G.R. No.
112127 July 17, 1995 - CENTRAL PHILIPPINE Petitioner now alleges that the Court of Appeals erred: (a) in holding that
UNIVERSITY, petitioner, vs. COURT OF APPEALS, REMEDIOS
FRANCO, FRANCISCO N. LOPEZ, CECILIA P. VDA. DE LOPEZ,
REDAN LOPEZ AND REMARENE LOPEZ, respondents.
BELLOSILLO, J.:
CENTRAL PHILIPPINE UNIVERSITY filed this petition for review
on certiorari of the decision of the Court of Appeals which reversed that of
the Regional Trial Court of Iloilo City directing petitioner to reconvey to
private respondents the property donated to it by their predecessor-in-
interest.
Sometime in 1939, the late Don Ramon Lopez, Sr., who was then a
member of the Board of Trustees of the Central Philippine College (now
Central Philippine University [CPU]), executed a deed of donation in favor
of the latter of a parcel of land identified as Lot No. 3174-B-1 of the
subdivision plan Psd-1144, then a portion of Lot No. 3174-B, for which
Transfer Certificate of Title No. T-3910-A was issued in the name of the
donee CPU with the following annotations copied from the deed of
donation —
1. The land described shall be utilized by the CPU exclusively
for the establishment and use of a medical college with all its
buildings as part of the curriculum;
2. The said college shall not sell, transfer or convey to any third
party nor in any way encumber said land;
3. The said land shall be called "RAMON LOPEZ CAMPUS",
and the said college shall be under obligation to erect a
cornerstone bearing that name. Any net income from the land
or any of its parks shall be put in a fund to be known as the
"RAMON LOPEZ CAMPUS FUND" to be used for
improvements of said campus and erection of a building
thereon.1
On 31 May 1989, private respondents, who are the heirs of Don Ramon
Lopez, Sr., filed an action for annulment of donation, reconveyance and
damages against CPU alleging that since 1939 up to the time the action
was filed the latter had not complied with the conditions of the donation.
Private respondents also argued that petitioner had in fact negotiated with
the National Housing Authority (NHA) to exchange the donated property
with another land owned by the latter.
In its answer petitioner alleged that the right of private respondents to file
the action had prescribed; that it did not violate any of the conditions in the
deed of donation because it never used the donated property for any other
purpose than that for which it was intended; and, that it did not sell,
transfer or convey it to any third party.
On 31 May 1991, the trial court held that petitioner failed to comply with
the conditions of the donation and declared it null and void. The court a
quo further directed petitioner to execute a deed of the reconveyance of
the property in favor of the heirs of the donor, namely, private respondents
herein.
Petitioner appealed to the Court of Appeals which on 18 June 1993 ruled
that the annotations at the back of petitioner's certificate of title were
resolutory conditions breach of which should terminate the rights of the
donee thus making the donation revocable.
The appellate court also found that while the first condition mandated
petitioner to utilize the donated property for the establishment of a medical
school, the donor did not fix a period within which the condition must be
fulfilled, hence, until a period was fixed for the fulfillment of the condition,
petitioner could not be considered as having failed to comply with its part
of the bargain. Thus, the appellate court rendered its decision reversing
the appealed decision and remanding the case to the court of origin for the
determination of the time within which petitioner should comply with the
first condition annotated in the certificate of title.
the quoted annotations in the certificate of title of petitioner are onerous
obligations and resolutory conditions of the donation which must be
fulfilled non-compliance of which would render the donation revocable; (b)
in holding that the issue of prescription does not deserve "disquisition;"
and, (c) in remanding the case to the trial court for the fixing of the period
within which petitioner would establish a medical college.2
We find it difficult to sustain the petition. A clear perusal of the conditions
set forth in the deed of donation executed by Don Ramon Lopez, Sr.,
gives us no alternative but to conclude that his donation was onerous, one
executed for a valuable consideration which is considered the equivalent
of the donation itself, e.g., when a donation imposes a burden equivalent
to the value of the donation. A gift of land to the City of Manila requiring
the latter to erect schools, construct a children's playground and open
streets on the land was considered an onerous donation.3 Similarly, where
Don Ramon Lopez donated the subject parcel of land to petitioner but
imposed an obligation upon the latter to establish a medical college
thereon, the donation must be for an onerous consideration.
Under Art. 1181 of the Civil Code, on conditional obligations, the
acquisition of rights, as well as the extinguishment or loss of those already
acquired, shall depend upon the happening of the event which constitutes
the condition. Thus, when a person donates land to another on the
condition that the latter would build upon the land a school, the condition
imposed was not a condition precedent or a suspensive condition but a
resolutory one.4 It is not correct to say that the schoolhouse had to be
constructed before the donation became effective, that is, before the
donee could become the owner of the land, otherwise, it would be
invading the property rights of the donor. The donation had to be valid
before the fulfillment of the condition.5 If there was no fulfillment or
compliance with the condition, such as what obtains in the instant case,
the donation may now be revoked and all rights which the donee may
have acquired under it shall be deemed lost and extinguished.
The claim of petitioner that prescription bars the instant action of private
respondents is unavailing.
The condition imposed by the donor, i.e., the building of a
medical school upon the land donated, depended upon the
exclusive will of the donee as to when this condition shall be
fulfilled. When petitioner accepted the donation, it bound itself
to comply with the condition thereof. Since the time within
which the condition should be fulfilled depended upon the
exclusive will of the petitioner, it has been held that its absolute
acceptance and the acknowledgment of its obligation provided
in the deed of donation were sufficient to prevent the statute of
limitations from barring the action of private respondents upon
the original contract which was the deed of donation.6
Moreover, the time from which the cause of action accrued for the
revocation of the donation and recovery of the property donated cannot be
specifically determined in the instant case. A cause of action arises when
that which should have been done is not done, or that which should not
have been done is done.7 In cases where there is no special provision for
such computation, recourse must be had to the rule that the period must
be counted from the day on which the corresponding action could have
been instituted. It is the legal possibility of bringing the action which
determines the starting point for the computation of the period. In this
case, the starting point begins with the expiration of a reasonable period
and opportunity for petitioner to fulfill what has been charged upon it by
the donor.
The period of time for the establishment of a medical college and the
necessary buildings and improvements on the property cannot be
quantified in a specific number of years because of the presence of
several factors and circumstances involved in the erection of an
educational institution, such as government laws and regulations
pertaining to education, building requirements and property restrictions
which are beyond the control of the donee.
Thus, when the obligation does not fix a period but from its nature and
circumstances it can be inferred that a period was intended, the general
rule provided in Art. 1197 of the Civil Code applies, which provides that the
courts may fix the duration thereof because the fulfillment of the obligation
itself cannot be demanded until after the court has fixed the period for
compliance therewith and such period has arrived.8
This general rule however cannot be applied considering the different set
of circumstances existing in the instant case. More than a reasonable
period of fifty (50) years has already been allowed petitioner to avail of the
opportunity to comply with the condition even if it be burdensome, to make
the donation in its favor forever valid. But, unfortunately, it failed to do so.
Hence, there is no more need to fix the duration of a term of the obligation
when such procedure would be a mere technicality and formality and
would serve no purpose than to delay or lead to an unnecessary and
expensive multiplication of suits. 9 Moreover, under Art. 1191 of the Civil
Code, when one of the obligors cannot comply with what is incumbent
upon him, the obligee may seek rescission and the court shall decree the
same unless there is just cause authorizing the fixing of a period. In the
absence of any just cause for the court to determine the period of the
compliance, there is no more obstacle for the court to decree the
rescission claimed.
Finally, since the questioned deed of donation herein is basically a
gratuitous one, doubts referring to incidental circumstances of a gratuitous
contract should be resolved in favor of the least transmission of rights and
interests. 10Records are clear and facts are undisputed that since the
execution of the deed of donation up to the time of filing of the instant
action, petitioner has failed to comply with its obligation as donee.
Petitioner has slept on its obligation for an unreasonable length of time.
Hence, it is only just and equitable now to declare the subject donation
already ineffective and, for all purposes, revoked so that petitioner as
donee should now return the donated property to the heirs of the donor,
private respondents herein, by means of reconveyance.
WHEREFORE, the decision of the Regional Trial Court of Iloilo, Br. 34, of
31 May 1991 is REINSTATED and AFFIRMED, and the decision of the
Court of Appeals of 18 June 1993 is accordingly MODIFIED.
Consequently, petitioner is directed to reconvey to private respondents Lot
No. 3174-B-1 of the subdivision plan Psd-1144 covered by Transfer
Certificate of Title No. T-3910-A within thirty (30) days from the finality of
this judgment.
Costs against petitioner.
SO ORDERED.
Quiason and Kapunan, JJ., concur.
Separate Opinions - DAVIDE, JR., J., dissenting:
I agree with the view in the majority opinion that the donation in question is
onerous considering the conditions imposed by the donor on the donee
which created reciprocal obligations upon both parties. Beyond that, I beg
to disagree.
First of all, may I point out an inconsistency in the majority opinion's
description of the donation in question. In one part, it says that the
donation in question is onerous. Thus, on page 4 it states:
We find it difficult to sustain the petition. A clear perusal of the
conditions set forth in the deed of donation executed by Don
Ramon Lopez, Sr., give us no alternative but to conclude
that his donation was onerous, one executed for a valuable
consideration which is considered the equivalent of the
donation itself, e.g., when a donation imposes a burden
equivalent to the value of the donation . . . . (emphasis
supplied)
Yet, in the last paragraph of page 8 it states that the donation is basically a
gratuitous one. The pertinent portion thereof reads:
Finally, since the questioned deed of donation herein is
basically a gratuitous one, doubts referring to incidental
circumstances of a gratuitous contract should be resolved in
favor of the least transmission of rights and interest . . .
(emphasis supplied)
Second, the discussion on conditional obligations is unnecessary. There is
no conditional obligation to speak of in this case. It seems that the
"conditions" imposed by the donor and as the word is used in the law of
donations is confused with "conditions" as used in the law of obligations.
In his annotation of Article 764 of the Civil Code on Donations, Arturo M.
Tolentino, citing the well-known civilists such as Castan, Perez Gonzalez
and Alguer, and Colin & Capitant, states clearly the context within which
the term "conditions" is used in the law of donations, to wit:
The word "conditions" in this article does not refer to uncertain
events on which the birth or extinguishment of a juridical
relation depends, but is used in the vulgar sense of obligations
or chargesimposed by the donor on the donee. It is used, not in
its technical or strict legal sense, but in its broadest
sense.1 (emphasis supplied)
Clearly then, when the law and the deed of donation speaks of
"conditions" of a donation, what are referred to are actually the obligations,
charges or burdens imposed by the donor upon the donee and which
would characterize the donation as onerous. In the present case, the
donation is, quite obviously, onerous, but it is more properly called a
"modal donation." A modal donation is one in which the donor imposes a
prestation upon the donee. The establishment of the medical college as
the condition of the donation in the present case is one such prestation.
The conditions imposed by the donor Don Ramon Lopez determines
neither the existence nor the extinguishment of the obligations of the
donor and the donee with respect to the donation. In fact, the conditions
imposed by Don Ramon Lopez upon the donee are the very obligations of
the donation — to build the medical college and use the property for the
purposes specified in the deed of donation. It is very clear that those
obligations are unconditional, the fulfillment, performance, existence or
extinguishment of which is not dependent on any future or uncertain event
or past and unknown event, as the Civil Code would define a conditional
obligation.2
Reliance on the case of Parks vs. Province of Tarlac3 as cited on page 5
of the majority opinion is erroneous in so far as the latter stated that the
condition in Parks is a resolutory one and applied this to the present case.
A more careful reading of this Court's decision would reveal that nowhere
did we say, whether explicitly or impliedly, that the donation in that case,
which also has a condition imposed to build a school and a public park
upon the property donated, is a resolutory condition.4 It is incorrect to say
that the "conditions" of the donation there or in the present case are
resolutory conditions because, applying Article 1181 of the Civil Code, that
would mean that upon fulfillment of the conditions, the rights already
acquired will be extinguished. Obviously, that could not have been the
intention of the parties.
What the majority opinion probably had in mind was that the conditions are
resolutory because if they are notcomplied with, the rights of the donee as
such will be extinguished and the donation will be revoked. To my mind,
though, it is more accurate to state that the conditions here are not
resolutory conditions but, for the reasons stated above,
are the obligations imposed by the donor.
Third, I cannot subscribe to the view that the provisions of Article 1197
cannot be applied here. The conditions/obligations imposed by the donor
herein are subject to a period. I draw this conclusion based on our
previous ruling which, although made almost 90 years ago, still finds
application in the present case. In Barretto vs. City of Manila,5 we said that
when the contract of donation, as the one involved therein, has no fixed
period in which the condition should be fulfilled, the provisions of what is
now Article 1197 (then Article 1128) are applicable and it is the duty of the
court to fix a suitable time for its fulfillment. Indeed, from the nature and
circumstances of the conditions/obligations of the present donation, it can
be inferred that a period was contemplated by the donor. Don Ramon
Lopez could not have intended his property to remain idle for a long period
of time when in fact, he specifically burdened the donee with the obligation
to set up a medical college therein and thus put his property to good use.
There is a need to fix the duration of the time within which the conditions
imposed are to be fulfilled.
It is also important to fix the duration or period for the performance of the
conditions/obligations in the donation in resolving the petitioner's claim
that prescription has already barred the present action. I disagree once
more with the ruling of the majority that the action of the petitioners is not
barred by the statute of limitations. There is misplaced reliance again on a
previous decision of this Court in Osmeña vs. Rama.6 That case does not
speak of a deed of donation as erroneously quoted and cited by the
majority opinion. It speaks of a contract for a sum of money where the
debtor herself imposed a condition which will determine when she will fulfill
her obligation to pay the creditor, thus, making the fulfillment of her
obligation dependent upon her will. What we have here, however, is not a
contract for a sum of money but a donation where the donee has not
imposed any conditions on the fulfillment of its obligations. Although it is
admitted that the fulfillment of the conditions/obligations of the present
donation may be dependent on the will of the donee as to when it will
comply therewith, this did not arise out of a condition which the donee
itself imposed. It is believed that the donee was not meant to and does not
have absolute control over the time within which it will perform its
obligations. It must still do so within a reasonable time. What that
reasonable time is, under the circumstances, for the courts to determine.
Thus, the mere fact that there is no time fixed as to when the conditions of
the donation are to be fulfilled does not ipso facto mean that the statute of
limitations will not apply anymore and the action to revoke the donation
becomes imprescriptible.
Admittedly, the donation now in question is an onerous donation and is
governed by the law on contracts (Article 733) and the case of Osmeña,
being one involving a contract, may apply. But we must not lose sight of
the fact that it is still a donation for which this Court itself applied the
pertinent law to resolve situations such as this. That the action to revoke
the donation can still prescribe has been the pronouncement of this Court
as early as 1926 in the case of Parks which, on this point, finds relevance
in this case. There, this Court said,
[that] this action [for the revocation of the donation] is
prescriptible, there is no doubt. There is no legal provision
which excludes this class of action from the statute of
limitations. And not only this, the law itself recognizes the
prescriptibility of the action for the revocation of a donation,
providing a special period of [four] years for the revocation by
the subsequent birth of children [Art. 646, now Art. 763], and . .
. by reason of ingratitude. If no special period is provided for
the prescription of the action for revocation for noncompliance
of the conditions of the donation [Art. 647, now Art. 764], it is
because in this respect the donation is considered onerous and
is governed by the law of contracts and the general rules of
prescription.7
More recently, in De Luna v. Abrigo,8 this Court reiterated the ruling
in Parks and said that:
It is true that under Article 764 of the New Civil Code, actions
for the revocation of a donation must be brought within four (4)
years from the non-compliance of the conditions of the
donation. However, it is Our opinion that said article does not
apply to onerous donations in view of the specific provision of
Article 733 providing that onerous donations are governed by
the rules on contracts.
In the light of the above, the rules on contracts and the general
rules on prescription and not the rules on donations are
applicable in the case at bar.
The law applied in both cases is Article 1144(1). It refers to the
prescription of an action upon a written contract, which is what the deed of
an onerous donation is. The prescriptive period is ten years from the time
the cause of action accrues, and that is, from the expiration of the time
within which the donee must comply with the conditions/obligations of the
donation. As to when this exactly is remains to be determined, and that is
for the courts to do as reposed upon them by Article 1197.
For the reasons expressed above, I register my dissent. Accordingly, the
decision of the Court of Appeals must be upheld, except its ruling that the
conditions of the donation are resolutory.
Padilla, J., dissents
Separate Opinions - DAVIDE, JR., J., dissenting:
I agree with the view in the majority opinion that the donation in question is
onerous considering the conditions imposed by the donor on the donee
which created reciprocal obligations upon both parties. Beyond that, I beg
to disagree.
First of all, may I point out an inconsistency in the majority opinion's
description of the donation in question. In one part, it says that the
donation in question is onerous. Thus, on page 4 it states:
We find it difficult to sustain the petition. A clear perusal of the
conditions set forth in the deed of donation executed by Don
Ramon Lopez, Sr., give us no alternative but to conclude
that his donation was onerous, one executed for a valuable
consideration which is considered the equivalent of the
donation itself, e.g., when a donation imposes a burden
equivalent to the value of the donation . . . . (emphasis
supplied)
Yet, in the last paragraph of page 8 it states that the donation is basically a
gratuitous one. The pertinent portion thereof reads:
Finally, since the questioned deed of donation herein is
basically a gratuitous one, doubts referring to incidental
circumstances of a gratuitous contract should be resolved in
favor of the least transmission of rights and interest . . .
(emphasis supplied)
Second, the discussion on conditional obligations is unnecessary. There is
no conditional obligation to speak of in this case. It seems that the
"conditions" imposed by the donor and as the word is used in the law of
donations is confused with "conditions" as used in the law of obligations.
In his annotation of Article 764 of the Civil Code on Donations, Arturo M.
Tolentino, citing the well-known civilists such as Castan, Perez Gonzalez
and Alguer, and Colin & Capitant, states clearly the context within which
the term "conditions" is used in the law of donations, to wit:
The word "conditions" in this article does not refer to uncertain
events on which the birth or extinguishment of a juridical
relation depends, but is used in the vulgar sense of obligations
or chargesimposed by the donor on the donee. It is used, not in
its technical or strict legal sense, but in its broadest
sense.1 (emphasis supplied)
Clearly then, when the law and the deed of donation speaks of
"conditions" of a donation, what are referred to are actually the obligations,
charges or burdens imposed by the donor upon the donee and which
would characterize the donation as onerous. In the present case, the
donation is, quite obviously, onerous, but it is more properly called a
"modal donation." A modal donation is one in which the donor imposes a
prestation upon the donee. The establishment of the medical college as
the condition of the donation in the present case is one such prestation.
The conditions imposed by the donor Don Ramon Lopez determines
neither the existence nor the extinguishment of the obligations of the
donor and the donee with respect to the donation. In fact, the conditions
imposed by Don Ramon Lopez upon the donee are the very obligations of
the donation — to build the medical college and use the property for the
purposes specified in the deed of donation. It is very clear that those
obligations are unconditional, the fulfillment, performance, existence or
extinguishment of which is not dependent on any future or uncertain event
or past and unknown event, as the Civil Code would define a conditional
obligation.2
Reliance on the case of Parks vs. Province of Tarlac3 as cited on page 5
of the majority opinion is erroneous in so far as the latter stated that the
condition in Parks is a resolutory one and applied this to the present case.
A more careful reading of this Court's decision would reveal that nowhere
did we say, whether explicitly or impliedly, that the donation in that case,
which also has a condition imposed to build a school and a public park
upon the property donated, is a resolutory condition.4 It is incorrect to say
that the "conditions" of the donation there or in the present case are
resolutory conditions because, applying Article 1181 of the Civil Code, that
would mean that upon fulfillment of the conditions, the rights already
acquired will be extinguished. Obviously, that could not have been the
intention of the parties.
the fact that it is still a donation for which this Court itself applied the
pertinent law to resolve situations such as this. That the action to revoke
the donation can still prescribe has been the pronouncement of this Court
as early as 1926 in the case of Parks which, on this point, finds relevance
in this case. There, this Court said,
[that] this action [for the revocation of the donation] is
prescriptible, there is no doubt. There is no legal provision
which excludes this class of action from the statute of
limitations. And not only this, the law itself recognizes the
prescriptibility of the action for the revocation of a donation,
providing a special period of [four] years for the revocation by
the subsequent birth of children [Art. 646, now Art. 763], and . .
. by reason of ingratitude. If no special period is provided for
the prescription of the action for revocation for noncompliance
of the conditions of the donation [Art. 647, now Art. 764], it is
because in this respect the donation is considered onerous and
is governed by the law of contracts and the general rules of
prescription.7

What the majority opinion probably had in mind was that the conditions are
resolutory because if they are notcomplied with, the rights of the donee as
such will be extinguished and the donation will be revoked. To my mind,
though, it is more accurate to state that the conditions here are not
resolutory conditions but, for the reasons stated above,
are the obligations imposed by the donor.
Third, I cannot subscribe to the view that the provisions of Article 1197
cannot be applied here. The conditions/obligations imposed by the donor
herein are subject to a period. I draw this conclusion based on our
previous ruling which, although made almost 90 years ago, still finds
application in the present case. In Barretto vs. City of Manila,5 we said that
when the contract of donation, as the one involved therein, has no fixed
period in which the condition should be fulfilled, the provisions of what is
now Article 1197 (then Article 1128) are applicable and it is the duty of the
court to fix a suitable time for its fulfillment. Indeed, from the nature and
circumstances of the conditions/obligations of the present donation, it can
be inferred that a period was contemplated by the donor. Don Ramon
Lopez could not have intended his property to remain idle for a long period
of time when in fact, he specifically burdened the donee with the obligation
to set up a medical college therein and thus put his property to good use.
There is a need to fix the duration of the time within which the conditions
imposed are to be fulfilled.
More recently, in De Luna v. Abrigo,8 this Court reiterated the ruling
in Parks and said that:
It is true that under Article 764 of the New Civil Code, actions
for the revocation of a donation must be brought within four (4)
years from the non-compliance of the conditions of the
donation. However, it is Our opinion that said article does not
apply to onerous donations in view of the specific provision of
Article 733 providing that onerous donations are governed by
the rules on contracts.
In the light of the above, the rules on contracts and the general
rules on prescription and not the rules on donations are
applicable in the case at bar.
The law applied in both cases is Article 1144(1). It refers to the
prescription of an action upon a written contract, which is what the deed of
an onerous donation is. The prescriptive period is ten years from the time
the cause of action accrues, and that is, from the expiration of the time
within which the donee must comply with the conditions/obligations of the
donation. As to when this exactly is remains to be determined, and that is
for the courts to do as reposed upon them by Article 1197.

It is also important to fix the duration or period for the performance of the For the reasons expressed above, I register my dissent. Accordingly, the
conditions/obligations in the donation in resolving the petitioner's claim decision of the Court of Appeals must be upheld, except its ruling that the
that prescription has already barred the present action. I disagree once conditions of the donation are resolutory.
more with the ruling of the majority that the action of the petitioners is not
barred by the statute of limitations. There is misplaced reliance again on a Padilla, J., dissents
previous decision of this Court in Osmeña vs. Rama.6 That case does not
speak of a deed of donation as erroneously quoted and cited by the
majority opinion. It speaks of a contract for a sum of money where the
debtor herself imposed a condition which will determine when she will fulfill
her obligation to pay the creditor, thus, making the fulfillment of her
obligation dependent upon her will. What we have here, however, is not a
contract for a sum of money but a donation where the donee has not
imposed any conditions on the fulfillment of its obligations. Although it is
admitted that the fulfillment of the conditions/obligations of the present
donation may be dependent on the will of the donee as to when it will
comply therewith, this did not arise out of a condition which the donee
itself imposed. It is believed that the donee was not meant to and does not
have absolute control over the time within which it will perform its
obligations. It must still do so within a reasonable time. What that
reasonable time is, under the circumstances, for the courts to determine.
Thus, the mere fact that there is no time fixed as to when the conditions of
the donation are to be fulfilled does not ipso facto mean that the statute of
limitations will not apply anymore and the action to revoke the donation
becomes imprescriptible.

Admittedly, the donation now in question is an onerous donation and is

governed by the law on contracts (Article 733) and the case of Osmeña,
being one involving a contract, may apply. But we must not lose sight of
 [G.R. No. 146839, March 23 : 2011] ROLANDO T. CATUNGAL, JOSE T.
CATUNGAL, JR., CAROLYN T. CATUNGAL AND ERLINDA CATUNGAL-
WESSEL, PETITIONERS, VS. ANGEL S. RODRIGUEZ, RESPONDENT.
DECISION
LEONARDO-DE CASTRO, J.:
Before the Court is a Petition for Review on Certiorari, assailing the following
issuances of the Court of Appeals in CA-G.R. CV No. 40627 consolidated with
CA-G.R. SP No. 27565: (a) the August 8, 2000 Decision,[1] which affirmed the
Decision[2] dated May 30, 1992 of the Regional Trial Court (RTC), Branch 27 of
Lapu-lapu City, Cebu in Civil Case No. 2365-L, and (b) the January 30, 2001
Resolution,[3] denying herein petitioners' motion for reconsideration of the
August 8, 2000 Decision.
The relevant factual and procedural antecedents of this case are as follows:
This controversy arose from a Complaint for Damages and Injunction with
Preliminary Injunction/Restraining Order[4] filed on December 10, 1990 by
herein respondent Angel S. Rodriguez (Rodriguez), with the RTC, Branch 27,
Lapu-lapu City, Cebu, docketed as Civil Case No. 2365-L against the spouses
Agapita and Jose Catungal (the spouses Catungal), the parents of petitioners.
In the said Complaint, it was alleged that Agapita T. Catungal (Agapita) owned
a parcel of land (Lot 10963) with an area of 65,246 square meters, covered by
Original Certificate of Title (OCT) No. 105[5] in her name situated in the Barrio
of Talamban, Cebu City. The said property was allegedly the exclusive
paraphernal property of Agapita.
On April 23, 1990, Agapita, with the consent of her husband Jose, entered into
a Contract to Sell[6] with respondent Rodriguez. Subsequently, the Contract to
Sell was purportedly "upgraded" into a Conditional Deed of Sale dated July 26,
1990 between the same parties. Both the Contract to Sell and the Conditional
Deed of Sale were annotated on the title.
The provisions of the Conditional Deed of Sale pertinent to the present dispute
are quoted below:
1. The VENDOR for and in consideration of the sum of TWENTY[-]FIVE
MILLION PESOS (£25,000,000.00) payable as follows:
a. FIVE HUNDRED THOUSAND PESOS (P500,000.00) downpayment upon
the signing of this agreement, receipt of which sum is hereby acknowledged in
full from the VENDEE.
b. The balance of TWENTY[-]FOUR MILLION FIVE HUNDRED THOUSAND
PESO'S (P24,500,000.00) shall be payable in five separate checks, made to
the order of JOSE Ch. CATUNGAL, the first check shall be for FOUR MILLION
FIVE HUNDRED THOUSAND PESOS (P4,500,000.00) and the remaining
balance to be paid in four checks in the amounts of FIVE MILLION PESOS
(P5,000,000.00) each after the VENDEE have (sic)' successfully negotiated,
secured and provided a Road Right of Way consisting of 12 meters in width
cutting across Lot 10884 up to the national road, either by widening the
existing Road Right of Way or by securing a new Road Right of Way of 12
meters in width. If however said Road Right of Way could not be negotiated,
the VENDEE shall give notice to the VENDOR for them to reassess and solve
the problem by taking other options and should the situation ultimately prove
futile, he shall take steps to rescind or cancel the herein Conditional Deed of
Sale.
c. That the access road or Road Right of Way leading to Lot 10963 shall be the
responsibility of the VENDEE to secure and any or all cost relative to the
acquisition thereof shall be borne solely by the VENDEE. He shall, however,
be accorded with enough time necessary for the success of his endeavor,
granting him a free hand in negotiating for the passage.
BY THESE PRESENTS, the VENDOR do hereby agree to sell by way of
herein CONDITIONAL DEED OF SALE to VENDEE, his heirs, successors and
assigns, the real property described in the Original Certificate of Title No. 105 x
x x.
xxxx
5. That the VENDEE has the option to rescind the sale. In the event the
VENDEE exercises his option to rescind the herein Conditional Deed of Sale,
the VENDEE shall notify the VENDOR by way of a written notice relinquishing
his rights over the property. The VENDEE shall then be reimbursed by the
VENDOR the sum of FIVE HUNDRED THOUSAND PESOS (P500,000.00)
representing the downpayment, interest free, payable but contingent upon the
event that the VENDOR shall have been able to sell the property to another
party.[8]
In accordance with the Conditional Deed of Sale, Rodriguez purportedly
secured the necessary surveys and plans and through his efforts, the properly
was reclassified from agricultural land into residential land which he claimed
substantially increased the property's value. He likewise alleged that he
actively negotiated for the road right of way as stipulated in the contract.[9]
Rodriguez further claimed that on August 31, 1990 the spouses Catungal
requested an advance of P5,000,000.00 on the purchase price for personal
reasons. Rodriquez allegedly refused on the ground that the amount was
substantial and was not due under the terms of their agreement. Shortly after
his refusal to pay the advance, he purportedly learned that the Catungals were
offering the property for sale to third parties.[10]
Thereafter, Rodriguez received letters dated October 22, 1990,[11] October 24,
1990[12] and October 29, 1990,[13] all signed by Jose Catungal who was a
lawyer, essentially demanding that the former make up his mind about buying
the land or exercising his "option" to buy because the spouses Catungal
allegedly received other offers and they needed money to pay for personal
obligations and for investing in other properties/business ventures. Should
Rodriguez fail to exercise his option to buy the land, the Catungals warned that
they would consider the contract cancelled and that they were free to look for
other buyers.
