which consisted in the involuntary
upgrading of the Vazquezes’ seat accommodation, was not attended by fraud or bad faith. The Court
of Appeals’ award of moral damages has, therefore, no leg to stand on.

The deletion of the award for exemplary damages by the Court of Appeals is correct. It is a requisite
in the grant of exemplary damages that the act of the offender must be accompanied by bad faith or
done in wanton, fraudulent or malevolent manner.15 Such requisite is absent in this case. Moreover,
to be entitled thereto the claimant must first establish his right to moral, temperate, or compensatory
damages.16 Since the Vazquezes are not entitled to any of these damages, the award for exemplary
damages has no legal basis. And where the awards for moral and exemplary damages are
eliminated, so must the award for attorney’s fees.17

The most that can be adjudged in favor of the Vazquezes for Cathay’s breach of contract is an
award for nominal damages under Article 2221 of the Civil Code, which reads as follows:

Article 2221 of the Civil Code provides:

Article 2221. Nominal damages are adjudicated in order that a right of the plaintiff, which has
been violated or invaded by the defendant, may be vindicated or recognized, and not for the
purpose of indemnifying the plaintiff for any loss suffered by him.
Worth noting is the fact that in Cathay’s Memorandum filed with this Court, it prayed only for the
deletion of the award for moral damages. It deferred to the Court of Appeals’ discretion in awarding
nominal damages; thus:

As far as the award of nominal damages is concerned, petitioner respectfully defers to the
Honorable Court of Appeals’ discretion. Aware as it is that somehow, due to the resistance of
respondents-spouses to the normally-appreciated gesture of petitioner to upgrade their
accommodations, petitioner may have disturbed the respondents-spouses’ wish to be with
their companions (who traveled to Hong Kong with them) at the Business Class on their flight
to Manila. Petitioner regrets that in its desire to provide the respondents-spouses with
additional amenities for the one and one-half (1 1/2) hour flight to Manila, unintended tension
ensued.18

Nonetheless, considering that the breach was intended to give more benefit and advantage to the
Vazquezes by upgrading their Business Class accommodation to First Class because of their valued
status as Marco Polo members, we reduce the award for nominal damages to P5,000.

Before writing finis to this decision, we find it well-worth to quote the apt observation of the Court of
Appeals regarding the awards adjudged by the trial court:

We are not amused but alarmed at the lower court’s unbelievable alacrity, bordering on the
scandalous, to award excessive amounts as damages. In their complaint, appellees asked for P1
million as moral damages but the lower court awarded P4 million; they asked for P500,000.00 as
exemplary damages but the lower court cavalierly awarded a whooping P10 million; they asked for
P250,000.00 as attorney’s fees but were awarded P2 million; they did not ask for nominal damages
but were awarded P200,000.00. It is as if the lower court went on a rampage, and why it acted that
way is beyond all tests of reason. In fact the excessiveness of the total award invites the suspicion
that it was the result of "prejudice or corruption on the part of the trial court."

The presiding judge of the lower court is enjoined to hearken to the Supreme Court’s
admonition in Singson vs. CA (282 SCRA 149 [1997]), where it said:

The well-entrenched principle is that the grant of moral damages depends upon the
discretion of the court based on the circumstances of each case. This discretion is
limited by the principle that the amount awarded should not be palpably and
scandalously excessive as to indicate that it was the result of prejudice or corruption
on the part of the trial court….

and in Alitalia Airways vs. CA (187 SCRA 763 [1990], where it was held:

Nonetheless, we agree with the injunction expressed by the Court of Appeals that
passengers must not prey on international airlines for damage awards, like "trophies
in a safari." After all neither the social standing nor prestige of the passenger should
determine the extent to which he would suffer because of a wrong done, since the
dignity affronted in the individual is a quality inherent in him and not conferred by
these social indicators. 19

We adopt as our own this observation of the Court of Appeals.

WHEREFORE, the instant petition is hereby partly GRANTED. The Decision of the Court of Appeals
of 24 July 2001 in CA-G.R. CV No. 63339 is hereby MODIFIED, and as modified, the awards for
moral damages and attorney’s fees are set aside and deleted, and the award for nominal damages
is reduced to P5,000.

No pronouncement on costs.

SO ORDERED.

Vitug, Carpio, and Azcuna, JJ., concur.

Ynares-Santiago, J., on leave.

FIRST DIVISION

February 20, 2017

G.R. No. 212690 *

SPOUSES ROMEO PAJARES and IDA T. PAJARES, Petitioners

vs.
REMARKABLE LAUNDRY AND DRY CLEANING, represented by ARCHEMEDES G. SOLIS,
Respondent

DECISION

DEL CASTILLO, J.:

Breach of contract may give rise to an action for specific performance or rescission of contract. It
1

may also be the cause of action in a complaint for damages filed pursuant to Art. 1170 of the Civil
Code. In the specific performance and rescission of contract cases, the subject matter is incapable
2

of pecuniary estimation, hence jurisdiction belongs to the Regional Trial Court (RTC). In the case for
damages, however, the court that has jurisdiction depends upon the total amount of the damages
claimed.

Assailed in this Petition for Review on Certiorari is the December 11, 2013 Decision of the Court of
3 4

Appeals (CA) in CA-G.R. CEB SP No. 07711 that set aside the February 19, 2013 Order of the5

RTC, Branch 17, Cebu City dismissing Civil Case No. CEB-39025 for lack of jurisdiction.

Factual Antecedents

On September 3, 2012, Remarkable Laundry and Dry Cleaning (respondent) filed a Complaint
denominated as "Breach of Contract and Damages" against spouses Romeo and Ida Pajares
6

(petitioners) before the RTC of Cebu City, which was docketed as Civil Case No. CEB-39025 and
assigned to Branch 17 of said court. Respondent alleged that it entered into a Remarkable Dealer
Outlet Contract with petitioners whereby the latter, acting as a dealer outlet, shall accept and
7

receive items or materials for laundry which are then picked up and processed by the former in its
main plant or laundry outlet; that petitioners violated Article IV (Standard Required Quota &
Penalties) of said contract, which required them to produce at least 200 kilos of laundry items each
week, when, on April 30, 2012, they ceased dealer outlet operations on account of lack of personnel;
that respondent made written demands upon petitioners for the payment of penalties imposed and
provided for in the contract, but the latter failed to pay; and, that petitioners' violation constitutes
breach of contract. Respondent thus prayed, as fol1ows:

WHEREFORE, premises considered, by reason of the above-mentioned breach of the subject

dealer contract agreement made by the defendant, it is most respectfully prayed of the Honorable
Court to order the said defendant to pay the following incidental and consequential damages to the
plaintiff, to wit:

a) TWO HUNDRED THOUSAND PESOS (PHP200,000.00) plus legal interest as incidental and
consequential [sic] for violating Articles IV and XVI of the Remarkable Laundry Dealer Contract
dated 08 September 2011.

b) Thirty Thousand Pesos (₱30,000.00) as legal expenses.

c) Thirty Thousand Pesos (₱30,000.00) as exemplary damages.

d) Twenty Thousand Pesos (₱20,000.00) as cost of suit.

e) Such other reliefs that the Honorable Court deems as just and equitable. (Italics in the original)
8

Petitioners submitted their Answer, to which respondent filed its Reply.

9 10

During pre-trial, the issue of jurisdiction was raised, and the parties were required to submit their
respective position papers.

Ruling of the Regional Trial Court

On February 19, 2013, the RTC issued an Order dismissing Civil Case No. CEB-39025 for lack of
jurisdiction, stating:

In the instant case, the plaintiffs complaint is for the recovery of damages for the alleged breach of
contract. The complaint sought the award of ₱200,000.00 as incidental and consequential damages;
the amount of ₱30,000.00 as legal expenses; the amount of ₱30,000.00 as exemplary damages;
and the amount of ₱20,000.00 as cost of the suit, or for the total amount of ₱280,000.00 as
damages.

Under the provisions of Batas Pambansa Blg. 129 as amended by Republic Act No. 7691, the
amount of demand or claim in the complaint for the Regional Trial Courts (RTCs) to exercise
exclusive original jurisdiction shall exceed ₱300,000.00; otherwise, the action shall fall under the
jurisdiction of the Municipal Trial Courts. In this case, the total amount of demand in the complaint is
only ₱280,000.00, which is less than the jurisdictional amount of the RTCs. Hence, this Court (RTC)
has no jurisdiction over the instant case. 1âwphi1

WHEREFORE, premises considered, the instant case is hereby DISMISSED for lack of jurisdiction.

Notify the counsels.

SO ORDERED. (Emphasis in the original)

11
Respondent filed its Motion for Reconsideration, arguing that as Civil Case No. CEB-39025 is for
12

breach of contract, or one whose subject is incapable of pecuniary estimation, jurisdiction thus falls
with the RTC. However, in an April 29, 2013 Order, the RTC held its ground.
13

Ruling of the Court of Appeals

Respondent filed CA-G.R. CEB SP No. 07711, a Petition for Certiorari seeking to nullify the RTC's
14

February 19, 2013 and April 29, 2013 Orders. It argued that the RTC acted with grave abuse of
discretion in dismissing Civil Case No. CEB-39025. According to respondent, said case is one
whose subject matter is incapable of pecuniary estimation and that the damages prayed for therein
are merely incidental thereto. Hence, Civil Case No. CEB-39025 falls within the jurisdiction of the
RTC pursuant to Section 19 of Batas Pambansa Blg. 129, as amended (BP 129).

On December 11, 2013, the CA rendered the assailed Decision setting aside the February 19, 2013
Order of the RTC and remanding the case to the court a quo for further proceedings. It held as
follows:

In determining the jurisdiction of an action whose subject is incapable of pecuniary estimation, the
nature of the principal action or remedy sought must first be ascertained. If it is primarily for the
recovery of a sum of money, the claim is considered capable of pecuniary estimation and the
jurisdiction of the court depends on the amount of the claim. But, where the primary issue is
something other than the right to recover a sum of money, where the money claim is purely
incidental to, or a consequence of the principal relief sought, such are actions whose subjects are
incapable of pecuniary estimation, hence cognizable by the RTCs. 15

x x xx

Verily, what determines the nature of the action and which court has jurisdiction over it are the
allegations of the complaint and the character of the relief sought.16

In our considered view, the complaint, is one incapable of pecuniary estimation; thus, one within the
RTC's jurisdiction. x x x

x x xx

A case for breach of contract [sic] is a cause of action either for specific performance or rescission of
contracts. An action for rescission of contract, as a counterpart of an action for specific performance,
is incapable of pecuniary estimation, and therefore falls under the jurisdiction of the RTC. 17

Thus, the totality of damages principle finds no application in the instant case since the same applies
only when damages is principally and primarily demanded in accordance with the specification in
Administrative Circular No. 09-94 which reads: 'in cases where the claim for damages is the main
cause of action ... the amount of such claim shall be considered in determining the jurisdiction of the
court.'

Thus, the court a quo should not have dismissed the instant case.

WHEREFORE, in view of the foregoing, the Order dated February 19, 2013 of the Regional Trial
Court, 7th Judicial Region, Branch 17, Cebu City in Civil Case No. CEB-39025 for Breach of
Contract and Damages is hereby REVERSED and SET ASCDE. This case is hereby REMANDED
to the RTC which is ORDERED to PROCEED with the trial on the merits with dispatch.
SO ORDERED. 18

Petitioners sought to reconsider, but were denied. Hence, the present Petition.

Issue

In a June 29, 2015 Resolution, this Court resolved to give due course to the Petition, which claims
19

that the CA erred in declaring that the RTC had jurisdiction over respondent's Complaint which,
although denominated as one for breach of contract, is essentially one for simple payment of
damages.

Petitioners' Arguments

In praying that the assailed CA dispositions be set aside and that the RTC's February 19, 2013
Order dismissing Civil Case No. CEB-39025 be reinstated, petitioners in their Petition and
Reply espouse the original findings of the RTC that Civil Case No. CEB-39025 is for the recovery of
20

a sum of money in the form of damages. They asserted that in determining jurisdiction over the
subject matter, the allegations in the Complaint and the principal relief in the prayer thereof must be
considered; that since respondent merely prayed for the payment of damages in its Complaint and
not a judgment on the claim of breach of contract, then jurisdiction should be determined based
solely on the total amount of the claim or demand as alleged in the prayer; that while breach of
contract may involve a claim for specific performance or rescission, neither relief was sought in
respondent's Complaint; and, that respondent "chose to focus his [sic] primary relief on the payment
of damages," which is "the true, actual, and principal relief sought, and is not merely incidental to or
21

a consequence of the alleged breach of contract." Petitioners conclude that, applying the totality of
22

claims rule, respondent's Complaint should be dismissed as the claim stated therein is below the
jurisdictional amount of the RTC.

Respondent's Arguments

Respondent, on the other hand, counters in its Comment that the CA is correct in declaring that
23

Civil Case No. CEB-39025 is primarily based on breach of contract, and the damages prayed for are
merely incidental to the principal action; that the Complaint itself made reference to the Remarkable
Dealer Outlet Contract and the breach committed by petitioners, which gave rise to a cause of action
against the latter; and, that with the filing of the case, the trial court was thus called upon to
determine whether petitioners violated the dealer outlet contract, and if so, the amount of damages
that may be adjudged in respondent's favor.

Our Ruling

The Court grants the Petition. The RTC was correct in categorizing Civil Case No. CEB-39025 as an
action for damages seeking to recover an amount below its jurisdictional limit.

Respondent's complaint denominated

as one for "'Breach of Contract &
Damages" is neither an action for
specific performance nor a complaint
for rescission of contract.

In ruling that respondent's Complaint is incapable of pecuniary estimation and that the RTC has
jurisdiction, the CA comported itself with the following ratiocination:
A case for breach of contract [sic] is a cause of action either for specific performance or rescission of
contracts. An action for rescission of contract, as a counterpart of an action for specific performance,
is incapable of pecuniary estimation, and therefore falls under the jurisdiction of the RTC. 24

without, however, determining whether, from the four corners of the Complaint, respondent actually
intended to initiate an action for specific performance or an action for rescission of contract. Specific
performance is ''[t]he remedy of requiring exact performance of a contract in the specific form in
which it was made, or according to the precise terms agreed upon. [It is t]he actual accomplishment
of a contract by a party bound to fulfill it." Rescission of contract under Article 1191 of the Civil
25

Code, on the other hand, is a remedy available to the obligee when the obligor cannot comply with
what is incumbent upon him. It is predicated on a breach of faith by the other party who violates the
26

reciprocity between them. Rescission may also refer to a remedy granted by law to the contracting
parties and sometimes even to third persons in order to secure reparation of damages caused them
by a valid contract; by means of restoration of things to their condition in which they were prior to the
celebration of the contract. 27

In a line of cases, this Court held that –

In determining whether an action is one the subject matter of which is not capable of pecuniary
estimation this Court has adopted the criterion of first ascertaining the nature of the principal action
or remedy sought. If it is primarily for the recovery of a sum of money, the claim is considered
capable of pecuniary estimation, and whether jurisdiction is in the municipal trial courts or in the
courts of first instance would depend on the amount of the claim. However, where the basic issue is
something other than the right to recover a sum of money, where the money claim is purely
incidental to, or a consequence of, the principal relief sought, this Court has considered such actions
as cases where the subject of the litigation may not be estimated in terms of money, and are
cognizable exclusively by courts 1of first instance (now Regional Trial Courts). 28

To write finis to this controversy, therefore, it is imperative that we first determine the real nature of
respondent's principal action, as well as the relief sought in its Complaint, which we 1quote in haec
verba:

REPUBLIC OF THE PHILIPPNES

REGIONAL TRIAL COURT
BRANCH ______
CEBU CITY

Remarkable Laundry and Dry Cleaning herein Civil Case No. ______
represented by Archemedes G. Solis, Plaintiff, For: Breach of Contract
& Damages

vs.

Spouses Romeo Pajares and Ida T. Pajares,

Defendants.

----------------------------------------------------------------------------------------------------------

COMPLAINT
Plaintiff, by counsels, to the Honorable Court most respectfully states THAT:

1. Plaintiff Remarkable Laundry and Dry Cleaning Services, is a sole proprietorship business owned
by Archemedes Solis with principal office address at PREDECO CMPD AS-Ostechi Bldg. Banilad,
Heman Cortes St., Mandaue City.

2. Defendant Ida Pajares is of legal age, Filipino, married with address at Hermag Village, Basak
Mandaue City where she can be served with summons and other processes of the Honorable Court.

3. On 08 SEP 2011, parties entered and signed a Remarkable Laundry Dealer Outlet Contract for
the processing of laundry materials, plaintiff being the owner of Remarkable Laundry and the
defendant being the authorized dealer of the said business. (Attached and marked as Annex "A" is a
copy of the Remarkable Laundry Dealer Outlet Contract.)

CAUSES OF ACTION:

4. Sometime on [sic] the second (2nd) quarter of 2012, defendant failed to follow the required
standard purchase quota mentioned in article IV of the subject dealership agreement.

5. Defendant through a letter dated April 24, 2012 said it [sic] would CEASE OPERATION. It [sic]
further stated that they [sic] would just notify or advise the office when they are [sic] ready for the
business again making the whole business endeavor totally dependent upon their [sic] whims and
caprices. (Attached and marked as Annex "B'' is a copy of letter of the defendant dated April 24,
2012.)

6. The aforementioned act of unilateral cessation of operation by the defendant constitutes a serious
breach to [sic] the contract because it totally, whimsically and grossly disregarded the Remarkable
Laundry Dealer Outlet Contract, which resulted to [sic] failure on its part in obtaining the minimum
purchase or delivery of 200 kilos per week for the entire duration of its cessation of operations.

7. Under the aforementioned Dealer Contract, specifically in Article XV of the same are classified as
BREACH BY THE OUTLETS:

'The parties agree that the happening of any of the stipulation and events by the dealer outlet is
otherwise [sic] in default of any of its obligations or violate any of the terms and condition under this
agreement.

Any violation of the above-mentioned provisions shall result in the immediate termination of this
agreement, without prejudice to any of the RL Main Operators rights or remedies granted to it by
law.

THE DEALER OUTLET SHALL ALSO BE LIABLE TO PAY A FINE OF TWENTY FIVE THOUSAND
PESOS, (₱25,000), FOR EVERY VIOLATION AND PHP 50,000 IF PRE-TERMINATION BY THE RL
MAIN OPERATOR DUE TO BREACH OF THIS AGREEMENT.'

8. Likewise it is provided in the said contract that:

' ... The DEALER OUTLET must have a minimum 200 kilos on a six-day or per week pick-up for the
entire duration of the contract to free the dealer outlet from being charge[d] Php 200/week on falling
below required minimum kilos per week of laundry materials. Automatic charging shall become part
of the billing on the services of the dealer outlet on cases where the minimum requirements on
required kilos are not met.[']

9. The cessation of operation by the defendant, which is tantamount to gross infraction to [sic] the
subject contract, resulted to [sic] incidental damages amounting to Two Hundred Thousand Pesos
(PHP200,000.00). Defendant should have opted to comply with the Pre-termination clause in the
subject contract other than its [sic] unilateral and whimsical cessation of operations.

10. The plaintiff formally reminded the defendant of her obligations under the subject contract
through demand letters, but to no avail. The defendant purposely ignored the letters by [sic] the
plaintiff. (Attached and marked as Annex "C" to "C-2" are the Demand Letters dated May 2, 2012,
June 2, 2012 and June 19, 2012 respectively.)

11. To reiterate, the defendant temporarily stopped its business operation prior to the two-year
contract duration had elapsed to the prejudice of the plaintiff, which is a clear disregard of its two-
year obligation to operate the business unless a pre-termination is called.

12. Under Article 1159 of the Civil Code of the Philippines provides [sic]:

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

13. Likewise, Article 1170 of the Civil Code of the Philippines [provides] that:

'Those who in the performance of their obligations are guilty of fraud, negligence, or delay, and
those who in any manner contravene the tenor thereof are liable for damages. '

14. That the above-mentioned violations by the defendant to the Remarkable Laundry Dealer
Contract, specifically Articles IV and XVI thereof constitute gross breach of contract which are
unlawful and malicious under the Civil Code of the Philippines, which caused the plaintiff to
incur incidental and consequential damages as found in the subject dealer contract in the total
amount of Two Hundred Thousand Pesos (PHP200,000.00) and incidental legal expenses to protect
its rights in the amount of ₱30,000.00.

PRAYER:

WHEREFORE, premises considered, by reason of the above-mentioned breach of the subject

dealer contract agreement made by the defendant, it is most respectfully prayed of the Honorable
Court to order the said defendant to pay the following incidental and consequential damages to the
plaintiff, to wit:

a) TWO HUNDRED THOUSAND PESOS (PHP200,000.00) plus legal interest as incidental and
consequential [damages] for violating Articles IV and XVI of the Remarkable Laundry Dealer
Contract dated 08 SEP 2011;

b) Thirty Thousand Pesos (₱30,000.00) as legal expenses;

c) Thirty Thousand Pesos (₱30,000.00) as exemplary damages;

d) Twenty Thousand Pesos (₱20,000.00) as cost of suit;

e) Such other reliefs that the Honorable Court deems as just and equitable.

August 31, 2012, Cebu City, Philippines. 29

An analysis of the factual and material allegations in the Complaint shows that there is nothing
therein which would support a conclusion that respondent's Complaint is one for specific
performance or rescission of contract. It should be recalled that the principal obligation of petitioners
under the Remarkable Laundry Dealership Contract is to act as respondent's dealer outlet.
Respondent, however, neither asked the RTC to compel petitioners to perfom1 such obligation as
contemplated in said contract nor sought the rescission thereof. The Complaint's body, heading, and
relief are bereft of such allegation. In fact, neither phrase appeared on or was used in the Complaint
when, for purposes of clarity, respondent's counsels, who are presumed to be learned in law, could
and should have used any of those phrases to indicate the proper designation of the Complaint. To
the contrary, respondent's counsels designated the Complaint as one for "Breach of Contract &
Damages," which is a misnomer and inaccurate. This erroneous notion was reiterated in
respondent's Memorandum wherein it was stated that "the main action of CEB 39025 is one for a
30

breach of contract." There is no such thing as an "action for breach of contract." Rather, "[b]reach of
31

contract is a cause of action, but not the action or relief itself" Breach of contract may be the cause
32 33

of action in a complaint for specific performance or rescission of contract, both of which are
incapable of pecuniary estimation and, therefore, cognizable by the RTC. However, as will be
discussed below, breach of contract may also be the cause of action in a complaint for damages.

A complaint primarily seeking to

enforce the accessory obligation
contained in the penal clause is actually
an action for damages capable of
pecuniary estimation.

Neither can we sustain respondent's contention that its Complaint is incapable of pecuniary
estimation since it primarily seeks to enforce the penal clause contained in Article IV of the
Remarkable Dealer Outlet Contract, which reads:

Article IV: STANDARD REQUIRED QUOTA & PENALTIES

In consideration [sic] for such renewal of franchise-dealership rights, the dealer outlet must have a
minimum 200 kilos on a six-day or per week pick-up for the entire duration of the contract to FREE
the dealer outlet from being charge [sic] Php200/week on falling below required minimum kilos per
week of laundry materials. Automatic charging shall become part of the billing on the services of the
dealer outlet on cases where the minimum requirements on required kilos are not met.

The RL Main Operator has the option to cancel, terminate this dealership outlet contract, at its option
should [sic] in the event that there are unpaid services equivalent to a two-week minimum required
number of kilos of laundry materials but not ₱8,000 worth of collectibles, for services performed by
the RL Main Operator or its assigned Franchise Outlet, unpaid bills on ordered and delivered support
products, falling below required monthly minimum number of kilos.

Ten [percent] (10%) interest charge per month will be collected on all unpaid obligations but should
not be more than 45 days or an additional 10% on top of uncollected amount shall be imposed and
shall earn additional 10% on the next succeeding months if it still remains unpaid. However, if the
cause of default is due to issuance of a bouncing check the amount of such check shall earn same
penalty charge with additional 5% for the first two weeks and 10% for the next two weeks and its
succeeding two weeks thereafter from the date of dishonor until fully paid without prejudice to the
filling of appropriate cases before the courts of justice. Violation of this provision if remained
unsettled for two months shall be considered as violation [wherein] Article XV of this agreement shall
be applied.34

To Our mind, petitioners' responsibility under the above penal clause involves the payment of
liquidated damages because under Article 2226 of the Civil Code the amount the parties stipulated
35

to pay in case of breach are liquidated damages. "It is attached to an obligation in order to ensure
performance and has a double function: (1) to provide for liquidated damages, and (2) to strengthen
the coercive force of the obligation by the threat of greater responsibility in the event of breach."
36

Concomitantly, what respondent primarily seeks in its Complaint is to recover aforesaid liquidated
damages (which it termed as "incidental and consequential damages") premised on the alleged
breach of contract committed by the petitioners when they unilaterally ceased business operations.
Breach of contract may also be the cause of action in a complaint for damages filed pursuant to
Article 1170 of the Civil Code. It provides:

Art. 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or
delay, and those who in any manner contravene the tenor thereof; are liable for damages.
(Emphasis supplied)

In Pacmac, Inc. v. Intermediate Appellate Court, this Court held that the party who unilaterally
37

terminated the exclusive distributorship contract without any legal justification can be held liable for
damages by reason of the breach committed pursuant to Article 1170.

In sum, after juxtaposing Article IV of the Remarkable Dealer Outlet Contract vis-a-vis the prayer
sought in respondent's Complaint, this Court is convinced that said Complaint is one for damages.
True, breach of contract may give rise to a complaint for specific performance or rescission of
contract. In which case, the subject matter is incapable of pecuniary estimation and, therefore,
jurisdiction is lodged with the RTC. However, breach of contract may also be the cause of action in a
complaint for damages. Thus, it is not correct to immediately conclude, as the CA erroneously did,
that since the cause of action is breach of contract, the case would only either be specific
pe1formance or rescission of contract because it may happen, as in this case, that the complaint is
one for damages.

In an action for damages, the court

which has jurisdiction is determined by
the total amount of damages claimed.

Having thus determined the nature of respondent's principal action, the next question brought to fore
is whether it is the RTC which has jurisdiction over the subject matter of Civil Case No. CEB-39025.

Paragraph 8, Section 19 of BP 129, as amended by Republic Act No. 7691, provides that where
38 39

the amount of the demand exceeds ₱100,000.00, exclusive of interest, damages of whatever kind,
attorney's fees, litigation expenses, and costs, exclusive jurisdiction is lodged with the RTC.
Otherwise, jurisdiction belongs to the Municipal Trial Court. 40

The above jurisdictional amount had been increased to ₱200,000.00 on March 20, 1999 and further
raised to ₱300,000.00 on February 22, 2004 pursuant to Section 5 of RA 7691. 41

Then in Administrative Circular No. 09-94 this Court declared that "where the claim for damages is
42

the main cause of action, or one of the causes of action, the amount of such claim shall be
considered in determining the jurisdiction of the court." In other words, where the complaint primarily
seeks to recover damages, all claims for damages should be considered in determining which court
has jurisdiction over the subject matter of the case regardless of whether they arose from a single
cause of action or several causes of action.1âwphi1

Since the total amount of the damages claimed by the respondent in its Complaint filed with the RTC
on September 3, 2012 amounted only to ₱280,000.00, said court was correct in refusing to take
cognizance of the case.

WHEREFORE, the Petition is GRANTED and the December 11, 2013 Decision and March 19, 2014
Resolution of the Court of Appeals in CA-G.R. CEB SP No. 07711 are REVERSED and SET
ASIDE. The February 19, 2013 Order of the Regional Trial Court, Branch 17, Cebu City dismissing
Civil Case No. CEB-39025 for lack of jurisdiction is REINSTATED.

SO ORDERED.

MARIANO C. DEL CASTILLO

Associate Justice

G.R. No. 179337 April 30, 2008

JOSEPH SALUDAGA, petitioner,

vs.
FAR EASTERN UNIVERSITY and EDILBERTO C. DE JESUS in his capacity as President of
FEU, respondents.

DECISION

YNARES-SANTIAGO, J.:

This Petition for Review on Certiorari1 under Rule 45 of the Rules of Court assails the June 29, 2007
Decision2 of the Court of Appeals in CA-G.R. CV No. 87050, nullifying and setting aside the
November 10, 2004 Decision3 of the Regional Trial Court of Manila, Branch 2, in Civil Case No. 98-
89483 and dismissing the complaint filed by petitioner; as well as its August 23, 2007
Resolution4 denying the Motion for Reconsideration.5

The antecedent facts are as follows:

Petitioner Joseph Saludaga was a sophomore law student of respondent Far Eastern University
(FEU) when he was shot by Alejandro Rosete (Rosete), one of the security guards on duty at the
school premises on August 18, 1996. Petitioner was rushed to FEU-Dr. Nicanor Reyes Medical
Foundation (FEU-NRMF) due to the wound he sustained.6Meanwhile, Rosete was brought to the
police station where he explained that the shooting was accidental. He was eventually released
considering that no formal complaint was filed against him.

Petitioner thereafter filed a complaint for damages against respondents on the ground that they
breached their obligation to provide students with a safe and secure environment and an
atmosphere conducive to learning. Respondents, in turn, filed a Third-Party Complaint 7 against
Galaxy Development and Management Corporation (Galaxy), the agency contracted by respondent
FEU to provide security services within its premises and Mariano D. Imperial (Imperial), Galaxy's
President, to indemnify them for whatever would be adjudged in favor of petitioner, if any; and to pay
attorney's fees and cost of the suit. On the other hand, Galaxy and Imperial filed a Fourth-Party
Complaint against AFP General Insurance.8

On November 10, 2004, the trial court rendered a decision in favor of petitioner, the dispositive
portion of which reads:

WHEREFORE, from the foregoing, judgment is hereby rendered ordering:

1. FEU and Edilberto de Jesus, in his capacity as president of FEU to pay jointly and
severally Joseph Saludaga the amount of P35,298.25 for actual damages with 12%
interest per annum from the filing of the complaint until fully paid; moral damages of
P300,000.00, exemplary damages of P500,000.00, attorney's fees of P100,000.00
and cost of the suit;

2. Galaxy Management and Development Corp. and its president, Col. Mariano
Imperial to indemnify jointly and severally 3rd party plaintiffs (FEU and Edilberto de
Jesus in his capacity as President of FEU) for the above-mentioned amounts;

3. And the 4th party complaint is dismissed for lack of cause of action. No
pronouncement as to costs.

SO ORDERED.9

Respondents appealed to the Court of Appeals which rendered the assailed Decision, the decretal
portion of which provides, viz:

WHEREFORE, the appeal is hereby GRANTED. The Decision dated November 10, 2004 is
hereby REVERSED and SET ASIDE. The complaint filed by Joseph Saludaga against
appellant Far Eastern University and its President in Civil Case No. 98-89483 is
DISMISSED.

SO ORDERED.10

Petitioner filed a Motion for Reconsideration which was denied; hence, the instant petition based on
the following grounds:

THE COURT OF APPEALS SERIOUSLY ERRED IN MANNER CONTRARY TO LAW AND

JURISPRUDENCE IN RULING THAT:

5.1. THE SHOOTING INCIDENT IS A FORTUITOUS EVENT;

5.2. RESPONDENTS ARE NOT LIABLE FOR DAMAGES FOR THE INJURY RESULTING
FROM A GUNSHOT WOUND SUFFERED BY THE PETITIONER FROM THE HANDS OF
NO LESS THAN THEIR OWN SECURITY GUARD IN VIOLATION OF THEIR BUILT-IN
CONTRACTUAL OBLIGATION TO PETITIONER, BEING THEIR LAW STUDENT AT THAT
TIME, TO PROVIDE HIM WITH A SAFE AND SECURE EDUCATIONAL ENVIRONMENT;

5.3. SECURITY GAURD, ALEJANDRO ROSETE, WHO SHOT PETITIONER WHILE HE

WAS WALKING ON HIS WAY TO THE LAW LIBRARY OF RESPONDENT FEU IS NOT
THEIR EMPLOYEE BY VIRTUE OF THE CONTRACT FOR SECURITY SERVICES
BETWEEN GALAXY AND FEU NOTWITHSTANDING THE FACT THAT PETITIONER, NOT
 BEING A PARTY TO IT, IS NOT BOUND BY THE SAME UNDER THE PRINCIPLE OF
RELATIVITY OF CONTRACTS; and

5.4. RESPONDENT EXERCISED DUE DILIGENCE IN SELECTING GALAXY AS THE

AGENCY WHICH WOULD PROVIDE SECURITY SERVICES WITHIN THE PREMISES OF
RESPONDENT FEU.11

Petitioner is suing respondents for damages based on the alleged breach of student-school contract
for a safe learning environment. The pertinent portions of petitioner's Complaint read:

6.0. At the time of plaintiff's confinement, the defendants or any of their representative did
not bother to visit and inquire about his condition. This abject indifference on the part of the
defendants continued even after plaintiff was discharged from the hospital when not even a
word of consolation was heard from them. Plaintiff waited for more than one (1) year for the
defendants to perform their moral obligation but the wait was fruitless. This indifference and
total lack of concern of defendants served to exacerbate plaintiff's miserable condition.

xxxx

11.0. Defendants are responsible for ensuring the safety of its students while the latter are
within the University premises. And that should anything untoward happens to any of its
students while they are within the University's premises shall be the responsibility of the
defendants. In this case, defendants, despite being legally and morally bound, miserably
failed to protect plaintiff from injury and thereafter, to mitigate and compensate plaintiff for
said injury;

12.0. When plaintiff enrolled with defendant FEU, a contract was entered into between them.
Under this contract, defendants are supposed to ensure that adequate steps are taken to
provide an atmosphere conducive to study and ensure the safety of the plaintiff while inside
defendant FEU's premises. In the instant case, the latter breached this contract when
defendant allowed harm to befall upon the plaintiff when he was shot at by, of all people,
their security guard who was tasked to maintain peace inside the campus.12

In Philippine School of Business Administration v. Court of Appeals,13 we held that:

When an academic institution accepts students for enrollment, there is established a contract
between them, resulting in bilateral obligations which both parties are bound to comply with.
For its part, the school undertakes to provide the student with an education that would
presumably suffice to equip him with the necessary tools and skills to pursue higher
education or a profession. On the other hand, the student covenants to abide by the school's
academic requirements and observe its rules and regulations.

