Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION

that his accounts are all in order, Florence Onia admitted it was their fault.
The motor vehicle was returned to the plaintiff upon proper receipt.
After trial, the court a quo rendered its decision 6 the decretal portion of which reads:

G.R. No. L-65935 September 30, 1988

WHEREFORE, premises considered, this Court hereby renders judgment as

follows, to wit:

FILINVEST CREDIT CORPORATION, petitioner,

vs.
THE INTERMEDIATE APPELLATE COURT and NESTOR B. SUGA JR., respondents.

(1) ORDERING the defendant Filinvest Credit Corporation to pay the plaintiff
Nestor Sunga Jr. the following damages, to wit:

Labaguis, Loyola, Angara Law Offices for petitioner.

Juan C. Navarro, Jr. for private respondent.

(a)
Moral
(b)
Loss
on
Income
(c)
Actual
(d)
Litigation
(e) Attorney's Fees 10,000.00

of

the

SARMIENTO, J.:

(2) And to pay the costs.

In this special civil action for certiorari, Filinvest Credit Corporation implores us to declare the
nullity of the Decision 1 dated September 30, 1983 and the Resolution 2 dated December 16,
1983 of the Intermediate Appellate Courts 3 (now Court of Appeals) which were allegedly issued

SO ORDERED.

with grave abuse of discretion, amounting to lack of jurisdiction, or in excess of jurisdiction, and
with patent denial of due process. 4
The facts as found by the trial court are as follows: 5
This is a case for damages filed by Nestor B. Sunga Jr., businessman and
owner of the NBS Machineries Marketing and the NAP-NAP Transit. Plaintiff
alleged that he purchased a passenger minibus Mazda from the Motor
center, Inc. at Calasiao, Pangasinan on March 21, 1978 and for which he
executed a promissory note (Exhibit "B") to cover the amount of P62,592.00
payable monthly in the amount of P2,608.00 for 24 months due and payable
the 1st day of each month starting May 1, 1978 thru and inclusive of May 1,
1980. On the same date, however, a chattel mortgage was executed by him
in favor of the Motor center, Inc. (Exhibit "A"). The Chattel Mortgage and
Assignment was assigned to the Filinvest Credit Corporation with the
conformity of the plaintiff. Nestor Sunga claimed that on October 21, 1978,
the minibus was seized by two (2) employees of the defendant Filinvest
Credit Corporation upon orders of the branch manager Mr. Gaspar de los
Santos, without any receipt, who claimed that he was delinquent in the
payments of his vehicle. The plaintiff reported the loss to the PC (Exhibit "Y")
and after proper verification from the office of the Filinvest, the said vehicle
was recovered from the Crisologo Compound which was later released by
Rosario Fronda Assistant Manager of the Filinvest, and Arturo Balatbat as
caretaker of the compound. The police blotter of the Integrated National
Police of Dagupan City shows that Nestor Sunga and T/Sgt. Isidro Pascual
of the 153rd PC Company sought the assistance of the Dagupan police and
one Florence Onia of the Filinvest explained that the minibus was
confiscated because the balance was already past due. After verification

Damages
minibus
for
damages
expenses

three

days

P30,000.00
600.00
500.00
5,000.00

Dissatisfied with the aforecited decision, the defendant (petitioner herein), interposed a timely
appeal with the respondent court. On September 30, 1983, the latter promulgated its decision
affirming in toto the decision of the trial court dated July 17, 1981, "except with regard to the
moral damages which, under the circumstances of the accounting error incurred by Filinvest, is
hereby increased from P30,000.00 to P50,000.00." 7 As the reconsideration of said decision
proved futile in view of its denial by the respondent court in its resolution of December 16, 1983,
the petitioners come to us thru this instant petition for certiorari under Rule 65 of the Rules of
Court.
The petitioner alleges the following errors: 8
It is a patent grave abuse of discretion amounting to lack of jurisdiction and
a bare denial of petitioner's constitutional right to due process of law, when
the respondent Court completely ignored the assigned errors in the
petitioner's Brief upon which private respondent had joined issues with
petitioner.
In resolving the appeal before it thru matters and questions not raised at the
trial or on appeal, by either of the parties, respondent Court exceeded its
jurisdiction and acted with grave abuse of discretion.
When the respondent Court granted private respondent MORAL DAMAGES
in an exaggerated and unconscionable amount, respondent Court exceeded
the bounds of its discretion, amounting to an absence or lack of jurisdiction.
Respondent Court had NO authority to increase the award of DAMAGES to
private respondent when the latter did not appeal the decision because
private respondent considered the judgment (questioned by petitioner on
appeal) as "perfect", "sound" and "wise" (at pp. 17 to 20, Brief for Appellee).
In relying upon a BILL pending before the Batasan Pambansa to buttress its

judgment, the respondent Court acted contrary to law and jurisprudence,

making of its judgment a NULLITY.
The extensive citation and adherence by the respondent Court on (sic) its
decision in the case of "Edilberto Rebosura, et al. versus Rogaciano
Oropeza, CA-G.R. No. 63048-R, December 17, 1983" (which is nondoctrinal and under question in the Honorable Supreme Court) is not
warranted in law and jurisprudence, and amounts to a grave abuse of
discretion.
The various assignments of error may be synthesized into the sole issues 9 of. Whether or not
the respondent court a) in allegedly ignoring the various assigned errors in petitioners brief; b) in
resolving issues not raised at the trial and on appeal; c) in increasing the amount of moral
damages; and (d) in adhering to its decision in Edilberto Rebosura et al. vs. Rogaciano
Oropeza, CA-G.R. No. 63048-R, as well as to Batasan Bill No. 3075, which is yet to be enacted
into law, acted with grave abuse of discretion amounting to lack of jurisdiction.
Contrary views are espoused by the parties in this case. Petitioner maintains that it was patent
grave abuse of discretion amounting to lack of jurisdiction and a bare denial of the petitioner's
constitutional right to due process of law, when the respondent court completely brushed aside
the assigned errors in its brief. 10 It asserts that the constitutionality of the contractual stipulation
between the parties embodied in the documents denominated as Promissory Note and Deed of
Mortgage was not in issue in the court a quo and neither was the same raised on appea 11 and
therefore should not have been passed upon based on the premise that the appellate court
should not consider any error other than those assigned or specified. 12 Further, it submits that
the controversy on appeal is capable of adjudication on other substantive grounds, without
necessarily treading into constitutional questions. 13 It is also the petitioner's submission that the
increase in the award of moral damages from the P30,000.00 adjudged by the trial court which
was not appealed by respondent Sunga who felt that the award was "perfect," "sound," and
"wise," to a "whopping P50,000.00" imposed by the respondent Intermediate Appellate Court
(now Court of Appeals) amounted to a grave abuse of discretion. 14 Thus, the increase in the
award which the respondent appellate court justified by the accounting error committed by the
petitioner, should not be countenanced, as the same had no legal basis. 15 It rationalizes that
the respondent court's invocation of a pending bill in the legislature, Batasan Bill 3075, to
support its decision, is untenable. 16 Lastly, it deposits that Rebosura is riot on all fours with the
case at bar and therefore adherence thereto was misplaced, 17 citing the following distinctions:
18 1) In Rebosura, there was unlawful entry while in this case, there was none; 2) in the former,
the plaintiff did not breach the contract whereas in this case there is a finding by the court a quo
of such violation; 3) in the former, the contract was denominated Deed of Sale with Reservation
of Title, while in this case, the contracts referred to are the Promissory Note and Deed of
Mortgage; 4) in the former, the defendant Oropeza was an unpaid seller while the plaintiff
Rebosura was the buyer, whereas, in this case, the petitioner is the promissor-mortgagee while
Sunga is the promissor-mortgagor; 5) in the former, there was no notice of delinquency and
repossession, whereas, in this case, there is notice and demand; and 6) in the former, the
contract was in fine print, whereas, in this case, it is not so.

On the other side, the private respondent maintains that the respondent court did not abuse its
discretion, stressing that a careful reading and understanding of the assailed decision would
manifest that all assigned errors were resolved, citing portions of the decision which dealt
specifically with each of the errors assigned. 19 He maintains that the award of moral damages,
impeached as exaggerated and unconscionable, is justified by the prayer in the appellee's
(respondent Sunga's brief, to wit: FURTHER REMEDIES AND RELIEFS DEEMED JUST AND
EQUITABLE UNDER AND WITHIN THE PREMISES ARE PRAYED FOR. 20 Lastly, the private
respondent submits that the references to Batasan Bill No. 3075 and Rebosura were mere
passing comments which did not in any way detract from the validity of the assailed decision. 21
After carefully considering and weighing all the arguments of both protagonists, we hold that the
respondent court committed a grave abuse of discretion in increasing extravagantly the award of
moral damages and in granting litigation expenses. In those respects, the petition is granted and
to that extent the questioned decision is modified.
There is no gainsaying that the plaintiff-appellee (respondent Sunga did not appeal from the
decision of the court a quo which awarded him the sum of P30,000.00 by way of moral
damages. "Well settled is the rule in this jurisdiction that whenever an appeal is taken in a civil
case an appellee who has not himself appealed cannot obtain from the appellate court any
affirmative relief other than the ones granted in the decision of the court below." 22 Verily the
respondent court disregarded such a well settled rule when it increased the award for moral
damages from P30,000.00 to P50,000.00, notwithstanding the fact that the private respondent
did not appeal from the judgment of the trial court, an act indicative of grave abuse of discretion
amounting to lack of jurisdiction.
Certiorari lies when a court has acted without or in excess of jurisdiction or
with grave abuse of discretion. 'without jurisdiction' means that the court
acted with absolute want of jurisdiction. There is "excess of jurisdiction"
where the court has jurisdiction but has transcended the same or acted
without any statutory authority Leung Ben vs. O'Brien, 38 Phils., 182;
Salvador Campos y CIA vs. Del Rosario, 41 Phil., 45). "Grave abuse of
discretion" implies such capricious and whimsical exercise of judgment as is
equivalent to lack of jurisdiction (Abad Santos vs. Province of Tarlac, 38 Off.
Gaz., 83.) or in other words, where the power is exercised in an arbitrary or
despotic manner by reason of passion or personal hostility, and it must be so
patent and gross as to amount to an evasion of positive duty or to a virtual
refusal to perform the duty enjoined or to act at all in contemplation of law.
(Talavera-Luna vs. Nable, 38 Off. Gaz., 62). 23
Or, as held in the recent case of Robert Young vs. Julio A. Sulit, Jr., 24 "(F)or certiorari to lie,
there must be capricious, arbitrary, and whimsical exercise of power, the very antithesis of the
judicial prerogative in accordance with centuries of civil law and common law tradition."
We had occasion to state that "there is no hard and fast rule in the determination of what would
be a fair amount of moral damages, since each case must be governed by its own peculiar
circumstances." 25 Be that as it may and in amplification of this generalization, we set the
criterion that "in the case of moral damages, the yardstick should be that the "amount awarded

should not be palpably and scandalously excessive" so as to indicate that it was the result of
passion, prejudice or corruption on the part of the trial court ... . Moreover, the actual losses
sustained by the aggrieved parties and the gravity of the injuries must be considered in arriving
at reasonable levels ... ." 26
There is no dispute that the private respondent, a businessman and owner of the NBS
Machineries Marketing and NAP-NAP Transit, is entitled to moral damages due to the
unwarranted seizure of the minibus Mazda, allegedly because he was delinquent in the payment
of its monthly amortizations, which as stated above, turned out to be incorrect. 27 No doubt such
intent tainted private respondent Sunga's reputation in the business community, thus causing
him mental anguish, serious anxiety, besmirched reputation, wounded feelings, moral shock,
and social humiliation. Considering, however, that respondent Sunga was dispossessed of his
motor vehicle for barely three days, that is, from October 21, 1978 to October 23, 1978,
possession of which was restored to him soon after the accounting errors were ironed out, we
find that the award of moral damages even in the sum of P30,000.00 is excessive for it must be
emphasized that "damages are not intended to enrich the complainant at the expense of a
defendant. They are awarded only to enable the injured parties to obtain means, diversions or
amusements that will serve to alleviate the moral sufferings the injured parties have undergone
by reason of defendant's culpable action. In other words, the award of moral damages is aimed
at a restoration within the limits of the possible, of the spiritual status quo ante; and therefore it
must be proportionate to the suffering inflicted." 28 Moreover, "(M)oral damages though not
incapable of pecuniary estimations, are in the category of an award designed to compensate the
claimant for actual injury suffered and not to impose a penalty on the wrongdoer. 29
It behooves us therefore to reiterate the caveat to lower courts "to guard against the award of
exorbitant damages that are way out of proportion to the environmental circumstances of a case
and which time and again, this Court has reduced or eliminated. Judicial discretion granted to
the courts in the assessment of damages must always be exercised with balanced restraints and
measured objectivity. 30
We do not agree with private respondent's argument that the increase in the award of moral
damages is justified by the prayer in its brief, to wit: FURTHER REMEDIES AND RELIEFS
DEEMED JUST AND EQUITABLE UNDER AND WITHIN THE PREMISES ARE PRAYED FOR.
Such statement is usually extant in practically all pleadings as a final statement; it is rhetorical
flourish as it were and could not be a substitute for appeal as required by the rules for "the
appellee cannot seek modification or reversal of the judgment or affirmative relief, unless he has
also appealed therefrom." 31
With regard to the award of litigation expenses in the sum of P5,000.00, the same is hereby
disallowed, there being no price for litigation.
WHEREFORE, the petition is partially GRANTED. The award of moral damages is REDUCED to
P10,000.00 and the grant of litigation expenses is ELIMINATED. The rest of the judgment is
AFFIRMED. Without costs.
SO ORDERED.
Melencio-Herrera (Chairperson), Paras, and Regalado, JJ., concur.

Padilla, J., took no part.

Whereas, on January 21, 1960 the beneficiary, Pedro Bartolome Enterprises assigned the
aforementioned letter of credit to Lanuza Lumber of Surigao per attached Deed of Assignment;
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION

Whereas, the correspondent Bank, Philippine National Bank requires the Lanuza Lumber to post
a surety bond in the sum of Twenty Five Thousand (P 25,000.00) Pesos, Philippine Currency, to
guarantee full and faithful compliance by the beneficiary of the terms and conditions of the said
letter of credit.

G.R. No. L-39215 September 1, 1989

It is a special provision of this undertaking to guarantee the full payment of a loan not to exceed
TWENTY FIVE THOUSAND PESOS (P 25,000.00) that may be granted by the Philippine
National Bank to Lanuza Lumber.

PHILIPPINE NATIONAL BANK, plaintiff-appellee,

vs.
UTILITY ASSURANCE & SURETY CO., INC., defendant- appellant.

Whereas, said contract requires said Principal to give a good and sufficient bond in the abovestated sum to secure the full and faithful performance on his part of said contract;

The Chief and Asst. Chief Legal Counsel for plaintiff appellee.
Ceferino M. Carpio, Jr. for defendant-appellant.
RESOLUTION

FELICIANO, J.:
The Kangyo Bank Ltd., Tokyo, Japan, issued Letter of Credit No. 14-10272 in the amount of US$
28,150.00 in favor of the Pedro Bartolome Enterprises of Manila to cover an export shipment of
logs to Japan. The beneficiary of the Letter of Credit assigned its rights to Lanuza Lumber. On
29 March 1960, Procopio Caderao, doing business under the trade name "Lanuza Lumber,"
obtained a loan of P 25,000.00 from plaintiff-appellee Philippine National Bank (PNB) as
evidenced by a promissory note on the security, among other things, of the proceeds of the
Letter of Credit. The PNB in addition required Lanuza Lumber to submit a surety bond.
Defendant- Appellant Utility Assurance & Surety Co., Inc. ("Utassco"), accordingly, executed
Surety Bond No. B-123 in favor of PNB. It is useful to quote the terms of the Surety Bond in their
entirety:

Now Therefore, if the Principal shall well and truly perform and fulfill all the undertakings,
covenants, terms, conditions and agreements stipulated in said contract, then this obligation
shall be null and void otherwise to remain in full force and effect.
The liability of the UTILITY ASSURANCE & SURETY CO., INC., on this bond will expire on
March 17, 1961 and said bond will be cancelled TEN DAYS after its expiration, unless Surety is
notified of any existing obligations thereunder.
In Witness Whereof, we have set our hands and signed our names at Manila on March 17,
1960.
Utility Assurance & Surety Co., Inc.
S/ Dalmacio Urtula, Jr.
DALMACIO URTULA, JR.
AUTHORIZED SIGNATURE
LANUZA LUMBER
S/ Procopio 0. Caderao

SURETY BOND

General Manager

Know All Men By These Presents:

That we, LANUZA LUMBER of Surigao, Surigao (532 Rosario St., Manila) as Principal, and the
UTILITY ASSURANCE & SURETY CO., INC., a corporation duly organized and existing under
and by virtue of the laws of the Philippines, with Head Office in the City of Manila, as Surety, are
held and firmly bound unto PHILIPPINE NATIONAL BANK in the penal sum of TWENTY FIVE
THOUSAND ONLY-PESOS (P 25,000.00) Philippine Currency, for the payment of which, well
and truly to be made, we bind ourselves, our heirs, executors, administrators and successors
and assigns, jointly and severally, firmly by these presents:
The conditions of this obligation are as follows:
Whereas, the Kangyo Bank, Ltd., Tokyo, Japan has granted a letter of credit No. 14-10272 in the
amount of $ 28,150.00 in favor of Pedro Bartolome Enterprises of 302 Salvacion Apt. 2504
Pennsylvania, Manila, to cover shipment of 500,000 board feet of logs to Shin Asshigawa Co.,
Ltd., Tokyo, Japan;

SIGNED IN THE PRESENCE OF:

(Sgd) ILLEGIBLE
(Sgd) ILLEGIBLE. (Emphasis supplied)
The surety bond was accompanied by an Endorsement No. B-60-3 which provided as
follows:
In lieu of the last paragraph of this bond, it is hereby declared and agreed
that the following condition be incorporated in said bond and made an
integral part thereof :
That, if the above bounden principal and surety shall, in all respects, duly

and fully observe and perform all and singular terms and conditions of the
aforementioned Letter of Credit, then this obligation shall be and become
null and of no further force nor effect; in the contrary case, the same shall
continue in full effect and be enforceable, as a joint and several obligation of
the parties hereto in the manner provided by law so long as the account
remains unpaid and outstanding in the books of the Bank either thru noncollection, extension, renewals or plans of payment with or without consent
of the surety.
It is a special condition of this bond that the liability of the surety thereon
shall, at all times, be enforceable simultaneously with that of the principal
without the necessity of having the assets of the principal resorted to, or
exhausted by, the creditor; Provided, however, that the liability of the surety
shall he limited to the sum of TWENTY-FIVE THOUSAND PESOS (P
25,000), Philippine Currency. Nothing herein contained shall be held to vary,
alter, waive or change any of the terms, limits or conditions of the bond,
except as herein-above set forth. (Emphasis supplied)
The promissory note executed by Lanuza Lumber became due and payable. Neither Lanuza
Lumber nor Utassco paid the loan despite repeated demands by PNB for payment. Accordingly,
PNB filed in the then Court of First Instance of Manila an action to recover the amount of the
promissory note with interest as provided thereon plus attorney's fees. 1
In its Answer to PNB's complaint, Utassco stated that it had "no knowledge or information
sufficient to form a belief as to the truth of the allegations contained in [paragraphs 2, 3, 4 and 5]
of the amended complaint and perforce [denied] the same." 2 At the same time, however, in
setting out its affirmative defense, Utassco admitted that it had executed the surety bond and
simultaneously pointed to the provisions of Endorsement No. B- 60-3. In particular, Utassco
contended that its obligation under the Surety Bond was to secure the performance of all the
terms and conditions of the US$ 28,150.00 Letter of Credit issued by Kangyo Bank Ltd. and had
not guaranteed the performance of Lanuza Lumber's obligation under its P 25,000.00 loan from
PNB.
On 14 January 1971, upon motion of PNB, the trial court rendered judgment on the pleadings.
The dispositive part of the judgment reads as follows:
WHEREFORE, in the light of the foregoing considerations, judgment is
hereby rendered ordering the defendant to pay the plaintiff the sum of P
25,000.00 plus 6 % interest per annum counted from May 19, 1962, the date
of the filing of the original complaint until fully paid, plus attorney's fees
equivalent to 10 % of the principal obligation and the costs of the suit.
Its Motion for Reconsideration of the trial court's judgment on the pleadings having been denied,
Utassco appealed that judgment to the Court of Appeals.
The Court of Appeals, by a Resolution dated 31 July 1974, certified the appeal to us as involving
only questions of law.Both before the Court of Appeals and this Court, Utassco claims that the
trial court fell into error:
(1) in granting the plaintiff-appellee's (PNB's) motion for judgment on the
pleadings;

(2) assuming the trial court could render judgment on the pleadings, in doing
so prematurely; and
(3) in awarding interest and attorney's fees in favor of plaintiff-appellee PNB.
We turn to the first alleged error. As noted earlier, Utassco had alleged in its answer that it had
no knowledge or information sufficient to form a belief as to the truth of the allegations made by
PNB in its complaint. Utassco, in other words, purported to deny those allegations and hence
now contends that it had generated an issue of fact which the trial court should have first passed
upon. Utassco, however, cannot be deemed to have denied the allegations of the amended
complaint, considering that the truth of those allegations relating to the execution of the surety
bond and the contents thereof was peculiarly within the knowledge of Utassco being the issuer
of the bond and Endorsement No. B-60-3 itself. In Equitable Banking Corporation v. Liwanag, 3
the Supreme Court rejected out of hand the same argument which Utassco now seeks to make:
This pretense is manifestly devoid of merit Although the Rules of Court
permit a litigant to file an answer alleging lack of knowledge to form a belief
as to the truth of certain allegations in the complaint, this form of denial
'must be availed of with sincerity and in good faith, -certainly neither for the
purpose of delay.' Indeed, it has been held that said mode of denial is
unavailing 'where the fact as to which want of knowledge is asserted is to
the knowledge of the court so plainly and necessarily within the defendant's
knowledge that his averment of ignorance must be palpably untrue.' Thus,
under conditions almost Identical to those obtaining in the case at bar, this
Court, speaking through Mr. Justice Villamor, upheld a judgment on the
pleadings in Capitol Motors vs. Nemesio L. Yabut (G.R. No. L-28140, March
19, 1970) from which we quote:
We agree with the defendant-appellant that one of the modes of specific
denial contemplated in Section 10, Rule 8, is a denial by stating that the
defendant is without knowledge or information sufficient to form a belief as to
the truth of a material averment in the complaint. The question, however, is
whether paragraph 2 of defendant-appellant's answer constitutes a specific
denial under the said rule. We do not think so. In Warner Barnes & Co. Ltd.
vs. Reyes, et al. G.R. No. L-9531, May 14,1958 (103 Phil. 662), this Court
said that the rule authorizing an answer to the effect that the defendant has
no knowledge or information sufficient to form a belief as to the truth of an
averment and giving such answer the effect of a denial, does not apply
where the fact as to which want of knowledge is asserted, is so plainly and
necessarily within the defendant's knowledge that his averment of ignorance
must be palpably untrue.
In said case the suit was one for foreclosure of mortgage, and a copy of the
deed of mortgage was attached to the complaint: thus, according to this
Court, it would have been easy for the defendants to specifically allege in
their answer whether or not they had executed the alleged mortgage. The
same thing can be said in the present case, where a copy of the promissory
note sued upon was attached to the complaint. The doctrine in Warner
Barnes & Co. Ltd. was reiterated in J.P. Juan & Sons, Inc. v. Lianga
Industries, Inc., G.R. No. L-25137, July 28, 1969 (28 SCRA 807) . . . .