In a letter dated November 4, 1990,[14] Rodriguez registered his objections to
what he termed the Catungals' unwarranted demands in view of the terms of
the Conditional Deed of Sale which allowed him sufficient time to negotiate a
road right of way and granted him, the vendee, the exclusive right to rescind
the contract. Still, on November 15, 1990, Rodriguez purportedly received a
letter dated November 9, 1990[15] from Atty. Catungal, stating that the contract
had been cancelled and terminated.
Contending that the Catungals' unilateral rescission of the Conditional Deed of
Sale was unjustified, arbitrary and unwarranted, Rodriquez prayed in his
Complaint, that:
1. Upon the filing of this complaint, a restraining order be issued enjoining
defendants [the spouses Catungal], their employees, agents, representatives
or other persons acting in their behalf from offering the property subject of this
case for sale to third persons; from entertaining offers or proposals by third
persons to purchase the said property; and, in general, from performing acts in
furtherance or implementation of defendants' rescission of their Conditional
Deed of Sale with plaintiff [Rodriguez].
2. After hearing, a writ of preliminary injunction be issued upon such
reasonable bond as may be fixed by the court enjoining defendants and other
persons acting in their behalf from performing any of the acts mentioned in the
next preceding paragraph.
3. After trial, a Decision be rendered:
a) Making the injunction permanent;
b) Condemning defendants to pay to plaintiff, jointly and solidarily:
Actual damages in the amount of P400,000.00 for their unlawful rescission of
the Agreement and their performance of acts in violation or disregard of the
said Agreement;
Moral damages in the amount of P200,000.00;
Exemplary damages in the amount of P200,000.00; Expenses of litigation and
attorney's fees in the amount of P100,000.00; and Costs of suit.[16]
On December 12, 1990, the trial court issued a temporary restraining order
and set the application for a writ of preliminary injunction for hearing on
December 21, 1990 with a directive to the spouses Catungal to show cause
within five days from notice why preliminary injunction should not be granted.
The trial court likewise ordered that summons be served on them.[17]
Thereafter, the spouses Catungal filed their opposition[18] to the issuance of a
writ of preliminary injunction and later filed a motion to dismiss[19] on the ground
of improper venue. According to the Catungals, the subject property was
located in Cebu City and thus, the complaint should have been filed in Cebu
City, not Lapu-lapu City. Rodriguez opposed the motion to dismiss on the
ground that his action was a personal action as its subject was breach of a
contract, the Conditional Deed of Sale, and not title to, or possession of real
property.[20]
In an Order dated January 17, 1991,[21] the trial court denied the motion to
dismiss and ruled that the complaint involved a personal action, being merely
for damages with a prayer for injunction.
Subsequently, on January 30, 1991, the trial court ordered the issuance of a
writ of preliminary injunction upon posting by Rodriguez of a bond in the
amount of P100,000.00 to answer for damages that the defendants may
sustain by reason of the injunction.
On February 1, 1991, the spouses Catungal filed their Answer with
Counterclaim[22] alleging that they had the right to rescind the contract in view
of (1) Rodriguez's failure to negotiate the road right of way despite the lapse of
several months since the signing of the contract, and (2) his refusal to pay the
additional amount of P5,000,000.00 asked by the Catungals, which to them
indicated his lack of funds to purchase the property. The Catungals likewise
contended that Rodriguez did not have an exclusive right to rescind the
contract and that the contract, being reciprocal, meant both parties had the
right to rescind.[23] The spouses Catungal further claimed that it was Rodriguez
who was in breach of their agreement and guilty of bad faith which justified
their rescission of the contract.[24] By way of counterclaim, the spouses
Catungal prayed for actual and consequential damages in the form of
unearned interests from the balance (of the purchase price in the amount) of
P24,500,000.00, moral and exemplary damages in the amount of
P2,000,000.00, attorney's fees in the amount of P200,000.00 and costs of suits
and litigation expenses in the amount of P10,000.00.[25] The spouses Catungal
prayed for the dismissal of the complaint and the grant of their counterclaim.
The Catungals amended their Answer twice,[26] retaining their basic allegations
but amplifying their charges of contractual breach and bad faith on the part of
Rodriguez and adding the argument that in view of Article 1191 of the Civil
Code, the power to rescind reciprocal obligations is granted by the law itself to
both parties and does not need an express stipulation to grant the same to the
injured party. In the Second Amended Answer with Counterclaim, the spouses
Catungal added a prayer for the trial court to order the Register of Deeds to
cancel the annotations of the two contracts at the back of their OCT.
On October 24, 1991, Rodriguez filed an Amended Complaint,[28] adding
allegations to the effect that the Catungals were guilty of several
misrepresentations which purportedly induced Rodriguez to buy the property at
the price of P25,000,000.00. Among others, it was alleged that the spouses
Catungal misrepresented that their Lot 10963 includes a flat portion of land
which later turned out to be a separate lot (Lot 10986) owned by Teodora
Tudtud who sold the same to one Antonio Pablo. The Catungals also allegedly
misrepresented that the road right of way will only traverse two lots owned by
Anatolia Tudtud and her daughter Sally who were their relatives and who had
already agreed to sell a portion of the said lots for the road right of way at a
price of P550.00 per square meter. However, because of the Catungals' acts
of offering the property to other buyers who offered to buy the road lots for
P2,500.00 per square meter, the adjacent lot owners were no longer willing to
sell the road lots to Rodriguez at P550.00 per square meter but were asking for
a price of P3,500.00 per square meter. In other words, instead of assisting
Rodriguez in his efforts to negotiate the road right of way, the spouses
Catungal allegedly intentionally and maliciously defeated Rodriguez's
negotiations for a road right of way in order to justify rescission of the said
contract and enable them to offer the property to other buyers.
Despite requesting the trial court for an extension of time to file an amended
Answer,[29] the Catungals did not file an amended Answer and instead filed an
Urgent Motion to Dismiss[30] again invoking the ground of improper venue. In
the meantime, for failure to file an amended Answer within the period allowed,
the trial court set the case for pre-trial on December 20, 1991.
During the pre-trial held on December 20, 1991, the trial court denied in open
court the Catungals' Urgent Motion to Dismiss for violation of the rules and for
being repetitious and having been previously denied. However, Atty. Catungal
refused to enter into pre-trial which prompted the trial court to declare the
defendants in default and to set the presentation of the plaintiffs evidence on
February 14, 1992;[32]
On December 23, 1991, the Catungals filed a motion for reconsideration[33] of
the December 20, 1991 Order denying their Urgent Motion to Dismiss but the
trial court denied reconsideration in an Order dated February 3,
1992.[34] Undeterred, the Catungals subsequently filed a Motion to Lift and to
Set Aside Order of Default[35] but it was likewise denied for being in violation of
the rules and for being not meritorious.[36] On February 28, 1992, the
Catungals filed a Petition for Certiorari and Prohibition[37]with the Court of
Appeals, questioning the denial of their motion to dismiss and the order of
default. This was docketed as CA-G.R. SP No. 27565.
Meanwhile, Rodriguez proceeded to present his evidence before the trial court.
In a Decision dated May 30, 1992, the trial court ruled in favor of Rodriguez,
finding that: (a) under the contract it was complainant (Rodriguez) that had the
option to rescind the sale; (b) Rodriguez's obligation to pay the balance of the
purchase price arises only upon successful negotiation of the road right of way;
(c) he proved his diligent efforts to negotiate the road right of way; (d) the
spouses Catungal were guilty of misrepresentation which defeated Rodriguez's
efforts to acquire the road right of way; and (e) the Catungals' rescission of the
contract had no basis and was in bad faith. Thus, the trial court made the
injunction permanent, ordered the Catungals to reduce the purchase price by
the amount of acquisition of Lot 10963 which they misrepresented was part of
the property sold but was in fact owned by a third party and ordered them to
pay P100,000.00 as damages, P30,000.00 as attorney's fees and costs.
The Catungals appealed the decision to the Court of Appeals, asserting the
commission of the following errors by the trial court in their appellants' brief8
dated February 9, 1994:
I
THE COURT A QUO ERRED IN NOT DISMISSING OF (SIC) THE CASE ON
THE GROUNDS OF IMPROPER VENUE AND LACK OF JURISDICTION.
II
THE COURT A QUO ERRED IN CONSIDERING THE CASE AS A
PERSONAL AND NOT A REAL ACTION.
III
GRANTING WITHOUT ADMITTING THAT VENUE WAS PROPERLY LAID
AND THE CASE IS A PERSONAL ACTION, THE COURT A QUO ERRED IN
DECLARING THE DEFENDANTS IN DEFAULT DURING THE PRE-TRIAL
WHEN AT THAT TIME THE DEFENDANTS HAD ALREADY FILED THEIR
ANSWER TO THE COMPLAINT.
IV
THE COURT A QUO ERRED IN CONSIDERING THE DEFENDANTS AS
HAVING LOST THEIR LEGAL STANDING IN COURT WHEN AT MOST
THEY COULD ONLY BE CONSIDERED AS IN DEFAULT AND STILL
ENTITLED TO NOTICES OF ALL FURTHER PROCEEDINGS ESPECIALLY
AFTER THEY HAD FILED THE MOTION TO LIFT THE ORDER OF
DEFAULT.
V
THE COURT A QUO ERRED IN ISSUING THE WRIT [OF] PRELIMINARY
INJUNCTION RESTRAINING THE EXERCISE OF ACTS OF OWNERSHIP
AND OTHER RIGHTS OVER REAL PROPERTY OUTSIDE OF THE
COURT'S TERRITORIAL JURISDICTION AND INCLUDING PERSONS WHO
WERE NOT BROUGHT UNDER ITS JURISDICTION, THUS THE NULLITY
OF THE WRIT.
VI
THE COURT A QUO ERRED IN NOT RESTRAINING ITSELF MOTU
PROP[R]IO FROM CONTINUING WITH THE PROCEEDINGS IN THE CASE
AND IN RENDERING DECISION THEREIN IF ONLY FOR REASON OF
COURTESY AND FAIRNESS BEING MANDATED AS DISPENSER OF FAIR
AND EQUAL JUSTICE TO ALL AND SUNDRY WITHOUT FEAR OR FAVOR
IT HAVING BEEN SERVED EARLIER WITH A COPY OF THE PETITION
FOR CERTIORARI QUESTIONING ITS VENUE AND JURISDICTION IN CA-
G.R. NO. SP 27565 IN FACT NOTICES FOR THE FILING OF COMMENT
THERETO HAD ALREADY BEEN SENT OUT BY THE HONORABLE COURT
OF APPEALS, SECOND DIVISION, AND THE COURT A QUO WAS
FURNISHED WITH COPY OF SAID NOTICE.
VII
THE COURT A QUO ERRED IN DECIDING THE CASE IN FAVOR OF THE
PLAINTIFF AND AGAINST THE DEFENDANTS ON THE BASIS OF
EVIDENCE WHICH ARE IMAGINARY, FABRICATED, AND DEVOID OF
TRUTH, TO BE STATED IN DETAIL IN THE DISCUSSION OF THIS
PARTICULAR ERROR, AND, THEREFORE, THE DECISION IS
REVERSIBLE.[39]
On August 31, 1995, after being granted several extensions, Rodriguez filed
his appellee's brief,[40]essentially arguing the correctness of the trial court's
Decision regarding the foregoing issues raised by the Catungals.
Subsequently, the Catungals filed a Reply Brief[41] dated October 16, 1995.
From the filing of the appellants' brief in 1994 up to the filing of the Reply Brief,
the spouses Catungal were represented by appellant Jose Catungal himself.
However, a new counsel for the Catungals, Atty. Jesus N. Borromeo (Atty.
Borromeo), entered his appearance before the Court of Appeals on September
2, 1997.[42] On the same date, Atty. Borromeo filed a Motion for Leave of Court
to File Citation of Authorities[43] and a Citation of Authorities.[44] This would be
followed by Atty. Borromeo's filing of an Additional Citation of Authority and
Second Additional Citation of Authority both on November 17, 1997.[45]
During the pendency of the case with the Court of Appeals, Agapita Catungal
passed away and thus, her husband, Jose, filed on February 17, 1999 a
motion for Agapita's substitution by her surviving children[46]
On August 8, 2000, the Court of Appeals rendered a Decision in the
consolidated cases CA-G.R. CV No. 40627 and CA-G.R. SP No.
27565,[47] affirming the trial court's Decision.
In a Motion for Reconsideration dated August 21, 2000,[48] counsel for the
Catungals, Atty. Borromeo, argued for the first time that paragraphs 1(b) and
5[49] of the Conditional Deed of Sale, whether taken separately or jointly,
violated the principle of mutuality of contracts under Article 1308 of the Civil
Code and thus, said contract was void ab initio. He adverted to the cases
mentioned in his various citations of authorities to support his argument of
nullity of the contract and his position that this issue may be raised for the first
time on appeal.
Meanwhile, a Second Motion for Substitution[50] was filed by Atty. Borromeo in
view of the death of Jose Catungal.
In a Resolution dated January 30, 2001, the Court of Appeals allowed the
substitution of the deceased Agapita and Jose Catungal by their surviving heirs
and denied the motion for reconsideration for lack of merit
Hence, the heirs of Agapita and Jose Catungal filed on March 2001 the
present petition for review,[51]which essentially argued that the Court of
Appeals erred in not finding that paragraphs 1(b) and/or 5 of the Conditional
Deed of Sale, violated the principle of mutuality of contracts under Article 1308
of the Civil Code. Thus, said contract was supposedly void ab initio and the
Catungals' rescission thereof was superfluous.
In his Comment,[52] Rodriguez highlighted that (a) petitioners were raising new
matters that cannot be passed upon on appeal; (b) the validity of the
Conditional Deed of Sale was already admitted and petitioners cannot be
allowed to change theories on appeal; (c) the questioned paragraphs of the
Conditional Deed of Sale were valid; and (d) petitioners were the ones who
committed fraud and breach of contract and were not entitled to relief for not
having come to court with clean hands.
The Court gave due course to the Petition[53] and the parties filed their
respective Memoranda.
The issues to be resolved in, the case at bar can be summed into two
questions:
I. Are petitioners allowed to raise their theory of nullity of the
Conditional Deed of Sale for the first time on appeal?
II. Do paragraphs 1(b) and 5 of the Conditional Deed of Sale violate
the principle of mutuality of contracts under Article 1308 of the Civil
Code?
On petitioners' change of theory
Petitioners claimed that the Court of Appeals should have reversed the trial
courts' Decision on the ground of the alleged nullity of paragraphs 1(b) and 5
of the Conditional Deed of Sale notwithstanding that the same was not raised
as an error in their appellants' brief. Citing Catholic Bishop of Balanga v. Court
of Appeals,[54] petitioners argued in the Petition that this case falls under the
following exceptions:
(3) Matters not assigned as errors on appeal but consideration of which is
necessary in arriving at a just decision and complete resolution of the case or
to serve the interest of justice or to avoid dispensing piecemeal justice;
(4) Matters not specifically assigned as errors on appeal but raised in the trial
court and are matters of record having some bearing on the issue submitted
which the parties failed to raise or which the lower court ignored;
(5) Matters not assigned as errors on appeal but closely related to an error
assigned; and
(6) Matters not assigned as errors but upon which the determination of a
question properly assigned is dependent.
We are not persuaded.
This is not an instance where a party merely failed to assign an issue as an
error in the brief nor failed to argue a material point on appeal that was raised
in the trial court and supported by the record. Neither is this a case where a
party raised an error closely related to, nor dependent on the resolution of, an
error properly assigned in his brief. This is a situation where a party completely
changes his theory of the case on appeal and abandons his previous
assignment of errors in his brief, which plainly should not be allowed as
anathema to due process.
Petitioners should be reminded that the object of pleadings is to draw the lines
of battle between the litigants and to indicate fairly the nature of the claims or
defenses of both parties.[56] In Philippine National Construction Corporation v.
Court of Appeals,[57] we held that "[w]hen a party adopts a certain theory in the
trial court, he will not be permitted to change his theory on appeal, for to permit
him to do so would not only be unfair to the other party but it would also be
offensive' to the basic rules of fair play, justice and due process."
We have also previously ruled that "courts of justice have no jurisdiction or
power to decide a question not in issue. Thus, a judgment that goes beyond
the issues and purports to adjudicate something on which the court did not
hear the parties, is not only irregular but also extrajudicial and invalid. The rule
rests on the fundamental tenets of fair play."[59]
During the proceedings before the trial court, the spouses Catungal never
claimed that the provisions in the Conditional Deed of Sale, stipulating that the
payment of the balance of the purchase price was contingent upon the
successful negotiation of a road right of way (paragraph 1[b]) and granting
Rodriguez the option to rescind (paragraph 5), were void for allegedly making
the fulfillment of the contract dependent solely on the will of Rodriguez.
On the contrary, with respect to paragraph 1(b), the Catungals did not aver in
the Answer (and its amended versions) that the payment of the purchase price
was subject to the will of Rodriguez but rather they claimed that paragraph 1(b)
in relation to 1(c) only presupposed a reasonable time be given to Rodriguez to
negotiate the road right of way. However, it was petitioners' theory that more
than sufficient time had already been given Rodriguez to negotiate the road
right of way. Consequently, Rodriguez's refusal/failure to pay the balance of
the purchase price, upon demand, was allegedly indicative of lack of funds and
a breach of the contract on the part of Rodriguez.
Anent paragraph 5 of the Conditional Deed of Sale, regarding Rodriguez's
option to rescind, it was petitioners' theory in the court a quo that
notwithstanding such provision, they retained the right to rescind the contract
for Rodriguez's breach of the same under Article 1191 of the Civil Code.
Verily, the first time petitioners raised their theory of the nullity of the
Conditional Deed of Sale in view of the questioned provisions was only in their
Motion for Reconsideration of the Court of Appeals' Decision, affirming the trial
court's judgment. The previous filing of various citations of authorities by Atty.
Borromeo and the Court of Appeals' resolutions noting such citations were of
no moment. The citations of authorities merely listed cases and their main
rulings without even any mention of their relevance to the present case or any
prayer for the Court of Appeals to consider them. In sum, the Court of Appeals
did not err in disregarding the citations of authorities or in denying petitioners'
motion for reconsideration of the assailed August 8, 2000 Decision in view of
the proscription against changing legal theories on appeal.
Ruling on the questioned provisions of the
Conditional Deed of Sale
Even assuming for the sake of argument that this Court may overlook the
procedural misstep of petitioners, we still cannot uphold their belatedly
proffered arguments.
At the outset, it should be noted that what the parties entered into is a
Conditional Deed of Sale, whereby the spouses Catungal agreed to sell and
Rodriguez agreed to buy Lot 10963 conditioned on the payment of a certain
price but the payment of the purchase price was additionally made contingent
on the successful negotiation of a road right of way. It is elementary that "[i]n
conditional obligations, the acquisition of rights, as well as the extinguishment
or loss of those already acquired, shall depend upon the happening of the
event which constitutes the condition."[60]
Petitioners rely on Article 1308 of the Civil Code to support their conclusion
regarding the claimed nullity of the aforementioned provisions. Article 1308
states that "[t]he contract must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them."
Article 1182 of the Civil Code, in turn, provides:
Art. 1182. When the fulfillment of the condition depends upon the sole will of
the debtor, the conditional obligation shall be void. If it depends upon chance
or upon the will of a third person, the obligation shall take effect in conformity
with the provisions of this Code.
In the past, this Court has distinguished between a condition imposed on the
perfection of a contract and a condition imposed merely on the performance of
an obligation. While failure to comply with the first condition results in the
failure of a contract, failure to comply with the second merely gives the other
party the option to either refuse to proceed with the sale or to waive the
condition.[61] This principle is evident in Article 1545 of the Civil Code on sales,
which provides in part:
Art. 1545. Where the obligation of either party to a contract of sale is subject to
any condition which is not performed, such party may refuse to proceed with
the contract or he may waive performance of the condition x x x.
Paragraph 1(b) of the Conditional Deed of Sale, stating that respondent shall
pay the balance of the purchase price when he has successfully negotiated
and secured a road right of way, is not a condition on the perfection of the
contract nor on the validity of the entire contract or its compliance as
contemplated in Article 1308. It is a condition imposed only on respondent's
obligation to pay the remainder of the purchase price. In our view and applying
Article 1182, such a condition is not purely potestative as petitioners contend.
It is not dependent on the sole will of the debtor but also on the will of third
persons who own the adjacent land and from whom the road right of way shall
be negotiated. In a manner of speaking, such a condition is likewise dependent
on chance as there is no guarantee that respondent and the third party-
landowners would come to an agreement regarding the road right of way. This
type of mixed condition is expressly allowed under Article 1182 of the Civil
Code.
Analogous to the present case is Romero v. Court of Appeals,[62] wherein the
Court interpreted the legal effect of a condition in a deed of sale that the
balance of the purchase price would be paid by the vendee when the vendor
has successfully ejected the informal settlers occupying the property.
In Romero, we found that such a condition did not affect the perfection of the
contract but only imposed a condition on the fulfillment of the obligation to pay
the balance of the purchase price, to wit:
From the moment the contract is perfected, the parties are bound not only to
the fulfillment of what has been expressly stipulated but also to all the
consequences which, according to their nature, may be in keeping with good
faith, usage and law. Under the agreement, private respondent is obligated to
evict the squatters on the property. The ejectment of the squatters is a
condition the operative act of which sets into motion the period of
compliance by petitioner of his own obligation, i.e., to pay the balance of
the purchase price. Private respondent's failure "to remove the squatters
from the property" within the stipulated period gives petitioner the right
to either refuse to proceed! with the agreement or waive that condition in
consonance with Article 1545 of the Civil Code. This option clearly belongs
to petitioner and not to private respondent.
We share the opinion of the appellate court that the undertaking required
of private respondent does not constitute a "potestative condition
dependent solely on his will" that might, otherwise, be void in
accordance with Article 1182 of the Civil Code but a "mixed" condition
"dependent not on the will of the vendor alone but also of third persons
like the squatters and government agencies and personnel
concerned." We must hasten to add, however, that where the so-called
"potestative condition" is imposed not on the birth of the obligation but on its
fulfillment, only the condition is avoided, leaving unaffected the obligation
itself.[63] (Emphases supplied.)
From the provisions of the Conditional Deed of Sale subject matter of this
case, it was the vendee (Rodriguez) that had the obligation to successfully
negotiate and secure the road right of way. However, in the decision of the trial
court, which was affirmed by the Court of Appeals, it was found that
respondent Rodriguez diligently exerted efforts to secure the road right of way
but the spouses Catungal, in bad faith, contributed to the collapse of the
negotiations for said road right of way. To quote from the trial court's decision:
It is therefore apparent that the vendee's obligations (sic) to pay the balance of
the purchase price arises only when the road-right-of-way to the property shall
have been successfully negotiated, secured and provided. In other words, the
obligation to pay the balance is conditioned upon the acquisition of the road-
right-of-way, in accordance with paragraph 2 of Article 1181 of the New Civil
Code. Accordingly, "an obligation dependent upon a suspensive condition
cannot be demanded until after the condition takes place because it is only
after the fulfillment of the condition that the obligation arises." (Javier v[s] CA
183 SCRA) Exhibits H, D, P, R, T, FF and JJ show that plaintiff [Rodriguez]
indeed was diligent in his efforts to negotiate for a road-right-of-way to
the property. The written offers, proposals and follow-up of his proposals show
that plaintiff [Rodriguez] went all out in his efforts to immediately acquire an
access road to the property, even going to the extent of offering P3,000.00 per
square meter for the road lots (Exh. Q) from the original P550.00 per sq.
meter. This Court also notes that defendant (sic) [the Catungals] made
misrepresentation in the negotiation they have entered into with
plaintiff [Rodriguez]. (Exhs. F and G) The misrepresentation of defendant (sic)
[the Catungals] as to the third lot (Lot 10986) to be part and parcel of the
subject property [(]Lot 10963) contributed in defeating the plaintiffs
[Rodriguez's] effort in acquiring the road-right-of-way to the property.
Defendants [the Catungals] cannot now invoke the non-fulfillment of the
condition in the contract as a ground for rescission when defendants
[the Catungals] themselves are guilty of preventing the fulfillment of
such condition.
From the foregoing, this Court is of the considered view that rescission of the
conditional deed of sale by the defendants is without any legal or factual
basis.[64] x x x. (Emphases supplied.)
In all, we see no cogent reason to disturb the foregoing factual findings of the
trial court.
Furthermore, it is evident from the language of paragraph 1(b) that the
condition precedent (for respondent's obligation to pay the balance of the
purchase price to arise) in itself partly involves an obligation to do, i.e., the
undertaking of respondent to negotiate and secure a road right of way at his
own expense.[65] It does not escape our notice as well, that far from disclaiming
paragraph 1(b) as void, it was the Catungals' contention before the trial court
that said provision should be read in relation to paragraph 1(c) which stated:
c. That the access road or Road Right of Way leading to Lot 10963 shall be the
responsibility of the VENDEE to secure and any or all cost relative to the
acquisition thereof shall be borne solely by the VENDEE. He shall, however,
be accorded with enough time necessary for the success of his
endeavor; granting him a free hand in negotiating for the
passage.[66] (Emphasis supplied.)
The Catungals' interpretation of the foregoing stipulation was that Rodriguez's
obligation to negotiate and secure a road right of way was one with a period
and that period, i.e., "enough time" to negotiate, had already lapsed by the
time they demanded the payment of P5,000,000.00 from respondent. Even
assuming arguendo that the Catungals were correct that the respondent's
obligation to negotiate a road right of way was one with an uncertain period,
their rescission of the Conditional Deed of Sale would still be unwarranted.
Based on their own theory, the Catungals had a remedy under Article 1197 of
the Civil Code, which mandates:
Art. 1197. If the obligation does not fix a period, but from its nature and the
circumstances it can be inferred that a period was intended, the courts may fix
the duration thereof.
The courts shall also fix the duration of the period when it depends upon the
will of the debtor.
In every case, the courts shall determine such period as may under the
circumstances have been probably contemplated by the parties. Once fixed by
the courts, the period cannot be changed by them.
What the Catungals should have done was to first file an action in court to fix
the period within which Rodriguez should accomplish the successful
negotiation of the road fight of way pursuant to the above quoted provision.
Thus, the Catungals' demand for Rodriguez to make an additional payment of
P5,000,000.00 was premature and Rodriguez's failure to accede to such
demand did not justify the rescission of the contract.
With respect to petitioners' argument that paragraph 5 of the Conditional Deed
of Sale likewise rendered the said contract void, we find no merit to this theory.
Paragraph 5 provides:
5. That the VENDEE has the option to rescind the sale. In the event the
VENDEE exercises his option to rescind the herein Conditional Deed of Sale,
the VENDEE shall notify the VENDOR by way of a written notice relinquishing
his rights over the property. The VENDEE shall then be reimbursed by the
VENDOR the sum of FIVE HUNDRED THOUSAND PESOS (£500,000,00)
representing the downpayment, interest free, payable but contingent upon the
event that the VENDOR shall have been able to sell the property to another
party.[67]
Petitioners posited that the above stipulation was the "deadliest" provision in
the Conditional Deed of Sale for violating the principle of mutuality of contracts
since it purportedly rendered the contract subject to the will of respondent.
We do not agree.
It is petitioners' strategy to insist that the Court examine the first sentence of
paragraph 5 alone and, resist a correlation of such sentence with other
provisions of the contract. Petitioners' view, however, ignores a basic rule in
the interpretation of contracts - that the contract should be taken as a whole.
Article 1374 of the Civil Code provides that "[t]he various stipulations of a
contract shall be interpreted together, attributing to the doubtful ones that
sense which may result from all of them taken jointly." The same Code further
sets down the rule that "[i]f some stipulation of any contract should admit of
several meanings, it shall be understood as bearing that import which is most
adequate to render it effectual."[68]
Similarly, under the Rules of Court it is prescribed that "[i]n the construction of
an instrument where there are several provisions or particulars, such a
construction is, if possible, to be adopted as will give effect to all"[69] and "for
the proper construction of an instrument, the circumstances under which it was
made, including the situation of the subject thereof and of the parties to it, may
be shown, so that the judge may be placed in the position of those whose
language he is to interpret."[70]
Bearing in mind the aforementioned interpretative rules, we find that the first
sentence of paragraph 5 must be taken in relation with the rest of paragraph 5
and with the other provisions of the Conditional Deed of Sale.
