Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-55300 March 15, 1990
FRANKLIN G. GACAL and CORAZON M. GACAL, the latter assisted by her husband,
FRANKLIN G. GACAL,petitioners,
vs.
PHILIPPINE AIR LINES, INC., and THE HONORABLE PEDRO SAMSON C. ANIMAS, in his
capacity as PRESIDING JUDGE of the COURT OF FIRST INSTANCE OF SOUTH COTABATO,
BRANCH I, respondents.
PARAS, J .:
This is a, petition for review on certiorari of the decision of the Court of First Instance of South
Cotabato, Branch 1, *promulgated on August 26, 1980 dismissing three (3) consolidated cases for
damages: Civil Case No. 1701, Civil Case No. 1773 and Civil Case No. 1797 (Rollo, p. 35).
The facts, as found by respondent court, are as follows:
Plaintiffs Franklin G. Gacal and his wife, Corazon M. Gacal, Bonifacio S. Anislag and
his wife, Mansueta L. Anislag, and the late Elma de Guzman, were then passengers
boarding defendant's BAC 1-11 at Davao Airport for a flight to Manila, not knowing
that on the same flight, Macalinog, Taurac Pendatum known as Commander Zapata,
Nasser Omar, Liling Pusuan Radia, Dimantong Dimarosing and Mike Randa, all of
Marawi City and members of the Moro National Liberation Front (MNLF), were their
co-passengers, three (3) armed with grenades, two (2) with .45 caliber pistols, and
one with a .22 caliber pistol. Ten (10) minutes after take off at about 2:30 in the
afternoon, the hijackers brandishing their respective firearms announced the
hijacking of the aircraft and directed its pilot to fly to Libya. With the pilot explaining to
them especially to its leader, Commander Zapata, of the inherent fuel limitations of
the plane and that they are not rated for international flights, the hijackers directed
the pilot to fly to Sabah. With the same explanation, they relented and directed the
aircraft to land at Zamboanga Airport, Zamboanga City for refueling. The aircraft
landed at 3:00 o'clock in the afternoon of May 21, 1976 at Zamboanga Airport. When
the plane began to taxi at the runway, it was met by two armored cars of the military
with machine guns pointed at the plane, and it stopped there. The rebels thru its
commander demanded that a DC-aircraft take them to Libya with the President of the
defendant company as hostage and that they be given $375,000 and six (6)
armalites, otherwise they will blow up the plane if their demands will not be met by
the government and Philippine Air Lines. Meanwhile, the passengers were not
served any food nor water and it was only on May 23, a Sunday, at about 1:00
o'clock in the afternoon that they were served 1/4 slice of a sandwich and 1/10 cup of
PAL water. After that, relatives of the hijackers were allowed to board the plane but
immediately after they alighted therefrom, an armored car bumped the stairs. That
commenced the battle between the military and the hijackers which led ultimately to
the liberation of the surviving crew and the passengers, with the final score of ten
(10) passengers and three (3) hijackers dead on the spot and three (3) hijackers
captured.
City Fiscal Franklin G. Gacal was unhurt. Mrs. Corazon M. Gacal suffered injuries in
the course of her jumping out of the plane when it was peppered with bullets by the
army and after two (2) hand grenades exploded inside the plane. She was
hospitalized at General Santos Doctors Hospital, General Santos City, for two (2)
days, spending P245.60 for hospital and medical expenses, Assistant City Fiscal
Bonifacio S. Anislag also escaped unhurt but Mrs. Anislag suffered a fracture at the
radial bone of her left elbow for which she was hospitalized and operated on at the
San Pedro Hospital, Davao City, and therefore, at Davao Regional Hospital, Davao
City, spending P4,500.00. Elma de Guzman died because of that battle. Hence, the
action of damages instituted by the plaintiffs demanding the following damages, to
wit:
Civil Case No. 1701
City Fiscal Franklin G. Gacal and Mrs. Corazon M. Gacal actual
damages: P245.60 for hospital and medical expenses of Mrs Gacal;
P8,995.00 for their personal belongings which were lost and not
recovered; P50,000.00 each for moral damages; and P5,000.00 for
attorney's fees, apart from the prayer for an award of exemplary
damages (Record, pp. 4-6, Civil Case No. 1701).
Civil Case No. 1773
xxx xxx xxx
Civil Case No. 1797
xxx xxx xxx
The trial court, on August 26, 1980, dismissed the complaints finding that all the damages sustained
in the premises were attributed to force majeure.
On September 12, 1980 the spouses Franklin G. Gacal and Corazon M. Gacal, plaintiffs in Civil
Case No. 1701, filed a notice of appeal with the lower court on pure questions of law (Rollo, p. 55)
and the petition for review oncertiorari was filed with this Court on October 20, 1980 (Rollo, p. 30).
The Court gave due course to the petition (Rollo, p. 147) and both parties filed their respective briefs
but petitioner failed to file reply brief which was noted by the Court in the resolution dated May 3,
1982 (Rollo, p. 183).
Petitioners alleged that the main cause of the unfortunate incident is the gross, wanton and
inexcusable negligence of respondent Airline personnel in their failure to frisk the passengers
adequately in order to discover hidden weapons in the bodies of the six (6) hijackers. They claimed
that despite the prevalence of skyjacking, PAL did not use a metal detector which is the most
effective means of discovering potential skyjackers among the passengers (Rollo, pp. 6-7).
Respondent Airline averred that in the performance of its obligation to safely transport passengers
as far as human care and foresight can provide, it has exercised the utmost diligence of a very
cautious person with due regard to all circumstances, but the security checks and measures and
surveillance precautions in all flights, including the inspection of baggages and cargo and frisking of
passengers at the Davao Airport were performed and rendered solely by military personnel who
under appropriate authority had assumed exclusive jurisdiction over the same in all airports in the
Philippines.
Similarly, the negotiations with the hijackers were a purely government matter and a military
operation, handled by and subject to the absolute and exclusive jurisdiction of the military
authorities. Hence, it concluded that the accident that befell RP-C1161 was caused by fortuitous
event, force majeure and other causes beyond the control of the respondent Airline.
The determinative issue in this case is whether or not hijacking or air piracy during martial law and
under the circumstances obtaining herein, is a caso fortuito or force majeure which would exempt an
aircraft from payment of damages to its passengers whose lives were put in jeopardy and whose
personal belongings were lost during the incident.
Under the Civil Code, common carriers are required to exercise extraordinary diligence in their
vigilance over the goods and for the safety of passengers transported by them, according to all the
circumstances of each case (Article 1733). They are presumed at fault or to have acted negligently
whenever a passenger dies or is injured (Philippine Airlines, Inc. v. National Labor Relations
Commission, 124 SCRA 583 [1983]) or for the loss, destruction or deterioration of goods in cases
other than those enumerated in Article 1734 of the Civil Code (Eastern Shipping Lines, Inc. v.
Intermediate Appellate Court, 150 SCRA 463 [1987]).
The source of a common carrier's legal liability is the contract of carriage, and by entering into said
contract, it binds itself to carry the passengers safely as far as human care and foresight can
provide. There is breach of this obligation if it fails to exert extraordinary diligence according to all the
circumstances of the case in exercise of the utmost diligence of a very cautious person (Isaac v.
Ammen Transportation Co., 101 Phil. 1046 [1957]; Juntilla v. Fontanar, 136 SCRA 624 [1985]).
It is the duty of a common carrier to overcome the presumption of negligence (Philippine National
Railways v. Court of Appeals, 139 SCRA 87 [1985]) and it must be shown that the carrier had
observed the required extraordinary diligence of a very cautious person as far as human care and
foresight can provide or that the accident was caused by a fortuitous event (Estrada v. Consolacion,
71 SCRA 523 [1976]). Thus, as ruled by this Court, no person shall be responsible for those "events
which could not be foreseen or which though foreseen were inevitable. (Article 1174, Civil Code).
The term is synonymous with caso fortuito (Lasam v. Smith, 45 Phil. 657 [1924]) which is of the
same sense as "force majeure" (Words and Phrases Permanent Edition, Vol. 17, p. 362).
In order to constitute a caso fortuito or force majeure that would exempt a person from liability under
Article 1174 of the Civil Code, it is necessary that the following elements must concur: (a) the cause
of the breach of the obligation must be independent of the human will (the will of the debtor or the
obligor); (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 (Lasam v. Smith, 45 Phil.
657 [1924]; Austria v. Court of Appeals, 39 SCRA 527 [1971]; Estrada v. Consolacion, supra;
Vasquez v. Court of Appeals, 138 SCRA 553 [1985]; Juan F. Nakpil & Sons v. Court of Appeals, 144
SCRA 596 [1986]). Caso fortuito or force majeure, by definition, are extraordinary events not
foreseeable or avoidable, events that could not be foreseen, or which, though foreseen, are
inevitable. It is, therefore, not enough that the event should not have been foreseen or anticipated,
as is commonly believed, but it must be one impossible to foresee or to avoid. The mere difficulty to
foresee the happening is not impossibility to foresee the same (Republic v. Luzon Stevedoring
Corporation, 21 SCRA 279 [1967]).
Applying the above guidelines to the case at bar, the failure to transport petitioners safely from
Davao to Manila was due to the skyjacking incident staged by six (6) passengers of the same plane,
all members of the Moro National Liberation Front (MNLF), without any connection with private
respondent, hence, independent of the will of either the PAL or of its passengers.
Under normal circumstances, PAL might have foreseen the skyjacking incident which could have
been avoided had there been a more thorough frisking of passengers and inspection of baggages as
authorized by R.A. No. 6235. But the incident in question occurred during Martial Law where there
was a military take-over of airport security including the frisking of passengers and the inspection of
their luggage preparatory to boarding domestic and international flights. In fact military take-over was
specifically announced on October 20, 1973 by General Jose L. Rancudo, Commanding General of
the Philippine Air Force in a letter to Brig. Gen. Jesus Singson, then Director of the Civil Aeronautics
Administration (Rollo, pp. 71-72) later confirmed shortly before the hijacking incident of May 21,
1976 by Letter of Instruction No. 399 issued on April 28, 1976 (Rollo, p. 72).
Otherwise stated, these events rendered it impossible for PAL to perform its obligations in a nominal
manner and obviously it cannot be faulted with negligence in the performance of duty taken over by
the Armed Forces of the Philippines to the exclusion of the former.
Finally, there is no dispute that the fourth element has also been satisfied. Consequently the
existence of force majeure has been established exempting respondent PAL from the payment of
damages to its passengers who suffered death or injuries in their persons and for loss of their
baggages.
PREMISES CONSIDERED, the petition is hereby DISMISSED for lack of merit and the decision of
the Court of First Instance of South Cotabato, Branch I is hereby AFFIRMED.
SO ORDERED.


Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION

G.R. No. 102970 May 13, 1993
LUZAN SIA, petitioner,
vs.
COURT OF APPEALS and SECURITY BANK and TRUST COMPANY, respondents.
DAVIDE, JR., J .:
The Decision of public respondent Court of Appeals in CA-G.R. CV No. 26737, promulgated on 21
August 1991,
1
reversing and setting aside the Decision, dated 19 February 1990,
2
of Branch 47 of the
Regional Trial Court (RTC) of Manila in Civil Case No. 87-42601, entitled "LUZAN SIA vs. SECURITY
BANK and TRUST CO.," is challenged in this petition for review on certiorari under Rule 45 of the Rules
Court.
Civil Case No. 87-42601 is an action for damages arising out of the destruction or loss of the stamp
collection of the plaintiff (petitioner herein) contained in Safety Deposit Box No. 54 which had been
rented from the defendant pursuant to a contract denominated as a Lease Agreement.
3
Judgment
therein was rendered in favor of the dispositive portion of which reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff
and against the defendant, Security Bank & Trust Company, ordering the defendant bank
to pay the plaintiff the sum of
a) Twenty Thousand Pesos (P20,000.00), Philippine Currency, as actual damages;
b) One Hundred Thousand Pesos (P100,000.00), Philippine Currency, as moral damages;
and
c) Five Thousand Pesos (P5,000.00), Philippine Currency, as attorney's fees and legal
expenses.
The counterclaim set up by the defendant are hereby dismissed for lack of merit.
No costs.
SO ORDERED.
4