(Emphasis supplied)
At the same time that Utassco pretended to have denied the allegations of PNB's amended
complaint, it admitted in the affirmative defense section of its answer that it had indeed executed
the Surety Bond and Endorsement No. B-60-3 in favor of PNB; Utassco must be deemed
thereby to have admitted the due execution of the Bond and the Endorsement. Its affirmative
defense in fact consisted of pleading the very provisions of the Surety Bond upon which PNB
based its cause of action. Thus, the issues raised by the amended complaint and the answer
were not genuine issues of fact on which evidence would have had to be submitted. Those
pleadings raised, rather, questions concerning the proper interpretation of the provisions of the
Surety Bond and Endorsement No. B-60-3, i.e., the determination of whether the surety bond
and the endorsement had, as contended by the PNB, guaranteed the payment by Lanuza
Lumber of its P 25,000.00 loan from PNB; or whether, as maintained by Utassco, the surety
bond and its endorsement served merely to secure the performance of the terms and conditions
of the Letter of Credit No. 14-10272. We hold, therefore, that under these circumstances, the
trial court correctly rendered judgment on the pleadings.
We turn to the second error imputed by Utassco to the trial court: that the judgment on the
pleadings, while it may have been within the jurisdiction of the trial court, was prematurely
issued. This argument appears to us even more tenuous than the first assigned error. Utassco
claims that the trial court should have withheld judgment on the pleadings until after the third
party action brought by Utassco against the owner of Lanuza Lumber on the indemnity
agreement executed between them, had gone forward to judgment. The third party complaint
could, of course, have been prosecuted quite separately from the principal action between PNB
and Utassco. Indeed, there was no reason at all why the trial court should have deferred
rendering judgment on the pleadings in the principal action, considering that the PNB was not
interested at all in the outcome of the third party complaint. Under Section 12, Rule 6 of the
Revised Rules of Court, the purpose of a third party complaint is to enable a defending party to
obtain contribution, indemnity, subrogation or other relief from a person not a party to the action,
Thus, notwithstanding the judgment on the pleadings, Utassco could still proceed with the
prosecution of its third party complaint.

The principle of effectiveness is basic in contract interpretation: where two (2) interpretations of
the same contract language are possible, one interpretation having the effect of rendering the
contract meaningless (and one of the parties merely dishonest for receiving consideration
thereunder without parting with any), while the other interpretation would give effect to the
contract as a whole, the latter interpretation must be adopted . 4
In the instant case, the reference to the Letter of Credit in the surety bond and the endorsement
was either merely inadvertent surplusage or, alternatively, merely indication of ineptness on the
part of the draftsman of the bond and the endorsement. It is not disputed by Utassco that the
endorsement was intended to replace the final paragraph of the original bond, which paragraph
limited the life of the bond to one year from issuance. The endorsement had the important effect
of giving the bond continuing life so long as "the account" remained unpaid and outstanding on
the books of PNB. The term "account" here could only refer to the account of the principal
debtor, Lanuza Lumber, with PNB. The endorsement also made it clear that the liability of
Lanuza Lumber and Utassco was joint and several in nature, and that Utassco had waived any
benefit of excussion that it might otherwise have had. Finally, on a very practical level, it is
difficult to understand how Utassco could have reasonably supposed that its bond in the amount
of RP P 25,000.00 was intended only (or even principally) to secure performance of the
obligations of the issuer-Kangyo Bank-under the Letter of Credit which had a face value of US$
28,150.00, many times the face value of the bond.
We come to the final error assigned by Utassco: that the trial court should not have granted
interest and attorney's fees in favor of PNB, considering the clause in the endorsement limiting
the liability of Utassco to P 25,000.00. The issue here presented is not a new one. It was
extensively discussed and Utassco's submission decisively rejected by this Court in Plaridel
Surety and Insurance Co., Inc. 5 v. P.L. Galang Machinery Co., Inc. There, the Court held:
Petitioner objects to the payment of interest and attorney's fees because: (1)
they were not mentioned in the bond; and (2) the surety would become
liable for more than the amount stated in the contract of suretyship.

Before passing on to the third error assigned by Utassco, it is important to note that Utassco did
not really dispute the correctness of the conclusion reached by the trial court in respect of the
substantive issue raised before it: whether the bond issued by Utassco secured the obligations
of Lanuza Lumber to repay the P 25,000.00 loan obtained from PNB, or whether the bond had
secured the Letter of Credit. The trial court held that the surety bond was intended to secure the
repayment of Lanuza Lumber's loan from PNB. We believe and so hold that the trial court was
correct in so holding. In the first place, the surety bond explicitly stated that the P 25,000.00 loan
was being secured by the bond:

In support of its objection petitioner dwells on the proposition that a surety's

liability can not be extended beyond the terms of his undertaking, citing
articles 1956 and 2208 of the New Civil Code which provide as follows:

It is a special provision of this undertaking to guarantee the full payment of a

loan not to exceed TWENTY FIVE THOUSAND PESOS (P 25,000.00) that
may be granted by the Philippine National Bank to Lanuza Lumber.

The objection has to be overruled, because as far back as the year 1922
this Court held in Tagawa vs. Aldanese, 43 Phil. 852, that creditors suing on
a suretyship bond may recover from the surety as part of their damages,
interest at the legal rate even if the surety would thereby become liable to
pay more than the total amount stipulated in the bond. 'The theory is that
interest is allowed only by way of damages for delay upon the part of the
sureties in making payment after they should have done. In some states, the
interest has been charged from the date of the judgment of the appellate
court. In this jurisdiction, we rather prefer to follow the general practice

In the second place, while the bond and the endorsement had referred to the Letter of Credit,
Lanuza Lumber had no obligations under the Letter of Credit. As noted earlier, Lanuza Lumber
was beneficiary-assignee of the Letter of Credit. Thus, Utassco's view would reduce the terms
and conditions of the Surety Bond to nonsense. Such view would also mean that Utassco, in its
own reading of the bond, was never at risk since there were no obligations to secure and that
Utassco was in fact collecting premiums for issuing the bond under which it had no liabilities.

ART. 1956. No interest shall be due unless it has been expressly stipulated
in writing.
ART. 2208. In the absence of stipulation, attorney's fees and expenses of
litigation, other than judicial costs, cannot be recovered, except: . . . .

which is to order that interest begin to run from the date when the complaint
was filed in court, . . . . '
Such theory aligned with Sec. 510 of the Code of Civil Procedure which was
subsequently recognized in the Rules of Court (Rule 53, Section 6) and with
Article 11- 08 of the Civil Code (now Art. 2209 of the New Civil Code).
In other words the surety is made to pay interest, not by reason of the
contract, but by reason of its failure to pay when demanded and for having
compelled the plaintiff to resort to the courts to obtain payment. It should be
observed that interest does not run from the time the obligation became due,
but from the filing of the complaint.
As to attorney's fees. Before the enactment of the New Civil Code,
successful litigants could not recover attorney's fees as part of the damages
they suffered by reason of the litigation. Even if the party paid thousands of
pesos to his lawyers, he could not charge the amount to his opponent.
However, the New Civil Code permits recovery of attorney's fees in eleven
cases enumerated in Article 2208, among them 'where the court deem it just
and equitable that attorney's fees and expenses of litigation should be
recovered' or 'when the defendant acted in gross and evident bad faith in
refusing to satisfy the plaintiffs plainly valid, just and demandable claim.' This
gives the courts discretion in apportioning attorney's fees.
Now, considering, in this case, that the principal debtor had openly and
expressly admitted his liability under the bond, and the surety knew it (p.123
R.A.) we can not say there was abuse of lower court's discretion in the way
of awarding fees, specially when the indemnity agreement . . . afforded the
surety adequate protection. (100 Phil. 681-682. (Emphasis supplied)
WHEREFORE, the Court Resolved to DISMISS the appeal by defendant-appellant Utility
Assurance & Surety Co., Inc. for lack of merit, and to AFFIRM the judgment of the trial court
dated 14 January 1971. No pronouncement as to costs. This Resolution is immediately
executory. SO ORDERED.
Fernan, C.J., Gutierrez, Jr., Bidin and Cortes, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION

In his answer to the complaint, the petitioner alleged that he acted only as agent or employee of
St. Joseph Lumber when he executed the affidavit which his employer submitted to the
investigating fiscal who conducted the preliminary investigation of his employer's estafa charge
against Espiritu.
The pre-trial of the case was set on October 30, 1984. Since the defendants and their counsel
failed to appear in court, they were declared in default.
On November 11, 1984, the defendants filed a motion for reconsideration of the order of default.
On November 13, 1984, the motion was granted, and the order of default was set aside.

G.R. No. 82808 July 11, 1991

DENNIS L. LAO, petitioner,
vs.
HON. COURT OF APPEALS, JUDGE FLORENTINO FLOR, Regional Trial Court, Branch 89
of Morong, Rizal, BENJAMIN L. ESPIRITU, MANUEL QUERUBIN and CHAN TONG,
respondents.

On January 16, 1985, the defendants, including herein petition petitioner Lao, and their counsel,
again failed to attend the pretrial despite due notice to the latter who, however, failed to notify
Lao. They were once more declared in default. The private respondent was allowed to present
his evidence ex parte.

F. Sumulong & Associates Law Offices for petitioner.

On January 22, 1985, a decision was rendered by the trial court in favor of Espiritu ordering the
defendants Lao and St. Joseph Lumber to pay jointly and severally to Espiritu the sums of
P100,000 as moral damages, P5,000 as attorney's fees, and costs.

Manuel LL. Querubin for and in his own behalf.

Petitioner's motion for reconsideration of the decision was denied by the trial court.

Enrique M. Basa for private respondent.

On February 25, 1985, Lao filed a motion for new trial on the ground of accident and
insufficiency of evidence, but it was denied by the trial court.

GRIO-AQUINO, J.:p
For being a witness in an unsuccessful estafa case which his employer filed against a debtor
who had defaulted in paying his just obligation, the petitioner was sued, together with his
employer, for damages for malicious prosecution. The issue in this case is whether the damages
awarded to the defaulting debtor may be satisfied by execution against the employee's property
since his employer's business has already folded up.

He appealed to the Court of Appeals (CA-G.R. CV No. 06796, "Benjamin L. Espiritu, plaintiffappellee vs. Dennis Lao and New St. Joseph Lumber and Hardware Supply, defendantsappellant"). The appellate court dismissed his appeal on May 21, 1987. He filed this special civil
action of certiorari and prohibition to partially annul the appellate court's decision and to enjoin
the execution of said decision against him. The petitioner avers that the Court of Appeals erred:
1. in not holding that he (petitioner Lao) has a valid defense to the action for
malicious prosecution in Civil Case No. 84-M;

Petitioner Dennis Lao was an employee of the New St. Joseph Lumber & Hardware Supply,
hereinafter called St. Joseph Lumber, owned by the private respondent, Chan Tong. In January
1981, St. Joseph Lumber filed a collection suit against a customer, the private respondent,
Benjamin Espiritu, for unpaid purchases of construction materials from St. Joseph Lumber.

2. in not holding that he was deprived of a day in court due to the gross
ignorance, negligence and dereliction of duty of the lawyer whom his
employer hired as his and the company's counsel, but who failed to protect
his interest and even acted in a manner inimical to him; and

In November 1981, upon the advice of its lawyer, St. Joseph Lumber filed a criminal complaint
for estafa against Espiritu, based on the same transaction. Since the petitioner was the
employee who transacted business with Espiritu, he was directed by his employer, the firm's
owner, Chan Tong, to sign the affidavit or complaint prepared by the firm's, lawyer, Attorney
Manuel Querubin.

3. in not partially annulling the decision of the trial court dated January 22,
1985 insofar as he is concerned.

Finding probable cause after conducting a preliminary investigation of the charge, the
investigating fiscal filed an information for estafa in the Court of First Instance of Quezon City
against Espiritu. The case was however later dismissed because the court believed that
Espiritu's liability was only civil, not criminal.
On April 12, 1984, Espiritu filed a complaint for malicious prosecution against the petitioner and
St. Joseph Lumber, praying that the defendants be ordered to pay him P500,000 as moral
damages, P10,000 as actual damages, and P100,000 as attorney's fees.

The petition is meritorious.

Lao had a valid defense to the action for malicious prosecution (Civil Case No. 84-M) because it
was his employer, St. Joseph Lumber, not himself, that was the complainant in the estafa case
against Espiritu. It was Chan Tong, the owner of the St. Joseph Lumber, who, upon advice of his
counsel, filed the criminal complaint against Espiritu. Lao was only a witness in the case. He had
no personal interest in the prosecution of Espiritu for he was not the party defrauded by Espiritu.
He executed the affidavit which was used as basis of the criminal charge against Espiritu
because he was the salesman who sold the construction materials to Espiritu. He was only an
agent of St. Joseph Lumber, hence, not personally liable to the party with whom he contracted

(Art. 1897, Civil Code; Philippine Products Co. vs. Primateria Societe Anonyme, 122 Phil. 698).
To maintain an action for damages based on malicious prosecution, three elements must be
present: First, the fact of the prosecution and the further fact that the defendant was himself the
prosecutor, and that the action was finally terminated with an acquittal; second, that in bringing
the action, the prosecutor acted without probable cause; and third, the prosecutor was actuated
or impelled by legal malice (Ferrer vs. Vergara, 52 O.G. 291).
Lao was only a witness, not the prosecutor in the estafa case. The prosecutor was his employer,
Chan Tong or the St. Joseph Lumber.
There was probable cause for the charge of estafa against Espiritu, as found and certified by the
investigating fiscal himself.
Lao was not motivated by malice in making the affidavit upon which the fiscal based the filing of
the information against Espiritu. He executed it as an employee, a salesman of the St. Joseph
Lumber from whom Espiritu made his purchases of construction materials and who, therefore,
had personal knowledge of the transaction. Although the prosecution of Espiritu for estafa did
not prosper, the unsuccessful prosecution may not be labelled as malicious. "Sound principles of
justice and public policy dictate that persons shall have free resort to the courts for redress of
wrongs and vindication of their rights without later having to stand trial for instituting
prosecutions in good faith" (Buenaventura vs. Sto. Domingo, 103 Phil. 239).
There is merit in petitioner's contention that he was deprived of his day in court in the damage
suit filed by Espiritu, due to the gross ignorance, negligence, and dereliction of duty of Attorney
Manuel Querubin whom his employer had hired to act as counsel for him and the St. Joseph
Lumber. However, Attorney Querubin neglected to defend Lao. He concentrated on the defense
of the company and completely forgot his duty to defend Lao as well. He never informed Lao
about the pre-trial conferences. In fact, he (Attorney Querubin) neglected to attend other pre-trial
conferences set by the court.
When adverse judgment was entered by the court against Lao and the lumber company,
Attorney Querubin did not file a motion for reconsideration of the decision. He allowed it to
become final, because anyway Espiritu would not be able to satisfy his judgment against Chan
Tong who had informed his lawyer that the St. Joseph Lumber was insolvent, had gone out of
business, and did not have any leviable assets. As a result, Espiritu levied on the petitioner's car
to satisfy the judgment in his favor since the company itself had no more assets that he could
seize.
In view of the foregoing circumstances, the judgment against Lao was a nullity and should be set
aside. Its execution against the petitioner cannot be allowed to proceed.
WHEREFORE, judgment is hereby rendered partially setting aside the decision of the Court of
Appeals dated May 21, 1987, insofar as it declared the petitioner, Dennis Lao, solidarily liable
with St. Joseph Lumber to pay the damages awarded to the private respondent Benjamin
Espiritu. Said petitioner is hereby absolved from any liability to the private respondent arising
from the unsuccessful prosecution of Criminal Case No. Q-20086 for estafa against said private
respondent. Costs against the private respondent.
SO ORDERED.
Narvasa, Cruz and Medialdea, JJ., concur.

Gancayco, J., is on leave.