Institutions of learning must also meet the implicit or "built-in" obligation of providing their
students with an atmosphere that promotes or assists in attaining its primary undertaking of
imparting knowledge. Certainly, no student can absorb the intricacies of physics or higher
mathematics or explore the realm of the arts and other sciences when bullets are flying or
grenades exploding in the air or where there looms around the school premises a constant
threat to life and limb. Necessarily, the school must ensure that adequate steps are taken to
maintain peace and order within the campus premises and to prevent the breakdown
thereof.14
It is undisputed that petitioner was enrolled as a sophomore law student in respondent FEU. As
such, there was created a contractual obligation between the two parties. On petitioner's part, he
was obliged to comply with the rules and regulations of the school. On the other hand, respondent
FEU, as a learning institution is mandated to impart knowledge and equip its students with the
necessary skills to pursue higher education or a profession. At the same time, it is obliged to ensure
and take adequate steps to maintain peace and order within the campus.

It is settled that in culpa contractual, the mere proof of the existence of the contract and the failure of
its compliance justify, prima facie, a corresponding right of relief.15 In the instant case, we find that,
when petitioner was shot inside the campus by no less the security guard who was hired to maintain
peace and secure the premises, there is a prima facie showing that respondents failed to comply
with its obligation to provide a safe and secure environment to its students.

In order to avoid liability, however, respondents aver that the shooting incident was a fortuitous event
because they could not have reasonably foreseen nor avoided the accident caused by Rosete as he
was not their employee;16and that they complied with their obligation to ensure a safe learning
environment for their students by having exercised due diligence in selecting the security services of
Galaxy.

After a thorough review of the records, we find that respondents failed to discharge the burden of
proving that they exercised due diligence in providing a safe learning environment for their students.
They failed to prove that they ensured that the guards assigned in the campus met the requirements
stipulated in the Security Service Agreement. Indeed, certain documents about Galaxy were
presented during trial; however, no evidence as to the qualifications of Rosete as a security guard
for the university was offered.

Respondents also failed to show that they undertook steps to ascertain and confirm that the security
guards assigned to them actually possess the qualifications required in the Security Service
Agreement. It was not proven that they examined the clearances, psychiatric test results, 201 files,
and other vital documents enumerated in its contract with Galaxy. Total reliance on the security
agency about these matters or failure to check the papers stating the qualifications of the guards is
negligence on the part of respondents. A learning institution should not be allowed to completely
relinquish or abdicate security matters in its premises to the security agency it hired. To do so would
result to contracting away its inherent obligation to ensure a safe learning environment for its
students.

Consequently, respondents' defense of force majeure must fail. In order for force majeure to be
considered, respondents must show that no negligence or misconduct was committed that may have
occasioned the loss. An act of God cannot be invoked to protect a person who has failed to take
steps to forestall the possible adverse consequences of such a loss. One's negligence may have
concurred with an act of God in producing damage and injury to another; nonetheless, showing that
the immediate or proximate cause of the damage or injury was a fortuitous event would not exempt
one from liability. When the effect is found to be partly the result of a person's participation - whether
by active intervention, neglect or failure to act - the whole occurrence is humanized and removed
from the rules applicable to acts of God.17

Article 1170 of the Civil Code provides that those who are negligent in the performance of their
obligations are liable for damages. Accordingly, for breach of contract due to negligence in providing
a safe learning environment, respondent FEU is liable to petitioner for damages. It is essential in the
award of damages that the claimant must have satisfactorily proven during the trial the existence of
the factual basis of the damages and its causal connection to defendant's acts. 18
In the instant case, it was established that petitioner spent P35,298.25 for his hospitalization and
other medical expenses.19 While the trial court correctly imposed interest on said amount, however,
the case at bar involves an obligation arising from a contract and not a loan or forbearance of
money. As such, the proper rate of legal interest is six percent (6%) per annum of the amount
demanded. Such interest shall continue to run from the filing of the complaint until the finality of this
Decision.20 After this Decision becomes final and executory, the applicable rate shall be twelve
percent (12%) per annum until its satisfaction.

The other expenses being claimed by petitioner, such as transportation expenses and those incurred
in hiring a personal assistant while recuperating were however not duly supported by receipts. 21 In
the absence thereof, no actual damages may be awarded. Nonetheless, temperate damages under
Art. 2224 of the Civil Code may be recovered where it has been shown that the claimant suffered
some pecuniary loss but the amount thereof cannot be proved with certainty. Hence, the amount of
P20,000.00 as temperate damages is awarded to petitioner.

As regards the award of moral damages, there is no hard and fast rule in the determination of what
would be a fair amount of moral damages since each case must be governed by its own peculiar
circumstances.22 The testimony of petitioner about his physical suffering, mental anguish, fright,
serious anxiety, and moral shock resulting from the shooting incident23 justify the award of moral
damages. However, moral damages are in the category of an award designed to compensate the
claimant for actual injury suffered and not to impose a penalty on the wrongdoer. The award is not
meant to enrich the complainant at the expense of the defendant, but to enable the injured party to
obtain means, diversion, or amusements that will serve to obviate the moral suffering he has
undergone. It is aimed at the restoration, within the limits of the possible, of the spiritual status quo
ante, and should be proportionate to the suffering inflicted. Trial courts must then guard against the
award of exorbitant damages; they should exercise balanced restrained and measured objectivity to
avoid suspicion that it was due to passion, prejudice, or corruption on the part of the trial court. 24 We
deem it just and reasonable under the circumstances to award petitioner moral damages in the
amount of P100,000.00.

Likewise, attorney's fees and litigation expenses in the amount of P50,000.00 as part of damages is
reasonable in view of Article 2208 of the Civil Code.25 However, the award of exemplary damages is
deleted considering the absence of proof that respondents acted in a wanton, fraudulent, reckless,
oppressive, or malevolent manner.

We note that the trial court held respondent De Jesus solidarily liable with respondent FEU.
In Powton Conglomerate, Inc. v. Agcolicol,26 we held that:

[A] corporation is invested by law with a personality separate and distinct from those of the
persons composing it, such that, save for certain exceptions, corporate officers who entered
into contracts in behalf of the corporation cannot be held personally liable for the liabilities of
the latter. Personal liability of a corporate director, trustee or officer along (although not
necessarily) with the corporation may so validly attach, as a rule, only when - (1) he assents
to a patently unlawful act of the corporation, or when he is guilty of bad faith or gross
negligence in directing its affairs, or when there is a conflict of interest resulting in damages
to the corporation, its stockholders or other persons; (2) he consents to the issuance of
watered down stocks or who, having knowledge thereof, does not forthwith file with the
corporate secretary his written objection thereto; (3) he agrees to hold himself personally and
solidarily liable with the corporation; or (4) he is made by a specific provision of law
personally answerable for his corporate action.27
None of the foregoing exceptions was established in the instant case; hence, respondent De Jesus
should not be held solidarily liable with respondent FEU.

Incidentally, although the main cause of action in the instant case is the breach of the school-student
contract, petitioner, in the alternative, also holds respondents vicariously liable under Article 2180 of
the Civil Code, which provides:

Art. 2180. The obligation imposed by Article 2176 is demandable not only for one's own acts
or omissions, but also for those of persons for whom one is responsible.

xxxx

Employers shall be liable for the damages caused by their employees and household
helpers acting within the scope of their assigned tasks, even though the former are not
engaged in any business or industry.

xxxx

The responsibility treated of in this article shall cease when the persons herein mentioned
prove that they observed all the diligence of a good father of a family to prevent damage.

We agree with the findings of the Court of Appeals that respondents cannot be held liable for
damages under Art. 2180 of the Civil Code because respondents are not the employers of Rosete.
The latter was employed by Galaxy. The instructions issued by respondents' Security Consultant to
Galaxy and its security guards are ordinarily no more than requests commonly envisaged in the
contract for services entered into by a principal and a security agency. They cannot be construed as
the element of control as to treat respondents as the employers of Rosete. 28

As held in Mercury Drug Corporation v. Libunao:29

In Soliman, Jr. v. Tuazon,30 we held that where the security agency recruits, hires and
assigns the works of its watchmen or security guards to a client, the employer of such guards
or watchmen is such agency, and not the client, since the latter has no hand in selecting the
security guards. Thus, the duty to observe the diligence of a good father of a family cannot
be demanded from the said client:

… [I]t is settled in our jurisdiction that where the security agency, as here, recruits,
hires and assigns the work of its watchmen or security guards, the agency is the
employer of such guards or watchmen. Liability for illegal or harmful acts committed
by the security guards attaches to the employer agency, and not to the clients or
customers of such agency. As a general rule, a client or customer of a security
agency has no hand in selecting who among the pool of security guards or
watchmen employed by the agency shall be assigned to it; the duty to observe the
diligence of a good father of a family in the selection of the guards cannot, in the
ordinary course of events, be demanded from the client whose premises or property
are protected by the security guards.

xxxx
 The fact that a client company may give instructions or directions to the security guards
assigned to it, does not, by itself, render the client responsible as an employer of the security
guards concerned and liable for their wrongful acts or omissions.31

We now come to respondents' Third Party Claim against Galaxy. In Firestone Tire and Rubber
Company of the Philippines v. Tempengko,32 we held that:

The third-party complaint is, therefore, a procedural device whereby a 'third party' who is
neither a party nor privy to the act or deed complained of by the plaintiff, may be brought into
the case with leave of court, by the defendant, who acts as third-party plaintiff to enforce
against such third-party defendant a right for contribution, indemnity, subrogation or any
other relief, in respect of the plaintiff's claim. The third-party complaint is actually
independent of and separate and distinct from the plaintiff's complaint. Were it not for this
provision of the Rules of Court, it would have to be filed independently and separately from
the original complaint by the defendant against the third-party. But the Rules permit
defendant to bring in a third-party defendant or so to speak, to litigate his separate cause of
action in respect of plaintiff's claim against a third-party in the original and principal case with
the object of avoiding circuitry of action and unnecessary proliferation of law suits and of
disposing expeditiously in one litigation the entire subject matter arising from one particular
set of facts.33

Respondents and Galaxy were able to litigate their respective claims and defenses in the course of
the trial of petitioner's complaint. Evidence duly supports the findings of the trial court that Galaxy is
negligent not only in the selection of its employees but also in their supervision. Indeed, no
administrative sanction was imposed against Rosete despite the shooting incident; moreover, he
was even allowed to go on leave of absence which led eventually to his disappearance. 34 Galaxy
also failed to monitor petitioner's condition or extend the necessary assistance, other than the
P5,000.00 initially given to petitioner. Galaxy and Imperial failed to make good their pledge to
reimburse petitioner's medical expenses.

For these acts of negligence and for having supplied respondent FEU with an unqualified security
guard, which resulted to the latter's breach of obligation to petitioner, it is proper to hold Galaxy liable
to respondent FEU for such damages equivalent to the above-mentioned amounts awarded to
petitioner.

Unlike respondent De Jesus, we deem Imperial to be solidarily liable with Galaxy for being grossly
negligent in directing the affairs of the security agency. It was Imperial who assured petitioner that
his medical expenses will be shouldered by Galaxy but said representations were not fulfilled
because they presumed that petitioner and his family were no longer interested in filing a formal
complaint against them.35

WHEREFORE, the petition is GRANTED. The June 29, 2007 Decision of the Court of Appeals in
CA-G.R. CV No. 87050 nullifying the Decision of the trial court and dismissing the complaint as well
as the August 23, 2007 Resolution denying the Motion for Reconsideration are REVERSED and
SET ASIDE. The Decision of the Regional Trial Court of Manila, Branch 2, in Civil Case No. 98-
89483 finding respondent FEU liable for damages for breach of its obligation to provide students with
a safe and secure learning atmosphere, is AFFIRMED with the following MODIFICATIONS:

a. respondent Far Eastern University (FEU) is ORDERED to pay petitioner actual damages in the
amount of P35,298.25, plus 6% interest per annum from the filing of the complaint until the finality of
this Decision. After this decision becomes final and executory, the applicable rate shall be twelve
percent (12%) per annum until its satisfaction;
b. respondent FEU is also ORDERED to pay petitioner temperate damages in the amount of
P20,000.00; moral damages in the amount of P100,000.00; and attorney's fees and litigation
expenses in the amount of P50,000.00;

c. the award of exemplary damages is DELETED.

The Complaint against respondent Edilberto C. De Jesus is DISMISSED. The counterclaims of

respondents are likewise DISMISSED.

Galaxy Development and Management Corporation (Galaxy) and its president, Mariano D. Imperial
are ORDEREDto jointly and severally pay respondent FEU damages equivalent to the above-
mentioned amounts awarded to petitioner.

SO ORDERED.

THIRD DIVISION

G.R. No. 158911 March 4, 2008

MANILA ELECTRIC COMPANY, Petitioner,

vs.
MATILDE MACABAGDAL RAMOY, BIENVENIDO RAMOY, ROMANA RAMOY-RAMOS,
ROSEMARIE RAMOY, OFELIA DURIAN and CYRENE PANADO, Respondents.

DECISION

AUSTRIA-MARTINEZ, J.:

This resolves the Petition for Review on Certiorari under Rule 45 of the Rules of Court, praying that
the Decision1 of the Court of Appeals (CA) dated December 16, 2002, ordering petitioner Manila
Electric Company (MERALCO) to pay Leoncio Ramoy2 moral and exemplary damages and
attorney's fees, and the CA Resolution3 dated July 1, 2003, denying petitioner's motion for
reconsideration, be reversed and set aside.

The Regional Trial Court (RTC) of Quezon City, Branch 81, accurately summarized the facts as
culled from the records, thus:

The evidence on record has established that in the year 1987 the National Power Corporation (NPC)
filed with the MTC Quezon City a case for ejectment against several persons allegedly illegally
occupying its properties in Baesa, Quezon City. Among the defendants in the ejectment case was
Leoncio Ramoy, one of the plaintiffs in the case at bar. On April 28, 1989 after the defendants failed
to file an answer in spite of summons duly served, the MTC Branch 36, Quezon City rendered
judgment for the plaintiff [MERALCO] and "ordering the defendants to demolish or remove the
building and structures they built on the land of the plaintiff and to vacate the premises." In the case
of Leoncio Ramoy, the Court found that he was occupying a portion of Lot No. 72-B-2-B with the
exact location of his apartments indicated and encircled in the location map as No. 7. A copy of the
decision was furnished Leoncio Ramoy (Exhibits 2, 2-A, 2-B, 2-C, pp. 128-131, Record; TSN, July 2,
1993, p. 5).

On June 20, 1990 NPC wrote Meralco requesting for the "immediate disconnection of electric power
supply to all residential and commercial establishments beneath the NPC transmission lines along
Baesa, Quezon City (Exh. 7, p. 143, Record). Attached to the letter was a list of establishments
affected which included plaintiffs Leoncio and Matilde Ramoy (Exh. 9), as well as a copy of the court
decision (Exh. 2). After deliberating on NPC's letter, Meralco decided to comply with NPC's request
(Exhibits 6, 6-A, 6-A-1, 6-B) and thereupon issued notices of disconnection to all establishments
affected including plaintiffs Leoncio Ramoy (Exhs. 3, 3-A to 3-C), Matilde Ramoy/Matilde
Macabagdal (Exhibits 3-D to 3-E), Rosemarie Ramoy (Exh. 3-F), Ofelia Durian (Exh. 3-G), Jose
Valiza (Exh. 3-H) and Cyrene S. Panado (Exh. 3-I).

In a letter dated August 17, 1990 Meralco requested NPC for a joint survey to determine all the
establishments which are considered under NPC property in view of the fact that "the houses in the
area are very close to each other" (Exh. 12). Shortly thereafter, a joint survey was conducted and the
NPC personnel pointed out the electric meters to be disconnected (Exh. 13; TSN, October 8, 1993,
p. 7; TSN, July 1994, p. 8).

In due time, the electric service connection of the plaintiffs [herein respondents] was disconnected
(Exhibits D to G, with submarkings, pp. 86-87, Record).

Plaintiff Leoncio Ramoy testified that he and his wife are the registered owners of a parcel of land
covered by TCT No. 326346, a portion of which was occupied by plaintiffs Rosemarie Ramoy, Ofelia
Durian, Jose Valiza and Cyrene S. Panado as lessees. When the Meralco employees were
disconnecting plaintiffs' power connection, plaintiff Leoncio Ramoy objected by informing the
Meralco foreman that his property was outside the NPC property and pointing out the monuments
showing the boundaries of his property. However, he was threatened and told not to interfere by the
armed men who accompanied the Meralco employees. After the electric power in Ramoy's
apartment was cut off, the plaintiffs-lessees left the premises.

During the ocular inspection ordered by the Court and attended by the parties, it was found out that
the residence of plaintiffs-spouses Leoncio and Matilde Ramoy was indeed outside the NPC
property. This was confirmed by defendant's witness R.P. Monsale III on cross-examination (TSN,
October 13, 1993, pp. 10 and 11). Monsale also admitted that he did not inform his supervisor about
this fact nor did he recommend re-connection of plaintiffs' power supply (Ibid., p. 14).

The record also shows that at the request of NPC, defendant Meralco re-connected the electric
service of four customers previously disconnected none of whom was any of the plaintiffs (Exh. 14). 4

The RTC decided in favor of MERALCO by dismissing herein respondents' claim for moral damages,
exemplary damages and attorney's fees. However, the RTC ordered MERALCO to restore the
electric power supply of respondents.

Respondents then appealed to the CA. In its Decision dated December 16, 2002, the CA faulted
MERALCO for not requiring from National Power Corporation (NPC) a writ of execution or demolition
and in not coordinating with the court sheriff or other proper officer before complying with the NPC's
request. Thus, the CA held MERALCO liable for moral and exemplary damages and attorney's fees.
MERALCO's motion for reconsideration of the Decision was denied per Resolution dated July 1,
2003.

Hence, herein petition for review on certiorari on the following grounds:

I
THE COURT OF APPEALS GRAVELY ERRED WHEN IT FOUND MERALCO NEGLIGENT WHEN
IT DISCONNECTED THE SUBJECT ELECTRIC SERVICE OF RESPONDENTS.

II

THE COURT OF APPEALS GRAVELY ERRED WHEN IT AWARDED MORAL AND EXEMPLARY
DAMAGES AND ATTORNEY'S FEES AGAINST MERALCO UNDER THE CIRCUMSTANCES
THAT THE LATTER ACTED IN GOOD FAITH IN THE DISCONNECTION OF THE ELECTRIC
SERVICES OF THE RESPONDENTS. 5

The petition is partly meritorious.

MERALCO admits6 that respondents are its customers under a Service Contract whereby it is
obliged to supply respondents with electricity. Nevertheless, upon request of the NPC, MERALCO
disconnected its power supply to respondents on the ground that they were illegally occupying the
NPC's right of way. Under the Service Contract, "[a] customer of electric service must show his right
or proper interest over the property in order that he will be provided with and assured a continuous
electric service."7 MERALCO argues that since there is a Decision of the Metropolitan Trial Court
(MTC) of Quezon City ruling that herein respondents were among the illegal occupants of the NPC's
right of way, MERALCO was justified in cutting off service to respondents.

Clearly, respondents' cause of action against MERALCO is anchored on culpa contractual or breach
of contract for the latter's discontinuance of its service to respondents under Article 1170 of the Civil
Code which provides:

Article 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or
delay, and those who in any manner contravene the tenor thereof, are liable for damages.

In Radio Communications of the Philippines, Inc. v. Verchez,8 the Court expounded on the nature
of culpa contractual, thus:

"In culpa contractual x x x the mere proof of the existence of the contract and the failure of its
compliance justify, prima facie, a corresponding right of relief. The law, recognizing the
obligatory force of contracts, will not permit a party to be set free from liability for any kind of
misperformance of the contractual undertaking or a contravention of the tenor thereof. A breach
upon the contract confers upon the injured party a valid cause for recovering that which may have
been lost or suffered. The remedy serves to preserve the interests of the promissee that may include
his "expectation interest," which is his interest in having the benefit of his bargain by being put in as
good a position as he would have been in had the contract been performed, or his "reliance interest,"
which is his interest in being reimbursed for loss caused by reliance on the contract by being put in
as good a position as he would have been in had the contract not been made; or his "restitution
interest," which is his interest in having restored to him any benefit that he has conferred on the
other party. Indeed, agreements can accomplish little, either for their makers or for society, unless
they are made the basis for action. The effect of every infraction is to create a new duty, that is, to
make recompense to the one who has been injured by the failure of another to observe his
contractual obligation unless he can show extenuating circumstances, like proof of his exercise of
due diligence x x x or of the attendance of fortuitous event, to excuse him from his ensuing
liability.9 (Emphasis supplied)

Article 1173 also provides that the fault or negligence of the obligor consists in the omission of that
diligence which is required by the nature of the obligation and corresponds with the circumstances of
the persons, of the time and of the place. The Court emphasized in Ridjo Tape & Chemical
Corporation v. Court of Appeals10 that "as a public utility, MERALCO has the obligation to discharge
its functions with utmost care and diligence."11

The Court agrees with the CA that under the factual milieu of the present case, MERALCO failed to
exercise the utmost degree of care and diligence required of it. To repeat, it was not enough for
MERALCO to merely rely on the Decision of the MTC without ascertaining whether it had become
final and executory. Verily, only upon finality of said Decision can it be said with conclusiveness that
respondents have no right or proper interest over the subject property, thus, are not entitled to the
services of MERALCO.

Although MERALCO insists that the MTC Decision is final and executory, it never showed any
documentary evidence to support this allegation. Moreover, if it were true that the decision was final
and executory, the most prudent thing for MERALCO to have done was to coordinate with the proper
court officials in determining which structures are covered by said court order. Likewise, there is no
evidence on record to show that this was done by MERALCO.

The utmost care and diligence required of MERALCO necessitates such great degree of prudence
on its part, and failure to exercise the diligence required means that MERALCO was at fault and
negligent in the performance of its obligation. In Ridjo Tape,12 the Court explained:

[B]eing a public utility vested with vital public interest, MERALCO is impressed with certain
obligations towards its customers and any omission on its part to perform such duties would be
prejudicial to its interest. For in the final analysis, the bottom line is that those who do not exercise
such prudence in the discharge of their duties shall be made to bear the consequences of such
oversight.13

This being so, MERALCO is liable for damages under Article 1170 of the Civil Code.

The next question is: Are respondents entitled to moral and exemplary damages and attorney's
fees?

Article 2220 of the Civil Code provides:

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

In the present case, MERALCO wilfully caused injury to Leoncio Ramoy by withholding from him and
his tenants the supply of electricity to which they were entitled under the Service Contract. This is
contrary to public policy because, as discussed above, MERALCO, being a vital public utility, is
expected to exercise utmost care and diligence in the performance of its obligation. It was incumbent
upon MERALCO to do everything within its power to ensure that the improvements built by
respondents are within the NPC’s right of way before disconnecting their power supply. The Court
emphasized in Samar II Electric Cooperative, Inc. v. Quijano14 that:

Electricity is a basic necessity the generation and distribution of which is imbued with public interest,
and its provider is a public utility subject to strict regulation by the State in the exercise of police
power. Failure to comply with these regulations will give rise to the presumption of bad faith
or abuse of right.15 (Emphasis supplied)
Thus, by analogy, MERALCO's failure to exercise utmost care and diligence in the performance of
its obligation to Leoncio Ramoy, its customer, is tantamount to bad faith. Leoncio Ramoy testified
that he suffered wounded feelings because of MERALCO's actions.16 Furthermore, due to the lack of
power supply, the lessees of his four apartments on subject lot left the premises. 17 Clearly, therefore,
Leoncio Ramoy is entitled to moral damages in the amount awarded by the CA.

Leoncio Ramoy, the lone witness for respondents, was the only one who testified regarding the
effects on him of MERALCO's electric service disconnection. His co-respondents Matilde Ramoy,
Rosemarie Ramoy, Ofelia Durian and Cyrene Panado did not present any evidence of damages
they suffered.

It is a hornbook principle that damages may be awarded only if proven. In Mahinay v. Velasquez,
Jr.,18 the Court held thus:

In order that moral damages may be awarded, there must be pleading and proof of moral
suffering, mental anguish, fright and the like. While respondent alleged in his complaint that he
suffered mental anguish, serious anxiety, wounded feelings and moral shock, he failed to prove
them during the trial. Indeed, respondent should have taken the witness stand and should have
testified on the mental anguish, serious anxiety, wounded feelings and other emotional and mental
suffering he purportedly suffered to sustain his claim for moral damages. Mere allegations do not
suffice; they must be substantiated by clear and convincing proof. No other person could have
proven such damages except the respondent himself as they were extremely personal to him.

In Keirulf vs. Court of Appeals, we held:

"While no proof of pecuniary loss is necessary in order that moral damages may be awarded, the
amount of indemnity being left to the discretion of the court, it is nevertheless essential that the
claimant should satisfactorily show the existence of the factual basis of damages and its causal
connection to defendant’s acts. This is so because moral damages, though incapable of pecuniary
estimation, are in the category of an award designed to compensate the claimant for actual injury
suffered and not to impose a penalty on the wrongdoer. In Francisco vs. GSIS, the Court held
that there must be clear testimony on the anguish and other forms of mental suffering. Thus, if
the plaintiff fails to take the witness stand and testify as to his/her social humiliation, wounded
feelings and anxiety, moral damages cannot be awarded. In Cocoland Development Corporation vs.
National Labor Relations Commission, the Court held that "additional facts must be pleaded and
proven to warrant the grant of moral damages under the Civil Code, these being, x x x social
humiliation, wounded feelings, grave anxiety, etc. that resulted therefrom."

x x x The award of moral damages must be anchored to a clear showing that respondent actually
experienced mental anguish, besmirched reputation, sleepless nights, wounded feelings or similar
injury. There was no better witness to this experience than respondent himself. Since respondent
failed to testify on the witness stand, the trial court did not have any factual basis to award
moral damages to him.19 (Emphasis supplied)

Thus, only respondent Leoncio Ramoy, who testified as to his wounded feelings, may be awarded
moral damages.20

With regard to exemplary damages, Article 2232 of the Civil Code provides that in contracts and
quasi-contracts, the court may award exemplary damages if the defendant, in this case MERALCO,
acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner, while Article 2233 of the
same Code provides that such damages cannot be recovered as a matter of right and the
adjudication of the same is within the discretion of the court.
1avvphi1
The Court finds that MERALCO fell short of exercising the due diligence required, but its actions
cannot be considered wanton, fraudulent, reckless, oppressive or malevolent. Records show that
MERALCO did take some measures, i.e., coordinating with NPC officials and conducting a joint
survey of the subject area, to verify which electric meters should be disconnected although these
measures are not sufficient, considering the degree of diligence required of it. Thus, in this case,
exemplary damages should not be awarded.

Since the Court does not deem it proper to award exemplary damages in this case, then the CA's
award for attorney's fees should likewise be deleted, as Article 2208 of the Civil Code states that in
the absence of stipulation, attorney's fees cannot be recovered except in cases provided for in
said Article, to wit:

Article 2208. In the absence of stipulation, attorney’s fees and expenses of litigation, other than
judicial costs, cannot be recovered, except:

(1) When exemplary damages are awarded;

(2) When the defendant’s act or omission has compelled the plaintiff to litigate with third
persons or to incur expenses to protect his interest;

(3) In criminal cases of malicious prosecution against the plaintiff;

(4) In case of a clearly unfounded civil action or proceeding against the plaintiff;

(5) Where the defendant acted in gross and evident bad faith in refusing to satisfy the
plaintiff’s plainly valid, just and demandable claim;

(6) In actions for legal support;

(7) In actions for the recovery of wages of household helpers, laborers and skilled workers;

(8) In actions for indemnity under workmen’s compensation and employer’s liability laws;

(9) In a separate civil action to recover civil liability arising from a crime;

(10) When at least double judicial costs are awarded;

(11) In any other case where the court deems it just and equitable that attorney’s fees and
expenses of litigation should be recovered.

In all cases, the attorney’s fees and expenses of litigation must be reasonable.

None of the grounds for recovery of attorney's fees are present.

WHEREFORE, the petition is PARTLY GRANTED. The Decision of the Court of Appeals
is AFFIRMED with MODIFICATION. The award for exemplary damages and attorney's fees
is DELETED.

No costs.
SO ORDERED.

G.R. No. 205838, November 29, 2017

JOSEPH HARRY WALTER POOLE-BLUNDEN, Petitioner, v. UNION BANK OF THE

PHILIPPINES, Respondent.

DECISION

LEONEN, J.:

Banks are required to observe a high degree of diligence in their affairs. This
encompasses their dealings concerning properties offered as security for loans. A bank
that wrongly advertises the area of a property acquired through foreclosure because it
failed to dutifully ascertain the property's specifications is grossly negligent as to
practically be in bad faith in offering that property to prospective buyers. Any sale made
on this account is voidable for causal fraud. In actions to void such sales, banks cannot
hide under the defense that a sale was made on an as-is-where-is basis. As-is-where-is
stipulations can only encompass physical features that are readily perceptible by an
ordinary person possessing no specialized skills.

This resolves a Petition for Review on Certiorari 1 under Rule 45 of the 1997 Rules of
Civil Procedure praying that the assailed November 15, 2012 Decision 2 and February
12, 2013 Resolution3 of the Court of Appeals in CA-G.R. CV No. 95369 be reversed and
set aside and that judgment be rendered annulling or rescinding the Contract to Sell
between petitioner Joseph Harry Walter Poole-Blunden (Poole-Blunden) and respondent
Union Bank of the Philippines (UnionBank).

The assailed Court of Appeals Decision affirmed the April 20, 2010 Decision of the
Regional Trial Court, Branch 65, Makati City which dismissed the Complaint for
Rescission of Contract and Damages filed by Poole-Blunden against respondent
UnionBank.4 The assailed Court of Appeals Resolution denied Poole-Blunden's Motion for
Reconsideration.5

Sometime in March 2001, Poole-Blunden came across an advertisement placed by

Union Bank in the Manila Bulletin. The ad was for the public auction of certain
properties. One of these properties was a condominium unit, identified as Unit 2-C of T-
Tower Condominium (the "Unit"), located at 5040 P. Burgos corner Calderon Streets,
Makati City.6 UnionBank had acquired the property through foreclosure proceedings
"after the developer defaulted in the payment of its loan from [UnionBank]." 7

The Unit was advertised to have an area of 95 square meters. Thinking that it was
sufficient and spacious enough for his residential needs, Poole-Blunden decided to
register for the sale and bid on the unit.8

About a week prior to the auction, Poole-Blunden visited the unit for inspection. He was
accompanied by a representative of UnionBank. The unit had an irregular shape; it was
neither a square nor a rectangle and included a circular terrace. Poole-Blunden did not
doubt the unit's area as advertised. However, he found that the ceiling was in bad
condition, that the parquet floor was damaged, and that the unit was in need of other
substantial repairs to be habitable.9

On the day of the auction, Poole-Blunden inspected the Master Title of the project
owner to the condominium in the name of Integrated Network (TCT No. 171433) and
the Condominium Certificate of Title of UnionBank (CCT No. 36151) to verify once again
the details as advertised and the ownership of the unit. Both documents were on
display at the auction venue.10

Poole-Blunden placed his bid and won the unit for P2,650,000.00. 11 On May 7, 2001,
Poole-Blunden entered into a Contract to Sell with UnionBank. This Contract stipulated
that Poole-Blunden would pay 10% of the purchase price as down payment 12 and that
the balance shall be paid over a period of 15 years in equal monthly instalments, with
interest of 15% per annum starting July 7, 2001.13

Poole-Blunden started occupying the unit in June 2001. By July 20, 2003, he was able
to fully pay for the Unit, paying a total amount of P3,257,142.49. 14

In late 2003, Poole-Blunden decided to construct two (2) additional bedrooms in the
Unit. Upon examining it, he noticed apparent problems in its dimensions. He took rough
measurements of the Unit, which indicated that its floor area was just about 70 square
meters, not 95 square meters, as advertised by UnionBank. 15

Poole-Blunden got in touch with an officer of UnionBank to raise the matter, but no
action was taken.16 On July 12, 2004, Poole-Blunden wrote to UnionBank, informing it
of the discrepancy. He asked for a rescission of the Contract to Sell, along with a refund
of the amounts he had paid, in the event that it was conclusively established that the
area of the unit was less than 95 square meters. 17

In a letter dated December 6, 2004,18 UnionBank informed Poole-Blunden that after

inquiring with the Housing and Land Use Regulatory Board (HLURB), the Homeowners'
Association of T-Tower Condominium, and its appraisers, the Unit was confirmed to be
95 square meters,inclusive of the terrace and the common areas surrounding it. 19

Poole-Blunden was not satisfied with UnionBank's response as the condominium's

Master Title expressly stated that the "boundary of each unit are the interior surfaces of
the perimeter walls, floors, ceilings, windows and doors thereof." 20 Thus, he hired an
independent geodetic engineer, Engr. Gayril P. Tagal (Engr. Tagal) of the Filipinas
Dravo Corporation, to survey the Unit and measure its actual floor area. Engr. Tagal
issued a certification stating that the total floor area of the Unit was only 74.4 square
meters.21 Poole-Blunden gave UnionBank a copy of Engr. Tagal's certification on July
12, 2005.22

In a letter dated February 1, 2006, UnionBank explained:

[T]he total area of the subject unit based on the ratio allocation maintenance cost
submitted by the developer to HLURB is 98 square meters (60 square meters as unit
area and 38 square meters as share on open space). On the other hand, the actual
area thereof based on the measurements made by its surveyor is 74.18 square meters
which was much higher than the unit area of 60 square meters that was approved by
HLURB.23

Poole-Blunden's dissatisfaction with UnionBank's answer prompted him to file his

Complaint for Rescission of Contract and Damages with the Regional Trial Court, Makati
City.24

On April 20, 2010, the Regional Trial Court dismissed Poole-Blunden's complaint for lack
of merit. The dispositive portion of its Decision read:

WHEREFORE, premises considered, the instant complaint for rescission of contract and
damages is hereby DISMISSED for lack of merit. The counterclaim is likewise DENIED.