The antecedent facts of the present controversy are summarized by the public respondent in its
challenged decision as follows:
The plaintiff rented on March 22, 1985 the Safety Deposit Box No. 54 of the
defendant bank at its Binondo Branch located at the Fookien Times Building, Soler St.,
Binondo, Manila wherein he placed his collection of stamps. The said safety deposit box
leased by the plaintiff was at the bottom or at the lowest level of the safety deposit boxes of
the defendant bank at its aforesaid Binondo Branch.
During the floods that took place in 1985 and 1986, floodwater entered into the
defendant bank's premises, seeped into the safety deposit box leased by the plaintiff and
caused, according to the plaintiff, damage to his stamps collection. The defendant bank
rejected the plaintiff's claim for compensation for his damaged stamps collection, so, the
plaintiff instituted an action for damages against the defendant bank.
The defendant bank denied liability for the damaged stamps collection of the plaintiff
on the basis of the "Rules and Regulations Governing the Lease of Safe Deposit Boxes"
(Exhs. "A-1", "1-A"), particularly paragraphs 9 and 13, which reads (sic):
"9. The liability of the Bank by reason of the lease, is limited to the exercise of the
diligence to prevent the opening of the safe by any person other than the Renter, his
authorized agent or legal representative;
xxx xxx xxx
"13. The Bank is not a depository of the contents of the safe and it has neither the
possession nor the control of the same. The Bank has no interest whatsoever in said
contents, except as herein provided, and it assumes absolutely no liability in connection
therewith."
The defendant bank also contended that its contract with the plaintiff over safety
deposit box No. 54 was one of lease and not of deposit and, therefore, governed by the
lease agreement (Exhs. "A", "L") which should be the applicable law; that the destruction of
the plaintiff's stamps collection was due to a calamity beyond obligation on its part to notify
the plaintiff about the floodwaters that inundated its premises at Binondo branch which
allegedly seeped into the safety deposit box leased to the plaintiff.
The trial court then directed that an ocular inspection on (sic) the contents of the
safety deposit box be conducted, which was done on December 8, 1988 by its clerk of court
in the presence of the parties and their counsels. A report thereon was then submitted on
December 12, 1988 (Records, p. 98-A) and confirmed in open court by both parties thru
counsel during the hearing on the same date (Ibid., p. 102) stating:
"That the Safety Box Deposit No. 54 was opened by both plaintiff Luzan Sia
and the Acting Branch Manager Jimmy B. Ynion in the presence of the undersigned,
plaintiff's and defendant's counsel. Said Safety Box when opened contains two
albums of different sizes and thickness, length and width and a tin box with printed
word 'Tai Ping Shiang Roast Pork in pieces with Chinese designs and character."
Condition of the above-stated Items
"Both albums are wet, moldy and badly damaged.
1. The first album measures 10 1/8 inches in length, 8 inches in width and 3/4 in
thick. The leaves of the album are attached to every page and cannot be lifted without
destroying it, hence the stamps contained therein are no longer visible.
2. The second album measure 12 1/2 inches in length, 9 3/4 in width 1 inch thick.
Some of its pages can still be lifted. The stamps therein can still be distinguished but
beyond restoration. Others have lost its original form.
3. The tin box is rusty inside. It contains an album with several pieces of papers
stuck up to the cover of the box. The condition of the album is the second
abovementioned album."
5

The SECURITY BANK AND TRUST COMPANY, hereinafter referred to as SBTC, appealed the trial
court's decision to the public respondent Court of Appeals. The appeal was docketed as CA-G.R. CV No.
26737.
In urging the public respondent to reverse the decision of the trial court, SBTC contended that the
latter erred in (a) holding that the lease agreement is a contract of adhesion; (b) finding that the
defendant had failed to exercise the required diligence expected of a bank in maintaining the safety
deposit box; (c) awarding to the plaintiff actual damages in the amount of P20,000.00, moral
damages in the amount of P100,000.00 and attorney's fees and legal expenses in the amount of
P5,000.00; and (d) dismissing the counterclaim.
On 21 August 1991, the respondent promulgated its decision the dispositive portion of which reads:
WHEREFORE, the decision appealed from is hereby REVERSED and instead the
appellee's complaint is hereby DISMISSED. The appellant bank's counterclaim is likewise
DISMISSED. No costs.
6

In reversing the trial court's decision and absolving SBTC from liability, the public respondent found and
ruled that:
a) the fine print in the "Lease Agreement " (Exhibits "A" and "1" ) constitutes the terms and
conditions of the contract of lease which the appellee (now petitioner) had voluntarily and knowingly
executed with SBTC;
b) the contract entered into by the parties regarding Safe Deposit Box No. 54 was not a contract of
deposit wherein the bank became a depositary of the subject stamp collection; hence, as contended
by SBTC, the provisions of Book IV, Title XII of the Civil Code on deposits do not apply;
c) The following provisions of the questioned lease agreement of the safety deposit box limiting
SBTC's liability:
9. The liability of the bank by reason of the lease, is limited to the exercise of the
diligence to prevent the opening of the Safe by any person other than the Renter, his
authorized agent or legal representative.
xxx xxx xxx
13. The bank is not a depository of the contents of the Safe and it has neither the
possession nor the control of the same. The Bank has no interest whatsoever in said
contents, except as herein provided, and it assumes absolutely no liability in connection
therewith.
are valid since said stipulations are not contrary to law, morals, good customs, public order or public
policy; and
d) there is no concrete evidence to show that SBTC failed to exercise the required diligence in
maintaining the safety deposit box; what was proven was that the floods of 1985 and 1986, which
were beyond the control of SBTC, caused the damage to the stamp collection; said floods were
fortuitous events which SBTC should not be held liable for since it was not shown to have
participated in the aggravation of the damage to the stamp collection; on the contrary, it offered its
services to secure the assistance of an expert in order to save most of the stamps, but the appellee
refused; appellee must then bear the lose under the principle of "res perit domino."
Unsuccessful in his bid to have the above decision reconsidered by the public
respondent,
7
petitioner filed the instant petition wherein he contends that:
I
IT WAS A GRAVE ERROR OR AN ABUSE OF DISCRETION ON THE PART OF THE
RESPONDENT COURT WHEN IT RULED THAT RESPONDENT SBTC DID NOT FAIL TO
EXERCISE THE REQUIRED DILIGENCE IN MAINTAINING THE SAFETY DEPOSIT BOX
OF THE PETITIONER CONSIDERING THAT SUBSTANTIAL EVIDENCE EXIST (sic)
PROVING THE CONTRARY.
II
THE RESPONDENT COURT SERIOUSLY ERRED IN EXCULPATING PRIVATE
RESPONDENT FROM ANY LIABILITY WHATSOEVER BY REASON OF THE PROVISIONS
OF PARAGRAPHS 9 AND 13 OF THE AGREEMENT (EXHS. "A" AND "A-1").
III
THE RESPONDENT COURT SERIOUSLY ERRED IN NOT UPHOLDING THE AWARDS OF
THE TRIAL COURT FOR ACTUAL AND MORAL DAMAGES, INCLUDING ATTORNEY'S
FEES AND LEGAL EXPENSES, IN FAVOR OF THE PETITIONER.
8

We subsequently gave due course the petition and required both parties to submit their respective
memoranda, which they complied with.
9

Petitioner insists that the trial court correctly ruled that SBTC had failed "to exercise the required diligence
expected of a bank maintaining such safety deposit box . . . in the light of the environmental circumstance
of said safety deposit box after the floods of 1985 and 1986." He argues that such a conclusion is
supported by the evidence on record, to wit: SBTC was fully cognizant of the exact location of the safety
deposit box in question; it knew that the premises were inundated by floodwaters in 1985 and 1986 and
considering that the bank is guarded twenty-four (24) hours a day , it is safe to conclude that it was also
aware of the inundation of the premises where the safety deposit box was located; despite such
knowledge, however, it never bothered to inform the petitioner of the flooding or take any appropriate
measures to insure the safety and good maintenance of the safety deposit box in question.
SBTC does not squarely dispute these facts; rather, it relies on the rule that findings of facts of the
Court of Appeals, when supported by substantial exidence, are not reviewable on appeal
by certiorari.
10

The foregoing rule is, of course, subject to certain exceptions such as when there exists a disparity
between the factual findings and conclusions of the Court of Appeals and the trial court.
11
Such a
disparity obtains in the present case.
As We see it, SBTC's theory, which was upheld by the public respondent, is that the "Lease
Agreement " covering Safe Deposit Box No. 54 (Exhibit "A and "1") is just that a contract of lease
and not a contract of deposit, and that paragraphs 9 and 13 thereof, which expressly limit the
bank's liability as follows:
9. The liability of the bank by reason of the lease, is limited to the exercise of the
diligence to prevent the opening of the Safe by any person other than the Renter, his
autliorized agent or legal representative;
xxx xxx xxx
13. The bank is not a depository of the contents of the Safe and it has neither the
possession nor the control of the same. The Bank has no interest whatsoever said
contents, except as herein provided, and it assumes absolutely no liability in connection
therewith.
12

are valid and binding upon the parties. In the challenged decision, the public respondent further avers that
even without such a limitation of liability, SBTC should still be absolved from any responsibility for the
damage sustained by the petitioner as it appears that such damage was occasioned by a fortuitous event
and that the respondent bank was free from any participation in the aggravation of the injury.
We cannot accept this theory and ratiocination. Consequently, this Court finds the petition to be
impressed with merit.
In the recent case CA Agro-Industrial Development Corp. vs. Court of Appeals,
13
this Court explicitly
rejected the contention that a contract for the use of a safety deposit box is a contract of lease governed
by Title VII, Book IV of the Civil Code. Nor did We fully subscribe to the view that it is a contract of deposit
to be strictly governed by the Civil Code provision on deposit;
14
it is, as We declared, a special kind of
deposit. The prevailing rule in American jurisprudence that the relation between a bank renting out
safe deposit boxes and its customer with respect to the contents of the box is that of a bailor and bailee,
the bailment for hire and mutual benefit
15
has been adopted in this jurisdiction, thus:
In the context of our laws which authorize banking institutions to rent out safety
deposit boxes, it is clear that in this jurisdiction, the prevailing rule in the United States has
been adopted. Section 72 of the General Banking Act [R.A. 337, as amended] pertinently
provides:
"Sec. 72. In addition to the operations specifically authorized elsewhere in this Act,
banking institutions other than building and loan associations may perform the following
services:
(a) Receive in custody funds, documents, and valuable objects, and rent safety
deposit boxes for the safequarding of such effects.
xxx xxx xxx
The banks shall perform the services permitted under subsections (a), (b) and (c) of this
section asdepositories or as agents. . . ."(emphasis supplied)
Note that the primary function is still found within the parameters of a contract
of deposit, i.e., the receiving in custody of funds, documents and other valuable objects
for safekeeping. The renting out of the safety deposit boxes is not independent from, but
related to or in conjunction with, this principal function. A contract of deposit may be
entered into orally or in writing (Art. 1969, Civil Code] and, pursuant to Article 1306 of the
Civil Code, the parties thereto 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. The depositary's responsibility for the
safekeeping of the objects deposited in the case at bar is governed by Title I, Book IV of
the Civil Code. Accordingly, the depositary would be liable if, in performing its obligation,
it is found guilty of fraud, negligence, delay or contravention of the tenor of the
agreement [Art. 1170, id.]. In the absence of any stipulation prescribing the degree of
diligence required, that of a good father of a family is to be observed [Art. 1173, id.].
Hence, any stipulation exempting the depositary from any liability arising from the loss of
the thing deposited on account of fraud, negligence or delay would be void for being
contrary to law and public policy. In the instant case, petitioner maintains that conditions
13 and l4 of the questioned contract of lease of the safety deposit box, which read:
"13. The bank is a depositary of the contents of the safe and it has neither the
possession nor control of the same.
"14. The bank has no interest whatsoever in said contents, except as herein expressly
provided, and it assumes absolutely no liability in connection therewith."
are void as they are contrary to law and public policy. We find Ourselves in agreement
with this proposition for indeed, said provisions are inconsistent with the respondent
Bank's responsibility as a depositary under Section 72 (a) of the General Banking Act.
Both exempt the latter from any liability except as contemplated in condition 8 thereof
which limits its duty to exercise reasonable diligence only with respect to who shall be
admitted to any rented safe, to wit:
"8. The Bank shall use due diligence that no unauthorized person shall be
admitted to any rented safe and beyond this, the Bank will not be
responsible for the contents of any safe rented from it."
Furthermore condition 13 stands on a wrong premise and is contrary to the actual
practice of the Bank. It is not correct to assert that the Bank has neither the possession
nor control of the contents of the box since in fact, the safety deposit box itself is located
in its premises and is under its absolute control; moreover, the respondent Bank keeps
the guard key to the said box. As stated earlier, renters cannot open their respective
boxes unless the Bank cooperates by presenting and using this guard key. Clearly then,
to the extent above stated, the foregoing conditions in the contract in question are void
and ineffective. It has been said:
"With respect to property deposited in a safe-deposit box by a customer of a safe-
deposit company, the parties, since the relation is a contractual one, may by
special contract define their respective duties or provide for increasing or limiting
the liability of the deposit company, provided such contract is not in violation of
law or public policy. It must clearly appear that there actually was such a special
contract, however, in order to vary the ordinary obligations implied by law from the
relationship of the parties; liability of the deposit company will not be enlarged or
restricted by words of doubtful meaning. The company, in renting safe-deposit
boxes, cannot exempt itself from liability for loss of the contents by its own fraud
or negligence or that, of its agents or servants, and if a provision of the contract
may be construed as an attempt to do so, it will be held ineffective for the
purpose. Although it has been held that the lessor of a safe-deposit box cannot
limit its liability for loss of the contents thereof through its own negligence, the
view has been taken that such a lessor may limit its liability to some extent by
agreement or stipulation ."[10 AM JUR 2d., 466]. (citations omitted) 16
It must be noted that conditions No. 13 and No. 14 in the Contract of Lease of Safety Deposit Box
in CA Agro-Industrial Development Corp. are strikingly similar to condition No. 13 in the instant case.
On the other hand, both condition No. 8 in CA Agro-Industrial Development Corp. and condition No.
9 in the present case limit the scope of the exercise of due diligence by the banks involved to merely
seeing to it that only the renter, his authorized agent or his legal representative should open or have
access to the safety deposit box. In short, in all other situations, it would seem that SBTC is not
bound to exercise diligence of any kind at all. Assayed in the light of Our aforementioned
pronouncements in CA Agro-lndustrial Development Corp., it is not at all difficult to conclude that
both conditions No. 9 and No. 13 of the "Lease Agreement" covering the safety deposit box in
question (Exhibits "A" and "1") must be stricken down for being contrary to law and public policy as
they are meant to exempt SBTC from any liability for damage, loss or destruction of the contents of
the safety deposit box which may arise from its own or its agents' fraud, negligence or delay.
Accordingly, SBTC cannot take refuge under the said conditions.
Public respondent further postulates that SBTC cannot be held responsible for the destruction or
loss of the stamp collection because the flooding was a fortuitous event and there was no showing of
SBTC's participation in the aggravation of the loss or injury. It states:
Article 1174 of the Civil Code provides:
"Except in cases expressly specified by the law, or when it is otherwise declared
by stipulation, or when the nature of the obligation requires the assumption of
risk, no person shall be responsible for those events which could not be
foreseen, or which, though foreseen, were inevitable.'
In its dissertation of the phrase "caso fortuito" the Enciclopedia Jurisdicada
Espaola
17
says: "In a legal sense and, consequently, also in relation to contracts, a "caso fortuito" prevents (sic)
18
the
following essential characteristics: (1) the cause of the unforeseen ands unexpected occurrence, or of the failure of the debtor
to comply with his obligation, must be independent of the human will; (2) it must be impossible to foresee the event which
constitutes 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 one debtor to fulfill his obligation in a normal manner; and (4) the obligor must be free from any
participation in the aggravation of the injury resulting to the creditor." (cited in Servando vs. Phil., Steam Navigation
Co., supra).
19