Oliva went to the police station and filed their sworn statements charging Armando Quilatan with
4
rape.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. 132725

September 28, 2000

PEOPLE OF THE PHILIPPINES, plaintiff-appellee,

vs.
ARMANDO QUILATAN, accused-appellant.
DECISION
PER CURIAM:
ARMANDO QUILATAN was charged with incestuous rape and found guilty by the trial court. He
was sentenced to death. He is now before us on automatic review.
The Information alleged that on 19 July 1995 the accused by means of force and intimidation
1
willfully and feloniously had carnal knowledge of his own 13-year old daughter, Oliva Quilatan.
On 23 February 1997 the trial court found him guilty of rape as defined in Art. 335 of the Revised
Penal Code in relation to Sec. 11 of RA 7659, and sentenced him to death. He was also ordered
2
to pay Oliva Quilatan P200,000.00 for moral and exemplary damages.
The evidence shows that in the early morning of 19 July 1995, Oliva Quilatan, then 13 years old,
was sleeping with her younger brothers and sisters in their house at Block 37, Welfareville,
Mandaluyong City, when she was awakened by her father, the accused Armando Quilatan.
Oliva's mother, Elenita, had left the house earlier to go to the market. With his wife gone the
accused then told Oliva to undress. Although she wanted to shout for help she was prevented
from doing so by her father who threatened to kill her and all her younger siblings if she did.
Oliva had no choice; she had to remove her clothes. The accused touched the different parts of
her body. He made her lie down and then went on top of her. He inserted his penis into her
vagina; she felt pain.
The incident was not Armando's first sexual assault on his daughter. The first was on the
occasion of Oliva's 11th birthday on 13 May 1993. Her mother at that time had left her father and
settled in Caloocan City because he was beating her. Oliva was raped by her father for the
second time on 14 July 1995. Every time the accused would abuse Oliva he would threaten to
3
"kill them all" if she would reveal to anyone what he was doing to her.
Elenita Quilatan narrated that there was another incident when in the morning of 18 July 1995
she found the accused no longer beside her. To her surprise she saw him lying beside their
daughter Oliva. When she asked Armando the reason for his action he just kept silent. Offended
by what she saw she dashed out of the house. The accused followed her and promised not to
abuse Oliva again. Elenita then asked her daughter about her father's abuses and Oliva
revealed her painful and harrowing experiences, with her father. On 20 July 1995 Elenita and

Dr. Jesusa N. Vergara of the PNP Crime Laboratory at Camp Crame conducted a medical
examination of Oliva and found her hymen with shallow healed lacerations at 3 o'clock and 6
5
o'clock positions, as well as a deep healed laceration at 9 o'clock position.
The accused interposed denial for his defense. He alleged that when he was still working abroad
he learned from a neighbor, whose name he could not recall, that his wife Elenita had a
paramour. He confronted her sometime in March 1993 about the P9,000.00 he was sending her
every month. When she could not answer him he slapped her. Immediately after, his wife
together with all their children left him. But two (2) months later they all returned to their house.
The prosecution presented as its rebuttal witness Brenda Quilatan, 8-year old sister of Oliva.
Brenda claimed that she saw her father sexually abuse her sister Oliva twice. She said that one
afternoon "a long time ago," she saw her father "play" with the breasts of Oliva who was crying
and saying "tama na, po." The accused brought Oliva upstairs and then laid on top of her.
6
Brenda, in another incident, saw her father pumping on top of Oliva who was already naked.
Convinced beyond reasonable doubt that the accused Armando Quilatan did rape his 13-year
old daughter Oliva on 19 July 1995 the trial court convicted him as charged and sentenced him
to death.
The accused now contends in his Brief that the trial court gravely erred in convicting him of rape
as the testimonies of the victim and other prosecution witnesses were riddled with
inconsistencies on material matters which render them unworthy of belief. He cited the following:
(a) Oliva testified that she was raped at 3 o'clock in the morning of 19 July 1995, but when she
said that her mother was not around as she left for the market at 5 o'clock, she changed her
testimony and explained that the rape occurred after 5 o'clock; (b) In her sworn statement before
the police, she alleged that the accused was unable to insert his penis into her vagina, which is
contradictory to her testimony in court that the accused was able to penetrate her as she felt
pain; (c) The testimony of Dr. Vergara disclosed that no rape could have taken place on 19 July
1995 because the laceration was already healed; and, (d) according to Elenita Quilatan, she
saw the accused lying beside Oliva on 18 July 1995, which is inconsistent with Oliva's testimony
that she was raped on 13 March 1993, 14 July 1995 and 19 July 1995.
We find the arguments of the accused bereft of merit. Courts usually give credence to the
testimony of a girl who is a victim of sexual assault, particularly if it constitutes incestuous rape
because, normally, no person would be willing to undergo the humiliation of a public trial and
testify on the details of her ordeal, especially in the hands of her own father, were it not to
7
condemn a grievous injustice. The bare denial of the accused cannot overcome the categorical
testimony of the victim. Denial, when unsubstantiated by clear and convincing evidence, as in
this case, is a negative and self-serving evidence which deserves no greater evidentiary value
8
than the testimony of credible witnesses who testify on affirmative matters. 1wphi1
The record shows no material inconsistencies in the testimonies of the victim and her mother
and younger sister to justify a reversal of her father's conviction. As long as the inaccuracies
concern only minor matters, the same do not affect the credibility of witnesses. Truth-telling

witnesses are not always expected to give error-free testimonies considering the lapse of time
and the treachery of human memory. Inaccuracies may in fact suggest that the witnesses are
9
telling the truth and have not been rehearsed.
Oliva's testimony given in a categorical, straightforward, spontaneous and candid manner, as
observed by the trial court, is worthy of faith and belief. The crying of the victim during her
testimony is evidence of the credibility of the rape charge which is a matter of judicial
10
cognizance.
Oliva's narration of the sexual assault upon her by her father was direct, clear
and convincing Q: Oliva, do you know accused in this case; Mr. Armando Quilatan
A: Yes, sir.
Q: Why do you know him?

A: He (laid) me down, sir.

Q: After your father laid you down, what did he do next?
A: He went on top of me, sir.
Q: When he was already on top of you, what did he do if he did anything?
A: He inserted his penis in my vagina.
Q: What did you do when you felt that he inserted his penis in your vagina?
A: I was hurt, sir.
Q: And what did you tell your father when he was doing that to you.
A: I was not able to speak, sir.
11

A: He is my father, sir.

COURT: Make it on record that the witness is shedding tears.

Q: Do you still remember the incident or what happened on July 19, 1995, particularly at dawn?

Initially Oliva stated on the witness stand that she was raped at 3 o'clock in the morning of 19
July 1995; however, she corrected herself and declared categorically that the rape happened
12
after 5 o'clock in the morning because at that time her mother had already gone to the market.
A witness is not expected to remember an occurrence with perfect recollection of minor and
minute details. A mis-estimation of time is too immaterial to discredit the testimony of a witness
especially where the time is not an essential element nor has any substantial bearing on the fact
13
of the commission of the offense.
What is decisive in a rape charge is the complainant's
14
positive identification of the accused as the malefactor.

A: Yes, sir x x x x On that day, my mother was not in the house, she went to the market and all
my brothers and sisters are (sic) sleeping and he woke me up because one of my sister(s) was
crying.
Q: Who was that who woke you up while you were sleeping?
A: My father, sir.
Q: And as soon as you were awaken(ed), what did your father do if he did anything?
A: He told me to undress, sir.
Q: What did you do?
A: I wanted to speak out but he told me that if I will (sic) shout or if I will (sic) report to my mother
or to the police he will (sic) kill us all.
Q: And after that what happened?
A: That was when he started touching me and even if I wanted to shout I cannot (sic) because I
was afraid of him and he was threatening me.
Q: When he started touching you as you said and you could not shout, what did you do?
A: I did not talk anymore.
Q: And what did he do to you?
A: He asked me to undress, sir.
Q: Did you undress? x x x x
A: Yes, sir.
Q: And when you were already undressed, what did your father do?

The testimony of the victim's mother that she saw the accused lying beside Oliva on 18 July
1995 did not in anyway negate the commission of the rape on 19 July 1995 for these may be
separate incidents; after all, the accused is not charged for raping his daughter on 18 July 1995.
It could have been mentioned to show the propensity of the accused to molest Oliva. Besides,
slight variations in the testimonies of witnesses as to minor and inconsequential details or
collateral matters do not affect their credibility as variations in fact may be indicative of truth. As
long as the testimonies of the witnesses corroborate each other on material points pertaining to
the commission of rape, minor discrepancies cannot destroy their credibility. Settled is the rule
that the date of the occurrence of the rape is not an essential element of the commission of
15
rape. The argument of the accused that no rape could have been committed against Oliva on
19 July 1995 because the laceration was already healed when she was medically examined on
20 July 1995 cannot be sustained. Hymenal laceration is not an element of rape. It is sufficient
that there was sexual congress, and that this was consummated by the slightest introduction of
16
the male organ into the labia of the pudemdum.
This Court perceives no merit in the story of the accused that the charge levelled against him
was but a retaliatory move on the part of his wife who suffered maltreatment from him. In a long
line of cases, this Court has consistently ruled that such a defense is simply unbelievable and
too unnatural to deserve faith and credit. It is hard to fathom that a parent would use her
offspring as engine of malice especially if the same would subject the latter to humiliation, nay,
stigma. No mother in her right mind would expose her daughter to the disgrace and trauma

resulting from a prosecution for rape if she was not genuinely motivated by a desire to
incarcerate the person responsible for her daughter's defilement. Consequently, as the defense
utterly failed to prove that the principal witnesses for the People were improperly motivated, the
presumption is that they were not so moved, and therefore, their testimony is entitled to full faith
and credence.
The Court finds that the accused was correctly meted the supreme penalty of death, pursuant, to
Art. 335 of the Revised Penal Code, as amended by RA 7659 and RA 8353, providing that the
death penalty shall be imposed upon the perpetrator if the crime of rape is committed with any of
the following aggravating/ qualifying circumstances: x x x x when the victim is under eighteen
(18) years of age and the offender is a parent, ascendant, step-parent, guardian, relative by
consanguinity or affinity within the third civil degree or the common-law spouse of the parent of
the victim.
This Court observes that the trial court did not award any indemnity to Oliva for the physical
abuse she suffered although it granted her P200,000.00 by way of moral and exemplary
17
damages. In People v. Prades we reiterated that civil indemnity is mandatory upon the finding
of the fact of rape; it is distinct from and should not be denominated as moral damages which is
based on different jural foundations and assessed by the court in the exercise of sound
discretion. If the crime of rape is committed or effectively qualified by any of the circumstances
under which the death penalty is authorized by law, the indemnity for the victim shall be
P75,000.00. Moral damages may additionally be awarded to the victim in the criminal
proceeding, in such amount as the court may deem just, without the need for pleading or proof
18
of the basis thereof as has heretofore been the practice. With regard to exemplary damages,
the same may be awarded in criminal cases committed with one or more aggravating
19
circumstances. We find that the award by the trial court of moral and exemplary damages in
the amount of P200,000.00 should be split into P150,000.00 for moral damages and P50,000.00
for exemplary damages, the total amount of P200,000.00 for moral and exemplary damages not
being disputed by the accused-appellant and is a factual matter binding on this Court.
Four (4) Members of this Court maintain their position that RA 7659 is unconstitutional insofar as
it prescribes the death penalty. Nonetheless, they submit to the ruling of the majority that the law
is constitutional and the death penalty should be imposed in this case.
WHEREFORE, the Decision of the Regional Trial Court of Pasig City finding the accused
ARMANDO QUILATAN guilty of Incestuous Rape and imposing on him the DEATH penalty is
AFFIRMED, with the modification that the accused is ordered to pay his victim Oliva Quilatan the
amounts of P75,000.00 for civil indemnity and P200,000.00 for moral and exemplary damages.
Let the records of this case, upon finality of this Decision, be forwarded to His Excellency, the
President, for the possible exercise of his pardoning power. Costs de oficio.
SO ORDERED.
Davide, Jr., C.J., Bellosillo, Melo, Puno, Vitug, Kapunan, Mendoza, Panganiban, Quisumbing,
Purisima, Pardo, Buena, Gonzaga-Reyes, Ynares-Santiago, and De Leon, Jr., JJ., concur.

On January 7, 1982 defendant Allied Brokerage Corporation received the

shipment from defendant Metro Port Service, Inc., one drum opened and
without seal (per "Request for Bad Order Survey." Exh. D).

Republic of the Philippines

SUPREME COURT
Manila
EN BANC

G.R. No. 97412 July 12, 1994

EASTERN SHIPPING LINES, INC., petitioner,
vs.
HON. COURT OF APPEALS AND MERCANTILE INSURANCE COMPANY, INC., respondents.
Alojada & Garcia and Jimenea, Dala & Zaragoza for petitoner.

On January 8 and 14, 1982, defendant Allied Brokerage Corporation made

deliveries of the shipment to the consignee's warehouse. The latter
excepted to one drum which contained spillages, while the rest of the
contents was adulterated/fake (per "Bad Order Waybill" No. 10649, Exh. E).
Plaintiff contended that due to the losses/damage sustained by said drum,
the consignee suffered losses totaling P19,032.95, due to the fault and
negligence of defendants. Claims were presented against defendants who
failed and refused to pay the same (Exhs. H, I, J, K, L).
As a consequence of the losses sustained, plaintiff was compelled to pay
the consignee P19,032.95 under the aforestated marine insurance policy, so
that it became subrogated to all the rights of action of said consignee
against defendants (per "Form of Subrogation", "Release" and Philbanking
check, Exhs. M, N, and O). (pp. 85-86, Rollo.)
There were, to be sure, other factual issues that confronted both courts. Here, the appellate
court said:

Zapa Law Office for private respondent.

VITUG, J.:
The issues, albeit not completely novel, are: (a) whether or not a claim for damage sustained on
a shipment of goods can be a solidary, or joint and several, liability of the common carrier, the
arrastre operator and the customs broker; (b) whether the payment of legal interest on an award
for loss or damage is to be computed from the time the complaint is filed or from the date the
decision appealed from is rendered; and (c) whether the applicable rate of interest, referred to
above, is twelve percent (12%) or six percent (6%).
The findings of the court a quo, adopted by the Court of Appeals, on the antecedent and
undisputed facts that have led to the controversy are hereunder reproduced:
This is an action against defendants shipping company, arrastre operator
and broker-forwarder for damages sustained by a shipment while in
defendants' custody, filed by the insurer-subrogee who paid the consignee
the value of such losses/damages.
On December 4, 1981, two fiber drums of riboflavin were shipped from
Yokohama, Japan for delivery vessel "SS EASTERN COMET" owned by
defendant Eastern
Shipping
Lines under Bill of Lading
No. YMA-8 (Exh. B). The shipment was insured under plaintiff's Marine
Insurance Policy No. 81/01177 for P36,382,466.38.
Upon arrival of the shipment in Manila on December 12, 1981, it was
discharged unto the custody of defendant Metro Port Service, Inc. The latter
excepted to one drum, said to be in bad order, which damage was unknown
to plaintiff.

Defendants filed their respective answers, traversing the material allegations

of the complaint contending that: As for defendant Eastern Shipping it
alleged that the shipment was discharged in good order from the vessel unto
the custody of Metro Port Service so that any damage/losses incurred after
the shipment was incurred after the shipment was turned over to the latter, is
no longer its liability (p. 17, Record); Metroport averred that although subject
shipment was discharged unto its custody, portion of the same was already
in bad order (p. 11, Record); Allied Brokerage alleged that plaintiff has no
cause of action against it, not having negligent or at fault for the shipment
was already in damage and bad order condition when received by it, but
nonetheless, it still exercised extra ordinary care and diligence in the
handling/delivery of the cargo to consignee in the same condition shipment
was received by it.
From the evidence the court found the following:
The issues are:
1. Whether or
losses/damages;

not

the

shipment

sustained

2. Whether or not these losses/damages were sustained

while in the custody of defendants (in whose respective
custody, if determinable);
3. Whether or not defendant(s) should be held liable for
the losses/damages (see plaintiff's pre-Trial Brief,
Records, p. 34; Allied's pre-Trial Brief, adopting plaintiff's
Records, p. 38).

As to the first issue, there can be no doubt that the

shipment sustained losses/damages. The two drums
were shipped in good order and condition, as clearly
shown by the Bill of Lading and Commercial Invoice
which do not indicate any damages drum that was
shipped (Exhs. B and C). But when on December 12,
1981 the shipment was delivered to defendant Metro
Port Service, Inc., it excepted to one drum in bad order.
Correspondingly, as to the second issue, it follows that
the losses/damages were sustained while in the
respective and/or successive custody and possession of
defendants carrier (Eastern), arrastre operator (Metro
Port) and broker (Allied Brokerage). This becomes
evident when the Marine Cargo Survey Report (Exh. G),
with its "Additional Survey Notes", are considered. In the
latter notes, it is stated that when the shipment was
"landed on vessel" to dock of Pier # 15, South Harbor,
Manila on December 12, 1981, it was observed that
"one (1) fiber drum (was) in damaged condition, covered
by the vessel's Agent's Bad Order Tally Sheet No.
86427." The report further states that when defendant
Allied Brokerage withdrew the shipment from defendant
arrastre operator's custody on January 7, 1982, one
drum was found opened without seal, cello bag partly
torn but contents intact. Net unrecovered spillages was
15 kgs. The report went on to state that when the drums
reached the consignee, one drum was found with
adulterated/faked contents. It is obvious, therefore, that
these losses/damages occurred before the shipment
reached the consignee while under the successive
custodies of defendants. Under Art. 1737 of the New
Civil Code, the common carrier's duty to observe
extraordinary diligence in the vigilance of goods remains
in full force and effect even if the goods are temporarily
unloaded and stored in transit in the warehouse of the
carrier at the place of destination, until the consignee
has been advised and has had reasonable opportunity
to remove or dispose of the goods (Art. 1738, NCC).
Defendant Eastern Shipping's own exhibit, the "TurnOver Survey of Bad Order Cargoes" (Exhs. 3-Eastern)
states that on December 12, 1981 one drum was found
"open".
and thus held:
WHEREFORE, PREMISES CONSIDERED, judgment is
hereby rendered:
A. Ordering defendants to pay plaintiff, jointly and severally:

1. The amount of P19,032.95, with the present legal

interest of 12% per annum from October 1, 1982, the
date of filing of this complaints, until fully paid (the
liability of defendant Eastern Shipping, Inc. shall not
exceed US$500 per case or the CIF value of the loss,
whichever is lesser, while the liability of defendant Metro
Port Service, Inc. shall be to the extent of the actual
invoice value of each package, crate box or container in
no case to exceed P5,000.00 each, pursuant to Section
6.01 of the Management Contract);
2. P3,000.00 as attorney's fees, and
3. Costs.
B. Dismissing the counterclaims and
crossclaim
of
defendant/crossclaimant
Allied
Brokerage
Corporation.
SO ORDERED. (p. 207, Record).
Dissatisfied, defendant's recourse to US.
The appeal is devoid of merit.
After a careful scrutiny of the evidence on record. We find that the
conclusion drawn therefrom is correct. As there is sufficient evidence that
the shipment sustained damage while in the successive possession of
appellants, and therefore they are liable to the appellee, as subrogee for the
amount it paid to the consignee. (pp. 87-89, Rollo.)
The Court
a quo.

of

Appeals

thus

affirmed

in

toto

the

judgment

of

the

court

In this petition, Eastern Shipping Lines, Inc., the common carrier, attributes error and grave
abuse of discretion on the part of the appellate court when
I. IT HELD PETITIONER CARRIER JOINTLY AND SEVERALLY LIABLE
WITH THE ARRASTRE OPERATOR AND CUSTOMS BROKER FOR THE
CLAIM OF PRIVATE RESPONDENT AS GRANTED IN THE QUESTIONED
DECISION;
II. IT HELD THAT THE GRANT OF INTEREST ON THE CLAIM OF
PRIVATE RESPONDENT SHOULD COMMENCE FROM THE DATE OF
THE FILING OF THE COMPLAINT AT THE RATE OF TWELVE PERCENT
PER ANNUM INSTEAD OF FROM THE DATE OF THE DECISION OF THE
TRIAL COURT AND ONLY AT THE RATE OF SIX PERCENT PER ANNUM,
PRIVATE
RESPONDENT'S
CLAIM
BEING
INDISPUTABLY
UNLIQUIDATED.
The petition is, in part, granted.

In this decision, we have begun by saying that the questions raised by petitioner carrier are not
all that novel. Indeed, we do have a fairly good number of previous decisions this Court can
merely tack to.
The common carrier's duty to observe the requisite diligence in the shipment of goods lasts from
the time the articles are surrendered to or unconditionally placed in the possession of, and
received by, the carrier for transportation until delivered to, or until the lapse of a reasonable time
for their acceptance by, the person entitled to receive them (Arts. 1736-1738, Civil Code;
Ganzon vs. Court of Appeals, 161 SCRA 646; Kui Bai vs. Dollar Steamship Lines, 52 Phil. 863).
When the goods shipped either are lost or arrive in damaged condition, a presumption arises
against the carrier of its failure to observe that diligence, and there need not be an express
finding of negligence to hold it liable (Art. 1735, Civil Code; Philippine National Railways vs.
Court of Appeals, 139 SCRA 87; Metro Port Service vs. Court of Appeals, 131 SCRA 365). There
are, of course, exceptional cases when such presumption of fault is not observed but these
cases, enumerated in Article 1734 1 of the Civil Code, are exclusive, not one of which can be
applied to this case.
The question of charging both the carrier and the arrastre operator with the obligation of properly
delivering the goods to the consignee has, too, been passed upon by the Court. In Fireman's
Fund Insurance vs. Metro Port Services (182 SCRA 455), we have explained, in holding the
carrier and the arrastre operator liable in solidum, thus:
The legal relationship between the consignee and the arrastre operator is
akin to that of a depositor and warehouseman (Lua Kian v. Manila Railroad
Co., 19 SCRA 5 [1967]. The relationship between the consignee and the
common carrier is similar to that of the consignee and the arrastre operator
(Northern Motors, Inc. v. Prince Line, et al., 107 Phil. 253 [1960]). Since it is
the duty of the ARRASTRE to take good care of the goods that are in its
custody and to deliver them in good condition to the consignee, such
responsibility also devolves upon the CARRIER. Both the ARRASTRE and
the CARRIER are therefore charged with the obligation to deliver the goods
in good condition to the consignee.
We do not, of course, imply by the above pronouncement that the arrastre operator and the
customs broker are themselves always and necessarily liable solidarily with the carrier, or viceversa, nor that attendant facts in a given case may not vary the rule. The instant petition has
been brought solely by Eastern Shipping Lines, which, being the carrier and not having been
able to rebut the presumption of fault, is, in any event, to be held liable in this particular case. A
factual finding of both the court a quo and the appellate court, we take note, is that "there is
sufficient evidence that the shipment sustained damage while in the successive possession of
appellants" (the herein petitioner among them). Accordingly, the liability imposed on Eastern
Shipping Lines, Inc., the sole petitioner in this case, is inevitable regardless of whether there are
others solidarily liable with it.
It is over the issue of legal interest adjudged by the appellate court that deserves more than just
a passing remark.
Let us first see a chronological recitation of the major rulings of this Court:
The

early

case

of

Malayan

Insurance

Co.,

Inc.,

vs.