Reading paragraph 5 in its entirety will show that Rodriguez's option to rescind
the contract is not absolute as it is subject to the requirement that there should
be written notice to the vendor and the vendor shall only return Rodriguez's
downpayment of P500,000.00, without interest, when the vendor shall have
been able to sell the property to another party. That what is stipulated to be
returned is oniy the downpayment of P500,000.00 in the event that Rodriguez
exercises his option to rescind is significant. To recall, paragraph 1(b) of the
contract clearly states that the installments on the balance of the purchase
price shall only be paid upon successful negotiation and procurement of a road
right of way. It is clear from such provision that the existence of a road right of
way is a material consideration for Rodriguez to purchase the property. Thus,
prior to him being able to procure the road right of way, by express stipulation
in the contract, he is not bound to make additional payments to the Catungals.
It was further stipulated in paragraph 1(b) that: "[i]f however said road right of
way cannot be negotiated, the VENDEE shall give notice to the VENDOR for
them to reassess and solve the problem by taking other options and should
the situation ultimately prove futile, he [Rodriguez] shall take steps to
rescind or [cancel] the herein Conditional Deed of Sale." The intention of
the parties for providing subsequently in paragraph 5 that Rodriguez has the
option to rescind the sale is undeniably only limited to the contingency that
Rodriguez shall not be able to secure the road right of way. Indeed, if the
parties intended to give Rodriguez the absolute option to rescind the sale at
any time, the contract would have provided for the return of all payments made
by Rodriguez and not only the downpayment. To our mind, the reason only the
downpayment was stipulated to be returned is that the vendee's option to
rescind can only be exercised in the event that no road right of way is secured
and, thus, the vendee has not made any additional payments, other than his
downpayment.
In sum, Rodriguez's option to rescind the contract is not purely potestative but
rather also subject to the same mixed condition as his obligation to pay the
balance of the purchase price - i.e., the negotiation of a road right of way. In
the event the condition is fulfilled (or the negotiation is successful), Rodriguez
must pay the balance of the purchase price. In the event the condition is not
fulfilled (or the negotiation fails), Rodriguez has the choice either (a) to not
proceed with the sale and demand return of his downpayment or (b)
considering that the condition was imposed for his benefit, to waive the
condition and still pay the purchase price despite the lack of road access. This
is the most just interpretation of the parties' contract that gives effect to all its
provisions.
In any event, even if we assume for the sake of argument that the grant to
Rodriguez of an option to rescind, in the manner provided for in the contract, is
tantamount to a potestative condition, not being a condition affecting the
perfection of the contract, only the said condition would be considered void and
the rest of the contract will remain valid. In Romero, the Court observed that
"where the so-called 'potestative condition' is imposed not on the birth of the
obligation but on its fulfillment, only the condition is avoided, leaving unaffected
the obligation itself."[71]
It cannot be gainsaid that "contracts have the force of law between the
contracting parties and should be complied with in good faith.'" We have also
previously ruled that "[b]eing the primary law between the parties, the contract
governs the adjudication of their rights and obligations. A court has no
alternative but to enforce the contractual stipulations in the manner they have
been agreed upon and written.'" We find no merit in petitioners' contention that
their parents were merely "duped" into accepting the questioned provisions in
the Conditional Deed of Sale. We note that although the contract was between
Agapita Catungal and Rodriguez, Jose Catungal nonetheless signed thereon
to signify his marital consent to the same. We concur with the trial court's
finding that the spouses Catungals' claim of being misled into signing the
contract was contrary to human experience and conventional wisdom since it
was Jose Catungal who was a practicing lawyer while Rodriquez was a non-
lawyer.[74] It can be reasonably presumed that Atty. Catungal and his wife
reviewed the provisions of the contract, understood and accepted its provisions
before they affixed their signatures thereon.
After thorough review of the records of this case, we have come to the
conclusion that petitioners failed to demonstrate that the Court of Appeals
committed any reversible error in deciding the present controversy. However,
having made the observation that it was desirable for the Catungals to file a
separate action to fix the period for respondent Rodriguez's obligation to
negotiate a road right of way, the Court finds it necessary to fix said period in
these proceedings. It is but equitable for us to make a determination of the
issue here to obviate further delay and in line with the judicial policy of avoiding
multiplicity of suits.
If still warranted, Rodriguez is given a period of thirty (30) days from the finality
of this decision to negotiate a road right of way. In the event no road right of
way is secured by Rodriquez at the end of said period, the parties shall
reassess and discuss other options as stipulated in paragraph 1(b) of the
Conditional Deed of Sale and, for this purpose, they are given a period of thirty
(30) days to agree on a course of action. Should the discussions of the parties
prove futile after the said thirty (30)-day period, immediately upon the
expiration of said period for discussion, Rodriguez may (a) exercise his option
to rescind the contract, subject to the return of his downpayment, in
accordance with the provisions of paragraphs 1(b) and 5 of the Conditional
Deed of Sale or (b) waive the road right of way and pay the balance of the
deducted purchase price as determined in the RTC Decision dated May 30,
1992.
WHEREFORE, the Decision dated August 8, 2000 and the Resolution dated
January 30, 2001 of the Court of Appeals in CA-G.R. CV No. 40627
consolidated with CA-G.R. SP No. 27565 are AFFIRMED withthe
following MODIFICATION:
If still warranted, respondent Angel S. Rodriguez is given a period of thirty (30)
days from the finality of this Decision to negotiate a road right of way. In the
event no road right of way is secured by respondent at the end of said period,
the parties shall reassess and discuss other options as stipulated in paragraph
1(b) of the Conditional Deed of Sale and, for this purpose, they are given a
period of thirty (30) days to agree on a course of action. Should the
discussions of the parties prove futile after the said thirty (30)-day period,
immediately upon the expiration of said period for discussion, Rodriguez may
(a) exercise his option to rescind the contract, subject to the return of his
downpayment, in accordance with the provisions of paragraphs 1(b) and 5 of
the Conditional Deed of Sale or (b) waive the road right of way and pay the
balance of the deducted purchase price as determined in the RTC Decision
dated May 30, 1992.
No pronouncement as to costs.
SO ORDERED.
G.R. No. 117009 October 11, 1995 SECURITY BANK & TRUST COMPANY and
ROSITO C. MANHIT, petitioners, vs. COURT OF APPEALS and YSMAEL
C.FERRER, respondents.
PADILLA, J.: In this petition for review under Rule 45 of the Rules of Court, petitioners
seek a review and reversal of the decision * of respondent Court of Appeals in CA-G.R.
CV No. 40450, entitled "Ysmael C. Ferrer v. Security Bank and Trust Company, et. al."
dated 31 August 1994, which affirmed the decision ** of the Regional Trial Court, Branch
63, Makati in Civil Case No. 42712, a complaint for breach of contract with damages.
Private respondent Ysmael C. Ferrer was contracted by herein petitioners Security Bank
and Trust Company (SBTC) and Rosito C. Manhit to construct the building of SBTC in
Davao City for the price of P1,760,000.00. The contract dated 4 February 1980 provided
that Ferrer would finish the construction in two hundred (200) working days. Respondent
Ferrer was able to complete the construction of the building on 15 August 1980 (within
the contracted period) but he was compelled by a drastic increase in the cost of
construction materials to incur expenses of about P300,000.00 on top of the original cost.
The additional expenses were made known to petitioner SBTC thru its Vice-President
Fely Sebastian and Supervising Architect Rudy de la Rama as early as March 1980.
Respondent Ferrer made timely demands for payment of the increased cost. Said
demands were supported by receipts, invoices, payrolls and other documents proving the
additional expenses.
In March 1981, SBTC thru Assistant Vice-President Susan Guanio and a representative
of an architectural firm consulted by SBTC, verified Ferrer's claims for additional cost. A
recommendation was then made to settle Ferrer's claim but only for P200,000.00. SBTC,
instead of paying the recommended additional amount, denied ever authorizing payment
of any amount beyond the original contract price. SBTC likewise denied any liability for
the additional cost based on Article IX of the building contract which states:
If at any time prior to the completion of the work to be performed hereunder,
increase in prices of construction materials and/or labor shall supervene
through no fault on the part of the contractor whatsoever or any act of the
government and its instrumentalities which directly or indirectly affects the
increase of the cost of the project, OWNER shall equitably make the
appropriate adjustment on mutual agreement of both parties.
Ysmael C. Ferrer then filed a complaint for breach of contract with damages. The trial
court ruled for Ferrer and ordered defendants SBTC and Rosito C. Manhit to pay:
a) P259,417.23 for the increase in price of labor and materials plus 12%
interest thereon per annumfrom 15 August 1980 until fully paid;
b) P24,000.00 as actual damages;
c) P20,000.00 as moral damages;
d) P20,000.00 as exemplary damages;
e) attorney's fees equivalent to 25% of the principal amount due; and
f) costs of suit.
On appeal, the Court of Appeals affirmed the trial court decision.
In the present petition for review, petitioners assign the following errors to the appellate
court:
. . . IN HOLDING THAT PLAINTIFF-APPELLEE HAS, BY
PREPONDERANCE OF EVIDENCE SUFFICIENTLY PROVEN HIS CLAIM
AGAINST THE DEFENDANTS-APPELLANTS.
. . . IN INTERPRETING AN OTHERWISE CLEAR AND UNAMBIGUOUS
PROVISION OF THE CONSTRUCTION CONTRACT.
. . . IN DISREGARDING THE EXPRESS PROVISION OF THE
CONSTRUCTION CONTRACT, THE LOWER COURT VIOLATED
DEFENDANTS-APPELLANTS' CONSTITUTIONAL GUARANTY OF NON
IMPAIRMENT OF THE OBLIGATION OF CONTRACT.1
Petitioners argue that under the aforequoted Article IX of the building contract, any
increase in the price of labor and/or materials resulting in an increase in construction cost
above the stipulated contract price will not automatically make petitioners liable to pay for
such increased cost, as any payment above the stipulated contract price has been made
subject to the condition that the "appropriate adjustment" will be made "upon mutual
agreement of both parties". It is contended that since there was no mutual agreement
between the parties, petitioners' obligation to pay amounts above the original contract
price never materialized.
Respondent Ysmael C. Ferrer, through counsel, on the other hand, opposed the
arguments raised by petitioners. It is of note however that the pleadings filed with this
Court by counsel for Ferrer hardly refute the arguments raised by petitioners, as the
contents of said pleadings are mostly quoted portions of the decision of the Court of
Appeals, devoid of adequate discussion of the merits of respondent's case. The Court, to
be sure, expects more diligence and legal know-how from lawyers than what has been
exhibited by counsel for respondent in the present case. Under these circumstances, the
Court had to review the entire records of this case to evaluate the merits of the issues
raised by the contending parties.
Article 22 of the Civil Code which embodies the maxim, Nemo ex alterius incommodo
debet lecupletari (no man ought to be made rich out of another's injury) states:
Art. 22. Every person who through an act of performance by another, or any
other means, acquires or comes into possession of something at the
expense of the latter without just or legal ground, shall return the same to
him.
The above-quoted article is part of the chapter of the Civil Code on Human Relations, the
provisions of which were formulated as "basic principles to be observed for the rightful
relationship between human beings and for the stability of the social order, . . . designed
to indicate certain norms that spring from the fountain of good conscience, . . . guides for
human conduct [that] should run as golden threads through society to the end that law
may approach its supreme ideal which is the sway and dominance of justice." 2
In the present case, petitioners' arguments to support absence of liability for the cost of
construction beyond the original contract price are not persuasive.
Under the previously quoted Article IX of the construction contract, petitioners would
make the appropriate adjustment to the contract price in case the cost of the project
increases through no fault of the contractor (private respondent). Private respondent
informed petitioners of the drastic increase in construction cost as early as March 1980.
Petitioners in turn had the increased cost evaluated and audited. When private
respondent demanded payment of P259,417.23, petitioner bank's Vice-President Rosito
C. Manhit and the bank's architectural consultant were directed by the bank to verify and
compute private respondent's claims of increased cost. A recommendation was then
made to settle private respondent's claim for P200,000.00. Despite this recommendation
and several demands from private respondent, SBTC failed to make payment. It denied
authorizing anyone to make a settlement of private respondent's claim and likewise
denied any liability, contending that the absence of a mutual agreement made private
respondent's demand premature and baseless.
Petitioners' arguments are specious.
It is not denied that private respondent incurred additional expenses in constructing
petitioner bank's building due to a drastic and unexpected increase in construction cost.
In fact, petitioner bank admitted liability for increased cost when a recommendation was
made to settle private respondent's claim for P200,000.00. Private respondent's claim for
the increased amount was adequately proven during the trial by receipts, invoices and
other supporting documents.
Under Article 1182 of the Civil Code, a conditional obligation shall be void if its fulfillment
depends upon the sole will of the debtor. In the present case, the mutual agreement, the
absence of which petitioner bank relies upon to support its non-liability for the increased
construction cost, is in effect a condition dependent on petitioner bank's sole will, since
private respondent would naturally and logically give consent to such an agreement
which would allow him recovery of the increased cost.
Further, it cannot be denied that petitioner bank derived benefits when private respondent
completed the construction even at an increased cost.
Hence, to allow petitioner bank to acquire the constructed building at a price far below its
actual construction cost would undoubtedly constitute unjust enrichment for the bank to
the prejudice of private respondent. Such unjust enrichment, as previously discussed, is
not allowed by law.
Finally, with respect to the award of attorney's fees to respondent, the Court has
previously held that, "even with the presence of an agreement between the parties, the
court may nevertheless reduce attorney's fees though fixed in the contract when the
amount thereof appears to be unconscionable or unreasonable." 3 As previously noted,
the diligence and legal know-how exhibited by counsel for private respondent hardly
justify an award of 25% of the principal amount due, which would be at least P60,000.00.
Besides, the issues in this case are far from complex and intricate. The award of
attorney's fees is thus reduced to P10,000.00.
WHEREFORE, with the above modification in respect of the amount of attorney's fees,
the appealed decision of the Court of Appeals in CA G.R. CV No. 40450 is AFFIRMED.
SO ORDERED.
G.R. No. L-16109 October 2, 1922 - M. D. TAYLOR, plaintiff-appellant, vs. UY TIENG PIAO
and TAN LIUAN, doing business under the firm name and style of Tan Liuan &
Company,defendants. Uy TIENG PIAO, defendant-appellant.
Cohn, Fisher and DeWitt and William C. Brady for plaintiff-appellant.
Gabriel La O for defendant-appellant Uy Tieng Piao.
Crossfield and O'Brien for Tan Liuan and Tan Liyan and Co.
STREET, J.: This case comes by appeal from the Court of First Instance of the city of Manila, in
a case where the court awarded to the plaintiff the sum of P300, as damages for breach of
contract. The plaintiff appeals on the ground that the amount of damages awarded is
inadequate; while the defendant Uy Tieng Piao appeals on the ground that he is not liable at all.
The judgment having been heretofore affirmed by us in a brief opinion, we now avail ourselves
of the occasion of the filing of a motion to rehear by the attorneys for the plaintiff to modify the
judgment in a slight measure and to state more fully the reasons underlying our decision.
It appears that on December 12, 1918, the plaintiff contracted his services to Tan Liuan and
Co., as superintendent of an oil factory which the latter contemplated establishing in this city.
The period of the contract extended over two years from the date mentioned; and the salary
was to be at the rate of P600 per month during the first year and P700 per month during the
second, with electric light and water for domestic consumption, and a residence to live in, or in
lieu thereof P60 per month.
At the time this agreement was made the machinery for the contemplated factory had not been
acquired, though ten expellers had been ordered from the United States; and among the
stipulations inserted in the contract with the plaintiff was a provision to the following effect:
It is understood and agreed that should the machinery to be installed in the said
factory fail, for any reason, to arrive in the city of Manila within a period of six
months from date hereof, this contract may be cancelled by the party of the
second part at its option, such cancellation, however, not to occur before the
expiration of such six months.
The machinery above referred to did not arrive in the city of Manila within the six months
succeeding the making of the contract; nor was other equipment necessary for the
establishment of the factory at any time provided by the defendants. The reason for this does
not appear with certainty, but a preponderance of the evidence is to the effect that the
defendants, in the first months of 1919, seeing that the oil business no longer promised large
returns, either cancelled the order for the machinery from choice or were unable to supply the
capital necessary to finance the project. At any rate on June 28, 1919, availing themselves in
part of the option given in the clause above quoted, the defendants communicated in writing to
the plaintiff the fact that they had decided to rescind the contract, effective June 30th then
current, upon which date he was discharged. The plaintiff thereupon instituted this action to
recover damages in the amount of P13,000, covering salary and perquisites due and to become
due under the contract.
The case for the plaintiff proceeds on the idea that the stipulation above quoted, giving to the
defendants the right to cancel the contract upon the contingency of the nonarrival of the
machinery in Manila within six months, must be understood as applicable only in those cases
where such nonarrival is due to causes not having their origin in the will or act of the
defendants, as delays caused by strikes or unfavorable conditions of transporting by land or
sea; and it is urged that the right to cancel cannot be admitted unless the defendants
affirmatively show that the failure of the machinery to arrive was due to causes of that character,
and that it did not have its origin in their own act or volition. In this connection the plaintiff relies
on article 1256 of the Civil Code, which is to the effect that the validity and fulfillment of
contracts cannot be left to the will of one of the contracting parties, and to article 1119, which
says that a condition shall be deemed fulfilled if the obligor intentially impedes its fulfillment.
It will be noted that the language conferring the right of cancellation upon the defendants is
broad enough to cover any case of the nonarrival of the machinery, due to whatever cause; and
the stress in the expression "for any reason" should evidently fall upon the word "any." It must
follow of necessity that the defendants had the right to cancel the contract in the contingency
that occurred, unless some clear and sufficient reason can be adduced for limiting the operation
of the words conferring the right of cancellation. Upon this point it is our opinion that the
language used in the stipulation should be given effect in its ordinary sense, without technicality
or circumvention; and in this sense it is believed that the parties to the contract must have
understood it.
Article 1256 of the Civil Code in our opinion creates no impediment to the insertion in a contract
for personal service of a resolutory condition permitting the cancellation of the contract by one
of the parties. Such a stipulation, as can be readily seen, does not make either the validity or
the fulfillment of the contract dependent upon the will of the party to whom is conceded the
privilege of cancellation; for where the contracting parties have agreed that such option shall
exist, the exercise of the option is as much in the fulfillment of the contract as any other act
which may have been the subject of agreement. Indeed, the cancellation of a contract in
accordance with conditions agreed upon beforehands is fulfillment.
In this connection, we note that the commentator Manresa has the following observation with
respect to article 1256 of the Civil Code. Says he: "It is entirely licit to leave fulfillment to the will
of either of the parties in the negative form of rescission, a case frequent in certain contracts
(the letting of service for hire, the supplying of electrical energy, etc.), for in such supposed case
neither is the article infringed, nor is there any lack of equality between the persons contracting,
since they remain with the same faculties in respect to fulfillment." (Manresa, 2d ed., vol. 8, p.
610.) 1awph!l.net
Undoubtedly one of the consequences of this stipulation was that the employers were left in a
position where they could dominate the contingency, and the result was about the same as if
they had been given an unqualified option to dispense with the services of the plaintiff at the
end of six months. But this circumstance does not make the stipulation illegal.
The case of Hall vs. Hardaker (61 Fla., 267) cited by the appellant Taylor, though superficially
somewhat analogous, is not precisely in point. In that case one Hardaker had contracted to
render competent and efficient service as manager of a corporation, to which position it was
understood he was to be appointed. In the same contract it was stipulated that if "for any
reason" Hardaker should not be given that position, or if he should not be permitted to act in
that capacity for a stated period, certain things would be done by Hall. Upon being installed in
the position aforesaid, Hardaker failed to render efficient service and was discharged. It was
held that Hall was released from the obligation to do the things that he had agreed to perform.
Some of the judges appear to have thought that the case turned on the meaning of the phrase
"for any reason," and the familiar maxim was cited that no man shall take advantage of his own
wrong. The result of the case must have been the same from whatever point of view, as there
was an admitted failure on the part of Hardaker to render competent service. In the present
case there was no breach of contract by the defendants; and the argument to the contrary
apparently suffers from the logical defect of assuming the very point at issue.
But it will be said that the question is not so much one concerning the legality of the clause
referred to as one concerning the interpretation of the resolutory clause as written, the idea
being that the court should adjust its interpretation of said clause to the supposed precepts of
article 1256, by restricting its operation exclusively to cases where the nonarrival of the
machinery may be due to extraneous causes not referable to the will or act of the defendants.
But even when the question is viewed in this aspect their result is the same, because the
argument for the restrictive interpretation evidently proceeds on the assumption that the clause
in question is illegal in so far as it purports to concede to the defendants the broad right to
cancel the contract upon nonarrival of the machinery due to any cause; and the debate returns
again to the point whether in a contract for the prestation of service it is lawful for the parties to
insert a provision giving to the employer the power to cancel the contract in a contingency which
may be dominated by himself. Upon this point what has already been said must suffice.
As we view the case, there is nothing in article 1256 which makes it necessary for us to warp
the language used by the parties from its natural meaning and thereby in legal effect to restrict
the words "for any reason," as used in the contract, to mean "for any reason not having its origin
in the will or acts of the defendants." To impose this interpretation upon those words would in
our opinion constitute an unjustifiable invasion of the power of the parties to establish the terms
which they deem advisable, a right which is expressed in article 1255 of the Civil Code and
constitutes one of the most fundamental conceptions of contract right enshrined in the Code.
The view already expressed with regard to the legality and interpretation of the clause under
consideration disposes in a great measure of the argument of the appellant in so far as the
same is based on article 1119 of the Civil Code. This provision supposes a case where the
obligor intentionally impedes the fulfillment of a condition which would entitle the obligee to
exact performance from the obligor; and an assumption underlying the provision is that the
obligor prevents the obligee from performing some act which the obligee is entitled to perform
as a condition precedent to the exaction of what is due to him. Such an act must be considered
unwarranted and unlawful, involving per se a breach of the implied terms of the contract. The
article can have no application to an external contingency which, like that involved in this case,
is lawfully within the control of the obligor.
In Spanish jurisprudence a condition like that here under discussion is designated by Manresa a
facultative condition (vol. 8, p. 611), and we gather from his comment on articles 1115 and 1119
of the Civil Code that a condition, facultative as to the debtor, is obnoxious to the first sentence
contained in article 1115 and renders the whole obligation void (vol. 8, p. 131). That statement
is no doubt correct in the sense intended by the learned author, but it must be remembered that
he evidently has in mind the suspensive condition, such as is contemplated in article 1115. Said
article can have no application to the resolutory condition, the validity of which is recognized in
article 1113 of the Civil Code. In other words, a condition at once facultative and resolutory may
be valid even though the condition is made to depend upon the will of the obligor.
If it were apparent, or could be demonstrated, that the defendants were under a positive
obligation to cause the machinery to arrive in Manila, they would of course be liable, in the
absence of affirmative proof showing that the nonarrival of the machinery was due to some
cause not having its origin in their own act or will. The contract, however, expresses no such
positive obligation, and its existence cannot be implied in the fact of stipulation, defining the
conditions under which the defendants can cancel the contract.
Our conclusion is that the Court of First Instance committed no error in rejecting the plaintiff's
claim in so far as damages are sought for the period subsequent to the expiration of the first six
months, but in assessing the damages due for the six-month period, the trial judge evidently
overlooked the item of P60, specified in the plaintiff's fourth assignment of error, which
represents commutation of house rent for the month of June, 1919. This amount the plaintiff is
clearly entitled to recover, in addition to the P300 awarded in the court below.
We note that Uy Tieng Piao, who is sued as a partner with Tan Liuan, appealed from the
judgment holding him liable as a member of the firm of Tan Liuan and Co.; and it is insisted in
his behalf that he was not bound by the act of Tan Liuan as manager of Tan Liuan and Co. in
employing the plaintiff. Upon this we will merely say that the conclusion stated by the trial court
in the next to the last paragraph of the decision with respect to the liability of this appellant in
our opinion in conformity with the law and facts.
The judgment appealed from will be modified by declaring that the defendants shall pay to the
plaintiff the sum of P360, instead of P300, as allowed by the lower court, and as thus modified
the judgment will be affirmed with interest from November 4, 1919, as provided in section 510 of
the Code of Civil Procedure, and with costs. So ordered.
Araullo, C.J., Johnson, Malcolm, Avanceña, Villamor, Ostrand, Johns and Romualdez, JJ.,
concur.
G.R. No. 107112 February 24, 1994 NAGA TELEPHONE CO., INC.
(NATELCO) AND LUCIANO M. MAGGAY, petitioners, vs. THE COURT OF
APPEALS AND CAMARINES SUR II ELECTRIC COOPERATIVE, INC.
(CASURECO II), respondents.
NOCON, J.: The case of Reyes v. Caltex (Philippines), Inc.1 enunciated the
doctrine that where a person by his contract charges himself with an obligation
possible to be performed, he must perform it, unless its performance is
rendered impossible by the act of God, by the law, or by the other party, it
being the rule that in case the party desires to be excused from performance in
the event of contingencies arising thereto, it is his duty to provide the basis
therefor in his contract.
With the enactment of the New Civil Code, a new provision was included
therein, namely, Article 1267 which provides:
When the service has become so difficult as to be manifestly
beyond the contemplation of the parties, the obligor may also be
released therefrom, in whole or in part.
In the report of the Code Commission, the rationale behind this innovation was
explained, thus:
The general rule is that impossibility of performance releases the
obligor. However, it is submitted that when the service has become
so difficult as to be manifestly beyond the contemplation of the
parties, the court should be authorized to release the obligor in
whole or in part. The intention of the parties should govern and if it
appears that the service turns out to be so difficult as to have been
beyond their contemplation, it would be doing violence to that
intention to hold their contemplation, it would be doing violence to
that intention to hold the obligor still responsible.2
In other words, fair and square consideration underscores the legal precept
therein.
Naga Telephone Co., Inc. remonstrates mainly against the application by the
Court of Appeals of Article 1267 in favor of Camarines Sur II Electric
Cooperative, Inc. in the case before us. Stated differently, the former insists
that the complaint should have been dismissed for failure to state a cause of
action.
The antecedent facts, as narrated by respondent Court of Appeals are, as
follows:
Petitioner Naga Telephone Co., Inc. (NATELCO) is a telephone company
rendering local as well as long distance telephone service in Naga City while
private respondent Camarines Sur II Electric Cooperative, Inc. (CASURECO II)
is a private corporation established for the purpose of operating an electric
power service in the same city.
On November 1, 1977, the parties entered into a contract (Exh. "A") for the use
by petitioners in the operation of its telephone service the electric light posts of
private respondent in Naga City. In consideration therefor, petitioners agreed
to install, free of charge, ten (10) telephone connections for the use by private
respondent in the following places:
(a) 3 units — The Main Office of (private respondent);
(b) 2 Units — The Warehouse of (private respondent);
(c) 1 Unit — The Sub-Station of (private respondent) at
Concepcion Pequeña;
(d) 1 Unit — The Residence of (private respondent's) President;
(e) 1 Unit — The Residence of (private respondent's) Acting
General Manager; &
(f) 2 Units — To be determined by the General Manager.3
Said contract also provided:
(a) That the term or period of this contract shall be as long as the
party of the first part has need for the electric light posts of the
party of the second part it being understood that this contract shall
terminate when for any reason whatsoever, the party of the second
part is forced to stop, abandoned [sic] its operation as a public
service and it becomes necessary to remove the electric lightpost;
(sic)4
It was prepared by or with the assistance of the other petitioner, Atty. Luciano
M. Maggay, then a member of the Board of Directors of private respondent and
at the same time the legal counsel of petitioner.
After the contract had been enforced for over ten (10) years, private
respondent filed on January 2, 1989 with the Regional Trial Court of Naga City
(Br. 28) C.C. No. 89-1642 against petitioners for reformation of the contract
with damages, on the ground that it is too one-sided in favor of petitioners; that
it is not in conformity with the guidelines of the National Electrification
Administration (NEA) which direct that the reasonable compensation for the
use of the posts is P10.00 per post, per month; that after eleven (11) years of
petitioners' use of the posts, the telephone cables strung by them thereon have
become much heavier with the increase in the volume of their subscribers,
worsened by the fact that their linemen bore holes through the posts at which
points those posts were broken during typhoons; that a post now costs as
much as P2,630.00; so that justice and equity demand that the contract be
reformed to abolish the inequities thereon.
As second cause of action, private respondent alleged that starting with the
year 1981, petitioners have used 319 posts in the towns of Pili, Canaman,
Magarao and Milaor, Camarines Sur, all outside Naga City, without any
contract with it; that at the rate of P10.00 per post, petitioners should pay
private respondent for the use thereof the total amount of P267,960.00 from
1981 up to the filing of its complaint; and that petitioners had refused to pay
private respondent said amount despite demands.