Here, the unforeseen or unexpected inundating floods were independent of the will of the
appellant bank and the latter was not shown to have participated in aggravating damage
(sic) to the stamps collection of the appellee. In fact, the appellant bank offered its services
to secure the assistance of an expert to save most of the then good stamps but the appelle
refused and let (sic) these recoverable stamps inside the safety deposit box until they were
ruined.
20

Both the law and authority cited are clear enough and require no further elucidation. Unfortunately,
however, the public respondent failed to consider that in the instant case, as correctly held by the trial
court, SBTC was guilty of negligence. The facts constituting negligence are enumerated in the petition
and have been summarized in this ponencia. SBTC's negligenceaggravated the injury or damage to the
stamp collection. SBTC was aware of the floods of 1985 and 1986; it also knew that the floodwaters
inundated the room where Safe Deposit Box No. 54 was located. In view thereof, it should have lost no
time in notifying the petitioner in order that the box could have been opened to retrieve the stamps, thus
saving the same from further deterioration and loss. In this respect, it failed to exercise the reasonable
care and prudence expected of a good father of a family, thereby becoming a party to the aggravation of
the injury or loss. Accordingly, the aforementioned fourth characteristic of a fortuitous event is absent
Article 1170 of the Civil Code, which reads:
Those who in the performance of their obligation are guilty of fraud, negligence, or
delay, and those who in any manner contravene the tenor thereof, are liable for
damages,
thus comes to the succor of the petitioner. The destruction or loss of the stamp collection which was,
in the language of the trial court, the "product of 27 years of patience and diligence"
21
caused the
petitioner pecuniary loss; hence, he must be compensated therefor.
We cannot, however, place Our imprimatur on the trial court's award of moral damages. Since the
relationship between the petitioner and SBTC is based on a contract, either of them may be held
liable for moral damages for breach thereof only if said party had acted fraudulently or in bad
faith.
22
There is here no proof of fraud or bad faith on the part of SBTC.
WHEREFORE, the instant petition is hereby GRANTED. The challenged Decision and Resolution of
the public respondent Court of Appeals of 21 August 1991 and 21 November 1991, respectively, in
CA-G.R. CV No. 26737, are hereby SET ASIDE and the Decision of 19 February 1990 of Branch 47
of the Regional Trial Court of Manila in Civil Case No. 87-42601 is hereby REINSTATED in full,
except as to the award of moral damages which is hereby set aside.
Costs against the private respondent.
SO ORDERED.

Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 147839 June 8, 2006
GAISANO CAGAYAN, INC. Petitioner,
vs.
INSURANCE COMPANY OF NORTH AMERICA, Respondent.
D E C I S I O N
AUSTRIA-MARTINEZ, J .:
Before the Court is a petition for review on certiorari of the Decision
1
dated October 11, 2000 of the
Court of Appeals (CA) in CA-G.R. CV No. 61848 which set aside the Decision dated August 31,
1998 of the Regional Trial Court, Branch 138, Makati (RTC) in Civil Case No. 92-322 and upheld the
causes of action for damages of Insurance Company of North America (respondent) against
Gaisano Cagayan, Inc. (petitioner); and the CA Resolution dated April 11, 2001 which denied
petitioner's motion for reconsideration.
The factual background of the case is as follows:
Intercapitol Marketing Corporation (IMC) is the maker of Wrangler Blue Jeans. Levi Strauss (Phils.)
Inc. (LSPI) is the local distributor of products bearing trademarks owned by Levi Strauss & Co.. IMC
and LSPI separately obtained from respondent fire insurance policies with book debt endorsements.
The insurance policies provide for coverage on "book debts in connection with ready-made clothing
materials which have been sold or delivered to various customers and dealers of the Insured
anywhere in the Philippines."
2
The policies defined book debts as the "unpaid account still appearing
in the Book of Account of the Insured 45 days after the time of the loss covered under this
Policy."
3
The policies also provide for the following conditions:
1. Warranted that the Company shall not be liable for any unpaid account in respect of the
merchandise sold and delivered by the Insured which are outstanding at the date of loss for
a period in excess of six (6) months from the date of the covering invoice or actual delivery of
the merchandise whichever shall first occur.
2. Warranted that the Insured shall submit to the Company within twelve (12) days after the
close of every calendar month all amount shown in their books of accounts as unpaid and
thus become receivable item from their customers and dealers. x x x
4

x x x x
Petitioner is a customer and dealer of the products of IMC and LSPI. On February 25, 1991, the
Gaisano Superstore Complex in Cagayan de Oro City, owned by petitioner, was consumed by fire.
Included in the items lost or destroyed in the fire were stocks of ready-made clothing materials sold
and delivered by IMC and LSPI.
On February 4, 1992, respondent filed a complaint for damages against petitioner. It alleges that
IMC and LSPI filed with respondent their claims under their respective fire insurance policies with
book debt endorsements; that as of February 25, 1991, the unpaid accounts of petitioner on the sale
and delivery of ready-made clothing materials with IMC was P2,119,205.00 while with LSPI it
was P535,613.00; that respondent paid the claims of IMC and LSPI and, by virtue thereof,
respondent was subrogated to their rights against petitioner; that respondent made several demands
for payment upon petitioner but these went unheeded.
5

In its Answer with Counter Claim dated July 4, 1995, petitioner contends that it could not be held
liable because the property covered by the insurance policies were destroyed due to fortuities event
or force majeure; that respondent's right of subrogation has no basis inasmuch as there was no
breach of contract committed by it since the loss was due to fire which it could not prevent or
foresee; that IMC and LSPI never communicated to it that they insured their properties; that it never
consented to paying the claim of the insured.
6

At the pre-trial conference the parties failed to arrive at an amicable settlement.
7
Thus, trial on the
merits ensued.
On August 31, 1998, the RTC rendered its decision dismissing respondent's complaint.
8
It held that
the fire was purely accidental; that the cause of the fire was not attributable to the negligence of the
petitioner; that it has not been established that petitioner is the debtor of IMC and LSPI; that since
the sales invoices state that "it is further agreed that merely for purpose of securing the payment of
purchase price, the above-described merchandise remains the property of the vendor until the
purchase price is fully paid", IMC and LSPI retained ownership of the delivered goods and must bear
the loss.
Dissatisfied, petitioner appealed to the CA.
9
On October 11, 2000, the CA rendered its decision
setting aside the decision of the RTC. The dispositive portion of the decision reads:
WHEREFORE, in view of the foregoing, the appealed decision is REVERSED and SET ASIDE and
a new one is entered ordering defendant-appellee Gaisano Cagayan, Inc. to pay:
1. the amount of P2,119,205.60 representing the amount paid by the plaintiff-appellant to the
insured Inter Capitol Marketing Corporation, plus legal interest from the time of demand until
fully paid;
2. the amount of P535,613.00 representing the amount paid by the plaintiff-appellant to the
insured Levi Strauss Phil., Inc., plus legal interest from the time of demand until fully paid.
With costs against the defendant-appellee.
SO ORDERED.
10

The CA held that the sales invoices are proofs of sale, being detailed statements of the nature,
quantity and cost of the thing sold; that loss of the goods in the fire must be borne by petitioner since
the proviso contained in the sales invoices is an exception under Article 1504 (1) of the Civil Code,
to the general rule that if the thing is lost by a fortuitous event, the risk is borne by the owner of the
thing at the time the loss under the principle of res perit domino; that petitioner's obligation to IMC
and LSPI is not the delivery of the lost goods but the payment of its unpaid account and as such the
obligation to pay is not extinguished, even if the fire is considered a fortuitous event; that by
subrogation, the insurer has the right to go against petitioner; that, being a fire insurance with book
debt endorsements, what was insured was the vendor's interest as a creditor.
11

Petitioner filed a motion for reconsideration
12
but it was denied by the CA in its Resolution dated April
11, 2001.
13

Hence, the present petition for review on certiorari anchored on the following Assignment of Errors:
THE COURT OF APPEALS ERRED IN HOLDING THAT THE INSURANCE IN THE INSTANT
CASE WAS ONE OVER CREDIT.
THE COURT OF APPEALS ERRED IN HOLDING THAT ALL RISK OVER THE SUBJECT GOODS
IN THE INSTANT CASE HAD TRANSFERRED TO PETITIONER UPON DELIVERY THEREOF.
THE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS AUTOMATIC
SUBROGATION UNDER ART. 2207 OF THE CIVIL CODE IN FAVOR OF RESPONDENT.
14

Anent the first error, petitioner contends that the insurance in the present case cannot be deemed to
be over credit since an insurance "on credit" belies not only the nature of fire insurance but the
express terms of the policies; that it was not credit that was insured since respondent paid on the
occasion of the loss of the insured goods to fire and not because of the non-payment by petitioner of
any obligation; that, even if the insurance is deemed as one over credit, there was no loss as the
accounts were not yet due since no prior demands were made by IMC and LSPI against petitioner
for payment of the debt and such demands came from respondent only after it had already paid IMC
and LSPI under the fire insurance policies.
15

As to the second error, petitioner avers that despite delivery of the goods, petitioner-buyer IMC and
LSPI assumed the risk of loss when they secured fire insurance policies over the goods.
Concerning the third ground, petitioner submits that there is no subrogation in favor of respondent as
no valid insurance could be maintained thereon by IMC and LSPI since all risk had transferred to
petitioner upon delivery of the goods; that petitioner was not privy to the insurance contract or the
payment between respondent and its insured nor was its consent or approval ever secured; that this
lack of privity forecloses any real interest on the part of respondent in the obligation to pay, limiting
its interest to keeping the insured goods safe from fire.
For its part, respondent counters that while ownership over the ready- made clothing materials was
transferred upon delivery to petitioner, IMC and LSPI have insurable interest over said goods as
creditors who stand to suffer direct pecuniary loss from its destruction by fire; that petitioner is liable
for loss of the ready-made clothing materials since it failed to overcome the presumption of liability
under Article 1265
16
of the Civil Code; that the fire was caused through petitioner's negligence in
failing to provide stringent measures of caution, care and maintenance on its property because
electric wires do not usually short circuit unless there are defects in their installation or when there is
lack of proper maintenance and supervision of the property; that petitioner is guilty of gross and
evident bad faith in refusing to pay respondent's valid claim and should be liable to respondent for
contracted lawyer's fees, litigation expenses and cost of suit.
17

As a general rule, in petitions for review, the jurisdiction of this Court in cases brought before it from
the CA is limited to reviewing questions of law which involves no examination of the probative value
of the evidence presented by the litigants or any of them.
18
The Supreme Court is not a trier of facts;
it is not its function to analyze or weigh evidence all over again.
19
Accordingly, findings of fact of the
appellate court are generally conclusive on the Supreme Court.
20