Manila

Port

Service, 2 decided 3 on 15 May 1969, involved a suit for recovery of money arising out of short
deliveries and pilferage of goods. In this case, appellee Malayan Insurance (the plaintiff in the
lower court) averred in its complaint that the total amount of its claim for the value of the
undelivered goods amounted to P3,947.20. This demand, however, was neither established in
its totality nor definitely ascertained. In the stipulation of facts later entered into by the parties, in
lieu of proof, the amount of P1,447.51 was agreed upon. The trial court rendered judgment
ordering the appellants (defendants) Manila Port Service and Manila Railroad Company to pay
appellee Malayan Insurance the sum of P1,447.51 with legal interest thereon from the date the
complaint was filed on 28 December 1962 until full payment thereof. The appellants then
assailed, inter alia, the award of legal interest. In sustaining the appellants, this Court ruled:
Interest upon an obligation which calls for the payment of money, absent a
stipulation, is the legal rate. Such interest normally is allowable from the
date of demand, judicial or extrajudicial. The trial court opted for judicial
demand as the starting point.
But then upon the provisions of Article 2213 of the Civil Code, interest
"cannot be recovered upon unliquidated claims or damages, except when
the demand can be established with reasonable certainty." And as was held
by this Court in Rivera vs. Perez, 4 L-6998, February 29, 1956, if the suit
were for damages, "unliquidated and not known until definitely ascertained,
assessed and determined by the courts after proof (Montilla c. Corporacion
de P.P. Agustinos, 25 Phil. 447; Lichauco v. Guzman,
38 Phil. 302)," then, interest "should be from the date of the decision."
(Emphasis supplied)
The case of Reformina vs. Tomol, 5 rendered on 11 October 1985, was for "Recovery of
Damages for Injury to Person and Loss of Property." After trial, the lower court decreed:
WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and
third party defendants and against the defendants and third party plaintiffs
as follows:
Ordering defendants and third party plaintiffs Shell and Michael,
Incorporated to pay jointly and severally the following persons:
xxx xxx xxx
(g) Plaintiffs Pacita F. Reformina and Francisco Reformina the sum of
P131,084.00 which is the value of the boat F B Pacita III together with its
accessories, fishing gear and equipment minus P80,000.00 which is the
value of the insurance recovered and the amount of P10,000.00 a month as
the estimated monthly loss suffered by them as a result of the fire of May 6,
1969 up to the time they are actually paid or already the total sum of
P370,000.00 as of June 4, 1972 with legal interest from the filing of the
complaint until paid and to pay attorney's fees of P5,000.00 with costs
against defendants and third party plaintiffs. (Emphasis supplied.)
On appeal to the Court of Appeals, the latter modified the amount of damages
awarded but sustained the trial court in adjudging legal interest from the filing of the
complaint until fully paid. When the appellate court's decision became final, the case

was remanded to the lower court for execution, and this was when the trial court
issued its assailed resolution which applied the 6% interest per annum prescribed in
Article 2209 of the Civil Code. In their petition for review on certiorari, the petitioners
contended
that
Central
Bank
Circular
No. 416, providing thus
By virtue of the authority granted to it under Section 1 of Act 2655, as
amended, Monetary Board in its Resolution No. 1622 dated July 29, 1974,
has prescribed that the rate of interest for the loan, or forbearance of any
money, goods, or credits and the rate allowed in judgments, in the absence
of express contract as to such rate of interest, shall be twelve (12%) percent
per annum. This Circular shall take effect immediately. (Emphasis found in
the text)
should have, instead, been applied. This Court 6 ruled:
The judgments spoken of and referred to are judgments in litigations
involving loans or forbearance of any money, goods or credits. Any other
kind of monetary judgment which has nothing to do with, nor involving loans
or forbearance of any money, goods or credits does not fall within the
coverage of the said law for it is not within the ambit of the authority granted
to the Central Bank.
xxx xxx xxx
Coming to the case at bar, the decision herein sought to be executed is one
rendered in an Action for Damages for injury to persons and loss of property
and does not involve any loan, much less forbearances of any money, goods
or credits. As correctly argued by the private respondents, the law applicable
to the said case is Article 2209 of the New Civil Code which reads
Art. 2209. If the obligation consists in the payment of
a sum of money, and the debtor incurs in delay, the
indemnity for damages, there being no stipulation to the
contrary, shall be the payment of interest agreed upon,
and in the absence of stipulation, the legal interest
which is six percent per annum.
The above rule was reiterated in Philippine Rabbit Bus Lines, Inc., v. Cruz, 7 promulgated on 28
July 1986. The case was for damages occasioned by an injury to person and loss of property.
The trial court awarded private respondent Pedro Manabat actual and compensatory damages
in the amount of P72,500.00 with legal interest thereon from the filing of the complaint until fully
paid. Relying on the Reformina v. Tomol case, this Court 8 modified the interest award from

November 29, 1968, the date of the filing of the complaint until full payment . . . ." Save from the
modification of the amount granted by the lower court, the Court of Appeals sustained the trial
court's decision. When taken to this Court for review, the case, on 03 October 1986, was
decided, thus:
WHEREFORE, the decision appealed from is hereby MODIFIED and
considering the special and environmental circumstances of this case, we
deem it reasonable to render a decision imposing, as We do hereby impose,
upon the defendant and the third-party defendants (with the exception of
Roman Ozaeta) a solidary (Art. 1723, Civil Code, Supra.
p. 10) indemnity in favor of the Philippine Bar Association of FIVE MILLION
(P5,000,000.00) Pesos to cover all damages (with the exception to
attorney's fees) occasioned by the loss of the building (including interest
charges and lost rentals) and an additional ONE HUNDRED THOUSAND
(P100,000.00) Pesos as and for attorney's fees, the total sum being payable
upon the finality of this decision. Upon failure to pay on such finality, twelve
(12%) per cent interest per annum shall be imposed upon aforementioned
amounts from finality until paid. Solidary costs against the defendant and
third-party defendants (Except Roman Ozaeta). (Emphasis supplied)
A motion for reconsideration was filed by United Construction, contending that "the
interest of twelve (12%) per cent per annum imposed on the total amount of the
monetary award was in contravention of law." The Court 10 ruled out the applicability
of the Reformina and Philippine Rabbit Bus Lines cases and, in its resolution of 15
April 1988, it explained:
There should be no dispute that the imposition of 12% interest pursuant to
Central Bank Circular No. 416 . . . is applicable only in the following: (1)
loans; (2) forbearance of any money, goods or credit; and
(3) rate allowed in judgments (judgments spoken of refer to judgments
involving loans or forbearance of any money, goods or credits. (Philippine
Rabbit Bus Lines Inc. v. Cruz, 143 SCRA 160-161 [1986]; Reformina v.
Tomol, Jr., 139 SCRA 260 [1985]). It is true that in the instant case, there is
neither a loan or a forbearance, but then no interest is actually imposed
provided the sums referred to in the judgment are paid upon the finality of
the judgment. It is delay in the payment of such final judgment, that will
cause the imposition of the interest.
It will be noted that in the cases already adverted to, the rate of interest is
imposed on the total sum, from the filing of the complaint until paid; in other
words, as part of the judgment for damages. Clearly, they are not applicable
to the instant case. (Emphasis supplied.)

12% to 6% interest per annum but sustained the time computation thereof, i.e., from the filing of
the complaint until fully paid.

The subsequent case of American Express International, Inc., vs. Intermediate Appellate Court
11 was a petition for review on certiorari from the decision, dated 27 February 1985, of the then

In Nakpil and Sons vs. Court of Appeals, 9 the trial court, in an action for the recovery of
damages
arising
from
the
collapse
of
a
building,
ordered,
inter alia, the "defendant United Construction Co., Inc. (one of the petitioners)
. . . to pay the plaintiff, . . . , the sum of P989,335.68 with interest at the legal rate from

Intermediate Appellate Court reducing the amount of moral and exemplary damages awarded by
the trial court, to P240,000.00 and P100,000.00, respectively, and its resolution, dated 29 April
1985, restoring the amount of damages awarded by the trial court, i.e., P2,000,000.00 as moral
damages and P400,000.00 as exemplary damages with interest thereon at 12% per annum from
notice of judgment, plus costs of suit. In a decision of 09 November 1988, this Court, while

recognizing the right of the private respondent to recover damages, held the award, however, for
moral damages by the trial court, later sustained by the IAC, to be inconceivably large. The
Court 12 thus set aside the decision of the appellate court and rendered a new one, "ordering

since the kind of interest involved in the joint judgment of the lower court
sought to be enforced in this case is interest by way of damages, and not by
way of earnings from loans, etc. Art. 2209 of the Civil Code shall apply.

the petitioner to pay private respondent the sum of One Hundred Thousand (P100,000.00)
Pesos
as
moral
damages,
with
six (6%) percent interest thereon computed from the finality of this decision until paid. (Emphasis
supplied)

Concededly, there have been seeming variances in the above holdings. The cases can perhaps
be classified into two groups according to the similarity of the issues involved and the
corresponding rulings rendered by the court. The "first group" would consist of the cases of
Reformina v. Tomol (1985), Philippine Rabbit Bus Lines v. Cruz (1986), Florendo v. Ruiz (1989)
and National Power Corporation v. Angas (1992). In the "second group" would be Malayan
Insurance Company v. Manila Port Service (1969), Nakpil and Sons v. Court of Appeals (1988),
and American Express International v. Intermediate Appellate Court (1988).

Reformina came into fore again in the 21 February 1989 case of Florendo v. Ruiz 13 which
arose from a breach of employment contract. For having been illegally dismissed, the petitioner
was awarded by the trial court moral and exemplary damages without, however, providing any
legal interest thereon. When the decision was appealed to the Court of Appeals, the latter held:
WHEREFORE, except as modified hereinabove the decision of the CFI of
Negros Oriental dated October 31, 1972 is affirmed in all respects, with the
modification that defendants-appellants, except defendant-appellant Merton
Munn, are ordered to pay, jointly and severally, the amounts stated in the
dispositive portion of the decision, including the sum of P1,400.00 in concept
of compensatory damages, with interest at the legal rate from the date of the
filing of the complaint until fully paid (Emphasis supplied.)
The petition for review to this Court was denied. The records were thereupon
transmitted to the trial court, and an entry of judgment was made. The writ of
execution issued by the trial court directed that only compensatory damages should
earn interest at 6% per annum from the date of the filing of the complaint. Ascribing
grave abuse of discretion on the part of the trial judge, a petition for certiorari assailed
the said order. This Court said:
. . . , it is to be noted that the Court of Appeals ordered the payment of
interest "at the legal rate" from the time of the filing of the complaint. . . Said
circular [Central Bank Circular No. 416] does not apply to actions based on
a breach of employment contract like the case at bar. (Emphasis supplied)
The Court reiterated that the 6% interest per annum on the damages should be
computed from the time the complaint was filed until the amount is fully paid.
Quite recently, the Court had another occasion to rule on the matter. National Power Corporation
vs. Angas, 14 decided on 08 May 1992, involved the expropriation of certain parcels of land.
After conducting a hearing on the complaints for eminent domain, the trial court ordered the
petitioner to pay the private respondents certain sums of money as just compensation for their
lands so expropriated "with legal interest thereon . . . until fully paid." Again, in applying the 6%
legal interest per annum under the Civil Code, the Court 15 declared:
. . . , (T)he transaction involved is clearly not a loan or forbearance of
money, goods or credits but expropriation of certain parcels of land for a
public purpose, the payment of which is without stipulation regarding
interest, and the interest adjudged by the trial court is in the nature of
indemnity for damages. The legal interest required to be paid on the amount
of just compensation for the properties expropriated is manifestly in the form
of indemnity for damages for the delay in the payment thereof. Therefore,

In the "first group", the basic issue focuses on the application of either the 6% (under the Civil
Code) or 12% (under the Central Bank Circular) interest per annum. It is easily discernible in
these cases that there has been a consistent holding that the Central Bank Circular imposing the
12% interest per annum applies only to loans or forbearance 16 of money, goods or credits, as
well as to judgments involving such loan or forbearance of money, goods or credits, and that the
6% interest under the Civil Code governs when the transaction involves the payment of
indemnities in the concept of damage arising from the breach or a delay in the performance of
obligations in general. Observe, too, that in these cases, a common time frame in the
computation of the 6% interest per annum has been applied, i.e., from the time the complaint is
filed until the adjudged amount is fully paid.
The "second group", did not alter the pronounced rule on the application of the 6% or 12%
interest per annum, 17 depending on whether or not the amount involved is a loan or
forbearance, on the one hand, or one of indemnity for damage, on the other hand. Unlike,
however, the "first group" which remained consistent in holding that the running of the legal
interest should be from the time of the filing of the complaint until fully paid, the "second group"
varied on the commencement of the running of the legal interest.
Malayan held that the amount awarded should bear legal interest from the date of the decision
of the court a quo, explaining that "if the suit were for damages, 'unliquidated and not known until
definitely ascertained, assessed and determined by the courts after proof,' then, interest 'should
be from the date of the decision.'" American Express International v. IAC, introduced a different
time frame for reckoning the 6% interest by ordering it to be "computed from the finality of (the)
decision until paid." The Nakpil and Sons case ruled that 12% interest per annum should be
imposed from the finality of the decision until the judgment amount is paid.
The ostensible discord is not difficult to explain. The factual circumstances may have called for
different applications, guided by the rule that the courts are vested with discretion, depending on
the equities of each case, on the award of interest. Nonetheless, it may not be unwise, by way of
clarification and reconciliation, to suggest the following rules of thumb for future guidance.
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or
quasi-delicts 18 is breached, the contravenor can be held liable for damages. 19 The provisions
under Title XVIII on "Damages" of the Civil Code govern in determining the measure of
recoverable damages. 20
II. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan
or forbearance of money, the interest due should be that which may have been stipulated in
writing. 21 Furthermore, the interest due shall itself earn legal interest from the time it is judicially
demanded. 22 In the absence of stipulation, the rate of interest shall be 12% per annum to be
computed from default, i.e., from judicial or extrajudicial demand under and subject to the
provisions of Article 1169 23 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest
on the amount of damages awarded may be imposed at the discretion of the court 24 at the rate
of 6% per annum. 25 No interest, however, shall be adjudged on unliquidated claims or
damages except when or until the demand can be established with reasonable certainty. 26
Accordingly, where the demand is established with reasonable certainty, the interest shall begin
to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when
such certainty cannot be so reasonably established at the time the demand is made, the interest
shall begin to run only from the date the judgment of the court is made (at which time the
quantification of damages may be deemed to have been reasonably ascertained). The actual
base for the computation of legal interest shall, in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the
rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be
12% per annum from such finality until its satisfaction, this interim period being deemed to be by
then an equivalent to a forbearance of credit.
WHEREFORE, the petition is partly GRANTED. The appealed decision is AFFIRMED with the
MODIFICATION that the legal interest to be paid is SIX PERCENT (6%) on the amount due
computed
from
the
decision,
dated
03 February 1988, of the court a quo. A TWELVE PERCENT (12%) interest, in lieu of SIX
PERCENT (6%), shall be imposed on such amount upon finality of this decision until the
payment thereof.
SO ORDERED.
Narvasa, C.J., Cruz, Feliciano, Padilla, Bidin, Regalado, Davide, Jr., Romero,
Bellosillo, Melo, Quiason, Puno and Kapunan, JJ., concur.
Mendoza, J., took no part.

Length of Service

8 yrs. & 1 month

Date Dismissed

January 24, 1997

Rate per day

P196.00

Date of Decisions

Aug. 18, 1998

P198.00 x 26 days x 8 months = P41,184.00

BACKWAGES

Republic of the Philippines

SUPREME COURT
Manila

a) 1/24/97 to 2/5/98 = 12.36 mos.

EN BANC
G.R. No. 189871

P196.00/day x 12.36 mos.

August 13, 2013

= P62,986.56

b) 2/6/98 to 8/18/98 = 6.4 months

DARIO NACAR, PETITIONER,

vs.
GALLERY FRAMES AND/OR FELIPE BORDEY, JR., RESPONDENTS.

Prevailing Rate per day

= P62,986.00

P198.00 x 26 days x 6.4 mos.

= P32,947.20

TO TAL

DECISION

= P95.933.76
xxxx

PERALTA, J.:
This is a petition for review on certiorari assailing the Decision

dated September 23, 2008 of

2
the Court of Appeals (CA) in CA-G.R. SP No. 98591, and the Resolution dated October 9, 2009
denying petitioners motion for reconsideration.
The factual antecedents are undisputed.
Petitioner Dario Nacar filed a complaint for constructive dismissal before the Arbitration Branch
of the National Labor Relations Commission (NLRC) against respondents Gallery Frames (GF)
and/or Felipe Bordey, Jr., docketed as NLRC NCR Case No. 01-00519-97.
3

On October 15, 1998, the Labor Arbiter rendered a Decision in favor of petitioner and found
that he was dismissed from employment without a valid or just cause. Thus, petitioner was
awarded backwages and separation pay in lieu of reinstatement in the amount of P158,919.92.
The dispositive portion of the decision, reads:
With the foregoing, we find and so rule that respondents failed to discharge the burden of
showing that complainant was dismissed from employment for a just or valid cause. All the
more, it is clear from the records that complainant was never afforded due process before he
was terminated. As such, we are perforce constrained to grant complainants prayer for the
payments of separation pay in lieu of reinstatement to his former position, considering the
strained relationship between the parties, and his apparent reluctance to be reinstated,
computed only up to promulgation of this decision as follows:
SEPARATION PAY
Date Hired

August 1990

Rate

P198/day

Date of Decision

Aug. 18, 1998

WHEREFORE, premises considered, judgment is hereby rendered finding respondents guilty of

constructive dismissal and are therefore, ordered:
To pay jointly and severally the complainant the amount of sixty-two thousand nine hundred
eighty-six pesos and 56/100 (P62,986.56) Pesos representing his separation pay;
To pay jointly and severally the complainant the amount of nine (sic) five thousand nine hundred
thirty-three and 36/100 (P95,933.36) representing his backwages; and
All other claims are hereby dismissed for lack of merit.
SO ORDERED.

5
Respondents appealed to the NLRC, but it was dismissed for lack of merit in the Resolution
dated February 29, 2000. Accordingly, the NLRC sustained the decision of the Labor Arbiter.
6
Respondents filed a motion for reconsideration, but it was denied.
Dissatisfied, respondents filed a Petition for Review on Certiorari before the CA. On August 24,
2000, the CA issued a Resolution dismissing the petition. Respondents filed a Motion for
7
Reconsideration, but it was likewise denied in a Resolution dated May 8, 2001.
Respondents then sought relief before the Supreme Court, docketed as G.R. No. 151332.
Finding no reversible error on the part of the CA, this Court denied the petition in the Resolution
8
dated April 17, 2002.
An Entry of Judgment was later issued certifying that the resolution became final and executory
9
on May 27, 2002. The case was, thereafter, referred back to the Labor Arbiter. A pre-execution
10
conference was consequently scheduled, but respondents failed to appear.

On November 5, 2002, petitioner filed a Motion for Correct Computation, praying that his
backwages be computed from the date of his dismissal on January 24, 1997 up to the finality of
11
the Resolution of the Supreme Court on May 27, 2002. Upon recomputation, the Computation
12
and Examination Unit of the NLRC arrived at an updated amount in the sum of P471,320.31.
13
On December 2, 2002, a Writ of Execution
was issued by the Labor Arbiter ordering the
Sheriff to collect from respondents the total amount of P471,320.31. Respondents filed a Motion
to Quash Writ of Execution, arguing, among other things, that since the Labor Arbiter awarded
separation pay of P62,986.56 and limited backwages of P95,933.36, no more recomputation is
required to be made of the said awards. They claimed that after the decision becomes final and
14
executory, the same cannot be altered or amended anymore. On January 13, 2003, the Labor
15
16
Arbiter issued an Order denying the motion. Thus, an Alias Writ of Execution was issued on
January 14, 2003.
17
Respondents again appealed before the NLRC, which on June 30, 2003 issued a Resolution
granting the appeal in favor of the respondents and ordered the recomputation of the judgment
award.
On August 20, 2003, an Entry of Judgment was issued declaring the Resolution of the NLRC to
be final and executory. Consequently, another pre-execution conference was held, but
respondents failed to appear on time. Meanwhile, petitioner moved that an Alias Writ of
Execution be issued to enforce the earlier recomputed judgment award in the sum of
18
P471,320.31.
The records of the case were again forwarded to the Computation and Examination Unit for
recomputation, where the judgment award of petitioner was reassessed to be in the total amount
of only P147,560.19.
Petitioner then moved that a writ of execution be issued ordering respondents to pay him the
original amount as determined by the Labor Arbiter in his Decision dated October 15, 1998,
pending the final computation of his backwages and separation pay.
On January 14, 2003, the Labor Arbiter issued an Alias Writ of Execution to satisfy the judgment
award that was due to petitioner in the amount of P147,560.19, which petitioner eventually
received.
Petitioner then filed a Manifestation and Motion praying for the re-computation of the monetary
19
award to include the appropriate interests.
20
On May 10, 2005, the Labor Arbiter issued an Order
granting the motion, but only up to the
amount of P11,459.73. The Labor Arbiter reasoned that it is the October 15, 1998 Decision that
should be enforced considering that it was the one that became final and executory. However,
the Labor Arbiter reasoned that since the decision states that the separation pay and backwages
are computed only up to the promulgation of the said decision, it is the amount of P158,919.92
that should be executed. Thus, since petitioner already received P147,560.19, he is only entitled
to the balance of P11,459.73.