SO ORDERED.25

On appeal, the Court of Appeals affirmed the ruling of the Regional Trial Court. 26 It
noted that the sale was made on an "as-is-where-is" basis as indicated in Section 12 of
the Contract to Sell.27 Thus, Poole-Blunden supposedly waived any errors in the bounds
or description of the unit.28 The Court of Appeals added that Poole-Blunden failed to
show, by clear and convincing evidence that causal fraud can be attributed to
UnionBank.29 It added that the sale was made for a lump-sum amount and that, in
accordance with Article 1542, paragraph 1 of the Civil Code, 30 Poole-Blunden could not
demand a reduction in the purchase price.31

Following the denial of his Motion for Reconsideration, Poole-Blunden filed the present
Petition before this Court.32

Poole-Blunden charges UnionBank with fraud in failing to disclose to him that the
advertised 95 square meters was inclusive of common areas. 33 With the vitiation of his
consent as to the object of the sale, he asserts that the Contract to Sell may be voided.
He insists that UnionBank is liable for breach of warranty despite the "as-is-where-is"
clause in the Contract to Sell.34Finally, he assails the Court of Appeals' application of
Article 1542 of the Civil Code.35

For resolution is the sole issue of whether or not respondent Union Bank of the
Philippines committed such a degree of fraud as would entitle petitioner Joseph Harry
Walter Poole-Blunden to the voiding of the Contract to Sell the condominium unit
identified as Unit 2C, T-Tower Condominium, 5040 P. Burgos corner Calderon Streets,
Makati City.

No longer in dispute at this juncture is how the Unit's interior area is only 74.4 square
meters. While respondent has maintained that the Unit's total area is in keeping with
the advertised 95 square meters, it has conceded that these 95 square meters is
inclusive of outside spaces and common areas.

Even before litigation commenced, in a December 6, 2004 letter, 36 respondent informed

petitioner that, following inquiries with the HLURB, the Homeowners' Association of T-
Tower Condominium, and its appraisers, it had confirmed that the Unit's 95 square
meters was inclusive of "the terrace and the common areas surrounding it."37

During trial, respondent's former Assistant Vice President of the Asset and Recovery
Group, Atty. Elna N. Cruz (Atty. Cruz), testified on how there would have been
documents (such as an appraisal report) relating to inspections made by respondent's
personnel at the time the unit was being offered as a collateral to a loan. These would
have concerned the unit's area.38 She affirmed respondent's statements in its December
6, 2004 letter and indicated that, based on an appraisal report, the declared 95 square
meters was not exclusive to the Unit's interiors but included common areas:

Q: So my impression, Madam Witness, is that before you accepted the property as a

collateral, Union Bank already knew what was the actual area of the unit?
A: Yes, sir.

Q: But you do not know what was the actual area as found by your inspector?
A: It would be 95 square meters as per the record, sir.

Q: That was the actual findings of your inspector, Madam Witness?

A: Yes, sir.

Q: What's your basis for saying that?

A: The appraisal report, sir.

Q: Do you have now with you that appraisal report showing that the actual area of the unit
is indeed 95 square meters?
A: We gathered the appraisal report and in the December 06, 2004 letter that we gave Mr.
Blunden, we consulted the appraiser of the Bank and we were informed that the area
was indeed 95 square meters. But that area was brought about by measuring not just the
inside of the unit, sir, but including also the terrace, and the common area.39 (Emphasis
supplied)

Respondent has not disavowed Atty. Cruz's testimony. In its Comment, it merely
asserted that the "[e]xtensive reference to the [transcript of stenographic notes] is
unmistakable proof that the litigated issue is one of fact, not of law" and insisted that
this Court should not take cognizance of the present Petition. 40
Respondent's insistence on how common spaces should be included in reckoning the
Unit's total area runs afoul of how Republic Act No. 4726, otherwise known as the
Condominium Act, reckons what forms part of a condominium unit.

Section 3(b) of the Condominium Act defines a condominium unit, as follows:

Section 3. As used in this Act, unless the context otherwise requires:

....

(b) "Unit" means a part of the condominium project intended for any type of independent
use or ownership, including one or more rooms or spaces located in one or more floors
(or part or parts of floors) in a building or buildings and such accessories as may be
appended thereto.

Section 6(a) of the Condominium Act specifies the reckoning of a condominium unit's
bounds. It also specifies that areas of common use "are not part of the unit":

Section 6. Unless otherwise expressly provided in the enabling or master deed or the
declaration of restrictions, the incidents of a condominium grant are as follows:

(a) The boundary of the unit granted are the interior surfaces of the perimeter walls, floors,
ceilings, windows and doors thereof. The following are not part of the unit bearing
walls, columns, floors, roofs, foundations and other common structural elements of the
building; lobbies, stairways, hallways, and other areas of common use, elevator
equipment and shafts, central heating, central refrigeration and central air-conditioning
equipment, reservoirs, tanks, pumps and other central services and facilities, pipes,
ducts, flues, chutes, conduits, wires and other utility installations, wherever located,
except the outlets thereof when located within the unit. (Emphasis supplied.)

Thus, the unit sold to petitioner was deficient in relation to its advertised area. This
advertisement having been made by respondent, it is equally settled there was a falsity
in the declarations made by respondent prior to, and with the intention of enticing
buyers to the sale. What remains in issue is whether or not this falsity amounts to fraud
warranting the voiding of the Contract to Sell.

II

For there to be a valid contract, all the three (3) elements of consent, subject matter,
and price must be present.41 Consent wrongfully obtained is defective. The party to a
contract whose consent was vitiated is entitled to have the contract rescinded.
Accordingly, Article 1390 of the Civil Code42 stipulates that a contract is voidable or
annullable even if there is no damage to the contracting parties where "consent is
vitiated by mistake, violence, intimidation, undue influence or fraud."

Under Article 1338 of the Civil Code "[t]here is fraud when, through insidious words or
machinations of one of the contracting parties, the other is induced to enter into a
contract which, without them, he would not have agreed to." However, not all instances
of fraud enable the voiding of contracts. Article 1344 clarifies that in order to make a
contract voidable, the fraud "should be serious and should not have been employed by
both contracting parties."43

Thus, Tankeh v. Development Bank of the Philippines44 explained, "There are two types
of fraud contemplated in the performance of contracts: dolo incidente or incidental
fraud and dolo causante or fraud serious enough to render a contract voidable." 45 The
fraud required to annul or avoid a contract "must be so material that had it not been
present, the defrauded party would not have entered into the contract." 46 The fraud
must be "the determining cause of the contract, or must have caused the consent to be
given."47

Petitioner's contention on how crucial the dimensions and area of the Unit are to his
decision to proceed with the purchase is well-taken. The significance of space and
dimensions to any buyer of real property is plain to see. This is particularly significant
to buyers of condominium units in urban areas, and even more so in central business
districts, where the scarcity of space drives vertical construction and propels property
values. It would be immensely guileless of this Court to fail to appreciate how the
advertised area of the Unit was material or even indispensable to petitioner's consent.
As petitioner emphasized, he opted to register for and participate in the auction for the
Unit only after determining that its advertised area was spacious enough for his
residential needs.48

III

The significance of the Unit's area as a determining cause of the Contract to Sell is
readily discernible. Falsity on its area is attributable to none but to respondent, which,
however, pleads that it should not be considered as having acted fraudulently given
that petitioner conceded to a sale on an as-is-where-is basis, thereby waiving
"warranties regarding possible errors in boundaries or description of property." 49

Section 12 of the Contract to Sell spells out the "as-is-where-is" terms of the purchase:

Section 12. The BUYER recognizes that he is buying the property on an "as-is-where-is"
basis including errors in boundaries or description of property, if any etc. and among
others, he shall be responsible for the eviction of the occupants on the property, if any,
or for the repair of the property, if needed. It shall be understood that the SELLER
makes no warranty whatsoever on the authenticity, accuracy, or title over
property.50 (Emphasis supplied.)

Reliance on Section 12's as-is-where-is stipulation is misplaced for two (2) reasons.
First, a stipulation absolving a seller of liability for hidden defects can only be invoked
by a seller who has no knowledge of hidden defects. Respondent here knew that the
Unit's area, as reckoned in accordance with the Condominium Act, was not 95 square
meters. Second, an as-is-where-is stipulation can only pertain to the readily perceptible
physical state of the object of a sale. It cannot encompass matters that require
specialized scrutiny, as well as features and traits that are immediately appreciable only
by someone with technical competence.
A seller is generally responsible for warranty against hidden defects of the thing sold.
As stated in Article 1561 of the New Civil Code:

Article 1561. The vendor shall be responsible for warranty against the hidden defects
which the thing sold may have, should they render it unfit for the use for which it is
intended, or should they diminish its fitness for such use to such an extent that, had
the vendee been aware thereof, he would not have acquired it or would have given a
lower price for it; but said vendor shall not be answerable for patent defects or those
which may be visible, or for those which are not visible if the vendee is an expert who,
by reason of his trade or profession, should have known.

Article 1566, paragraph 2 states the seller's liability for hidden defects shall be
inapplicable if there is a stipulation made to the contrary. However, a mere stipulation
does not suffice. To be fully absolved of liability, Article 1566, paragraph 2 also requires
a seller to be unaware of the hidden defects in the thing sold.

Article 1566. The vendor is responsible to the vendee for any hidden faults or defects in
the thing sold, even though he was not aware thereof.

This provision shall not apply if the contrary has been stipulated, and the vendor was
not aware of the hidden faults or defects in the thing sold. (Emphasis supplied.)

It is clear from the records that respondent fully knew that the Unit's area, reckoned
strictly in accordance with the Condominium Act, did not total 95 square meters.
Respondent admits that the only way the Unit's area could have amounted to 95 square
meters was if some areas for common use were added to its interior space. It
acknowledged knowing this fact through the efforts of its appraisers and even conceded
that their findings were documented in their reports.

In Hian v. Court of Tax Appeals,51 this Court construed an as-is-where-is stipulation as

pertaining to the "physical condition" of the thing sold and "not to [its] legal
situation."52 As further explained in National Development Company v. Madrigal Wan
Hai Lines Corporation:53

In Hian vs. Court of Tax Appeals, we had the occasion to construe the phrase "as is,
where is" basis, thus:

"We cannot accept the contention in the Government's Memorandum of March 31, 1976
that Condition No. 5 in the Notice of Sale to the effect that 'The above-mentioned
articles (the tobacco) are offered for sale 'AS IS' and the Bureau of Customs gives no
warranty as to their condition' relieves the Bureau of Customs of liability for the storage
fees in dispute. As we understand said Condition No. 5, it refers to the physical
condition of the tobacco and not to the legal situation in which it was at the time of the
sale, as could be implied from the right of inspection to prospective bidders under
Condition No. 1 [.]" (Emphasis ours)

The phrase "as is, where is" basis pertains solely to the physical condition of the thing
sold, not to its legal situation. In the case at bar, the US tax liabilities constitute a
potential lien which applies to NSCP's legal situation, not to its physical aspect. Thus,
respondent as a buyer, has no obligation to shoulder the same. 54

A condominium unit's area is a physical attribute. In Hian's contemplation, it appeared

that the total area of a condominium unit is a valid object of an as-is-where-is clause.
However, while as-is-where-is clauses exclusively apply to the physical attributes of a
thing sold, they apply only to physical features that are readily observable. The
significance of this Court's pronouncements in Hian and National Development
Company are in clarifying that legal status, which is a technical matter perceptible only
by lawyers and regulators, cannot be encompassed by an as-is-where-is
stipulation. Hian and National Development Company are not a sweeping approbation
of such stipulations' coverage of every corporeal attribute or tangible trait of objects
being sold. Thus, in Asset Privatization v. T.J. Enterprises,55 the as-is-where-is
stipulation was understood as one which "merely describes the actual state and location
of the machinery and equipment sold,"56and nothing else. Features that may be
physical but which can only be revealed after examination by persons with technical
competence cannot be covered by as-is-where-is stipulations. A buyer cannot be
considered to have agreed "to take possession of the things sold 'in the condition where
they are found and from the place where they are located'" 57 if the critical defect is one
which he or she cannot even readily sense.

In inspecting the Unit prior to the auction sale, petitioner took note of its actual state:
"he noticed that the ceilings were down, [that] there was water damage from the leaks
coming from the unit above, and [that] the parquet floor was damaged." 58 He also took
note of its irregular shape and the circular terrace outside it. These observations
represent the full extent of what was readily perceptible to petitioner. The precise
measurement of the Unit's area, in contrast, could only be determined by someone with
specialized or technical capabilities. While ordinary persons, such as petitioner, may
hold such opinions that the Unit looks small, their perception could not be ascertained
until after an examination by someone equipped with peculiar skills and training to
measure real property. Indeed, petitioner's suspicions were not roused until years after
he had occupied the Unit and confirmed until after a certification was issued by a
surveyor.

Any waiver of warranties under Section 12 of the Contract to Sell could have only been
concerned with the readily apparent subpar condition of the Unit. A person not
equipped with technical knowledge and expertise to survey real property could not
reasonably be expected to recognize deficiencies in measurement at the first instance
especially if that property was of "irregular shape," "neither square nor rectangle," and
having a "circular terrace."59

IV

Contrary to the Court of Appeals' assertion, Article 1542 of the Civil Code does not bar
the voiding of the Contract to Sell.

Article 1542 of the Civil Code states:

Article 1542. In the sale of real estate, made for a lump sum and not at the rate of a
certain sum for a unit of measure or number, there shall be no increase or decrease of
the price, although there be a greater or less area or number than that stated in the
contract.

The same rule shall be applied when two or more immovables are sold for a single
price; but if, besides mentioning the boundaries, which is indispensable in every
conveyance of real estate, its area or number should be designated in the contract, the
vendor shall be bound to deliver all that is included within said boundaries, even when
it exceeds the area or number specified in the contract; and, should he not be able to
do so, he shall suffer a reduction in the price, in proportion to what is lacking in the
area or number, unless the contract is rescinded because the vendee does not accede
to the failure to deliver what has been stipulated. (Emphasis supplied.)

Article 1542 has nothing to do with annulling fraudulently made sales. What it is
concerned with is the proportionate reduction of the purchase price in relation to the
measurable units of the thing sold. Petitioner does not seek a reduction of the purchase
price. He seeks judicial relief to have the entirety of his purchase annulled, his consent
having been fraudulently obtained. By filing an action under Article 1390 of the Civil
Code, petitioner declared that his consent to the entire subject matter of the contract
was vitiated. What suffices as relief is the complete annulment of the sale, not the
partial reimbursement upon which Article 1542 is premised.

Likewise, Article 1542 does not contemplate the seller's delivery to the buyer of things
other than the agreed object of the sale. While it is true that petitioner did not buy the
unit on a per-square-meter basis, it remains that what he bought was a condominium
unit. A condominium unit's bounds are reckoned by "the interior surfaces of [its]
perimeter walls, floors, ceilings, windows and doors." 60 It excludes common areas.
Thus, when petitioner agreed to purchase the Unit at a lump-sum price, he never
consented to including common areas as part of his purchase. Article 1542's concern
with a ratable reduction of the price delivered by the buyer assumes that the seller
correctly delivered, albeit deficiently, the object of the sale.

In any case, for Article 1542 to operate, "the discrepancy must not be
substantial."61 Article 1542 remains anchored on a sense of what is reasonable. An
estimate given as a premise for a sale should be "more or less" the actual area of the
thing sold.62 Here, the area advertised and stipulated in the Contract to Sell was 95
square meters but the actual area of the unit was only 74.4 square meters. 63 By no
stretch of the imagination can a 21.68% deficiency be discounted as a mere minor
discrepancy.

By definition, fraud presupposes bad faith or malicious intent. It transpires when

insidious words or machinations are deliberately employed to induce agreement to a
contract. Thus, one could conceivably claim that respondent could not be guilty of fraud
as it does not appear to have crafted a deceptive strategy directed specifically at
petitioner. However, while petitioner was not a specific target, respondent was so
callously remiss of its duties as a bank. It was so grossly negligent that its recklessness
amounts to a wrongful willingness to engender a situation where any buyer in
petitioner's shoes would have been insidiously induced into buying a unit with an actual
area so grossly short of its advertised space.
In Spouses Carbonell v. Metropolitan Bank and Trust Company,64 this Court considered
gross negligence, in relation to the fiduciary nature of banks:

Gross negligence connotes want of care in the performance of one's duties; it is a

negligence characterized by the want of even slight care, acting or omitting to act in a
situation where there is duty to act, not inadvertently but wilfully and intentionally, with
a conscious indifference to consequences insofar as other persons may be affected. It
evinces a thoughtless disregard of consequences without exerting any effort to avoid
them.

In order for gross negligence to exist as to warrant holding the respondent liable
therefor, the petitioners must establish that the latter did not exert any effort at all to
avoid unpleasant consequences, or that it wilfully and intentionally disregarded the
proper protocols or procedure . . . and in selecting and supervising its
employees.65 (Emphasis supplied)

Banks assume a degree of prudence and diligence higher than that of a good father of a
family, because their business is imbued with public interest 66 and is inherently
fiduciary.67 Thus, banks have the obligation to treat the accounts of its clients
"meticulously and with the highest degree of care." 68 With respect to its fiduciary
duties, this Court explained:

The law imposes on banks high standards in view of the fiduciary nature of banking.
Section 2 of Republic Act No. 8791 ("RA 8791"), which took effect on 13 June 2000,
declares that the State recognizes the "fiduciary nature of banking that requires high
standards of integrity and performance." This new provision in the general banking law,
introduced in 2000, is a statutory affirmation of Supreme Court decisions, starting with
the 1990 case of Simex International v. Court of Appeals, holding that "the bank is
under obligation to treat the accounts of its depositors with meticulous care, always
having in mind the fiduciary nature of their relationship.

This fiduciary relationship means that the bank's obligation to observe "high standards
of integrity and performance" is deemed written into every deposit agreement between
a bank and its depositor. The fiduciary nature of banking requires banks to assume a
degree of diligence higher than that of a good father of a family. Article 1172 of the
Civil Code states that the degree of diligence required of an obligor is that prescribed by
law or contract, and absent such stipulation then the diligence of a good father of a
family. Section 2 of RA 8791 prescribes the statutory diligence required from banks —
that banks must observe "high standards of integrity and performance" in servicing
their depositors.69 (Citations omitted)

The high degree of diligence required of banks equally holds true in their dealing with
mortgaged real properties, and subsequently acquired through foreclosure, such as the
Unit purchased by petitioner. In the same way that banks are "presumed to be familiar
with the rules on land registration," given that they are in the business of extending
loans secured by real estate mortgage,70 banks are also expected to exercise the
highest degree of diligence. This is especially true when investigating real properties
offered as security, since they are aware that such property may be passed on to an
innocent purchaser in the event of foreclosure. Indeed, "the ascertainment of the status
or condition of a property offered to it as security for a loan must be a standard and
indispensable part of a bank's operations":71

When the purchaser or the mortgagee is a bank, the rule on innocent purchasers or
mortgagees for value is applied more strictly. Being in the business of extending loans
secured by real estate mortgage, banks are presumed to be familiar with the rules on
land registration. Since the banking business is impressed with public interest, they are
expected to be more cautious, to exercise a higher degree of diligence, care and
prudence, than private individuals in their dealings, even those involving registered
lands. Banks may not simply rely on the face of the certificate of title. Hence, they
cannot assume that, simply because the title offered as security is on its face free of
any encumbrances or lien, they are relieved of the responsibility of taking further steps
to verify the title and inspect the properties to be mortgaged. As expected, the
ascertainment of the status or condition of a property offered to it as security for a loan
must be a standard and indispensable part of a bank's operations. It is of judicial notice
that the standard practice for banks before approving a loan is to send its
representatives to the property offered as collateral to assess its actual condition, verify
the genuineness of the title, and investigate who is/are its real owner/s and actual
possessors.72 (Citations omitted)

Credit investigations are standard practice for banks before approving loans and
admitting properties offered as security. It entails the assessment of such properties:
an appraisal of their value, an examination of their condition, a verification of the
authenticity of their title, and an investigation into their real owners and actual
possessors.73 Whether it was unaware of the unit's actual interior area; or, knew of it,
but wrongly thought that its area should include common spaces, respondent's
predicament demonstrates how it failed to exercise utmost diligence in investigating the
Unit offered as security before accepting it. This negligence is so inexcusable; it is
tantamount to bad faith.

Even the least effort on respondent's part could have very easily confirmed the Unit's
true area. Similarly, the most cursory review of the Condominium Act would have
revealed the proper reckoning of a condominium unit's area. Respondent could have
exerted these most elementary efforts to protect not only clients and innocent
purchasers but, most basically, itself. Respondent's failure to do so indicates how it
created a situation that could have led to no other outcome than petitioner being
defrauded.

VI

The Regional Trial Court and the Court of Appeals gravely erred in finding that causal
fraud is not attendant in this case. Quite the contrary, it is evident that respondent
orchestrated a situation rife for defrauding buyers of the advertised unit. Therefore, the
assailed Decision and Resolution must be reversed, the Contract to Sell between
petitioner and respondent be annulled, and petitioner be refunded all the amounts he
paid to respondent in respect of the purchase of the Unit.

Under Article 2232, in relation to Article 2229 of the Civil Code, "[i]n contracts and
quasi-contracts, the court may award exemplary damages if the defendant acted in a
wanton, fraudulent, reckless, oppressive, or malevolent manner," "by way of example
or correction for the public good." By awarding exemplary damages to petitioner, this
case shall serve as an example and warning to banks to observe the requisite care and
diligence in all of their affairs.

Consistent with Article 2208 of the Civil Code,74 respondent is equally liable to petitioner
for attorney's fees and the costs of litigation.

WHEREFORE, the Petition is GRANTED. The assailed November 15, 2012 Decision and
February 12, 2013 Resolution of the Court of Appeals in CA-G.R. CV No. 95369
are REVERSEDand SET ASIDE.

The Contract to Sell entered into by petitioner Joseph Harry Walter Poole-Blunden and
respondent Union Bank of the Philippines is declared null and void. Respondent is
ordered to pay petitioner the amount of P3,257,142.49 to refund the amounts
petitioner has paid to purchase Unit 2C of T-Tower Condominium located at 5040 P.
Burgos corner Calderon Streets, Makati City. This refund shall earn legal interest at
twelve percent (12%) per annum from the date of the filing of petitioner's Complaint
for Rescission of Contract and Damages up to June 30, 2013; and six percent (6%) per
annum, reckoned from July 1, 2013 until fully paid.

Respondent is ordered to pay petitioner P100,000.00 as exemplary damages,

P100,000.00 as attorney's fees, and the costs of litigation.

SO ORDERED.

Velasco, Jr., (Chairperson), Bersamin, and Martires, JJ., concur.

Gesmundo, J., on leave.

G.R. No. 164749

ROMULO ABROGAR and ERLINDA ABROGAR, Petitioners

vs
COSMOS BOTTLING COMPANY and INTERGAMES, INC., Respondents

DECISION

BERSAMIN, J.:

This case involves a claim for damages arising from the negligence causing the death of a
participant in an organized marathon bumped by a passenger jeepney on the route of the race. The
issues revolve on whether the organizer and the sponsor of the marathon were guilty of negligence,
and, if so, was their negligence the proximate cause of the death of the participant; on whether the
negligence of the driver of the passenger jeepney was an efficient intervening cause; on whether the
doctrine of assumption of risk was applicable to the fatality; and on whether the heirs of the fatality
can recover damages for loss of earning capacity of the latter who, being then a minor, had no
gainful employment.

The Case
By this appeal, the parents of the late Rommel Abrogar (Rommel), a marathon runner, seek the
review and reversal of the decision promulgated on March l 0, 2004, whereby the Court of Appeals
1

(CA) reversed and set aside the judgment rendered in their favor on May 10, 1991 by the Regional
Trial Court (RTC), Branch 83, in Quezon City finding and declaring respondents Cosmos Bottling
2

Company (Cosmos), a domestic soft-drinks company whose products included Pop Cola, and
Intergames, Inc. (Intergames), also a domestic corporation organizing and supervising the 1st Pop
Cola Junior Marathon" held on June 15, 1980 in Quezon City, solidarily liable for damages arising
from the untimely death of Rommel, then a minor 18 years of age, after being bumped by a
3

recklessly driven passenger jeepney along the route of the marathon.

Antecedents

The CA narrated the antecedents in the assailed judgment, viz.:

4

[T]o promote the sales of "Pop Cola", defendant Cosmos, jointly with Intergames, organized an
endurance running contest billed as the "1st Pop Cola Junior Marathon" scheduled to be held on
June 15, 1980. The organizers plotted a 10-kilometer course starting from the premises of the
Interim Batasang Pambansa (IBP for brevity), through public roads and streets, to end at the
Quezon Memorial Circle. Plaintiffs' son Rommel applied with the defendants to be allowed to
participate in the contest and after complying with defendants' requirements, his application was
accepted and he was given an official number. Consequently, on June 15, 1980 at the designated
time of the marathon, Rommel joined the other participants and ran the course plotted by the
defendants. As it turned out, the plaintiffs' (sic) further alleged, the defendants failed to provide
adequate safety and precautionary measures and to exercise the diligence required of them by the
nature of their undertaking, in that they failed to insulate and protect the participants of the marathon
from the vehicular and other dangers along the marathon route. Rommel was bumped by a jeepney
that was then running along the route of the marathon on Don Mariano Marcos A venue (DMMA for
brevity), and in spite of medical treatment given to him at the Ospital ng Bagong Lipunan, he died
later that same day due to severe head injuries.

On October 28, 1980, the petitioners sued the respondents in the then Court of First Instance of
Rizal (Quezon City) to recover various damages for the untimely death of Rommel (i.e., actual and
compensatory damages, loss of earning capacity, moral damages, exemplary damages, attorney's
fees and expenses oflitigation).5

Cosmos denied liability, insisting that it had not been the organizer of the marathon, but only its
sponsor; that its participation had been limited to providing financial assistance to Intergames; that
6

the financial assistance it had extended to Intergames, the sole organizer of the marathon, had been
in answer to the Government's call to the private sector to help promote sports development and
physical fitness; that the petitioners had no cause of action against it because there was no privity of
7

contract between the participants in the marathon and Cosmos; and that it had nothing to do with the
organization, operation and running of the event. 8

As counterclaim, Cosmos sought attorney's fees and expenses of litigation from the petitioners for
their being unwarrantedly included as a defendant in the case. It averred a cross-claim against
Intergames, stating that the latter had guaranteed to hold Cosmos "completely free and harmless
from any claim or action for liability for any injuries or bodily harm which may be sustained by any of
the entries in the '1st Pop Cola Junior Marathon' or for any damage to the property or properties of
third parties, which may likewise arise in the course of the race." Thus, Cosmos sought to hold
9

Intergames solely liable should the claim of the petitioners prosper. 10

On its part, Intergames asserted that Rommel's death had been an accident exclusively caused by
the negligence of the jeepney driver; that it was not responsible for the accident; that as the
marathon organizer, it did not assume the responsibilities of an insurer of the safety of the
participants; that it nevertheless caused the participants to be covered with accident insurance, but
the petitioners refused to accept the proceeds thereof; that there could be no cause of action
11

against it because the acceptance and approval of Rommel's application to join the marathon had
been conditioned on his waiver of all rights and causes of action arising from his participation in the
marathon; that it exercised due diligence in the conduct of the race that the circumstances called for
12

and was appropriate, it having availed of all its know-how and expertise, including the adoption and
implementation of all known and possible safety and precautionary measures in order to protect the
participants from injuries arising from vehicular and other forms of accidents; and, accordingly, the
13

complaint should be dismissed.

In their reply and answer to counterclaim, the petitioners averred that contrary to its claims,
Intergames did not provide adequate measures for the safety and protection of the race participants,
considering that motor vehicles were traversing the race route and the participants were made to run
along the flow of traffic, instead of against it; that Intergames did not provide adequate traffic
marshals to secure the safety and protection of the participants; that Intergames could not limit its
14

liability on the basis of the accident insurance policies it had secured to cover the race participants;
that the waiver signed by Rommel could not be a basis for denying liability because the same was
null and void for being contrary to law, morals, customs and public policy; that their complaint
15

sufficiently stated a cause of action because in no way could they be held liable for attorney's fees,
litigation expenses or any other relief due to their having abided by the law and having acted
honestly, fairly, in good faith by according to Intergames its due, as demanded by the facts and
circumstances. 16

At the pre-trial held on April 12, 1981, the parties agreed that the principal issue was whether or not
Cosmos and lntergames were liable for the death of Rommel because of negligence in conducting
the marathon. 17

Judgment of the RTC

In its decision dated May 10, 1991, the RTC ruled as follows:
18

WHEREFORE, judgment is hereby rendered in favor of plaintiffs-spouses Romulo Abrogar and

Erlinda Abrogar and against defendants Cosmos Bottling Company, Inc. and Intergames, Inc.,
ordering both defendants, jointly and severally, to pay and deliver to the plaintiffs the amounts of
Twenty Eight Thousand Sixty One Pesos and Sixty Three Centavos (₱28,061.63) as actual
damages; One Hundred Thousand Pesos (₱100,000.00) as moral damages; Fifty Thousand Pesos
(₱50,000.00) as exemplary damages and Ten Percent (10%) of the total amount of One Hundred
Seventy Eight Thousand Sixty One Pesos and Sixty Three Centavos (₱178,061,63) or Seventeen
Thousand Eight Hundred Six Pesos and Sixteen Centavos (₱17,806.16) as attorney's fees.

On the cross-claim of defendant Cosmos Bottling Company, Inc., defendant Intergames, Inc, is
hereby ordered to reimburse to the former any and all amounts which may be recovered by the
plaintiffs from it by virtue of this Decision.

SO ORDERED.

The RTC observed that the safeguards allegedly instituted by Intergames in conducting the
marathon had fallen short of the yardstick to satisfy the requirements of due diligence as called for
by and appropriate under the circumstances; that the accident had happened because of inadequate
preparation and Intergames' failure to exercise due diligence; that the respondents could not be
19

excused from liability by hiding behind the waiver executed by Rommel and the permission given to
him by his parents because the waiver could only be effective for risks inherent in the marathon,
such a:s stumbling, heat stroke, heart attack during the race, severe exhaustion and similar
occurrences; that the liability of the respondents towards the participants and third persons was
20

solidary, because Cosmos, the sponsor of the event, had been the principal mover of the event, and,
as such, had derived benefits from the marathon that in turn had carried responsibilities towards the
participants and the public; that the respondents' agreement to free Cosmos from any liability had
been an agreement binding only between them, and did not bind third persons; and that Cosmos
had a cause of action against Intergames for whatever could be recovered by the petitioners from
Cosmos. 21

Decision of the CA

All the parties appealed to the CA.

The petitioners contended that the RTC erred in not awarding damages for loss of earning capacity
on the part of Rommel for the reason that such damages were not recoverable due to Rommel not
yet having finished his schooling; and that it would be premature to award such damages upon the
assumption that he would finish college and be gainfully employed. 22

On their part, Cosmos and Intergames separately raised essentially similar errors on the part of the
RTC, to wit: (1) in holding them liable for the death of Rommel; (2) in finding them negligent in
conducting the marathon; (3) in holding that Rommel and his parents did not assume the risks of the
marathon; (4) in not holding that the sole and proximate cause of the death of Rommel was the
negligence of the jeepney driver; and (5) in making them liable, jointly and solidarily, for damages,
attorney's fees and expenses of litigation.23

The CA reduced the issues to four, namely:

1. Whether or not appellant Intergames was negligent in its conduct of the "1 st Pop Cola Junior
Marathon" held on June 15, 1980 and if so, whether its negligence was the proximate cause of the
death of Rommel Abrogar.

2. Whether or not appellant Cosmos can be held jointly and solidarily liable with appellant
Intergames for the death of Rommel Abrogar, assuming that appellant Intergames is found to have
been negligent in the conduct of the Pop Cola marathon and such negligence was the proximate
cause of the death of Rommel Abrogar.

3. Whether or not the appellants Abrogar are entitled to be compensated for the "loss of earning
capacity" of their son Rommel.

4. Whether or not the appellants Abrogar are entitled to the actual, moral, and exemplary damages
granted to them by the Trial Court. 24

In its assailed judgment promulgated on March 10, 2004, the CA ruled as follows:
25

As to the first issue, this Court finds that appellant Intergames was not negligent in organizing the
said marathon.
Negligence is the omission to do something which a reasonable man, guided upon those
considerations which ordinarily regulate the conduct to human affairs, would do, or doing something
which a prudent and reasonable man would not do.

The whole theory of negligence presuppose some uniform standard of behavior which must be an
external and objective one, rather than the individual judgment good or bad, of the particular actor; it
must be, as far as possible, the same for all persons; and at the same time make proper allowance
for the risk apparent to the actor for his capacity to meet it, and for the circumstances under which
he must act.

The question as to what would constitute the conduct of a prudent man in a given situation must of
course be always determined in the light of human experience and of the acts involved in the
particular case.

In the case at bar, the trial court erred in finding that the appellant Intergames failed to satisfy the
requirements of due diligence in the conduct of the race.

The trial court in its decision said that the accident in question could have been avoided if the route
of the marathon was blocked off from the regular traffic, instead of allowing the runners to run
together with the flow of traffic. Thus, the said court considered the appellant Intergames at fault for
proceeding with the marathon despite the fact that the Northern Police District, MPF, Quezon City
did not allow the road to be blocked off from traffic.

This Court finds that the standard of conduct used by the trial court is not the ordinary conduct of a
prudent man in such a given situation. According to the said court, the only way to conduct a safe
road race is to block off the traffic for the duration of the event and direct the cars and public utilities
to take alternative routes in the meantime that the marathon event is being held. Such standard is
too high and is even inapplicable in the case at bar because, there is no alternative route from IBP to
Don Mariano Marcos to Quezon City Hall.