And as third cause of action, private respondent complained about the poor
servicing by petitioners of the ten (10) telephone units which had caused it
great inconvenience and damages to the tune of not less than P100,000.00
In petitioners' answer to the first cause of action, they averred that it should be
dismissed because (1) it does not sufficiently state a cause of action for
reformation of contract; (2) it is barred by prescription, the same having been
filed more than ten (10) years after the execution of the contract; and (3) it is
barred by estoppel, since private respondent seeks to enforce the contract in
the same action. Petitioners further alleged that their utilization of private
respondent's posts could not have caused their deterioration because they
have already been in use for eleven (11) years; and that the value of their
expenses for the ten (10) telephone lines long enjoyed by private respondent
free of charge are far in excess of the amounts claimed by the latter for the use
of the posts, so that if there was any inequity, it was suffered by them.
Regarding the second cause of action, petitioners claimed that private
respondent had asked for telephone lines in areas outside Naga City for which
its posts were used by them; and that if petitioners had refused to comply with
private respondent's demands for payment for the use of the posts outside
Naga City, it was probably because what is due to them from private
respondent is more than its claim against them.
And with respect to the third cause of action, petitioners claimed, inter alia, that
their telephone service had been categorized by the National
Telecommunication Corporation (NTC) as "very high" and of "superior quality."
During the trial, private respondent presented the following witnesses:
(1) Dioscoro Ragragio, one of the two officials who signed the contract in its
behalf, declared that it was petitioner Maggay who prepared the contract; that
the understanding between private respondent and petitioners was that the
latter would only use the posts in Naga City because at that time, petitioners'
capability was very limited and they had no expectation of expansion because
of legal squabbles within the company; that private respondent agreed to allow
petitioners to use its posts in Naga City because there were many subscribers
therein who could not be served by them because of lack of facilities; and that
while the telephone lines strung to the posts were very light in 1977, said posts
have become heavily loaded in 1989.
(2) Engr. Antonio Borja, Chief of private respondent's Line Operation and
Maintenance Department, declared that the posts being used by petitioners
totalled 1,403 as of April 17, 1989, 192 of which were in the towns of Pili,
Canaman, and Magarao, all outside Naga City (Exhs. "B" and "B-1"); that
petitioners' cables strung to the posts in 1989 are much bigger than those in
November, 1977; that in 1987, almost 100 posts were destroyed by typhoon
Sisang: around 20 posts were located between Naga City and the town of Pili
while the posts in barangay Concepcion, Naga City were broken at the middle
which had been bored by petitioner's linemen to enable them to string bigger
telephone lines; that while the cost per post in 1977 was only from P700.00 to
P1,000.00, their costs in 1989 went up from P1,500.00 to P2,000.00,
depending on the size; that some lines that were strung to the posts did not
follow the minimum vertical clearance required by the National Building Code,
so that there were cases in 1988 where, because of the low clearance of the
cables, passing trucks would accidentally touch said cables causing the posts
to fall and resulting in brown-outs until the electric lines were repaired.
(3) Dario Bernardez, Project Supervisor and Acting General Manager of private
respondent and Manager of Region V of NEA, declared that according to NEA
guidelines in 1985 (Exh. "C"), for the use by private telephone systems of
electric cooperatives' posts, they should pay a minimum monthly rental of
P4.00 per post, and considering the escalation of prices since 1985, electric
cooperatives have been charging from P10.00 to P15.00 per post, which is
what petitioners should pay for the use of the posts.
(4) Engineer Antonio Macandog, Department Head of the Office of Services of
private respondent, testified on the poor service rendered by petitioner's
telephone lines, like the telephone in their Complaints Section which was
usually out of order such that they could not respond to the calls of their
customers. In case of disruption of their telephone lines, it would take two to
three hours for petitioners to reactivate them notwithstanding their calls on the
emergency line.
(5) Finally, Atty. Luis General, Jr., private respondent's counsel, testified that
the Board of Directors asked him to study the contract sometime during the
latter part of 1982 or in 1983, as it had appeared very disadvantageous to
private respondent. Notwithstanding his recommendation for the filing of a
court action to reform the contract, the former general managers of private
respondent wanted to adopt a soft approach with petitioners about the matter
until the term of General Manager Henry Pascual who, after failing to settle the
matter amicably with petitioners, finally agreed for him to file the present action
for reformation of contract.
On the other hand, petitioner Maggay testified to the following effect:
(1) It is true that he was a member of the Board of Directors of private
respondent and at the same time the lawyer of petitioner when the contract
was executed, but Atty. Gaudioso Tena, who was also a member of the Board
of Directors of private respondent, was the one who saw to it that the contract
was fair to both parties.
(2) With regard to the first cause of action:
(a) Private respondent has the right under the contract to use ten (10)
telephone units of petitioners for as long as it wishes without paying anything
therefor except for long distance calls through PLDT out of which the latter get
only 10% of the charges.
(b) In most cases, only drop wires and not telephone cables have been strung
to the posts, which posts have remained erect up to the present;
(c) Petitioner's linemen have strung only small messenger wires to many of the
posts and they need only small holes to pass through; and
(d) Documents existing in the NTC show that the stringing of petitioners' cables
in Naga City are according to standard and comparable to those of PLDT. The
accidents mentioned by private respondent involved trucks that were either
overloaded or had loads that protruded upwards, causing them to hit the
cables.
(3) Concerning the second cause of action, the intention of the parties when
they entered into the contract was that the coverage thereof would include the
whole area serviced by petitioners because at that time, they already had
subscribers outside Naga City. Private respondent, in fact, had asked for
telephone connections outside Naga City for its officers and employees
residing there in addition to the ten (10) telephone units mentioned in the
contract. Petitioners have not been charging private respondent for the
installation, transfers and re-connections of said telephones so that naturally,
they use the posts for those telephone lines.
(4) With respect to the third cause of action, the NTC has found petitioners'
cable installations to be in accordance with engineering standards and practice
and comparable to the best in the country.
On the basis of the foregoing countervailing evidence of the parties, the trial
court found, as regards private respondent's first cause of action, that while the
contract appeared to be fair to both parties when it was entered into by them
during the first year of private respondent's operation and when its Board of
Directors did not yet have any experience in that business, it had become
disadvantageous and unfair to private respondent because of subsequent
events and conditions, particularly the increase in the volume of the
subscribers of petitioners for more than ten (10) years without the
corresponding increase in the number of telephone connections to private
respondent free of charge. The trial court concluded that while in an action for
reformation of contract, it cannot make another contract for the parties, it can,
however, for reasons of justice and equity, order that the contract be reformed
to abolish the inequities therein. Thus, said court ruled that the contract should
be reformed by ordering petitioners to pay private respondent compensation
for the use of their posts in Naga City, while private respondent should also be
ordered to pay the monthly bills for the use of the telephones also in Naga City.
And taking into consideration the guidelines of the NEA on the rental of posts
by telephone companies and the increase in the costs of such posts, the trial
court opined that a monthly rental of P10.00 for each post of private
respondent used by petitioners is reasonable, which rental it should pay from
the filing of the complaint in this case on January 2, 1989. And in like manner,
private respondent should pay petitioners from the same date its monthly bills
for the use and transfers of its telephones in Naga City at the same rate that
the public are paying.
On private respondent's second cause of action, the trial court found that the
contract does not mention anything about the use by petitioners of private
respondent's posts outside Naga City. Therefore, the trial court held that for
reason of equity, the contract should be reformed by including therein the
provision that for the use of private respondent's posts outside Naga City,
petitioners should pay a monthly rental of P10.00 per post, the payment to start
on the date this case was filed, or on January 2, 1989, and private respondent
should also pay petitioners the monthly dues on its telephone connections
located outside Naga City beginning January, 1989.
And with respect to private respondent's third cause of action, the trial court
found the claim not sufficiently proved.
Thus, the following decretal portion of the trial court's decision dated July 20,
1990:
WHEREFORE, in view of all the foregoing, decision is hereby
rendered ordering the reformation of the agreement (Exh. A);
ordering the defendants to pay plaintiff's electric poles in Naga City
and in the towns of Milaor, Canaman, Magarao and Pili, Camarines
Sur and in other places where defendant NATELCO uses plaintiff's
electric poles, the sum of TEN (P10.00) PESOS per plaintiff's pole,
per month beginning January, 1989 and ordering also the plaintiff
to pay defendant NATELCO the monthly dues of all its telephones
including those installed at the residence of its officers, namely;
Engr. Joventino Cruz, Engr. Antonio Borja, Engr. Antonio
Macandog, Mr. Jesus Opiana and Atty. Luis General, Jr. beginning
January, 1989. Plaintiff's claim for attorney's fees and expenses of
litigation and defendants' counterclaim are both hereby ordered
dismissed. Without pronouncement as to costs.
Disagreeing with the foregoing judgment, petitioners appealed to respondent
Court of Appeals. In the decision dated May 28, 1992, respondent court
affirmed the decision of the trial court,5 but based on different grounds to wit:
(1) that Article 1267 of the New Civil Code is applicable and (2) that the
contract was subject to a potestative condition which rendered said condition
void. The motion for reconsideration was denied in the resolution dated
September 10, 1992.6 Hence, the present petition.
Petitioners assign the following pertinent errors committed by respondent
court:
1) in making a contract for the parties by invoking Article 1267 of
the New Civil Code;
 2) in ruling that prescription of the action for reformation of the
contract in this case commenced from the time it became
disadvantageous to private respondent; and
3) in ruling that the contract was subject to a potestative condition
in favor of petitioners.
Petitioners assert earnestly that Article 1267 of the New Civil Code is not
applicable primarily because the contract does not involve the rendition of
service or a personal prestation and it is not for future service with future
unusual change. Instead, the ruling in the case of Occeña, et al. v. Jabson,
etc., et al.,7 which interpreted the article, should be followed in resolving this
case. Besides, said article was never raised by the parties in their pleadings
and was never the subject of trial and evidence.
In applying Article 1267, respondent court rationalized:
We agree with appellant that in order that an action for reformation
of contract would lie and may prosper, there must be sufficient
allegations as well as proof that the contract in question failed to
express the true intention of the parties due to error or mistake,
accident, or fraud. Indeed, in embodying the equitable remedy of
reformation of instruments in the New Civil Code, the Code
Commission gave its reasons as follows:
Equity dictates the reformation of an instrument in order
that the true intention of the contracting parties may be
expressed. The courts by the reformation do not
attempt to make a new contract for the parties, but to
make the instrument express their real agreement. The
rationale of the doctrine is that it would be unjust and
inequitable to allow the enforcement of a written
instrument which does not reflect or disclose the real
meeting of the minds of the parties. The rigor of the
legalistic rule that a written instrument should be the
final and inflexible criterion and measure of the rights
and obligations of the contracting parties is thus
tempered to forestall the effects of mistake, fraud,
inequitable conduct, or accident. (pp. 55-56, Report of
Code Commission)
Thus, Articles 1359, 1361, 1362, 1363 and 1364 of the New Civil
Code provide in essence that where through mistake or accident
on the part of either or both of the parties or mistake or fraud on the
part of the clerk or typist who prepared the instrument, the true
intention of the parties is not expressed therein, then the
instrument may be reformed at the instance of either party if there
was mutual mistake on their part, or by the injured party if only he
was mistaken.
Here, plaintiff-appellee did not allege in its complaint, nor does its
evidence prove, that there was a mistake on its part or mutual
mistake on the part of both parties when they entered into the
agreement Exh. "A", and that because of this mistake, said
agreement failed to express their true intention. Rather, plaintiff's
evidence shows that said agreement was prepared by Atty.
Luciano Maggay, then a member of plaintiff's Board of Directors
and its legal counsel at that time, who was also the legal counsel
for defendant-appellant, so that as legal counsel for both
companies and presumably with the interests of both companies in
mind when he prepared the aforesaid agreement, Atty. Maggay
must have considered the same fair and equitable to both sides,
and this was affirmed by the lower court when it found said contract
to have been fair to both parties at the time of its execution. In fact,
there were no complaints on the part of both sides at the time of
and after the execution of said contract, and according to 73-year
old Justino de Jesus, Vice President and General manager of
appellant at the time who signed the agreement Exh. "A" in its
behalf and who was one of the witnesses for the plaintiff (sic), both
parties complied with said contract "from the very beginning" (p. 5,
tsn, April 17, 1989).
That the aforesaid contract has become inequitous or unfavorable
or disadvantageous to the plaintiff with the expansion of the
business of appellant and the increase in the volume of its
subscribers in Naga City and environs through the years,
necessitating the stringing of more and bigger telephone cable
wires by appellant to plaintiff's electric posts without a
corresponding increase in the ten (10) telephone connections given
by appellant to plaintiff free of charge in the agreement Exh. "A" as
consideration for its use of the latter's electric posts in Naga City,
appear, however, undisputed from the totality of the evidence on
record and the lower court so found. And it was for this reason that
in the later (sic) part of 1982 or 1983 (or five or six years after the
subject agreement was entered into by the parties), plaintiff's Board
of Directors already asked Atty. Luis General who had become
their legal counsel in 1982, to study said agreement which they
believed had become disadvantageous to their company and to
make the proper recommendation, which study Atty. General did,
and thereafter, he already recommended to the Board the filing of a
court action to reform said contract, but no action was taken on
Atty. General's recommendation because the former general
managers of plaintiff wanted to adopt a soft approach in discussing
the matter with appellant, until, during the term of General Manager
Henry Pascual, the latter, after failing to settle the problem with
Atty. Luciano Maggay who had become the president and general
manager of appellant, already agreed for Atty. General's filing of
the present action. The fact that said contract has become
inequitous or disadvantageous to plaintiff as the years went by did
not, however, give plaintiff a cause of action for reformation of said
contract, for the reasons already pointed out earlier. But this does
not mean that plaintiff is completely without a remedy, for we
believe that the allegations of its complaint herein and the evidence
it has presented sufficiently make out a cause of action under Art.
1267 of the New Civil Code for its release from the agreement in
question.
xxx xxx xxx
The understanding of the parties when they entered into the
Agreement Exh. "A" on November 1, 1977 and the prevailing
circumstances and conditions at the time, were described by
Dioscoro Ragragio, the President of plaintiff in 1977 and one of its
two officials who signed said agreement in its behalf, as follows:
Our understanding at that time is that we will allow
NATELCO to utilize the posts of CASURECO II only in
the City of Naga because at that time the capability of
NATELCO was very limited, as a matter of fact we do
[sic] not expect to be able to expand because of the
legal squabbles going on in the NATELCO. So, even at
that time there were so many subscribers in Naga City
that cannot be served by the NATELCO, so as a mater
of public service we allowed them to sue (sic) our posts
within the Naga City. (p. 8, tsn April 3, 1989)
Ragragio also declared that while the telephone wires strung to the
electric posts of plaintiff were very light and that very few telephone
lines were attached to the posts of CASURECO II in 1977, said
posts have become "heavily loaded" in 1989 (tsn, id.).
In truth, as also correctly found by the lower court, despite the
increase in the volume of appellant's subscribers and the
corresponding increase in the telephone cables and wires strung
by it to plaintiff's electric posts in Naga City for the more 10 years
that the agreement Exh. "A" of the parties has been in effect, there
has been no corresponding increase in the ten (10) telephone units
connected by appellant free of charge to plaintiff's offices and other
places chosen by plaintiff's general manager which was the only
consideration provided for in said agreement for appellant's use of
plaintiffs electric posts. Not only that, appellant even started using
plaintiff's electric posts outside Naga City although this was not
provided for in the agreement Exh. "A" as it extended and
expanded its telephone services to towns outside said city. Hence,
while very few of plaintiff's electric posts were being used by
appellant in 1977 and they were all in the City of Naga, the number
of plaintiff's electric posts that appellant was using in 1989 had
jumped to 1,403,192 of which are outside Naga City (Exh. "B").
Add to this the destruction of some of plaintiff's poles during
typhoons like the strong typhoon Sisang in 1987 because of the
heavy telephone cables attached thereto, and the escalation of the
costs of electric poles from 1977 to 1989, and the conclusion is
indeed ineluctable that the agreement Exh. "A" has already
become too one-sided in favor of appellant to the great
 disadvantage of plaintiff, in short, the continued enforcement of
said contract has manifestly gone far beyond the contemplation of
plaintiff, so much so that it should now be released therefrom under
Art. 1267 of the New Civil Code to avoid appellant's unjust
enrichment at its (plaintiff's) expense. As stated by Tolentino in his
commentaries on the Civil Code citing foreign civilist
Ruggiero, "equity demands a certain economic equilibrium
between the prestation and the counter-prestation, and does not
permit the unlimited impoverishment of one party for the benefit of
the other by the excessive rigidity of the principle of the obligatory
force of contracts (IV Tolentino, Civil Code of the Philippines, 1986
ed.,
pp. 247-248).
We therefore, find nothing wrong with the ruling of the trial court,
although based on a different and wrong premise (i.e., reformation
of contract), that from the date of the filing of this case, appellant
must pay for the use of plaintiff's electric posts in Naga City at the
reasonable monthly rental of P10.00 per post, while plaintiff should
pay appellant for the telephones in the same City that it was
formerly using free of charge under the terms of the agreement
Exh. "A" at the same rate being paid by the general public. In
affirming said ruling, we are not making a new contract for the
parties herein, but we find it necessary to do so in order not to
disrupt the basic and essential services being rendered by both
parties herein to the public and to avoid unjust enrichment by
appellant at the expense of plaintiff, said arrangement to continue
only until such time as said parties can re-negotiate another
agreement over the same
subject-matter covered by the agreement Exh. "A". Once said
agreement is reached and executed by the parties, the aforesaid
ruling of the lower court and affirmed by us shall cease to exist and
shall be substituted and superseded by their new agreement. . . ..8
Article 1267 speaks of "service" which has become so difficult. Taking into
consideration the rationale behind this provision,9 the term "service" should be
understood as referring to the "performance" of the obligation. In the present
case, the obligation of private respondent consists in allowing petitioners to
use its posts in Naga City, which is the service contemplated in said article.
Furthermore, a bare reading of this article reveals that it is not a requirement
thereunder that the contract be for future service with future unusual change.
According to Senator Arturo M. Tolentino,10 Article 1267 states in our law the
doctrine of unforseen events. This is said to be based on the discredited theory
of rebus sic stantibus in public international law; under this theory, the parties
stipulate in the light of certain prevailing conditions, and once these conditions
cease to exist the contract also ceases to exist. Considering practical needs
and the demands of equity and good faith, the disappearance of the basis of a
contract gives rise to a right to relief in favor of the party prejudiced.
In a nutshell, private respondent in the Occeña case filed a complaint against
petitioner before the trial court praying for modification of the terms and
conditions of the contract that they entered into by fixing the proper shares that
should pertain to them out of the gross proceeds from the sales of subdivided
lots. We ordered the dismissal of the complaint therein for failure to state a
sufficient cause of action. We rationalized that the Court of Appeals misapplied
Article 1267 because:
. . . respondent's complaint seeks not release from the subdivision
contract but that the court "render judgment modifying the terms
and conditions of the contract . . . by fixing the proper shares that
should pertain to the herein parties out of the gross proceeds from
the sales of subdivided lots of subject subdivision". The cited article
(Article 1267) does not grant the courts (the) authority to remake,
modify or revise the contract or to fix the division of shares
between the parties as contractually stipulated with the force of law
between the parties, so as to substitute its own terms for those
covenanted by the parties themselves. Respondent's complaint for
modification of contract manifestly has no basis in law and
therefore states no cause of action. Under the particular allegations
of respondent's complaint and the circumstances therein averred,
the courts cannot even in equity grant the relief sought.11
The ruling in the Occeña case is not applicable because we agree with
respondent court that the allegations in private respondent's complaint and the
evidence it has presented sufficiently made out a cause of action under Article
1267. We, therefore, release the parties from their correlative obligations under
the contract. However, our disposition of the present controversy does not end
here. We have to take into account the possible consequences of merely
releasing the parties therefrom: petitioners will remove the telephone
wires/cables in the posts of private respondent, resulting in disruption of their
service to the public; while private respondent, in consonance with the
contract12 will return all the telephone units to petitioners, causing prejudice to
its business. We shall not allow such eventuality. Rather, we require, as
ordered by the trial court: 1) petitioners to pay private respondent for the use of
its posts in Naga City and in the towns of Milaor, Canaman, Magarao and Pili,
Camarines Sur and in other places where petitioners use private respondent's
posts, the sum of ten (P10.00) pesos per post, per month, beginning January,
1989; and 2) private respondent to pay petitioner the monthly dues of all its
telephones at the same rate being paid by the public beginning January, 1989.
The peculiar circumstances of the present case, as distinguished further from
the Occeña case, necessitates exercise of our equity jurisdiction.13 By way of
emphasis, we reiterate the rationalization of respondent court that:
. . . In affirming said ruling, we are not making a new contract for
the parties herein, but we find it necessary to do so in order not to
disrupt the basic and essential services being rendered by both
parties herein to the public and to avoid unjust enrichment by
appellant at the expense of plaintiff . . . .14
Petitioners' assertion that Article 1267 was never raised by the parties in their
pleadings and was never the subject of trial and evidence has been passed
upon by respondent court in its well reasoned resolution, which we hereunder
quote as our own:
First, we do not agree with defendant-appellant that in applying Art.
1267 of the New Civil Code to this case, we have changed its
theory and decided the same on an issue not invoked by plaintiff in
the lower court. For basically, the main and pivotal issue in this
case is whether the continued enforcement of the contract Exh. "A"
between the parties has, through the years (since 1977), become
too inequitous or disadvantageous to the plaintiff and too one-sided
in favor of defendant-appellant, so that a solution must be found to
relieve plaintiff from the continued operation of said agreement and
to prevent defendant-appellant from further unjustly enriching itself
at plaintiff's expense. It is indeed unfortunate that defendant had
turned deaf ears to plaintiffs requests for renegotiation,
constraining the latter to go to court. But although plaintiff cannot,
as we have held, correctly invoke reformation of contract as a
proper remedy (there having been no showing of a mistake or error
in said contract on the part of any of the parties so as to result in its
failure to express their true intent), this does not mean that plaintiff
is absolutely without a remedy in order to relieve itself from a
contract that has gone far beyond its contemplation and has
become so highly inequitous and disadvantageous to it through the
years because of the expansion of defendant-appellant's business
and the increase in the volume of its subscribers. And as it is the
duty of the Court to administer justice, it must do so in this case in
the best way and manner it can in the light of the proven facts and
the law or laws applicable thereto.
It is settled that when the trial court decides a case in favor of a
party on a certain ground, the appellant court may uphold the
decision below upon some other point which was ignored or
erroneously decided by the trial court (Garcia Valdez v. Tuazon, 40
Phil. 943; Relativo v. Castro, 76 Phil. 563; Carillo v. Salak de Paz,
18 SCRA 467). Furthermore, the appellate court has the discretion
to consider an unassigned error that is closely related to an error
properly assigned (Paterno v. Jao Yan, 1 SCRA 631; Hernandez v.
Andal, 78 Phil. 196). It has also been held that the Supreme Court
(and this Court as well) has the authority to review matters, even if
they are not assigned as errors in the appeal, if it is found that their
consideration is necessary in arriving at a just decision of the case
(Saura Import & Export Co., Inc. v. Phil. International Surety Co.
and PNB, 8 SCRA 143). For it is the material allegations of fact in
the complaint, not the legal conclusion made therein or the prayer,
that determines the relief to which the plaintiff is entitled, and the
plaintiff is entitled to as much relief as the facts warrant although
that relief is not specifically prayed for in the complaint (Rosales v.
Reyes and Ordoveza, 25 Phil. 495; Cabigao v. Lim, 50 Phil. 844;
Baguioro v. Barrios, 77 Phil. 120). To quote an old but very
illuminating decision of our Supreme Court through the pen of
American jurist Adam C. Carson:
 "Under our system of pleading it is the duty of the
courts to grant the relief to which the parties are shown
to be entitled by the allegations in their pleadings and
the facts proven at the trial, and the mere fact that they
themselves misconstrue the legal effect of the facts
thus alleged and proven will not prevent the court from
placing the just construction thereon and adjudicating
the issues accordingly." (Alzua v. Johnson, 21 Phil.
308)
And in the fairly recent case of Caltex Phil., Inc. v IAC, 176 SCRA
741, the Honorable Supreme Court also held:
We rule that the respondent court did not commit any
error in taking cognizance of the aforesaid issues,
although not raised before the trial court. The presence
of strong consideration of substantial justice has led
this Court to relax the well-entrenched rule that, except
questions on jurisdiction, no question will be
entertained on appeal unless it has been raised in the
court below and it is within the issues made by the
parties in their pleadings (Cordero v. Cabral, L-36789,
July 25, 1983, 123 SCRA 532). . . .
We believe that the above authorities suffice to show that this
Court did not err in applying Art. 1267 of the New Civil Code to this
case. Defendant-appellant stresses that the applicability of said
provision is a question of fact, and that it should have been given
the opportunity to present evidence on said question. But
defendant-appellant cannot honestly and truthfully claim that it (did)
not (have) the opportunity to present evidence on the issue of
whether the continued operation of the contract Exh. "A" has now
become too one-sided in its favor and too inequitous, unfair, and
disadvantageous to plaintiff. As held in our decision, the abundant
and copious evidence presented by both parties in this case and
summarized in said decision established the following essential
and vital facts which led us to apply Art. 1267 of the New Civil
Code to this case:
xxx xxx xxx 15
On the issue of prescription of private respondent's action for reformation of
contract, petitioners allege that respondent court's ruling that the right of action
"arose only after said contract had already become disadvantageous and
unfair to it due to subsequent events and conditions, which must be sometime
during the latter part of 1982 or in 1983 . . ." 16 is erroneous. In reformation of
contracts, what is reformed is not the contract itself, but the instrument
embodying the contract. It follows that whether the contract is disadvantageous
or not is irrelevant to reformation and therefore, cannot be an element in the
determination of the period for prescription of the action to reform.
Article 1144 of the New Civil Code provides, inter alia, that an action upon a
written contract must be brought within ten (10) years from the time the right of
action accrues. Clearly, the ten (10) year period is to be reckoned from the
time the right of action accrues which is not necessarily the date of execution
of the contract. As correctly ruled by respondent court, private respondent's
right of action arose "sometime during the latter part of 1982 or in 1983 when
according to Atty. Luis General, Jr. . . ., he was asked by (private respondent's)
Board of Directors to study said contract as it already appeared
disadvantageous to (private respondent) (p. 31, tsn, May 8, 1989). (Private
respondent's) cause of action to ask for reformation of said contract should
thus be considered to have arisen only in 1982 or 1983, and from 1982 to
January 2, 1989 when the complaint in this case was filed, ten (10) years had
not yet elapsed." 17
Regarding the last issue, petitioners allege that there is nothing purely
potestative about the prestations of either party because petitioner's
permission for free use of telephones is not made to depend purely on their
will, neither is private respondent's permission for free use of its posts
dependent purely on its will.
Apart from applying Article 1267, respondent court cited another legal remedy
available to private respondent under the allegations of its complaint and the
preponderant evidence presented by it:
. . . we believe that the provision in said agreement —
(a) That the term or period of this contract shall be as
long as the party of the first part [herein appellant] has
need for the electric light posts of the party of the
second part [herein plaintiff] it being understood that
this contract shall terminate when for any reason
whatsoever, the party of the second part is forced to
stop, abandoned [sic] its operation as a public service
and it becomes necessary to remove the electric light
post [sic]"; (Emphasis supplied)
is invalid for being purely potestative on the part of appellant as it
leaves the continued effectivity of the aforesaid agreement to the
latter's sole and exclusive will as long as plaintiff is in operation. A
similar provision in a contract of lease wherein the parties agreed
that the lessee could stay on the leased premises "for as long as
the defendant needed the premises and can meet and pay said
increases" was recently held by the Supreme Court in Lim v. C.A.,
191 SCRA 150, citing the much earlier case of Encarnacion v.
Baldomar, 77 Phil. 470, as invalid for being "a purely potestative
condition because it leaves the effectivity and enjoyment of
leasehold rights to the sole and exclusive will of the lessee."
Further held the High Court in the Lim case:
The continuance, effectivity and fulfillment of a contract
of lease cannot be made to depend exclusively upon
the free and uncontrolled choice of the lessee between
continuing the payment of the rentals or not, completely
depriving the owner of any say in the matter. Mutuality
does not obtain in such a contract of lease of no
equality exists between the lessor and the lessee since
the life of the contract is dictated solely by the lessee.
The above can also be said of the agreement Exh. "A" between the
parties in this case. There is no mutuality and equality between
them under the afore-quoted provision thereof since the life and
continuity of said agreement is made to depend as long as
appellant needs plaintiff's electric posts. And this is precisely why,
since 1977 when said agreement was executed and up to 1989
when this case was finally filed by plaintiff, it could do nothing to be
released from or terminate said agreement notwithstanding that its
continued effectivity has become very disadvantageous and
inequitous to it due to the expansion and increase of appellant's
telephone services within Naga City and even outside the same,
without a corresponding increase in the ten (10) telephone units
being used by plaintiff free of charge, as well as the bad and
inefficient service of said telephones to the prejudice and
inconvenience of plaintiff and its customers. . . . 18
Petitioners' allegations must be upheld in this regard. A potestative condition is
a condition, the fulfillment of which depends upon the sole will of the debtor, in
which case, the conditional obligation is void. 19 Based on this definition,
respondent court's finding that the provision in the contract, to wit:
(a) That the term or period of this contract shall be as long as the
party of the first part (petitioner) has need for the electric light posts
of the party of the second part (private respondent) . . ..
is a potestative condition, is correct. However, it must have overlooked the
other conditions in the same provision, to wit:
. . . it being understood that this contract shall terminate when for
any reason whatsoever, the party of the second part (private
respondent) is forced to stop, abandoned (sic) its operation as a
public service and it becomes necessary to remove the electric
light post (sic);
which are casual conditions since they depend on chance, hazard, or the will
of a third person. 20 In sum, the contract is subject to mixed conditions, that is,
they depend partly on the will of the debtor and partly on chance, hazard or the
will of a third person, which do not invalidate the aforementioned
provision. 21 Nevertheless, in view of our discussions under the first and
second issues raised by petitioners, there is no reason to set aside the
questioned decision and resolution of respondent court.