Nevertheless, jurisprudence has recognized several exceptions in which factual issues may be
resolved by this Court, such as: (1) when the findings are grounded entirely on speculation, surmises
or conjectures; (2) when the inference made is manifestly mistaken, absurd or impossible; (3) when
there is grave abuse of discretion; (4) when the judgment is based on a misapprehension of facts;
(5) when the findings of facts are conflicting; (6) when in making its findings the CA went beyond the
issues of the case, or its findings are contrary to the admissions of both the appellant and the
appellee; (7) when the findings are contrary to the trial court; (8) when the findings are conclusions
without citation of specific evidence on which they are based; (9) when the facts set forth in the
petition as well as in the petitioner's main and reply briefs are not disputed by the respondent; (10)
when the findings of fact are premised on the supposed absence of evidence and contradicted by
the evidence on record; and (11) when the CA manifestly overlooked certain relevant facts not
disputed by the parties, which, if properly considered, would justify a different
conclusion.
21
Exceptions (4), (5), (7), and (11) apply to the present petition.
At issue is the proper interpretation of the questioned insurance policy. Petitioner claims that the CA
erred in construing a fire insurance policy on book debts as one covering the unpaid accounts of
IMC and LSPI since such insurance applies to loss of the ready-made clothing materials sold and
delivered to petitioner.
The Court disagrees with petitioner's stand.
It is well-settled that when the words of a contract are plain and readily understood, there is no room
for construction.
22
In this case, the questioned insurance policies provide coverage for "book debts in
connection with ready-made clothing materials which have been sold or delivered to various
customers and dealers of the Insured anywhere in the Philippines."
23
; and defined book debts as the
"unpaid account still appearing in the Book of Account of the Insured 45 days after the time of the
loss covered under this Policy."
24
Nowhere is it provided in the questioned insurance policies that the
subject of the insurance is the goods sold and delivered to the customers and dealers of the insured.
Indeed, when the terms of the agreement are clear and explicit that they do not justify an attempt to
read into it any alleged intention of the parties, the terms are to be understood literally just as they
appear on the face of the contract.
25
Thus, what were insured against were the accounts of IMC and
LSPI with petitioner which remained unpaid 45 days after the loss through fire, and not the loss or
destruction of the goods delivered.
Petitioner argues that IMC bears the risk of loss because it expressly reserved ownership of the
goods by stipulating in the sales invoices that "[i]t is further agreed that merely for purpose of
securing the payment of the purchase price the above described merchandise remains the property
of the vendor until the purchase price thereof is fully paid."
26

The Court is not persuaded.
The present case clearly falls under paragraph (1), Article 1504 of the Civil Code:
ART. 1504. Unless otherwise agreed, the goods remain at the seller's risk until the ownership therein
is transferred to the buyer, but when the ownership therein is transferred to the buyer the goods are
at the buyer's risk whether actual delivery has been made or not, except that:
(1) Where delivery of the goods has been made to the buyer or to a bailee for the buyer, in
pursuance of the contract and the ownership in the goods has been retained by the seller merely to
secure performance by the buyer of his obligations under the contract, the goods are at the buyer's
risk from the time of such delivery; (Emphasis supplied)
x x x x
Thus, when the seller retains ownership only to insure that the buyer will pay its debt, the risk of loss
is borne by the buyer.
27
Accordingly, petitioner bears the risk of loss of the goods delivered.
IMC and LSPI did not lose complete interest over the goods. They have an insurable interest until
full payment of the value of the delivered goods. Unlike the civil law concept of res perit domino,
where ownership is the basis for consideration of who bears the risk of loss, in property insurance,
one's interest is not determined by concept of title, but whether insured has substantial economic
interest in the property.
28

Section 13 of our Insurance Code defines insurable interest as "every interest in property, whether
real or personal, or any relation thereto, or liability in respect thereof, of such nature that a
contemplated peril might directly damnify the insured." Parenthetically, under Section 14 of the same
Code, an insurable interest in property may consist in: (a) an existing interest; (b) an inchoate
interest founded on existing interest; or (c) an expectancy, coupled with an existing interest in that
out of which the expectancy arises.
Therefore, an insurable interest in property does not necessarily imply a property interest in, or a lien
upon, or possession of, the subject matter of the insurance, and neither the title nor a beneficial
interest is requisite to the existence of such an interest, it is sufficient that the insured is so situated
with reference to the property that he would be liable to loss should it be injured or destroyed by the
peril against which it is insured.
29
Anyone has an insurable interest in property who derives a benefit
from its existence or would suffer loss from its destruction.
30
Indeed, a vendor or seller retains an
insurable interest in the property sold so long as he has any interest therein, in other words, so long
as he would suffer by its destruction, as where he has a vendor's lien.
31
In this case, the insurable
interest of IMC and LSPI pertain to the unpaid accounts appearing in their Books of Account 45 days
after the time of the loss covered by the policies.
The next question is: Is petitioner liable for the unpaid accounts?
Petitioner's argument that it is not liable because the fire is a fortuitous event under Article 1174
32
of
the Civil Code is misplaced. As held earlier, petitioner bears the loss under Article 1504 (1) of the
Civil Code.
Moreover, it must be stressed that the insurance in this case is not for loss of goods by fire but for
petitioner's accounts with IMC and LSPI that remained unpaid 45 days after the fire. Accordingly,
petitioner's obligation is for the payment of money. As correctly stated by the CA, where the
obligation consists in the payment of money, the failure of the debtor to make the payment even by
reason of a fortuitous event shall not relieve him of his liability.
33
The rationale for this is that the rule
that an obligor should be held exempt from liability when the loss occurs thru a fortuitous event only
holds true when the obligation consists in the delivery of a determinate thing and there is no
stipulation holding him liable even in case of fortuitous event. It does not apply when the obligation is
pecuniary in nature.
34

Under Article 1263 of the Civil Code, "[i]n an obligation to deliver a generic thing, the loss or
destruction of anything of the same kind does not extinguish the obligation." If the obligation is
generic in the sense that the object thereof is designated merely by its class or genus without any
particular designation or physical segregation from all others of the same class, the loss or
destruction of anything of the same kind even without the debtor's fault and before he has incurred in
delay will not have the effect of extinguishing the obligation.
35
This rule is based on the principle that
the genus of a thing can never perish. Genus nunquan perit.
36
An obligation to pay money is generic;
therefore, it is not excused by fortuitous loss of any specific property of the debtor.
37

Thus, whether fire is a fortuitous event or petitioner was negligent are matters immaterial to this
case. What is relevant here is whether it has been established that petitioner has outstanding
accounts with IMC and LSPI.
With respect to IMC, the respondent has adequately established its claim. Exhibits "C" to "C-
22"
38
show that petitioner has an outstanding account with IMC in the amount of P2,119,205.00.
Exhibit "E"
39
is the check voucher evidencing payment to IMC. Exhibit "F"
40
is the subrogation receipt
executed by IMC in favor of respondent upon receipt of the insurance proceeds. All these
documents have been properly identified, presented and marked as exhibits in court. The
subrogation receipt, by itself, is sufficient to establish not only the relationship of respondent as
insurer and IMC as the insured, but also the amount paid to settle the insurance claim. The right of
subrogation accrues simply upon payment by the insurance company of the insurance
claim.
41
Respondent's action against petitioner is squarely sanctioned by Article 2207 of the Civil
Code which provides:
Art. 2207. If the plaintiff's property has been insured, and he has received indemnity from the
insurance company for the injury or loss arising out of the wrong or breach of contract complained
of, the insurance company shall be subrogated to the rights of the insured against the wrongdoer or
the person who has violated the contract. x x x
Petitioner failed to refute respondent's evidence.
As to LSPI, respondent failed to present sufficient evidence to prove its cause of action. No
evidentiary weight can be given to Exhibit "F Levi Strauss",
42
a letter dated April 23, 1991 from
petitioner's General Manager, Stephen S. Gaisano, Jr., since it is not an admission of petitioner's
unpaid account with LSPI. It only confirms the loss of Levi's products in the amount of P535,613.00
in the fire that razed petitioner's building on February 25, 1991.
Moreover, there is no proof of full settlement of the insurance claim of LSPI; no subrogation receipt
was offered in evidence. Thus, there is no evidence that respondent has been subrogated to any
right which LSPI may have against petitioner. Failure to substantiate the claim of subrogation is fatal
to petitioner's case for recovery of the amount of P535,613.00.
WHEREFORE, the petition is partly GRANTED. The assailed Decision dated October 11, 2000 and
Resolution dated April 11, 2001 of the Court of Appeals in CA-G.R. CV No. 61848
are AFFIRMED with the MODIFICATION that the order to pay the amount of P535,613.00 to
respondent is DELETED for lack of factual basis.
No pronouncement as to costs.
SO ORDERED.

Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-7003 January 18, 1912
MANUEL ORIA Y GONZALES, plaintiff-appellant,
vs.
JOSE McMICKING, as sheriff of the city of Manila,
GUTIERREZ HERMANOS, MIGUEL GUTIERREZ DE CELIS, DANIEL PEREZ, and LEOPOLDO
CRIADO,defendants-appellees.
Chicote & Miranda for appellant.
Eduardo Gutierrez Repide for appellees.
MORELAND, J .:
These are the facts:
In the month of August, 1909, Gutierrez Hermanos brought an action Oria Hermanos & Co. for the
recovery of P147,204.28; that action is known as No. 7289 in the Court of First Instance of Manila. In
March, 1910 the plaintiff began another action against the same defendant for the recovery of
P12,318.57; this case was known as No. 7719 in said court. Subsequent to the beginning of the
above actions, and on or about the 30th day of April, 1910, the members of the company of Oria
Hermanos & Co., on account of the expiration of the time stated in their agreement of copartnership,
dissolved their relations and entered into liquidation. On the first day of June, 1910, Tomas Oria y
Balbas, as managing partner in liquidation, acting for himself and on behalf of his other coowners
Casimiro Oria y Balbas and Adolfo Fuster Robles, entered into a contract with the plaintiff in this
case, Manuel Orio Gonzales, which said contract was for the purpose of selling and transferring to
the plaintiff in this action all of the property of which the said Oria Hermanos & Co. was owner. Said
instrument contained the following clauses:
5. I, Tomas Oria y Balbas, do further state declare that I have agreed with the other party hereto,
Don Manuel Oria Gonzales, to sell all the property I have mentioned, which is specified more in
detail in the general inventory of Orio Hermanos & Co., for the price and under the conditions
hereinafter expressed; and in order to carry into effect such agreement made by me with the said
Don Manuel Orio Gonzales, in my own right and also in representation of my partners, Don Casimiro
Oria and Don Adolfo Fuster, I do hereby stipulate and agree:
6. As managing partner and liquidator of Oria Hermanos & Co., and further in my own right and in
the name and representation of Don Casimiro Oria y Balbas and Don Adolfo Fuster y Robles,
personally and as partners in Oria Hermanos & Co., in consideration of the sum of two hundred
seventy-four thousand pesos (P274,000), which the said Don Manuel Oria y Gonzales undertakes
and engages to pay to the firm of Oria Hermanos & Co., in liquidation, or to us the parties hereto,
myself and the persons I represent, as partners in Oria Hermanos & Co., which whom shall be paid
in installments, in the manner and under the conditions hereinafter set forth. I hereby sell, cede and
transfer absolutely and forever to the said Don Manuel Oria y Gonzales, his heirs and his assigns, all
and every part of the property mentioned in the fourth section hereof and more specially described in
the general inventory of Oria Hermosa & Co.; under the following mutual conditions:
(a) Don Manuel Oria y Gonzales engages and undertakes to pay and to settle the sum
agreed upon for this sale, cession and transfer within a period of twelve (12) years, further
engaging and undertaking to pay each year a sum of not less than ten thousand (10,000)
pesos and at the end of the said period to settle the balance of said price.
(b) After the first six (6) years of the period for the payment of the stipulated price, that is,
during the last six years of said period, Don Manuel Oria y Gonzales engages and
undertakes to pay the interest at 3 per cent a year on the price stipulated or the part thereof
unpaid at such time; provided, that this is mutual obligation and interest payable annually.
(c) Don Manuel Oria y Gonzales further engages and undertakes to pay Don Tomas Oria,
Don Casimiro Oria and Don Adolfo Fuster during the time that they remain in the Philippines
and do not reside abroad, the sum of one hundred and fifty (150) pesos monthly; which
obligation shall be understood to be contracted individually with each of the said parties; and
the amounts so paid to each and all of them shall be charged to the account of Oria
Hermanos & Co., in liquidation, in discharge of the stipulated consideration and the
installments thereof and interest thereon when due.
(d) Don Manuel Oria y Gonzales engages and undertakes not to sell, alienate, transfer or
mortgage, either wholly or in part, the property hereby sold to him, without the written
authorization of Don Tomas Oria as liquidator of the firm of Oria Hermanos & Co., so long as
the consideration of this sale is not fully satisfied, to guarantee which this restriction is
imposed: provided, that this restriction applies only to the vessels, real estate and branch
stores in the towns mentioned in the fourth section of this instrument, not to the rest of the
property.
(e) Don Manuel Oria y Gonzales engages and undertakes to cede gratuitously in the
dwelling-house in the town of Laoag, hereby sold, the use of the same or the portion thereof
that may be necessary for Don Tomas Oria to establish therein the liquidation office of Oria
Hermanos & Co.; provided, that this cession is made for a period of only two (2) years.
( f ) Don Tomas Oria y Balbas and Don Adolfo Fuster engage and undertake to place their
personal services at the disposal of Don Manuel Oria y Gonzales in everything relating to his
instruction in the management and conduct of the property and business hereby sold;
provided, that this obligation and promise shall be binding upon Don Adolfo Fuster only for
the time he may reside in the Philippines and upon both parties only for a maximum period of
12 months.
7. I, Manuel Oria y Gonzales, being informed of the foregoing action and contract executed by Don
Tomas Oria y Balbas, do on my part stipulated and agree: that I accept the sale, cession and
transfer hereby made by him in my favor and engage and undertake to pay Oria Hermanos & Co.,
either in liquidation, or if necessary to the partners of Oria Hermanos & Co., the price of said sale,
cession and transfer, that is, the sum of P274,000 within a period of 12 years, in the manner and
under the conditions set forth by him in the preceding section, and especially engaged not to sell,
alienate, transfer or mortgage the property involved in this sale which is specified in paragraph (d) of
the preceding section, without the previous written authorization of the vendor, Oria Hermanos &
Co., such property being so exempted as a guaranty for the payment of the purchase price of this
sale.
Among the goods transferred by this instrument was the steamship Serantes, which is the subject of
litigation.
On the 17th day of September, 1910, case No. 7719, above referred to, was resolved by the Court
of First Instance in favor of Gutierrez Hermanos and against Oria Hermanos & Co. for the sum
demanded in the complaint. The cause was appealed to the Supreme Court and, the judgment
therein having been affirmed,
1
execution was issued thereon and placed in the hands of the sheriff of
Manila. The sheriff immediately demanded that Tomas Oria y Balbas, as liquidator of the firm of Oria
Hermanos & Co. make payment of the said judgment, to which he replied that there were no funds
with which to pay the same. Thereupon the sheriff levied upon the said steamer Serantes, took
possession of the same, and announced it for sale at public auction on the 21st day of October,
19110. On the 18th day of October, 190, three days before the sale, the plaintiff in this action
presented to the sheriff a written statement claiming to be the owner of the said steamship, and to
have the right of possession of the same by reason of the sale to him by Oria Hermanos & Co. of all
of the property belonging to said company, including the said steamer Serantes, a shown by the
instrument above referred to the quoted. The sheriff thereupon required Gutierrez Hermanos to
present a bond for his protection, which having been done, the sheriff proceeded to the sale of the
steamship. At the sale Gutierrez Hermanos became the purchaser, said company being the highest
bidder, and the sum which it paid being the highest sum bidden for the same.
On the 19th day of October, 191, the plaintiff began the present action, which has for its object, as
shown by the prayer of the complaint: First, the issuance of a preliminary injunction to prevent the
sale of the steamship; and, second, the declaration that the plaintiff is the owner of said steamship
and is entitled to the possession of the same, and that the defendant be required to restore the same
to the plaintiff and to pay P10,000 damages for its detention.
Upon the trial judgment was found in favor of the defendant and against the plaintiff, and the
complaint was dismissed upon the merits with costs. From that judgment this appeal is taken.
The substantial question presented for our consideration is the validity of the sale from Oria
Hermanos & Co. to Manuel Oria y Gonzalez as against the creditors of said company. It is the
contention of Gutierrez Hermanos that said sale is fraudulent as against the creditors of Oria
Hermanos & Co., and that the transfer thereby consummated of the steamship in question was void
as to said creditors and as to Gutierrez Hermanos in particular.
There is some contention on the part of the plaintiffs that aside from the property included in the sale
referred to, Oria Hermanos & Co. had sufficient other property to pay the judgment of Gutierrez
Hermanos. The trial court found, however, against the plaintiff in this regard. A careful examination
of the record fails to disclose any sufficient reason for the reversal of the finding. While the evidence
is somewhat conflicting, we are of the opinion that there is sufficient to sustain the findings made.
In determining whether or not the sale in question was fraudulent as against creditors, these facts
must be kept in mind:
1. At the time of said sale the value of the assets of Oria Hermanos & Co., as stated by the
partners themselves, was P274,000.
2. That at the time of said sale actions were pending against said company by one single
creditor for sums aggregating in amount nearly P160,000.
3. The vendee of said sale was a son of Tomas Oria y Balbas and a nephew of the other two
persons heretofore mentioned which said three brothers together constituted all of the
members of said company.
4. Nothing of value seems to have been delivered by the plaintiff in consideration of said sale
and no security whatsoever was given for the payments therein provided for.
5. The plaintiff is a young man twenty-five years of age. There is no pretense whatsoever
that he owned any property or had any business at the time of the sale. On the contrary it
appears without contradiction that, when the sale took place, he was merely a student
without assets and without gainful occupation.
6. Plaintiff, at the time of the sale, was fully aware of the two suits that have already been
begun against the company whose assets he was purchasing and well knew that if said suits
should terminate in favor of the plaintiffs therein the judgments in which they terminated
would have to be paid out of the property which he was then taking over or they would not be
paid at all.
7. Under all the circumstances the sale in question was, so far as the creditors were
concerned, without consideration. To turn over a business worth P274,000 to an
"impecunious and vocationless youth" who knew absolutely nothing about the business he
received, and whose adaptability to the management of that business was entirely unknown,
without a penny being paid down, without any security whatsoever, is a proceeding so
unusual, so devoid of care and caution, and so wholly outside of the well defined lines of
ordinary business transactions, as to startle any person interested in the concern.
8. It is certain that the members of the company of Oria Hermanos & Co. would never have
made a similar contract or executed a similar instrument with a stranger.
9. The prohibition in the contract against the sale of certain portions of the property by the
plaintiff offers no protection whatever to the creditors. Such prohibitions is not security. The
parties who made the original transfer can waive and release it at pleasure. Such restrictions
is of no value to the creditors of the company. They can not utilize it for the reduction of their
claims or in any other beneficial ways.
In determining whether or not a certain conveyance is fraudulent the question in every case is
whether the conveyance was a bona fide transaction or a trick and contrivance to defeat creditors, or
whether it conserves to the debtor a special right. It is not sufficient that it is founded on good
consideration or is made with bona fide intent: it must have both elements. If defective in either of
these particulars, although good between the parties, it is voidable as to creditors. The rule is
universal both at law and in equity that whatever fraud creates justice will destroy. The test as to
whether or not a conveyance is fraudulent is, does it prejudice the rights of creditors?
In the consideration of whether or not certain transfers were fraudulent, courts have laid down
certain rules by which the fraudulent character of the transaction may be determined. The following
are some of the circumstances attending sales which have been dominated by the courts badges of
fraud:
1. The fact that the consideration of the conveyance is fictitious or is inadequate.
2. A transfer made by a debtor after suit has been begun and while it is pending against him.
3. A sale upon credit by an insolvent debtor.
4. Evidence of large indebtedness or complete insolvency.
5. The transfer of all or nearly all of his property by a debtor, especially when he is insolvent
or greatly embarrassed financially.
6. The fact that the transfer is made between father and son, when there are present other of
the above circumstances.
7. The failure of the vendee to take exclusive possession of all the property.
The case at bar presents every one of the badges of fraud above enumerated. Tested by the inquiry,
does the sale prejudice the rights of the creditors, the result is clear. The sale in the form in which it
was made leaves the creditors substantially without recourse. The property of the company is gone,
its income is gone, the business itself is likely to fail, the property is being dissipated, and is
depreciating in value. As a result, even if the claims of the creditors should live twelve years and the
creditors themselves wait that long, it more than likely that nothing would be found to satisfy their
claim at the end of the long wait. (Regalado vs. Luchsinger & Co., 5 Phil. Rep., 625; art. 1297, Civil
Code, par. 1; Manresa's Commentaries, vol. 8, pp. 713-719.)
Since the records shows that there was no property with which the judgment in question could be
paid, the defendants were obliged to resort to and levy upon the steamer in suit. The court below
was correct in finding the sale fraudulent and void as to Gutierrez Hermanos in so far as was
necessary to permit the collection of its judgment. As a corollary, the court below found that the
evidence failed to show that the plaintiff was the owner or entitled to the possession of the steamer
in question at the time of the levy and sale complained of, or that he was damaged thereby.
Defendant had the right to make the levy and test the validity of the sale in that way, without first
resorting to a direct action to annul the sale. The creditor may attack the sale by ignoring it and
seizing under his execution the property, or any necessary portion thereof, which is the subject of
the sale.
For these reasons the judgment is affirmed, without special finding as to costs. So ordered.

Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-22611 May 27, 1968
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
VISAYAN ELECTRIC COMPANY and THE COURT OF TAX APPEALS, respondents.
Office of the Solicitor General for petitioner.
Jesus P. Garcia for respondents.
SANCHEZ, J .:
The problems cast in legal setting in this petition for review
1
of the judgment of the Court of Tax
Appeals are:
Is Visayan Electric Company liable for deficiency income tax on dividends from the stock
investment of its employees' reserve fund for pensions?
Is it also liable for 25% surcharge on alleged late payment of franchise tax?
Respondent company is the holder of a legislative franchise, Act 3499 of the Philippine Legislature,
to operate and maintain an electric light, heat, and power system in the City of Cebu, certain
municipalities in the Province of Cebu, and other surrounding places.
In a board of directors' meeting held on March 14, 1949, respondent company established a pension
fund, known as the "Employees' Reserve for Pensions." Said fund is for the benefit of its "present
and future" employees, in the event of retirement, accident or disability. Every month thereafter an
amount has been set aside for this purpose. It is taken from the gross operating receipts of the
company. This reserve fund was later invested by the company in stocks of San Miguel Brewery,
Inc., for which dividends have been regularly received. But these dividends were not declared for tax
purposes.
It was in a letter dated August 9, 1957 that the Auditor General gave notice that as the company has
retained full control of the fund, therefore, the dividends are not tax exempt; but that such dividends
may be excluded from gross receipts for franchise tax purposes, provided the same are declared for
income tax purposes.
In pursuance of the above letter, the Provincial Auditor of Cebu allowed the company the option to
declare the dividends either as part of the company's income for income tax purposes or as part of
its income for franchise tax purposes. The company elected the latter.
2

The Revenue Examiner of Cebu, however, conducted a separate investigation for the Bureau of
Internal Revenue. His report dated September 17, 1959 likewise revealed that the "company itself is
the custodian or has the complete control of the fund." That report disagreed with the action of the
Provincial Auditor, instead considered the dividends as subject to corporate income tax under
Section 24 of the National Internal Revenue Code.
Said report further disclosed that: (a) during the years 1957, 1958 and 1959, some payments of the
franchise tax were made after fifteen days although within twenty days of the month following
the end of each calendar quarter, allegedly contrary to Section 259 of the Tax Code, which imposes
a 25% surcharge if the franchise faxes "remain unpaid for fifteen days from and after the date on
which they must be paid"; and (b) from 1954 to 1959, the company had not paid additional residence
tax imposed by Section 2 of Act 465.
With the foregoing report as basis, the Commissioner of Internal Revenue, in two letters of demand
dated September 7 and 15, 1960, assessed the following amounts against the company: (a)
P2,443.30 representing deficiency income tax for the years 1953 to 1958, plus interest and 50%
surcharge; (b) P3,850.00 as additional residence tax from 1954 to 1959; and (c) P35,419.05 as 25%
surcharge for late payment of franchise taxes for the years 1957, 1958 and 1959. Reconsideration
having been denied, the company went to the Court of Tax Appeals on petition for review.
On January 31, 1964, the Court of Tax Appeals sustained the correctness of the additional
residence tax assessments
3
but freed the company from liability for deficiency income tax and the
25% surcharge for late payment of franchise taxes.
It is now the turn of the Commissioner of Internal Revenue to appeal to this Court.
1. Admittedly, the investment of the fund in shares of stocks of the San Miguel Brewery, Inc. is not a
part of respondent company's business. Neither is it necessary or incidental to its operation under its
franchise. And yet those dividends were assessed by petitioner as part of the income of respondent
company. The tax court joins petitioner in this, but applied the following provision in Section 8, Act
3499 the company's legislative franchise in holding that the dividends are not subject to
income tax, viz.:
SEC. 8. The grantee shall pay the same taxes as are now or may hereafter be required by
law from other persons, on its real estate, buildings, plant, machinery, and other personal
property, except property declared exempt in this section. In consideration of the franchise
and rights hereby granted, the grantee shall pay into the municipal treasury of each
municipality in which it is supplying electricity to the public under this franchise, a tax equal to
two per centum of the gross earnings for electric current sold under this franchise in each of
the respective municipalities. Said percentage shall be due and payable quarterly and shall
be in lieu of all taxes of any kind levied, established or collected by any authority whatsoever,
now or in the future, on its poles, wires, insulators, switches, transformers and other
structures, installations, conductors and accessories, placed in and over the public streets,
avenues, roads, thoroughfares, squares, bridges, and other places andon its franchises,
rights, privileges, receipts, revenues and profits, from which taxes the grantee is hereby
expressly exempted.
4

We perceive incorrectness of this approach by the Tax Court. What is envisioned in the statute
granting exemption, so far as is pertinent to this case, is the last underscored portion thereof which
speaks of its receipts, revenues and profits, "from which taxes the grantee is hereby expressly
exempted." The heavy accent is on the word its. Plain import of this word, taken in context, is that
the receipts, revenues and profits, which could be tax-exempt under the statute, must be the
company's not somebody else's. No doubt this provision should not be broadened so as to
include situations which by fail intendment are excluded therefrom. To do so is to take too loose a
view of the statute.
The disputed income are not receipts, revenues or profits of the company. They do not go to the
general fund of the company. They are dividends from the San Miguel Brewery, Inc. investment
which form part of and are added to the reserve pension fund which is solely for the benefit of the
employees,
5
"to be distributed among the employees."
6

Not escaping notice is that by the resolution of respondent company's board and the setting aside of
monthly amounts from its gross operating receipts for that fund, said company was merely acting,
with respect to such fund, as trustee for its employees. For, indeed, the intention to establish a trust
in favor of the employees is clear. A valid express trust has thus been created.
7
And, for tax
purposes, the employees' reserve fund is a separate taxable entity.
8
Respondent company then,
while retaining legal title and custody
9
over the property, holds it in trust for the beneficiaries
mentioned in the resolution creating the trust, in the absence of any condition therein which would, in
effect, destroy the intention to create a trust.
10