21
Petitioner then appealed before the NLRC,
which appeal was denied by the NLRC in its
22
Resolution dated September 27, 2006. Petitioner filed a Motion for Reconsideration, but it was
23
likewise denied in the Resolution dated January 31, 2007.
Aggrieved, petitioner then sought recourse before the CA, docketed as CA-G.R. SP No. 98591.
24
On September 23, 2008, the CA rendered a Decision denying the petition. The CA opined that
since petitioner no longer appealed the October 15, 1998 Decision of the Labor Arbiter, which
already became final and executory, a belated correction thereof is no longer allowed. The CA
stated that there is nothing left to be done except to enforce the said judgment. Consequently, it
can no longer be modified in any respect, except to correct clerical errors or mistakes.
Petitioner filed a Motion for Reconsideration, but it was denied in the Resolution
October 9, 2009.

25

dated

Hence, the petition assigning the lone error:

I
WITH DUE RESPECT, THE HONORABLE COURT OF APPEALS SERIOUSLY
ERRED, COMMITTED GRAVE ABUSE OF DISCRETION AND DECIDED
CONTRARY TO LAW IN UPHOLDING THE QUESTIONED RESOLUTIONS OF
THE NLRC WHICH, IN TURN, SUSTAINED THE MAY 10, 2005 ORDER OF
LABOR ARBITER MAGAT MAKING THE DISPOSITIVE PORTION OF THE
OCTOBER 15, 1998 DECISION OF LABOR ARBITER LUSTRIA
SUBSERVIENT TO AN OPINION EXPRESSED IN THE BODY OF THE SAME
26
DECISION.
Petitioner argues that notwithstanding the fact that there was a computation of backwages in the
Labor Arbiters decision, the same is not final until reinstatement is made or until finality of the
decision, in case of an award of separation pay. Petitioner maintains that considering that the
October 15, 1998 decision of the Labor Arbiter did not become final and executory until the April
17, 2002 Resolution of the Supreme Court in G.R. No. 151332 was entered in the Book of
Entries on May 27, 2002, the reckoning point for the computation of the backwages and
separation pay should be on May 27, 2002 and not when the decision of the Labor Arbiter was
rendered on October 15, 1998. Further, petitioner posits that he is also entitled to the payment of
interest from the finality of the decision until full payment by the respondents.
On their part, respondents assert that since only separation pay and limited backwages were
awarded to petitioner by the October 15, 1998 decision of the Labor Arbiter, no more
recomputation is required to be made of said awards. Respondents insist that since the decision
clearly stated that the separation pay and backwages are "computed only up to [the]
promulgation of this decision," and considering that petitioner no longer appealed the decision,
petitioner is only entitled to the award as computed by the Labor Arbiter in the total amount of
P158,919.92. Respondents added that it was only during the execution proceedings that the
petitioner questioned the award, long after the decision had become final and executory.
Respondents contend that to allow the further recomputation of the backwages to be awarded to
petitioner at this point of the proceedings would substantially vary the decision of the Labor
Arbiter as it violates the rule on immutability of judgments.

The petition is meritorious.

The instant case is similar to the case of Session Delights Ice Cream and Fast Foods v. Court of
27
Appeals (Sixth Division),
wherein the issue submitted to the Court for resolution was the
propriety of the computation of the awards made, and whether this violated the principle of
immutability of judgment. Like in the present case, it was a distinct feature of the judgment of the
Labor Arbiter in the above-cited case that the decision already provided for the computation of
the payable separation pay and backwages due and did not further order the computation of the
monetary awards up to the time of the finality of the judgment. Also in Session Delights, the
dismissed employee failed to appeal the decision of the labor arbiter. The Court clarified, thus:
In concrete terms, the question is whether a re-computation in the course of execution of the
labor arbiter's original computation of the awards made, pegged as of the time the decision was
rendered and confirmed with modification by a final CA decision, is legally proper. The question
is posed, given that the petitioner did not immediately pay the awards stated in the original labor
arbiter's decision; it delayed payment because it continued with the litigation until final judgment
at the CA level.
A source of misunderstanding in implementing the final decision in this case proceeds from the
way the original labor arbiter framed his decision. The decision consists essentially of two parts.
The first is that part of the decision that cannot now be disputed because it has been confirmed
with finality. This is the finding of the illegality of the dismissal and the awards of separation pay
in lieu of reinstatement, backwages, attorney's fees, and legal interests.
The second part is the computation of the awards made. On its face, the computation the labor
arbiter made shows that it was time-bound as can be seen from the figures used in the
computation. This part, being merely a computation of what the first part of the decision
established and declared, can, by its nature, be re-computed. This is the part, too, that the
petitioner now posits should no longer be re-computed because the computation is already in
the labor arbiter's decision that the CA had affirmed. The public and private respondents, on the
other hand, posit that a re-computation is necessary because the relief in an illegal dismissal
decision goes all the way up to reinstatement if reinstatement is to be made, or up to the finality
of the decision, if separation pay is to be given in lieu reinstatement.
That the labor arbiter's decision, at the same time that it found that an illegal dismissal had taken
place, also made a computation of the award, is understandable in light of Section 3, Rule VIII of
the then NLRC Rules of Procedure which requires that a computation be made. This Section in
part states:

The petitioner appropriately sought to nullify the NLRC decision on jurisdictional grounds
through a timely filed Rule 65 petition for certiorari. The CA decision, finding that NLRC
exceeded its authority in affirming the payment of 13th month pay and indemnity, lapsed to
finality and was subsequently returned to the labor arbiter of origin for execution.
It was at this point that the present case arose. Focusing on the core illegal dismissal portion of
the original labor arbiter's decision, the implementing labor arbiter ordered the award recomputed; he apparently read the figures originally ordered to be paid to be the computation due
had the case been terminated and implemented at the labor arbiter's level. Thus, the labor
arbiter re-computed the award to include the separation pay and the backwages due up to the
finality of the CA decision that fully terminated the case on the merits. Unfortunately, the labor
arbiter's approved computation went beyond the finality of the CA decision (July 29, 2003) and
included as well the payment for awards the final CA decision had deleted - specifically, the
proportionate 13th month pay and the indemnity awards. Hence, the CA issued the decision now
questioned in the present petition.
We see no error in the CA decision confirming that a re-computation is necessary as it
essentially considered the labor arbiter's original decision in accordance with its basic
component parts as we discussed above. To reiterate, the first part contains the finding of
illegality and its monetary consequences; the second part is the computation of the awards or
monetary consequences of the illegal dismissal, computed as of the time of the labor arbiter's
28
original decision.
Consequently, from the above disquisitions, under the terms of the decision which is sought to
be executed by the petitioner, no essential change is made by a recomputation as this step is a
necessary consequence that flows from the nature of the illegality of dismissal declared by the
29
Labor Arbiter in that decision.
A recomputation (or an original computation, if no previous
computation has been made) is a part of the law specifically, Article 279 of the Labor Code and
the established jurisprudence on this provision that is read into the decision. By the nature of
an illegal dismissal case, the reliefs continue to add up until full satisfaction, as expressed under
Article 279 of the Labor Code. The recomputation of the consequences of illegal dismissal upon
execution of the decision does not constitute an alteration or amendment of the final decision
being implemented. The illegal dismissal ruling stands; only the computation of monetary
consequences of this dismissal is affected, and this is not a violation of the principle of
30
immutability of final judgments.

Clearly implied from this original computation is its currency up to the finality of the labor arbiter's
decision. As we noted above, this implication is apparent from the terms of the computation
itself, and no question would have arisen had the parties terminated the case and implemented
the decision at that point.

That the amount respondents shall now pay has greatly increased is a consequence that it
cannot avoid as it is the risk that it ran when it continued to seek recourses against the Labor
Arbiter's decision. Article 279 provides for the consequences of illegal dismissal in no uncertain
terms, qualified only by jurisprudence in its interpretation of when separation pay in lieu of
reinstatement is allowed. When that happens, the finality of the illegal dismissal decision
becomes the reckoning point instead of the reinstatement that the law decrees. In allowing
separation pay, the final decision effectively declares that the employment relationship ended so
31
that separation pay and backwages are to be computed up to that point.

However, the petitioner disagreed with the labor arbiter's findings on all counts - i.e., on the
finding of illegality as well as on all the consequent awards made. Hence, the petitioner
appealed the case to the NLRC which, in turn, affirmed the labor arbiter's decision. By law, the
NLRC decision is final, reviewable only by the CA on jurisdictional grounds.

Finally, anent the payment of legal interest. In the landmark case of Eastern Shipping Lines, Inc.
32
v. Court of Appeals,
the Court laid down the guidelines regarding the manner of computing
legal interest, to wit:

[T]he Labor Arbiter of origin, in cases involving monetary awards and at all events, as far as
practicable, shall embody in any such decision or order the detailed and full amount awarded.

II. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money,
i.e., a loan or forbearance of money, the interest due should be that which may have
been stipulated in writing. Furthermore, the interest due shall itself earn legal interest
from the time it is judicially demanded. In the absence of stipulation, the rate of interest
shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial
demand under and subject to the provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached,
an interest on the amount of damages awarded may be imposed at the discretion of
the court at the rate of 6% per annum. No interest, however, shall be adjudged on
unliquidated claims or damages except when or until the demand can be established
with reasonable certainty. Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so
reasonably established at the time the demand is made, the interest shall begin to run
only from the date the judgment of the court is made (at which time the quantification
of damages may be deemed to have been reasonably ascertained). The actual base
for the computation of legal interest shall, in any case, be on the amount finally
adjudged.
3. When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 12% per annum from such finality until its satisfaction,
this interim period being deemed to be by then an equivalent to a forbearance of
33
credit.
Recently, however, the Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), in its Resolution
34
No. 796 dated May 16, 2013, approved the amendment of Section 2
of Circular No. 905,
35
Series of 1982 and, accordingly, issued Circular No. 799,
Series of 2013, effective July 1,
2013, the pertinent portion of which reads:
The Monetary Board, in its Resolution No. 796 dated 16 May 2013, approved the following
revisions governing the rate of interest in the absence of stipulation in loan contracts, thereby
amending Section 2 of Circular No. 905, Series of 1982:
Section 1. The rate of interest for the loan or forbearance of any money, goods
or credits and the rate allowed in judgments, in the absence of an express
contract as to such rate of interest, shall be six percent (6%) per annum.
36
Section 2. In view of the above, Subsection X305.1
of the Manual of
37
38
39
Regulations for Banks and Sections 4305Q.1,
4305S.3
and 4303P.1
of
the Manual of Regulations for Non-Bank Financial Institutions are hereby
amended accordingly.
This Circular shall take effect on 1 July 2013.

Thus, from the foregoing, in the absence of an express stipulation as to the rate of interest that
would govern the parties, the rate of legal interest for loans or forbearance of any money, goods
or credits and the rate allowed in judgments shall no longer be twelve percent (12%) per annum
40
- as reflected in the case of Eastern Shipping Lines
and Subsection X305.1 of the Manual of
Regulations for Banks and Sections 4305Q.1, 4305S.3 and 4303P.1 of the Manual of
Regulations for Non-Bank Financial Institutions, before its amendment by BSP-MB Circular No.
799 - but will now be six percent (6%) per annum effective July 1, 2013. It should be noted,
nonetheless, that the new rate could only be applied prospectively and not retroactively.
Consequently, the twelve percent (12%) per annum legal interest shall apply only until June 30,
2013. Come July 1, 2013 the new rate of six percent (6%) per annum shall be the prevailing rate
of interest when applicable.
Corollarily, in the recent case of Advocates for Truth in Lending, Inc. and Eduardo B. Olaguer v.
41
Bangko Sentral Monetary Board,
this Court affirmed the authority of the BSP-MB to set
interest rates and to issue and enforce Circulars when it ruled that "the BSP-MB may prescribe
the maximum rate or rates of interest for all loans or renewals thereof or the forbearance of any
money, goods or credits, including those for loans of low priority such as consumer loans, as
well as such loans made by pawnshops, finance companies and similar credit institutions. It
even authorizes the BSP-MB to prescribe different maximum rate or rates for different types of
borrowings, including deposits and deposit substitutes, or loans of financial intermediaries."
Nonetheless, with regard to those judgments that have become final and executory prior to July
1, 2013, said judgments shall not be disturbed and shall continue to be implemented applying
the rate of interest fixed therein.1awp++i1
To recapitulate and for future guidance, the guidelines laid down in the case of Eastern Shipping
42
Lines are accordingly modified to embody BSP-MB Circular No. 799, as follows:
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts,
delicts or quasi-delicts is breached, the contravenor can be held liable for damages.
The provisions under Title XVIII on "Damages" of the Civil Code govern in determining
the measure of recoverable damages.1wphi1
II. With regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof, is
imposed, as follows:
When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan
or forbearance of money, the interest due should be that which may have been stipulated in
writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of interest shall be 6% per annum to be
computed from default, i.e., from judicial or extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.
When an obligation, not constituting a loan or forbearance of money, is breached, an interest on
the amount of damages awarded may be imposed at the discretion of the court at the rate of 6%
per annum. No interest, however, shall be adjudged on unliquidated claims or damages, except
when or until the demand can be established with reasonable certainty. Accordingly, where the
demand is established with reasonable certainty, the interest shall begin to run from the time the
claim is made judicially or extrajudicially (Art. 1169, Civil Code), but when such certainty cannot

be so reasonably established at the time the demand is made, the interest shall begin to run
only from the date the judgment of the court is made (at which time the quantification of
damages may be deemed to have been reasonably ascertained). The actual base for the
computation of legal interest shall, in any case, be on the amount finally adjudged.
When the judgment of the court awarding a sum of money becomes final and executory, the rate
of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 6%
per annum from such finality until its satisfaction, this interim period being deemed to be by then
an equivalent to a forbearance of credit.
And, in addition to the above, judgments that have become final and executory prior to July 1,
2013, shall not be disturbed and shall continue to be implemented applying the rate of interest
fixed therein.
WHEREFORE, premises considered, the Decision dated September 23, 2008 of the Court of
Appeals in CA-G.R. SP No. 98591, and the Resolution dated October 9, 2009 are REVERSED
and SET ASIDE. Respondents are Ordered to Pay petitioner:
(1) backwages computed from the time petitioner was illegally dismissed on January
24, 1997 up to May 27, 2002, when the Resolution of this Court in G.R. No. 151332
became final and executory;
(2) separation pay computed from August 1990 up to May 27, 2002 at the rate of one
month pay per year of service; and
(3) interest of twelve percent (12%) per annum of the total monetary awards,
computed from May 27, 2002 to June 30, 2013 and six percent (6%) per annum from
July 1, 2013 until their full satisfaction.
The Labor Arbiter is hereby ORDERED to make another recomputation of the total monetary
benefits awarded and due to petitioner in accordance with this Decision.
SO ORDERED.
DIOSDADO M. PERALTA
Associate Justice

other Zalameas were listed as "No. 34, showing a party of two." Out of the 42 names on the wait
list, the first 22 names were eventually allowed to board the flight to Los Angeles, including
petitioner Cesar Zalamea. The two others, on the other hand, at No. 34, being ranked lower than
22, were not able to fly. As it were, those holding full-fare tickets were given first priority among
the wait-listed passengers. Mr. Zalamea, who was holding the full-fare ticket of his daughter, was
allowed to board the plane; while his wife and daughter, who presented the discounted tickets
were denied boarding. According to Mr. Zalamea, it was only later when he discovered the he
was holding his daughter's full-fare ticket.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION

G.R. No. 104235 November 18, 1993

SPOUSES CESAR & SUTHIRA ZALAMEA and LIANA ZALAMEA, petitioners,
vs.
HONORABLE COURT OF APPEALS and TRANSWORLD AIRLINES, INC., respondents.

Even in the next TWA flight to Los Angeles Mrs. Zalamea and her daughter, could not be
accommodated because it was also fully booked. Thus, they were constrained to book in
another flight and purchased two tickets from American Airlines at a cost of Nine Hundred
Eighteen ($918.00) Dollars.
Upon their arrival in the Philippines, petitioners filed an action for damages based on breach of
contract of air carriage before the Regional Trial Court of Makati, Metro Manila, Branch 145. As
aforesaid, the lower court ruled in favor of petitioners in its decision 1 dated January 9, 1989 the
dispositive portion of which states as follows:
WHEREFORE, judgment is hereby rendered ordering the defendant to pay
plaintiffs the following amounts:

Sycip, Salazar, Hernandez, Gatmaitan for petitioners.

Quisumbing, Torres & Evangelista for private-respondent.

(1) US $918.00, or its peso equivalent at the time of payment representing

the price of the tickets bought by Suthira and Liana Zalamea from American
Airlines, to enable them to fly to Los Angeles from New York City;

NOCON, J.:

(2) US $159.49, or its peso equivalent at the time of payment, representing

the price of Suthira Zalamea's ticket for TWA Flight 007;

Disgruntled over TransWorld Airlines, Inc.'s refusal to accommodate them in TWA Flight 007
departing from New York to Los Angeles on June 6, 1984 despite possession of confirmed
tickets, petitioners filed an action for damages before the Regional Trial Court of Makati, Metro
Manila, Branch 145. Advocating petitioner's position, the trial court categorically ruled that
respondent TransWorld Airlines (TWA) breached its contract of carriage with petitioners and that
said breach was "characterized by bad faith." On appeal, however, the appellate court found that
while there was a breach of contract on respondent TWA's part, there was neither fraud nor bad
faith because under the Code of Federal Regulations by the Civil Aeronautics Board of the
United States of America it is allowed to overbook flights.

(3) Eight Thousand Nine Hundred Thirty-Four Pesos and Fifty Centavos
(P8,934.50, Philippine Currency, representing the price of Liana Zalamea's
ticket for TWA Flight 007,
(4) Two Hundred Fifty Thousand Pesos (P250,000.00), Philippine Currency,
as moral damages for all the plaintiffs'
(5) One Hundred Thousand Pesos (P100,000.00), Philippine Currency, as
and for attorney's fees; and
(6) The costs of suit.

The factual backdrop of the case is as follows:

Petitioners-spouses Cesar C. Zalamea and Suthira Zalamea, and their daughter, Liana
Zalamea, purchased three (3) airline tickets from the Manila agent of respondent TransWorld
Airlines, Inc. for a flight to New York to Los Angeles on June 6, 1984. The tickets of petitionersspouses were purchased at a discount of 75% while that of their daughter was a full fare ticket.
All three tickets represented confirmed reservations.
While in New York, on June 4, 1984, petitioners received notice of the reconfirmation of their
reservations for said flight. On the appointed date, however, petitioners checked in at 10:00
a.m., an hour earlier than the scheduled flight at 11:00 a.m. but were placed on the wait-list
because the number of passengers who had checked in before them had already taken all the
seats available on the flight. Liana Zalamea appeared as the No. 13 on the wait-list while the two

SO ORDERED. 2
On appeal, the respondent Court of Appeals held that moral damages are recoverable in a
damage suit predicated upon a breach of contract of carriage only where there is fraud or bad
faith. Since it is a matter of record that overbooking of flights is a common and accepted practice
of airlines in the United States and is specifically allowed under the Code of Federal Regulations
by the Civil Aeronautics Board, no fraud nor bad faith could be imputed on respondent
TransWorld Airlines.
Moreover, while respondent TWA was remiss in not informing petitioners that the flight was
overbooked and that even a person with a confirmed reservation may be denied accommodation

on an overbooked flight, nevertheless it ruled that such omission or negligence cannot under the
circumstances be considered to be so gross as to amount to bad faith.
Finally, it also held that there was no bad faith in placing petitioners in the wait-list along with
forty-eight (48) other passengers where full-fare first class tickets were given priority over
discounted tickets.
The dispositive portion of the decision of respondent Court of Appeals 3 dated October 25, 1991
states as follows:
WHEREFORE, in view of all the foregoing, the decision under review is
hereby MODIFIED in that the award of moral and exemplary damages to the
plaintiffs is eliminated, and the defendant-appellant is hereby ordered to pay
the plaintiff the following amounts:
(1) US$159.49, or its peso equivalent at the time of the payment,
representing the price of Suthira Zalamea's ticket for TWA Flight 007;

made by a secretary of an embassy or legation, consul general, consul, vice-consul, or consular

agent or by any officer in the foreign service of the Philippines stationed in the foreign country in
which the record is kept, and authenticated by the seal of his office. 7
Respondent TWA relied solely on the statement of Ms. Gwendolyn Lather, its customer service
agent, in her deposition dated January 27, 1986 that the Code of Federal Regulations of the
Civil Aeronautics Board allows overbooking. Aside from said statement, no official publication of
said code was presented as evidence. Thus, respondent court's finding that overbooking is
specifically allowed by the US Code of Federal Regulations has no basis in fact.
Even if the claimed U.S. Code of Federal Regulations does exist, the same is not applicable to
the case at bar in accordance with the principle of lex loci contractus which require that the law
of the place where the airline ticket was issued should be applied by the court where the
passengers are residents and nationals of the forum and the ticket is issued in such State by the
defendant airline. 8 Since the tickets were sold and issued in the Philippines, the applicable law
in this case would be Philippine law.

(2) US$159.49, or its peso equivalent at the time of the payment,

representing the price of Cesar Zalamea's ticket for TWA Flight 007;

Existing jurisprudence explicitly states that overbooking amounts to bad faith, entitling the
passengers concerned to an award of moral damages. In Alitalia Airways v. Court of Appeals, 9

(3) P50,000.00 as and for attorney's fees.

where passengers with confirmed bookings were refused carriage on the last minute, this Court
held that when an airline issues a ticket to a passenger confirmed on a particular flight, on a
certain date, a contract of carriage arises, and the passenger has every right to expect that he
would fly on that flight and on that date. If he does not, then the carrier opens itself to a suit for
breach of contract of carriage. Where an airline had deliberately overbooked, it took the risk of
having to deprive some passengers of their seats in case all of them would show up for the
check in. For the indignity and inconvenience of being refused a confirmed seat on the last
minute, said passenger is entitled to an award of moral damages.