The Civil Code provides that if the law or contract does not state the diligence which is to be
observed in the performance of an obligation that which is expected of a good father of the family
shall only be required. Accordingly, appellant Intergames is only bound to exercise the degree of
care that would be exercised by an ordinarily careful and prudent man in the same position and
circumstances and not that of the cautious man of more than average prudence. Hence, appellant
Intergames is only expected to observe ordinary diligence and not extraordinary diligence.

In this case, the marathon was allowed by the Northern Police District, MPF, Quezon City on the
condition that the road should not be blocked off from traffic. Appellant Intergames had no choice. It
had to comply with it or else the said marathon would not be allowed at all.

The trial court erred in contending that appellant Intergames should have looked for alternative
places in Metro Manila given the condition set by the Northern Police District, MPF, Quezon City;
precisely because as Mr. Jose Castro has testified the said route was found to be the best route
after a careful study and consideration of all the factors involved. Having conducted several
marathon events in said route, appellant Intergames as well as the volunteer groups and the other
agencies involved were in fact familiar with the said route. And assuming that there was an
alternative place suitable for the said race, the question is would they be allowed to block off the said
road from traffic?

Also, the trial court erred in stating that there was no adequate number of marshals, police officers
and personnel to man the race so as to prevent injury to the participants.
The general rule is that the party who relies on negligence for his cause of action has the burden of
proving the existence of the same, otherwise his action fails.

Here, the appellants-spouses failed to prove that there was inadequate number of marshals, police
officers, and personnel because they failed to prove what number is considered adequate.

This court considers that seven (7) traffic operatives, five (5) motorcycle policemen, fifteen (15)
patrolmen deployed along the route, fifteen (15) boyscouts, twelve (12) CA Ts, twenty (20) barangay
tanods, three (3) ambulances and three (3) medical teams were sufficient to stage a safe marathon.

Moreover, the failure of Mr. Jose R. Castro, Jr. to produce records of the lists of those constituting
the volunteer help during the marathon is not fatal to the case considering that one of the volunteers,
Victor Landingin of the Citizens Traffic Action (CTA) testified in court that CTA fielded five units on
June 15, 1980, assigned as follows: (1) at the sphere head; (2) at the finish line; (3) tail ender; (4) &
(5) roving.

The trial court again erred in concluding that the admission of P/Lt. Jesus Lipana, head of the traffic
policemen assigned at the marathon, that he showed up only at the finish line means that he did not
bother to check on his men and did not give them appropriate instructions. P/Lt. Lipana in his
testimony explained that he did not need to be in the start of the race because he had predesignated
another capable police officer to start the race.

In addition, this Court finds that the precautionary measures and preparations adopted by appellant
Intergames were sufficient considering the circumstances surrounding the case.

Appellant Intergames, using its previous experiences in conducting safe and successful road races,
took all the necessary precautions and made all the preparations for the race. The initial
preparations included: determination of the route to be taken; and an ocular inspection of the same
to see if it was well-paved, whether it had less corners for easy communication and coordination,
and whether it was wide enough to accommodate runners and transportation. Appellant Intergames
choose the Don Mariano Marcos Avenue primarily because it was well-paved; had wide lanes to
accommodate runners and vehicular traffic; had less corners thus facilitating easy communication
and coordination among the organizers and cooperating agencies; and was familiar to the race
organizers and operating agencies. The race covered a ten-kilometer course from the IBP lane to
the Quezon City Hall Compound passing through the Don Mariano Marcos A venue, which
constituted the main stretch of the route. Appellant Intergames scheduled the marathon on a Sunday
morning, when traffic along the route was at its lightest. Permission was sought from the then
Quezon City Mayor Adelina Rodriguez for the use of the Quezon City Hall Grandstand and the street
fronting it as the finish line. Police assistance was also obtained to control and supervise the traffic.
The Quezon City Traffic Detachment took charge of traffic control by assigning policemen to the
traffic route. The particular unit assigned during the race underwent extensive training and had been
involved in past marathons, including marathons in highly crowded areas. The Philippine Boy Scouts
tasked to assist the police and monitor the progress of the race; and Citizens Traffic Action Group
tasked with the monitoring of the race, which assigned five units consisting of ten operatives, to
provide communication and assistance were likewise obtained. Finally, medical equipments and
personnel were also requested from Camp Aguinaldo, the Philippine Red Cross and the Hospital ng
Bagong Lipunan.

Neither does this Court find the appellant Intergames' conduct of the marathon the proximate cause
of the death of Rommel Abrogar. Proximate cause has been defined as that which, in natural and
continuous sequence, unbroken by any efficient intervening cause, produces injury, and without
which the result would not have occurred.
It appears that Rommel Abrogar, while running on Don Mariano Marcos A venue and after passing
the Philippine Atomic Energy Commission Building, was bumped by a jeepney which apparently was
racing against a minibus and the two vehicles were trying to crowd each other. In fact, a criminal
case was filed against the jeepney driver by reason of his having killed Rommel Abrogar.

This proves that the death of Rommel Abrogar was caused by the negligence of the jeepney driver.
Rommel Abrogar cannot be faulted because he was performing a legal act; the marathon was
conducted with the permission and approval of all the city officials involved. He had the right to be
there. Neither can the appellant Intergames be faulted, as the organizer of the said marathon,
because it was not negligent in conducting the marathon.

Given the facts of this case, We believe that no amount of precaution can prevent such an accident.
Even if there were fences or barriers to separate the lanes for the runners and for the vehicles, it
would not prevent such an accident in the event that a negligent driver loses control of his vehicle.
And even if the road was blocked off from traffic, it would still not prevent such an accident, if a
jeepney driver on the other side of the road races with another vehicle loses control of his wheel and
as a result hits a person on the other side of the road. Another way of saying this is: A defendant's
tort cannot be considered a legal cause of plaintiffs damage if that damage would have occurred just
the same even though the defendant's tort had not been committed.

This Court also finds the doctrine of assumption of risk applicable in the case at bar. As explained by
a well-known authority on torts:

"The general principle underlying the defense of assumption of risk is that a plaintiff who voluntarily
assumes a risk of harm arising from the negligent or reckless conduct of the defendant cannot
recover for such harm. The defense may arise where a plaintiff, by contract or otherwise, expressly
agrees to accept a risk or harm arising from the defendant's conduct, or where a plaintiff who fully
understands a risk or harm caused by the defendant's conduct, or by a condition created by the
defendant, voluntarily chooses to enter or remain, or to permit his property to enter or remain, within
the area of such risk, under circumstances manifesting his willingness to accept the risk.

xxxx

"Assumption of the risk in its primary sense arises by assuming through contract, which may be
implied, the risk of a known danger. Its essence is venturousness. It implies intentional exposure to a
known danger; It embraces a mental state of willingness; It pertains to the preliminary conduct of
getting into a dangerous employment or relationship, it means voluntary incurring the risk of an
accident, which may or may not occur, and which the person assuming the risk may be careful to
avoid; and it defeats recovery because it is a previous abandonment of the right to complain if an
accident occurs.

"Of course, if the defense is predicated upon an express agreement the agreement must be valid,
and in the light of this qualification the rule has been stated that a plaintiff who, by contract or
otherwise, expressly agreed to accept a risk of harm arising from the defendant's negligent or
reckless conduct, cannot recover for such harm unless the agreement is invalid as contrary to public
policy.

xxxx

"The defense of assumption of risk presupposes: (1) that the plaintiff had actual knowledge of the
danger; (2) that he understood and appreciated the risk from the danger; and (3) that he voluntarily
exposed himself to such risk. x x x
"The term 'risk' as used in this connection applies to known dangers, and not to things from which
danger may possibly flow. The risk referred to is the particular risk, or one of the risks, which the
plaintiff accepted within the context of the situation in which he placed himself and the question is
whether the specific conduct or condition which caused the injury was such a risk."

In this case, appellant Romulo Abrogar himself admitted that his son, Rommel Abrogar, surveyed
the route of the marathon and even attended a briefing before the race. Consequently, he was
aware that the marathon would pass through a national road and that the said road would not be
blocked off from traffic. And considering that he was already eighteen years of age, had voluntarily
participated in the marathon, with his parents' consent, and was well aware of the traffic hazards
along the route, he thereby assumed all the risks of the race. This is precisely why permission from
the participant's parents, submission of a medical certificate and a waiver of all rights and causes of
action arising from the participation in the marathon which the participant or his heirs may have
against appellant Intergames were required as conditions in joining the marathon.

In the decision of the trial court, it stated that the risk mentioned in the waiver signed by Rommel
Abrogar only involved risks such as stumbling, suffering heatstroke, heart attack and other similar
risks. It did not consider vehicular accident as one of the risks included in the said waiver.

This Court does not agree. With respect to voluntary participation in a sport, the doctrine of
assumption of risk applies to any facet of the activity inherent in it and to any open and obvious
condition of the place where it is carried on. We believe that the waiver included vehicular accidents
for the simple reason that it was a road race run on public roads used by vehicles. Thus, it cannot be
denied that vehicular accidents are involved. It was not a track race which is held on an oval and
insulated from vehicular traffic. In a road race, there is always the risk of runners being hit by motor
vehicles while they train or compete. That risk is inherent in the sport and known to runners. It is a
risk they assume every time they voluntarily engage in their sport.

Furthermore, where a person voluntarily participates in a lawful game or contest, he assumes the
ordinary risks of such game or contest so as to preclude recovery from the promoter or operator of
the game or contest for injury or death resulting therefrom. Proprietors of amusements or of places
where sports and games are played are not insurers of safety of the public nor of their patrons.

In McLeod Store v. Vinson 213 Ky 667, 281 SW 799 (1926), it was held that a boy, seventeen years
of age, of ordinary intelligence and physique, who entered a race conducted by a department store,
the purpose of which was to secure guinea fowl which could be turned in for cash prizes, had
assumed the ordinary risks incident thereto and was barred from recovering against the department
store for injuries suffered when, within catching distance, he stopped to catch a guinea, and was
tripped or stumbled and fell to the pavement, six or eight others falling upon him. The court further
said: "In this (the race) he was a voluntary participant. xxx The anticipated danger was as obvious to
him as it was to appellant (the department store). While not an adult, he was practically 17 years of
age, of ordinary intelligence, and perfectly able to determine the risks ordinarily incident to such
games. An ordinary boy of that age is practically as well advised as to the hazards of baseball,
basketball, football, foot races and other games of skill and endurance as is an adult

x x x."

In the case at bar, the "1st Pop Cola Junior Marathon" held on June 15, 1980 was a race the winner
of which was to represent the country in the annual Spirit of Pheidippides Marathon Classic in
Greece, if he equals or breaks the 29-minute mark for the 10-km. race. Thus, Rommel Abrogar
having voluntarily participated in the race, with his parents' consent, assumed all the risks of the
race.
Anent the second issue, this Court finds that appellant Cosmos must also be absolved from any
liability in the instant case.

This Court finds that the trial court erred in holding appellant Cosmos liable for being the principal
mover and resultant beneficiary of the event.

In its decision it said that in view of the fact that appellant Cosmos will be deriving certain benefits
from the marathon event, it has the responsibility to ensure the safety of all the participants and the
public. It further said that the stipulations in the contract entered into by the two appellants, Cosmos
and Intergames, relieving the former from any liability does not bind third persons.

This Court does not agree with the reasoning of the trial court. The sponsorship contract entered
between appellant Cosmos and appellant Intergames specifically states that:

1. COSMOS BOTTLING CORPORATION shall pay INTERGAMES the amount of FIFTY FIVE
THOUSAND PESOS (₱55,000.00) representing full sponsorship fee and in consideration thereof,
INTERGAMES shall organize and stage a marathon race to be called '1st POP COLA JUNIOR
MARATHON.

xxxx

3. INTER GAMES shall draw up all the rules of the marathon race, eligibility requirements of
participants as well as provide all the staff required in the organization and actual staging of the race.
It is understood that all said staff shall be considered under the direct employ of INTERGAMES
which shall have full control over them.

xxxx

5. INTERGAMES shall secure all the necessary permits, clearances, traffic and police assistance in
all the areas covered by the entire route of the '1st POP COLA JUNIOR MARATHON.

12. INTERGAMES shall hold COSMOS BOTTLING CORPORATION, completely free and harmless
from any claim or action for liability for any injuries or bodily harm which may be sustained by any of
the entries in the '1st POP COLA JUNIOR MARATHON', or for any damages to the property or
properties of third parties, which may likewise arise in the course of the race.

From the foregoing, it is crystal clear that the role of the appellant Cosmos was limited to providing
financial assistance in the form of sponsorship. Appellant Cosmos' sponsorship was merely in
pursuance to the company's commitment for spo1is development of the youth as well as for
advertising purposes. The use of the name Cosmos was done for advertising purposes only; it did
not mean that it was an organizer of the said marathon. As pointed out by Intergames' President,
Jose Castro Jr., appellant Cosmos did not even have the right to suggest the location and the
number of runners.

To hold a defendant liable for torts, it must be clearly shown that he is the proximate cause of the
harm done to the plaintiff. The nexus or connection of the cause and effect, between a negligent act
and the damage done, must be established by competent evidence.

In this case, appellant Cosmos was not negligent in entering into a contract with the appellant
Intergames considering that the record of the latter was clean and that it has conducted at least thirty
(30) road races.
Also there is no direct or immediate causal connection between the financial sponsorship and the
death of Rommel Abrogar. The singular act of providing financial assistance without participating in
any manner in the conduct of the marathon cannot be palmed off as such proximate cause. In fact,
the appellant spouses never relied on any representation that Cosmos organized the race. It was not
even a factor considered by the appellants-spouses in allowing their son to join said marathon.

In view of the fact that both defendants are not liable for the death of Rommel Abrogar, appellants-
spouses are not entitled to actual, moral, exemplary damages as well as for the "loss of earning
capacity" of their son. The third and fourth issues are thus moot and academic.

UPON THE VIEW WE TAKE OF THIS CASE, THUS, the judgment appealed from must be, as it
hereby is, REVERSED and SET ASIDE, and another entered DISMISSING the complaint a quo.
The appellants shall bear their respective costs.

SO ORDERED. 26

Issues

In this appeal, the petitioners submit that the CA gravely erred:

A.

x x x in reversing the RTC Decision, (and) in holding that respondent Intergames was not negligent
considering that:

1. Respondent Intergames failed to exercise the diligence of a good father of the family in the
conduct of the marathon in that it did not block off from traffic the marathon route; and

2. Respondent Intergames' preparations for the race, including the number of marshal during the
marathon, were glaringly inadequate to prevent the happening of the injury to its participants.

B.

x x x in reversing the RTC Decision, (and) in holding that the doctrine of assumption of risk finds
application to the case at bar even though getting hit or run over by a vehicle is not an inherent risk
in a marathon race. Even assuming arguendo that deceased Abrogar made such waiver as claimed,
still there can be no valid waiver of one's right to life and limb for being against public policy.

C.

x x x in reversing the RTC Decision, (and) in absolving respondent Cosmos from liability to
petitioners on the sole ground that respondent Cosmos' contract with respondent Intergames
contained a stipulation exempting the former from liability.

D.

x x x m reversing the RTC Decision and consequently holding respondents free from liability, (and)
in not awarding petitioners with actual, moral and exemplary damages for the death of their child,
Rommel Abrogar. 27

Ruling of the Court

The appeal is partly meritorious.

Review of factual issues is allowed because of

the conflict between the findings of fact
by the RTC and the CA on the issue of negligence

The petitioners contend that Intergames was negligent; that Cosmos as the sponsor and Intergames
as the organizer of the marathon both had the obligation to provide a reasonably safe place for the
conduct of the race byblocking the route of the race from vehicular traffic and by providing adequate
manpower and personnel to ensure the safety of the participants; and that Intergames had foreseen
the harm posed by the situation but had not exercised the diligence of a good father of a family to
avoid the risk; hence, for such omission, Intergames was negligent.
28 29

Refuting, Cosmos and Intergames submit that the latter as the organizer was not negligent because
it had undertaken all the precautionary measures to ensure the safety of the race; and that there was
no duty on the part of the latter as the organizer to keep a racecourse "free and clear from
reasonably avoidable elements that would [occasion] or have the probable tendency, to occasion
injury."
30

The issue of whether one or both defendants were negligent is a mixed issue of fact and law. Does
this not restrict the Court against reviewing the records in this appeal on certiorari in order to settle
the issue?

The Court can proceed to review the factual findings of the CA as an exception to the general rule
that it should not review issues of fact on appeal on certiorari. We have recognized exceptions to the
rule that the findings of fact of the CA are conclusive and binding in the following instances: (1) when
the findings are grounded entirely on speculation, surmises or conjectures; (2) when the inference
made is manifestly mistaken, absurd or impossible; (3) when there is grave abuse of discretion; (4)
when the judgment is based on a misapprehension of facts; (5) when the findings of facts are
conflicting; (6) when in making its findings the CA went beyond the issues of the case, or its findings
are contrary to the admissions of both the appellant and the appellee; (7) when the findings are
contrary to the trial court; (8) when the findings are conclusions without citation of specific evidence
on which they are based; (9) when the facts set forth in the petition as well as in the petitioner's main
and reply briefs are not disputed by the respondent; (10) when the findings of fact are premised on
the supposed absence of evidence and contradicted by the evidence on record; and (11) when the
CA manifestly overlooked certain relevant facts not disputed by the parties, which, if properly
considered, would justify a different conclusion. Considering that the CA arrived at factual findings
31

contrary to those of the trial court, our review of the records in this appeal should have to be made.

Negligence is the failure to observe for the protection of the interests of another person that degree
of care, precaution, and vigilance which the circumstances justly demand, whereby such other
person suffers injury. Under Article 1173 of the Civil Code, it consists of the "omission of that
32

diligence which is required by the nature of the obligation and corresponds with the circumstances of
the person, of the time and of the place." The Civil Code makes liability for negligence clear under
33

Article 2176, and Article 20.

34 35

To determine the existence of negligence, the following time-honored test has been set in Picart v.
Smith:36
The test by which to determine the existence of negligence in a particular case may be stated as
follows: Did the defendant in doing the alleged negligent act use that reasonable care and caution
which an ordinarily prudent person would have used in the same situation? If not, then he is guilty of
negligence. The law here in effect adopts the standard supposed to be supplied by the imaginary
conduct of the discreet paterfamilias of the Roman law. The existence of negligence in a given case
is not determined by reference to the personal judgment of the actor in the situation before him. The
law considers what would be reckless, blameworthy, or negligent in the man of ordinary intelligence
and prudence and determines liability by that.

The question as to what would constitute the conduct of a prudent man in a given situation must of
course be always determined in the light of human experience and in view of the facts involved in
the particular case. Abstract speculation cannot here be of much value but this much can be
profitably said: Reasonable men govern their conduct by the circumstances which are before them
or known to them. They are not, and are not supposed to be, omniscient of the future. Hence they
can be expected to take care only when there is something before them to suggest or warn of
danger. Could a prudent man, in the case under consideration, foresee harm as a result of the
course actually pursued? If so, it was the duty of the actor to take precautions to guard against that
harm. Reasonable foresight of harm, followed by the ignoring of the suggestion born of this
prevision, is always necessary before negligence can be held to exist. Stated in these terms, the
proper criterion for determining the existence of negligence in a given case is this: Conduct is said to
be negligent when a prudent man in the position of the tortfeasor would have foreseen that an effect
harmful to another was sufficiently probable to warrant his foregoing the conduct or guarding against
its consequences. (bold underscoring supplied for emphasis)
37

A careful review of the evidence presented, particularly the testimonies of the relevant witnesses, in
accordance with the foregoing guidelines reasonably leads to the conclusion that the safety and
precautionary measures undertaken by Intergames were short of the diligence demanded by the
circumstances of persons, time and place under consideration. Hence, Intergames as the organizer
was guilty of negligence.

The race organized by Intergames was a junior marathon participated in by young persons aged 14
to 18 years. It was plotted to cover a distance of 10 kilometers, starting from the IBP Lane, then
38

going towards the Batasang Pambansa, and on to the circular route towards the Don Mariano
Marcos Highway, and then all the way back to the Quezon City Hall compound where the finish line
39

had been set. In staging the event, Intergames had no employees of its own to man the race, and
40 41

relied only on the "cooperating agencies" and volunteers who had worked with it in previous
races. The cooperating agencies included the Quezon City police, barangay tanods, volunteers
42

from the Boy Scouts of the Philippines, the Philippine National Red Cross, the Citizens Traffic Action
Group, and the medical teams of doctors and nurses coming from the Office of the Surgeon General
and the Ospital ng Bagong Lipunan. According to Jose R. Castro, Jr., the President of Intergames,
43

the preparations for the event included conducting an ocular inspection of the route of the
race, sending out letters to the various cooperating agencies, securing permits from proper
44 45

authorities, putting up directional signs, and setting up the water stations.

46 47 48

We consider the "safeguards" employed and adopted by Intergames not adequate to meet the
requirement of due diligence.

For one, the police authorities specifically prohibited Intergames from blocking Don Mariano Marcos
Highway in order not to impair road accessibility to the residential villages located beyond the IBP
Lanc. 49
However, contrary to the findings of the CA, Intergames had a choice on where to stage the
50

marathon, considering its admission of the sole responsibility for the conduct of the event, including
the choice of location.

Moreover, the CA had no basis for holding that "the said route was found to be the best route after a
careful study and consideration of all the factors involved." Castro, Jr. himself attested that the route
51

had been the best one only within the vicinity of the Batasan Pambansa, to wit:

COURT

q Was there any specific reason from ... Was there any specific reason why you used this route from
Batasan to City Hall? Was there any special reason?

a We have, your Honor, conducted for example the Milo Marathon in that area in the Batasan
Pambansa and we found it to be relatively safer than any other areas within the vicinity. As a matter
of fact, we had more runners in the Milo Marathon at that time and nothing happened, your Honor. 52

The chosen route (IBP Lane, on to Don Mariano Marcos Highway, and then to Quezon City Hall)
was not the only route appropriate for the marathon. In fact, Intergames came under no obligation to
use such route especially considering that the participants, who were young and inexperienced
runners, would be running alongside moving vehicles.

Intergames further conceded that the marathon could have been staged on a blocked-off route like
Roxas Boulevard in Manila where runners could run against the flow of vehicular traffic. Castro, Jr.
53

stated in that regard:

COURT TO WITNESS

q What law are you talking about when you say I cannot violate the law?

a The police authority, your Honor, would not grant us permit because that is one of the conditions
that if we are to conduct a race we should run the race in accordance with the flow of traffic.

q Did you not inform the police this is in accordance with the standard safety measures for a
marathon race?

a I believed we argued along that line but but (sic) again, if we insist the police again would not grant
us any permit like ... except in the case of Roxas Boulevard when it is normally closed from 8
a.m. when you can run against the flow of traffic.

q You were aware for a runner to run on the same route of the traffic would be risky because he
would not know what is coming behind him?

a I believed we talked of the risk, your Honor when the risk has been minimized to a certain level.
Yes, there is greater risk when you run with the traffic than when you run against the traffic to a
certain level, it is correct but most of the races in Manila or elsewhere are being run in accordance
with the flow of the traffic.

xxxx

ATTY. VINLUAN
q Following the observation of the Court, considering the local condition, you will agree with me the
risks here are greater than in the United States where drivers on the whole follow traffic rules?

a That is correct.

q And because of that fact, it is with all the more reason that you should take all necessary
precautions to insure the safety of the runners?

a That is correct. 54

xxxx

COURT:

xxxx

Q In your case in all the marathons that you had managed, how many cases have you encountered
where the routes are blocked off for vehicular traffic?

A These are the International Marathon, Philippines Third World Marathon and the Milo Marathon.
We are blocking them to a certain length of time.

Q What was the purpose of blocking the routes? Is it for the safety of the runners or just a matter of
convenience?

A In blocking off the route, Your Honor, it is light easier for the runners to run without impediments to
be rendered by the people or by vehicles and at the same time it would be also advantageous if the
road will be blocked off for vehicle traffic permitted to us by the traffic authorities.

Q So, in this case, you actually requested for the traffic authorities to block off the route?

A As far as I remember we asked Sgt. Pascual to block off the route but considering that it is the
main artery to Fairview Village, it would not be possible to block off the route since it will cause a lot
of inconvenience for the other people in those areas and jeepney drivers.

Q In other words, if you have your way you would have opted to block off the route.

A Yes, Your Honor.

Q But the fact is that the people did not agree.

A Yes, Your Honor, and it is stated in the permit given to us. 55

Based on the foregoing testimony of Castro, Jr., Intergames had full awareness of the higher risks
involved in staging the race alongside running vehicles, and had the option to hold the race in a
route where such risks could be minimized, if not eliminated. But it did not heed the danger already
foreseen, if not expected, and went ahead with staging the race along the plotted route on Don
Mariano Marcos Highway on the basis of its supposedly familiarity with the route. Such familiarity of
the organizer with the route and the fact that previous races had been conducted therein without any
untoward incident were not in themselves sufficient safeguards. The standards for avoidance of
56
injury through negligence further required Intergames to establish that it did take adequate measures
to avert the foreseen danger, but it failed to do so.

Another failing on the part of Intergames was the patent inadequacy of the personnel to man the
route. As borne by the records, Intergames had no personnel of its own for that purpose, and relied
exclusively on the assistance of volunteers, that is, "seven (7) traffic operatives, five (5) motorcycle
policemen, fifteen (15) patrolmen deployed along the route, fifteen (15) boy scouts, twelve (12)
CATs, twenty (20) barangay tanods, three (3) ambulances and three (3) medical teams" to ensure57

the safety of the young runners who would be running alongside moving vehicular traffic, to make
the event safe and well coordinated.

Although the party relying on negligence as his cause of action had the burden of proving the
existence of the same, Intergames' coordination and supervision of the personnel sourced from the
cooperating agencies did not satisfy the diligence required by the relevant circumstances. In this
regard, it can be pointed out that the number of deployed personnel, albeit sufficient to stage the
marathon, did not per se ensure the safe conduct of the race without proof that such deployed
volunteers had been properly coordinated and instructed on their tasks.

That the proper coordination and instruction were crucial elements for the safe conduct of the race
was well known to Intergames. Castro, Jr. stated as much, to wit:

ATTY. LOMBOS:

xxxx

Q You also said that if you block off one side of the road, it is possible that it would be more
convenient to hold the race in that matter. Will you tell the Honorable Court if it is possible also to
hold a race safely if the road is not blocked off?

A Yes, sir.

Q How is it done.

A You can still run a race safely even if it is partially blocked off as long as you have the necessary
cooperation with the police authorities, and the police assigned along the route of the race and the
police assigned would be there, this will contribute the safety of the participants, and also the
vehicular division, as long as there are substantial publicities in the newspapers, normally they will
take the precautions in the use of the particular route of the race.

Q Let me clarify this. Did you say that it is possible to hold a marathon safely if you have this traffic
assistance or coordination even if the route is blocked or not blocked?

A It is preferable to have the route blocked but in some cases, it would be impossible for the portions
of the road to be blocked totally. The route of the race could still be safe for runners if a proper
coordination or the agencies are notified especially police detailees to man the particular stage. 58

Sadly, Intergames' own evidence did not establish the conduct of proper coordination and
instruction. Castro, Jr. described the action plan adopted by Intergames in the preparation for the
race, as follows:

COURT
a Did you have any rehearsal let us say the race was conducted on June 15, now before June 15
you call a meeting of all these runners so you can have more or less a map-up and you would
indicate or who will be stationed in their places etc. Did you have such a rehearsal?

WITNESS

a It is not being done, your honor, but you have to specify them. You meet with the group and you
tell them that you wanted them to be placed in their particular areas which we pointed out to them for
example in the case of the Barangay Tanod, I specifically assigned them in the areas and we sat
down and we met.

COURT

q Did you have any action, plan or brochure which would indicate the assignment of each of the
participating group?

WITNESS

a Normally, sir, many of the races don't have that except when they called them to meeting either as
a whole group or the entire cooperating agency or meet them per group.

COURT

q Did you have a check list of the activities that would have to be entered before the actual marathon
some kind of system where you will indicate this particular activity has to be checked etc. You did
not have that?

WITNESS

q Are you asking, your honor, as a race director of I will check this because if I do that, I won't have a
race because that is not being done by any race director anywhere in the world?

COURT

I am interested in your planning activities.

q In other words, what planning activities did you perform before the actual marathon?

a The planning activities we had, your honor, was to coordinate with the different agencies involved
informing them where they would be more or less placed.

COURT

q Let us go to ... Who was supposed to be coordinating with you as to the citizens action group who
was your ... you were referring to a person who was supposed to be manning these people and who
was the person whom you coordinate with the Traffic Action Group?

WITNESS

a I can only remember his name ... his family name is Esguerra.
q How about with the Tanods?

a With the Tanods his name is Pedring Serrano.

q And with the Boys Scouts? (sic)

a And with the Boys Scouts of the Phils. (sic) it is Mr. Greg Panelo.

COURT

q When did you last meet rather how many times did you meet with Esguerra before the marathon
on June 15?

WITNESS

a The Citizens Traffic Action Group, your honor, had been with me m previous races.

COURT

q I am asking you a specific question. I am not interested in the Citizen Traffic Action Group. The
marathon was on June 15, did you meet with him on June 14, June 13 or June 12?

a We met once, your honor, I cannot remember the date.

q You don't recall how many days before?

a I cannot recall at the moment.

q How about with Mr. Serrano, how many times did you meet with him before the race?

a If my mind does not fail me, your honor, I met him twice because he lives just within our area and
we always see each other.

q How about with Panelo, how many times did you meet him?

a With Mr. Panelo, I did not meet with them, your honor.

q Was there an occasion where before the race you met with these three people together since you
did not meet with Panelo anytime? Was there anytime where you met with Serrano and Esguerra
together?

WITNESS

a No, your honor.

COURT

g When you met once with Esguerra, where did you meet? What place?

a I cannot recall at the moment, your honor, since it was already been almost six years ago.
g How about Serrano, where did you meet him?

a We met in my place.

q From your house? He went in your house?

a Yes, your honor.

q So you did not have let us say a ... you don't have records of your meetings with these people?

WITNESS

a With the Citizens Traffic Action, your honor?

COURT

a Yes.

WITNESS

a I don't have, your honor.

COURT

q Because you are familiar, I was just thinking this is an activity which requires planning etc., what I
was thinking when you said this was never done in any part of the world but all activities it has to be
planned. There must be some planning, now are you saying that in this particular case you had no
written plan or check list of activities what activities have to be implemented on a certain point and
time, who are the persons whom you must meet in a certain point and time.

WITNESS

a Normally, we did not have that, your honor, except the check list of all the things that should be
ready at a particular time prior to the race and the people to be involved and we have a check list to
see to it that everything would be in order before the start of the race.

COURT

Proceed.

ATTY. VINLUAN

q Following the question of the Court Mr. Castro, did you meet with Lt. Depano of the Police
Department who were supposed to supervise the police officers assigned to help during the race?

a I did not meet with him, sir.

q You did not meet with him?

a I did not meet with him.

q In fact, ever before or during the race you had no occasion to talk to Lt. Depano. Is that correct?

a That is correct, sir.

ATTY. VINLUAN

Based on the question of the Court and your answer to the question of the Court, are you trying to
say that this planning before any race of all these groups who have committed to help in the race,
this is not done in any part of the world?

WITNESS

a In the latter years when your race became bigger and bigger, this is being done now slowly.

ATTY. VINLUAN

q But for this particular race you will admit that you failed to do it when you have to coordinate and
even have a dry run of the race you failed to do all of that in this particular race, yes or no?

a Because there was ...

COURT

It was already answered by him when I asked him. The Court has ... Everybody has a copy how of
this time planner. Any activity or even meeting a girlfriend or most people plan.

A TTY. F .M. LOMBOS

If your honor please, before we proceed ...

WITNESS

In the latter years, your honor, when your race became bigger and bigger, this is being done now
slowly.

q For this particular race you will admit that you failed to do it?

a Because there was no need, sir. 59

Probably sensing that he might have thereby contradicted himself, Castro, Jr. clarified on re-direct
examination:

ATTY. LOMBOS

Q Now, you also responded to a question during the same hearing and this appears on page 26 of
the transcript that you did not hold any rehearsal or dry run for this particular marathon. Could you
tell the Court why you did not hold any such rehearsal or dry run?

A Because I believe there was no need for us to do that since we have been doing this for many
years and we have been the same people, same organization with us for so many years conducting
several races including some races in that area consisting of longer distances and consisting of
more runners, a lot more runners in that areay (sic) so these people, they know exactly what to do
and there was no need for us to have a rehearsal. I believe this rehearsal would only be applicable if
I am new and these people are new then, we have to rehearse.

ATTY. LOMBOS

q You also stated Mr. Castro that you did not have any action plan or brochure which you would
indicate, an assignment of each of the participating group as to what to do during the race. Will you
please explain what you meant when you said you have no action plan or brochure?

WITNESS

a What I mean of action plan, I did not have any written action plan but I was fully aware of what to
do. I mean, those people did not just go there out of nowhere. Obviously, there was an action on my
part because I have to communicate with them previously and to tell them exactly what the race is all
about; where to start; where it would end, and that is the reason why we have the ambulances, we
have the Boy Scouts, we have the CT A, we have the police, so it was very obvious that there was a
plan of action but not written because I know pretty well exactly what to do. I was dealing with people
who have been doing this for a long period of time. 60

While the level of trust Intergames had on its volunteers was admirable, the coordination among the
cooperating agencies was predicated on circumstances unilaterally assumed by Intergames. It was
obvious that Intergames' inaction had been impelled by its belief that it did not need any action plan
because it had been dealing with people who had been manning similar races for a long period of
time.

The evidence presented undoubtedly established that Intergames' notion of coordination only
involved informing the cooperating agencies of the date of the race, the starting and ending points of
the route, and the places along the route to man. Intergames did not conduct any general assembly
with all of them, being content with holding a few sporadic meetings with the leaders of the
coordinating agencies. It held no briefings of any kind on the actual duties to be performed by each
group of volunteers prior to the race. It did not instruct the volunteers on how to minimize, if not
avert, the risks of danger in manning the race, despite such being precisely why their assistance had
been obtained in the first place.