WHEREFORE, the petition is hereby DENIED. The decision of the Court of
Appeals dated May 28, 1992 and its resolution dated September 10, 1992 are
AFFIRMED.
SO ORDERED.
G.R. NO. 158361 : April 10, 2013 - INTERNATIONAL HOTEL
CORPORATION, Petitioner, v. FRANCISCO B. JOAQUIN, JR. and RAFAEL
SUAREZ, Respondents.
DECISION
BERSAMIN, J.: To avoid unjust enrichment to a party from resulting out of a
substantially performed contract, the principle of quantum meruit may be used
to determine his compensation in the absence of a written agreement for that
purpose. The principle of quantum meruit justifies the payment of the
reasonable value of the services rendered by him.
The Case
Under review is the decision the Court of Appeals (CA) promulgated on
November 8, 2002,1disposing:chanroblesvirtualawlibrary
WHEREFORE, premises considered, the decision dated August 26, 1993 of
the Regional Trial Court, Branch 13, Manila in Civil Case No. R-82-2434 is
AFFIRMED with Modification as to the amounts awarded as follows:
defendant-appellant IHC is ordered to pay plaintiff-appellant
Joaquin P700,000.00 and plaintiff-appellant Suarez P200,000.00, both to be
paid in cash.
SO ORDERED.
Antecedents
On February 1, 1969, respondent Francisco B. Joaquin, Jr. submitted a
proposal to the Board of Directors of the International Hotel Corporation (IHC)
for him to render technical assistance in securing a foreign loan for the
construction of a hotel, to be guaranteed by the Development Bank of the
Philippines (DBP).2The proposal encompassed nine phases, namely: (1) the
preparation of a new project study; (2) the settlement of the unregistered
mortgage prior to the submission of the application for guaranty for processing
by DBP; (3) the preparation of papers necessary to the application for
guaranty; (4) the securing of a foreign financier for the project; (5) the securing
of the approval of the DBP Board of Governors; (6) the actual follow up of the
application with DBP3; (7) the overall coordination in implementing the
projections of the project study; (8) the preparation of the staff for actual hotel
operations; and (9) the actual hotel operations.4chanroblesvirtualawlibrary
The IHC Board of Directors approved phase one to phase six of the proposal
during the special board meeting on February 11, 1969, and
earmarked P2,000,000.00 for the project.5 Anent the financing, IHC applied
with DBP for a foreign loan guaranty. DBP processed the application,6 and
approved it on October 24, 1969 subject to several
conditions.7chanroblesvirtualawlibrary
On July 11, 1969, shortly after submitting the application to DBP, Joaquin
wrote to IHC to request the payment of his fees in the amount of P500,000.00
for the services that he had provided and would be providing to IHC in relation
to the hotel project that were outside the scope of the technical proposal.
Joaquin intimated his amenability to receive shares of stock instead of cash in
view of IHC's financial situation.8chanroblesvirtualawlibrary
On July 11, 1969, the stockholders of IHC met and granted Joaquin's request,
allowing the payment for both Joaquin and Rafael Suarez for their services in
implementing the proposal.9chanroblesvirtualawlibrary
On June 20, 1970, Joaquin presented to the IHC Board of Directors the results
of his negotiations with potential foreign financiers. He narrowed the financiers
to Roger Dunn & Company and Materials Handling Corporation. He
recommended that the Board of Directors consider Materials Handling
Corporation based on the more beneficial terms it had offered. His
recommendation was accepted.10chanroblesvirtualawlibrary
Negotiations with Materials Handling Corporation and, later on, with its
principal, Barnes International (Barnes), ensued. While the negotiations with
Barnes were ongoing, Joaquin and Jose Valero, the Executive Director of IHC,
met with another financier, the Weston International Corporation (Weston), to
explore possible financing.11 When Barnes failed to deliver the needed loan,
IHC informed DBP that it would submit Weston for DBP's consideration.12 As a
result, DBP cancelled its previous guaranty through a letter dated December 6,
1971.13chanroblesvirtualawlibrary
On December 13, 1971, IHC entered into an agreement with Weston, and
communicated this development to DBP on June 26, 1972. However, DBP
denied the application for guaranty for failure to comply with the conditions
contained in its November 12, 1971 letter.14chanroblesvirtualawlibrary
Due to Joaquin's failure to secure the needed loan, IHC, through its President
Bautista, canceled the 17,000 shares of stock previously issued to Joaquin and
Suarez as payment for their services. The latter requested a reconsideration of
the cancellation, but their request was rejected.
Consequently, Joaquin and Suarez commenced this action for specific
performance, annulment, damages and injunction by a complaint dated
December 6, 1973 in the Regional Trial Court in Manila (RTC), impleading IHC
and the members of its Board of Directors, namely, Felix Angelo Bautista,
Sergio O. Rustia, Ephraim G. Gochangco, Mario B. Julian, Benjamin J.
Bautista, Basilio L. Lirag, Danilo R. Lacerna and Hermenegildo R.
Reyes.15 The complaint alleged that the cancellation of the shares had been
illegal, and had deprived them of their right to participate in the meetings and
elections held by IHC; that Barnes had been recommended by IHC President
Bautista, not by Joaquin; that they had failed to meet their obligation because
President Bautista and his son had intervened and negotiated with Barnes
instead of Weston; that DBP had canceled the guaranty because Barnes had
failed to release the loan; and that IHC had agreed to compensate their
services with 17,000 shares of the common stock plus cash
of P1,000,000.00.16chanroblesvirtualawlibrary
IHC, together with Felix Angelo Bautista, Sergio O. Rustia, Mario B. Julian and
Benjamin J. Bautista, filed an answer claiming that the shares issued to
Joaquin and Suarez as compensation for their "past and future services" had
been issued in violation of Section 16 of the Corporation Code; that Joaquin
and Suarez had not provided a foreign financier acceptable to DBP; and that
they had already received P96,350.00 as payment for their
services.17chanroblesvirtualawlibrary
On their part, Lirag and Lacerna denied any knowledge of or participation in
the cancellation of the shares.18chanroblesvirtualawlibrary
Similarly, Gochangco and Reyes denied any knowledge of or participation in
the cancellation of the shares, and clarified that they were not directors of
IHC.19 In the course of the proceedings, Reyes died and was substituted by
Consorcia P. Reyes, the administratrix of his
estate.20chanroblesvirtualawlibrary
Ruling of the RTC
Under its decision rendered on August 26, 1993, the RTC held IHC liable
pursuant to the second paragraph of Article 1284 of the Civil Code, disposing
thusly:chanroblesvirtualawlibrary
WHEREFORE, in the light of the above facts, law and jurisprudence, the Court
hereby orders the defendant International Hotel Corporation to pay plaintiff
Francisco B. Joaquin, the amount of Two Hundred Thousand Pesos
(P200,000.00) and to pay plaintiff Rafael Suarez the amount of Fifty Thousand
Pesos (P50,000.00); that the said defendant IHC likewise pay the co-plaintiffs,
attorney's fees of P20,000.00, and costs of suit.
IT IS SO ORDERED.21chanroblesvirtualawlibrary
The RTC found that Joaquin and Suarez had failed to meet their obligations
when IHC had chosen to negotiate with Barnes rather than with Weston, the
financier that Joaquin had recommended; and that the cancellation of the
shares of stock had been proper under Section 68 of the Corporation Code,
which allowed such transfer of shares to compensate only past services, not
future ones.
Ruling of the CA
Both parties appealed.22chanroblesvirtualawlibrary
Joaquin and Suarez assigned the following errors, to
wit:chanroblesvirtualawlibrary
DESPITE HAVING CORRECTLY ACKNOWLEDGED THAT PLAINTIFFS-
APPELLANTS FULLY PERFORMED ALL THAT WAS INCUMBENT UPON
THEM, THE HONORABLE JUDGE ERRED IN NOT ORDERING
THAT:chanroblesvirtualawlibrary
A. DEFENDANTS WERE UNJUSTIFIED IN CANCELLING THE SHARES OF
STOCK PREVIOUSLY ISSUED TO PLAINTIFFS-APPELLANTS; AND
B. DEFENDANTS PAY PLAINTIFFS-APPELLANTS TWO MILLION SEVEN
HUNDRED PESOS (sic) (P2,700,000.00), INCLUDING INTEREST THEREON
FROM 1973, REPRESENTING THE TOTAL OBLIGATION DUE PLAINTIFFS-
APPELLANTS.23chanroblesvirtualawlibrary
On the other hand, IHC attributed errors to the RTC, as
follows:chanroblesvirtualawlibrary
I.
THE LOWER COURT ERRED IN HOLDING THAT PLAINTIFFS-
APPELLANTS HAVE NOTBEEN COMPLETELY PAID FOR THEIR
SERVICES, AND IN ORDERING THE DEFENDANT-APPELLANT TO PAY
TWO HUNDRED THOUSAND PESOS (P200,000.00) AND FIFTY
THOUSAND PESOS (P50,000.00) TO PLAINTIFFS-APPELLANTS
FRANCISCO B. JOAQUIN AND RAFAEL SUAREZ, RESPECTIVELY.
II.
THE LOWER COURT ERRED IN AWARDING PLAINTIFFS-APPELLANTS
ATTORNEY'S FEES AND COSTS OF SUIT.24chanroblesvirtualawlibrary
In its questioned decision promulgated on November 8, 2002, the CA
concurred with the RTC, upholding IHC's liability under Article 1186 of the Civil
Code. It ruled that in the context of Article 1234 of the Civil Code, Joaquin had
substantially performed his obligations and had become entitled to be paid for
his services; and that the issuance of the shares of stock was ultra vires for
having been issued as consideration for future services.
Anent how much was due to Joaquin and Suarez, the CA explained
thusly:chanroblesvirtualawlibrary
This Court does not subscribe to plaintiffs-appellants' view that defendant-
appellant IHC agreed to pay them P2,000,000.00. Plaintiff-appellant Joaquin's
letter to defendant-appellee F.A. Bautista, quoting defendant-appellant IHC's
board resolutions which supposedly authorized the payment of such amount
cannot be sustained. The resolutions are quite clear and when taken together
show that said amount was only the "estimated maximum expenses" which
defendant-appellant IHC expected to incur in accomplishing phases 1 to 6, not
exclusively to plaintiffs-appellants' compensation.This conclusion finds support
in an unnumbered board resolution of defendant-appellant IHC dated July 11,
1969:chanroblesvirtualawlibrary
"Incidentally, it was also taken up the necessity of giving the Technical Group a
portion of the compensation that was authorized by this corporation in its
Resolution of February 11, 1969 considering that the assistance so far given
the corporation by said Technical Group in continuing our project with the DBP
and its request for guaranty for a foreign loan is 70% completed leaving only
some details which are now being processed. It is estimated that P400,000.00
worth of Common Stock would be reasonable for the present accomplishments
and to this effect, the President is authorized to issue the same in the name of
the Technical Group, as follows:chanroblesvirtualawlibrary
P200,000.00 in common stock to Rafael Suarez, as associate in the Technical
Group, and P200,000.00 in common stock to Francisco G. Joaquin, Jr., also a
member of the Technical Group.
It is apparent that not all of the P2,000,000.00 was allocated exclusively to
compensate plaintiffs-appellants. Rather, it was intended to fund the whole
undertaking including their compensation. On the same date, defendant-
appellant IHC also authorized its president to pay-appellant
Joaquin P500,000.00 either in cash or in stock or both.
The amount awarded by the lower court was therefore less than what
defendant-appellant IHC agreed to pay plaintiffs-appellants. While this Court
cannot decree that the cancelled shares be restored, for they are without a
doubt null and void, still and all, defendant-appellant IHC cannot now put up its
own ultra vires act as an excuse to escape obligation to plaintiffs-appellants.
Instead of shares of stock, defendant-appellant IHC is ordered to pay plaintiff-
appellant Joaquin a total of P700,000.00 and plaintiff-appellant
Suarez P200,000.00, both to be paid in cash.
Although the lower court failed to explain why it was granting the attorney's
fees, this Court nonetheless finds its award proper given defendant-appellant
IHC's actions.25chanroblesvirtualawlibrary
Issues
In this appeal, the IHC raises as issues for our consideration and resolution the
following:chanroblesvirtualawlibrary
I
WHETHER OR NOT THE COURT OF APPEALS IS CORRECT IN
AWARDING COMPENSATION AND EVEN MODIFYING THE PAYMENT TO
HEREIN RESPONDENTS DESPITE NON-FULFILLMENT OF THEIR
OBLIGATION TO HEREIN PETITIONER
II
WHETHER OR NOT THE COURT OF APPEALS IS CORRECT IN
AWARDING ATTORNEY'S FEES TO
RESPONDENTS26chanroblesvirtualawlibrary
IHC maintains that Article 1186 of the Civil Code was erroneously applied; that
it had no intention of preventing Joaquin from complying with his obligations
when it adopted his recommendation to negotiate with Barnes; that Article
1234 of the Civil Code applied only if there was a merely slight deviation from
the obligation, and the omission or defect was technical and unimportant; that
substantial compliance was unacceptable because the foreign loan was
material and was, in fact, the ultimate goal of its contract with Joaquin and
Suarez; that because the obligation was indivisible and subject to a suspensive
condition, Article 1181 of the Civil Code27 applied, under which a partial
performance was equivalent to non-performance; and that the award of
attorney's fees should be deleted for lack of legal and factual bases.
On the part of respondents, only Joaquin filed a comment,28 arguing that the
petition was fatally defective for raising questions of fact; that the obligation
was divisible and capable of partial performance; and that the suspensive
condition was deemed fulfilled through IHC's own
actions.29chanroblesvirtualawlibrary
Ruling
We deny the petition for review on certiorari subject to the ensuing
disquisitions.
1. IHC raises questions of law
We first consider and resolve whether IHC's petition improperly raised
questions of fact.
A question of law exists when there is doubt as to what the law is on a certain
state of facts, but, in contrast, a question of fact exists when the doubt arises
as to the truth or falsity of the facts alleged. A question of law does not involve
an examination of the probative value of the evidence presented by the
litigants or by any of them; the resolution of the issue must rest solely on what
the law provides on the given set of circumstances.30 When there is no dispute
as to the facts, the question of whether or not the conclusion drawn from the
facts is correct is a question of law.31chanroblesvirtualawlibrary
Considering that what IHC seeks to review is the CA's application of the law on
the facts presented therein, there is no doubt that IHC raises questions of law.
The basic issue posed here is whether the conclusions drawn by the CA were
correct under the pertinent laws.
2. Article 1186 and Article 1234 of the Civil Code cannot be the source of IHC's
obligation to pay respondents IHC argues that it should not be held liable
because: (a) it was Joaquin who had recommended Barnes; and (b) IHC's
negotiation with Barnes had been neither intentional nor willfully intended to
prevent Joaquin from complying with his obligations.
IHC's argument is meritorious.
Article 1186 of the Civil Code reads:chanroblesvirtualawlibrary
Article 1186. The condition shall be deemed fulfilled when the obligor
voluntarily prevents its fulfillment.
This provision refers to the constructive fulfillment of a suspensive
condition,32 whose application calls for two requisites, namely: (a) the intent of
the obligor to prevent the fulfillment of the condition, and (b) the actual
prevention of the fulfillment. Mere intention of the debtor to prevent the
happening of the condition, or to place ineffective obstacles to its compliance,
without actually preventing the fulfillment, is
insufficient.33chanroblesvirtualawlibrary
The error lies in the CA's failure to determine IHC's intent to pre-empt Joaquin
from meeting his obligations. The June 20, 1970 minutes of IHC's special
board meeting discloses that Joaquin impressed upon the members of the
Board that Materials Handling was offering more favorable terms for IHC, to
wit:chanroblesvirtualawlibrary
xxx
At the meeting all the members of the Board of Directors of the International
Hotel Corporation were present with the exception of Directors Benjamin J.
Bautista and Sergio O. Rustia who asked to be excused because of previous
engagements. In that meeting, the President called on Mr. Francisco G.
Joaquin, Jr. to explain the different negotiations he had conducted relative to
obtaining the needed financing for the hotel project in keeping with the
authority given to him in a resolution approved by the Board of Directors.
Mr. Joaquin presently explained that he contacted several local and foreign
financiers through different brokers and after examining the different offers he
narrowed down his choice to two (2), to wit: the foreign financier recommended
by George Wright of the Roger Dunn & Company and the offer made by the
Materials Handling Corporation.
After explaining the advantages and disadvantages to our corporation of the
two (2) offers specifically with regard to the terms and repayment of the loan
and the rate of interest requested by them, he concluded that the offer made
by the Materials Handling Corporation is much more advantageous because
the terms and conditions of payment as well as the rate of interest are much
more reasonable and would be much less onerous to our corporation.
However, he explained that the corporation accepted, in principle, the offer of
Roger Dunn, per the corporation's telegrams to Mr. Rudolph Meir of the Private
Bank of Zurich, Switzerland, and until such time as the corporation's
negotiations with Roger Dunn is terminated, we are committed, on one way or
the other, to their financing.
It was decided by the Directors that, should the negotiations with Roger Dunn
materialize, at the same time as the offer of Materials Handling Corporation,
that the funds committed by Roger Dunn may be diverted to other borrowers of
the Development Bank of the Philippines. With this condition, Director Joaquin
showed the advantages of the offer of Materials Handling Corporation. Mr.
Joaquin also informed the corporation that, as of this date, the bank
confirmation of Roger Dunn & Company has not been received. In view of the
fact that the corporation is racing against time in securing its financing, he
recommended that the corporation entertain other offers.
After a brief exchange of views on the part of the Directors present and after
hearing the clarification and explanation made by Mr. C. M. Javier who was
present and who represented the Materials Handling Corporation, the Directors
present approved unanimously the recommendation of Mr. Joaquin to entertain
the offer of Materials Handling Corporation.34chanroblesvirtualawlibrary
Evidently, IHC only relied on the opinion of its consultant in deciding to transact
with Materials Handling and, later on, with Barnes. In negotiating with Barnes,
IHC had no intention, willful or otherwise, to prevent Joaquin and Suarez from
meeting their undertaking. Such absence of any intention negated the basis for
the CA's reliance on Article 1186 of the Civil Code.
Nor do we agree with the CA's upholding of IHC's liability by virtue of Joaquin
and Suarez's substantial performance. In so ruling, the CA applied Article 1234
of the Civil Code, which states:chanroblesvirtualawlibrary
Article 1234. If the obligation has been substantially performed in good faith,
the obligor may recover as though there had been a strict and complete
fulfillment, less damages suffered by the obligee.
It is well to note that Article 1234 applies only when an obligor admits
breaching the contract35 after honestly and faithfully performing all the material
elements thereof except for some technical aspects that cause no serious
harm to the obligee.36 IHC correctly submits that the provision refers to an
omission or deviation that is slight, or technical and unimportant, and does not
affect the real purpose of the contract.
Tolentino explains the character of the obligor's breach under Article 1234 in
the following manner, to wit:chanroblesvirtualawlibrary
In order that there may be substantial performance of an obligation, there must
have been an attempt in good faith to perform, without any willful or intentional
departure therefrom. The deviation from the obligation must be slight, and the
omission or defect must be technical and unimportant, and must not pervade
the whole or be so material that the object which the parties intended to
accomplish in a particular manner is not attained. The non-performance of a
material part of a contract will prevent the performance from amounting to a
substantial compliance.
The party claiming substantial performance must show that he has attempted
in good faith to perform his contract, but has through oversight,
misunderstanding or any excusable neglect failed to completely perform in
certain negligible respects, for which the other party may be adequately
indemnified by an allowance and deduction from the contract price or by an
award of damages. But a party who knowingly and wilfully fails to perform his
contract in any respect, or omits to perform a material part of it, cannot be
permitted, under the protection of this rule, to compel the other party, and the
trend of the more recent decisions is to hold that the percentage of omitted or
irregular performance may in and of itself be sufficient to show that there had
not been a substantial performance.37chanroblesvirtualawlibrary
By reason of the inconsequential nature of the breach or omission, the law
deems the performance as substantial, making it the obligee's duty to
pay.38 The compulsion of payment is predicated on the substantial benefit
derived by the obligee from the partial performance. Although compelled to
pay, the obligee is nonetheless entitled to an allowance for the sum required to
remedy omissions or defects and to complete the work agreed
upon.39chanroblesvirtualawlibrary
Conversely, the principle of substantial performance is inappropriate when the
incomplete performance constitutes a material breach of the contract. A
contractual breach is material if it will adversely affect the nature of the
obligation that the obligor promised to deliver, the benefits that the obligee
expects to receive after full compliance, and the extent that the non-
performance defeated the purposes of the contract.40 Accordingly, for the
principle embodied in Article 1234 to apply, the failure of Joaquin and Suarez
to comply with their commitment should not defeat the ultimate purpose of the
contract.
The primary objective of the parties in entering into the services agreement
was to obtain a foreign loan to finance the construction of IHC's hotel project.
This objective could be inferred from IHC's approval of phase 1 to phase 6 of
the proposal. Phase 1 and phase 2, respectively the preparation of a new
project study and the settlement of the unregistered mortgage, would pave the
way for Joaquin and Suarez to render assistance to IHC in applying for the
DBP guaranty and thereafter to look for an able and willing foreign financial
institution acceptable to DBP. All the steps that Joaquin and Suarez undertook
to accomplish had a single objective to secure a loan to fund the construction
and eventual operations of the hotel of IHC. In that regard, Joaquin himself
admitted that his assistance was specifically sought to seek financing for IHC's
hotel project.41chanroblesvirtualawlibrary
Needless to say, finding the foreign financier that DBP would guarantee was
the essence of the parties' contract, so that the failure to completely satisfy
such obligation could not be characterized as slight and unimportant as to
have resulted in Joaquin and Suarez's substantial performance that
consequentially benefitted IHC. Whatever benefits IHC gained from their
services could only be minimal, and were even probably outweighed by
whatever losses IHC suffered from the delayed construction of its hotel.
Consequently, Article 1234 did not apply.
3. IHC is nonetheless liable to pay under the rule on constructive
fulfillment of a mixed conditional obligation
Notwithstanding the inapplicability of Article 1186 and Article 1234 of the Civil
Code, IHC was liable based on the nature of the obligation.
Considering that the agreement between the parties was not circumscribed by
a definite period, its termination was subject to a condition the happening of a
future and uncertain event.42 The prevailing rule in conditional obligations is
that the acquisition of rights, as well as the extinguishment or loss of those
already acquired, shall depend upon the happening of the event that
constitutes the condition.43chanroblesvirtualawlibrary
To recall, both the RTC and the CA held that Joaquin and Suarez's obligation
was subject to the suspensive condition of successfully securing a foreign loan
guaranteed by DBP. IHC agrees with both lower courts, and even argues that
the obligation with a suspensive condition did not arise when the event or
occurrence did not happen. In that instance, partial performance of the contract
subject to the suspensive condition was tantamount to no performance at all.
As such, the respondents were not entitled to any compensation.
We have to disagree with IHC's argument.
To secure a DBP-guaranteed foreign loan did not solely depend on the
diligence or the sole will of the respondents because it required the action and
discretion of third persons an able and willing foreign financial institution to
provide the needed funds, and the DBP Board of Governors to guarantee the
loan. Such third persons could not be legally compelled to act in a manner
favorable to IHC. There is no question that when the fulfillment of a condition is
dependent partly on the will of one of the contracting parties,44 or of the obligor,
and partly on chance, hazard or the will of a third person, the obligation is
mixed.45 The existing rule in a mixed conditional obligation is that when the
condition was not fulfilled but the obligor did all in his power to comply with the
obligation, the condition should be deemed
satisfied.46chanroblesvirtualawlibrary
Considering that the respondents were able to secure an agreement with
Weston, and subsequently tried to reverse the prior cancellation of the
guaranty by DBP, we rule that they thereby constructively fulfilled their
obligation.
4. Quantum meruit should apply in the absence of an express agreement on
the fees
The next issue to resolve is the amount of the fees that IHC should pay to
Joaquin and Suarez.
Joaquin claimed that aside from the approved P2,000,000.00 fee to implement
phase 1 to phase 6, the IHC Board of Directors had approved an
additional P500,000.00 as payment for his services. The RTC declared that he
and Suarez were entitled to P200,000.00 each, but the CA revised the
amounts to P700,000.00 for Joaquin and P200,000.00 for Suarez.
Anent the P2,000,000.00, the CA rightly concluded that the full amount
of P2,000,000.00 could not be awarded to respondents because such amount
was not allocated exclusively to compensate respondents, but was intended to
be the estimated maximum to fund the expenses in undertaking phase 6 of the
scope of services. Its conclusion was unquestionably borne out by the minutes
of the February 11, 1969 meeting, viz:chanroblesvirtualawlibrary
xxx
II
The preparation of the necessary papers for the DBP including the preparation
of the application, the presentation of the mechanics of financing, the actual
follow up with the different departments of the DBP which includes the
explanation of the feasibility studies up to the approval of the loan, conditioned
on the DBP's acceptance of the project as feasible. The estimated expenses
for this particular phase would be contingent, i.e. upon DBP's approval of the
plan now being studied and prepared, is somewhere around P2,000,000.00.
After a brief discussion on the matter, the Board on motion duly made and
seconded, unanimously adopted a resolution of the following
tenor:chanroblesvirtualawlibrary
RESOLUTION NO. ______
(Series of 1969)
"RESOLVED, as it is hereby RESOLVED, that if the Reparations allocation
and the plan being negotiated with the DBP is realized the estimated maximum
expenses of P2,000,000.00 for this phase is hereby authorized subject to the
sound discretion of the committee composed of Justice Felix Angelo Bautista,
Jose N. Valero and Ephraim G. Gochangco."47 (Emphasis supplied)
Joaquin's claim for the additional sum of P500,000.00 was similarly without
factual and legal bases. He had requested the payment of that amount to
cover services rendered and still to be rendered to IHC separately from those
covered by the first six phases of the scope of work. However, there is no
reason to hold IHC liable for that amount due to his failure to present sufficient
proof of the services rendered towards that end. Furthermore, his July 11,
1969 letter revealed that the additional services that he had supposedly
rendered were identical to those enumerated in the technical proposal,
thus:chanroblesvirtualawlibrary
The Board of Directors
International Hotel Corporation
Thru: Justice Felix Angelo Bautista
President & Chairman of the Board
Gentlemen:chanroblesvirtualawlibrary
I have the honor to request this Body for its deliberation and action on the fees
for my services rendered and to be rendered to the hotel project and to the
corporation. These fees are separate from the fees you have approved in your
previous Board Resolution, since my fees are separate. I realize the position of
the corporation at present, in that it is not in a financial position to pay my
services in cash, therefore, I am requesting this Body to consider payment of
my fees even in the form of shares of stock, as you have done to the other
technical men and for other services rendered to the corporation by other
people.
Inasmuch as my fees are contingent on the successful implementation of this
project, I request that my fees be based on a percentage of the total project
cost. The fees which I consider reasonable for the services that I have
rendered to the project up to the completion of its construction is P500,000.00.
I believe said amount is reasonable since this is approximately only of 1% of
the total project cost.
So far, I have accomplished Phases 1-5 of my report dated February 1, 1969
and which you authorized us to do under Board Resolution of February 11,
1969. It is only Phase 6 which now remains to be implemented. For my
appointment as Consultant dated May 12, 1969 and the Board Resolution
dated June 23, 1969 wherein I was appointed to the Technical Committee, it
now follows that I have been also authorized to implement part of Phases 7 &
8.
A brief summary of my accomplished work has been as
follows:chanroblesvirtualawlibrary
1. I have revised and made the new Project Study of your hotel project, making
it bankable and feasible.
2. I have reduced the total cost of your project by
approximately P24,735,000.00.
3. I have seen to it that a registered mortgage with the Reparations
Commission did not affect the application with the IBP for approval to
processing.
4. I have prepared the application papers acceptable to the DBP by means of
an advance analysis and the presentation of the financial mechanics, which
was accepted by the DBP.
5. I have presented the financial mechanics of the loan wherein the
requirement of the DBP for an additional P19,000,000.00 in equity from the
corporation became unnecessary.
6. The explanation of the financial mechanics and the justification of this
project was instrumental in changing the original recommendation of the
Investment Banking Department of the DBP, which recommended disapproval
of this application, to the present recommendation of the Real Estate
Department which is for the approval of this project for proceeding.