(4) The costs of suit.

SO ORDERED. 4
Not satisfied with the decision, petitioners raised the case on petition for review on certiorari and
alleged the following errors committed by the respondent Court of Appeals, to wit:
I.
. . . IN HOLDING THAT THERE WAS NO FRAUD OR BAD FAITH ON THE
PART OF RESPONDENT TWA BECAUSE IT HAS A RIGHT TO
OVERBOOK FLIGHTS.
II.
. . . IN ELIMINATING THE AWARD OF EXEMPLARY DAMAGES.

Similarly, in Korean Airlines Co., Ltd. v. Court of Appeals, 10 where private respondent was not
allowed to board the plane because her seat had already been given to another passenger even
before the allowable period for passengers to check in had lapsed despite the fact that she had
a confirmed ticket and she had arrived on time, this Court held that petitioner airline acted in bad
faith in violating private respondent's rights under their contract of carriage and is therefore liable
for the injuries she has sustained as a result.

III.

In fact, existing jurisprudence abounds with rulings where the breach of contract of carriage
amounts to bad faith. In Pan American World Airways, Inc. v. Intermediate Appellate Court, 11

. . . IN NOT ORDERING THE REFUND OF LIANA ZALAMEA'S TWA

TICKET
AND
PAYMENT
FOR
THE
AMERICAN
AIRLINES
5
TICKETS.

where a would-be passenger had the necessary ticket, baggage claim and clearance from
immigration all clearly and unmistakably showing that she was, in fact, included in the passenger
manifest of said flight, and yet was denied accommodation in said flight, this Court did not
hesitate to affirm the lower court's finding awarding her damages.

That there was fraud or bad faith on the part of respondent airline when it did not allow
petitioners to board their flight for Los Angeles in spite of confirmed tickets cannot be disputed.
The U.S. law or regulation allegedly authorizing overbooking has never been proved. Foreign
laws do not prove themselves nor can the courts take judicial notice of them. Like any other fact,
they must be alleged and proved. 6 Written law may be evidenced by an official publication
thereof or by a copy attested by the officer having the legal custody of the record, or by his
deputy, and accompanied with a certificate that such officer has custody. The certificate may be

A contract to transport passengers is quite different in kind and degree from any other
contractual relation. So ruled this Court in Zulueta v. Pan American World Airways, Inc. 12 This
is so, for a contract of carriage generates a relation attended with public duty a duty to
provide public service and convenience to its passengers which must be paramount to selfinterest or enrichment. Thus, it was also held that the switch of planes from Lockheed 1011 to a
smaller Boeing 707 because there were only 138 confirmed economy class passengers who

could very well be accommodated in the smaller planes, thereby sacrificing the comfort of its first
class passengers for the sake of economy, amounts to bad faith. Such inattention and lack of
care for the interest of its passengers who are entitled to its utmost consideration entitles the
passenger to an award of moral damages. 13
Even on the assumption that overbooking is allowed, respondent TWA is still guilty of bad faith in
not informing its passengers beforehand that it could breach the contract of carriage even if they
have confirmed tickets if there was overbooking. Respondent TWA should have incorporated
stipulations on overbooking on the tickets issued or to properly inform its passengers about
these policies so that the latter would be prepared for such eventuality or would have the choice
to ride with another airline.
Respondent TWA contends that Exhibit I, the detached flight coupon upon which were written
the name of the passenger and the points of origin and destination, contained such a notice. An
examination of Exhibit I does not bear this out. At any rate, said exhibit was not offered for the
purpose of showing the existence of a notice of overbooking but to show that Exhibit I was used
for flight 007 in first class of June 11, 1984 from New York to Los Angeles.
Moreover, respondent TWA was also guilty of not informing its passengers of its alleged policy of
giving less priority to discounted tickets. While the petitioners had checked in at the same time,
and held confirmed tickets, yet, only one of them was allowed to board the plane ten minutes
before departure time because the full-fare ticket he was holding was given priority over
discounted tickets. The other two petitioners were left behind.
It is respondent TWA's position that the practice of overbooking and the airline system of
boarding priorities are reasonable policies, which when implemented do not amount to bad faith.
But the issue raised in this case is not the reasonableness of said policies but whether or not
said policies were incorporated or deemed written on petitioners' contracts of carriage.
Respondent TWA failed to show that there are provisions to that effect. Neither did it present any
argument of substance to show that petitioners were duly apprised of the overbooked condition
of the flight or that there is a hierarchy of boarding priorities in booking passengers. It is evident
that petitioners had the right to rely upon the assurance of respondent TWA, thru its agent in
Manila, then in New York, that their tickets represented confirmed seats without any qualification.
The failure of respondent TWA to so inform them when it could easily have done so thereby
enabling respondent to hold on to them as passengers up to the last minute amounts to bad
faith. Evidently, respondent TWA placed its self-interest over the rights of petitioners under their
contracts of carriage. Such conscious disregard of petitioners' rights makes respondent TWA
liable for moral damages. To deter breach of contracts by respondent TWA in similar fashion in
the future, we adjudge respondent TWA liable for exemplary damages, as well.
Petitioners also assail the respondent court's decision not to require the refund of Liana
Zalamea's ticket because the ticket was used by her father. On this score, we uphold the
respondent court. Petitioners had not shown with certainty that the act of respondent TWA in
allowing Mr. Zalamea to use the ticket of her daughter was due to inadvertence or deliberate act.
Petitioners had also failed to establish that they did not accede to said agreement. The logical
conclusion, therefore, is that both petitioners and respondent TWA agreed, albeit impliedly, to the
course of action taken.
The respondent court erred, however, in not ordering the refund of the American Airlines tickets
purchased and used by petitioners Suthira and Liana. The evidence shows that petitioners

Suthira and Liana were constrained to take the American Airlines flight to Los Angeles not
because they "opted not to use their TWA tickets on another TWA flight" but because respondent
TWA could not accommodate them either on the next TWA flight which was also fully booked. 14
The purchase of the American Airlines tickets by petitioners Suthira and Liana was the
consequence of respondent TWA's unjustifiable breach of its contracts of carriage with
petitioners. In accordance with Article 2201, New Civil Code, respondent TWA should, therefore,
be responsible for all damages which may be reasonably attributed to the non-performance of its
obligation. In the previously cited case of Alitalia Airways v. Court of Appeals, 15 this Court
explicitly held that a passenger is entitled to be reimbursed for the cost of the tickets he had to
buy for a flight to another airline. Thus, instead of simply being refunded for the cost of the
unused TWA tickets, petitioners should be awarded the actual cost of their flight from New York
to Los Angeles. On this score, we differ from the trial court's ruling which ordered not only the
reimbursement of the American Airlines tickets but also the refund of the unused TWA tickets. To
require both prestations would have enabled petitioners to fly from New York to Los Angeles
without any fare being paid.
The award to petitioners of attorney's fees is also justified under Article 2208(2) of the Civil Code
which allows recovery when the defendant's act or omission has compelled plaintiff to litigate or
to incur expenses to protect his interest. However, the award for moral damages and exemplary
damages by the trial court is excessive in the light of the fact that only Suthira and Liana
Zalamea were actually "bumped off." An award of P50,000.00 moral damages and another
P50,000.00 exemplary damages would suffice under the circumstances obtaining in the instant
case.
WHEREFORE, the petition is hereby GRANTED and the decision of the respondent Court of
Appeals is hereby MODIFIED to the extent of adjudging respondent TransWorld Airlines to pay
damages to petitioners in the following amounts, to wit:
(1) US$918.00 or its peso equivalent at the time of payment representing the price of the tickets
bought by Suthira and Liana Zalamea from American Airlines, to enable them to fly to Los
Angeles from New York City;
(2) P50,000.00 as moral damages;
(3) P50,000.00 as exemplary damages;
(4) P50,000.00 as attorney's fees; and
(5) Costs of suit.
SO ORDERED.
Narvasa, C.J., Padilla, Regalado and Puno, JJ., concur.

warrant the awarding of moral damages." 1

Disagreeing, petitioner sought relief from the Regional Trial Court, which in a decision dated
March 16, 1987 disposed of petitioner's appeal as follows:
IN VIEW OF ALL THE FOREGOING, the civil aspect of the lower court's
decision of April 20, 1981 subject of this appeal, for lack of merit, is hereby
DENIED.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION

G.R. No. 82146 January 22, 1990

EULOGIO OCCENA, petitioner,
vs.
HON. PEDRO M. ICAMINA, Presiding Judge, Branch X of the Regional Trial Court Sixth
Judicial Region, San Jose, Antique; THE PEOPLE OF THE PHILIPPINES, represented by
the Honorable Provincial Fiscal of Antique; and CRISTINA VEGAFRIA, respondents.
Comelec Legal Assistance Office for petitioner.
Comelec Legal Assistance Officer for private respondent.

FERNAN, C.J.:
On May 31, 1979, herein petitioner Eulogio Occena instituted before the Second Municipal
Circuit Trial Court of Sibalom, San Remigio Belison, Province of Antique, Criminal Case No.
1717, a criminal complaint for Grave Oral Defamation against herein private respondent Cristina
Vegafria for allegedly openly, publicly and maliciously uttering the following insulting words and
statements: "Gago ikaw nga Barangay Captain, montisco, traidor, malugus, Hudas," which,
freely translated, mean: "You are a foolish Barangay Captain, ignoramus, traitor, tyrant, Judas"
and other words and statements of similar import which caused great and irreparable damage
and injury to his person and honor.
Private respondent as accused therein entered a plea of not guilty. Trial thereafter ensued, at
which petitioner, without reserving his right to file a separate civil action for damages actively
intervened thru a private prosecutor.
After trial, private respondent was convicted of the offense of Slight Oral Defamation and was
sentenced to pay a fine of Fifty Pesos (P50.00) with subsidiary imprisonment in case of
insolvency and to pay the costs. No damages were awarded to petitioner in view of the trial
court's opinion that "the facts and circumstances of the case as adduced by the evidence do not

After the decision shall have become final, remand the records of this case
to the court of origin, Second Municipal Circuit Trial Court of Sibalom, San
Remigio-Belison, Antique, for the execution of its decision on the criminal
aspect.
SO ORDERED. 2
Petitioner is now before us by way of a petition for review on certiorari seeking to annul the RTC
decision for being contrary to Article 100 of the Revised Penal Code providing that every person
criminally liable for a felony is also civilly liable, and Article 2219 of the New Civil Code providing
that moral damages may be recovered in libel, slander or any other form of defamation. He
submits that public respondent RTC erred in relying on the cases of Roa vs. de la Cruz, 107
Phil. 10 and Tan vs. Standard Vacuum Oil Co., et al., 91 Phil. 672 cited therein. He differentiates
said cases from the case at bar by saying that in the case of Roa, the decision of the trial court
had become final before Maria C. Roa instituted a civil action for damages; whereas in the
instant case, the decision of the trial court has not yet become final by reason of the timely
appeal interposed by him and no civil action for damages has been instituted by petitioner
against private respondent for the same cause. Tan, on the other hand, contemplates of two
actions, one criminal and one civil, and the prosecution of the criminal case had resulted in the
acquittal of the accused, which is not the situation here where the civil aspect was impliedly
instituted with the criminal action in accordance with Section 1, Rule 111, of the Rules of Court.
Private respondent for her part argues that the decision of the trial court carries with it the final
adjudication of her civil liability. Since petitioner chose to actively intervene in the criminal action
without reserving his right to file a separate civil action for damages, he assumed the risk that in
the event he failed to recover damages he cannot appeal from the decision of the lower court.
We find merit in the petition.
The issues confronting us in the instant petition is whether or not the decision of the Second
Municipal Trial Court of Sibalom, San-Remigio-Belison, Province of Antique constitutes the final
adjudication on the merits of private respondent's civil liability; and whether or not petitioner is
entitled to an award of damages arising from the remarks uttered by private respondent and
found by the trial court to be defamatory.
The decision of the Municipal Circuit Trial Court as affirmed by the Regional Trial Court in
Criminal Case No. 1709 cannot be considered as a final adjudication on the civil liability of
private respondent simply because said decision has not yet become final due to the timely
appeal filed by petitioner with respect to the civil liability of the accused in said case. It was only
the unappealed criminal aspect of the case which has become final.
In the case of People vs. Coloma, 105 Phil. 1287, we categorically stated that from a judgment
convicting the accused, two (2) appeals may, accordingly, be taken. The accused may seek a

review of said judgment, as regards both civil and criminal actions; while the complainant may
appeal with respect only to the civil action, either because the lower court has refused to award
damages or because the award made is unsatisfactory to him. The right of either to appeal or
not to appeal in the event of conviction of the accused is not dependent upon the other. Thus,
private respondent's theory that in actively intervening in the criminal action, petitioner waived
his right to appeal from the decision that may be rendered therein, is incorrect and inaccurate.
Petitioner may, as he did, appeal from the decision on the civil aspect which is deemed instituted
with the criminal action and such appeal, timely taken, prevents the decision on the civil liability
from attaining finality.

present in the case at bar.

We tackle the second issue by determining the basis of civil liability arising from crime. Civil
obligations arising from criminal offenses are governed by Article 100 of the Revised Penal Code
which provides that "(E)very person criminally liable for a felony is also civilly liable," in relation
to Article 2177 of the Civil Code on quasi-delict, the provisions for independent civil actions in the
Chapter on Human Relations and the provisions regulating damages, also found in the Civil
Code.

From the evidence presented, we rule that for the injury to his feelings and reputation, being a
barangay captain, petitioner is entitled to moral damages in the sum of P5,000.00 and a further
sum of P5,000.00 as exemplary damages.

Underlying the legal principle that a person who is criminally liable is also civilly liable is the view
that from the standpoint of its effects, a crime has dual character: (1) as an offense against the
state because of the disturbance of the social order; and (2) as an offense against the private
person injured by the crime unless it involves the crime of treason, rebellion, espionage,
contempt and others wherein no civil liability arises on the part of the offender either because
there are no damages to be compensated or there is no private person injured by the crime. 3 In
the ultimate analysis, what gives rise to the civil liability is really the obligation of everyone to
repair or to make whole the damage caused to another by reason of his act or omission,
whether done intentional or negligently and whether or not punishable by law. 4
In the case at bar, private respondent was found guilty of slight oral defamation and sentenced
to a fine of P50.00 with subsidiary imprisonment in case of insolvency, but no civil liability arising
from the felonious act of the accused was adjudged. This is erroneous. As a general rule, a
person who is found to be criminally liable offends two (2) entities: the state or society in which
he lives and the individual member of the society or private person who was injured or damaged
by the punishable act or omission. The offense of which private respondent was found guilty is
not one of those felonies where no civil liability results because either there is no offended party
or no damage was caused to a private person. There is here an offended party, whose main
contention precisely is that he suffered damages in view of the defamatory words and
statements uttered by private respondent, in the amount of Ten Thousand Pesos (P10,000.00)
as moral damages and the further sum of Ten Thousand Pesos (P10,000) as exemplary
damages.
Article 2219, par. (7) of the Civil Code allows the recovery of moral damages in case of libel,
slander or any other form of defamation This provision of law establishes the right of an offended
party in a case for oral defamation to recover from the guilty party damages for injury to his
feelings and reputation. The offended party is likewise allowed to recover punitive or exemplary
damages.
It must be remembered that every defamatory imputation is presumed to be malicious, even if it
be true, if no good intention and justifiable motive for making it is shown. And malice may be
inferred from the style and tone of publication 5 subject to certain exceptions which are not

Calling petitioner who was a barangay captain an ignoramus, traitor, tyrant and Judas is clearly
an imputation of defects in petitioner's character sufficient to cause him embarrassment and
social humiliation. Petitioner testified to the feelings of shame and anguish he suffered as a
result of the incident complained of. 6 It is patently error for the trial court to overlook this vital
piece of evidence and to conclude that the "facts and circumstances of the case as adduced by
the evidence do not warrant the awarding of moral damages." Having misapprehended the facts,
the trial court's findings with respect thereto is not conclusive upon us.

WHEREFORE, the petition is hereby GRANTED. The decision of the Regional Trial Court is
hereby MODIFIED and private respondent is ordered to pay petitioner the amount of P5,000.00
as moral damages and another P5,000.00 as exemplary damages. Costs against private
respondent.
SO ORDERED.
Gutierrez, Jr., Feliciano, Bidin and Corts JJ., concur

In November 1988, private respondent wrote to petitioner a letter demanding: (1) P10,000.00
cost of allegedly lost Nikkon camera; (2) $200.00 for alleged cost of transporting luggage from
Vienna to Piestany; and (3) P100,000.00 as damages. In its reply, petitioner informed private
respondent that his letter was forwarded to its legal department for investigation.
Private respondent felt his demand letter was left unheeded. He instituted an action for
Damages docketed as Civil Case No. 89-3496 before the Regional Trial Court of Makati.
Petitioner contested the complaint. It disclaimed any liability on the ground that there was neither
a report of mishandled baggage on flight PR 722 nor a tracer telex received from its Vienna
Station. It, however, contended that if at all liable its obligation is limited by the Warsaw
Convention rate.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION

Petitioner filed a Third-Party Complaint against Lufthansa German Airlines imputing the
mishandling of private respondent's baggage, but was dismissed for its failure to prosecute.
In its decision, the trial court observed that petitioner's actuation was not attended by bad faith.
Nevertheless, it awarded private respondent damages and attorney's fees, the dispositive
portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff (private
respondent) and against the defendant (petitioner), thereby ordering the
latter to pay the following:

G.R. No. 106664 March 8, 1995

PHILIPPINE AIR LINES, petitioner,
vs.
FLORANTE A. MIANO, respondent.

(a) U.S. $200.00 as cost of transporting the suitcase

from Vienna to Czechoslovakia;
(b) P40,000.00 as moral damages;

PUNO, J.:
(c) P20,000.00 as exemplary damages; and
The petitioner questions the Decision of the Regional Trial Court of Makati, Branch 148, dated
July 29, 1992, 1 awarding private respondent moral and exemplary damages and attorney's fees

(d) P15,000.00 as attorney's fees.

for want of legal justification. We grant the petition.

The facts are uncontroverted.
On August 31, 1988, private respondent took petitioner's flight PR 722, Mabuhay Class, bound
for Frankfurt, Germany. He had an immediate onward connecting flight via Lufthansa flight LH
1452 to Vienna, Austria. At the Ninoy Aquino International Airport, he checked-in one brown
suitcase weighing twenty (20) kilograms 2 but did not declare a higher valuation. He claimed that
his suitcase contained money, documents, one Nikkon camera with zoom lens, suits, sweaters,
shirts, pants, shoes, and other accessories. 3
Upon private respondent's arrival at Vienna via Lufthansa flight LH 1452, his checked-in
baggage was missing. He reported the matter to the Lufthansa authorities. After three (3) hours
of waiting in vain, he proceeded to Piestany, Czechoslovakia. Eleven (11) days after or on
September 11, 1988, his suitcase was delivered to him in his hotel in Piestany, Czechoslovakia.
He claimed that because of the delay in the delivery of his suitcase, he was forced to borrow
money to buy some clothes, to pay $200.00 for the transportation of his baggage from Vienna to
Piestany, and lost his Nikkon camera. 4

SO ORDERED. 5
Hence, this petition for review.
In breach of contract of carriage by air, moral damages are awarded only if the defendant acted
fraudulently or in bad faith. 6 Bad faith means a breach of a known duty through same motive of
interest or ill will. 7
The trial court erred in awarding moral damages to private respondent. The established facts
evince that petitioner's late delivery of the baggage for eleven (11) days was not motivated by ill
will or bad faith. In fact, it immediately coordinated with its Central Baggage Services to trace
private respondent's suitcase and succeeded in finding it. At the hearing, petitioner's Manager
for Administration of Airport Services Department Miguel Ebio testified that their records
disclosed that Manila, the originating station, did not receive any tracer telex. 8 A tracer telex, an
airline lingo, is an action of any station that the airlines operate from whom a passenger may
complain or have not received his baggage upon his arrival. 9 It was reasonable to presume that
the handling of the baggage was normal and regular. Upon inquiry from their Frankfurt Station, it
was however discovered that the interline tag of private respondent's baggage was accidentally

taken off. According to Mr. Ebio, it was customary for destination stations to hold a tagless
baggage until properly identified. The tracer telex, which contained information on the baggage,
is matched with the tagless luggage for identification. Without the tracer telex, the color and the
type of baggage are used as basis for the matching. Thus, the delay.
Worthy to stress, the trial court made an unequivocal conclusion that petitioner did not act in bad
faith or with malice, viz.:
xxx xxx xxx
Absent a finding as to the bad intention of defendant (petitioner) PAL, this
court finds it appropriate to apply the Warsaw Convention with respect to the
liability of Air Carriers. 10
xxx xxx xxx

xxx xxx xxx

Under the circumstances obtaining, considering that defendant's
(petitioner's) actuation was not attendant with bad faith, the award of moral
damages in the amount of P40,000.00 is but just and fair. 12
faith must be
Appeals, 13 we ruled:

substantiated

by

evidence.