Intergames had no right to assume that the volunteers had already been aware of what exactly they
would be doing during the race. It had the responsibility and duty to give to them the proper
instructions despite their experience from the past races it had organized considering that the
particular race related to runners of a different level of experience, and involved different weather
and environmental conditions, and traffic situations. It should have remembered that the personnel
manning the race were not its own employees paid to perform their tasks, but volunteers whose
nature of work was remotely associated with the safe conduct of road races. Verily, that the
volunteers showed up and assumed their proper places or that they were sufficient in number was
not really enough. It is worthy to stress that proper coordination in the context of the event did not
consist in the mere presence of the volunteers, but included making sure that they had been
properly instructed on their duties and tasks in order to ensure the safety of the young runners.

It is relevant to note that the participants of the 1st Pop Cola Junior Marathon were mostly minors
aged 14 to 18 years joining a race of that kind for the first time. The combined factors of their youth,
eagerness and inexperience ought to have put a reasonably prudent organizer on higher guard as to
their safety and security needs during the race, especially considering Intergames' awareness of the
risks already foreseen and of other risks already known to it as of similar events in the past
organizer. There was no question at all that a higher degree of diligence was required given that
practically all of the participants were children or minors like Rommel; and that the law imposes a
duty of care towards children and minors even if ordinarily there was no such duty under the same
circumstances had the persons involved been adults of sufficient discretion. In that respect,
61

Intergames did not observe the degree of care necessary as the organizer, rendering it liable for
negligence. As the Court has emphasized in Corliss v. The Manila Railroad Company, where the
62

danger is great, a high degree of care is necessary, and the failure to observe it is a want of ordinary
care under the circumstances. 63

The circumstances of the persons, time and place required far more than what Intergames
undertook in staging the race. Due diligence would have made a reasonably prudent organizer of the
race participated in by young, inexperienced or beginner runners to conduct the race in a route
suitably blocked off from vehicular traffic for the safety and security not only of the participants but
the motoring public as well. Since the marathon would be run alongside moving vehicular traffic, at
the very least, Intergames ought to have seen to the constant and closer coordination among the
personnel manning the route to prevent the foreseen risks from befalling the participants. But this it
sadly failed to do.

II

The negligence of Intergames as the organizer

was the proximate cause of the death of Rommel

As earlier mentioned, the CA found that Rommel, while running the marathon on Don Mariano
Marcos A venue and after passing the Philippine Atomic Energy Commission Building, was bumped
by a passenger jeepney that was racing with a minibus and two other vehicles as if trying to crowd
each other out. As such, the death of Rommel was caused by the negligence of the jeepney driver.

Intergames staunchly insists that it was not liable, maintaining that even assuming arguendo that it
was negligent, the negligence of the jeepney driver was the proximate cause of the death of
Rommel; hence, it should not be held liable.

Did the negligence of Intergames give rise to its liability for the death of ommel notwithstanding the
negligence of the jeepney driver?

In order for liability from negligence to arise, there must be not only proof of damage and negligence,
but also proof that the damage was the consequence of the negligence. The Court has said in Vda.
de Gregorio v. Go Chong Bing: 64

x x x Negligence as a source of obligation both under the civil law and in American cases was
carefully considered and it was held:

We agree with counsel for appellant that under the Civil Code, as under the generally accepted
doctrine in the United States, the plaintiff in an action such as that under consideration, in order to
establish his right to a recovery, must establish by competent evidence:

(1) Damages to the plaintiff.

(2) Negligence by act or omission of which defendant personally or some person for whose acts it
must respond, was guilty.
(3) The connection of cause and effect between the negligence and the damage." (Taylor vs. Manila
Electric Railroad and Light Co., supra, p. 15.)

In accordance with the decision of the Supreme Court of Spain, in order that a person may be held
guilty for damage through negligence, it is necessary that there be an act or omission on the part of
the person who is to be charged with the liability and that damage is produced by the said act or
omission. (Emphasis supplied)
65

We hold that the negligence of Intergames was the proximate cause despite the intervening
negligence of the jeepney driver.

Proximate cause is "that which, in natural and continuous sequence, unbroken by any new cause,
produces an event, and without which the event would not have occurred." In Vda. de Bataclan, et
66

al. v. Medina, the Court, borrowing from American Jurisprudence, has more extensively
67

defined proximate cause thusly:

"* * * 'that cause, which, in natural and continuous sequence, unbroken by any efficient intervening
cause, produces the injury and without which the result would not have occurred.' And more
comprehensively, 'the proximate legal cause is that acting first and producing the injury, either
immediately or by setting other events in motion, all constituting a natural and continuous chain of
events, each having a close causal connection with its immediate predecessor, the final event in the
chain immediately effecting the injury as a natural and probable result of the cause which first acted,
under such circumstances that the person responsible for the first event should, as an ordinarily
prudent and intelligent person, have reasonable ground to expect at the moment of his act or default
that an injury to some person might probably result therefrom." 68

To be considered the proximate cause of the injury, the negligence need not be the event closest in
time to the injury; a cause is still proximate, although farther in time in relation to the injury, if the
happening of it set other foreseeable events into motion resulting ultimately in the
damage. According to an authority on civil law: "A prior and remote cause cannot be made the
69 70

basis of an action, if such remote cause did nothing more than furnish the condition or give rise to
the occasion by which the injury was made possible, if there intervened between such prior or
remote cause and the injury a distinct, successive, unrelated and efficient cause, even though such
injury would not have happened but for such condition or occasion. If no damage exists in the
condition except because of the independent cause, such condition was not the proximate cause.
And if an independent negligent act or defective condition sets into operation the circumstances
which result in injury because of the prior defective condition, such act or condition is the proximate
cause."

Bouvier adds:

In many cases important questions arise as to which, in the chain of acts tending to the production of
a given state of things, is to be considered the responsible cause. It is not merely distance of place
or of causation that renders a cause remote. The cause nearest in the order of causation, without
any efficient concurring cause to produce the result, may be considered the direct cause. In the
course of decisions of cases in which it is necessary to determine which of several causes is so far
responsible for the happening of the act or injury complained of, what is known as the doctrine of
proximate cause is constantly resorted to in order to ascertain whether the act, omission, or
negligence of the person whom it is sought to hold liable was in law and in fact responsible for the
result which is the foundation of the action.71

xxxx
The question of proximate cause is said to be determined, not by the existence or non-existence of
intervening events, but by their character and the natural connection between the original act or
omission and the injurious consequences. When the intervening cause is set in operation by the
original negligence, such negligence is still the proximate cause; x x x If the party guilty of the first
act of negligence might have anticipated the intervening cause, the connection is not broken; x x x.
Any number of causes and effects may intervene, and if they arc such as might with reasonable
diligence have been foreseen, the last result is to be considered as the proximate result. But
whenever a new cause intervenes, which is not a consequence of the first wrongful cause, which is
not under control of the wrongdoer, which could not have been foreseen by the exercise of
reasonable diligence, and except for which the final injurious consequence could not have
happened, then such injurious consequence must be deemed too remote; x x x. (bold underscoring
72

supplied for emphasis)

An examination of the records in accordance with the foregoing concepts supports the conclusions
that the negligence of Intergames was the proximate cause of the death of Rommel; and that the
negligence of the jeepney driver was not an efficient intervening cause.

First of all, Intergames' negligence in not conducting the race in a road blocked off from vehicular
traffic, and in not properly coordinating the volunteer personnel manning the marathon route
effectively set the stage for the injury complained of. The submission that Intergames had previously
conducted numerous safe races did not persuasively demonstrate that it had exercised due
diligence because, as the trial court pointedly observed, "[t]hey were only lucky that no accident
occurred during the previous marathon races but still the danger was there." 73

Secondly, injury to the participants arising from an unfortunate vehicular accident on the route was
an event known to and foreseeable by Intergames, which could then have been avoided if only
Intergames had acted with due diligence by undertaking the race on a blocked-off road, and if only
Intergames had enforced and adopted more efficient supervision of the race through its volunteers.

And, thirdly, the negligence of the jeepney driver, albeit an intervening cause, was not efficient
enough to break the chain of connection between the negligence of Intergames and the injurious
consequence suffered by Rommel. An intervening cause, to be considered efficient, must be "one
not produced by a wrongful act or omission, but independent of it, and adequate to bring the
injurious results. Any cause intervening between the first wrongful cause and the final injury which
might reasonably have been foreseen or anticipated by the original wrongdoer is not such an
efficient intervening cause as will relieve the original wrong of its character as the proximate cause
of the final injury."
74

In fine, it was the duty of Intergames to guard Rommel against the foreseen risk, but it failed to do
so.

III

The doctrine of assumption of risk

had no application to Rommel

Unlike the R TC, the CA ruled that the doctrine of assumption of risk applied herein; hence, it
declared Intergames and Cosmos not liable. The CA rendered the following rationalization to
buttress its ruling, to wit:

In this case, appellant Romulo Abrogar himself admitted that his son, Rommel Abrogar, surveyed
the route of the marathon and even attended a briefing before the race. Consequently, he was
aware that the marathon would pass through a national road and that the said road would not be
blocked off from traffic. And considering that he was already eighteen years of age, had voluntarily
participated in the marathon, with his parents' consent, and was well aware of the traffic hazards
along the route, he thereby assumed all the risks of the race. This is precisely why permission from
the participant's parents, submission of a medical certificate and a waiver of all rights and causes of
action arising from the participation in the marathon which the participant or his heirs may have
against appellant Intergames were required as conditions in joining the marathon.

In the decision of the trial court, it stated that the risk mentioned in the waiver signed by Rommel
Abrogar only involved risks such as stumbling, suffering heatstroke, heart attack and other similar
risks. It did not consider vehicular accident as one of the risks included in the said waiver.

This Court does not agree. With respect to voluntary participation in a sport, the doctrine of
assumption of risk applies to any facet of the activity inherent in it and to any open and obvious
condition of the place where it is carried on. We believe that the waiver included vehicular accidents
for the simple reason that it was a road race run on public roads used by vehicles. Thus, it cannot be
denied that vehicular accidents are involved. It was not a track race which is held on an oval and
insulated from vehicular traffic. In a road race, there is always the risk of runners being hit by motor
vehicles while they train or compete. That risk is inherent in the sport and known to runners. It is a
risk they assume every time they voluntarily engage in their sport.

Furthermore, where a person voluntarily participates in a lawful game or contest, he assumes the
ordinary risks of such game or contest so as to preclude recovery from the promoter or operator of
the game or contest for injury or death resulting therefrom. Proprietors of amusements or of places
where sports and games are played are not insurers of safety of the public nor of their patrons.

In Mc Leod Store v. Vinson 213 Ky 667, 281 SW 799 (1926), it was held that a boy, seventeen years
of age, of ordinary intelligence and physique, who entered a race conducted by a department store,
the purpose of which was to secure guinea fowl which could be turned in for cash prizes, had
assumed the ordinary risks incident thereto and was barred from recovering against the department
store for injuries suffered when, within catching distance, he stopped to catch a guinea, and was
tripped or stumbled and fell to the pavement, six or eight others falling upon him. The comi further
said: "In this (the race) he was a voluntary participant. x x x The anticipated danger was as obvious
to him as it was to appellant (the department store). While not an adult, he was practically 17 years
of age, of ordinary intelligence, and perfectly able to determine the risks ordinarily incident to such
games. An ordinary boy of that age is practically as well advised as to the hazards of baseball,
basketball, football, foot races and other games of skill and endurance as is an adult

x x x."

In the case at bar, the "1st Pop Cola Junior Marathon" held on June 15, 1980 was a race the winner
of which was to represent the country in the annual Spirit of Pheidippides Marathon Classic in
Greece, if he equals or breaks the 29-minute mark for the 19-km. race. Thus, Rommel Abrogar
having voluntarily participated in the race, with his parents' consent, assumed all the risks of the
race.75

The doctrine of assumption of risk means that one who voluntarily exposes himself to an obvious,
known and appreciated danger assumes the risk of injury that may result therefrom. It rests on the
76

fact that the person injured has consented to relieve the defendant of an obligation of conduct
toward him and to take his chance of injury from a known risk, and whether the former has exercised
proper caution or not is immaterial. In other words, it is based on voluntary consent, express or
77

implied, to accept danger of a known and appreciated risk; it may sometimes include acceptance of
risk arising from the defendant's negligence, but one does not ordinarily assume risk of any
negligence which he does not know and appreciate.78 As a defense in negligence cases, therefore,
the doctrine requires the concurrence of three elements, namely: (1) the plaintiff must know that the
risk is present; (2) he must further understand its nature; and (3) his choice to incur it must be free
and voluntary. According to Prosser: "Knowledge of the risk is the watchword of assumption of
79 80

risk."

Contrary to the notion of the CA, the concurrence of the three elements was not shown to exist.
Rommel could not have assumed the risk of death when he participated in the race because death
was neither a known nor normal risk incident to running a race. Although he had surveyed the route
prior to the race and should be presumed to know that he would be running the race alongside
moving vehicular traffic, such knowledge of the general danger was not enough, for some authorities
have required that the knowledge must be of the specific risk that caused the harm to him. In81

theory, the standard to be applied is a subjective one, and should be geared to the particular plaintiff
and his situation, rather than that of the reasonable person of ordinary prudence who appears in
contributory negligence. He could not have appreciated the risk of being fatally struck by any
82

moving vehicle while running the race. Instead, he had every reason to believe that the organizer
had taken adequate measures to guard all participants against any danger from the fact that he was
participating in an organized marathon. Stated differently, nobody in his right mind, including minors
like him, would have joined the marathon if he had known of or appreciated the risk of harm or even
death from vehicular accident while running in the organized running event. Without question, a
marathon route safe and free from foreseeable risks was the reasonable expectation of every runner
participating in an organized running event.

Neither was the waiver by Rommel, then a minor, an effective form of express or implied consent in
the context of the doctrine of assumption of risk. There is ample authority, cited in Prosser, to the
83

effect that a person does not comprehend the risk involved in a known situation because of his
youth, or lack of information or experience, and thus will not be taken to consent to assume the
84 85

risk.

Clearly, the doctrine of assumption of risk does not apply to bar recovery by the petitioners.

IV

Cosmos is not liable for the negligence

of Intergames as the organizer

Nonetheless, the CA did not err in absolving Cosmos from liability.

The sponsorship of the marathon by Cosmos was limited to financing the race. Cosmos did nothing
beyond that, and did not involve itself at all in the preparations for the actual conduct of the race.
This verity was expressly confirmed by Intergames, through Castro, Jr., who declared as follows:

COURT

q Do you discuss all your preparation with Cosmos Bottling Company?

a As far as the Cosmos Bottling Company (sic) was a sponsor as to the actual conduct of the race, it
is my responsibility. The conduct of the race is my responsibility. The sponsor has nothing to do as
well as its code of the race because they are not the ones running. I was the one running. The
responsibility of Cosmos was just to provide the sponsor's money.
COURT

q They have no right to who (sic) suggest the location, the number of runners, you decide these
yourself without consulting them?

a Yes, your honor. 86

We uphold the finding by the CA that the role of Cosmos was to pursue its corporate commitment to
sports development of the youth as well as to serve the need for advertising its business. In the
absence of evidence showing that Cosmos had a hand in the organization of the race, and took part
in the determination of the route for the race and the adoption of the action plan, including the safety
and security measures for the benefit of the runners, we cannot but conclude that the requirement
for the direct or immediate causal connection between the financial sponsorship of Cosmos and the
death of Rommel simply did not exist. Indeed, Cosmos' mere sponsorship of the race was, legally
speaking, too remote to be the efficient and proximate cause of the injurious consequences.

Damages

Article 2202 of the Civil Code lists the damages that the plaintiffs in a suit upon crimes and quasi-
delicts can recover from the defendant, viz.:

Art. 2202. In crimes and quasi-delicts, the defendant shall be liable for all damages which are the
natural and probable consequences of the act or omission complained of. It is not necessary that
such damages have been foreseen or could have reasonably been foreseen by the defendant.

Accordingly, Intergames was liable for all damages that were the natural and probable
consequences of its negligence. In its judgment, the RTC explained the award of damages in favor
of the petitioners, as follows:

As borne by the evidence on record, the plaintiffs incurred medical, hospitalization and burial
expenses for their son in this aggregate amount of ₱28,061.65 (Exhibits "D'', "D-1" and "D-2"). In
instituting this case, they have paid their lawyer ₱5,000 as initial deposit, their arrangement being
that they would pay attorney's fees to the extent of 10% of whatever amount would be awarded to
them in this case.

For the loss of a son, it is unquestionable that plaintiffs suffered untold grief which should entitle
them to recover moral damages, and this Court believes that if only to assuage somehow their
untold grief but not necessarily to compensate them to the fullest, the nominal amount of ₱l00,00.00
should be paid by the defendants.

For failure to adopt elementary and basic precautionary measure to insure the safety of the
participants so that sponsors and organizers of sports events should exercise utmost diligence in
preventing injury to the participants and the public as well, exemplary damages should also be paid
by the defendants and this Court considers the amount of ₱50,000.00

as reasonable. 87

Although we will not disturb the foregoing findings and determinations, we need to add to the
justification for the grant of exemplary damages. Article 2231 of the Civil Code stipulates that
exemplary damages are to be awarded in cases of quasi-delict if the defendant acted with gross
negligence. The foregoing characterization by the RTC indicated that Intergames' negligence was
gross. We agree with the characterization. Gross negligence, according to Mendoza v. Spouses
Gomez, is the absence of care or diligence as to amount to a reckless disregard of the safety of
88

persons or property; it evinces a thoughtless disregard of consequences without exerting any effort
to avoid them. Indeed, the failure of Intergames to adopt the basic precautionary measures for the
safety of the minor participants like Rommel was in reckless disregard of their safety. Conduct is
reckless when it is an extreme departure from ordinary care, in a situation in which a high degree of
danger is apparent; it must be more than any mere mistake resulting from inexperience, excitement,
or confusion, and more than mere thoughtlessness or inadvertence, or simple inattention. The RTC
89

did not recognize the right of the petitioners to recover the loss of earning capacity of Rommel. It
should have, for doing so would have conformed to jurisprudence whereby the Court has
unhesitatingly allowed such recovery in respect of children, students and other non-working or still
unemployed victims. The legal basis for doing so is Article 2206 (l) of the Civil Code, which
stipulates that the defendant "shall be liable for the loss of the earning capacity of the deceased, and
the indemnity shall be paid to the heirs of the latter; such indemnity shall in every case be assessed
and awarded by the court, unless the deceased on account of permanent physical disability not
caused by the defendant, had no earning capacity at the time of his death."

Indeed, damages for loss of earning capacity may be awarded to the heirs of a deceased non-
working victim simply because earning capacity, not necessarily actual earning, may be lost.

In Metro Manila Transit Corporation v. Court of Appeals, damages for loss of earning capacity were
90

granted to the heirs of a third-year high school student of the University of the Philippines Integrated
School who had been killed when she was hit and run over by the petitioner's passenger bus as she
crossed Katipunan Avenue in Quezon City. The Court justified the grant in this wise:

Compensation of this nature is awarded not for loss of earnings but for loss of capacity to earn
money. Evidence must be presented that the victim, if not yet employed at the time of death, was
reasonably certain to complete training for a specific profession. In People v. Teehankee, no award
of compensation for loss of earning capacity was granted to the heirs of a college freshman because
there was no sufficient evidence on record to show that the victim would eventually become a
professional pilot. But compensation should be allowed for loss of earning capacity resulting from the
death of a minor who has not yet commenced employment or training for a specific profession if
sufficient evidence is presented to establish the amount thereor. (bold underscoring supplied for
91

emphasis)

In People v. Sanchez, damages for loss of earning capacity was also allowed to the heirs of the
92

victims of rape with homicide despite the lack of sufficient evidence to establish what they would
have earned had they not been killed. The Court rationalized its judgment with the following
observations:

Both Sarmenta and Gomez were senior agriculture students at UPLB, the country's leading
educational institution in agriculture. As reasonably assumed by the trial court, both victims would
1âwphi1

have graduated in due course. Undeniably, their untimely death deprived them of their future time
and earning capacity. For these deprivation, their heirs are entitled to compensation. xxxx. However,
considering that Sarmenta and Gomez would have graduated in due time from a reputable
university, it would not be unreasonable to assume that in 1993 they would have earned more than
the minimum wage. All factors considered, the Court believes that it is fair and reasonable to fix the
monthly income that the two would have earned in 1993 at ₱8,000.000 per month (or
₱96,000.00/year) and their deductible living and other incidental expenses at ₱3,000.00 per month
(or ₱36,000.00/year). (bold underscoring supplied for emphasis)
93
In Perena v. Zarate, the Court fixed damages for loss of earning capacity to be paid to the heirs of
94

the 15-year-old high school student of Don Bosco Technical Institute killed when a moving train hit
the school van ferrying him to school while it was traversing the railroad tracks. The RTC and the CA
had awarded damages for loss of earning capacity computed on the basis of the minimum wage in
effect at the time of his death. Upholding said findings, the Court opined:

x x x, the fact that Aaron was then without a history of earnings should not be taken against his
parents and in favor of the defendants whose negligence not only cost Aaron his life and his right to
work and earn money, but also deprived his parents of their right to his presence and his services as
well. x x x. Accordingly, we emphatically hold in favor of the indemnification for Aaron's loss of
earning capacity despite him having been unemployed, because compensation of this nature is
awarded not for loss of time or earnings but for loss of the deceased's power or ability to earn
money.

The petitioners sufficiently showed that Rommel was, at the time of his untimely but much lamented
death, able-bodied, in good physical and mental state, and a student in good standing. It should be
95

reasonable to assume that Rommel would have finished his schooling and would turn out to be a
useful and productive person had he not died. Under the foregoing jurisprudence, the petitioners
should be compensated for losing Rommel's power or ability to earn. The basis for the computation
of earning capacity is not what he would have become or what he would have wanted to be if not for
his untimely death, but the minimum wage in effect at the time of his death. The formula for this
purpose is:

Net Earning Capacity = Life Expectancy x [Gross Annual Income less Necessary Living Expenses ] 96

Life expectancy is equivalent to 2/3 multiplied by the difference of 80 and the age of the deceased.
Since Rommel was 18 years of age at the time of his death, his life expectancy was 41 years. His
projected gross annual income, computed based on the minimum wage for workers in the non-
agricultural sector in effect at the time of his death, then fixed at ₱l4.00/day, is ₱5,535.83. Allowing
97

for necessary living expenses of 50% of his projected gross annual income, his total net earning
capacity is ₱l13,484.52.

Article 2211 of the Civil Code expressly provides that interest, as a part of damages, may be
awarded in crimes and quasi-delicts at the discretion of the court. The rate of interest provided under
Article 2209 of the Civil Code is 6% per annum in the absence of stipulation to the contrary. The
legal interest rate of 6% per annum is to be imposed upon the total amounts herein awarded from
the time of the judgment of the RTC on May 10, 1991 until finality of judgment. Moreover, pursuant
98

to Article 2212 of the Civil Code, the legal interest rate of 6o/o per annum is to be further imposed
99

on the interest earned up to the time this judgment of the Court becomes final and executory until its
full satisfaction. 100

Article 2208 of the Civil Code expressly allows the recovery of attorney's fees and expenses of
litigation when exemplary damages have been awarded. Thus, we uphold the RTC's allocation of
1âwphi1

attorney's fees in favor of the petitioners equivalent to 10% of the total amount to be recovered,
inclusive of the damages for loss of earning capacity and interests, which we consider to be
reasonable under the circumstances.

WHEREFORE, the Court PARTLY AFFIRMS the decision promulgated on March 10, 2004 to the
extent that it absolved COSMOS BOTTLING COMPANY, INC. from liability; REVERSES and SETS
ASIDE the decision as to INTERGAMES, INC., and REINSTATES as to it the judgment rendered on
May 10, 1991 by the Regional Trial Court, Branch 83, in Quezon City subject to
the MODIFICATIONS that INTERGAMES, INC. is ORDERED TO PAY to the petitioners, in addition
to the aw3:rds thereby allowed: (a) the sum of ₱l13,484.52 as damages for the loss of Rommel
Abrogar's earning capacity; (b) interest of 6% per annum on the actual damages, moral damages,
exemplary damages and loss of earning capacity reckoned from May 10, 1991 until full payment; (c)
compounded interest of 6% per annum from the finality of this decision until full payment; and (d)
costs of suit.

SO ORDERED.

FIRST DIVISION

G.R. No. 172682, July 27, 2016

SULPICIO LINES, INC., Petitioner, v. NAPOLEON SESANTE, NOW SUBSTITUTED

BY MARIBEL ATILANO, KRISTEN MARIE, CHRISTIAN IONE, KENNETH KERRN
AND KARISNA KATE, ALL SURNAMED SESANTE, Respondent.

DECISION

BERSAMIN, J.:

Moral damages are meant to enable the injured party to obtain the means, diversions
or amusements in order to alleviate the moral suffering. Exemplary damages are
designed to permit the courts to reshape behavior that is socially deleterious in its
consequence by creating negative incentives or deterrents against such behavior.

The Case

This appeal seeks to undo and reverse the adverse decision promulgated on June 27,
2005,1whereby the Court of Appeals (CA) affirmed with modification the judgment of
the Regional Trial Court (RTC), Branch 91, in Quezon City holding the petitioner liable
to pay temperate and moral damages due to breach of contract of carriage. 2 chanrobleslaw

Antecedents

On September 18, 1998, at around 12:55 p.m., the M/V Princess of the Orient, a
passenger vessel owned and operated by the petitioner, sank near Fortune Island in
Batangas. Of the 388 recorded passengers, 150 were lost. 3 Napoleon Sesante, then a
member of the Philippine National Police (PNP) and a lawyer, was one of the passengers
who survived the sinking. He sued the petitioner for breach of contract and damages. 4 chanrobleslaw

Sesante alleged in his complaint that the M/V Princess of the Orient left the Port of
Manila while Metro Manila was experiencing stormy weather; that at around 11:00
p.m., he had noticed the vessel listing starboard, so he had gone to the uppermost
deck where he witnessed the strong winds and big waves pounding the vessel; that at
the same time, he had seen how the passengers had been panicking, crying for help
and frantically scrambling for life jackets in the absence of the vessel's officers and
crew; that sensing danger, he had called a certain Vency Ceballos through his cellphone
to request him to inform the proper authorities of the situation; that thereafter, big
waves had rocked the vessel, tossing him to the floor where he was pinned by a long
steel bar; that he had freed himself only after another wave had hit the vessel; 5 that he
had managed to stay afloat after the vessel had sunk, and had been carried by the
waves to the coastline of Cavite and Batangas until he had been rescued; that he had
suffered tremendous hunger, thirst, pain, fear, shock, serious anxiety and mental
anguish; that he had sustained injuries,6 and had lost money, jewelry, important
documents, police uniforms and the .45 caliber pistol issued to him by the PNP; and
that because it had committed bad faith in allowing the vessel to sail despite the storm
signal, the petitioner should pay him actual and moral damages of P500,000.00 and
P1,000,000.00, respectively.7 chanrobleslaw

In its defense, the petitioner insisted on the seaworthiness of the M/V Princess of the
Orient due to its having been cleared to sail from the Port of Manila by the proper
authorities; that the sinking had been due to force majeure; that it had not been
negligent; and that its officers and crew had also not been negligent because they had
made preparations to abandon the vessel because they had launched life rafts and had
provided the passengers assistance in that regard.8 chanrobleslaw

Decision of the RTC

On October 12, 2001, the RTC rendered its judgment in favor of the
respondent,9 holding as follows: ChanRoblesVirtualawlibrary

WHEREFORE, judgment is hereby rendered in favor of plaintiff Napoleon Sesante and

against defendant Sulpicio Lines, Inc., ordering said defendant to pay plaintiff:

1. Temperate damages in the amount of P400,000.00;

2. Moral damages in the amount of One Million Pesos (P1,000,000.00);

3. Costs of suit.

SO ORDERED.10 chanroblesvirtuallawlibrary

The RTC observed that the petitioner, being negligent, was liable to Sesante pursuant
to Articles 1739 and 1759 of the Civil Code; that the petitioner had not established its
due diligence in the selection and supervision of the vessel crew; that the ship officers
had failed to inspect the stowage of cargoes despite being aware of the storm signal;
that the officers and crew of the vessel had not immediately sent a distress signal to
the Philippine Coast Guard; that the ship captain had not called for then "abandon ship"
protocol; and that based on the report of the Board of Marine Inquiry (BMI), the
erroneous maneuvering of the vessel by the captain during the extreme weather
condition had been the immediate and proximate cause of the sinking.

The petitioner sought reconsideration, but the RTC only partly granted its motion by
reducing the temperate damages from P500,000.00 to P300,000.00. 11 chanrobleslaw

Dissatisfied, the petitioner appealed.12 It was pending the appeal in the CA when
Sesante passed away. He was substituted by his heirs.13 chanrobleslaw

Judgment of the CA

On June 27, 2005, the CA promulgated its assailed decision. It lowered the temperate
damages to P120,000.00, which approximated the cost of Sesante's lost personal
belongings; and held that despite the seaworthiness of the vessel, the petitioner
remained civilly liable because its officers and crew had been negligent in performing
their duties.14 chanrobleslaw

Sttill aggrieved, Sulpicio Lines moved for reconsideration, but the CA denied the
motion.15chanrobleslaw

Hence, this appeal.

Issues

The petitioner attributes the following errors to the CA, to wit: ChanRoblesVirtualawlibrary

THE ASSAILED DECISION ERRED IN SUSTAINING THE AWARD OF MORAL DAMAGES,

AS THE INSTANT CASE IS FOR ALLEGED PERSONAL INJURIES PREDICATED ON
BREACH OF CONTRACT OF CARRIAGE, AND THERE BEING NO PROOF OF BAD FAITH ON
THE PART OF SULPICIO

II

THE ASSAILED DECISION ERRED IN SUSTAINING THE AMOUNT OF MORAL DAMAGES

AWARDED, THE SAME BEING UNREASONABLE, EXCESSIVE AND UNCONSCIONABLE,
AND TRANSLATES TO UNJUST ENRICHMENT AGAINST SULPICIO

III

THE ASSAILED DECISION ERRED IN SUSTAINING THE AWARD OF TEMPERATE

DAMAGES AS THE SAME CANNOT SUBSTITUTE FOR A FAILED CLAIM FOR ACTUAL
DAMAGES, THERE BEING NO COMPETENT PROOF TO WARRANT SAID AWARD

IV

THE AWARD OF TEMPERATE DAMAGES IS UNTENABLE AS THE REQUISITE NOTICE

UNDER THE LAW WAS NOT GIVEN TO SULPICIO IN ORDER TO HOLD IT LIABLE FOR
THE ALLEGED LOSS OF SESANTE'S PERSONAL BELONGINGS

THE ASSAILED DECISION ERRED IN SUBSTITUTING THE HEIRS OF RESPONDENT

SESANTE IN THE INSTANT CASE, THE SAME BEING A PERSONAL ACTION WHICH DOES
NOT SURVIVE

VI

THE ASSAILED DECISION ERRED IN APPLYING ARTICLE 1759 OF THE NEW CIVIL CODE
AGAINST SULPICIO SANS A CLEAR-CUT FINDING OF SULPICIO'S BAD FAITH IN THE
INCIDENT16 chanroblesvirtuallawlibrary

In other words, to be resolved are the following, namely: (1) Is the complaint for
breach of contract and damages a personal action that does not survive the death of
the plaintiff?; (2) Is the petitioner liable for damages under Article 1759 of the Civil
Code?; and (3) Is there sufficient basis for awarding moral and temperate damages?

Ruling of the Court

The appeal lacks merit.

An action for breach of contract of carriage survives the death of the plaintiff

The petitioner urges that Sesante's complaint for damages was purely personal and
cannot be transferred to his heirs upon his death. Hence, the complaint should be
dismissed because the death of the plaintiff abates a personal action.

The petitioner's urging is unwarranted.

Section 16, Rule 3 of the Rules of Court lays down the proper procedure in the event of
the death of a litigant, viz.:
ChanRoblesVirtualawlibrary

Section 16. Death of party; duty of counsel. - Whenever a party to a pending action
dies, and the claim is not thereby extinguished, it shall be the duty of his counsel
to inform the court within thirty (30) days after such death of the fact thereof, and to
give the name and address of his legal representative or representatives. Failure of
counsel to comply with his duty shall be a ground for disciplinary action.

The heirs of the deceased may be allowed to be substituted for the deceased,
without requiring the appointment of an executor or administrator and the court may
appoint a guardian ad litem for the minor heirs.

xxxx
Substitution by the heirs is not a matter of jurisdiction, but a requirement of due
process.17 It protects the right of due process belonging to any party, that in the event
of death the deceased litigant continues to be protected and properly represented in the
suit through the duly appointed legal representative of his estate. 18 chanrobleslaw

The application of the rule on substitution depends on whether or not the action
survives the death of the litigant. Section 1, Rule 87 of the Rules of Court enumerates
the following actions that survive the death of a party, namely: (1) recovery of real or
personal property, or an interest from the estate; (2) enforcement of liens on the
estate; and (3) recovery of damages for an injury to person or property. On the one
hand, Section 5, Rule 86 of the Rules of Courtlists the actions abated by death as
including: (1) claims for funeral expenses and those for the last sickness of the
decedent; (2) judgments for money; and (3) all claims for money against the deceased,
arising from contract, express or implied.

A contract of carriage generates a relation attended with public duty, neglect or

malfeasance of the carrier's employees and gives ground for an action for
damages.19 Sesante's claim against the petitioner involved his personal injury caused by
the breach of the contract of carriage. Pursuant to the aforecited rules, the complaint
survived his death, and could be continued by his heirs following the rule on
substitution.

II

The petitioner is liable for breach of contract of carriage

The petitioner submits that an action for damages based on breach of contract of
carriage under Article 1759 of the Civil Code should be read in conjunction with Article
2201 of the same code; that although Article 1759 only provides for a presumption of
negligence, it does not envision automatic liability; and that it was not guilty of bad
faith considering that the sinking of M/V Princess of the Orient had been due to a
fortuitous event, an exempting circumstance under Article 1174 of the Civil Code.