7. I have submitted to you several offers already of foreign financiers which are
in your files. We are presently arranging the said financiers to confirm their
funds to the DBP for our project,
8. We have secured the approval of the DBP to process the loan application of
this corporation as per its letter July 2, 1969.
9. We have performed other services for the corporation which led to the
cooperation and understanding of the different factions of this corporation.
I have rendered services to your corporation for the past 6 months with no
clear understanding as to the compensation of my services. All I have drawn
from the corporation is the amount of P500.00 dated May 12, 1969 and
personal payment advanced by Justice Felix Angelo Bautista in the amount
of P1,000.00.
I am, therefore, requesting this Body for their approval of my fees. I have
shown my good faith and willingness to render services to your corporation
which is evidenced by my continued services in the past 6 months as well as
the accomplishments above mentioned. I believe that the final completion of
this hotel, at least for the processing of the DBP up to the completion of the
construction, will take approximately another 2 years. In view of the above, I
again reiterate my request for your approval of my fees. When the corporation
is in a better financial position, I will request for a withdrawal of a monthly
allowance, said amount to be determined by this Body.
Very truly yours,
(Sgd.)
Francisco G., Joaquin, Jr.48
(Emphasis supplied)
Joaquin could not even rest his claim on the approval by IHC's Board of
Directors. The approval apparently arose from the confusion between the
supposedly separate services that Joaquin had rendered and those to be done
under the technical proposal. The minutes of the July 11, 1969 board meeting
(when the Board of Directors allowed the payment for Joaquin's past services
and for the 70% project completion by the technical group) showed as
follows:chanroblesvirtualawlibrary
III
The Third order of business is the compensation of Mr. Francisco G. Joaquin,
Jr. for his services in the corporation.
After a brief discussion that ensued, upon motion duly made and seconded,
the stockholders unanimously approved a resolution of the following
tenor:chanroblesvirtualawlibrary
RESOLUTION NO. ___
(Series of 1969)
"RESOLVED that Mr. Francisco G. Joaquin, Jr. be granted a compensation in
the amount of Five Hundred Thousand (P500,000.00) Pesos for his past
services and services still to be rendered in the future to the corporation up to
the completion of the Project. The President is given full discretion to discuss
with Mr. Joaquin the manner of payment of said compensation, authorizing him
to pay part in stock and part in cash."
Incidentally, it was also taken up the necessity of giving the Technical Group a
portion of the compensation that was authorized by this corporation in its
Resolution of February 11, 1969 considering that the assistance so far given
the corporation by said Technical Group in continuing our project with the DBP
and its request for guaranty for a foreign loan is 70% completed leaving only
some details which are now being processed. It is estimated that P400,000.00
worth of Common Stock would be reasonable for the present accomplishments
and to this effect, the President is authorized to issue the same in the name of
the Technical Group, as follows:chanroblesvirtualawlibrary
P200,000.00 in Common Stock to Rafael Suarez, an associate in the
Technical Group, and P200,000.00 in Common stock to Francisco G. Joaquin,
Jr., also a member of the Technical Group.49chanroblesvirtualawlibrary
Lastly, the amount purportedly included services still to be rendered that
supposedly extended until the completion of the construction of the hotel. It is
basic, however, that in obligations to do, there can be no payment unless the
obligation has been completely rendered.50chanroblesvirtualawlibrary
It is notable that the confusion on the amounts of compensation arose from the
parties' inability to agree on the fees that respondents should receive.
Considering the absence of an agreement, and in view of respondents'
constructive fulfillment of their obligation, the Court has to apply the principle of
quantum meruit in determining how much was still due and owing to
respondents. Under the principle of quantum meruit, a contractor is allowed to
recover the reasonable value of the services rendered despite the lack of a
written contract.51 The measure of recovery under the principle should relate to
the reasonable value of the services performed.52 The principle prevents
undue enrichment based on the equitable postulate that it is unjust for a
person to retain any benefit without paying for it. Being predicated on equity,
the principle should only be applied if no express contract was entered into,
and no specific statutory provision was applicable.53chanroblesvirtualawlibrary
Under the established circumstances, we deem the total amount
of P200,000.00 to be reasonable compensation for respondents' services
under the principle of quantum meruit.
Finally, we sustain IHC's position that the grant of attorney's fees lacked
factual or legal basis. Attorney's fees are not awarded every time a party
prevails in a suit because of the policy that no premium should be placed on
the right to litigate. There should be factual or legal support in the records
before the award of such fees is sustained. It is not enough justification for the
award simply because respondents were compelled to protect their
rights.54chanroblesvirtualawlibrary
ACCORDINGLY, the Court DENIES the petition for review on certiorari; and
AFFIRMS the decision of the Court of Appeals promulgated on November 8,
2002 in C.A.-G.R. NO. 47094 subject to the MODIFICATIONS that: (a)
International Hotel Corporation is ordered to. pay Francisco G. Joaquin, Jr. and
Rafael Suarez P100,000.00 each as compensation for their services, and (b)
the award of P20,000.00 as attorney's fees is deleted.
No costs of suit.
SO ORDERED.
G.R. No. 192108 : November 21, 2012 - SPOUSES SOCRATES SY AND CELY
SY, Petitioner, v. ANDOK'S LITSON CORPORATION,Respondent.
DECISION
PEREZ, J.: Assailed in this Petition for Review on Certiorari is the Decision 1ςrνll of the
Court of Appeals dated 20 January 2010 in CA-G.R. CV No. 91942, as well as the
Resolution2ςrνll dated 29 April 2010, denying the motion for reconsideration.
This is a case for rescission of contract filed by the lessee, now respondent, against the
lessors, now the petitioners.
Petitioner Cely Sy (Sy) is the registered owner of a 316 square-meter lot located at 1940
Felix Huertas Street, Sta. Cruz, Manila. Respondent Andoks Litson Corporation (Andoks)
is engaged in the business of selling grilled chicken and pork with outlets all over the
Philippines. On 5 July 2005, Sy and Andoks entered into a 5-year lease contract covering
the parcel of land owned by Sy. Monthly rental was fixed at P60,000.00, exclusive of
taxes, for the first 2 years and P66,000.00 for the third, fourth and fifth year with 10%
escalation every year beginning on the fourth year.3ςrνll
Per contract, the lessee shall, upon signing the contract, pay four (4) months of advance
deposit amounting to P240,000.00 and a security deposit equivalent to four (4) months of
rental in the amount of P240,000.00. Accordingly, Andoks issued a check to Sy for
P480,000.00.
Andoks alleged that while in the process of applying for electrical connection on the
improvements to be constructed on Sys land, it was discovered that Sy has an unpaid
Manila Electric Company (MERALCO) bill amounting to P400,000.00. Andoks presented
a system-generated statement from MERALCO.4ςrνllAndoks further complained that
construction for the improvement it intended for the leased premises could not proceed
because another tenant, Mediapool, Inc. incurred delay in the construction of a billboard
structure also within the leased premises. In its letter dated 25 August 2005, Andoks first
informed Sy about the delay in the construction of the billboard structure on a portion of
its leased property. Three more letters of the same tenor were sent to Sy but the
demands fell on deaf ears. Consequently, Andoks suffered damages in the total amount
of P627,000.00 which comprises the advance rental and deposit, cost of money,
mobilization cost for the construction of improvement over leased premises, and
unrealized income. The complaint for rescission was filed on 13 February 2008, three
years after continued inaction on the request to have the billboard construction expedited.
In her Answer, Sy stated that she has faithfully complied with all the terms and conditions
of the lease contract and denied incurring an outstanding electricity bill. 5ςrνll
On 14 April 2008, Andoks filed a motion to set the case for pre-trial.
The Regional Trial Court of Manila (RTC) sent a Notice of Pre-trial Conference to the
parties on 28 April 2008 informing them that a pre-trial conference is set on 26 May 2008.
On 23 May 2008, an Urgent Motion to Reset Pre-Trial Conference was filed by Sys
counsel on the allegation that on the pre-trial date, he has to attend a hearing on another
branch of the RTC in Manila.
During the pre-trial conference, Sy and her counsel failed to appear. Sys urgent motion
was denied, and the RTC allowed Andoks to present its evidence ex-parte.
No motion for reconsideration was filed on the trial courts order allowing ex-parte
presentation of evidence. Thus, on the 2 June 2008 hearing, Andoks presented ex-parte
the testimony of its General Manager, Teodoro Calaunan, detailing the breach of contract
committed by Sy.
On 24 July 2008, the trial court rendered a decision favoring Andoks, to
wit:chanroblesvirtuallawlibrary
WHEREFORE, consistent with Section 5, Rule 18 of the 1997 Rules of Civil Procedure,
judgment is hereby rendered in favor of the plaintiff, ordering the defendants to pay to the
plaintiff (1) P480,000.00 with legal rate of interest from March 11, 2006, (2) P1,350.00 for
the comprehensive insurance on the leased portion of the realty, and (3) P4,873.00 as
contractors tax.
For lack of merit, defendants counterclaim is hereby dismissed.6ςrνll
On appeal, Sy decried deprivation of her right to present evidence resulting in a default
judgment against her. Sy denied that there was a breach on the lease contract.
On 20 January 2010, the Court of Appeals dismissed the appeal and affirmed the ruling
of the RTC.
The appellate court held that the trial court correctly allowed the presentation of evidence
ex-parte as there was no valid reason for the urgent motion for postponement of the pre-
trial filed by Sy. The appellate court found that Sy repeatedly failed to comply with her
obligation under the lease contract despite repeated demands. The appellate court
awarded damages for breach of contract.
After the denial of Sys motion for reconsideration, she filed the instant petition raising the
following grounds:
-A-
WITH ALL DUE RESPECT, THE HONORABLE COURT OF APPEALS IN AFFIRMING
THE TRIAL COURTS JUDGMENT FAILED TO NOTICE THAT THE DEFAULT
JUDGMENT STRAYED FROM JUDICIAL PRECEDENT AND POLICY, AND
AMOUNTED TO AN INFRINGEMENT OF THE RIGHT TO DUE PROCESS OF THE
SPOUSES SY.
-B-
WITH ALL DUE RESPECT, THE HONORABLE COURT OF APPEALS IN AFFIRMING
THE TRIAL COURTS DEFAULT JUDGMENT FAILED TO APPRECIATE THAT THE
RESPONDENT ITSELF CONTRACTUALLY ASSUMED THE RISK OF DELAY, AND
THUS ANY DELAY COULD NOT BE A GROUND FOR THE RESOLUTION OR
ANNULMENT OF THE CONTRACT OF LEASE.
-C-
WITH ALL DUE RESPECT, THE HONORABLE COURT OF APPEALS ALLOWED A
DEPARTURE FROM JUDICIAL PRECEDENT WHEN IT SUSTAINED THE TRIAL
COURTS IMPOSITION OF LEGAL INTEREST ON THE MONETARY AWARD IN
RESPONDENTS FAVOR.7ςrνll
The affirmance by the Court of Appeals of the judgment of the trial court is correct.
Section 4, Rule 18 of the Rules of Court requires the parties and their counsel to appear
at pre-trial, thus:chanroblesvirtuallawlibrary
Section 4. Appearance of parties. It shall be the duty of the parties and their counsel to
appear at the pre-trial. The non-appearance of a party may be excused only if a valid
cause is shown therefor or if a representative shall appear in his behalf fully authorized in
writing to enter into an amicable settlement, to submit to alternative modes of dispute
resolution, and to enter into stipulations or admissions of facts and of documents.
Section 5 of the same rule states the consequences of failure to appear during pre-trial,
thus:chanroblesvirtuallawlibrary
Section 5. Effect of failure to appear. The failure of the plaintiff to appear when so
required pursuant to the next preceding section shall be cause for dismissal of the action.
The dismissal shall be with prejudice, unless otherwise ordered by the court. A similar
failure on the part of the defendant shall be cause to allow the plaintiff to present his
evidence ex-parte and the court to render judgment on the basis thereof.
What constitutes a valid ground to excuse litigants and their counsels from appearing at
the pre-trial under Section 4, Rule 18 of the Rules of Court is subject to the sound
discretion of a judge.8ςrνll Such discretion was shown by the trial court, which was
correct in putting into effect the consequence of petitioners non-appearance at the pre-
trial. While Sy filed an Urgent Motion to Reset Pre-trial, she cannot assume that her
motion would be automatically granted. As found by the Court of Appeals, the denial of
petitioners motion for postponement is dictated by the motion
itself:chanroblesvirtuallawlibrary
A perusal of the Urgent Motion to Reset Pre-Trial Conference discloses that other than
the allegation that counsel will attend a hearing in another branch of the same court in
Manila, yet, it failed to substantiate its claim. It did not state the case number nor attach
the Calendar of Hearing or such other pertinent proof to appraise the court that indeed
counsel was predisposed.9ςrνll
We cannot allow petitioners to argue that their right to due process has been
infringed.
In The Philippine American Life & General Insurance Company v. Enario,10ςrνll we
reiterated that the essence of due process is to be found in the reasonable
opportunity to be heard and to submit any evidence one may have in support of
ones defense. Where the opportunity to be heard, either through verbal arguments
or pleadings, is accorded, and the party can present its side or defend its interest in
due course, there is no denial of procedural due process.
We next deal with the central issue of rescission.
Article 1191 of the Civil Code provides that the power to rescind obligations is
implied in reciprocal ones, in case one of the obligors should not comply with what
is incumbent upon him.
A lease contract is a reciprocal contract. By signing the lease agreement, the lessor
grants possession over his/her property to the lessee for a period of time in
exchange for rental payment.
Indeed, rescission is statutorily recognized in a contract of lease. Article 1659 of the
Civil Code provides:chanroblesvirtuallawlibrary
Art. 1659. If the lessor or the lessee should not comply with the obligations set forth
in articles 1654 and 1657, the aggrieved party may ask for the rescission of the
contract and indemnification for damages, or only the latter, allowing the contract to
remain in force.
Article 1659 outlines the remedies for non-compliance with the reciprocal
obligations in a lease contract, which obligations are cited in Articles 1654 and
1657:
Article 1654. The lessor is obliged:
(1) To deliver the thing which is the object of the contract in such a conditions as to
render it fit for the use intended;
(2) To make on the same during the lease all the necessary repairs in order to keep
it suitable for the use to which it has been devoted, unless there is a stipulation to
the contrary;
(3) To maintain the lessee in the peaceful and adequate enjoyment of the lease for
the entire duration of the contract.
Article 1657. The lessee is obliged:
(1) To pay the price of the lease according to the terms stipulated;
(2) To use the thing leased as a diligent father of a family, devoting it to the use
stipulated; and in the absence of stipulation, to that which may be inferred from the
nature of the thing leased, according to the custom of the place;
(3) To pay the expenses for the deed of lease. (Boldfacing supplied).
The aggrieved party is given the option to the aggrieved party to ask for: (1) the
rescission of the contract; (2) rescission and indemnification for damages; or (3)
only indemnification for damages, allowing the contract to remain in force.11ςrνll
While Andoks had complied with all its obligations as a lessee, the lessor failed to
render the premises fit for the use intended and to maintain the lessee in the
peaceful and adequate enjoyment of the lease.
The case of CMS Investments and Management Corporation v. Intermediate
Appellate Court12ςrνll quoted Manresas comment on the lessors obligation to
maintain the lessee in the peaceful and adequate enjoyment of the lease for the
entire duration of the contract, in this wise:chanroblesvirtuallawlibrary
The lessor must see that the enjoyment is not interrupted or disturbed, either by
others' acts x x x or by his own. By his own acts, because, being the person
principally obligated by the contract, he would openly violate it if, in going back on
his agreement, he should attempt to render ineffective in practice the right in the
thing he had granted to the lessee; and by others' acts, because he must guarantee
the right he created, for he is obliged to give warranty in the manner we have set
forth in our commentary on article 1553, and, in this sense, it is incumbent upon him
to protect the lessee in the latters peaceful enjoyment.13ςrνll
Andoks paid a total of P480,000.00 as advance deposit for four (4) months and
security deposit equivalent to four (4) months. However, the construction of its
outlet store was hindered by two incidents the unpaid MERALCO bills and the
unfinished construction of a billboard structure directly above the leased property.
Sy argues that per contract, Andoks had assumed the risk of delay by allowing
MediaPool, Inc. to construct a billboard structure on a portion of the leased
premises. We reproduce the pertinent provision for
brevity:chanroblesvirtuallawlibrary
10. That the LESSEE shall allow persons who will construct, inspect, maintain and
repair all billboard structures to be set up and constructed on the portion of the
parcel of land excluded from this contract, only upon approval of written request to
LESSEE AND LESSOR from the billboard LESSEE to avoid disruption of business
operations of Andoks Litson Corporation and its affiliates.14ςrνll
True, Andoks agreed to allow MediaPool, Inc. to construct a billboard structure but it
was conditioned on Andoks and the lessors approval to avoid disruption of its
business operation. Sy is thus cognizant of the fact that the said billboard structure
construction might disrupt, as it already did, the intended construction of
respondents outlet. It is thereby understood that the construction of a billboard
should be done within a period of time that is reasonable and sufficient so as not to
disrupt the business operations of respondent. In this case, Andoks had agreed to
several extensions for MediaPool, Inc. to finish its billboard construction. It had sent
a total of four (4) letters in a span of 8 months, all of which were merely ignored.
Indeed, the indifference demonstrated by Sy leaves no doubt that she has reneged
on her obligation.
Sys disregard of Andoks repeated demands for the billboard lessee to finish the
construction is a violation of her obligation to maintain the lessee in peaceful and
adequate enjoyment of the lease. The delay in the construction had obviously
caused disruption in respondents business as it could not immediately commence
its business operations despite prompt payment of rent.
The attendant circumstances show substantial breach. The delay in the
construction prevented Andoks from using the leased premises for its business
outlet. On top of the failure of Sy to address the delay in the billboard construction,
she also failed to resolve or explain the unpaid electricity bills. Sy resorted to a
blanket denial without however producing any proof that the said bill had been
settled. These incidents refer to the fundamentals of the contract for the lease of
Sys premises. She failed to comply with the obligations that have arisen upon
Andoks payment of the amount equivalent to eight months of the monthly rentals.
Anent the imposition of legal interest, the Court of Appeals is correct in stating that
the award of damages was warranted under the facts of the case and the imposition
of legal interest was necessary consequence thereof. We find applicable the
pertinent guidelines provided in Eastern Shipping Lines, Inc. v. Court of
Appeals,15ςrνll thus:
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, whatever 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.16ςrνll
Accordingly, legal interest at the rate of 6% per annum on the amounts awarded
starts to run from 24 July 2008, when the trial court rendered judgment. From the
time this judgment becomes final and executory, the interest rate shall be 12% per
annum on the judgment amount and the interest earned up to that date, until the
judgment is wholly satisfied.ςηαοblενιrυαllαωlιbrαr
WHEREFORE, the petition is DENIED. The 20 January 2010 Decision of the Court
of Appeals in CA-G.R. CV No. 91942, affirming the 24 July 2008 Decision of the
RTC, Branch 17, Manila, is hereby AFFIRMED.ςrαlαωlιbrαr
SO ORDERED.
ESTELITA VILLAMAR, Petitioner, - versus - BALBINO MANGAOIL, and the [P]185,000.00 already
Respondent. G.R. No. 188661 Promulgated: April 11, 2012 received as above-mentioned, the
DECISION PARTY OF THE SECOND PART
REYES, J.: The Case shall pay unto the PARTY OF THE
FIRST PART not later than June
Before us is a petition for review on certiorari[1] under Rule 45 of the Rules of Court 30, 1998 and thereafter the parties
filed by Estelita Villamar (Villamar) to assail the Decision [2] rendered by the Court of shall be released of any
Appeals (CA) on February 20, 2009 in CA-G.R. CV No. 86286, the dispositive portion obligations for and against each
of which reads: other; xxx

WHEREFORE, the instant appeal On April 1, 1998, the parties executed a Deed of Absolute
is DISMISSED. The assailed decision is AFFIRMED in Sale whereby Villamar (then Estelita Bernabe) transferred
toto. the subject parcel of land to Mangaoil for and in
SO ORDERED.[3] consideration of [P]150,000.00.

The resolution[4] issued by the CA on July 8, 2009 denied the petitioner's In a letter dated September 18, 1998, Mangaoil informed
motion for reconsideration to the foregoing. Villamar that he was backing out from the sale agreed upon
giving as one of the reasons therefor:
The ruling[5] of Branch 23, Regional Trial Court (RTC) of Roxas, Isabela,
which was affirmed by the CA in the herein assailed decision and resolution, ordered 3. That the area is not yet fully
the (1) rescission of the contract of sale of real property entered into by Villamar and cleared by incumbrances as there
Balbino Mangaoil (Mangaoil); and (2) return of the down payment made relative to are tenants who are not willing to
the said contract. vacate the land without giving
them back the amount that they
Antecedents Facts mortgaged the land.

The CA aptly summarized as follows the facts of the case prior to the filing by
Mangaoil of the complaint[6] for rescission of contract before the RTC:
Villamar is the registered owner of a 3.6080 hectares parcel
of land [hereinafter referred as the subject property] in San
Francisco, Manuel, Isabela covered by Transfer Certificate
of Title (TCT) No. T-92958-A. On March 30, 1998, she
entered into an Agreement with Mangaoil for the purchase
and sale of said parcel of land, under the following terms
and conditions:
Mangaoil demanded refund of his [P]185,000.00 down
payment. Reiterating said demand in another letter dated
April 29, 1999, the same, however, was unheeded.[7] x x x
(Citations omitted)
On January 28, 2002, the respondent filed before the RTC a
complaint[8] for rescission of contract against the petitioner. In the said complaint, the
respondent sought the return of P185,000.00 which he paid to the petitioner, payment
of interests thereon to be computed from March 27, 1998 until the suit's termination,
and the award of damages, costs and P20,000.00 attorney's fees. The respondent's
factual allegations were as follows:

1. The price of the land is ONE 5. That as could be gleaned the Agreement
HUNDRED AND EIGHTY (Annex A), the plaintiff [Mangaoil] handed to the defendant
THOUSAND (180,000.00) PESOS [Villamar] the sum of [P]185,000.00 to be applied as
per hectare but only the 3.5000 follows; [P]80,000 was for the redemption of the land which
hec. shall be paid and the rest shall was mortgaged to the Rural Bank of Cauayan, San Manuel
be given free, so that the total Branch, San Manuel, Isabela, to enable the plaintiff to get
purchase or selling price shall be hold of the title and register the sale x x x and [P]105,000.00
[P]630,000.00 only; was for the redemption of the said land from private
mortgages to enable plaintiff to posses[s] and cultivate the
2. ONE HUNDRED EIGHTY FIVE same;
THOUSAND (185,000.00) 6. That although the defendant had already
PESOS of the total price was long redeemed the said land from the said bank and
already received on March 27, withdrawn TCT No. T-92958-A, she has failed and refused,
1998 for payment of the loan despite repeated demands, to hand over the said title to the
secured by the certificate of title plaintiff and still refuses and fails to do so;
covering the land in favor of the
Rural Bank of Cauayan, San 7. That, also, the plaintiff could not physically,
Manuel Branch, San Manuel, actually and materially posses[s] and cultivate the said land
Isabela [Rural Bank of Cauayan], because the private mortgage[e]s and/or present
in order that the certificate of title possessors refuse to vacate the same;
thereof be withdrawn and released
from the said bank, and the rest xxxx
shall be for the payment of the
mortgag[e]s in favor of Romeo 11. That on September 18, 1998, the plaintiff
Lacaden and Florante sent a letter to the defendant demanding a return of the
Parangan; amount so advanced by him, but the latter ignored the
3. After the release of the same, x x x;
certificate of title covering the land 12. That, again, on April 29, 1999, the plaintiff
subject-matter of this agreement, sent to the defendant another demand letter but the latter
the necessary deed of absolute likewise ignored the same, x x x;
sale in favor of the PARTY OF
THE SECOND PART shall be 13. That, finally, the plaintiff notified the
executed and the transfer be defendant by a notarial act of his desire and intention to
immediately effected so that the rescind the said contract of sale, xxx;
latter can apply for a loan from any
lending institution using the x x x x.[9] (Citations omitted)
corresponding certificate of title as
collateral therefor, and the In the respondents answer to the complaint, she averred that she had complied with
proceeds of the loan, whatever be her obligations to the respondent. Specifically, she claimed having caused the
the amount, be given to the release of TCT No. T-92958-A by the Rural Bank of Cauayan and its delivery to a
PARTY OF THE FIRST PART; certain Atty. Pedro C. Antonio (Atty. Antonio). The petitioner alleged that Atty. Antonio
was commissioned to facilitate the transfer of the said title in the respondent's name.
4. Whatever balance left from the The petitioner likewise insisted that it was the respondent who unceremoniously
agreed purchase price of the land withdrew from their agreement for reasons only the latter knew.
subject matter hereof after
deducting the proceed of the loan The Ruling of the RTC
On September 9, 2005, the RTC ordered the rescission of the agreement and the
deed of absolute sale executed between the respondent and the petitioner. The
petitioner was, thus directed to return to the respondent the sum of P185,000.00
which the latter tendered as initial payment for the purchase of the subject property.
The RTC ratiocinated that:
There is no dispute that the defendant sold the LAND to the
plaintiff for [P]630,000.00 with down payment
of [P]185,000.00. There is no evidence presented if there
were any other partial payments made after the perfection
of the contract of sale.
Article 1458 of the Civil Code provides:
Art. 1458. By the contract of
sale[,] one of the contracting
parties obligates himself to
transfer the ownership of and to
deliver a determinate thing, and
the other to pay therefore a price
certain in money or its
equivalent.
As such, in a contract of sale, the obligation of the vendee
to pay the price is correlative of the obligation of the vendor
to deliver the thing sold. It created or established at the
same time, out of the same course, and which result in
mutual relations of creditor and debtor between the parties.
The claim of the plaintiff that the LAND has not been
delivered to him was not refuted by the defendant.
Considering that defendant failed to deliver to him the
certificate of title and of the possession over the LAND to
the plaintiff, the contract must be rescinded pursuant to
Article 1191 of the Civil Code which, in part, provides:
Art. 1191. The power of rescind
obligations is implied in
reciprocal ones in case one of
the obligors should not comply
with what is incumbent upon
him.[10]
The petitioner filed before the CA an appeal to challenge the foregoing. She ascribed
error on the part of the RTC when the latter ruled that the agreement and deed of
sale executed by and between the parties can be rescinded as she failed to deliver
to the respondent both the subject property and the certificate of title covering the
same.
The Ruling of the CA
On February 20, 2009, the CA rendered the now assailed decision dismissing the
petitioners appeal based on the following grounds:
Burden of proof is the duty of a party to prove the truth of
his claim or defense, or any fact in issue necessary to
establish his claim or defense by the amount of evidence
required by law. In civil cases, the burden of proof is on
the defendant if he alleges, in his answer, an affirmative
defense, which is not a denial of an essential ingredient in
the plaintiff's cause of action, but is one which, if
established, will be a good defense i.e., an avoidance of the
claim, which prima facie, the plaintiff already has because
of the defendant's own admissions in the pleadings.
Defendant-appellant Villamar's defense in this case was
an affirmative defense. She did not deny plaintiff-
appellees allegation that she had an agreement with
plaintiff-appellee for the sale of the subject parcel of land.
Neither did she deny that she was obliged under the
contract to deliver the certificate of title to plaintiff-appellee
immediately after said title/property was redeemed from the
bank. What she rather claims is that she already
complied with her obligation to deliver the title to
plaintiff-appellee when she delivered the same to Atty.
Antonio as it was plaintiff-appellee himself who engaged
the services of said lawyer to precisely work for the
immediate transfer of said title in his name. Since, however,
this affirmative defense as alleged in defendant-appellant's
answer was not admitted by plaintiff-appellee, it then follows
that it behooved the defendant-appellant to prove her
averments by preponderance of evidence.
Yet, a careful perusal of the record shows that the
defendant-appellant failed to sufficiently prove said
affirmative defense. She failed to prove that in the first
place, Atty. Antonio existed to receive the title for and in
behalf of plaintiff-appellee. Worse, the defendant-
appellant failed to prove that Atty. Antonio received said
title as allegedly agreed upon.
We likewise sustain the RTC's finding that defendant-
appellant V[i]llamar failed to deliver possession of the
subject property to plaintiff-appellee Mangaoil. As correctly
observed by the RTC - [t]he claim of the plaintiff that the land
has not been delivered to him was not refuted by the
defendant. Not only that. On cross-examination, the
defendant-appellant gave Us insight on why no such
delivery could be made, viz.:
xxxx
Q: So, you were not able to
deliver this property to Mr. Mangaoil just
after you redeem the property because of
the presence of these two (2) persons, is it
not?
xxx
A: Yes, sir.
Q: Forcing you to file the case against them and
which according to you, you have won, is it not?
A: Yes, sir.
Q: And now at present[,] you are in actual
possession of the land?
A: Yes, sir. x x x
With the foregoing judicial admission, the RTC could not
have erred in finding that defendant-[appellant] failed to
deliver the possession of the property sold, to plaintiff-
appellee.
Neither can We agree with defendant-appellant in her
argument that the execution of the Deed of Absolute Sale
by the parties is already equivalent to a valid and
constructive delivery of the property to plaintiff-appellee.