In

LBC

vs.

Court

of

Bad faith under the law cannot be presumed; it must be established by clear
and convincing evidence. Again, the unbroken jurisprudence is that in
breach of contract cases where the defendant is not shown to have acted
fraudulently or in bad faith, liability for damages is limited to the natural and
probable consequences of the breach of the obligation which the parties had
foreseen or could reasonably have foreseen. The damages, however, will
not include liability far moral damages. (Citations omitted)
We can neither sustain the award of exemplary damages. The prerequisite for the award of
exemplary damages in cases of contract or quasi-contract 14 is that the defendant acted in
wanton, fraudulent, reckless, oppressive, or malevolent manner. 15 The undisputed facts do not
so warrant the characterization of the action of petitioner.

in the transportation of the luggage in accord with the Warsaw Convention. Needless to say, the
award of attorney's fees must be deleted where the award of moral and exemplary damages are
eliminated.
IN VIEW WHEREOF, the assailed Decision of July 29, 1992 is MODIFIED deleting the award of
moral and exemplary damages and attorney's fees. No costs.
SO ORDERED.
Narvasa, C.J., Bidin, Regalado and Mendoza, JJ., concur.

The mere fact that defendant (petitioner) exerted effort to assist plaintiff
(private respondent) in his predicament as shown in defendant's
(petitioner's) letter to plaintiff (private respondent) (Exh. "E") and likewise the
letter from Mr. Miguel Ebio, Manager-Airport Services Administration of
defendant (petitioner) PAL to its Senior Counsel-Litigation, Atty. Marceliano
Calica (Exh. "3") which reveals the fact that an investigation was conducted
as to mishandled baggage, coupled with the fact that said information were
then relayed to plaintiff (private respondent) as evidenced by a letter of
defendant (petitioner) to plaintiff (private respondent) (Exh. "4") does not
warrant a showing of malice on the part of defendant
( petitioner). 11

Bad

The award of attorney's fees must also be disallowed for lack of legal leg to stand on. The fact
that private respondent was compelled to litigate and incur expenses to protect and enforce his
claim did not justify the award of attorney's fees. The general rule is that attorney's fees cannot
be recovered as part of damages because of the policy that no premium should be placed on
the right to litigate. 16 Petitioner is willing to pay the just claim of $200.00 as a result of the delay

installments due on said dates although petitioners subsequently paid the amounts due and
these were accepted by private respondent.
Again on October 1, 1966, November 1, 1966, December 1, 1966 and January 1, 1967,
petitioners failed to pay. On January 11, 1967, private respondent sent a letter (Exh. "3") to
petitioners calling their attention to the fact that their account was four months overdue. This
letter was followed up by another letter dated February 27, 1967 (Exh. "3") where private
respondent reminded petitioner of the automatic rescission clause of the contract. Petitioners
eventually paid on March 1, 1967.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. L-45349 August 15, 1988
NEWTON JISON and SALVACION I. JOSUE petitioners,
vs.
COURT OF APPEALS and ROBERT 0. PHILLIPS & SONS, INC., respondents.
Ledesma, Saludo & Associates for petitioners.
Domicador L. Reyes and Magtanggol C. Gunigundo for respondents.

CORTES, J.:
The instant petition for review of the decision of the Court of Appeals poses the issue of the
validity of the rescission of a contract to sell a subdivision lot due to the failure of the lot buyer to
pay monthly installments on their due dates and the forfeiture of the amounts already paid.
The case is not one of first impression, and neither is it exceptional. On the contrary, it
unambiguous. the common plight of countless subdivision lot buyers.
Petitioners, the spouses Newton and Salvacion Jison, entered into a Contract to Sell with private
respondent, Robert O. Phillips & Sons, Inc., whereby the latter agreed to sell to the former a lot
at the Victoria Valley Subdivision in Antipolo, Rizal for the agreed price of P55,000.00, with
interest at 8,1965 per annum, payable on an installment basis.
Pursuant to the contract, petitioners paid private respondents a down payment of P11,000.00 on
October 20, 1961 and from October 27, 1961; to May 8, 1965 a monthly installment of P533.85.
Thereafter, due to the failure of petitioners to build a house as provided in the contract, the
stipulated penalty of P5.00 per square meter was imposed to the effect that the monthly
amortization was increased to P707.24.
On January 1, 1966, February 1, 1966 and March 1, 1966, petitioners failed to pay the monthly

Petitioners again failed to pay the monthly installments due on February 1, 1967, March 1, 1967
and April 1, 1967. Thus, in a letter dated April 6, 1967 (Exh. "D"), private respondent returned
petitioners' check and informed them that the contract was cancelled when on April 1, 1987
petitioners failed to pay the monthly installment due, thereby making their account delinquent for
three months.
On April 19, 1967, petitioners tendered payment for all the installments already due but the
tender was refused. Thus, petitioners countered by filing a complaint for specific performance
with the Court of First Instance of Rizal on May 4, 1967 and consigning the monthly installments
due with the court.
Following the hearing of the case, wherein the parties entered into a stipulation of facts, the trial
court on January 9, 1969 rendered judgment in favor of private respondent, dismissing the
complaint and declaring the contract cancelled and all payments already made by petitioner
franchise. ordering petitioners to pay P1,000.00 as and for attorney's fees; and declaring the
consignation and tender of payment made by petitioners as not amounting to payment of the
corresponding monthly installments.
Not satisfied with the decision of the trial court, petitioners appealed to the Court of Appeals.
Agreeing with the findings and conclusions of the trial court, the Court of Appeals on November
4, 1976 affirmed the former's decision.
Thus, the instant petition for review.
In assailing the decision of the Court of Appeals, petitioners attributed the following errors:
I
THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT PETITIONERS
HAVE SUBSTANTIALLY, COMPLIED WITH THE TERMS OF THEIR AGREEMENT WITH
PRIVATE RESPONDENTS.
II
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE CONTRACT TO
SELL MAY BE AUTOMATICALLY RESCINDED AND PRIVATE RESPONDENT MAY
UNILATERALLY RESCINDED SAID CONTRACT AND REJECT THE CONSIGNATION OF
PAYMENTS MADE BY PETITIONERS, WHICH ACTIONS OF PRIVATE RESPONDENT ARE
HIGHLY INIQUITOUS AND UNCONSCIONABLE.
III
THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT PRIVATE

RESPONDENT'S ACT OF FORFEITING ALL PREVIOUS PAYMENTS MADE BY PETITIONERS

IS CONTRARY TO LAW, HIGHLY INIQUITOUS AND UNCONSCIONABLE. [Petitioners' Brief,
pp. 13-27.]

In this case, private respondent has denied that rescission is justified and
has resorted to judicial action. It is now for the Court to determine whether
resolution of the contract by petitioner was warranted.

As stated at the outset, the principal issue in this case is the legality of the rescission of the
contract and the forfeiture of the payments already made by petitioners.

We hold that resolution by petitioners of the contract was ineffective and

inoperative against private respondent for lack of notice of resolution, as
held in the U.P. v. Angeles case, supra.

To support the rescission and forfeiture private respondent falls back on paragraph 3 of the
contract which reads:
This contract shall be considered automatically rescinded and cancelled and
of no further force and effect, upon the failure of the Vendee to pay when
due Three (3) or more consecutive monthly installments mentioned in
Paragraph 2 of this Contract, or to comply with any of the terms and
conditions hereof, in which case the Vendor shall have the right to resell the
said parcel of land to any Vendee and any amount derived from the sale on
account hereof shall be forfeited in favor of the Vendor as liquidated
damages for the breach of the Contract by the Vendee, the latter hereby
renouncing and reconveying absolutely and forever in favor of the Vendor all
rights and claims to and for all the amount paid by the Vendee on account of
the Contract, as well as to and for all compensation of any kind, hereby also
agreeing in this connection, to forthwith vacate the said property or
properties peacefully without further advise of any kind.
Since the contract was executed and cancelled prior to the effectivity of Republic Act No. 65856,
(the Realty Installment Buyers', Protection Act) and Presidential Decree No. 957 (the Subdivision
and Condominium Buyers' Protective Decree), it becomes necessary to resort to jurisprudence
and the general provisions of law to resolve the controversy.
The decision in the recent case of Palay, Inc. v. Clave [G.R. No. L-56076, September 21, 1983,
124 SCRA 7,1969, factions the resolution of the controversy. In deciding whether the rescission
of the contract to sell a subdivision lot after the lot buyer has failed to pay several installments
was valid, the Court said:
Well settled is the rule, as held in previous k.- [Torralba v. De los Angeles, 96
SCRA 69, Luzon Brokerage Co., Inc. v. Maritime Building Co., 43 SCRA 93
and 86 SCRA 305; Lopez v. Commissioner of Customs, 37 SCRA 327; U.P.
v. De los Angeles, 35 SCRA 102; Ponce Enrile v. CA, 29 SCRA 504; Froilan
v. Pan Oriental Shipping Co., 12 SCRA 276; Taylor v. Uy Tieng Piao; 43 Phil.
896, that judicial action for the rescission of a contract is not necessary
where the contract provides that it may be cancelled for violation of any of its
terms and conditions. However, even in the cited cases, there was at least a
written notice sent to the degeneration, informing him of the rescission. As
stressed in University of the Philippines v. Walfrido de los Angeles [35 SCRA
102] the act of a party in treating a contract as cancelled should be made
known to the other....

xxx xxx xxx

The indispensability of notice of cancellation to the buyer was to be later
underscored in Republic Act No. 65856, entitled "An Act to Provide
Protection to Buyers of Real Estate on Installment Payments." which took
effect on September 14-15). when it specifically provided:
Sec. 3 (b) ... the actual cataract, of the contract shall take place thirty days
from receipt by the buyer of the notice of cancellation or the demand for
rescission of the contract by a notarial act and upon full payment of the cash
surrender value to the buyer.
There is no denying that in the instant case the resolution or rescission of the Contract to Sell
was valid. Neither can it be said that the cancellation of the contract was ineffective for failure of
private respondents to give petitioners notice thereof as petitioners were informed cancelled
private respondent that the contract was cancelled in the letter dated April 6, 1967 (Exh. "D"). As
R.A. No. 65856, was not yet effective, the notice of cancellation need not be by notarial act,
private respondent's letter being sufficient compliance with the legal requirement.
The facts of 'fee instant case should be distinguished from those in the Palay Inc. case, as such
distinction will explain why the Court in said case invalidated the resolution of the contract. In
said case, the subdivision developer, without informing the buyer of the cancellation of the
contract, resold the lot to another person. The lot buyer in said case was only informed of the
resolution of the contract some six years later after the developer, rejected his request for
authority to assign his rights under the contract. Such a situation does not obtain illness: the
instant case. In fact, petitioners were informed of the cancellation of their contract in April 1967,
when private respondent wrote them the letter dated April 6, 1967 (Exh. "D"), and within a month
they were able to file a complaint against Private respondent.

xxx xxx xxx

While the resolution of the contract and the forfeiture of the amounts already paid are valid and
binding upon petitioners, the Court is convinced that the forfeiture of the amount of P5.00
although it includes the accumulated fines for petitioners' failure to construct a house as required
by the contract, is clearly iniquitous considering that the contract price is only P6,173.15 The
forfeiture of fifty percent (50%) of the amount already paid, or P3,283.75 appears to be a fair
settlement. In arriving at this amount the Court gives weight to the fact that although petitioners
have been delinquent in paying their amortizations several times to the prejudice of private
respondent, with the cancellation of the contract the possession of the lot review.... to private
respondent who is free to resell it to another party. Also, had R.A. No. 65856, been applicable to
the instant case, the same percentage of the amount already paid would have been forfeited
[Torralba 3(b).]

In other words, resolution of reciprocal contracts may be made extrajudicially

unless successfully impugned in Court. If the debtor impugns the declaration
it shall be subject to judicial determination.

The Court's decision to reduce the amount forfeited finds support in the Civil Code. As stated in
paragraph 3 of the contract, in case the contract is cancelled, the amounts already paid shall be
forfeited in favor of the vendor as liquidated damages. The Code provides that liquidated

damages, whether intended as an indemnity or a penalty, shall be equitably reduced if they are
iniquitous or unconscionable [Art. 2227.]
Further, in obligations with a penal clause, the judge shall equitably reduce the penalty when the
principal obligation has been partly or irregularly complied with by the debtor [Art. 1229; Hodges
v. Javellana, G.R. No. L-17247, April 28, 1962, 4 SCRA 1228]. In this connection, the Court said:
It follows that, in any case wherein there has been a partial or irregular
compliance with the provisions in a contract for special indemnification in the
event of failure to comply with its terms, courts will rigidly apply the doctrine
of strict construction and against the enforcement in its entirety of the
industry.' where it is clear from the terms of the contract that the amount or
character of the indemnity is fixed without regard to the probable damages
which might be anticipated as a result of a breach of the terms of the
contract; or, in other words, where the indemnity provided for is essentially a
mere penalty having for its principal object the enforcement of compliance
with the corporations; (Laureano v. Kilayco, 32 Phil. 194 (1943).
This principle was reiterated in Makati Development Corp. v. Empire Insurance Co. [G.R. No. L21780, June 30, 1967, 20 SCRA 557] where the Court affirmed the judgment of the Court of First
Instance reducing the subdivision lot buyer's liability from the stipulated P12,000.00 to Plaintiffs
after finding that he had partially performed his obligation to complete at least fifty percent (50%)
of his house within two (2) years from March 31, 1961, fifty percent (50%) of the house having
been completed by the end of April 1961.
WHEREFORE, the Decision of the Court of Appeals is hereby MODIFIED as to the amount
forfeited which is reduced to fifty percent (50%) of the amount already paid or P23,656.32 and
AFFIRMED as to all other respects.
Private respondent is ordered to refund to petitioners the excess of P23,656.32 within thirty (30)
days from the date of finality of this judgment.
SO ORDERED.
Fernan , C.J., Gutierrez, Jr., Feliciano and Bidin, JJ., concur.

under the printed words "Non valuable apres de (meaning, "not valid after the").
The GANAS did not depart on 8 May 1970.
Sometime in January, 1971, Jose Gana sought the assistance of Teresita Manucdoc, a
Secretary of the Sta. Clara Lumber Company where Jose Gana was the Director and Treasurer,
for the extension of the validity of their tickets, which were due to expire on 8 May 1971. Teresita
enlisted the help of Lee Ella Manager of the Philippine Travel Bureau, who used to handle travel
arrangements for the personnel of the Sta. Clara Lumber Company. Ella sent the tickets to
Cesar Rillo, Office Manager of AIR FRANCE. The tickets were returned to Ella who was
informed that extension was not possible unless the fare differentials resulting from the increase
in fares triggered by an increase of the exchange rate of the US dollar to the Philippine peso and
the increased travel tax were first paid. Ella then returned the tickets to Teresita and informed
her of the impossibility of extension.
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-57339 December 29, 1983
AIR FRANCE, petitioner,
vs.
HONORABLE COURT OF APPEALS, JOSE G. GANA (Deceased), CLARA A. GANA,
RAMON GANA, MANUEL GANA, MARIA TERESA GANA, ROBERTO GANA, JAIME JAVIER
GANA, CLOTILDE VDA. DE AREVALO, and EMILY SAN JUAN, respondents.
Benjamin S. Valte for petitioner.
Napoleon Garcia for private respondents.

MELENCIO-HERRERA, J.:
In this petition for review on certiorari, petitioner AIR FRANCE assails the Decision of then
respondent Court of Appeals 1 promulgated on 15 December 1980 in CA-G.R. No. 58164-R,
entitled "Jose G. Gana, et al. vs. Sociedad Nacionale Air France", which reversed the Trial
Court's judgment dismissing the Complaint of private respondents for damages arising from
breach of contract of carriage, and awarding instead P90,000.00 as moral damages.
Sometime in February, 1970, the late Jose G. Gana and his family, numbering nine (the
GANAS), purchased from AIR FRANCE through Imperial Travels, Incorporated, a duly
authorized travel agent, nine (9) "open-dated" air passage tickets for the
Manila/Osaka/Tokyo/Manila route. The GANAS paid a total of US$2,528.85 for their economy
and first class fares. Said tickets were bought at the then prevailing exchange rate of P3.90 per
US$1.00. The GANAS also paid travel taxes of P100.00 for each passenger.
On 24 April 1970, AIR FRANCE exchanged or substituted the aforementioned tickets with other
tickets for the same route. At this time, the GANAS were booked for the Manila/Osaka segment
on AIR FRANCE Flight 184 for 8 May 1970, and for the Tokyo/Manila return trip on AIR FRANCE
Flight 187 on 22 May 1970. The aforesaid tickets were valid until 8 May 1971, the date written

In the meantime, the GANAS had scheduled their departure on 7 May 1971 or one day before
the expiry date. In the morning of the very day of their scheduled departure on the first leg of
their trip, Teresita requested travel agent Ella to arrange the revalidation of the tickets. Ella gave
the same negative answer and warned her that although the tickets could be used by the
GANAS if they left on 7 May 1971, the tickets would no longer be valid for the rest of their trip
because the tickets would then have expired on 8 May 1971. Teresita replied that it will be up to
the GANAS to make the arrangements. With that assurance, Ella on his own, attached to the
tickets validating stickers for the Osaka/Tokyo flight, one a JAL. sticker and the other an SAS
(Scandinavian Airways System) sticker. The SAS sticker indicates thereon that it was
"Reevaluated by: the Philippine Travel Bureau, Branch No. 2" (as shown by a circular rubber
stamp) and signed "Ador", and the date is handwritten in the center of the circle. Then appear
under printed headings the notations: JL. 108 (Flight), 16 May (Date), 1040 (Time), OK (status).
Apparently, Ella made no more attempt to contact AIR FRANCE as there was no more time.
Notwithstanding the warnings, the GANAS departed from Manila in the afternoon of 7 May 1971
on board AIR FRANCE Flight 184 for Osaka, Japan. There is no question with respect to this leg
of the trip.
However, for the Osaka/Tokyo flight on 17 May 1971, Japan Airlines refused to honor the tickets
because of their expiration, and the GANAS had to purchase new tickets. They encountered the
same difficulty with respect to their return trip to Manila as AIR FRANCE also refused to honor
their tickets. They were able to return only after pre-payment in Manila, through their relatives, of
the readjusted rates. They finally flew back to Manila on separate Air France Frights on 19 May
1971 for Jose Gana and 26 May 1971 for the rest of the family.
On 25 August 1971, the GANAS commenced before the then Court of First Instance of Manila,
Branch III, Civil Case No. 84111 for damages arising from breach of contract of carriage.
AIR FRANCE traversed the material allegations of the Complaint and alleged that the GANAS
brought upon themselves the predicament they found themselves in and assumed the
consequential risks; that travel agent Ella's affixing of validating stickers on the tickets without
the knowledge and consent of AIR FRANCE, violated airline tariff rules and regulations and was
beyond the scope of his authority as a travel agent; and that AIR FRANCE was not guilty of any
fraudulent conduct or bad faith.
On 29 May 1975, the Trial Court dismissed the Complaint based on Partial and Additional
Stipulations of Fact as wen as on the documentary and testimonial evidence.