Given the fact that the dividends are returns of the trust estate and not of the grantor company, we
must say that petitioner misconceived the import of the law when he assessed said dividends as part
of the income of the company. Similarly, the tax court should not have considered them at all as the
company's "receipts, revenues and profits" which are exempt from income tax.
2. As we look back at the resolution creating the employees' reserve fund and having in mind the
company's admission that it is "solely for the benefit of the employees" and that the company is
holding said fund "merely as trustee of its employees,"
11
we reach the conclusion that the fund may
not be diverted for other purposes, and that the trust so created is irrevocable. For, really nothing in
respondent company's acts suggests that it reserved the power to revoke that fund or for that matter
appropriate it for itself. The trust binds the company to its employees. The trust created is not
therefore a revocable trust a provided in Section 59 of the Tax Code.
12
Nor is it a trust contemplated
in Section 60, the income from which is for the benefit of the grantor.
13

This state of facts calls for inquiry into the applicability of Section 56 of the Tax Code, which in part
reads:
SEC. 56. Imposition of tax (a) Application of tax. The taxes imposed by this Title upon
individuals shall apply to the income of estate or of any kind of property held in trust,
including
(1) Income accumulated in trust for the benefit of unborn or unascertained person or persons
with contingent interests and income accumulated or held for future distribution under the
terms of the will or trust;
x x x x x x x x x
(c) Computation and payment
(1) In general. The tax shall be computed upon the net income of the estate or trust and
shall be paid by the fiduciary, except as provided in Section fifty-nine (relating to revocable
trust) and section sixty (relating to income for the benefit of the grantor);
x x x x x x x x x
14

Of interest here is that an amendment to Section 56 Republic Act 1983,
15
approved on June 22,
1957 singles out employees' trust for tax exemption in the following language:
(b) Exception. The tax imposed by this Title shall not apply to employees' trust which
forms part of a pension, stock bonus or profit-sharing plan of an employer for the benefit of
some or all of his employees (1) if contributions are made to the trust by such employer, or
employees, or both for the purpose of distributing to such employees the earnings and
principal of the fund accumulated by the trust in accordance with such plan, and (2) if under
the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with
respect to employees under the trust, for any part of the corpus or income to be (within the
taxable year or thereafter) used for, or diverted to, purposes other then for the exclusive
benefit of his employees: Provided, That any amount actually distributed to any employee or
distributee shall be taxable to him in the year in which so distributed to the extent that it
exceeds the amount contributed by such employee or distributee.
16

A dig into the legislative history unearths the fact that this exemption in Republic Act 1983 was
conceived in order to encourage the formation of pension trust systems for the benefit of laborers
and employees outside the Social Security Act.
17

Understandably, the second requirement in paragraph (b) of Section 56 of the Tax Code as it was
inserted by Republic Act 1983 non-diversion of fund was written into the statute the better to
insure that the trust fund and its income will be used "for the exclusive benefit" of the employees.
Of importance is the employment of the word plan as it is applied to pension set forth in the first part
of paragraph (b) aforesaid. Worth mentioning is that a sizeable portion of our Tax Code has been
lifted from the United States Internal Revenue Code. To be sure, Republic Act 1983 which amends
Section 56 of our Tax Code is substantially similar in terms to Section 165 of the United States
Internal Revenue Code of 1939.
18
It is thus permissible for this Court to look into the interpretations
of the American counterpart in an effort to determine the congressional scheme in exempting
employees' trust from taxation.
In the American jurisdiction, the word plan is emphasized. To qualify for exemption, the employees'
trust must refer to a definite program, scheme or plan. It must be set up in good faith. It must be
acturially sound. Under such plan, employees generally are to be extended retirement and pension
benefits. But why? The fund is not thereafter to be controlled or used for the benefit of the company
in any way.
19
A trust device used to disguise added compensation to the shareholders and officers of
a company and thereby avoid present payment of income tax thereon instead of providing for
future security of the employees in general will not qualify under the exemption.
20
Hubbell vs.
Commissioner of Internal Revenue, 150 F. 2d 516, 161 A.L.R. 764, 773, which was decided under
the 1939 version, confirms this view. There, the United States Circuit Court of Appeals took into
account the direction of the amendments in construing congressional purpose, and held that the
1942 amendment which added the requirement of non-discrimination in favor of shareholders,
officials, or highly-compensated employees presents no apparent change in congressional purpose:
"to insure that ... pension ... plans are operated for the welfare of employees in general, and to
prevent the trust device from being used for the benefit of shareholders, officials, or highly paid
employees...."
This is not to say, of course, that the employees' trust fund established by private respondent is a
device calculated to unserve its purpose and serve tax evasion. Unquestionably, the trust fund was
created in good faith. It is meant as it was intended to mean for the employees' welfare.
But wanting are sufficient data which would justify this Court to make a conclusive statement that the
trust qualifies under Section 56 (b) as it was inserted into the Tax Code by Republic Act 1963. The
only written evidence of record of the creation of the pension trust is the minutes of the board of
directors' meeting of March 14, 1949, the pertinent portion of which reads:
3. Upon motion duly seconded, the following resolution was unanimously passed:
RESOLVED, that the sum of FOUR HUNDRED FIFTEEN THOUSAND PESOS
(P415,000.00) be appropriated from the surplus of the company arising from prewar
operations in order to cover the payments of backpay and payment of reasonable
compensations to those persons who have materially aided the Company in its Organization
and Rehabilitation and in the preparation and prosecution of the Company's claims. This
appropriation shall cover a reserve fund for pensions for all the present and future
employees of the firm in the amount of SIXTY THOUSAND PESOS (P60,000.00), Reserve
Fund for Employees' Welfare to the amount of FIFTY THOUSAND PESOS (P50,000.00).
Reserve Funds for Medical Hospitalization, etc. to the amount of THIRTY THOUSAND
PESOS (P30,000.00). Reserve Fund for Insurance and Accident to the amount of TWENTY
FOUR THOUSAND PESOS (P24,000.00) and a Reserve Fund for Bonuses Payable to the
amount of FIFTY THOUSAND PESOS (P50,000.00).
4. Upon motion by Mr. Jesus Moraza, duly seconded by Mr. Juan Coromina, it was resolved
further that the committee consisting of Dr. Mamerto Escano, as Chairman and Messrs. Gil
Garcia and Salvador E. Sala as members be constituted, as it is hereby constituted, to study
the details of all the above resolutions and give effect thereto. The said committee is hereby
empowered to immediately put into effect the above resolutions.
We have the admitted fact also that every month thereafter an amount has been set aside for the
fund and the investment thereof in stocks of San Miguel Brewery, Inc.
And yet, something is amiss. For one, there is the admission made on page 3 of respondents' brief
that:
... It is, of course, admitted by the respondent Company that the strict requirements of
Section 56 (b) of the Tax Code on the formation of employees' trust funds for pension had
not been strictly complied with, although said funds and their returns are exclusively for the
benefit of respondent Company's employees.
And then, nothing extant in the record will show a pension plan actuarially sound. Correctly did the
Court of Tax Appeals find that "[i]t does not appear, however, that said pension trust was created in
accordance with the provision of Section 56 (b) of the Revenue Code."
21

The absence of such plan prevents us from taking a view which fits the purpose of the statute.
Coming into play then is the specific provision in paragraph (a), Section 56, heretofore transcribed,
which directs that the "taxes imposed by this Title upon individuals shall apply to the income ... of
any kind of property held in trust." For which reason, the income received by the employees' trust
fund from January 1, 1957 is subject to the income tax prescribed for individuals under Section 21 of
the Tax Code.
To follow a different construction would run "smack against the familiar rules that exemption from
taxation is not favored,
22
and that exemptions in tax statutes are never presumed,"
23
and these "are
but statements in adherence to the ancient rule that exemptions from taxation are construed
in strictissimi juris against the taxpayer and liberally in favor of the taxing authority."
24

3. Having reached the conclusion that the assessment made by petitioner and the ruling of the Court
of Tax Appeals on lack of income tax liability were on a mistaken premise, but that the trust
established by respondent should pay the taxes imposed upon individuals, we are now faced with
the mechanics of tax collection.
The problem of prescription comes in. By Section 331 of the Tax Code, internal revenue taxes shall
be assessed within five years after the return is filed. Here, no return was filed upon a belief in good
faith that no tax liability attaches. Add to this the fact that the Commissioner of Internal Revenue
made an assessment of income tax but upon the mistaken assumption that the tax payable was
upon the basis of a corporate tax and not individual tax, and the picture is complete. Good faith in
one, and honest mistake in the other. Both petitioner and respondent company are on the same
footing. It is because of this that we rule that Section 332 (a) of the Tax Code finds application. It
reads:
SEC. 332. Exceptions as to period of limitation of assessment and collection of taxes. (a)
In the case of a false or fraudulent return with intent to evade tax or of a failure to file a
return, the tax may be assessed, or a proceeding in court for the collection of such tax may
be begun without assessment, at any time within ten years after the discovery of the falsity,
fraud, or omission.
Assessment should have as starting point the known figures. From 1953 to 1958, the following
amounts were dividends received on the San Miguel Brewery, Inc. investment:
1953 ................................... P4,430.00
1954 ................................... 4,384.00
1955 ................................... 6,240.00
1956 ................................... 8,000.00
1957 ................................... 8,009.60
1958 ................................... 7,999.20
As far as we could read from the record, on the 1953 to 1956 dividends, payments under protest
were made as follows:
1. Deficiency franchise tax .................................. P468.14
2. 25% surcharge .................................................. 117.04
3. Compromise penalty ........................................ 50.00
Total ............................................

P635.18
On the 1957 dividends, the following were paid under protest:
1. Deficiency franchise tax .................................. P166.85
2. 25% surcharge .................................................. 41.71
3. Compromise ...................................................... 10.00
Total ............................................

P218.56
The 1958 dividends were included in the franchise tax return for the first quarter of 1959, the tax for
which was paid on April 16, 1959.
In the determination of the taxes due, the 50% surcharge sought by petitioner should not be
included. To subject a taxpayer to the payment of 50% surcharge provided for in Section 72 of the
National Internal Revenue Code, the State must show either that there was a wilful neglect to file a
return or that a case of a false or fraudulent return wilfully made exists. There is total absence of
proof, and petitioner does not allege, that respondent company wilfully neglected to file a return or
that it made a false or fraudulent return. In fact, this Court's pronouncement was necessary to
determine whether such dividends are taxable at all, and if so, under what law. In Yutivo Sons
Hardware Company vs. Commissioner,
25
our ruling is that where a man "honestly believes" that the
method employed by him in computing his tax liability is correct, he does not incur any fraud; in
which case, no fraud penalty attaches under Section 72 of the Tax Code, which in part reads:
SEC. 72. Surcharges for failure to render return and for rendering false and fraudulent
returns.
... In case of wilful neglect to file the return or list within the time prescribed by law, or in case
a false or fraudulent return or list is wilfully made, the Commissioner of Internal Revenue
shall add to the tax or to the deficiency tax, in case any payment has been made on the
basis of such return before the discovery of the falsity or fraud, a surcharge of fifty per
centum of the amount of such tax or deficiency tax....
Absent the specifics exacted in Section 72, no 50% surcharge is collectible.
4. Was respondent company late in the payment of its franchise taxes?
We first go to the controlling statutes. Section 259, paragraph (2) of the National Internal Revenue
Code reads:
SEC. 259. Tax on corporate franchises. ....
The taxes, charges, and percentages on corporate franchises, shall be due and payable as
specified in the particular franchise, or in case no time limit is specified therein, the
provisions of section one hundred and eighty-three shall apply; and if such taxes, charges,
and percentages remain unpaid for fifteen days from and after the date on which they must
be paid, twenty-five per centum shall be added to the amount of such taxes, charges, and
percentages, which increase shall form part of the tax.
26

Section 183 (a) mentioned in Section 259 of the same Code in turn partly reads:
SEC. 183. Payment of percentage taxes. (a) In general. It shall be the duty of every
person conducting a business on which a percentage tax is imposed under this Title, to
make a true and complete return of the amount of his, her or its gross monthly sales, receipts
or earnings, or gross value of output actually removed from the factory or mill warehouses
and within twenty days after the end of each month, pay the tax due thereon:....
Upon the other hand, the company's franchise provides:
... Said percentage shall be due and payable quarterly.
The quintessence of petitioner's argument is that the phrase "due and payable quarterly" in the
franchise of the company means that the tax is immediately demandable at the end of each calendar
quarter; and that since the franchise itself sets the time limit for the payment of the franchise tax,
Section 183 just quoted finds no application. In which case, so petitioner avers, the 25% surcharge
would be collectible if the percentage taxes remain unpaid after fifteen days from the end of each
calendar quarter.
Decisive of the question is the meaning of the term "due and payable quarterly." Resort to the
following definitions may help in clearing up the issue:
(1) The word "due" is only equivalent to or synonymous with "payable."
27

(2) The word "due" with reference to taxes, implies that such taxes are then "owing,
collectible or matured."
28