Not only is it doctrinally settled that in a contract of sale,
the vendor is bound to transfer the ownership of, and to
deliver the thing that is the object of the sale, the way
Article 1547 of the Civil Code is worded, viz.:
Art. 1547. In a contract of sale,
unless a contrary intention
appears, there is:
(1) An implied warranty on the
part of the seller that he has a
right to sell the thing at the time
when the ownership is to pass,
and that the buyer shall from
that time have and enjoy the
legal and peaceful possession
of the thing;
(2) An implied warranty that the
thing shall be free from any hidden
defaults or defects, or any change
or encumbrance not declared or
known to the buyer.
x x x.
shows that actual, and not mere constructive delivery is
warrantied by the seller to the buyer. (P)eaceful
possession of the thing sold can hardly be enjoyed in a
mere constructive delivery.
The obligation of defendant-appellant Villamar to transfer
ownership and deliver possession of the subject parcel of
land was her correlative obligation to plaintiff-appellee in
 exchange for the latter's purchase price thereof. Thus, if she
fails to comply with what is incumbent upon her, a
correlative right to rescind such contract from plaintiff-
appellee arises, pursuant to Article 1191 of the Civil
Code.[11] x x x (Citations omitted)
The Issues
Aggrieved, the petitioner filed before us the instant petition and submits the following
issues for resolution:
I.
WHETHER THE FAILURE OF PETITIONER-SELLER TO
DELIVER THE CERTIFICATE OF TITLE OVER THE
PROPERTY TO RESPONDENT-BUYER IS A BREACH OF
OBLIGATION IN A CONTRACT OF SALE OF REAL
PROPERTY THAT WOULD WARRANT RESCISSION OF
THE CONTRACT;
II.
WHETHER PETITIONER IS LIABLE FOR BREACH OF
OBLIGATION IN A CONTRACT OF SALE FOR FAILURE
OF RESPONDENT[-]BUYER TO IMMEDIATELY TAKE
ACTUAL POSSESSION OF THE PROPERTY
NOTWITHSTANDING THE ABSENCE OF ANY
STIPULATION IN THE CONTRACT PROVIDING FOR THE
SAME;
III.
WHETHER THE EXECUTION OF A DEED OF SALE OF
REAL PROPERTY IN THE PRESENT CASE IS ALREADY
EQUIVALENT TO A VALID AND CONSTRUCTIVE
DELIVERY OF THE PROPERTY TO THE BUYER;
IV.
WHETHER OR NOT THE CONTRACT
OF SALE SUBJECT MATTER OF THIS CASE SHOULD
BE RESCINDED ON SLIGHT OR CASUAL BREACH;
V.
WHETHER OR NOT THE COURT OF APPEALS ERRED
IN AFFIRMING THE DECISION OF THE RTC ORDERING
THE RESCISSION OF THE CONTRACT OF SALE[.][12]
The Petitioner's Arguments
The petitioner avers that the CA, in ordering the rescission of the agreement and
deed of sale, which she entered into with the respondent, on the basis of her alleged
failure to deliver the certificate of title, effectively imposed upon her an extra duty
which was neither stipulated in the contract nor required by law. She argues that
under Articles 1495[13] and 1496[14] of the New Civil Code (NCC), the obligation to
deliver the thing sold is complied with by a seller who executes in favor of a buyer an
instrument of sale in a public document. Citing Chua v. Court of Appeals,[15] she
claims that there is a distinction between transferring a certificate of title in the buyer's
name, on one hand, and transferring ownership over the property sold, on the
other. The latter can be accomplished by the seller's execution of an instrument of
sale in a public document. The recording of the sale with the Registry of Deeds and
the transfer of the certificate of title in the buyer's name are necessary only to bind
third parties to the transfer of ownership.[16]
The petitioner contends that in her case, she had already complied with her
obligations under the agreement and the law when she had caused the release of
TCT No. T-92958-A from the Rural Bank of Cauayan, paid individual mortgagees
Romeo Lacaden (Lacaden) and Florante Parangan (Paranga), and executed an
absolute deed of sale in the respondent's favor. She adds that before T-92958-A can
be cancelled and a new one be issued in the respondent's favor, the latter decided to
withdraw from their agreement. She also points out that in the letters seeking for an
outright rescission of their agreement sent to her by the respondent, not once did he
demand for the delivery of TCT.
The petitioner insists that the respondent's change of heart was due to (1) the latter's
realization of the difficulty in determining the subject property's perimeter boundary;
(2) his doubt that the property he purchased would yield harvests in the amount he
expected; and (3) the presence of mortgagees who were not willing to give up
possession without first being paid the amounts due to them. The petitioner contends
that the actual reasons for the respondent's intent to rescind their agreement did not
at all constitute a substantial breach of her obligations.
The petitioner stresses that under Article 1498 of the NCC, when a sale is made
through a public instrument, its execution is equivalent to the delivery of the thing
which is the contract's object, unless in the deed, the contrary appears or can be
inferred. Further, in Power Commercial and Industrial Corporation v. CA,[17] it was
ruled that the failure of a seller to eject lessees from the property he sold and to
deliver actual and physical possession, cannot be considered a substantial breach,
when such failure was not stipulated as a resolutory or suspensive condition in the
contract and when the effects and consequences of the said failure were not specified
as well. The execution of a deed of sale operates as a formal or symbolic delivery of
the property sold and it already authorizes the buyer to use the instrument as proof
of ownership.[18]
The petitioner argues that in the case at bar, the agreement and the absolute deed
of sale contains no stipulation that she was obliged to actually and physically deliver
the subject property to the respondent. The respondent fully knew Lacaden's and
Parangan's possession of the subject property. When they agreed on the sale of the
property, the respondent consciously assumed the risk of not being able to take
immediate physical possession on account of Lacaden's and Parangan's presence
therein.
The petitioner likewise laments that the CA allegedly misappreciated the evidence
offered before it when it declared that she failed to prove the existence of Atty.
Antonio. For the record, she emphasizes that the said lawyer prepared and notarized
the agreement and deed of absolute sale which were executed between the parties.
He was also the petitioners counsel in the proceedings before the RTC. Atty. Antonio
was also the one asked by the respondent to cease the transfer of the title over the
subject property in the latter's name and to return the money he paid in advance.
The Respondent's Contentions
In the respondent's comment,[19] he seeks the dismissal of the instant petition. He
invokes Articles 1191 and 1458 to argue that when a seller fails to transfer the
ownership and possession of a property sold, the buyer is entitled to rescind the
contract of sale. Further, he contends that the execution of a deed of absolute sale
does not necessarily amount to a valid and constructive delivery. In Masallo v.
Cesar,[20] it was ruled that a person who does not have actual possession of real
property cannot transfer constructive possession by the execution and delivery of a
public document by which the title to the land is transferred. In Addison v. Felix and
Tioco,[21] the Court was emphatic that symbolic delivery by the execution of a public
instrument is equivalent to actual delivery only when the thing sold is subject to the
control of the vendor.
Our Ruling
The instant petition is bereft of merit.
There is only a single issue for resolution in the instant petition, to wit, whether or not
the failure of the petitioner to deliver to the respondent both the physical possession
of the subject property and the certificate of title covering the same amount to a
substantial breach of the former's obligations to the latter constituting a valid cause
to rescind the agreement and deed of sale entered into by the parties.
We rule in the affirmative.
The RTC and the CA both found that the petitioner failed to comply with her
obligations to deliver to the respondent both the possession of the subject property
and the certificate of title covering the same.
Although Articles 1458, 1495 and 1498 of the NCC and case law do
not generally require the seller to deliver to the buyer the physical
possession of the property subject of a contract of sale and the
certificate of title covering the same, the agreement entered into by
the petitioner and the respondent provides otherwise. However, the
terms of the agreement cannot be considered as violative of law,
morals, good customs, public order, or public policy, hence, valid.
Article 1458 of the NCC obliges the seller to transfer the ownership of and to deliver
a determinate thing to the buyer, who shall in turn pay therefor a price certain in
money or its equivalent. In addition thereto, Article 1495 of the NCC binds the seller
to warrant the thing which is the object of the sale. On the other hand, Article 1498 of
the same code provides that when the sale is made through a public instrument, the
execution thereof shall be equivalent to the delivery of the thing which is the object of
the contract, if from the deed, the contrary does not appear or cannot clearly be
inferred.
In the case of Chua v. Court of Appeals,[22] which was cited by the petitioner, it was
ruled that when the deed of absolute sale is signed by the parties and notarized, then
delivery of the real property is deemed made by the seller to the buyer.[23] The transfer
of the certificate of title in the name of the buyer is not necessary to confer ownership
upon him.
In the case now under our consideration, item nos. 2 and 3 of the agreement entered
into by the petitioner and the respondent explicitly provide:
2. ONE HUNDRED EIGHTY FIVE THOUSAND
(P185,000.00) PESOS of the total price was already
received on March 27, 1998 for payment of the loan secured
by the certificate of title covering the land in favor of the
Rural Bank of Cauayan, San Manuel Branch, San Manuel,
Isabela, in order that the certificate of title thereof be
withdrawn and released from the said bank, and the rest
shall be for the payment of the mortgages in favor of Romeo
Lacaden and Florante Parangan;
 3. After the release of the certificate of title covering the land
subject-matter of this agreement, the necessary deed of
absolute sale in favor of the PARTY OF THE SECOND
PART shall be executed and the transfer be immediately
effected so that the latter can apply for a loan from any
lending institution using the corresponding certificate of title
as collateral therefor, and the proceeds of the loan,
whatever be the amount, be given to the PARTY OF THE
FIRST PART;[24] (underlining supplied)
As can be gleaned from the agreement of the contending parties, the respondent
initially paid the petitioner P185,000.00 for the latter to pay the loan obtained from the
Rural Bank of Cauayan and to cause the release from the said bank of the certificate
of title covering the subject property. The rest of the amount shall be used to pay the
mortgages over the subject property which was executed in favor of Lacaden and
Parangan. After the release of the TCT, a deed of sale shall be executed and transfer
shall be immediately effected so that the title covering the subject property can be
used as a collateral for a loan the respondent will apply for, the proceeds of which
shall be given to the petitioner.
Under Article 1306 of the NCC, the contracting parties may establish such
stipulations, clauses, terms and conditions as they may deem convenient, provided
they are not contrary to law, morals, good customs, public order or public policy.
While Articles 1458 and 1495 of the NCC and the doctrine enunciated in the case
of Chua do not impose upon the petitioner the obligation to physically deliver to the
respondent the certificate of title covering the subject property or cause the transfer
in the latter's name of the said title, a stipulation requiring otherwise is not prohibited
by law and cannot be regarded as violative of morals, good customs, public order or
public policy. Item no. 3 of the agreement executed by the parties expressly states
that transfer [shall] be immediately effected so that the latter can apply for a loan from
any lending institution using the corresponding certificate of title as collateral
therefore. Item no. 3 is literal enough to mean that there should be physical delivery
of the TCT for how else can the respondent use it as a collateral to obtain a loan if
the title remains in the petitioners possession. We agree with the RTC and the CA
that the petitioner failed to prove that she delivered the TCT covering the subject
property to the respondent. What the petitioner attempted to establish was that she
gave the TCT to Atty. Antonio whom she alleged was commissioned to effect the
transfer of the title in the respondent's name. Although Atty. Antonio's existence is
certain as he was the petitioners counsel in the proceedings before the RTC, there
was no proof that the former indeed received the TCT or that he was commissioned
to process the transfer of the title in the respondent's name.
It is likewise the petitioners contention that pursuant to Article 1498 of the NCC, she
had already complied with her obligation to deliver the subject property upon her
execution of an absolute deed of sale in the respondents favor. The petitioner avers
that she did not undertake to eject the mortgagors Parangan and Lacaden, whose
presence in the premises of the subject property was known to the respondent.
We are not persuaded.
In the case of Power Commercial and Industrial Corporation[25] cited by the petitioner,
the Court ruled that the failure of the seller to eject the squatters from the property
sold cannot be made a ground for rescission if the said ejectment was not stipulated
as a condition in the contract of sale, and when in the negotiation stage, the buyer's
counsel himself undertook to eject the illegal settlers.
The circumstances surrounding the case now under our consideration are different.
In item no. 2 of the agreement, it is stated that part of the P185,000.00 initially paid
to the petitioner shall be used to pay the mortgagors, Parangan and Lacaden. While
the provision does not expressly impose upon the petitioner the obligation to eject the
said mortgagors, the undertaking is necessarily implied. Cessation of occupancy of
the subject property is logically expected from the mortgagors upon payment by the
petitioner of the amounts due to them.
We note that in the demand letter[26] dated September 18, 1998, which was sent by
the respondent to the petitioner, the former lamented that the area is not yet fully
cleared of incumbrances as there are tenants who are not willing to vacate the land
without giving them back the amount that they mortgaged the land. Further, in the
proceedings before the RTC conducted after the complaint for rescission was filed,
the petitioner herself testified that she won the ejectment suit against the mortgagors
only last year.[27] The complaint was filed on September 8, 2002 or more than four
years from the execution of the parties' agreement. This means that after the lapse
of a considerable period of time from the agreement's execution, the mortgagors
remained in possession of the subject property.
Notwithstanding the absence of stipulations in the agreement and absolute
deed of sale entered into by Villamar and Mangaoil expressly indicating the
consequences of the former's failure to deliver the physical possession of the
subject property and the certificate of title covering the same, the latter is
entitled to demand for the rescission of their contract pursuant to Article 1191
of the NCC.
We note that the agreement entered into by the petitioner and the respondent
only contains three items specifying the parties' undertakings. In item no. 5, the
parties consented to abide with all the terms and conditions set forth in this agreement
and never violate the same.[28]
Article 1191 of the NCC is clear that the power to rescind obligations is implied in
reciprocal ones, in case one of the obligors should not comply with what is incumbent
upon him. The respondent cannot be deprived of his right to demand for rescission
in view of the petitioners failure to abide with item nos. 2 and 3 of the agreement. This
remains true notwithstanding the absence of express stipulations in the agreement
indicating the consequences of breaches which the parties may commit. To hold
otherwise would render Article 1191 of the NCC as useless.
Article 1498 of the NCC generally considers the execution of a
public instrument as constructive delivery by the seller to the buyer
of the property subject of a contract of sale. The case at bar,
however, falls among the exceptions to the foregoing rule since a
mere presumptive and not conclusive delivery is created as the
respondent failed to take material possession of the subject
property.
Further, even if we were to assume for argument's sake that the agreement entered
into by the contending parties does not require the delivery of the physical possession
of the subject property from the mortgagors to the respondent, still, the petitioner's
claim that her execution of an absolute deed of sale was already sufficient as it
already amounted to a constructive delivery of the thing sold which Article 1498 of
the NCC allows, cannot stand.
In Philippine Suburban Development Corporation v. The Auditor General,[29] we held:
When the sale of real property is made in a public
instrument, the execution thereof is equivalent to the
delivery of the thing object of the contract, if from the deed
the contrary does not appear or cannot clearly be inferred.
In other words, there is symbolic delivery of the property
subject of the sale by the execution of the public instrument,
unless from the express terms of the instrument, or by clear
inference therefrom, this was not the intention of the parties.
Such would be the case, for instance, x x x where the
vendor has no control over the thing sold at the moment of
the sale, and, therefore, its material delivery could not have
been made.[30] (Underlining supplied and citations omitted)
Stated differently, as a general rule, the execution of a public instrument amounts to
a constructive delivery of the thing subject of a contract of sale. However, exceptions
exist, among which is when mere presumptive and not conclusive delivery is created
in cases where the buyer fails to take material possession of the subject of sale. A
person who does not have actual possession of the thing sold cannot transfer
constructive possession by the execution and delivery of a public instrument.
In the case at bar, the RTC and the CA found that the petitioner failed to deliver to
the respondent the possession of the subject property due to the continued presence
and occupation of Parangan and Lacaden. We find no ample reason to reverse the
said findings. Considered in the light of either the agreement entered into by the
parties or the pertinent provisions of law, the petitioner failed in her undertaking to
deliver the subject property to the respondent.
IN VIEW OF THE FOREGOING, the instant petition is DENIED. The February 20,
2009 Decision and July 8, 2009 Resolution of the Court of Appeals, directing the
rescission of the agreement and absolute deed of sale entered into by Estelita
Villamar and Balbino Mangaoil and the return of the down payment made for the
purchase of the subject property, are AFFIRMED. However, pursuant to our ruling
in Eastern Shipping Lines, Inc. v. CA,[31] an interest of 12% per annum is imposed
on the sum of P185,000.00 to be returned to Mangaoil to be computed from the date
of finality of this Decision until full satisfaction thereof.
SO ORDERED.
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 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.
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.]
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.
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
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.
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.
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.
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.
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).]
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. L-21780, 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.

There is no denying that in the instant case the resolution or rescission of WHEREFORE, the Decision of the Court of Appeals is hereby MODIFIED
the Contract to Sell was valid. Neither can it be said that the cancellation as to the amount forfeited which is reduced to fifty percent (50%) of the
of the contract was ineffective for failure of private respondents to give amount already paid or P23,656.32 and AFFIRMED as to all other
petitioners notice thereof as petitioners were informed cancelled private respects.
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 Private respondent is ordered to refund to petitioners the excess of
cancellation need not be by notarial act, private respondent's letter being P23,656.32 within thirty (30) days from the date of finality of this judgment.
sufficient compliance with the legal requirement.
SO ORDERED.
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.

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
GR No. 210215, Dec 09, 2015 - ROGELIO S. NOLASCO v. CELERINO S. CUERPO +
PERLAS-BERNABE, J.: Assailed in this petition for review on certiorari[1] are the
Decision[2] dated June 17, 2013 and the Resolution[3]dated November 19, 2013 of the Court of
Appeals (CA) in CA-G.R. CV No. 95353, which affirmed in toto the Decision[4] dated March 1,
2010 of the Regional Trial Court of Quezon City, Branch 81 (RTC) in Civil Case No. Q-08-63860
ordering the rescission of the Contract to Sell executed by herein parties and the return of the
amounts already paid by respondents Celerino S. Cuerpo, Joselito Encabo, Joseph Ascutia,
and Domilo Lucenario (respondents) to petitioners Rogelio S. Nolasco, Nicanora N. Guevara,
Leonarda N. Elpedes, Heirs of Arnulfo S. Nolasco, and Remedios M. Nolasco, represented by
Elenita M. Nolasco (petitioners), as well as the remaining post-dated checks issued by
respondent Celerino S. Cuerpo representing the remaining monthly amortizations, all in
connection with the said contract.
The Facts
On July 22, 2008, petitioners and respondents entered into a Contract to Sell [5] (subject
contract) over a 165,775-square meter parcel of land located in Barangay San Isidro,
Rodriguez, Rizal covered by Original Certificate of Title No. 152 (subject land).[6] The subject
contract provides, inter alia, that: (a) the consideration for the sale is P33,155,000.00 payable
as follows: down payment in the amount of P11,604,250.00 inclusive of the amount of
P2,000,000.00 previously paid by respondents as earnest money/reservation fee, and the
remaining balance of P21,550,750.00 payable in 36 monthly installments, each in the amount of
P598,632.00 through post-dated checks; (b) in case any of the checks is dishonored, the
amounts already paid shall be forfeited in petitioners' favor, and the latter shall be entitled to
cancel the subject contract without judicial recourse in addition to other appropriate legal action;
(c) respondents are not entitled to possess the subject land until full payment of the purchase
price; (d) petitioners shall transfer the title over the subject land from a certain Edilberta N.
Santos to petitioners' names, and, should they fail to do so, respondents may cause the said
transfer and charge the costs incurred against the monthly amortizations; and (e) upon full
payment of the purchase price, petitioners shall transfer title over the subject land to
respondents.[7] However, respondents sent petitioners a letter[8] dated November 7, 2008
seeking to rescind the subject contract on the ground of financial difficulties in complying with
the same. They also sought the return of the amount of P12,202,882.00 they had paid to
petitioners.[9] As their letter went unheeded, respondents filed the instant complaint[10] for
rescission before the RTC.[11]
In their defense,[12] petitioners countered that respondents' act is a unilateral cancellation of the
subject contract as the former did not consent to it. Moreover, the ground of financial difficulties
is not among the grounds provided by law to effect a valid rescission. [13]
In view of petitioners' failure to file the required pre-trial brief, they were declared "as in default"
and, consequently, respondents were allowed to present their evidence ex-parte.[14]
The RTC Ruling
In a Decision[15] dated March 1, 2010, the RTC ruled in favor of respondents and,
accordingly, ordered: (a) the rescission of the subject contract; and (b) the return of the
amounts already paid by respondents to petitioners, as well as the remaining post-dated
checks issued by respondent Celerino S. Cuerpo representing the remaining monthly
amortizations.[16]
It found petitioners to have substantially breached paragraph 7 of the subject contract
which states that "[t]he [petitioners] shall, within ninety (90) days from the signing of [the
subject contract] cause the completion of the transfer of registration of title of the property
subject of [the said contract], from Edilberta N. Santos to their names, at [petitioners']
own expense."[17] As such, respondents were entitled to rescission under Article 1191 of
the Civil Code.[18]
Dissatisfied, petitioners appealed[19] to the CA.
The CA Ruling
In a Decision[20] dated June 17, 2013, the CA affirmed the RTC ruling. It agreed with the
RTC that petitioners substantially breached paragraph 7 of the subject contract when
they did not effect the transfer of the subject land from Edilberta N. Santos to petitioners'
names within ninety (90) days from the execution of said contract, thus, entitling
respondents to rescind the same. In this relation, the CA held that under the present
circumstances, the forfeiture of the payments already made by respondents to petitioners
is clearly improper and unwarranted.[21]
Aggrieved, petitioners moved for reconsideration,[22] which was denied in a
Resolution[23] dated November 19, 2013; hence, this petition.
The Issue Before the Court
The core issue for the Court's resolution is whether or not the CA correctly affirmed the
rescission of the subject contract and the return of the amounts already paid by
respondents to petitioners, as well as the remaining post-dated checks issued by
respondent Celerino S. Cuerpo representing the remaining monthly amortizations.
The Court's Ruling
The petition is partially meritorious.
In reciprocal obligations, either party may rescind - or more appropriately, resolve - the
contract upon the other party's substantial breach of the obligation/s he had assumed
thereunder.[24] This is expressly provided for in Article 1191 of the Civil Code which
states:
Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of
the obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation,
with the payment of damages in either case. He may also seek rescission, even after he
has chosen fulfillment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the
fixing of a period.
This is understood to be without prejudice to the rights of third persons who have
acquired the thing, in accordance with Articles 1385 and 1388 and the Mortgage Law.
"More accurately referred to as resolution, the right of rescission under Article 1191 is
predicated on a breach of faith that violates the reciprocity between the parties to the
contract. This retaliatory remedy is given to the contracting party who suffers the injurious
breach on the premise that it is 'unjust that a party be held bound to fulfill his promises
when the other violates his.'"[25] Note that the rescission (or resolution) of a contract will
not be permitted for a slight or casual breach, but only for such substantial and
fundamental violations as would defeat the very object of the parties in making the
agreement.[26] Ultimately, the question of whether a breach of contract is substantial
depends upon the attending circumstances.[27]
In the instant case, both the RTC and the CA held that petitioners were in substantial
breach of paragraph 7 of the subject contract as they did not cause the transfer of the
property to their names from one Edilberta N. Santos within 90 days from the execution of
said contract.[28]
The courts a quo are mistaken.
Paragraph 7 of the subject contract state in full:
7. [Petitioners] shall, within ninety (90) days from the signing of [the subject contract],
cause the completion of the transfer of registration of title of the property subject of [the
subject contract], from Edilberta N. Santos to their names, at [petitioners'] own
expense. Failure on the part of [petitioners] to undertake the foregoing within the
prescribed period shall automatically authorize [respondents] to undertake the
same in behalf of [petitioners] and charge the costs incidental to the monthly
amortizations upon due date. (Emphasis and underscoring supplied)
A plain reading of paragraph 7 of the subject contract reveals that while the RTC and the
CA were indeed correct in finding that petitioners failed to perform their obligation to
effect the transfer of the title to the subject land from one Edilberta N. Santos to their
names within the prescribed period, said courts erred in concluding that such failure
constituted a substantial breach that would entitle respondents to rescind (or resolve) the
subject contract. To reiterate, for a contracting party to be entitled to rescission (or
resolution) in accordance with Article 1191 of the Civil Code, the other contracting party
must be in substantial breach of the terms and conditions of their contract. A substantial
breach of a contract, unlike slight and casual breaches thereof, is a fundamental breach
that defeats the object of the parties in entering into an agreement. [29] Here, it cannot be
said that petitioners' failure to undertake their obligation under paragraph 7 defeats the
object of the parties in entering into the subject contract, considering that the same
paragraph provides respondents contractual recourse in the event of petitioners' non-
performance of the aforesaid obligation, that is, to cause such transfer themselves in
behalf and at the expense of petitioners.
Indubitably, there is no substantial breach of paragraph 7 on the part of petitioners that
would necessitate a rescission (or resolution) of the subject contract. As such, a reversal
of the rulings of the RTC and the CA is in order.
The foregoing notwithstanding, the Court cannot grant petitioners' prayer in the instant
petition to order the cancellation of the subject contract and the forfeiture of the amounts
already paid by respondents on account of the latter's failure to pay its monthly
amortizations,[30] simply because in their Answer with Compulsory Counterclaim and
Motion for Summary Judgment[31] filed before the RTC, petitioners neither prayed for this
specific relief nor argued that they were entitled to the same. Worse, petitioners were
declared "as in default" for failure to file the required pre-trial brief and, thus, failed to
present any evidence in support of their defense.[32]It is settled that "[w]hen a party
deliberately adopts a certain theory and the case is decided upon that theory in the court
below, he will not be permitted to change the same on appeal, because to permit him to
do so would be unfair to the adverse party."[33] The Court's pronouncement in Peña v.
Spouses Tolentino[34] is instructive on this matter, to wit:
Indeed, the settled rule in this jurisdiction, according to Mon v. Court of Appeals, is that a
party cannot change his theory of the case or his cause of action on appeal. This rule
affirms that "courts of justice have no jurisdiction or power to decide a question not in
issue." Thus, a judgment that goes beyond the issues and purports to adjudicate
something on which the court did not hear the parties is not only irregular but also
extrajudicial and invalid. The legal theory under which the controversy
was heard and decided in the trial court should be the same theory under which
the review on appeal is conducted. Otherwise, prejudice will result to the adverse
party. We stress that points of law, theories, issues, and arguments not adequately
brought to the attention of the lower court will not be ordinarily considered by a
reviewing court, inasmuch as they cannot be raised for the first time on appeal.
This would be offensive to the basic rules of fair play, justice, and due
process.[35] (Emphasis and underscoring supplied)
WHEREFORE, the petition is PARTIALLY GRANTED. Accordingly, the Decision dated
June 17, 2013 and the Resolution dated November 19, 2013 of the Court of Appeals in
CA-G.R. CV No. 95353 are hereby REVERSEDand SET ASIDE. The Contract to Sell
executed by the parties on July 22, 2008 remains VALID and SUBSISTING.
SO ORDERED.
G.R. No. 188986 GALILEO A. MAGLASANG v. NORTHWESTERN UNIVERSITY +
SERENO, C.J.: Before this Court is a Rule 45 Petition, seeking a review of the 27 July
2009 Court of Appeals (CA) Decision in CA-G.R. CV No. 88989,[1] which modified the
Regional Trial Court (RTC) Decision of 8 January 2007 in Civil Case No. Q-04-
53660.[2] The CA held that petitioner substantially breached its contracts with respondent
for the installation of an integrated bridge system (IBS).
The antecedent facts are as follows:[3]
On 10 June 2004, respondent Northwestern University (Northwestern), an educational
institution offering maritime-related courses, engaged the services of a Quezon City-
based firm, petitioner GL Enterprises, to install a new IBS in Laoag City. The installation
of an IBS, used as the students' training laboratory, was required by the Commission on
Higher Education (CHED) before a school could offer maritime transportation programs. [4]
Since its IBS was already obsolete, respondent required petitioner to supply and install
specific components in order to form the most modern IBS that would be acceptable to
CHED and would be compliant with the standards of the International Maritime
Organization (IMO). For this purpose, the parties executed two contracts.
The first contract partly reads:[5]
That in consideration of the payment herein mentioned to be made by the First Party
(defendant), the Second Party agrees to furnish, supply, install and integrate the most
modern INTEGRATED BRIDGE SYSTEM located at Northwestern University Mock Boat
in accordance with the general conditions, plans and specifications of this contract.