The submission has no substance.

Article 1759 of the Civil Code does not establish a presumption of negligence because it
explicitly makes the common carrier liable in the event of death or injury to passengers
due to the negligence or fault of the common carrier's employees. It reads: ChanRoblesVirtualawlibrary

Article 1759. Common carriers are liable for the death or injuries to passengers
through the negligence or willful acts of the former's employees, although such
employees may have acted beyond the scope of their authority or in violation of the
orders of the common carriers.

This liability of the common carriers does not cease upon proof that they exercised all
the diligence of a good father of a family in the selection and supervision of their
employees.
The liability of common carriers under Article 1759 is demanded by the duty of
extraordinary diligence required of common carriers in safely carrying their
passengers.20chanrobleslaw

On the other hand, Article 1756 of the Civil Code lays down the presumption of
negligence against the common carrier in the event of death or injury of its
passenger, viz.: ChanRoblesVirtualawlibrary

Article 1756. In case of death of or injuries to passengers, common carriers are

presumed to have been at fault or to have acted negligently, unless they prove that
they observed extraordinary diligence as prescribed in Articles 1733 and 1755.
Clearly, the trial court is not required to make an express finding of the common
carrier's fault or negligence.21 Even the mere proof of injury relieves the passengers
from establishing the fault or negligence of the carrier or its employees. 22 The
presumption of negligence applies so long as there is evidence showing that: (a) a
contract exists between the passenger and the common carrier; and (b) the injury or
death took place during the existence of such contract. 23In such event, the burden
shifts to the common carrier to prove its observance of extraordinary diligence, and
that an unforeseen event or force majeure had caused the injury.24 chanrobleslaw

Sesante sustained injuries due to the buffeting by the waves and consequent sinking of
M/V Princess of the Orient where he was a passenger. To exculpate itself from liability,
the common carrier vouched for the seaworthiness of M/V Princess of the Orient, and
referred to the BMI report to the effect that the severe weather condition - a force
majeure - had brought about the sinking of the vessel.

The petitioner was directly liable to Sesante and his heirs.

A common carrier may be relieved of any liability arising from a fortuitous event
pursuant to Article 117425 of the Civil Code. But while it may free a common carrier
cralawred

from liability, the provision still requires exclusion of human agency from the cause of
injury or loss.26 Else stated, for a common carrier to be absolved from liability in case
of force majeure, it is not enough that the accident was caused by a fortuitous event.
The common carrier must still prove that it did not contribute to the occurrence of the
incident due to its own or its employees' negligence. 27 We explained in Schmitz
Transport & Brokerage Corporation v. Transport Venture, Inc.,28 as follows: ChanRoblesVirtualawlibrary

In order to be considered a fortuitous event, however, (1) the cause of the unforeseen
and unexpected occurrence, or the failure of the debtor to comply with his obligation,
must be independent of human will; (2) it must be impossible to foresee the event
which constitute the caso fortuito, or if it can be foreseen it must be impossible to
avoid; (3) the occurrence must be such as to render it impossible for the debtor to fulfill
his obligation in any manner; and (4) the obligor must be free from any participation in
the aggravation of the injury resulting to the creditor.
[T]he principle embodied in the act of God doctrine strictly requires that the act must
be occasioned solely by the violence of nature. Human intervention is to be
excluded from creating or entering into the cause of the mischief. When the
effect is found to be in part the result of the participation of man, whether due
to his active intervention or neglect or failure to act, the whole occurrence is
then humanized and removed from the rules applicable to the acts of
God.29 (bold underscoring supplied for emphasis)
The petitioner has attributed the sinking of the vessel to the storm notwithstanding its
position on the seaworthiness of M/V Princess of the Orient. Yet, the findings of the BMI
directly contradicted the petitioner's attribution, as follows:ChanRoblesVirtualawlibrary

7. The Immediate and the Proximate Cause of the Sinking

The Captain's erroneous maneuvers of the M/V Princess of the Orient minutes before
she sunk [sic] had caused the accident. It should be noted that during the first two
hours when the ship left North Harbor, she was navigating smoothly towards Limbones
Point. During the same period, the ship was only subjected to the normal weather
stress prevailing at the time. She was then inside Manila Bar. The waves were observed
to be relatively small to endanger the safety of the ship. It was only when the MV
Princess of the Orient had cleared Limbones Pt. while navigating towards the direction
of the Fortune Island when this agonizing misfortune struck the ship.

Initially, a list of three degrees was observed. The listing of the ship to her portside had
continuously increased. It was at this point that the captain had misjudged the
situation. While the ship continuously listed to her portside and was battered by big
waves, strong southwesterly winds, prudent judgement [sic] would dictate that the
Captain should have considerably reduced the ship's speed. He could have immediately
ordered the Chief Engineer to slacken down the speed. Meanwhile, the winds and
waves continuously hit the ship on her starboard side. The waves were at least seven to
eight meters in height and the wind velocity was a[t] 25 knots. The MV Princess of the
Orient being a close-type ship (seven decks, wide and high superstructure) was
vulnerable and exposed to the howling winds and ravaging seas. Because of the
excessive movement, the solid and liquid cargo below the decks must have shifted its
weight to port, which could have contributed to the tilted position of the ship.

Minutes later, the Captain finally ordered to reduce the speed of the ship to 14 knots.
At the same time, he ordered to put ballast water to the starboard-heeling tank to
arrest the continuous listing of the ship. This was an exercise in futility because the ship
was already listing between 15 to 20 degrees to her portside. The ship had almost
reached the maximum angle of her loll. At this stage, she was about to lose her
stability.

Despite this critical situation, the Captain executed several starboard maneuvers.
Steering the course of the Princess to starboard had greatly added to her tilting. In the
open seas, with a fast speed of 14 knots, advance maneuvers such as this would tend
to bring the body of the ship in the opposite side. In navigational terms, this movement
is described as the centripetal force. This force is produced by the water acting on the
side of the ship away from the center of the turn. The force is considered to act at the
center of lateral resistance which, in this case, is the centroid of the underwater area of
the ship's side away from the center of the turn. In the case of the Princess, when the
Captain maneuvered her to starboard, her body shifted its weight to port. Being already
inclined to an angle of 15 degrees, coupled with the instantaneous movement of the
ship, the cargoes below deck could have completely shifted its position and weight
towards portside. By this time, the ship being ravaged simultaneously by ravaging
waves and howling winds on her starboard side, finally lost her grip. 30chanroblesvirtuallawlibrary

Even assuming the seaworthiness of the MA/ Princess of the Orient, the petitioner could
not escape liability considering that, as borne out by the aforequoted findings of the
BMI, the immediate and proximate cause of the sinking of the vessel had been the
gross negligence of its captain in maneuvering the vessel.

The Court also notes that Metro Manila was experiencing Storm Signal No. 1 during the
time of the sinking.31 The BMI observed that a vessel like the M/V Princess of the
Orient, which had a volume of 13.734 gross tons, should have been capable of
withstanding a Storm Signal No. 1 considering that the responding fishing boats of less
than 500 gross tons had been able to weather through the same waves and winds to go
to the succor of the sinking vessel and had actually rescued several of the latter's
distressed passengers.32 chanrobleslaw

III

The award of moral damages and temperate damages is proper

The petitioner argues that moral damages could be meted against a common carrier
only in the following instances, to wit: (1) in the situations enumerated by Article 2201
of the Civil Code; (2) in cases of the death of a passenger; or (3)where there was bad
faith on the part of the common carrier. It contends that none of these instances
obtained herein; hence, the award should be deleted.

We agree with the petitioner that moral damages may be recovered in an action upon
breach of contract of carriage only when: (a) death of a passenger results, or (b) it is
proved that the carrier was guilty of fraud and bad faith, even if death does not
result.33 However, moral damages may be awarded if the contractual breach is found to
be wanton and deliberately injurious, or if the one responsible acted fraudulently or
with malice or bad faith.34
chanrobleslaw

The CA enumerated the negligent acts committed by the officers and crew of M/V
Princess of the Orient, viz.: ChanRoblesVirtualawlibrary

x x x. [W]hile this Court yields to the findings of the said investigation report, yet it
should be observed that what was complied with by Sulpicio Lines were only the basic
and minimal safety standards which would qualify the vessel as seaworthy. In the same
report however it also revealed that the immediate and proximate cause of the sinking
of the M/V Princess of the Orient was brought by the following: erroneous maneuvering
command of Captain Esrum Mahilum and due to the weather condition prevailing at the
time of the tragedy. There is no doubt that under the circumstances the crew of the
vessel were negligent in manning it. In fact this was clearly established by the
investigation of the Board of Marine Inquiry where it was found that: ChanRoblesVirtualawlibrary

The Chief Mate, when interviewed under oath, had attested that he was not able to
make stability calculation of the ship vis-a-vis her cargo. He did not even know the
metacentric height (GM) of the ship whether it be positive or negative.

As cargo officer of the ship, he failed to prepare a detailed report of the ship's cargo
stowage plan.
He likewise failed to conduct the soundings (measurement) of the ballast tanks before
the ship departed from port. He readily presumed that the ship was full of ballast since
the ship was fully ballasted when she left Cebu for Manila on 16 September 1998 and
had never discharge[d] its contents since that time.

Being the officer-in-charge for emergency situation (sic) like this, he failed to execute
and supervise the actual abandonship (sic) procedure. There was no announcement at
the public address system of abandonship (sic), no orderly distribution of life jackets
and no orderly launching of life rafts. The witnesses have confirmed this finding on their
sworn statements.

There was miscalculation in judgment on the part of the Captain when he erroneously
navigated the ship at her last crucial moment. x x x

To aggravate his case, the Captain, having full command and responsibility of the MV
Princess of the Orient, had failed to ensure the proper execution of the actual
abandoning of the ship.

The deck and engine officers (Second Mate, Third Mate, Chief Engineers, Second
Engineer, Third Engineer and Fourth Engineer), being in charge of their respective
abandonship (sic) post, failed to supervise the crew and passengers in the proper
execution of abandonship (sic) procedure.

The Radio Officer (spark) failed to send the SOS message in the internationally
accepted communication network (VHF Channel 16). Instead, he used the Single Side
Band (SSB) radio in informing the company about the emergency situation. x x x x 35 chanroblesvirtuallawlibrary

The aforestated negligent acts of the officers and crew of M/V Princess of the Orient
could not be ignored in view of the extraordinary duty of the common carrier to ensure
the safety of the passengers. The totality of the negligence by the officers and crew of
M/V Princess of the Orient, coupled with the seeming indifference of the petitioner to
render assistance to Sesante,36warranted the award of moral damages.

While there is no hard-and-fast rule in determining what is a fair and reasonable

amount of moral damages, the discretion to make the determination is lodged in the
trial court with the limitation that the amount should not be palpably and scandalously
excessive. The trial court then bears in mind that moral damages are not intended to
impose a penalty on the wrongdoer, or to enrich the plaintiff at the expense of the
defendant.37 The amount of the moral damages must always reasonably approximate
the extent of injury and be proportional to the wrong committed. 38chanrobleslaw

The Court recognizes the mental anguish, agony and pain suffered by Sesante who
fought to survive in the midst of the raging waves of the sea while facing the immediate
prospect of losing his life. His claim for moral and economic vindication is a bitter
remnant of that most infamous tragedy that left hundreds of families broken in its
wake. The anguish and moral sufferings he sustained after surviving the tragedy would
always include the memory of facing the prospect of his death from drowning, or
dehydration, or being preyed upon by sharks. Based on the established circumstances,
his survival could only have been a miracle wrought by God's grace, by which he was
guided in his desperate swim for the safety of the shore. But even with the glory of
survival, he still had to grapple with not just the memory of having come face to face
with almost certain death, but also with having to answer to the instinctive guilt for the
rest of his days of being chosen to live among the many who perished in the
tragedy.39chanrobleslaw

While the anguish, anxiety, pain and stress experienced by Sesante during and after
the sinking cannot be quantified, the moral damages to be awarded should at least
approximate the reparation of all the consequences of the petitioner's negligence. With
moral damages being meant to enable the injured party to obtain the means, diversions
or amusements in order to alleviate his moral and physical sufferings, 40 the Court is
called upon to ensure that proper recompense be allowed to him, through his heirs. For
this purpose, the amount of P1,000,000.00, as granted by the RTC and affirmed by the
CA, is maintained.

The petitioner contends that its liability for the loss of Sesante's personal belongings
should conform with Article 1754, in relation to Articles 1998, 2000 to 2003 of the Civil
Code, which provide: ChanRoblesVirtualawlibrary

Article 1754. The provisions of Articles 1733 to 1753 shall apply to the passenger's
baggage which is not in his personal custody or in that of his employees. As to other
baggage, the rules in Articles 1998 and 2000 to 2003 concerning the responsibility of
hotel-keepers shall be applicable.

xxxx

Article 1998. The deposit of effects made by travellers in hotels or inns shall also be
regarded as necessary. The keepers of hotels or inns shall be responsible for them as
depositaries, provided that notice was given to them, or to their employees, of the
effects brought by the guests and that, on the part of the latter, they take the
precautions which said hotel-keepers or their substitutes advised relative to the care
and vigilance of their effects.
xxxx

Article 2000. The responsibility referred to in the two preceding articles shall include the
loss of, or injury to the personal property of the guests caused by the servants or
employees of the keepers of hotels or inns as well as by strangers; but not that which
may proceed from any force majeure. The fact that travellers are constrained to rely on
the vigilance of the keeper of the hotel or inn shall be considered in determining the
degree of care required of him.

Article 2001. The act of a thief or robber, who has entered the hotel is not
deemed force majeure, unless it is done with the use of arms or through an irresistible
force.

Article 2002. The hotel-keeper is not liable for compensation if the loss is due to the
acts of the guest, his family, servants or visitors, or if the loss arises from the character
of the things brought into the hotel.

Article 2003. The hotel-keeper cannot free himself from responsibility by posting
notices to the effect that he is not liable for the articles brought by the guest. Any
stipulation to the contrary between the hotel-keeper and the guest whereby the
responsibility of the former as set forth in Articles 1998 to 2001 is suppressed or
diminished shall be void.
The petitioner denies liability because Sesante's belongings had remained in his custody
all throughout the voyage until the sinking, and he had not notified the petitioner or its
employees about such belongings. Hence, absent such notice, liability did not attach to
the petitioner.

Is notification required before the common carrier becomes liable for lost belongings
that remained in the custody of the passenger?

We answer in the negative.

The rule that the common carrier is always responsible for the passenger's baggage
during the voyage needs to be emphasized. Article 1754 of the Civil Code does not
exempt the common carrier from liability in case of loss, but only highlights the degree
of care required of it depending on who has the custody of the belongings. Hence, the
law requires the common carrier to observe the same diligence as the hotel keepers in
case the baggage remains with the passenger; otherwise, extraordinary diligence must
be exercised.41 Furthermore, the liability of the common carrier attaches even if the loss
or damage to the belongings resulted from the acts of the common carrier's employees,
the only exception being where such loss or damages is due to force majeure.42 chanrobleslaw

In YHT Realty Corporation v. Court of Appeals,43 we declared the actual delivery of the
goods to the innkeepers or their employees as unnecessary before liability could attach
to the hotelkeepers in the event of loss of personal belongings of their guests
considering that the personal effects were inside the hotel or inn because the
hotelkeeper shall remain accountable.44 Accordingly, actual notification was not
necessary to render the petitioner as the common carrier liable for the lost personal
belongings of Sesante. By allowing him to board the vessel with his belongings without
any protest, the petitioner became sufficiently notified of such belongings. So long as
the belongings were brought inside the premises of the vessel, the petitioner was
thereby effectively notified and consequently duty-bound to observe the required
diligence in ensuring the safety of the belongings during the voyage. Applying Article
2000 of the Civil Code, the petitioner assumed the liability for loss of the belongings
caused by the negligence of its officers or crew. In view of our finding that the
negligence of the officers and crew of the petitioner was the immediate and proximate
cause of the sinking of the M/V Princess of the Orient, its liability for Sesante's lost
personal belongings was beyond question.

The petitioner claims that temperate damages were erroneously awarded because
Sesante had not proved pecuniary loss; and that the CA merely relied on his self-
serving testimony.

The award of temperate damages was proper.

Temperate damages may be recovered when some pecuniary loss has been suffered
but the amount cannot, from the nature of the case, be proven with certainty. 45 Article
222446 of the Civil Code expressly authorizes the courts to award temperate damages
despite the lack of certain proof of actual damages. 47chanrobleslaw

Indubitably, Sesante suffered some pecuniary loss from the sinking of the vessel, but
the value of the loss could not be established with certainty. The CA, which can try facts
and appreciate evidence, pegged the value of the lost belongings as itemized in the
police report at P120,000.00. The valuation approximated the costs of the lost
belongings. In that context, the valuation of P120,000.00 is correct, but to be regarded
as temperate damages.

In fine, the petitioner, as a common carrier, was required to observe extraordinary

diligence in ensuring the safety of its passengers and their personal belongings. It being
found herein short of the required diligence rendered it liable for the resulting injuries
and damages sustained by Sesante as one of its passengers.

Should the petitioner be further held liable for exemplary damages?

In contracts and quasi-contracts, the Court has the discretion to award exemplary
damages if the defendant acted in a wanton, fraudulent, reckless, oppressive, or
malevolent manner.48Indeed, exemplary damages cannot be recovered as a matter of
right, and it is left to the court to decide whether or not to award them. 49 In
consideration of these legal premises for the exercise of the judicial discretion to grant
or deny exemplary damages in contracts and quasi-contracts against a defendant who
acted in a wanton, fraudulent,' reckless, oppressive, or malevolent manner, the Court
hereby awards exemplary damages to Sesante.

First of all, exemplary damages did not have to be specifically pleaded or proved,
because the courts had the discretion to award them for as long as the evidence so
warranted. In Marchan v. Mendoza,50 the Court has relevantly discoursed: ChanRoblesVirtualawlibrary

x x x. It is argued that this Court is without jurisdiction to adjudicate this

exemplary damages since there was no allegation nor prayer, nor proof, nor
counterclaim of error for the same by the appellees. It is to be observed
however, that in the complaint, plaintiffs "prayed for such other and further
relief as this Court may deem just and equitable." Now, since the body of the
complaint sought to recover damages against the defendant-carrier wherein
plaintiffs prayed for indemnification for the damages they suffered as a result
of the negligence of said Silverio Marchan who is appellant's employee; and
since exemplary damages is intimately connected with general damages,
plaintiffs may not be expected to single out by express term the kind of
damages they are trying to recover against the defendant's carrier. Suffice it
to state that when plaintiffs prayed in their complaint for such other relief and
remedies that may be availed of under the premises, in effect, therefore, the
court is called upon to exercise and use its discretion whether the imposition
of punitive or exemplary damages even though not expressly prayed or
pleaded in the plaintiffs' complaint.

x x x It further appears that the amount of exemplary damages need not be

proved, because its determination depends upon the amount of compensatory
damages that may be awarded to the claimant. If the amount of exemplary
damages need not be proved, it need not also be alleged, and the reason is
obvious because it is merely incidental or dependent upon what the court may
award as compensatory damages. Unless and until this premise is determined
and established, what may be claimed as exemplary damages would amount
to a mere surmise or speculation. It follows as a necessary consequence that
the amount of exemplary damages need not be pleaded in the complaint
because the same cannot be predetermined. One can merely ask that it be
determined by the court if in the use of its discretion the same is warranted by
the evidence, and this is just what appellee has done. (Bold underscoring
supplied for emphasis)
And, secondly, exemplary damages are designed by our civil law to "permit the courts
to reshape behavior that is socially deleterious in its consequence by creating negative
incentives or deterrents against such behavior."51 The nature and purpose for this kind
of damages have been well-stated in People v. Dalisay,52 to wit:ChanRoblesVirtualawlibrary

Also known as 'punitive' or 'vindictive' damages, exemplary or corrective damages

are intended to serve as a deterrent to serious wrong doings, and as a
vindication of undue sufferings and wanton invasion of the rights of an injured
or a punishment for those guilty of outrageous conduct. These terms are
generally, but not always, used interchangeably. In common law, there is preference in
the use of exemplary damages when the award is to account for injury to feelings and
for the sense of indignity and humiliation suffered by a person as a result of an injury
that has been maliciously and wantonly inflicted, the theory being that there should be
compensation for the hurt caused by the highly reprehensible conduct of the defendant
- associated with such circumstances as willfulness, wantonness, malice, gross
negligence or recklessness, oppression, insult or fraud or gross fraud - that intensifies
the injury. The terms punitive or vindictive damages are often used to refer to those
species of damages that may be awarded against a person to punish him for his
outrageous conduct. In either case, these damages are intended in good
measure to deter the wrongdoer and others like him from similar conduct in
the future. (Bold underscoring supplied for emphasis)
The BMI found that the "erroneous maneuvers" during the ill-fated voyage by the
captain of the petitioner's vessel had caused the sinking. After the vessel had cleared
Limbones Point while navigating towards the direction of Fortune Island, the captain
already noticed the listing of the vessel by three degrees to the portside of the vessel,
but, according to the BMI, he did not exercise prudence as required by the situation in
which his vessel was suffering the battering on the starboard side by big waves of
seven to eight meters high and strong southwesterly winds of 25 knots. The BMI
pointed out that he should have considerably reduced the speed of the vessel based on
his experience about the vessel - a close-type ship of seven decks, and of a wide and
high superstructure - being vulnerable if exposed to strong winds and high waves. He
ought to have also known that maintaining a high speed under such circumstances
would have shifted the solid and liquid cargo of the vessel to port, worsening the tilted
position of the vessel. It was only after a few minutes thereafter that he finally ordered
the speed to go down to 14 knots, and to put ballast water to the starboard-heeling
tank to arrest the continuous listing at portside. By then, his moves became an exercise
in futility because, according to the BMI, the vessel was already listing to her portside
between 15 to 20 degrees, which was almost the maximum angle of the vessel's loll. It
then became inevitable for the vessel to lose her stability.

The BMI concluded that the captain had executed several starboard maneuvers despite
the critical situation of the vessel, and that the maneuvers had greatly added to the
tilting of the vessel. It observed:
ChanRoblesVirtualawlibrary

x x x In the open seas, with a fast speed of 14 knots, advance maneuvers such
as this would tend to bring the body of the ship in the opposite side. In
navigational terms, this movement is described as the centripetal force. This
force is produced by the water acting on the side of the ship away from the
center of the turn. The force is considered to act at the center of lateral
resistance which, in this case, is the centroid of the underwater area of the
ship's side away from the center of the turn. In the case of the Princess, when
the Captain maneuvered her to starboard, her body shifted its weight to port.
Being already inclined to an angle of 15 degrees, coupled with the
instantaneous movement of the ship, the cargoes below deck could have
completely shifted its position and weight towards portside. By this time, the
ship being ravaged simultaneously by ravaging waves and howling winds on
her starboard side, finally lost her grip.53 chanroblesvirtuallawlibrary

Clearly, the petitioner and its agents on the scene acted wantonly and
recklessly. Wanton and reckless are virtually synonymous in meaning as respects
liability for conduct towards others.54Wanton means characterized by extreme
recklessness and utter disregard for the rights of others; or marked by or manifesting
arrogant recklessness of justice or of rights or feelings of others. 55 Conduct
is reckless when it is an extreme departure from ordinary care, in a situation in which a
high degree of danger is apparent. It must be more than any mere mistake resulting
from inexperience, excitement, or confusion, and more than mere thoughtlessness or
inadvertence, or simple inattention.56 chanrobleslaw

The actuations of the petitioner and its agents during the incident attending the
unfortunate sinking of the M/V Princess of the Orient were far below the standard of
care and circumspection that the law on common carriers demanded. Accordingly, we
hereby fix the sum of P1,000,000.00 in order to serve fully the objective of exemplarity
among those engaged in the business of transporting passengers and cargo by sea. The
amount would not be excessive, but proper. As the Court put it in Pereña v. Zarate:57
Anent the P1,000,000.00 allowed as exemplary damages, we should not reduce the
amount if only to render effective the desired example for the public good. As a
common carrier, the Perenas needed to be vigorously reminded to observe their duty to
exercise extraordinary diligence to prevent a similarly senseless accident from
happening again. Only by an award of exemplary damages in that amount would suffice
to instill in them and others similarly situated like them the ever-present need for
greater and constant vigilance in the conduct of a business imbued with public
interest.58 (Bold underscoring supplied for emphasis)
WHEREFORE, the Court AFFIRMS the decision promulgated on June 27, 2005 with
the MODIFICATIONS that: (a) the amount of moral damages is fixed at
P1,000,000.00; (b) the amount of P1,000,000.00 is granted as exemplary damages;
and (c) the sum of P120,000.00 is allowed as temperate damages, all to be paid to the
heirs of the late Napoleon Sesante. In addition, all the amounts hereby awarded shall
earn interest of 6% per annum from the finality of this decision until fully paid. Costs of
suit to be paid by the petitioner.

SO ORDERED. chanRoblesvirtualLawlibrary

G.R. No. 111386 August 28, 1995

METAL FORMING CORPORATION, petitioner,

vs.
OFFICE OF THE PRESIDENT, represented by the EXECUTIVE SECRETARY, VIRGILIO
M. DEL ROSARIO and CORAZON PAREDES-DEL ROSARIO, respondents.

DECISION 1

BELLOSILLO, J.:

On 21 November 1990 the private respondents, spouses Virgilio M. del Rosario and
Corazon Paredes-del Rosario, filed a letter-complaint with the Department of Trade and
Industry (DTI) charging petitioner METAL FORMING CORPORATION with violation of Sec.
3 of Act No. 3740, "An Act to Penalize Fraudulent Advertising, Mislabeling or Misbranding of
any Product, Stocks, Bonds, Etc." Specifically it provides:

Sec. 3. It shall be unlawful for any person, firm or corporation, either as principal or
agent, in any handbill, billboard, sign, pamphlet, circular, projected lantern slides, or
any other form of advertising whatsoever printed, displayed, or circulated in the
Philippine Islands, to misrepresent the character, value, properties or condition of
any article offered or exposed for sale, barter, or exchange, or of the materials of
which the article is composed.

The spouses alleged, among other things, that in selling to the public roofing materials
known as "Banawe" shingles, petitioner made representations on the durability of the product
and the sturdiness of its installation. Aside from massive advertisements in print media and
television, it also distributed brochures to its prospective customers containing the same
representations.

The alleged advertisements were not submitted in evidence at the DTI except a copy of a
brochure which was among those distributed by petitioner to prospective customers and
which prompted private respondents to buy the "Banawe" shingles and had them installed at
their residence. On the first page of the brochure appears the following: "STRUCTURALLY
SAFE AND STRONG
. . . The BANAWE METAL TILE structure acts as a single unit against wind and storm
pressure due to the strong hook action on its overlaps." Barely two (2) months after
2

completion of the installation, portions of the roof of private respondents were blown away by
strong winds brought about by typhoon "Ruping."

On 29 May 1991 the DTI rendered a decision ordering petitioner to pay an administrative fine
of P10,000.00, otherwise, for failure to do so within ten (10) days from finality of the decision,
the business name registration of petitioner, if any, would be deemed suspended and its
establishment closed until the fine was fully paid. Its decision was based on the finding that
3

petitioner misrepresented that (a) the Banawe metal tile structure was strong against wind
and storm pressure, and (b) it acted as a single unit against wind and storm pressure.
According to the DTI, letter (a) was a misrepresentation as far as the metal tile structure
installed at the residence of private respondents was concerned because as the records
showed, strong winds blew off part of the structure/roof; and letter (b) was likewise a
misrepresentation as far as the structure installed at the residence of private respondents
was concerned because the records showed that the structure acted in parts when strong
winds blew. A part remained while another part was blown off. Therefore petitioner
misrepresented the character of the merchandise offered. 4

On 9 January 1992 the motion to reconsider the decision was denied. 5

On 30 April 1993, on appeal to respondent Office of the President, the decision of the DTI
was affirmed in toto. On 18 June 1993 the motion for its reconsideration was denied. On 2
6

August 1993 the second motion for reconsideration was likewise denied except that public
respondent reversed its previous finding that petitioner also misrepresented that its product
was "strong when there (was) wind and storm pressure" for the reason that —

A careful reading of the pertinent portion of the brochure, supra, readily reveals that
what (petitioner) represented is that its (product) "acts as a single unit against wind
and strong (storm?) pressure due to the strong hook (action) on its overlaps."

Nowhere is it mentioned in the brochure that "the structure is strong when there is
wind and storm pressure."

As correctly pointed out by (petitioner), this is already "misinterpretation" or a

strained interpretation, to say the least. While the term "strong" is indeed found in
said brochure, it was there mentioned only to describe the hook's action on the
overlaps.7

Petitioner raises as an issue whether the statement in its brochure that "the Banawe metal
tile acts as a single unit against wind and storm pressure due to the strong hook action on its
overlaps" is a misrepresentation within the contemplation of Sec. 3 of Act No. 3740 simply
because a section or portion of the roof of private respondents was blown away by a strong
typhoon.

Petitioner asseverates that under Art. 1174 of the Civil Code it should not be made
responsible for the adverse consequences of a fortuitous event such as typhoon "Ruping"
which, as admitted by private respondents, caused the blowing away of a section or portion
of their roof. Besides, its product acts as a single unit specifically against storm pressure. A
cursory examination of the questioned statement in the brochure shows that even without
availing of said provision there could not have been any misrepresentation under Sec. 3 of
Act No. 3740. What appears to be emphasized in the brochure is the strong hook action on
 the overlaps of the tiles. There is no evidence whatsoever that single panels of the tiles from
the same section or portion were blown away while other panels in the same section or
portion remained; or that individual panels from different sections or portions were blown
away. It is common knowledge in the trade that roofs are not monolithically constructed but
are made up of sections. A section can be entirely blown off without affecting the others.
Consequently even if only one section or portion was blown away, it can still be reasonably
concluded that the tiles in that section acted as a single unit.

The claim of petitioner that roofs are made up of sections such that even if only one section
or portion is blown away the tiles in that section can be said to have acted as a single unit,
may appear to be a sound argument. Nevertheless, it is a defense that should have been
established at the administrative level. We take into account the finding of the DTI, that
a part of the roof was blown away while a part remained. There was no reference to a
section or distinct portion of the roof that was blown away nor to a section or distinct portion
that remained. Public respondent arrived at the same finding. Whether the part that was
blown away and that which remained constitute sections is a question of fact that we will not
determine here. This Court is not a trier of facts. Moreover, we agree with the observation of
the Solicitor General that —

Petitioner (gives) a restricted interpretation of its statement that the structure of its
roof tiles has the capacity to act as a single unit . . . Surely, in buying the subject roof
tiles, the private respondents correctly relied on petitioner's representations as it
would be commonly and reasonably interpreted by the buying public, viz., that since
its structure acts as a single unit, wind and storm pressure would not be able to blow
away any part or portion thereof. 8

Petitioner harps on the distinction between a tropical storm and a typhoon. According to the
Philippine Atmospheric, Geophysical and Astronomical Services Administration, "the
maximum winds about the center of the disturbance (tropical storm) range from 64 to 117
kilometers per hour (kph) or 18 to 32 meters per second (mps) or 34 to 64 knots, while the
maximum winds about the center of the disturbance (typhoon) are 118 kilometers per hour or
33 meters per second or 65 knots or more. 9

Contrary to petitioner's pretension, the phrase "against wind and storm pressure" is not
couched in specific terms because as correctly pointed out by the Office of the Solicitor
General —

. . . . in deciding whether or not to buy the subject roof tiles being advertised by
petitioner, it is reasonable to assume that buyers, like private respondents, would
consider (said) phrase . . . as referring to all kinds of weather disturbances being
experienced in our country during the rainy season, be it a mere tropical depression,
a storm or even a typhoon. 10

In this regard, public respondent opined, which we sustain, that —

(Petitioner) cannot place undue reliance on the distinction between or among the
terms "storm," "typhoon" or "cyclone" because it itself had caused the
misrepresentations to be couched in general terms. Also, considering the weather
situation in the country where storms and typhoons are not a rare or unusual
occurrence, these terms ought to, as they should only be, understood as
comprehending and referring practically to the same thing, at least insofar as the
jural effects of misrepresentations (petitioner's) are concerned. 11
On a different angle, petitioner avers that under Art. 1174 of the Civil Code it should not be
made responsible for the adverse consequences of a fortuitous event such as the typhoon
which caused the section or portion of private respondents' roof to be blown away.

Article 1174 provides that subject to certain exceptional, no person shall be for those events
which could not be foreseen, or which though foreseen were inevitable. A fortuitous event
presents the following characteristics: (a) the cause of the unforeseen and unexpected
occurrence, or the failure of the debtor to comply with his obligations, must be independent
of the human will; (b) it must be impossible to foresee the event which constitutes the caso
fortuito, or if it can be foreseen, it must be imposible, to avoid; (c) the occurrence must be
such as to render it impossible for the debtor to fulfill his obligation in a normal manner; and,
(d) the obligor must be free from any participation in the aggravation of the injury resulting to
the creditor.

Based on the foregoing, in order that a fortuitous event may exempt a person from liability, it
is necessary that he be free from negligence. An act of God cannot be urged for the
protection of a person who has been guilty of gross negligence in not trying to avert its
results. When the negligence of a person concurs with an act of God in producing a loss,
such person is not exempt from liability by showing that the immediate cause of the damage
was the act of God. 12

As correctly viewed by public respondent, although the occurrence of a typhoon is a

fortuitous event which by itself might have exempted petitioner from liability to private
respondents —

. . . . it cannot efface the fundamental fact that (petitioner) acted in bad faith and/or
with gross negligence in failing to deliver the necessary accessories for the proper
installation of the structure . . . . and actually installed inferior roofing materials at
(private respondents') residence, in violation of the proper installation procedure
expressly specified in the former's brochures and advertisements for installation, i.e.,
the metal tile attached to the roof panels should be by two (2) self-drilling screws for
one (1) metal cleat. However, instead of conforming with this procedure, (petitioner)
attached some of the metal cleats with only one (1)-inch ordinary nail each and
others were fastened with only one (1) wood screw each. 13

To a large extent, the capacity of petitioner's roof tiles to act as a single unit depends on the
strong hook action on the overlaps of the individual parts which comprise the whole
structure. However, as inferred by the Solicitor General —

. . . . there can only be a strong hook action if the subject roof tiles were properly
installed by petitioner complete with all the necessary accessories thereto . . . . 14

As it turned out, the tiles were improperly installed thus contributing to the damage to private
respondents' roof.