(3) "The word 'due' in one sense means that the debt or obligation to which it is applied has
by contract of operation of law become immediately payable, but in another sense it denotes
the existence of a simple indebtedness, without reference to the time of payment, in which it
is synonymous with 'owing' and includes all debts whether payable in praesenti or in
futuro."
29

(4) "Unless context clearly indicates a contrary meaning, the phrase 'due and payable' on a
specified date means the debt or obligation to which it is applicable is then immediately
payable."
30

In line with the foregoing definitions, the term "due and payable on the first day of each month" was
interpreted to mean that payment on any day during the month other than the first day would
constitute non-compliance.
31

In our opinion, the term "due and payable quarterly" in this case merely indicates the frequency of
payment of the franchise tax, viz., very three months. It does not refer to the time limit or, in the
precise language of Section 259, "the date on which they (the taxes) must be paid."
Under Section 183(a) in relation to Section 259, second paragraph, the law has opted to collect the
tax within twenty days after it becomes due and payable, namely, the last day of each quarter. The
time limit or the date on which the percentage tax must be paid by the company is the twentieth day
after the last day of each quarter. Section 259 grants another grace period of fifteen days from the
termination of this time limit before imposing the 25% surcharge.
To say that Section 183(a) is not applicable simply because, as amended, it provides for monthly
payment while the company's charter speaks of quarterly payment, is to hang so heavy a meaning
on too slender a frame. Prior to its amendment by R.A. 1612 on August 24, 1956, said Section
183(a) prescribed quarterly payment of percentage taxes.
32
Accurately read, the amendment merely
changed the manner or frequency of payment of the tax, whereas Section 259 makes reference to
Section 183(a) with respect to the time limit for payment of percentage taxes. The amendment does
not nullify the applicability of Section 183(a) to franchises which do not set any time limit for payment
although providing for a different manner or frequency of payment. Common sense dictates that it be
so. For, if the law has chosen to allow a fifteen-day grace period to taxpayers paying every month,
no cogent reason exists why the same period if not longer should be denied taxpayers paying
every three months. The latter require more time for preparation their return covers a longer
period. The tax court is correct.
33

Really, the tax cannot be immediately demandable at the end of each calendar quarter. Reason for
this is that transactions on the last day of the quarter must have to be included in the computation of
the taxpayer's return for each particular quarter. It is well-nigh impossible for the taxpayer to add up
his income, write down the deductions, and compute the net amount taxable as of the last working
hour of the last day of the quarter, and at the same time go to the nearest revenue office, submit the
quarterly return and pay the tax. This accounts for the fact that Section 183(a) of the National
Internal Revenue Code gives the taxpayer a leeway of twenty days after the end of each quarter to
do all of these. And by Section 259, it is only upon failure to pay for fifteen days "from and after the
date on which they must be paid" that the twenty-five per centum shall be added to the amount of
"taxes, charges, and percentages," on corporate franchises. Statutes are not to be so narrowly read
as to beget unreasonableness.
We accordingly rule that the franchise tax "must be paid" within "twenty days after the end" of each
quarter and that if such tax remains unpaid for 15 days "from and after the date on which they must
be paid," then twenty-five per centum shall be added to the amount due. No surcharge for late
payment of respondent company's franchise taxes accrues.
For the reasons given
The judgment under review is hereby AFFIRMED insofar as it reverses petitioner's assessment of
surcharge for late payment of respondent company's franchise tax;
34
and
Said judgment is hereby REVERSED insofar as it exempts respondent company from the payment
of deficiency income tax, in the sense that respondent company, in its capacity as fiduciary of its
employees' reserve fund, is hereby declared liable for the payment of individual income tax set forth
in Section 56(a) in connection with Section 21 of the National Internal Revenue Code; and
Conformably to the opinion expressed herein, let the record of this case be returned to the Court of
Tax Appeals with instructions to hear and determine the tax liability of the trust known as
"Employees' Reserve for Pensions" and/or tax refund, if any, to respondent Visayan Electric
Company, upon the dividends received during the years 1953 to 1958 on the investment of its
employees' reserve fund for pensions, and tax payments made by reason thereof, said tax to be
computed in accordance with Section 56(a) and (c) of the National Internal Revenue Code in relation
to Section 21 of the same Code.
No costs. So ordered.

Republic of the Philippines
SUPREME COURT
Manila
EN BANC

G.R. No. L-25885 January 31, 1972
LUZON BROKERAGE CO., INC., plaintiff-appellee,
vs.
MARITIME BUILDING CO., INC., and MYERS BUILDING CO., INC., defendants, MARITIME
BUILDING CO., INC., defendant-appellant.
Ross, Salcedo, Del Rosario, Bito and Misa for plaintiff-appellee.
C. R. Tiongson and L. V. Simbulan and Araneta, Mendoza and Papa for defendant Myers Building
Co., Inc.
Ambrosio Padilla Law Offices for defendant-appellant Maritima Building Co., Inc.