The GANAS appealed to respondent Appellate Court. During the pendency of the appeal, Jose
Gana, the principal plaintiff, died.
On 15 December 1980, respondent Appellate Court set aside and reversed the Trial Court's
judgment in a Decision, which decreed:
WHEREFORE, the decision appealed from is set aside. Air France is hereby
ordered to pay appellants moral damages in the total sum of NINETY
THOUSAND PESOS (P90,000.00) plus costs.
SO ORDERED. 2
Reconsideration sought by AIR FRANCE was denied, hence, petitioner's recourse before this
instance, to which we gave due course.
The crucial issue is whether or not, under the environmental milieu the GANAS have made out a
case for breach of contract of carriage entitling them to an award of damages.
We are constrained to reverse respondent Appellate Court's affirmative ruling thereon.
Pursuant to tariff rules and regulations of the International Air Transportation Association (IATA),
included in paragraphs 9, 10, and 11 of the Stipulations of Fact between the parties in the Trial
Court, dated 31 March 1973, an airplane ticket is valid for one year. "The passenger must
undertake the final portion of his journey by departing from the last point at which he has made a
voluntary stop before the expiry of this limit (parag. 3.1.2. ) ... That is the time allowed a
passenger to begin and to complete his trip (parags. 3.2 and 3.3.). ... A ticket can no longer be
used for travel if its validity has expired before the passenger completes his trip (parag. 3.5.1.) ...
To complete the trip, the passenger must purchase a new ticket for the remaining portion of the
journey" (ibid.) 3
From the foregoing rules, it is clear that AIR FRANCE cannot be faulted for breach of contract
when it dishonored the tickets of the GANAS after 8 May 1971 since those tickets expired on
said date; nor when it required the GANAS to buy new tickets or have their tickets re-issued for
the Tokyo/Manila segment of their trip. Neither can it be said that, when upon sale of the new
tickets, it imposed additional charges representing fare differentials, it was motivated by selfinterest or unjust enrichment considering that an increase of fares took effect, as authorized by
the Civil Aeronautics Board (CAB) in April, 1971. This procedure is well in accord with the IATA
tariff rules which provide:
6. TARIFF RULES
7. APPLICABLE FARE ON THE DATE OF DEPARTURE
3.1 General Rule.
All journeys must be charged for at the fare (or charge) in effect on the date
on which transportation commences from the point of origin. Any ticket sold
prior to a change of fare or charge (increase or decrease) occurring between
the date of commencement of the journey, is subject to the above general
rule and must be adjusted accordingly. A new ticket must be issued and the
difference is to be collected or refunded as the case may be. No adjustment
is necessary if the increase or decrease in fare (or charge) occurs when the

journey is already commenced. 4

The GANAS cannot defend by contending lack of knowledge of those rules since the evidence
bears out that Teresita, who handled travel arrangements for the GANAS, was duly informed by
travel agent Ella of the advice of Reno, the Office Manager of Air France, that the tickets in
question could not be extended beyond the period of their validity without paying the fare
differentials and additional travel taxes brought about by the increased fare rate and travel taxes.
ATTY. VALTE
Q What did you tell Mrs. Manucdoc, in turn after being
told this by Mr. Rillo?
A I told her, because that is the reason why they
accepted again the tickets when we returned the tickets
spin, that they could not be extended. They could be
extended by paying the additional fare, additional tax
and additional exchange during that time.
Q You said so to Mrs. Manucdoc?
A Yes, sir." ... 5
The ruling relied on by respondent Appellate Court, therefore, in KLM. vs. Court of Appeals, 65
SCRA 237 (1975), holding that it would be unfair to charge respondents therein with automatic
knowledge or notice of conditions in contracts of adhesion, is inapplicable. To all legal intents
and purposes, Teresita was the agent of the GANAS and notice to her of the rejection of the
request for extension of the validity of the tickets was notice to the GANAS, her principals.
The SAS validating sticker for the Osaka/Tokyo flight affixed by Era showing reservations for
JAL. Flight 108 for 16 May 1971, without clearing the same with AIR FRANCE allegedly because
of the imminent departure of the GANAS on the same day so that he could not get in touch with
Air France 6 was certainly in contravention of IATA rules although as he had explained, he did so
upon Teresita's assurance that for the onward flight from Osaka and return, the GANAS would
make other arrangements.
Q Referring you to page 33 of the transcript of the last
session, I had this question which reads as follows: 'But
did she say anything to you when you said that the
tickets were about to expire?' Your answer was: 'I am
the one who asked her. At that time I told her if the
tickets being used ... I was telling her what about their
bookings on the return. What about their travel on the
return? She told me it is up for the Ganas to make the
arrangement.' May I know from you what did you mean
by this testimony of yours?
A That was on the day when they were asking me on
May 7, 1971 when they were checking the tickets. I told
Mrs. Manucdoc that I was going to get the tickets. I
asked her what about the tickets onward from the return

from Tokyo, and her answer was it is up for the Ganas to

make the arrangement, because I told her that they
could leave on the seventh, but they could take care of
that when they arrived in Osaka.
Q What do you mean?
A The Ganas will make the arrangement from Osaka,
Tokyo and Manila.
Q What arrangement?
A The arrangement for the airline because the tickets
would expire on May 7, and they insisted on leaving. I
asked Mrs. Manucdoc what about the return onward
portion because they would be travelling to Osaka, and
her answer was, it is up to for the Ganas to make the
arrangement.
Q Exactly what were the words of Mrs. Manucdoc when
you told her that? If you can remember, what were her
exact words?
A Her words only, it is up for the Ganas to make the
arrangement.
Q This was in Tagalog or in English?
A I think it was in English. ... 7
The circumstances that AIR FRANCE personnel at the ticket counter in the airport allowed the
GANAS to leave is not tantamount to an implied ratification of travel agent Ella's irregular
actuations. It should be recalled that the GANAS left in Manila the day before the expiry date of
their tickets and that "other arrangements" were to be made with respect to the remaining
segments. Besides, the validating stickers that Ella affixed on his own merely reflect the status of
reservations on the specified flight and could not legally serve to extend the validity of a ticket or
revive an expired one.
The conclusion is inevitable that the GANAS brought upon themselves the predicament they
were in for having insisted on using tickets that were due to expire in an effort, perhaps, to beat
the deadline and in the thought that by commencing the trip the day before the expiry date, they
could complete the trip even thereafter. It should be recalled that AIR FRANCE was even
unaware of the validating SAS and JAL. stickers that Ella had affixed spuriously. Consequently,
Japan Air Lines and AIR FRANCE merely acted within their contractual rights when they
dishonored the tickets on the remaining segments of the trip and when AIR FRANCE demanded
payment of the adjusted fare rates and travel taxes for the Tokyo/Manila flight.
WHEREFORE, the judgment under review is hereby reversed and set aside, and the Amended
Complaint filed by private respondents hereby dismissed.
No costs.
SO ORDERED.

Teehankee (Chairman), Plana, Relova and Gutierrez, Jr., JJ., concur.

3. Ordering the plaintiff to pay the defendant the sum of P289,534.78,

representing arrears in rentals, unremitted amounts for amusement tax
delinquency and accrued interest thereon, with further interest on said
amounts at the rate of 12% per annum (per lease agreement) from
December 1, 1980 until the same is fully paid;
4. Ordering the plaintiff to pay the defendant the amount of P100,000.00,
representing the P10,000.00 portion of the monthly lease rental which were
not deducted from the cash deposit of the plaintiff from February to
November, 1980, after the forfeiture of the said cash deposit on February 11,
1980, with interest thereon at the rate of 12% per annum on each of the said
monthly amounts of P10,000.00 from the time the same became due until it
is paid;
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 85161 September 9, 1991
COUNTRY BANKERS INSURANCE CORPORATION and ENRIQUE SY, petitioners,
vs.
COURT OF APPEALS and OSCAR VENTANILLA ENTERPRISES
CORPORATION, respondents.
Esteban C. Manuel for petitioners.
Augusta Gatmaytan for OVEC.

MEDIALDEA, J.:p
Petitioners seek a review on certiorari of the decision of the Court of Appeals in CA-G.R. CV No.
09504 "Enrique Sy and Country Bankers Insurance Corporation v. Oscar Ventanilla Enterprises
Corporation" affirming in toto the decision of the Regional Trial Court, Cabanatuan City, Branch
XXV, to wit:
WHEREFORE, the complaint of the plaintiff Enrique F. Sy is dismissed, and
on the counterclaim of the defendant O. Ventanilla Enterprises Corporation,
judgment is hereby rendered:
1. Declaring as lawful, the cancellation and termination of the Lease
Agreement (Exh. A) and the defendant's re-entry and repossession of the
Avenue, Broadway and Capitol theaters under lease on February 11, 1980;
2. Declaring as lawful, the forfeiture clause under paragraph 12 of the Id
Lease Agreement, and confirming the forfeiture of the plaintiffs remaining
cash deposit of P290,000.00 in favor of the defendant thereunder, as of
February 11, 1980;

5. Ordering the plaintiff to pay the defendant through the injunction bond, the
sum of P100,000.00, representing the P10,000.00 monthly increase in
rentals which the defendant failed to realize from February to November
1980 result from the injunction, with legal interest thereon from the finality of
this decision until fully paid;
6. Ordering the plaintiff to pay to the defendant the sum equivalent to ten per
centum (10%) of the above-mentioned amounts of P289,534.78,
P100,000.00 and P100,000.00, as and for attorney's fees; and
7. Ordering the plaintiff to pay the costs. (pp. 94-95, Rollo)
The antecedent facts of the case are as follows:
Respondent Oscar Ventanilla Enterprises Corporation (OVEC), as lessor, and the petitioner
Enrique F. Sy, as lessee, entered into a lease agreement over the Avenue, Broadway and
Capitol Theaters and the land on which they are situated in Cabanatuan City, including their airconditioning systems, projectors and accessories needed for showing the films or motion
pictures. The term of the lease was for six (6) years commencing from June 13, 1977 and
ending June 12,1983. After more than two (2) years of operation of the Avenue, Broadway and
Capitol Theaters, the lessor OVEC made demands for the repossession of the said leased
properties in view of the Sy's arrears in monthly rentals and non-payment of amusement taxes.
On August 8,1979, OVEC and Sy had a conference and by reason of Sy's request for
reconsideration of OVECs demand for repossession of the three (3) theaters, the former was
allowed to continue operating the leased premises upon his conformity to certain conditions
imposed by the latter in a supplemental agreement dated August 13, 1979.
In pursuance of their latter agreement, Sy's arrears in rental in the amount of P125,455.76 (as of
July 31, 1979) was reduced to P71,028.91 as of December 31, 1979. However, the accrued
amusement tax liability of the three (3) theaters to the City Government of Cabanatuan City had
accumulated to P84,000.00 despite the fact that Sy had been deducting the amount of
P4,000.00 from his monthly rental with the obligation to remit the said deductions to the city
government. Hence, letters of demand dated January 7, 1980 and February 3, 1980 were sent
to Sy demanding payment of the arrears in rentals and amusement tax delinquency. The latter
demand was with warning that OVEC will re-enter and repossess the Avenue, Broadway and
Capital Theaters on February 11, 1980 in pursuance of the pertinent provisions of their lease
contract of June 11, 1977 and their supplemental letter-agreement of August 13, 1979. But

notwithstanding the said demands and warnings SY failed to pay the above-mentioned amounts
in full Consequently, OVEC padlocked the gates of the three theaters under lease and took
possession thereof in the morning of February 11, 1980 by posting its men around the premises
of the Id movie houses and preventing the lessee's employees from entering the same.
Sy, through his counsel, filed the present action for reformation of the lease agreement,
damages and injunction late in the afternoon of the same day. And by virtue of a restraining
order dated February 12, 1980 followed by an order directing the issuance of a writ of
preliminary injunction issued in said case, Sy regained possession and operation of the Avenue,
Broadway and Capital theaters.
As first cause of action, Sy alleged that the amount of deposit P600,000.00 as agreed upon,
P300,000.00 of which was to be paid on June 13, 1977 and the balance on December 13, 1977
was too big; and that OVEC had assured him that said forfeiture will not come to pass. By
way of second cause of action, Sy sought to recover from OVEC the sums of P100,000.00
which Sy allegedly spent in making "major repairs" on Broadway Theater and the application of
which to Sy's due rentals; (2) P48,000.00 covering the cost of electrical current allegedly used
by OVEC in its alleged "illegal connection" to Capitol Theater and (3) P31,000.00 also for the
cost of electrical current allegedly used by OVEC for its alleged "illegal connection" to Broadway
Theater and for damages suffered by Sy as a result of such connection. Under the third cause of
action, it is alleged in the complaint that on February 11, 1980, OVEC had the three theaters
padlocked with the use of force, and that as a result, Sy suffered damages at the rate of
P5,000.00 a day, in view of his failure to go thru the contracts he had entered into with movie
and booking companies for the showing of movies at ABC. As fourth cause of action, Sy prayed
for the issuance of a restraining order/preliminary injunction to enjoin OVEC and all persons
employed by it from entering and taking possession of the three theaters, conditioned upon Sy's
filing of a P500,000.00 bond supplied by Country Bankers Insurance Corporation (CBISCO).
OVEC on the other hand, alleged in its answer by way of counterclaims, that by reason of Sy's
violation of the terms of the subject lease agreement, OVEC became authorized to enter and
possess the three theaters in question and to terminate said agreement and the balance of the
deposits given by Sy to OVEC had thus become forfeited; that OVEC would be losing
P50,000.00 for every month that the possession and operation of said three theaters remain with
Sy and that OVEC incurred P500,000.00 for attorney's service.
The trial court arrived at the conclusions that Sy is not entitled to the reformation of the lease
agreement; that the repossession of the leased premises by OVEC after the cancellation and
termination of the lease was in accordance with the stipulation of the parties in the said
agreement and the law applicable thereto and that the consequent forfeiture of Sy's cash deposit
in favor of OVEC was clearly agreed upon by them in the lease agreement. The trial court further
concluded that Sy was not entitled to the writ of preliminary injunction issued in his favor after
the commencement of the action and that the injunction bond filed by Sy is liable for whatever
damages OVEC may have suffered by reason of the injunction.

liability amounted to P289,534.78. In addition, it held that Sy was under obligation to pay
P10,000.00 every month from February to November, 1980 or the total amount of P100,000.00
with interest on each amount of P10,000.00 from the time the same became due. This
P10,000.00 portion of the monthly lease rental was supposed to come from the remaining cash
deposit of Sy but with the consequent forfeiture of the remaining cash deposit of P290,000.00,
there was no more cash deposit from which said amount could be deducted. Further, it adjudged
Sy to pay attorney's fees equivalent to 10% of the amounts above-mentioned.
Finally, the trial court held Sy through the injunction bond liable to pay the sum of P10,000.00
every month from February to November, 1980. The amount represents the supposed increase
in rental from P50,000.00 to P60,000.00 in view of the offer of one RTG Productions, Inc. to
lease the three theaters involved for P60,000.00 a month.
From this decision of the trial court, Sy and (CBISCO) appealed the decision in toto while OVEC
appealed insofar as the decision failed to hold the injunction bond liable for an damages
awarded by the trial court.
The respondent Court of Appeals found no ambiguity in the provisions of the lease agreement. It
held that the provisions are fair and reasonable and therefore, should be respected and
enforced as the law between the parties. It held that the cancellation or termination of the
agreement prior to its expiration period is justified as it was brought about by Sy's own default in
his compliance with the terms of the agreement and not "motivated by fraud or greed." It also
affirmed the award to OVEC of the amount of P100,000.00 chargeable against the injunction
bond posted by CBISCO which was soundly and amply justified by the trial court.
The respondent Court likewise found no merit in OVECS appeal and held that the trial court did
not err in not charging and holding the injunction bond posted by Sy liable for all the awards as
the undertaking of CBISCO under the bond referred only to damages which OVEC may suffer as
a result of the injunction.
From this decision, CBISCO and Sy filed this instant petition on the following grounds:
A
PRIVATE RESPONDENT SHOULD NOT BE ALLOWED TO UNJUSTLY
ENRICH OR BE BENEFITTED AT THE EXPENSE OF THE PETITIONERS.
B
RESPONDENT COURT OF APPEALS CO D SERIOUS ERROR OF LAW
AND GRAVE ABUSE OF DISCRETION IN NOT SETTING OFF THE
P100,000.00 SUPPOSED DAMAGE RESULTING FROM THE INJUNCTION
AGAINST THE P290,000.00 REMAINING CASH DEPOSIT OF
PETITIONER ENRIQUE SY.
C

On the counterclaim of OVEC the trial court found that the said lessor was deprived of the
possession and enjoyment of the leased premises and also suffered damages as a result of the
filing of the case by Sy and his violation of the terms and conditions of the lease agreement.
Hence, it held that OVEC is entitled to recover the said damages in addition to the arrears in
rentals and amusement tax delinquency of Sy and the accrued interest thereon. From the
evidence presented, it found that as of the end of November, 1980, when OVEC finally regained
the possession of the three (3) theaters under lease, Sy's unpaid rentals and amusement tax

RESPONDENT COURT OF APPEALS FURTHER COMMITTED SERIOUS

ERROR OF LAW AND GRAVE ABUSE OF DISCRETION IN NOT
DISMISSING PRIVATE RESPONDENTS COUNTER-CLAIM FOR FAILURE
TO PAY THE NECESSARY DOCKET FEE. (p. 10, Rollo)

We find no merit in petitioners' argument that the forfeiture clause stipulated in the lease
agreement would unjustly enrich the respondent OVEC at the expense of Sy and CBISCO
contrary to law, morals, good customs, public order or public policy. A provision which calls for
the forfeiture of the remaining deposit still in the possession of the lessor, without prejudice to
any other obligation still owing, in the event of the termination or cancellation of the agreement
by reason of the lessee's violation of any of the terms and conditions of the agreement is a penal
clause that may be validly entered into. A penal clause is an accessory obligation which the
parties attach to a principal obligation for the purpose of insuring the performance thereof by
imposing on the debtor a special presentation (generally consisting in the payment of a sum of
money) in case the obligation is not fulfilled or is irregularly or inadequately fulfilled. (Eduardo P.
Caguioa, Comments and Cases on Civil Law, Vol. IV, First Edition, pp. 199-200) As a general
rule, in obligations with a penal clause, the penalty shall substitute the indemnity for damages
and the payment of interests in case of non-compliance. This is specifically provided for in Article
1226, par. 1, New Civil Code. In such case, proof of actual damages suffered by the creditor is
not necessary in order that the penalty may be demanded (Article 1228, New Civil Code).
However, there are exceptions to the rule that the penalty shall substitute the indemnity for
damages and the payment of interests in case of non-compliance with the principal obligation.
They are first, when there is a stipulation to the contrary; second, when the obligor is sued for
refusal to pay the agreed penalty; and third, when the obligor is guilty of fraud (Article 1226, par.
1, New Civil Code). It is evident that in all said cases, the purpose of the penalty is to punish the
obligor. Therefore, the obligee can recover from the obligor not only the penalty but also the
damages resulting from the non-fulfillment or defective performance of the principal obligation.
In the case at bar, inasmuch as the forfeiture clause provides that the deposit shall be deemed
forfeited, without prejudice to any other obligation still owing by the lessee to the lessor, the
penalty cannot substitute for the P100,000.00 supposed damage resulting from the issuance of
the injunction against the P290,000.00 remaining cash deposit. This supposed damage suffered
by OVEC was the alleged P10,000.00 a month increase in rental from P50,000.00 to
P60,000,00), which OVEC failed to realize for ten months from February to November, 1980 in
the total sum of P100,000.00. This opportunity cost which was duly proven before the trial court,
was correctly made chargeable by the said court against the injunction bond posted by CBISCO.
The undertaking assumed by CBISCO under subject injunction refers to "all such damages as
such party may sustain by reason of the injunction if the Court should finally decide that the
Plaintiff was/were not entitled thereto." (Rollo, p. 101) Thus, the respondent Court correctly
sustained the trial court in holding that the bond shall and may answer only for damages which
OVEC may suffer as a result of the injunction. The arrears in rental, the unmeritted amounts of
the amusement tax delinquency, the amount of P100,000.00 (P10,000.00 portions of each
monthly rental which were not deducted from plaintiffs cash deposit from February to November,
1980 after the forfeiture of said cash deposit on February 11, 1980) and attorney's fees which
were all charged against Sy were correctly considered by the respondent Court as damages
which OVEC sustained not as a result of the injunction.
There is likewise no merit to the claim of petitioners that respondent Court committed serious
error of law and grave abuse of discretion in not dismissing private respondent's counterclaim for
failure to pay the necessary docket fee, which is an issue raised for the first time in this petition.
Petitioners rely on the rule in Manchester Development Corporation v. Court of Appeals, G.R.
No. 75919, May 7, 1987, 149 SCRA 562 to the effect that all the proceedings held in connection
with a case where the correct docket fees are not paid should be peremptorily be considered
null and void because, for all legal purposes, the trial court never acquired jurisdiction over the

case. It should be remembered however, that in Davao Light and Power Co., Inc. v. Dinopol,
G.R. 75195, August 19, 1988, 164 SCRA 748, this Court took note of the fact that the assailed
order of the trial court was issued prior to the resolution in the Manchester case and held that its
strict application to the case at bar would therefore be unduly harsh. Thus, We allowed the
amendment of the complaint by specifying the amount of damages within a non-extendible
period of five (5) days from notice and the re-assessment of the filing fees. Then, in Sun
Insurance Office, Ltd. v. Asuncion, G.R. 79937-38, February 3, 1989, 170 SCRA 274, We held
that where the filing of the initiatory pleading is not accompanied by payment of the docket fee,
the court may allow payment of the fee within a reasonable time but in no case beyond the
applicable prescriptive or reglemen tary period.
Nevertheless, OVEC's counterclaims are compulsory so no docket fees are required as the
following circumstances are present: (a) they arise out of or are necessarily connected with the
transaction or occurrence that is subject matter of the opposing party's claim; (b) they do not
require for their adjudication the presence of third parties of whom the court cannot acquire
jurisdiction; and (c) the court has jurisdiction to entertain the claim (see Javier v. Intermediate
Appellate Court, G.R. 75379, March 31, 1989, 171 SCRA 605). Whether the respective claims
asserted by the parties arise out of the same contract or transaction within the limitation on
counterclaims imposed by the statutes depends on a consideration of all the facts brought forth
by the parties and on a determination of whether there is some legal or equitable relationship
between the ground of recovery alleged in the counterclaim and the matters alleged as the
cause of action by the plaintiff (80 C.J.S. 48). As the counterclaims of OVEC arise from or are
necessarily connected with the facts alleged in the complaint for reformation of instrument of Sy,
it is clear that said counterclaims are compulsory.
ACCORDINGLY, finding no merit in the grounds relied upon by petitioners in their petition, the
same is hereby DENIED and the decision dated June 15, 1988 and the resolution dated
September 21, 1988, both of the respondent Court of Appeals are AFFIRMED.
SO ORDERED.
Narvasa (Chairman), Cruz and Grio-Aquino, JJ., concur.