By reason of the special knowledge and expertise of the DTI and public respondent over
matters falling under their jurisdiction, they are in a better position to pass judgment thereon
and their findings of fact in that regard are generally accorded respect, if not with finality, by
the courts. Furthermore, petitioner failed to show any grave abuse of discretion on the part
15

of public respondent in affirming the ruling of the DTI. There is no reason indeed to rule
otherwise.
 We therefore uphold the finding of the DTI and public respondent that petitioner
misrepresented the character of its product which is prohibited under Sec. 3 of Act. No.
3740. The Banawe Metal Tile structure did not act as a single unit against wind and storm
pressure due to the weak hook action on its overlaps. However we note that Sec. 6 of said
Act, as amended by C.A. 46, provides the penalty of fine of not less than P200.00 and not
more than P5,000.00. Conformably therewith, we have no choice but to reduce the fine
imposed on petitioner from P10,000.00 to P5,000.00.

WHEREFORE, finding no grave abuse of discretion amounting to lack or excess of

jurisdiction, the petition is DISMISSED. The decision dated 30 April 1993, the order dated 18
June 1993, and the resolution dated 2 August 1993 of public respondent are AFFIRMED
except as to the fine of P10,000.00 which is reduced to P5,000.00.

SO ORDERED.

SECOND DIVISION

[G.R. NO. 167195 : May 8, 2009]

ASSET PRIVATIZATION TRUST, Petitioner, v. T.J. ENTERPRISES, Respondent.

DECISION

TINGA, J.:

This is a Rule 45 petition1 which seeks the reversal of the Court of Appeals' decision 2and
resolution3 affirming the RTC's decision4 holding petitioner liable for actual damages for
breach of contract.

Petitioner Asset Privatization Trust5 (petitioner) was a government entity created for the
purpose to conserve, to provisionally manage and to dispose assets of government
institutions.6 Petitioner had acquired from the Development Bank of the Philippines
(DBP) assets consisting of machinery and refrigeration equipment which were then
stored at Golden City compound, Pasay City. The compound was then leased to and in
the physical possession of Creative Lines, Inc., (Creative Lines). These assets were
being sold on an as-is-where-is basis.

On 7 November 1990, petitioner and respondent entered into an absolute deed of sale
over certain machinery and refrigeration equipment identified as Lots Nos. 2, 3 and 5.
Respondent paid the full amount of P84,000.00 as evidenced by petitioner's Receipt No.
12844. After two (2) days, respondent demanded the delivery of the machinery it had
purchased. Sometime in March 1991, petitioner issued Gate Pass No. 4955. Respondent
was able to pull out from the compound the properties designated as Lots Nos. 3 and 5.
However, during the hauling of Lot No. 2 consisting of sixteen (16) items, only nine (9)
items were pulled out by respondent. The seven (7) items that were left behind
consisted of the following: (1) one (1) Reefer Unit 1; (2) one (1) Reefer Unit 2; (3) one
(1) Reefer Unit 3; (4) one (1) unit blast freezer with all accessories; (5) one (1) unit
chest freezer; (6) one (1) unit room air-conditioner; and (7) one (1) unit air
compressor. Creative Lines' employees prevented respondent from hauling the
remaining machinery and equipment.
Respondent filed a complaint for specific performance and damages against petitioner
and Creative Lines.7 During the pendency of the case, respondent was able to pull out
the remaining machinery and equipment. However, upon inspection it was discovered
that the machinery and equipment were damaged and had missing parts.

Petitioner argued that upon the execution of the deed of sale it had complied with its
obligation to deliver the object of the sale since there was no stipulation to the
contrary. It further argued that being a sale on an as-is-where-is basis, it was the duty
of respondent to take possession of the property. Petitioner claimed that there was
already a constructive delivery of the machinery and equipment.

The RTC ruled that the execution of the deed of absolute sale did not result in
constructive delivery of the machinery and equipment. It found that at the time of the
sale, petitioner did not have control over the machinery and equipment and, thus, could
not have transferred ownership by constructive delivery. The RTC ruled that petitioner
is liable for breach of contract and should pay for the actual damages suffered by
respondent.

On petitioner's appeal, the Court of Appeals affirmed in toto the decision of the RTC.

Hence this petition.

Before this Court, petitioner raises issues by attributing the following errors to the Court
of Appeals, to wit:

I.

The Court of Appeals erred in not finding that petitioner had complied with its obligation
to make delivery of the properties subject of the contract of sale.

II.

The Court of Appeals erred in not considering that the sale was on an "as-is-where-is"
basis wherein the properties were sold in the condition and in the place where they
were located.

III.

The Court of Appeals erred in not considering that respondent's acceptance of

petitioner's disclaimer of warranty forecloses respondent's legal basis to enforce any
right arising from the contract.

IV.

The reason for the failure to make actual delivery of the properties was not attributable
to the fault and was beyond the control of petitioner. The claim for damages against
petitioner is therefore bereft of legal basis.8
The first issue hinges on the determination of whether there was a constructive delivery
of the machinery and equipment upon the execution of the deed of absolute sale
between petitioner and respondent.

The ownership of a thing sold shall be transferred to the vendee upon the actual or
constructive delivery thereof.9 The thing sold shall be understood as delivered when it is
placed in the control and possession of the vendee. 10

As a general rule, when the sale is made through a public instrument, the execution
thereof shall be equivalent to the delivery of the thing which is the object of the
contract, if from the deed the contrary does not appear or cannot clearly be inferred.
And with regard to movable property, its delivery may also be made by the delivery of
the keys of the place or depository where it is stored or kept. 11 In order for the
execution of a public instrument to effect tradition, the purchaser must be placed in
control of the thing sold.12

However, the execution of a public instrument only gives rise to a prima

faciepresumption of delivery. Such presumption is destroyed when the delivery is not
effected because of a legal impediment.13 It is necessary that the vendor shall have
control over the thing sold that, at the moment of sale, its material delivery could have
been made.14 Thus, a person who does not have actual possession of the thing sold
cannot transfer constructive possession by the execution and delivery of a public
instrument.15

In this case, there was no constructive delivery of the machinery and equipment upon
the execution of the deed of absolute sale or upon the issuance of the gate pass since it
was not petitioner but Creative Lines which had actual possession of the property. The
presumption of constructive delivery is not applicable as it has to yield to the reality
that the purchaser was not placed in possession and control of the property.

On the second issue, petitioner posits that the sale being in an as-is-where-is basis,
respondent agreed to take possession of the things sold in the condition where they are
found and from the place

where they are located. The phrase as-is where-is basis pertains solely to the physical
condition of the thing sold, not to its legal situation.16 It is merely descriptive of the
state of the thing sold. Thus, the as-is where-is basis merely describes the actual state
and location of the machinery and equipment sold by petitioner to respondent. The
depiction does not alter petitioner's responsibility to deliver the property to
respondent. ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

Anent the third issue, petitioner maintains that the presence of the disclaimer of
warranty in the deed of absolute sale absolves it from all warranties, implied or
otherwise. The position is untenable.

The vendor is bound to transfer the ownership of and deliver, as well as warrant the
thing which is the object of the sale.17 Ownership of the thing sold is acquired by the
vendee from the moment it its delivered to him in any of the ways specified in articles
1497 to 1501, or in any other manner signifying an agreement that the possession is
transferred from the vendor to the vendee.18 A perusal of the deed of absolute sale
shows that both the vendor and the vendee represented and warranted to each other
that each had all the requisite power and authority to enter into the deed of absolute
sale and that they shall perform each of their respective obligations under the deed of
absolute in accordance with the terms thereof.19 As previously shown, there was no
actual or constructive delivery of the things sold. Thus, petitioner has not performed its
obligation to transfer ownership and possession of the things sold to respondent.

As to the last issue, petitioner claims that its failure to make actual delivery was beyond
its control. It posits that the refusal of Creative Lines to allow the hauling of the
machinery and equipment was unforeseen and constituted a fortuitous event.

The matter of fortuitous events is governed by Art. 1174 of the Civil Code which
provides that except in cases expressly specified by the law, or when it is otherwise
declared by stipulation, or when the nature of the obligation requires assumption of
risk, no person shall be responsible for those events which could not be foreseen, or
which though foreseen, were inevitable. The elements of a fortuitous event are: (a) the
cause of the unforeseen and unexpected occurrence, must have been independent of
human will; (b) the event that constituted the caso fortuito must have been impossible
to foresee or, if foreseeable, impossible to avoid; (c) the occurrence must have been
such as to render it impossible for the debtors to fulfill their obligation in a normal
manner, and; (d) the obligor must have been free from any participation in the
aggravation of the resulting injury to the creditor. 20

A fortuitous event may either be an act of God, or natural occurrences such as floods or
typhoons, or an act of man such as riots, strikes or wars. 21 However, when the loss is
found to be partly the result of a person's participation whether by active intervention,
neglect or failure to act the whole occurrence is humanized and removed from the rules
applicable to a fortuitous event.22

We quote with approval the following findings of the Court of Appeals, to wit:

We find that Creative Lines' refusal to surrender the property to the vendee does not
constitute force majeure which exculpates APT from the payment of damages. This
event cannot be considered unavoidable or unforeseen. APT knew for a fact that the
properties to be sold were housed in the premises leased by Creative Lines. It should
have made arrangements with Creative Lines beforehand for the smooth and orderly
removal of the equipment. The principle embodied in the act of God doctrine strictly
requires that the act must be one occasioned exclusively by the violence of nature and
all human agencies are to be excluded from creating or entering into the cause of the
mischief. When the effect, the cause of which is to be considered, is found to be in part
the result of the participation of man, whether it be from active intervention or neglect,
or failure to act, the whole occurrence is thereby humanized, as it were, and removed
from the rules applicable to the acts of God.23

Moreover, Art. 1504 of the Civil Code provides that where actual delivery has been
delayed through the fault of either the buyer or seller the goods are at the risk of the
party in fault. The risk of loss or deterioration of the goods sold does not pass to the
buyer until there is actual or constructive delivery thereof. As previously discussed,
there was no actual or constructive delivery of the machinery and equipment. Thus, the
risk of loss or deterioration of property is borne by petitioner. Thus, it should be liable
for the damages that may arise from the delay. ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

Assuming arguendo that Creative Lines' refusal to allow the hauling of the machinery
and equipment is a fortuitous event, petitioner will still be liable for damages. This
Court agrees with the appellate court's findings on the matter of damages, thus:

Article 1170 of the Civil Code states: "Those who in the performance of their obligations
are guilty of fraud, negligence, or delay and those who in any manner contravene the
tenor thereof are liable for damages." In contracts and quasi-contracts, the damages
for which the obligor who acted in good faith is liable shall be those that are the natural
and probable consequences of the breach of the obligation, and which the parties have
foreseen or could have reasonably foreseen at the time the obligation was
constituted.24 The trial court correctly awarded actual damages as pleaded and proven
during trial.25

WHEREFORE, the Court AFFIRMS in toto the Decision of the Court of Appeals dated 31
August 2004. Cost against petitioner.

SO ORDERED.

G.R. No. 119729 January 21, 1997

ACE-AGRO DEVELOPMENT CORPORATION, petitioner,

vs.
COURT OF APPEALS and COSMOS BOTTLING CORPORATION, respondents.

MENDOZA, J.:

This case originated in a complaint for damages for breach of contract which petitioner filed against
private respondent. From the decision of the Regional Trial Court, Branch 72, Malabon, Metro
Manila, finding private respondent guilty of breach of contract and ordering it to pay damages,
private respondent appealed to the Court of Appeals which reversed the trial court's decision and
dismissed the complaint for lack of merit. Petitioner in turn moved for a reconsideration, but its
motion was denied. Hence, this petition for review on certiorari.

The facts are as follows:

Petitioner Ace-Agro Development Corporation and private respondent Cosmos Bottling Corporation
are corporations duly organized and existing under Philippine laws. Private respondent Cosmos
Bottling Corp. is engaged in the manufacture of soft drinks. Since 1979 petitioner Ace-Agro
Development Corp. (Ace-Agro) had been cleaning soft drink bottles and repairing wooden shells for
Cosmos, rendering its services within the company premises in San Fernando, Pampanga. The
parties entered into service contracts which they renewed every year. On January 18, 1990, they
signed a contract covering the period January 1, 1990 to December 31, 1990. Private respondent
had earlier contracted the services of Aren Enterprises in view of the fact that petitioner could handle
only from 2,000 to 2,500 cases a day and could not cope with private respondent's daily production
of 8,000 cases. Unlike petitioner, Aren Enterprises rendered service outside private respondent's
plant.

On April 25, 1990, fire broke out in private respondent's plant, destroying, among other places, the
area where petitioner did its work. As a result, petitioner's work was stopped.

On May 15, 1990, petitioner asked private respondent to allow it to resume its service, but petitioner
was advised that on account of the fire, which had "practically burned all . . . old soft drink bottles
and wooden shells," private respondent was terminating their contract.

Petitioner expressed surprise at the termination of the contract and requested private respondent, on
June 13, 1990, to reconsider its decision and allow petitioner to resume its work in order to "cushion
the sudden impact of the unemployment of many of [its] workers." As it received no reply from
private respondent, petitioner, on June 20, 1990, informed its employees of the termination of their
employment. Petitioner's memorandum read: 1

MEMORANDUM TO : All Workers/Union Members

THRU : Mr. Angelito B. Catalan
Local Chapter President
Bisig Manggagawa sa Ace Agro-NAFLU

This is to inform you that the Cosmos Bottling Corp. has sent a letter to Ace Agro-
Development Corp. terminating our contract with them.

However, we are still doing what we can to save our contract and resume our
operations, though this might take some time.

We will notify you whatever would be the outcome of our negotiation with them in due
time.

Truly yours,

ACE AGRO-
DEVELOPME
NT CORP.

(Sgd.)
ANTONIO L.
ARQUIZA
Manager

This led the employees to file a complaint for illegal dismissal before the Labor Arbiter against
petitioner and private respondent.

On July 17, 1990, petitioner sent another letter to private respondent, reiterating its request for
reconsideration. Its letter read:
2
 COSMOS BOTTLING CORPORATION
San Isidro MacArthur Highway
San Fernando, Pampanga

Attention: Mr. Norman P. Uy

General Services Manager

Gentlemen:

In our letter to you dated June 13, 1990 seeking your kind reconsideration of your
sudden drastic decision to terminate our mutually beneficial contract of long standing,
it is more than a month now but our office has not received a reply from you.

Our workers, who have been anxiously waiting for the resumption of the operations
and who are the ones most affected by your sudden decision, are now becoming
restless due to the financial difficulties they are now suffering.

We are, therefore, again seeking for the reconsideration of your decision to help
alleviate the sufferings of the displaced workers, which we also have to consider for
humanitarian reason.

Yours very
truly,

ACE AGRO-
DEVELOPME
NT CORP.

(Sgd.)
ANTONIO I.
ARQUIZA
Manager

In response, private respondent advised petitioner on August 28, 1990 that the latter could resume
the repair of wooden shells under terms similar to those contained in its contract but work had to be
done outside the company premises. Private respondent's letter read:
3

MR. ANTONIO I. ARQUIZA

Manager
ACE-AGRO DEVELOPMENT CORPORATION
165 J.P. Bautista Street
Malabon, Metro Manila

Dear Mr. Arquiza:

We are pleased to inform you that COSMOS BOTTLING CORPORATION, San

Fernando Plant is again accepting job-out contract for the repair of our wooden
shells.
 Work shall be done outside the premises of the plant and under similar terms you
previously had with the company. We intend to give you priority so please see or
contact me at my office soonest for the particulars regarding the job.

Here is looking forward to doing business with you at the earliest possible time.

(Sgd.)
DANIL
O M.
DE
CASTR
O
Plant
Genera
l
Manag
er

Petitioner refused the offer, claiming that to do its work outside the company's premises would make
it (petitioner) incur additional costs for transportation which "will eat up the meager profits that [it]
realizes from its original contract with Cosmos." In subsequent meetings with Danilo M. de Castro,
Butch Ceña and Norman Uy of Cosmos, petitioner's manager, Antonio I. Arquiza, asked for an
extension of the term of the contract in view of the suspension of work. But its request was
apparently turned down.

On November 7, 1990, private respondent advised petitioner that the latter could then resume its
work inside the plant in accordance with its original contract with Cosmos. Private respondent's
letter stated:
4

MR. ANTONIO I. ARQUIZA

General Manager
Ace-Agro Development Corporation
165 J. P. Bautista St., Malabon
Metro Manila

Dear Mr. Arquiza:

This is to officially inform you that you can now resume the repair of wooden shells
inside the plant according to your existing contract with the Company.

Please see Mr. Ener G. Ocampo, OIC-PDGS, on your new job site in the Plant.

Very truly
yours,

COSMOS
BOTTLING
CORPORATIO
N
 (Sgd.)
MICHAEL M.
ALBINO
VP-Luzon/Plan
t General
Manager

On November 17, 1990, petitioner rejected private respondent's offer, this time, citing the fact that
there was a pending labor case. Its letter to private respondent stated:
5

Mr. Michael M. Albino

VP-Luzon/Plant General Manager
Cosmos Bottling Corporation
San Fernando, Pampanga

Dear Mr. Albino,

This is in connection with your letter dated November 7, 1990 regarding the
resumption of the repair of your wooden shells inside San Fernando, Pampanga
Plant according to the existing contract with your company.

At present, there is a pending case before the Department of Labor and Employment
in San Fernando, Pampanga which was a result of the premature termination of the
said existing contract with your company. In view of that, we find it proper for us to
work for the resolution of the said pending case and include in the Compromise
Agreement the matter of the resumption of the repair of wooden shells in your San
Fernando, Pampanga Plant.

Thank you very much.

Very truly
yours,

ACE AGRO-
DEVELOPME
NT CORP.

(Sgd.)
ANTONIO I.
ARQUIZA
Manager

On January 3, 1991, petitioner brought this case against private respondent for breach of contract
and damages in the Regional Trial Court of Malabon. It complained that the termination of its service
contract was illegal and arbitrary and that, as a result, it stood to lose profits and to be held liable to
its employees for backwages, damages and/or separation pay.

On January 16, 1991, a decision was rendered in the labor case, finding petitioner liable for the
claims of its employees. Petitioner was ordered to reinstate the employees and pay them
backwages. However, private respondent Cosmos was absolved from the employees' claims on the
ground that there was no privity of contract between them and private respondent.
On the other hand, in its decision rendered on November 21, 1991, the RTC found private
respondent guilty of breach of contract and ordered it to pay damages to petitioner. Petitioner's claim
for reimbursement for what it had paid to its employees in the labor case was denied. The dispositive
portion of the trial court's decision read:

WHEREFORE, premises considered, judgment is hereby rendered in favor of plaintiff

Ace-Agro Development Corporation and against defendant Cosmos Bottling
Corporation, ordering the latter to pay to the former the following:

a) The amount of P1,008,418.01 as actual damages;

b) P100,000.00 as corrective or exemplary damages;

c) The amount of P50,000.00 as and for attorney's fees; and

d) Costs and expenses of litigation.

Defendant's counterclaims are dismissed.

SO ORDERED.

Private respondent appealed to the Court of Appeals, which on December 29, 1994, reversed the
trial court's decision and dismissed petitioner's complaint. The appellate court found that it was
petitioner which had refused to resume work, after failing to secure an extension of its contract.
Petitioner now seeks a review of the Court of Appeals' decision.

First. Petitioner claims that the appellate court erred "in ruling that respondent was justified in
unilaterally terminating the contract on account of a force majeure." Quite possibly it did not
understand the appellate court's decision, or it would not be contending that there was no valid
cause for the termination of the contract but only for its suspension. The following is what the
appellate court said:6

Article 1231 of the New Civil Code on extinguishment of obligations does not
specifically mention unilateral termination as a mode of extinguishment of obligation
but, according to Tolentino, "there are other causes of extinguishment of obligations
which are not expressly provided for in this chapter" (Tolentino, Civil Code of the
Phils., Vol. IV, 1986 ed., p. 273). He further said:

But in some contracts, either because of its indeterminate duration or

because of the nature of the prestation which is its object, one of the
parties may free himself from the contractual tie by his own will
(unilateral extinguishment); . . . (p. 274-275, Ibid)

And that was just what defendant-appellant did when it unilaterally terminated the
agreement it had with plaintiff-appellee by sending the May 23, 1990 letter. As per its
letter, the reason given by defendant-appellant for unilaterally terminating the
agreement was because the April 25, 1990 fire practically burned all of the softdrink
bottles and wooden shells which plaintiff-appellee was working on under the
agreement. What defendant-appellant was trying to say was that the prestation or
the object of their agreement had been lost and destroyed in the above-described
 fire. Apparently, the defendant-appellant would like this situation to fall within what —
according to Tolentino — would be:

. . . (O)bligations may be extinguished by the happening of

unforeseen events, under whose influence the obligation would never
have been contracted, because in such cases, the very basis upon
which the existence of the obligation is founded would be wanting.

Both parties admitted that the April 25, 1990 fire was a force majeure or unforeseen
event and that the same even burned practically all the softdrink bottles and wooden
shells — which are the objects of the agreement. But the story did not end there.

It is true that defendant-appellant still had other bottles that needed cleaning and
wooden shells that needed repairing (pp. 110-111, orig. rec.); therefore, the
suspension of the work of the plaintiff-appellee brought about by the fire is, at
best, temporary as found by the trial court. Hence, plaintiff-appellee's letters of
reconsideration of the termination of the agreement addressed to defendant-
appellant dated June 13, 1990 and July 17, 1990.

It is obvious that what petitioner thought was the appellate court's ruling is merely its summary of
private respondent's allegations. Precisely the appellate court, does not agree with private
respondent, that is why, in the last paragraph of the above excerpt, the court says that there was no
cause for terminating the contract but at most a "temporary suspension of work." The court thus
rejects private respondent's claim that, as a result of the fire, the obligation of contract must be
deemed to have been extinguished.

Nonetheless, the Court of Appeals found that private respondent had reconsidered its decision to
terminate the contract and tried to accommodate the request of petitioner, first, by notifying petitioner
on August 28, 1990 that it could resume work provided that this was done outside the premises and,
later, on November 7, 1990, by notifying petitioner that it could then work in its premises, under the
terms of their contract. However, petitioner unjustifiably refused the offer because it wanted an
extension of the contract to make up for the period of inactivity. As the Court of Appeals said in its
decision:7

It took defendant-appellant time to make a reply to plaintiff-appellee's letters. But

when it did on August 28, 1990, it granted plaintiff-appellee priority to resume its work
under the terms of their agreement (but outside its premises), and the plaintiff-
appellee refused the same on the ground that working outside the defendant-
appellant's San Fernando Plant would mean added transportation costs that would
offset any profit it would earn.

The appellee was without legal ground to refuse resumption of work as offered by the
appellant, under the terms of their above agreement. It could not legally insist on
staying inside property it did not own, nor was under lease to
it . . . . In its refusal to resume its work because of the additional transportation costs
to be brought about by working outside the appellant's San Fernando plant, the
appellee could be held liable for damages for breach of contract.

xxx xxx xxx

Thereafter, appellant sent its November 7, 1990 letter to appellee, this time
specifically stating that plaintiff-appellee can now resume work in accordance with
 their existing agreement. This time, it could not be denied that by the tenor of the
letter, appellant was willing to honor its agreement with appellee, that it had finally
made a reconsideration of appellee's plea to resume work under the contract. But
again, plaintiff-appellee refused this offer to resume work.

Why did the appellee refuse to resume work? Its November 17, 1990 letter stated
that it had something to do with the settlement of the NLRC case filed against it by its
employees. But that was not the real reason. In his cross-examination, the witness
for appellee stated that its real reason for refusing to resume work with the appellant
was — as in its previous refusal — because it wanted an extension of the period or
duration of the contract beyond December 31, 1991, to cover the period within which
it was unable to work.

The agreement between the appellee and the appellant is with a resolutory period,
beginning from January 1, 1990 and ending on December 31, 1990. When the fire
broke out on April 25, 1990, there resulted a suspension of the appellee's work as
per agreement. But this suspension of work due to force majeure did not merit an
automatic extension of the period of the agreement between them. According to
Tolentino:

The stipulation that in the event of a fortuitous event or force majeure

the contract shall be deemed suspended during the said period does
not mean that the happening of any of those events stops the running
of the period the contract has been agreed upon to run. It only
relieves the parties from the fulfillment of their respective obligations
during that time. If during six of the thirty years fixed as the duration
of a contract, one of the parties is prevented by force majeure to
perform his obligation during those years, he cannot after the
expiration of the thirty-year period, be compelled to perform his
obligation for six more years to make up for what he failed to perform
during the said six years, because it would in effect be an extension
of the term of the contract. The contract is stipulated to run for thirty
years, and the period expires on the thirtieth year; the period of six
years during which performance by one of the parties is prevented by
force majeure cannot be deducted from the period stipulated.

In fine, the appellant withdrew its unilateral termination of its agreement with appellee
in its letter dated November 7, 1990. But the appellee's refusal to resume work was,
in effect, a unilateral termination of the parties' agreement — an act that was without
basis. When the appellee asked for an extension of the period of the contract beyond
December 31, 1990 it was, in effect, asking for a new contract which needed the
consent of defendant-appellant. The appellee might be forgiven for its first refusal
(pertaining to defendant-appellant's August 28, 1990 letter), but the second refusal
must be construed as a breach of contract by plaintiff-appellee. . . .

The Court of Appeals was right that petitioner had no basis for refusing private respondent's offer
unless petitioner was allowed to carry out its work in the company premises. That petitioner would
incur additional cost for transportation was not a good reason for its refusal. Petitioner has not
shown that on August 28, 1990, when it was notified of the private respondent's offer, the latter's
premises had so far been restored so as to permit petitioner to resume work there. In fact, even
when petitioner was finally allowed to resume work within the plant, it was not in the former work
place but in a new one, which shows that private respondent's reason for not granting petitioner's
request was not just a pretext.

Nor was petitioner justified in refusing to resume work on November 7 when it was again notified by
petitioner to work. Although it cited the pending labor case as reason for turning down private
respondent's offer, it would appear that the real reason for petitioner's refusal was the fact that the
term of the contract was expiring in two months and its request for an extension was not granted.
But, as the appellate court correctly ruled, the suspension of work under the contract was brought
about by force majeure. Therefore, the period during which work was suspended did not justify an
extension of the term of the contract. For the fact is that the contract was subject to a resolutory
8

period which relieved the parties of their respective obligations but did not stop the running of the
period of their contract.

The truth of the matter is that while private respondent had made efforts towards accommodation,
petitioner was unwilling to make adjustments as it insisted that it "cannot profitably resume operation
under the same terms and conditions [of] the terminated contract but with an outside work venue [as]
transportation costs alone will eat up the meager profit that Ace-Agro realizes from its original
contract." While this so-called "job-out" offer of private respondent had the effect of varying the
9

terms of the contract in the sense that it could increase its cost, what petitioner did not seem to
realize was that the change was brought about by circumstances not of private respondent's making.

Again when private respondent finally advised petitioner on November 7, 1990 to work under the
strict terms of its contract and inside the plant, petitioner thought only of its interest by insisting that
the contract be extended. Petitioner's manager, Antonio I. Arquiza, testified that he tried to secure a
term extension for his company but his request was turned down because the management of
private respondent wanted a new contract after the expiration of the contract on December 31, 1990.
Arquiza testified.10

A [Butch Ceña] told me that Cosmos is agreeable to allow us to

resume our operation and when I inquired about the extension of the
contract he told me that I better refer the matter to Mr. Norman Uy.

xxx xxx xxx

Q Did you see Mr. Norman Uy?

A Yes, sir, when I went to see Mr. Norman Uy he asked me why I

was there and he told me why I did not start operation I told him that
what we are expecting that Mr. Ceña would give me the formal letter
regarding the resumption of the operation and honoring of contract
and he said that our price was so high and if we are willing to use
said contract and when I said yes he told me that we will just send
you a letter considering that another contractor repairing our
damaged shells and cleaning of dirty bottles. When I asked him that
does that mean that the meeting I had with Mr. Ceña, he told me that
was null and void and he told me that Mr. Ceña want a new contract.

As already stated, because the suspension of work was due to force majeure, there was no
justification for petitioner's demand for an extension of the terms of the contract. Private respondent
was justified in insisting that after the expiration of the contract, the parties must negotiate a new one
as they had done every year since the start of their business relations in 1979.
Second. Petitioner slams the Court of Appeals for ruling that "it was [petitioner's] unjustified refusal
which finally terminated the contract between the parties." This contention is likewise without merit.
Petitioner may not be responsible for the termination of the contract, but neither is private
respondent, since the question in this case is whether private respondent is guilty of breach of
contract. The trial court held that private respondent committed a breach of contract because, even
as its August 28, 1990 letter allowed petitioner to resume work, private respondent's offer was
limited to the repairs of wooden shells and this had to be done outside the company's premises. On
the other hand, the final offer made on November 7, 1990, while allowing the "repair of wooden
shells [to be done] inside the plant according to your contract with the company," was still limited to
the repair of the wooden shells, when the fact was that the parties' contract was both for the repair of
wooden crates and for the cleaning of soft drink bottles.

But this was not the petitioner's complaint. There was never an issue whether the company's offer
included the cleaning of bottles. Both parties understood private respondent's offer as including the
cleaning of empty soft drink bottles and the repair of the wooden crates. Rather, the discussions
between petitioner and private respondent's representatives focused first, on the insistence of
petitioner that it be allowed to work inside the company plant and, later, on its request for the
extension of the life of the contract.

Petitioner claims that private respondent had a reason to want to terminate the contract and that was
to give the business to Aren Enterprises, as the latter offered its services at a much lower rate than
petitioner. Aren Enterprises' rate was P2.50 per shell while petitioner's rates were P4.00 and P6.00
per shell for ordinary and super sized bottles, respectively.11

The contention has no basis in fact. The contract between private respondent and Aren Enterprises
had been made on March 29, 1990 — before the fire broke out. The contract between petitioner and
private respondent did not prohibit the hiring by private respondent of another service contractor.
With private respondent hitting production at 8,000 bottles of soft drinks per day, petitioner could
clearly not handle the business, since it could clean only 2,500 bottles a day. These facts show that
12

although Aren Enterprises' rate was lower than petitioner's, they did not affect private respondent's
business relation with petitioner. Despite private respondent's contract with Aren Enterprises, private
respondent continued doing business with petitioner and would probably have done so were it not
for the fire. On the other hand, Aren Enterprises could not be begrudged for being allowed to
continue rendering service even after the fire because it was doing its work outside private
respondent's plant. For that matter, after the fire, private respondent on August 28, 1990 offered to
let petitioner resume its service provided this was done outside the plant.

Petitioner may not be to blame for the failure to resume work after the fire, but neither is private
respondent. Since the question is whether private respondent is guilty of breach of contract, the fact
that private respondent is blameless can only lead to the conclusion that the appealed decision is
correct.

WHEREFORE, the petition for review is DENIED and the decision of the Court of Appeals is
AFFIRMED.

SO ORDERED.

[G.R. NO. 154188 : June 15, 2005]

 MONDRAGON LEISURE AND RESORTS CORPORATION, Petitioner, v. COURT OF
APPEALS, ASIAN BANK CORPORATION, FAR EAST BANK AND TRUST COMPANY,
and UNITED COCONUT PLANTERS BANK, Respondents.

DECISION

QUISUMBING, J.:

In its DECISION1 dated March 12, 2002, the Court of Appeals in CA-G.R. SP No. 61047
dismissed the petition for certiorari filed by Mondragon Leisure and Resorts Corporation
against the Order2 dated March 9, 2000, of the Regional Trial Court of Angeles City,
Branch 61, in Civil Case No. 9527. Likewise, in its Resolution dated July 3, 2002, the CA
denied the motion for reconsideration.

The facts of the case are undisputed.

On February 28, 1994, Mondragon International Philippines, Inc. (MIPI), Mondragon

Securities Corporation (MSC) and herein petitioner entered into a lease agreement with
the Clark Development Corporation (CDC) for the development of what is now known
as the Mimosa Leisure Estate.

To help finance the project, petitioner, on June 30, 1997, entered into an Omnibus Loan
and Security Agreement3 (hereafter Omnibus Agreement) with respondent banks for a
syndicated term loan in the aggregate principal amount of US$20M. Under the
agreement, as amended on January 19, 1999,4 the proceeds of the loan were to be
released through advances evidenced by promissory notes to be executed by petitioner
in favor of each lender-bank, and to be paid within a six-year period from the date of
initial advance inclusive of a one year and two quarters grace period.

To secure the repayment of the loan, petitioner pledged in favor of respondents

US$20M worth of MIPI shares of stocks; assigned, transferred and delivered all rights,
title to and interest in the pledged shares; and assigned by way of security its leasehold
rights over the project and all the rights, title, interests and benefits in, to and under
any and all agreements in connection with the project.

On July 3, 1997, petitioner fully availed of and received the full amount of the
syndicated loan agreement. Petitioner, which had regularly paid the monthly interests
due on the promissory notes until October 1998, thereafter failed to make payments.
Consequently, on January 6 and February 5, 1999, written notices of default,
acceleration of payment and demand letters were sent by the lenders to the petitioner.
Then on August 27, 1999, respondents filed a complaint, docketed as Civil Case No.
9527, for the foreclosure of leasehold rights against petitioner.

Petitioner moved for the dismissal of the complaint on the following grounds: (1) a
condition precedent for the filing of the complaint has not been complied with and/or
the instant complaint failed to state a cause of action, or otherwise the filing was
premature; (2) the certification of non-forum shopping appended to the complaint was
fatally defective since one of the plaintiffs, UCPB, deliberately failed to mention that it
had previously filed another complaint; and (3) plaintiffs had engaged in forum
shopping in filing the instant complaint.