REYES, J.B.L., J .:p
Direct appeal (prior to the effectivity of Republic Act 5440) by Maritime Building Co., Inc. from a
decision of the Court of First Instance of Manila (in its Civil Case No. 47319), the dispositive part of
which provides as follows:
FOR ALL THE FOREGOING CONSIDERATIONS, judgment is hereby rendered
declaring that the Myers Building Co., Inc. is entitled to receive the rentals which the
plaintiff has been paying, including those already deposited in Court, thereby
relieving the plaintiff of any obligation to pay the same to any other party, and
ordering the Maritime Building Co., Inc. to pay the commission fees paid by the
Myers Building Co., Inc. to the Clerk of this Court, plus the sum of P3,000.00 as and
for attorney's fees.
On the cross-claim by the Myers Building Co., Inc., the Maritima Building Co., Inc. is
hereby ordered to pay the Myers Building Co., Inc. the sum of P10,000.00 damages,
plus the sum of P30,000.00, representing rentals wrongfully collected by it from the
plaintiff corresponding to the months of March, April and May, 1961 and the costs
hereof.
The antecedents of the litigation are summarized in the appealed judgment thus:
This is an action for interpleading.
It appears that on April 30, 1949, in the City of Manila, the defendant Myers Building
Co., Inc., owner of three parcels of land in the City of Manila, together with the
improvements thereon, entered into a contract entitled "Deed of Conditional Sale" in
favor of Bary Building Co., Inc., later known as Maritime Building Co., Inc., whereby
the former sold the same to the latter for P1,000,000.00, Philippine currency.
P50,000.00 of this price was paid upon the execution of the said contract and the
parties agreed that the balance of P950,000.00 was to be paid in monthly
installments at the rate of P10,000.00 with interest of 5% per annum until the same
was fully paid.
In Par. (O), they agreed that in case of failure on the part of the vendee to pay any of
the installments due and payable, the contract shall be annulled at the option of the
vendor and all payments already made by vendee shall be forfeited and the vendor
shall have right to re-enter the property and take possession thereof.
Later, the monthly installment of P10,000.00 above-stipulated with 5% interest per
annum was amended or decreased to P5,000.00 per month and the interest was
raised to 5-1/2% per annum. The monthly installments under the contract was
regularly paid by the Bary Building Co., Inc. and/or the Maritime Co., Inc. until the
end of February, 1961. It failed to pay the monthly installment corresponding to the
month of March 1961, for which the Vice-President, George Schedler, of the
Maritime Building Co., Inc., wrote a letter to the President of Myers, Mr. C. Parsons,
requesting for a moratorium on the monthly payment of the installments until the end
of the year 1961, for the reason that the said company was encountering difficulties
in connection with the operation of the warehouse business. However, Mr. C.
Parsons, in behalf of the Myers Estate, answered that the monthly payments due
were not payable to the Myers Estate but to the Myers Building Co., Inc., and that the
Board of Directors of the Myers Co., Inc. refused to grant the request for moratorium
for suspension of payments under any condition.
Notwithstanding the denial of this request for moratorium by the Myers Board of
Directors the Maritime Building Co., Inc. failed to pay the monthly installments
corresponding to the months of March, April and May, 1961. Whereupon, on May 16,
1961, the Myers Building Co., Inc. made a demand upon the Maritime Building Co.,
Inc., for the payment of the installments that had become due and payable, which
letter, however, was returned unclaimed.
Then, on June 5, 1961, the Myers Building Co., Inc. wrote the Maritime Building Co.,
Inc. another letter advising it of the cancellation of the Deed of Conditional Sale
entered into between them and demanding the return of the possession of the
properties and holding the Maritime Building Co., Inc. liable for use and occupation of
the said properties at P10,000.00 monthly.
In the meantime, the Myers Building Co., Inc. demanded upon the Luzon Brokerage
Co., Inc. to whom the Maritime Building Co., Inc. leased the properties, the payment
of monthly rentals of P10,000.00 and the surrender of the same to it. As a
consequence, the Luzon Brokerage Co., Inc. found itself in a payment to the wrong
party, filed this action for interpleader against the Maritime Building Co., Inc.
After the filing of this action, the Myers Building Co., Inc. in its answer filed a cross-
claim against the Maritime Building Co., Inc. praying for the confirmation of its right to
cancel the said contract. In the meantime, the contract between the Maritime Building
Co., Inc. and the Luzon Brokerage Co., Inc. was extended by mutual agreement for a
period of four (4) more years, from April, 1964 to March 31, 1968.
The Maritime Building Co., Inc. now contends (1) that the Myers Building Co., Inc.
cannot cancel the contract entered into by them for the conditional sale of the
properties in question extrajudicially and (2) that it had not failed to pay the monthly
installments due under the contract and, therefore, is not guilty of having violated the
same.
It should be further elucidated that the suspension by the appellant Maritime Building Co., Inc.
(hereinafter called Maritime) of the payment of installments due from it to appellee Myers Building
Co., Inc. (hereinafter designated as Myers Corporation) arose from an award of backwages made by
the Court of Industrial Relations in favor of members of Luzon Labor Union who served the Fil-
American forces in Bataan in early 1942 at the instance of the employer Luzon Brokerage Co. and
for which F. H. Myers, former majority stockholder of the Luzon Brokerage Co., had allegedly
promised to indemnify E. M. Schedler (who controlled Maritime) when the latter purchased Myers'
stock in the Brokerage Company. Schedler contended that he was being sued for the backpay
award of some P325,000, when it was a liability of Myers, or of the latter's estate upon his death. In
his letter to Myers Corporation (Exhibit "11", Maritime) dated 7 April 1961 (two months and ten days
before the initial complaint in the case at bar), Schedler claimed the following:
At all times when the F. H. Myers Estate was open in the Philippine Islands and open
in San Francisco, the Myers Estate or heirs assumed the defense of the Labor Union
claims and led us to believe that they would indemnify us therefrom.
Recently, however, for the first time, and after both the Philippine and San Francisco
F. H. Myers Estates were closed, we have been notified that the F. H. Myers
indemnity on the Labor Union case will not be honored, and in fact Mrs. Schedler and
I have been sued in the Philippines by my successor in interest, Mr. Wentholt, and
have been put to considerable expense.
You are advised that my wife and I, as the owners of the Maritime Building Company,
intend to withhold any further payments to Myers Building Company or Estate, in
order that we can preserve those funds and assets to set off against the potential
liability to which I am now exposed by the failure of the Myers heirs to honor the
indemnity agreement pertaining to the Labor claims.
The trial court found the position of Schedler indefensible, and that Maritime, by its failure to pay,
committed a breach of the sale contract; that Myers Company, from and after the breach, became
entitled to terminate the contract, to forfeit the installments paid, as well as to repossess, and collect
the rentals of, the building from its lessee, Luzon Brokerage Co., in view of the terms of the
conditional contract of sale stipulating that:
(d) It is hereby agreed, covenanted and stipulated by and between the parties hereto
that the Vendor will execute and deliver to the Vendee a definite or absolute deed of
sale upon the full payment by the vendee of the unpaid balance of the purchase price
hereinabove stipulated; that should the Vendee fail to pay any of the monthly
installments, when due, or otherwise fail to comply with any of the terms and
conditions herein stipulated, then this Deed of Conditional Sale shall automatically
and without any further formality, become null and void, and all sums so paid by the
Vendee by reason thereof, shall be considered as rentals and the Vendor shall then
and there be free to enter into the premises, take possession thereof or sell the
properties to any other party.
xxx xxx xxx
(o) In case the Vendee fails to make payment or payments, or any part thereof, as
herein provided, or fails to perform any of the covenants or agreements hereof, this
contract shall, at the option of the Vendor, be annulled and, in such event, all
payments made by the Vendee to the Vendor by virtue of this contract shall be
forfeited and retained by the Vendor in full satisfaction of the liquidated damages by
said Vendor sustained; and the said Vendor shall have the right to forthwith re-enter,
and take possession of, the premises subject-matter of this contract.
"The remedy of forfeiture stated in the next-preceding paragraph shall not be
exclusive of any other remedy, but the Vendor shall have every other remedy
granted it by virtue of this contract, by law, and by equity."
From the judgment of the court below, the dispositive portion whereof has been transcribed at the
start of this opinion, Myers duly appealed to this Court.
The main issue posed by appellant is that there has been no breach of contract by Maritime; and
assuming that there was one, that the appellee Myers was not entitled to rescind or resolve the
contract without recoursing to judicial process.
It is difficult to understand how appellant Maritime can seriously contend that its failure or refusal to
pay the P5,000 monthly installments corresponding to the months of March, April and May, 1961 did
not constitute a breach of contract with Myers, when said agreement (transcribed in the Record on
Appeal, pages 59-71) expressly stipulated that the balance of the purchase price (P950,000)
shall be paid at the rate of Ten Thousand Pesos (P10,000) monthly on or before the
10th day of each month with interest at 5% per annum, this amount to be first applied
on the interest, and the balance paid to the principal thereof; and the failure to pay
any installment or interest when due shall ipso factocause the whole unpaid balance
of the principal and interest to be and become immediately due and payable.
(Contract, paragraph b; Record on Appeal, page 63)
Contrary to appellant Maritime's averments, the default was not made in good faith. The text of the
letter to Myers (Exhibit "11", Maritime), heretofore quoted, leaves no doubt that the non-payment of
the installments was the result of a deliberate course of action on the part of appellant, designed to
coerce the appellee Myers Corporation into answering for an alleged promise of the late F. H.
MYERS to indemnify E. W. Schedler, the controlling stock-holder of appellant, for any payments to
be made to the members of the Luzon Labor Union. This is apparent also from appellant's letter to
his counsel (Exhibit "12", Maritime):
... I do not wish to deposit pesos representing the months of March, April and May,
since the Myers refusal to honor the indemnity concerning the labor claims has
caused me to disburse (sic) roughly $10,000.00 to date in fees, cost and travel
expenses. However, if the Myers people will deposit in trust with Mr. C. Parsons
25,000 pesos to cover my costs to date, I will then deposit with Mr. Parsons, in trust,
15,000 pesos for March, April and May and will also post a monthly deposit of 5,000
pesos until the dispute is settled. The dispute won't be settled in my mind, unless and
until:
a) The Myers people indemnify me fully the labor cases;
b) The labor cases are terminated favorably to Luzon Brokerage and no liability
exists;
c) The Myers people pay any judgment entered on the labor cases thereby releasing
me; or
d) It is finally determined either in San Francisco or in the Philippines by a court that
the Myers heirs must honor the indemnity which Mr. F. H. Myers promised when I
purchased Luzon Brokerage Company.
Yet appellant Maritime (assuming that it had validly acquired the claims of its president and
controlling stockholder, E. M. Schedler) could not ignore the fact that whatever obligation F. H.
Myers or his estate had assumed in favor of Schedler with respect to the Luzon Brokerage labor
case was not, and could not have been, an obligation of appellee corporation (Myers Building
Company). No proof exists that the board of directors of the Myers Corporation had agreed to
assume responsibility for the debts (if any) that the late Myers or his heirs had incurred in favor of
Schedler. Not only this, but it is apparent from the letters quoted heretofore that Schedler had
allowed the estate proceedings of the late F. M. Myers to close without providing for any contingent
liability in Schedler's favor; so that by offsetting the alleged debt of Myers to him, against the balance
of the price due under the "Deed of Conditional Sale", appellant Maritime was in fact attempting to
burden the Myers Building Company with an uncollectible debt, since enforcement thereof against
the estate of F. H. Myers was already barred.
Under the circumstances, the action of Maritime in suspending payments to Myers Corporation was
a breach of contract tainted with fraud or malice (dolo), as distinguished from mere negligence
(culpa), "dolo" being succinctly defined as a "conscious and intentional design to evade the normal
fulfillment of existing obligations" (Capistrano, Civil Code of the Philippines, Vol. 3, page 38), and
therefore incompatible with good faith (Castan, Derecho Civil, 7th Ed., Vol. 3, page 129; Diaz Pairo,
Teoria de Obligaciones, Vol. 1, page 116).
Maritime having acted in bad faith, it was not entitled to ask the court to give it further time to make
payment and thereby erase the default or breach that it had deliberately incurred. Thus the lower
court committed no error in refusing to extend the periods for payment. To do otherwise would be to
sanction a deliberate and reiterated infringement of the contractual obligations incurred by Maritime,
an attitude repugnant to the stability and obligatory force of contracts.
From another point of view, it is irrelevant whether appellant Maritime's infringement of its contract
was casual or serious, for as pointed out by this Court in Manuel vs. Rodriguez, 109 Phil. 1, at page
10
The contention of plaintiff-appellant that Payatas Subdivision Inc. had no right to
cancel the contract as there was only a "casual breach" is likewise untenable. In
contracts to sell, where ownership is retained by the seller and is not to pass until the
full payment of the price, such payment, as we said, is a positive suspensive
condition, the 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, in accordance with Article 1117 of the Old Civil Code. To argue that there was
only a casual breach is to proceed from the assumption that the contract is one of
absolute sale, where non-payment is a resolutory condition, which is not the case.
But it is argued for Maritime that even if it had really violated the Contract of Conditional Sale with
Myers, the latter could not extrajudicially rescind or resolve the contract, but must first recourse to
the courts. While recognizing that paragraph (d) of the deed of conditional sale expressly
provides inter alia
that should the Vendee fail to pay any of the monthly installments when due, or
otherwise fail to comply with any of the terms and conditions herein stipulated, then
this Deed of Conditional Sale shallautomatically and without any further formality,
become null and void, and all sums so paid by the Vendee by reason thereof shall be
considered as rentals.. (Emphasis supplied)
herein appellant Maritime avers that paragraph (e) of the deed contemplates that a suit should be
brought in court for a judicial declaration of rescission. The paragraph relied upon by Maritime is
couched in the following, terms:
(e) It is also hereby agreed, covenanted and stipulated by and between the parties
hereto that should the Vendor rescind this Deed of Conditional Sale, for any of the
reasons stipulated in the preceding paragraph, the Vendee by these presents
obligates itself to peacefully deliver the properties subject of this contract to the
Vendor, and in the event that the Vendee refuses to peacefully deliver the
possession of the properties subject of this contract to the Vendor in case of
rescission, and a suit should be brought in court by the Vendor to seek judicial
declaration of rescission and take possession of the properties subject of this
contract, the Vendee hereby obligates itself to pay all the expenses to be incurred by
reason of such suit and in addition obligates itself to pay the sum of P10,000.00, in
concept of damages, penalty and attorney's fees.
Correlation of this paragraph (e) with the preceding paragraph (d) of the Deed of Conditional Sale
(quoted in page 5 of this opinion) reveals no incompatibility between the two; and the suit to "be
brought in Court by the Vendor to seek judicial declaration of rescission" is provided for by
paragraph(e) only in the eventuality that, notwithstanding the automatic annulment of the deed under
paragraph (d), the Vendee "refuses to peacefully deliver the possession of the properties subject of
this contract". The step contemplated is logical since the Vendor can not, by himself, dispossess the
Vendee manu militari, if the latter should refuse to vacate despite the violation of the contract, since
no party can take the law in his own hands. But the bringing of such an action in no way contradicts
or restricts the automatic termination of the contract in case the Vendee (i.e., appellant Maritime)
should not comply with the agreement.
Anyway, this Court has repeatedly held that
Well settled is, however, the rule that a judicial action for the rescission of a contract
is not necessary where the contract provides that it may be revoked and cancelled
for violation of any of its terms and conditions" (Lopez vs. Commissioner of Customs,
L-28235, 30 January 1971, 37 SCRA 327, 334,, and cases cited therein).
1
(Emphasis
supplied.)
Resort to judicial action for rescission is obviously not contemplated.... The validity of
the stipulation can not be seriously disputed. It is in the nature of a facultative
resolutory condition which in many cases has been upheld by this Court. (Ponce
Enrile vs. Court of Appeals, L-27549, 30 Sept. 1969; 29 SCRA 504).
The obvious remedy of the party opposing the rescission for any reason being to file the
corresponding action to question the rescission and enforce the agreement, as indicated in our
decision in University of the Philippines vs. Walfrido de los Angeles,
L-28602, 29 September 1970, 35 SCRA 107.
Of course, it must be understood that the act of a party in treating a contract as
cancelled or resolved on account of infractions by the other contracting party must be
made known to the other and is always provisional, being ever subject to scrutiny
and review by the proper court. If the other party denies that rescission is justified, it
is free to resort to judicial action in its own behalf, and bring the matter to court.
Then, should the court, after due hearing, decide that the resolution of the contract
was not warranted, the responsible party will be sentenced to damages; in the
contrary case, the resolution will be affirmed, and the consequent indemnity awarded
to the party prejudiced.
In other words, the party who deems the contract violated may consider it resolved or
rescinded, and act accordingly, without previous court action, but it proceeds at its
own risk. For it is only the final judgment of the corresponding court that will
conclusively and finally settle whether the action taken was or was not correct in law.
But the law definitely does not require that the contracting party who believes itself
injured must first file suit and wait for a judgment before taking extrajudicial steps to
protect its interest. Otherwise, the party injured by the other's breach will have to
passively sit and watch its damages accumulate during the pendency of the suit until
the final judgment of rescission is rendered when the law itself requires that he
should exercise due diligence to minimize its own damages (Civil Code, Article
2203).
Maritime likewise invokes Article 1592 of the Civil Code of the Philippines as entitling it to pay
despite its default:
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.
Assuming arguendo that Article 1592 is applicable, the cross-claim filed by Myers against Maritime
in the court below constituted a judicial demand for rescission that satisfies the requirements of said
article.
But even if it were not so, appellant overlooks that its contract with appellee Myers is not the ordinary
sale envisaged by Article 1592, transferring ownership simultaneously with the delivery of the real
property sold, but one in which the vendor retained ownership of the immovable object of the sale,
merely undertaking to convey it provided the buyer strictly complied with the terms of the contract
(see paragraph [d], ante, page 5). In suing to recover possession of the building from Maritime,
appellee Myers is not after the resolution or setting aside of the contract and the restoration of the
parties to the status quo ante, as contemplated by Article 1592, but precisely enforcing the
provisions of the agreement that it is no longer obligated to part with the ownership or possession of
the property because Maritime failed to comply with the specified condition precedent, which is to
pay the installments as they fell due.
The distinction between contracts of sale and contract to sell with reserved title has been recognized
by this Court in repeated decisions
2
upholding the power of promisors under contracts to sell in case of
failure of the other party to complete payment, to extrajudicially terminate the operation of the contract,
refuse conveyance and retain the sums or installments already received, where such rights are expressly
provided for, as in the case at bar.
Maritime's appeal that it would be iniquituous that it should be compelled to forfeit the P973,000
already paid to Myers, as a result of its failure to make good a balance of only P319,300.65, payable
at P5,000 monthly, becomes unimpressive when it is considered that while obligated to pay the price
of one million pesos at P5,000 monthly, plus interest, Maritime, on the other hand, had leased the
building to Luzon Brokerage, Inc. since 1949; and Luzon paid P13,000 a month rent, from
September, 1951 to August 1956, and thereafter until 1961, at P10,000 a month, thus paying a total
of around one and a half million pesos in rentals to Maritime. Even adding to Maritime's losses of
P973,000 the P10,000 damages and P3,000 attorneys' fees awarded by the trial court, it is
undeniable that appellant Maritime has come out of the entire transaction still at a profit to itself.
There remains the procedural objection raised by appellant Maritime to this interpleader action filed
by the Luzon Brokerage Co., the lessee of the building conditionally sold by Myers to Maritime. It
should be recalled that when Maritime defaulted in its payments to Myers, and the latter notified the
former that it was cancelling the contract of conditional sale, Myers also notified Luzon Brokerage,
Maritime's lessee of the building, of the cancellation of the sale, and demanded that Luzon should
pay to Myers the rentals of the building beginning from June, 1961, under penalty of ejectment
(Record on Appeal, pages 14-15). In doubt as to who was entitled to the rentals, Luzon filed this
action for interpleader against Myers and Maritime, and deposited the rentals in court as they fell
due. The appellant Maritime moved to dismiss on the ground that (a) Luzon could not entertain
doubts as to whom the rentals should be paid since Luzon had leased the building from Maritime
since 1949, renewing the contract from time to time, and Myers had no right to cancel the lease; and
(b) that Luzon was not a disinterested party, since it tended to favor appellee Myers. The court below
overruled Maritime's objections and We see no plausible reason to overturn the order. While Myers
was not a party to the lease, its cancellation of the conditional sale of the premises to Maritime,
Luzon's lessor, could not but raise reasonable doubts as to the continuation of the lease, for the
termination of the lessor's right of possession of the premises necessarily ended its right to the
rentals falling due thereafter. The preceding portion of our opinion is conclusive that Luzon's doubts
were grounded under the law and the jurisprudence of this Court.
No adequate proof exists that Luzon was favoring any one of the contending parties. It was
interested in being protected against prejudice deriving from the result of the controversy, regardless
of who should win. For the purpose it was simpler for Luzon to compel the disputants to litigate
between themselves, rather than chance being sued by Myers, and later being compelled to proceed
against Maritime to recoup its losses. In any event, Maritime ultimately confirmed the act of Luzon in
suing for interpleader, by agreeing to renew Luzon's lease in 1963 during the pendency of the
present action, and authorizing Luzon to continue depositing the rentals in court "until otherwise
directed by a court of competent jurisdiction" (Exhibit "18-Maritime"). The procedural objection has
thus become moot.
PREMISES CONSIDERED, the appealed decision should be, and hereby is, affirmed, and appellant
Maritime Building Co., as well as appellee Luzon Brokerage Co., are further ordered to surrender the
premises to the appellee Myers Building Co. Costs against appellant.