The trial court denied the motion and ruled as follows:

...

After a careful study of the arguments of the parties, this court finds that the motion to
dismiss is without merit. As correctly pointed out by the plaintiffs under par. 6.01, the
borrower defaults when interests due at stated maturity are not paid and the lenders
are authorized to accelerate any amount payable under the loan agreements. One of
the consequences of such default is the foreclosure of collaterals. This is the action
taken by the herein plaintiffs-lenders.

This court also finds the alleged force majeure baseless. The same are not those
provided for under Sec. 1, Article 41 of the loan agreement.

As to the allegation of forum shopping, the herein parties Asian Bank Corporation and
Far East Bank and Trust Company are not parties to this case in 9510 (sic). The subject
matter of Civil Case No. 9527 is not the same with the subject matter in Civil Case No.
9510.

Wherefore, premises considered, the motion to dismiss is denied. The defendant is

given 15 days from receipt hereof within which to file its answer and/or responsive
pleading.

SO ORDERED.5

Petitioner moved for the reconsideration of the order and argued that the complaint is
premature, since it had not been validly declared in default. 6 The trial court denied the
motion for reconsideration. Seasonably, petitioner filed a special civil action
for certiorari with the Court of Appeals.

Before the appellate court, petitioner reiterated its arguments in its motion to dismiss
before the trial court, including the failure of the respondents to attach the board
resolutions authorizing them to file the complaint. 7

The Court of Appeals dismissed the petition and denied the subsequent motion for
reconsideration. Hence, this appeal by certiorari 8 imputing the following errors:

THE RESPONDENT-APPELLEE COURT OF APPEALS COMMITTED A SERIOUS ERROR OF

LAW AND ACTED WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR
EXCESS OF JURISDICTION IN RULING THAT THE COMPLAINT IN CIVIL CASE NO. 9527
COMPLIED WITH THE MANDATORY REQUIREMENTS OF CERTIFICATION OF NON-FORUM
SHOPPING.

II
THE RESPONDENT-APPELLEE COURT OF APPEALS COMMITTED A SERIOUS ERROR OF
LAW AND ACTED WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR
EXCESS OF JURISDICTION IN NOT RULING THAT A CONDITION PRECEDENT FOR THE
FILING OF THE COMPLAINT IN CIVIL CASE NO. 9527 HAS NOT BEEN COMPLIED WITH,
OR THAT IT IS OTHERWISE PREMATURE, AND/OR THAT IT FAILS TO STATE A CAUSE
OF ACTION AGAINST PETITIONER-APPELLANT.

III

THE RESPONDENT-APPELLEE COURT OF APPEALS COMMITTED A SERIOUS ERROR OF

LAW AND ACTED WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR
EXCESS OF JURISDICTION IN NOT RULING THAT RESPONDENT-APPELLEE BANKS, IN
FILING THE COMPLAINT IN CIVIL CASE NO. 9527, DELIBERATELY ENGAGED IN FORUM
SHOPPING.9

In brief, three issues are presented for resolution, namely, (1) Was the certificate of
non-forum shopping defective? (2) Did respondents engage in forum shopping? and (3)
Do respondents have a cause of action against the petitioner? cralawlibrary

On the first issue, petitioner asserts that the verification and certificate of forum
shopping were defective because there was no proof as to the authority of the
signatories to file the complaint. Petitioner avers that UCPB Resolution 48-87, which
was only presented in the Court of Appeals, merely authorized the signatory to "appear,
act for, or otherwise represent the bank in all judicial, quasi-judicial or administrative
hearings or incidents, including pre-trial conference, and in connection therewith, to do
any and all of the following acts and deeds'" and clearly pertains to a pending
proceeding.

Respondents, on the other hand, contend that the lack of authority of the persons who
verified and certified the complaint was neither raised in the motion to dismiss nor in
the motion for reconsideration of the petitioner. They aver that the verification and
certification of non-forum shopping contained a statement by the persons who signed it
that they had been so authorized by the board of directors of their respective
corporations.

Considering the submissions of the parties, we are constrained to agree with the
respondents' contention. The trial court did not err in denying the motion to dismiss.
The issue concerning the signatories' authorization was never raised before it. Likewise,
the appellate court did not err in refusing to take cognizance of the issue, since the
parties did not raise it beforehand. Issues not raised in the trial court cannot be raised
for the first time on appeal.10

On the second issue, petitioner claims that respondent UCPB engaged in forum
shopping since it earlier instituted an action for foreclosure of mortgage and/or
collection, docketed as Civil Case No. 9510.11 This claim, in our view, is untenable. A
comparison of the two complaints would show its utter lack of merit.

Civil Case No. 9510 pertains to an Omnibus Credit and Security Agreement executed by
and between the petitioner and respondent UCPB on November 23, 1995. This is
separate and distinct from the Omnibus Agreement involved in Civil Case No. 9527.
Moreover, respondents Asian Bank and Far East Bank are not among the parties to Civil
Case No. 9510.

As pointed out by the Court of Appeals, forum shopping exists when both actions
involve the same transactions, with the same essential facts and circumstances; and
where identical causes of actions, subject matter and issues are raised. The test to
determine the existence of forum shopping is whether the elements of litis
pendentia are present, or whether a final judgment in one case will amount to res
judicatain another.12 The requisites in order that an action may be dismissed on the
ground of litis pendentia are (a) the identity of parties, or at least such as representing
the same interest in both actions; (b) the identity of rights asserted and relief prayed
for, the relief being founded on the same facts; and (c) the identity of the two cases
such that judgment in one, regardless of which party is successful, would amount to res
judicata in the other.13 Such requisites are not present in this controversy.

Apropos the third issue, petitioner contends the subject obligation of the instant case is
not yet due and demandable because the Omnibus Agreement allows a full six-year
term of payment. Even if it failed to pay some installments, petitioner insists it is not in
default because respondents merely sent collection and demand letters, but failed to
give the written notice of default required under their agreement. Moreover, petitioner
avers that the provisions on default in the Omnibus Agreement have been rendered
inapplicable and unenforceable by fortuitous events, namely the Asian economic crisis
and the closure of the Mimosa Regency Casino, which was petitioner's primary source
of revenues. ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

Respondents counter that the Omnibus Agreement defines, as an event of default, the
failure of petitioner to pay when due at stated maturity, by acceleration or otherwise,
any amount payable under the loan documents. Since petitioner is also required to pay
interest, respondents posit that non-payment thereof constituted a clear and
unmistakable case of default. Respondents add that they had properly advised the
petitioner that it had been declared in default, referring to the January 6 and February
5, 1999 letters as their compliance with the notice requirement.

On this issue, we are unable to agree with the petitioner.

Section 2.06 (a) of Part B of the Omnibus Agreement provides that the borrower shall
pay interest on the advances outstanding from time to time on each interest payment
date, while Section 6 of Part A reads

6.01 Events of Default

Each of the following events shall constitute an Event of Default under this Omnibus
Agreement:

(a) Payment Default - The BORROWER defaults in the payment when due at stated
maturity, by acceleration or otherwise, of any amount payable under the Loan
Documents.14

...
Clearly, under the foregoing provisions of the Agreement, petitioner may be validly
declared in default for failure to pay the interest. As a consequence of default, the
unpaid amount shall earn default interest,15 and the respondent-banks have four
alternative remedies without prejudice to the application of the provisions on collaterals
and any other steps or action which may be adopted by the majority lender. 16

The four remedies are alternative, with the right of choice given to the lenders, in this
case the respondents. Under Article 1201 of the Civil Code, the choice shall produce no
effect except from the time it has been communicated. This is the reason why a written
notice is required under Section 6.02 of the Omnibus Agreement.

In the present case, we find that written notices were sent to the petitioner by the
respondents. The notices clearly indicate respondents' choice of remedy: to accelerate
all payments payable under the loan agreement. On January 6, 1999, respondents
notified petitioner that it was in default, and demanded payment of the stated amount
within five days from receipt of the letter, otherwise all outstanding availments of the
US$20M term loan together with interests and other sum payable shall be declared due
and demandable.17 The letter clearly indicated the choice of remedy by the
respondents, pursuant to the Omnibus Agreement.

Even though subsequent demand is waived by the petitioner in Section 6.02 of Part B of
the Omnibus Agreement, on February 5, 1999, the respondents nevertheless actually
made their demand in writing for the payment of the principal plus interest and penalty
charges due on or before February 28, 1999, with express notice that they would take
all legal remedies available to protect the interests of their clients. 18 Clearly,
respondents have more than complied with the requirement concerning notice to the
petitioner.

It should be noted that the agreement also provides that the choice of remedy is
without prejudice to the action on the collaterals. Thus, respondents could properly file
an action for foreclosure of the leasehold rights to obtain payment for the amount
demanded.

Petitioner's claim, that the respondents could not be held in default because of a
fortuitous event, is untenable. Said event, the Asian financial crisis of 1997, is not
among the fortuitous events contemplated under Article 1174 19 of the Civil Code. To
exempt the obligor from liability for a breach of an obligation by reason of a fortuitous
event, the following requisites must concur: (a) the cause of the breach of the
obligation must be independent of the will of the debtor; (b) the event must be either
unforeseeable or unavoidable; (c) the event must be such as to render it impossible for
the debtor to fulfill his obligation in a normal manner; and (d) the debtor must be free
from any participation in, or aggravation of the injury to the creditor. 20

As pointed out by the respondents, the loan agreement was entered into on June 30,
1997, or when the Asian economic crisis had already started. Petitioner, as a long
established corporation, should have been well aware of the economic environment at
that time, yet it still took the risk to expand operations. Likewise, the closure of the
Mimosa Regency Casino was not an unforeseeable or unavoidable event, in the context
of the contract of lease between petitioner and CDC. Every business venture involves
risks. Risks are not unforeseeable; they are inherent in business.
Worthy of note, risk is an exception to the general rule on fortuitous events. Under the
law, these exceptions are: (1) when the law expressly so specifies; (2) when it is
otherwise declared by the parties; and (3) when the nature of the obligation requires
the assumption of risks.21 We find that in the Omnibus Agreement, the parties expressly
agreed that any enactment, official action, act of war, act of nature or other force
majeure or other similar circumstances shall in no way affect the obligation of the
borrowers to make payments.22

In sum, the appellate court did not err in dismissing petitioner's action for certiorari and
in denying the motion for reconsideration. It committed no reversible error, much less
any grave abuse of discretion amounting to lack or excess of jurisdiction, contrary to
petitioner's contentions.

WHEREFORE, the appeal is DENIED for lack of merit. The Decision dated March 12,
2002 and the Resolution dated July 3, 2002 of the Court of Appeals in CA-G.R. SP No.
61047 are hereby AFFIRMED.

Costs against petitioner.

SO ORDERED.

G.R. No. 192986 January 15, 2013

ADVOCATES FOR TRUTH IN LENDING, INC. and EDUARDO B. OLAGUER, Petitioners,

vs.
BANGKO SENTRAL MONETARY BOARD, represented by its Chairman, GOVERNOR
ARMANDO M. TETANGCO, JR., and its incumbent members: JUANITA D. AMATONG,
ALFREDO C. ANTONIO, PETER FA VILA, NELLY F. VILLAFUERTE, IGNACIO R. BUNYE and
CESAR V. PURISIMA, Respondents.

DECISION

REYES, J.:

Petitioners, claiming that they are raising issues of transcendental importance to the public, filed
directly with this Court this Petition for Certiorari under Rule 65 of the 1997 Rules of Court, seeking
to declare that the Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), replacing the Central
Bank Monetary Board (CB-MB) by virtue of Republic Act (R.A.) No. 7653, has no authority to
continue enforcing Central Bank Circular No. 905,1 issued by the CB-MB in 1982, which "suspended"
Act No. 2655, or the Usury Law of 1916.

Factual Antecedents

Petitioner "Advocates for Truth in Lending, Inc." (AFTIL) is a non-profit, non-stock corporation
organized to engage in pro bono concerns and activities relating to money lending issues. It was
incorporated on July 9, 2010,2 and a month later, it filed this petition, joined by its founder and
president, Eduardo B. Olaguer, suing as a taxpayer and a citizen.

R.A. No. 265, which created the Central Bank (CB) of the Philippines on June 15, 1948, empowered
the CB-MB to, among others, set the maximum interest rates which banks may charge for all types
of loans and other credit operations, within limits prescribed by the Usury Law. Section 109 of R.A.
No. 265 reads:

Sec. 109. Interest Rates, Commissions and Charges. — The Monetary Board may fix the maximum
rates of interest which banks may pay on deposits and on other obligations.

The Monetary Board may, within the limits prescribed in the Usury Law fix the maximum rates of
interest which banks may charge for different types of loans and for any other credit operations, or
may fix the maximum differences which may exist between the interest or rediscount rates of the
Central Bank and the rates which the banks may charge their customers if the respective credit
documents are not to lose their eligibility for rediscount or advances in the Central Bank.

Any modifications in the maximum interest rates permitted for the borrowing or lending operations of
the banks shall apply only to future operations and not to those made prior to the date on which the
modification becomes effective.

In order to avoid possible evasion of maximum interest rates set by the Monetary Board, the Board
may also fix the maximum rates that banks may pay to or collect from their customers in the form of
commissions, discounts, charges, fees or payments of any sort. (Underlining ours)

On March 17, 1980, the Usury Law was amended by Presidential Decree (P.D.) No. 1684, giving the
CB-MB authority to prescribe different maximum rates of interest which may be imposed for a loan
or renewal thereof or the forbearance of any money, goods or credits, provided that the changes are
effected gradually and announced in advance. Thus, Section 1-a of Act No. 2655 now reads:

Sec. 1-a. The Monetary Board is hereby authorized to prescribe the maximum rate or rates of
interest for the loan or renewal thereof or the forbearance of any money, goods or credits, and to
change such rate or rates whenever warranted by prevailing economic and social conditions:
Provided, That changes in such rate or rates may be effected gradually on scheduled dates
announced in advance.

In the exercise of the authority herein granted the Monetary Board may prescribe higher maximum
rates for loans of low priority, such as consumer loans or renewals thereof as well as such loans
made by pawnshops, finance companies and other similar credit institutions although the rates
prescribed for these institutions need not necessarily be uniform. The Monetary Board is also
authorized to prescribe different maximum rate or rates for different types of borrowings, including
deposits and deposit substitutes, or loans of financial intermediaries. (Underlining and emphasis
ours)

In its Resolution No. 2224 dated December 3, 1982,3 the CB-MB issued CB Circular No. 905, Series
of 1982, effective on January 1, 1983. Section 1 of the Circular, under its General Provisions,
removed the ceilings on interest rates on loans or forbearance of any money, goods or credits, to
wit:

Sec. 1. The rate of interest, including commissions, premiums, fees and other charges, on a loan or
forbearance of any money, goods, or credits, regardless of maturity and whether secured or
unsecured, that may be charged or collected by any person, whether natural or juridical, shall not be
subject to any ceiling prescribed under or pursuant to the Usury Law, as amended. (Underscoring
and emphasis ours)
The Circular then went on to amend Books I to IV of the CB’s "Manual of Regulations for Banks and
Other Financial Intermediaries" (Manual of Regulations) by removing the applicable ceilings on
specific interest rates. Thus, Sections 5, 9 and 10 of CB Circular No. 905 amended Book I,
Subsections 1303, 1349, 1388.1 of the Manual of Regulations, by removing the ceilings for interest
and other charges, commissions, premiums, and fees applicable to commercial banks; Sections 12
and 17 removed the interest ceilings for thrift banks (Book II, Subsections 2303, 2349); Sections 19
and 21 removed the ceilings applicable to rural banks (Book III, Subsection 3152.3-c); and, Sections
26, 28, 30 and 32 removed the ceilings for non-bank financial intermediaries (Book IV, Subsections
4303Q.1 to 4303Q.9, 4303N.1, 4303P).4

On June 14, 1993, President Fidel V. Ramos signed into law R.A. No. 7653 establishing the Bangko
Sentral ng Pilipinas (BSP) to replace the CB. The repealing clause thereof, Section 135, reads:

Sec. 135. Repealing Clause. — Except as may be provided for in Sections 46 and 132 of this Act,
Republic Act No. 265, as amended, the provisions of any other law, special charters, rule or
regulation issued pursuant to said Republic Act No. 265, as amended, or parts thereof, which may
be inconsistent with the provisions of this Act are hereby repealed. Presidential Decree No. 1792 is
likewise repealed.

Petition for Certiorari

To justify their skipping the hierarchy of courts and going directly to this Court to secure a writ of
certiorari, petitioners contend that the transcendental importance of their Petition can readily be seen
in the issues raised therein, to wit:

a) Whether under R.A. No. 265 and/or P.D. No. 1684, the CB-MB had the statutory or
constitutional authority to prescribe the maximum rates of interest for all kinds of credit
transactions and forbearance of money, goods or credit beyond the limits prescribed in the
Usury Law;

b) If so, whether the CB-MB exceeded its authority when it issued CB Circular No. 905,
which removed all interest ceilings and thus suspended Act No. 2655 as regards usurious
interest rates;

c) Whether under R.A. No. 7653, the new BSP-MB may continue to enforce CB Circular No.
905.5

Petitioners attached to their petition copies of several Senate Bills and Resolutions of the 10th
Congress, which held its sessions from 1995 to 1998, calling for investigations by the Senate
Committee on Banks and Financial Institutions into alleged unconscionable commercial rates of
interest imposed by these entities. Senate Bill (SB) Nos. 376 and 1860,7 filed by Senator Vicente C.
Sotto III and the late Senator Blas F. Ople, respectively, sought to amend Act No. 2655 by fixing the
rates of interest on loans and forbearance of credit; Philippine Senate Resolution (SR) No.
1053,8 10739 and 1102,10 filed by Senators Ramon B. Magsaysay, Jr., Gregorio B. Honasan and
Franklin M. Drilon, respectively, urged the aforesaid Senate Committee to investigate ways to curb
the high commercial interest rates then obtaining in the country; Senator Ernesto Maceda filed SB
No. 1151 to prohibit the collection of more than two months of advance interest on any loan of
money; and Senator Raul Roco filed SR No. 114411seeking an investigation into an alleged cartel of
commercial banks, called "Club 1821", reportedly behind the regime of high interest rates. The
petitioners also attached news clippings12 showing that in February 1998 the banks’ prime lending
rates, or interests on loans to their best borrowers, ranged from 26% to 31%.
Petitioners contend that under Section 1-a of Act No. 2655, as amended by P.D. No. 1684, the CB-
MB was authorized only to prescribe or set the maximum rates of interest for a loan or renewal
thereof or for the forbearance of any money, goods or credits, and to change such rates whenever
warranted by prevailing economic and social conditions, the changes to be effected gradually and on
scheduled dates; that nothing in P.D. No. 1684 authorized the CB-MB to lift or suspend the limits of
interest on all credit transactions, when it issued CB Circular No. 905. They further insist that under
Section 109 of R.A. No. 265, the authority of the CB-MB was clearly only to fix the banks’ maximum
rates of interest, but always within the limits prescribed by the Usury Law.

Thus, according to petitioners, CB Circular No. 905, which was promulgated without the benefit of
any prior public hearing, is void because it violated Article 5 of the New Civil Code, which provides
that "Acts executed against the provisions of mandatory or prohibitory laws shall be void, except
when the law itself authorizes their validity."

They further claim that just weeks after the issuance of CB Circular No. 905, the benchmark 91-day
Treasury bills (T-bills),13 then known as "Jobo" bills14 shot up to 40% per annum, as a result. The
banks immediately followed suit and re-priced their loans to rates which were even higher than those
of the "Jobo" bills. Petitioners thus assert that CB Circular No. 905 is also unconstitutional in light of
Section 1 of the Bill of Rights, which commands that "no person shall be deprived of life, liberty or
property without due process of law, nor shall any person be denied the equal protection of the
laws."

Finally, petitioners point out that R.A. No. 7653 did not re-enact a provision similar to Section 109 of
R.A. No. 265, and therefore, in view of the repealing clause in Section 135 of R.A. No. 7653, the
BSP-MB has been stripped of the power either to prescribe the maximum rates of interest which
banks may charge for different kinds of loans and credit transactions, or to suspend Act No. 2655
and continue enforcing CB Circular No. 905.

Ruling

The petition must fail.

A. The Petition is procedurally infirm.

The decision on whether or not to accept a petition for certiorari, as well as to grant due course
thereto, is addressed to the sound discretion of the court.15 A petition for certiorari being an
extraordinary remedy, the party seeking to avail of the same must strictly observe the procedural
rules laid down by law, and non-observance thereof may not be brushed aside as mere
technicality.16

As provided in Section 1 of Rule 65, a writ of certiorari is directed against a tribunal exercising
judicial or quasi-judicial functions.17 Judicial functions are exercised by a body or officer clothed with
authority to determine what the law is and what the legal rights of the parties are with respect to the
matter in controversy. Quasi-judicial function is a term that applies to the action or discretion of
public administrative officers or bodies given the authority to investigate facts or ascertain the
existence of facts, hold hearings, and draw conclusions from them as a basis for their official action
using discretion of a judicial nature.18

The CB-MB (now BSP-MB) was created to perform executive functions with respect to the
establishment, operation or liquidation of banking and credit institutions, and branches and agencies
thereof.19 It does not perform judicial or quasi-judicial functions. Certainly, the issuance of CB
Circular No. 905 was done in the exercise of an executive function. Certiorari will not lie in the instant
case.20

B. Petitioners have no locus standi to file the Petition

Locus standi is defined as "a right of appearance in a court of justice on a given question." In private
suits, Section 2, Rule 3 of the 1997 Rules of Civil Procedure provides that "every action must be
prosecuted or defended in the name of the real party in interest," who 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."
Succinctly put, a party’s standing is based on his own right to the relief sought. 21

Even in public interest cases such as this petition, the Court has generally adopted the "direct injury"
test that the person who impugns the validity of a statute must have "a personal and substantial
interest in the case such that he has sustained, or will sustain direct injury as a result." 22 Thus, while
petitioners assert a public right to assail CB Circular No. 905 as an illegal executive action, it is
nonetheless required of them to make out a sufficient interest in the vindication of the public order
and the securing of relief. It is significant that in this petition, the petitioners do not allege that they
sustained any personal injury from the issuance of CB Circular No. 905.

Petitioners also do not claim that public funds were being misused in the enforcement of CB Circular
No. 905. In Kilosbayan, Inc. v. Morato,23 involving the on-line lottery contract of the PCSO, there was
no allegation that public funds were being misspent, which according to the Court would have made
the action a public one, "and justify relaxation of the requirement that an action must be prosecuted
in the name of the real party-in-interest." The Court held, moreover, that the status of Kilosbayan as
a people’s organization did not give it the requisite personality to question the validity of the contract.
Thus:

Petitioners do not in fact show what particularized interest they have for bringing this suit. It does not
detract from the high regard for petitioners as civic leaders to say that their interest falls short of that
required to maintain an action under the Rule 3, Sec. 2.24

C. The Petition raises no issues of transcendental importance.

In the 1993 case of Joya v. Presidential Commission on Good Government, 25 it was held that no
question involving the constitutionality or validity of a law or governmental act may be heard and
decided by the court unless there is compliance with the legal requisites for judicial inquiry, namely:
(a) that the question must be raised by the proper party; (b) that there must be an actual case or
controversy; (c) that the question must be raised at the earliest possible opportunity; and (d) that the
decision on the constitutional or legal question must be necessary to the determination of the case
itself.

In Prof. David v. Pres. Macapagal-Arroyo,26 the Court summarized the requirements before
taxpayers, voters, concerned citizens, and legislators can be accorded a standing to sue, viz:

(1) the cases involve constitutional issues;

(2) for taxpayers, there must be a claim of illegal disbursement of public funds or that the tax
measure is unconstitutional;

(3) for voters, there must be a showing of obvious interest in the validity of the election law in
question;
 (4) for concerned citizens, there must be a showing that the issues raised are of
transcendental importance which must be settled early; and

(5) for legislators, there must be a claim that the official action complained of infringes upon
their prerogatives as legislators.

While the Court may have shown in recent decisions a certain toughening in its attitude concerning
the question of legal standing, it has nonetheless always made an exception where the
transcendental importance of the issues has been established, notwithstanding the petitioners’
failure to show a direct injury.27 In CREBA v. ERC,28 the Court set out the following instructive guides
as determinants on whether a matter is of transcendental importance, namely: (1) the character of
the funds or other assets involved in the case; (2) the presence of a clear case of disregard of a
constitutional or statutory prohibition by the public respondent agency or instrumentality of the
government; and (3) the lack of any other party with a more direct and specific interest in the
questions being raised. Further, the Court stated in Anak Mindanao Party-List Group v. The
Executive Secretary29 that the rule on standing will not be waived where these determinants are not
established.

In the instant case, there is no allegation of misuse of public funds in the implementation of CB
Circular No. 905. Neither were borrowers who were actually affected by the suspension of the Usury
Law joined in this petition. Absent any showing of transcendental importance, the petition must fail.

More importantly, the Court notes that the instant petition adverted to the regime of high interest
rates which obtained at least 15 years ago, when the banks’ prime lending rates ranged from 26% to
31%,30 or even 29 years ago, when the 91-day Jobo bills reached 40% per annum. In contrast,
according to the BSP, in the first two (2) months of 2012 the bank lending rates averaged 5.91%,
which implies that the banks’ prime lending rates were lower; moreover, deposit interests on savings
and long-term deposits have also gone very low, averaging 1.75% and 1.62%, respectively. 31

Judging from the most recent auctions of T-bills, the savings rates must be approaching 0%. In the
1âwphi1

auctions held on November 12, 2012, the rates of 3-month, 6-month and 1-year T-bills have dropped
to 0.150%, 0.450% and 0.680%, respectively.32 According to Manila Bulletin, this very low interest
regime has been attributed to "high liquidity and strong investor demand amid positive economic
indicators of the country."33

While the Court acknowledges that cases of transcendental importance demand that they be settled
promptly and definitely, brushing aside, if we must, technicalities of procedure, 34 the delay of at least
15 years in the filing of the instant petition has actually rendered moot and academic the issues it
now raises.

For its part, BSP-MB maintains that the petitioners’ allegations of constitutional and statutory
violations of CB Circular No. 905 are really mere challenges made by petitioners concerning the
wisdom of the Circular. It explains that it was in view of the global economic downturn in the early
1980’s that the executive department through the CB-MB had to formulate policies to achieve
economic recovery, and among these policies was the establishment of a market-oriented interest
rate structure which would require the removal of the government-imposed interest rate ceilings. 35

D. The CB-MB merely suspended the effectivity of the Usury Law when it issued CB Circular No.
905.

The power of the CB to effectively suspend the Usury Law pursuant to P.D. No. 1684 has long been
recognized and upheld in many cases. As the Court explained in the landmark case of Medel v.
CA,36 citing several cases, CB Circular No. 905 "did not repeal nor in anyway amend the Usury Law
but simply suspended the latter’s effectivity;"37that "a CB Circular cannot repeal a law, [for] only a law
can repeal another law;"38 that "by virtue of CB Circular No. 905, the Usury Law has been rendered
ineffective;"39 and "Usury has been legally non-existent in our jurisdiction. Interest can now be
charged as lender and borrower may agree upon."40

In First Metro Investment Corp. v. Este Del Sol Mountain Reserve, Inc. 41 cited in DBP v. Perez,42 we
also belied the contention that the CB was engaged in self-legislation. Thus:

Central Bank Circular No. 905 did not repeal nor in any way amend the Usury Law but simply
suspended the latter’s effectivity. The illegality of usury is wholly the creature of legislation. A Central
Bank Circular cannot repeal a law. Only a law can repeal another law. x x x. 43

In PNB v. Court of Appeals,44 an escalation clause in a loan agreement authorized the PNB to
unilaterally increase the rate of interest to 25% per annum, plus a penalty of 6% per annum on past
dues, then to 30% on October 15, 1984, and to 42% on October 25, 1984. The Supreme Court
invalidated the rate increases made by the PNB and upheld the 12% interest imposed by the CA, in
this wise:

P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting parties to stipulate freely
regarding any subsequent adjustment in the interest rate that shall accrue on a loan or forbearance
of money, goods or credits. In fine, they can agree to adjust, upward or downward, the interest
previously stipulated. x x x.45

Thus, according to the Court, by lifting the interest ceiling, CB Circular No. 905 merely upheld the
parties’ freedom of contract to agree freely on the rate of interest. It cited Article 1306 of the New
Civil Code, under which the contracting parties may establish such stipulations, clauses, terms and
conditions as they may deem convenient, provided they are not contrary to law, morals, good
customs, public order, or public policy.

E. The BSP-MB has authority to enforce CB Circular No. 905.

Section 1 of CB Circular No. 905 provides that "The rate of interest, including commissions,
premiums, fees and other charges, on a loan or forbearance of any money, goods, or credits,
regardless of maturity and whether secured or unsecured, that may be charged or collected by any
person, whether natural or juridical, shall not be subject to any ceiling prescribed under or pursuant
to the Usury Law, as amended." It does not purport to suspend the Usury Law only as it applies to
banks, but to all lenders.

Petitioners contend that, granting that the CB had power to "suspend" the Usury Law, the new BSP-
MB did not retain this power of its predecessor, in view of Section 135 of R.A. No. 7653, which
expressly repealed R.A. No. 265. The petitioners point out that R.A. No. 7653 did not reenact a
provision similar to Section 109 of R.A. No. 265.

A closer perusal shows that Section 109 of R.A. No. 265 covered only loans extended by banks,
whereas under Section 1-a of the Usury Law, as amended, the BSP-MB may prescribe the
maximum rate or rates of interest for all loans or renewals thereof or the forbearance of any money,
goods or credits, including those for loans of low priority such as consumer loans, as well as such
loans made by pawnshops, finance companies and similar credit institutions. It even authorizes the
BSP-MB to prescribe different maximum rate or rates for different types of borrowings, including
deposits and deposit substitutes, or loans of financial intermediaries.
Act No. 2655, an earlier law, is much broader in scope, whereas R.A. No. 265, now R.A. No. 7653,
merely supplemented it as it concerns loans by banks and other financial institutions. Had R.A. No.
7653 been intended to repeal Section 1-a of Act No. 2655, it would have so stated in unequivocal
terms.

Moreover, the rule is settled that repeals by implication are not favored, because laws are presumed
to be passed with deliberation and full knowledge of all laws existing pertaining to the subject. 46 An
implied repeal is predicated upon the condition that a substantial conflict or repugnancy is found
between the new and prior laws. Thus, in the absence of an express repeal, a subsequent law
cannot be construed as repealing a prior law unless an irreconcilable inconsistency and repugnancy
exists in the terms of the new and old laws.47 We find no such conflict between the provisions of Act
2655 and R.A. No. 7653.

F. The lifting of the ceilings for interest rates does not authorize stipulations charging excessive,
unconscionable, and iniquitous interest.

It is settled that nothing in CB Circular No. 905 grants lenders a carte blanche authority to raise
interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their
assets.48 As held in Castro v. Tan:49

The imposition of an unconscionable rate of interest on a money debt, even if knowingly and
voluntarily assumed, is immoral and unjust. It is tantamount to a repugnant spoliation and an
iniquitous deprivation of property, repulsive to the common sense of man. It has no support in law, in
principles of justice, or in the human conscience nor is there any reason whatsoever which may
justify such imposition as righteous and as one that may be sustained within the sphere of public or
private morals.50

Stipulations authorizing iniquitous or unconscionable interests have been invariably struck down for
being contrary to morals, if not against the law.51 Indeed, under Article 1409 of the Civil Code, these
contracts are deemed inexistent and void ab initio, and therefore cannot be ratified, nor may the right
to set up their illegality as a defense be waived.

Nonetheless, the nullity of the stipulation of usurious interest does not affect the lender’s right to
recover the principal of a loan, nor affect the other terms thereof. 52 Thus, in a usurious loan with
mortgage, the right to foreclose the mortgage subsists, and this right can be exercised by the
creditor upon failure by the debtor to pay the debt due. The debt due is considered as without the
stipulated excessive interest, and a legal interest of 12% per annum will be added in place of the
excessive interest formerly imposed,53following the guidelines laid down in the landmark case of
Eastern Shipping Lines, Inc. v. Court of Appeals,54 regarding the manner of computing legal interest:

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

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a
loan or forbearance of money, the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time
it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per
annum to be computed from default, i.e., from judicial or extrajudicial demand under and
subject to the provisions of Article 1169 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached, an

interest on the amount of damages awarded may be imposed at the discretion of the court at
 the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or
damages except when or until the demand can be established with reasonable certainty.
Accordingly, where the demand is established with reasonable certainty, the interest shall
begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code)
but when such certainty cannot be so reasonably established at the time the demand is
made, the interest shall begin to run only from the date the judgment of the court is made (at
which time the quantification of damages may be deemed to have been reasonably
ascertained). The actual base for the computation of legal interest shall, in any case, be on
the amount finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and executory,
the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above,
shall be 12% per annum from such finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of credit.55 (Citations omitted)

The foregoing rules were further clarified in Sunga-Chan v. Court of Appeals, 56

as follows:

Eastern Shipping Lines, Inc. synthesized the rules on the imposition of interest, if proper, and the
applicable rate, as follows: The 12% per annum rate under CB Circular No. 416 shall apply only to
loans or forbearance of money, goods, or credits, as well as to judgments involving such loan or
forbearance of money, goods, or credit, while the 6% per annum under Art. 2209 of the Civil Code
applies "when the transaction involves the payment of indemnities in the concept of damage arising
from the breach or a delay in the performance of obligations in general," with the application of both
rates reckoned "from the time the complaint was filed until the [adjudged] amount is fully paid." In
either instance, the reckoning period for the commencement of the running of the legal interest shall
be subject to the condition "that the courts are vested with discretion, depending on the equities of
each case, on the award of interest."57 (Citations omitted)

WHEREFORE, premises considered, the Petition for certiorari is DISMISSED.

SO ORDERED.