SUPPLY & INSTALLATION OF THE FOLLOWING:
INTEGRATED BRIDGE SYSTEM
A. 2-RADAR SYSTEM
B. OVERHEAD CONSOLE MONITORING SYSTEM
C. ENGINE TELEGRAPH SYSTEM
D. ENGINE CONTROL SYSTEM
E. WEATHER CONTROL SYSTEM
F. ECDIS SYSTEM
G. STEERING WHEEL SYSTEM
H. BRIDGE CONSOLE
TOTAL COST: PhP 3,800,000.00
LESS: OLD MARITIME
EQUIPMENT TRADE-IN VALUE 1,000,000.00
DISCOUNT 100,000.00
PROJECT COST (MATERIALS & INSTALLATION) PhP 2,700,000.00
(Emphasis in the original)
The second contract essentially contains the same terms and conditions as follows: [6]
That in consideration of the payment herein mentioned to be made by the First Party
(defendant), the Second Party agrees to furnish, supply, install & integrate the most
modern INTEGRATED BRIDGE SYSTEM located at Northwestern University MOCK
BOAT in accordance with the general conditions, plans and specifications of this
contract.
SUPPLY & INSTALLATION OF THE FOLLOWING:
1. ARPA RADAR SIMULATION ROOM
xxxx
2. GMDSS SIMULATION ROOM
xxxx
TOTAL COST: PhP 270,000.00
(Emphasis in the original)
Common to both contracts are the following provisions: (1) the IBS and its components
must be compliant with the IMO and CHED standard and with manuals for
simulators/major equipment; (2) the contracts may be terminated if one party commits a
substantial breach of its undertaking; and (3) any dispute under the agreement shall first
be settled mutually between the parties, and if settlement is not obtained, resort shall be
sought in the courts of law.
Subsequently, Northwestern paid P1 million as down payment to GL Enterprises. The
former then assumed possession of Northwestern's old IBS as trade-in payment for its
service. Thus, the balance of the contract price remained at P1.97 million.[7]
Two months after the execution of the contracts, GL Enterprises technicians delivered
various materials to the project site. However, when they started installing the
components, respondent halted the operations. GL Enterprises then asked for an
explanation.[8]
Northwestern justified the work stoppage upon its finding that the delivered equipment
were substandard.[9] It explained further that GL Enterprises violated the terms and
conditions of the contracts, since the delivered components (1) were old; (2) did not have
instruction manuals and warranty certificates; (3) contained indications of being
reconditioned machines; and (4) did not meet the IMO and CHED standards. Thus,
Northwestern demanded compliance with the agreement and suggested that GL
Enterprises meet with the former's representatives to iron out the situation.
Instead of heeding this suggestion, GL Enterprises filed on 8 September 2004 a
Complaint[10] for breach of contract and prayed for the following sums: P1.97 million,
representing the amount that it would have earned, had Northwestern not stopped it from
performing its tasks under the two contracts; at least P100,000 as moral damages; at
least P100,000 by way of exemplary damages; at least P100,000 as attorney's fees and
litigation expenses; and cost of suit. Petitioner alleged that Northwestern breached the
contracts by ordering the work stoppage and thus preventing the installation of the
materials for the IBS.
Northwestern denied the allegation. In its defense, it asserted that since the equipment
delivered were not in accordance with the specifications provided by the contracts, all
succeeding works would be futile and would entail unnecessary expenses. Hence, it
prayed for the rescission of the contracts and made a compulsory counterclaim for actual,
moral, and exemplary damages, and attorney's fees.
The RTC held both parties at fault. It found that Northwestern unduly halted the
operations, even if the contracts called for a completed project to be evaluated by the
CHED. In turn, the breach committed by GL Enterprises consisted of the delivery of
substandard equipment that were not compliant with IMO and CHED standards as
required by the agreement.
Invoking the equitable principle that "each party must bear its own loss," the trial court
treated the contracts as impossible of performance without the fault of either party or as
having been dissolved by mutual consent. Consequently, it ordered mutual restitution,
which would thereby restore the parties to their original positions as follows:[11]
Accordingly, plaintiff is hereby ordered to restore to the defendant all the equipment
obtained by reason of the First Contract and refund the downpayment of P1,000,000.00
to the defendant; and for the defendant to return to the plaintiff the equipment and
materials it withheld by reason of the non-continuance of the installation and integration
project. In the event that restoration of the old equipment taken from defendant's
premises is no longer possible, plaintiff is hereby ordered to pay the appraised value of
defendant's old equipment at P1,000,000.00. Likewise, in the event that restoration of the
equipment and materials delivered by the plaintiff to the defendant is no longer possible,
defendant is hereby ordered to pay its appraised value at P1,027,480.00.
Moreover, plaintiff is likewise ordered to restore and return all the equipment obtained by
reason of the Second Contract, or if restoration or return is not possible, plaintiff is
ordered to pay the value thereof to the defendant.
SO ORDERED.
Aggrieved, both parties appealed to the CA. With each of them pointing a finger at the
other party as the violator of the contracts, the appellate court ultimately determined that
GL Enterprises was the one guilty of substantial breach and liable for attorney's fees.
The CA appreciated that since the parties essentially sought to have an IBS compliant
with the CHED and IMO standards, it was GL Enterprises' delivery of defective
equipment that materially and substantially breached the contracts. Although the
contracts contemplated a completed project to be evaluated by CHED, Northwestern
could not just sit idly by when it was apparent that the components delivered were
substandard.
The CA held that Northwestern only exercised ordinary prudence to prevent the inevitable
rejection of the IBS delivered by GL Enterprises. Likewise, the appellate court
disregarded petitioner's excuse that the equipment delivered might not have been the
components intended to be installed, for it would be contrary to human experience to
deliver equipment from Quezon City to Laoag City with no intention to use it.
This time, applying Article 1191 of the Civil Code, the CA declared the rescission of the
contracts. It then proceeded to affirm the RTC's order of mutual restitution. Additionally,
the appellate court granted P50,000 to Northwestern by way of attorney's fees.
Before this Court, petitioner rehashes all the arguments he had raised in the courts a
quo.[12] He maintains his prayer for actual damages equivalent to the amount that he
would have earned, had respondent not stopped him from performing his tasks under the
two contracts; moral and exemplary damages; attorney's fees; litigation expenses; and
cost of suit.
Hence, the pertinent issue to be resolved in the instant appeal is whether the CA gravely
erred in (1) finding substantial breach on the part of GL Enterprises; (2) refusing
petitioner's claims for damages, and (3) awarding attorney's fees to Northwestern.
RULING OF THE COURT
Substantial Breaches of the Contracts
Although the RTC and the CA concurred in ordering restitution, the courts a quo,
however, differed on the basis thereof. The RTC applied the equitable principle of
mutual fault, while the CA applied Article 1191 on rescission.
The power to rescind the obligations of the injured party is implied in reciprocal
obligations, such as in this case. On this score, the CA correctly applied Article
1191, which provides thus:
The power to rescind obligations is implied in reciprocal ones, in case one of the
obligors should not comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the
obligation, with the payment of damages in either case. He may also seek
rescission, even after he has chosen fulfillment, if the latter should become
impossible.
The court shall decree the rescission claimed, unless there be just cause
authorizing the fixing of a period.
The two contracts require no less than substantial breach before they can be
rescinded. Since the contracts do not provide for a definition of substantial breach
that would terminate the rights and obligations of the parties, we apply the definition
found in our jurisprudence.
This Court defined in Cannu v. Galang[13] that substantial, unlike slight or casual
breaches of contract, are fundamental breaches that defeat the object of the parties
in entering into an agreement, since the law is not concerned with trifles.[14]
The question of whether a breach of contract is substantial depends upon the
attending circumstances.[15]
In the case at bar, the parties explicitly agreed that the materials to be delivered
must be compliant with the CHED and IMO standards and must be complete with
manuals. Aside from these clear provisions in the contracts, the courts a
quo similarly found that the intent of the parties was to replace the old IBS in order
to obtain CHED accreditation for Northwestern's maritime-related courses.
According to CHED Memorandum Order (CMO) No. 10, Series of 1999, as
amended by CMO No. 13, Series of 2005, any simulator used for simulator-based
training shall be capable of simulating the operating capabilities of the shipboard
equipment concerned. The simulation must be achieved at a level of physical
realism appropriate for training objectives; include the capabilities, limitations and
possible errors of such equipment; and provide an interface through which a trainee
can interact with the equipment, and the simulated environment.
Given these conditions, it was thus incumbent upon GL Enterprises to supply the
components that would create an IBS that would effectively facilitate the learning of
the students.
However, GL Enterprises miserably failed in meeting its responsibility. As contained
in the findings of the CA and the RTC, petitioner supplied substandard equipment
when it delivered components that (1) were old; (2) did not have instruction manuals
and warranty certificates; (3) bore indications of being reconditioned machines; and,
all told, (4) might not have met the IMO and CHED standards. Highlighting the
defects of the delivered materials, the CA quoted respondent's testimonial evidence
as follows:[16]
Q: In particular which of these equipment of CHED requirements were not complied
with?
A: The Radar Ma'am, because they delivered only 10-inch PPI, that is the monitor
of the Radar. That is 16-inch and the gyrocompass with two (2) repeaters and the
history card. The gyrocompass - there is no marker, there is no model, there is no
serial number, no gimbal, no gyroscope and a bulb to work it properly to point the
true North because it is very important to the Cadets to learn where is the true North
being indicated by the Master Gyrocompass.
xxxx
Q: Mr. Witness, one of the defects you noted down in this history card is that the
master gyrocompass had no gimbals, gyroscope and balls and was replaced with
an ordinary electric motor. So what is the Implication of this?
A: Because those gimbals, balls and the gyroscope it let the gyrocompass to work
so it will point the true North but they being replaced with the ordinary motor used
for toys so it will not indicate the true North.
Q: So what happens if it will not indicate the true North?
A: It is very big problem for my cadets because they must[,] to learn into school
where is the true North and what is that equipment to be used on board.
Q: One of the defects is that the steering wheel was that of an ordinary automobile.
And what is the implication of this?
A: Because. on board Ma'am, we are using the real steering wheel and the cadets
will be implicated if they will notice that the ship have the same steering wheel as
the car so it is not advisable for them.
Q:. And another one is that the gyrocompass repeater was only refurbished and it
has no serial number. What is wrong with that?
A: It should be original Ma'am because this gyro repeater, it must to repeat also the
true [N]orth being indicated by the Master Gyro Compass so it will not work
properly, I don't know it will work properly. (Underscoring supplied)
Evidently, the materials delivered were less likely to pass the CHED standards,
because the navigation system to be installed might not accurately point to the true
north; and the steering wheel delivered was one that came from an automobile,
instead of one used in ships. Logically, by no stretch of the imagination could these
form part of the most modern IBS compliant with the IMO and CHED standards.
Even in the instant appeal, GL Enterprises does not refute that the equipment it
delivered was substandard. However, it reiterates its rejected excuse that
Northwestern should have made an assessment only after the completion of the
IBS.[17] Thus, petitioner stresses that it was Northwestern that breached the
agreement when the latter halted the installation of the materials for the IBS, even if
the parties had contemplated a completed project to be evaluated by CHED.
However, as aptly considered by the CA, respondent could not just "sit still and wait
for such day that its accreditation may not be granted by CHED due to the apparent
substandard equipment installed in the bridge system."[18] The appellate court
correctly emphasized that, by that time, both parties would have incurred more
costs for nothing.
Additionally, GL Enterprises reasons that, based on the contracts, the materials that
were hauled all the way from Quezon City to Laoag City under the custody of the
four designated installers might not have been the components to be
used.[19] Without belaboring the point, we affirm the conclusion of the CA and the
RTC that the excuse is untenable for being contrary to human experience.[20]
Given that petitioner, without justification, supplied substandard components for the
new IBS, it is thus clear that its violation was not merely incidental, but directly
related to the essence of the agreement pertaining to the installation of an IBS
compliant with the CHED and IMO standards. Consequently, the CA correctly found
substantial breach on the part of petitioner.
In contrast, Northwestern's breach, if any, was characterized by the appellate court
as slight or casual.[21] By way of negative definition, a breach is considered casual if
it does not fundamentally defeat the object of the parties in entering into an
agreement. Furthermore, for there to be a breach to begin with, there must be a
"failure, without legal excuse, to perform any promise which forms the whole or part
of the contract."[22]
Here, as discussed, the stoppage of the installation was justified. The action of
Northwestern constituted a legal excuse to prevent the highly possible rejection of
the IBS. Hence, just as the CA concluded, we find that Northwestern exercised
ordinary prudence to avert a possible wastage of time, effort, resources and also of
the ?2.9 million representing the value of the new IBS.
Actual Damages, Moral and Exemplary
Damages, and Attorney's Fees
As between the parties, substantial breach can clearly be attributed to GL
Enterprises. Consequently, it is not the injured party who can claim damages under
Article 1170 of the Civil Code. For this reason, we concur in the result of the CA's
Decision denying petitioner actual damages in the form of lost earnings, as well as
moral and exemplary damages.
With respect to attorney's fees, Article 2208 of the Civil Code allows the grant
thereof when the court deems it just and equitable that attorney's fees should be
recovered. An award of attorney's fees is proper if one was forced to litigate and
incur expenses to protect one's rights and interest by reason of an unjustified act or
omission on the part of the party from whom the award is sought.[23]
Since we affirm the CA's finding that it was not Northwestern but GL Enterprises
that breached the contracts without justification, it follows that the appellate court
correctly awarded attorney's fees to respondent. Notably, this litigation could have
altogether been avoided if petitioner heeded respondent's suggestion to amicably
settle; or, better yet, if in the first place petitioner delivered the right materials as
required by the contracts.
IN VIEW THEREOF, the assailed 27 July 2009 Decision of the Court of Appeals in
CA-G.R. CV No. 88989 is hereby AFFIRMED.
SO ORDERED.
G.R. No. 185440 VICELET LALICON and VICELEN LALICON, Petitioners,
- versus - NATIONAL HOUSING AUTHORITY, Respondent. July 13, 2011
DECISION
ABAD, J.: This case is about (a) the right of the National Housing Authority to seek
annulment of sales made by housing beneficiaries of lands they bought from it within the
prohibited period and (b) the distinction between actions for rescission instituted under
Article 1191 of the Civil Code and those instituted under Article 1381 of the same code.
The Facts and the Case
On November 25, 1980 the National Housing Authority (NHA) executed a Deed of Sale
with Mortgage over a Quezon City lot[1] in favor of the spouses Isidro and Flaviana Alfaro
(the Alfaros). In due time, the Quezon City Registry of Deeds issued Transfer Certificate of
Title (TCT) 277321 in the name of the Alfaros. The deed of sale provided, among others,
that the Alfaros could sell the land within five years from the date of its release from
mortgage without NHAs prior written consent. Thus:
x x x. 5. Except by hereditary succession, the lot herein sold and
conveyed, or any part thereof, cannot be alienated, transferred
or encumbered within five (5) years from the date of release
of herein mortgage without the prior written consent and
authority from the VENDOR-MORTGAGEE (NHA). x x
x.[2] (Emphasis supplied)
The mortgage and the restriction on sale were annotated on the Alfaros title on April 14,
1981.
About nine years later or on November 30, 1990, while the mortgage on the land subsisted,
the Alfaros sold the same to their son, Victor Alfaro, who had taken in a common-law wife,
Cecilia, with whom he had two daughters, petitioners Vicelet and Vicelen Lalicon (the
Lalicons). Cecilia, who had the means, had a house built on the property and paid for the
amortizations. After full payment of the loan or on March 21, 1991 the NHA released the
mortgage. Six days later or on March 27 Victor transferred ownership of the land to his
illegitimate daughters.
About four and a half years after the release of the mortgage or on October 4, 1995, Victor
registered the November 30, 1990 sale of the land in his favor, resulting in the cancellation
of his parents title. The register of deeds issued TCT 140646 in Victors name. On
December 14, 1995 Victor mortgaged the land to Marcela Lao Chua, Rosa Sy, Amparo
Ong, and Ida See. Subsequently, on February 14, 1997 Victor sold the property to Chua,
one of the mortgagees, resulting in the cancellation of his TCT 140646 and the issuance
of TCT N-172342 in Chuas name.
A year later or on April 10, 1998 the NHA instituted a case before the Quezon City Regional
Trial Court (RTC) for the annulment of the NHAs 1980 sale of the land to the Alfaros, the
latters 1990 sale of the land to their son Victor, and the subsequent sale of the same to
Chua, made in violation of NHA rules and regulations.
On February 12, 2004 the RTC rendered a decision in the case. It ruled that, although the
Alfaros clearly violated the five-year prohibition, the NHA could no longer rescind its sale
to them since its right to do so had already prescribed, applying Article 1389 of the New
Civil Code. The NHA and the Lalicons, who intervened, filed their respective appeals to the
Court of Appeals (CA).
On August 1, 2008 the CA reversed the RTC decision and found the NHA entitled to
rescission. The CA declared TCT 277321 in the name of the Alfaros and all subsequent
titles and deeds of sale null and void. It ordered Chua to reconvey the subject land to the
NHA but the latter must pay the Lalicons the full amount of their amortization, plus interest,
and the value of the improvements they constructed on the property.
The Issues Presented
The issues in this case are:
1. Whether or not the CA erred in holding that the Alfaros violated their contract with
the NHA;
2. Whether or not the NHAs right to rescind has prescribed; and
3. Whether or not the subsequent buyers of the land acted in good faith and their
rights, therefore, cannot be affected by the rescission.
The Rulings of the Court
First. The contract between the NHA and the Alfaros forbade the latter from selling
the land within five years from the date of the release of the mortgage in their
favor.[3] But the Alfaros sold the property to Victor on November 30, 1990 even before
the NHA could release the mortgage in their favor on March 21, 1991. Clearly, the
Alfaros violated the five-year restriction, thus entitling the NHA to rescind the contract.
The Lalicons contend, however, that the Alfaros did not violate the five-year
restriction against resale since what the contract between the parties barred was a
transfer of the property within five years from the release of the mortgage, not a
transfer of the same prior to such release.
But the Lalicons are trying to be clever. The restriction clause is more of a condition
on the sale of the property to the Alfaros rather than a condition on the mortgage
constituted on it. Indeed, the prohibition against resale remained even after the land
had been released from the mortgage. The five-year restriction against resale,
counted from the release of the property from the NHA mortgage, measures out the
desired hold that the government felt it needed to ensure that its objective of providing
cheap housing for the homeless is not defeated by wily entrepreneurs.
The Lalicons claim that the NHA unreasonably ignored their letters that asked for
consent to the resale of the subject property. They also claim that their failure to get
NHAs prior written consent was not such a substantial breach that warranted
rescission.
But the NHA had no obligation to grant the Lalicons request for exemption from the
five-year restriction as to warrant their proceeding with the sale when such consent
was not immediately forthcoming. And the resale without the NHAs consent is a
substantial breach. The essence of the governments socialized housing program is
to preserve the beneficiarys ownerships for a reasonable length of time, here at least
within five years from the time he acquired it free from any encumbrance.
Second. Invoking the RTC ruling, the Lalicons claim that under Article 1389 of the
Civil Code the action to claim rescission must be commenced within four years from
the time of the commission of the cause for it.
But an action for rescission can proceed from either Article 1191 or Article 1381. It
has been held that Article 1191 speaks of rescission in reciprocal obligations within
the context of Article 1124 of the Old Civil Code which uses the term
resolution. Resolution applies only to reciprocal obligations such that a breach on the
part of one party constitutes an implied resolutory condition which entitles the other
party to rescission. Resolution grants the injured party the option to pursue, as
principal actions, either a rescission or specific performance of the obligation, with
payment of damages in either case.
Rescission under Article 1381, on the other hand, was taken from Article 1291 of the
Old Civil Code, which is a subsidiary action, not based on a partys breach of
obligation.[4] The four-year prescriptive period provided in Article 1389 applies to
rescissions under Article 1381.
.
Here, the NHA sought annulment of the Alfaros sale to Victor because they violated
the five-year restriction against such sale provided in their contract. Thus, the CA
correctly ruled that such violation comes under Article 1191 where the applicable
prescriptive period is that provided in Article 1144 which is 10 years from the time the
right of action accrues. The NHAs right of action accrued on February 18, 1992 when
it learned of the Alfaros forbidden sale of the property to Victor. Since the NHA filed
its action for annulment of sale on April 10, 1998, it did so well within the 10-year
prescriptive period.
Third. The Court also agrees with the CA that the Lalicons and Chua were not buyers
in good faith. Since the five-year prohibition against alienation without the NHAs
written consent was annotated on the propertys title, the Lalicons very well knew that
the Alfaros sale of the property to their father, Victor, even before the release of the
mortgage violated that prohibition.
As regards Chua, she and a few others with her took the property by way of mortgage
from Victor in 1995, well within the prohibited period. Chua knew, therefore, based
on the annotated restriction on the property, that Victor had no right to mortgage the
property to her group considering that the Alfaros could not yet sell the same to him
without the NHAs consent. Consequently, although Victor later sold the property to
Chua after the five-year restriction had lapsed, Chua cannot claim lack of awareness
of the illegality of Victors acquisition of the property from the Alfaros.
Lastly, since mutual restitution is required in cases involving rescission under Article
1191,[5] the NHA must return the full amount of the amortizations it received for the
property, plus the value of the improvements introduced on the same, with 6%
interest per annum from the time of the finality of this judgment. The Court will no
longer dwell on the matter as to who has a better right to receive the amount from
the NHA: the Lalicons, who paid the amortizations and occupied the property, or
Chua, who bought the subject lot from Victor and obtained for herself a title to the
same, as this matter was not raised as one of the issues in this case. Chuas appeal
to the Court in a separate case[6] having been denied due course and NHA failing to
file its own petition for review, the CA decision ordering the restitution in favor of the
Lalicons has now become final and binding against them.
WHEREFORE, the Court AFFIRMS the Decision of the Court of Appeals in CA-G.R.
CV 82298 dated August 1, 2008.
SO ORDERED.
[G.R. No. 159823, February 18, 2013] TEODORO A.
REYES, Petitioner, v. ETTORE ROSSI, Respondents.
DECISION
BERSAMIN, J.: The rescission of a contract of sale is not a prejudicial question that
will warrant the suspension of the criminal proceedings commenced to prosecute
the buyer for violations of the Bouncing Checks Law (Batas Pambansa Blg. 22)
arising from the dishonor of the checks the buyer issued in connection with the sale.
Antecedents
On October 31, 1997, petitioner Teodoro A. Reyes (Reyes) and Advanced
Foundation Construction Systems Corporation (Advanced Foundation), represented
by its Executive Project Director, respondent Ettore Rossi (Rossi), executed a deed
of conditional sale involving the purchase by Reyes of equipment consisting of a
Warman Dredging Pump HY 300A worth P10,000,000.00. The parties agreed
therein that Reyes would pay the sum of P3,000,000.00 as downpayment, and the
balance of P7,000,000.00 through four post-dated checks. Reyes complied, but in
January 1998, he requested the restructuring of his obligation under the deed of
conditional sale by replacing the four post-dated checks with nine post-dated
checks that would include interest at the rate of P25,000.00/month accruing on the
unpaid portion of the obligation on April 30, 1998, June 30, 1998, July 31, 1998,
September 30, 1998 and October 31, 1998.1
Advanced Foundation assented to Reyes’ request, and returned the four checks. In
turn, Reyes issued and delivered the following nine post-dated checks in the
aggregate sum of P7,125,000.00 drawn against the United Coconut Planters
Bank,2 to wit:
Check No. Date Amount
72807 April 30, 1998 P 25,000.00
79125 May 1, 1998 1,000,000.00
72802 May 30, 1998 2,000,000.00
72808 June 30, 1998 25,000.00
72809 July 31, 1998 25,000.00
72801 August 31, 1998 2,000,000.00
72810 September 30, 1998 25,000.00
72811 October 31, 1998 25,000.00
72903 November 30, 1998 2,000,000.00
Rossi deposited three of the post-dated checks (i.e., No. 72807, No. 79125 and No.
72808) on their maturity dates in Advanced Foundation’s bank account at the PCI
Bank in Makati. Two of the checks were denied payment ostensibly upon Reyes’
instructions to stop their payment, while the third (i.e., No. 72802) was dishonored
for insufficiency of funds.3
Rossi likewise deposited two more checks (i.e., No. 72809 and No. 72801) in
Advanced Foundation’s account at the PCI Bank in Makati, but the checks were
returned with the notation Account Closedstamped on them. He did not anymore
deposit the three remaining checks on the assumption that they would be similarly
dishonored.4
In the meanwhile, on July 29, 1998, Reyes commenced an action for rescission of
contract and damages in the Regional Trial Court in Quezon City (RTC). His
complaint, docketed as Civil Case No. Q98-35109 and entitled Teodoro A. Reyes v.
Advanced Foundation Construction Systems Corporation, sought judgment
declaring the deed of conditional sale “rescinded and of no further force and effect,”
and ordering Advanced Foundation to return the P3,000,000.00 downpayment with
legal interest from June 4, 1998 until fully paid; and to pay to him attorney’s fees,
and various kinds and amounts of damages.5
On September 8, 1998, Rossi charged Reyes with five counts of estafa and five
counts of violation of Batas Pambansa Blg. 22 in the Office of the City Prosecutor of
Makati for the dishonor of Checks No. 72807, No. 72808, No. 72801, No. 72809
and No. 79125. Another criminal charge for violation of Batas Pambansa Blg. 22
was lodged against Reyes in the Office of the City Prosecutor of Quezon City for
the dishonor of Check No. 72802.6
On September 29, 1998, Reyes submitted his counter-affidavit in the Office of the
City Prosecutor of Makati,7 claiming that the checks had not been issued for any
valuable consideration; that he had discovered from the start of using the dredging
pump involved in the conditional sale that the Caterpillar diesel engine powering the
pump had been rated at only 560 horsepower instead of the 1200 horsepower
Advanced Foundation had represented to him; that welding works on the pump had
neatly concealed several cracks; that on May 6, 1998 he had written to Advanced
Foundation complaining about the misrepresentations on the specifications of the
pump and demanding documentary proof of Advanced Foundation’s ownership of
the pump; that he had caused the order to stop the payment of three checks (i.e.,
No. 72806, No. 72807 and No. 79125); that Advanced Foundation had replied to his
letter on May 8, 1998 by saying that the pump had been sold to him on an as is,
where is basis; that he had then sent another letter to Advanced Foundation on May
18, 1998 to reiterate his complaints and the request for proper documentation of
ownership; that he had subsequently discovered other hidden defects, prompting
him to write another letter; and that instead of attending to his complaints and
request, Advanced Foundation’s lawyers had threatened him with legal action.
At the same time, Reyes assailed the jurisdiction of the Office of the City Prosecutor
of Makati over the criminal charges against him on the ground that he had issued
the checks in Quezon City; as well as argued that the Office of the City Prosecutor
of Makati should suspend the proceedings because of the pendency in the RTC of
the civil action for rescission of contract that posed a prejudicial question as to the
criminal proceedings.8
On November 20, 1998, the Assistant City Prosecutor handling the preliminary
investigation recommended the dismissal of the charges of estafa and the
suspension of the proceedings relating to the violation of Batas Pambansa Blg. 22
based on a prejudicial question.9
On January 5, 1999, the City Prosecutor of Makati approved the recommendation of
the handling Assistant City Prosecutor,10 stating:
WHEREFORE, premises considered, the complaint for Estafa is respectfully
recommended to be dismissed, as upon approval, it is hereby dismissed.
Further, it is respectfully recommended that the proceedings in the charge for
Violation of Batas Pambansa Bilang 22 against the respondent be suspended until
the prejudicial question raised in Civil Case Q-98-35109 for Rescission of Contract
and Damages which is now pending with the RTC of Quezon City, Branch 224, has
been duly resolved.
Rossi appealed the resolution of the City Prosecutor to the Department of Justice,
but the Secretary of Justice, by resolution of July 24, 2001, denied Rossi’s petition
for review.
After the denial of his motion for reconsideration on April 29, 2002, Rossi
challenged the resolutions of the Secretary of Justice by petition for certiorari in the
CA.
Ruling of the CA
In the petition for certiorari, Rossi insisted that the Secretary of Justice had
committed grave abuse of discretion amounting to lack or excess of jurisdiction in
upholding the suspension of the criminal proceedings by the City Prosecutor of
Makati on account of the existence of a prejudicial question, and in sustaining the
dismissal of the complaints for estafa.
On May 30, 2003, the CA promulgated its assailed decision,11 to wit:
WHEREFORE, the foregoing considered, the assailed resolution is
hereby MODIFIED and the instant petition is GRANTED in so far as the issue of the
existence of prejudicial question is concerned. Accordingly, the order suspending
the preliminary investigation in I.S. No. 98-40024-29 is REVERSED and SET
ASIDE, and the dismissal of the complaint for estafa is AFFIRMED.
SO ORDERED.
Issues
Hence, this appeal by Reyes.
Reyes asserts that the CA erred in ruling that there was no prejudicial question that
warranted the suspension of the criminal proceedings against him; that the petition
suffered fatal defects that merited its immediate dismissal; that the CA was wrong in
relying on the pronouncements in Balgos, Jr. v. Sandiganbayan12 and Umali v.
Intermediate Appellate Court13 because the factual backgrounds thereat were not
similar to that obtaining here; and that the Secretary of Justice did not commit any
grave abuse of discretion amounting to lack or excess of jurisdiction.
In his comment,14 Rossi counters that the petition for review should be outrightly
dismissed because of its fatal defect; that the CA did not err in ruling that the action
for rescission of contract did not pose a prejudicial question that would suspend the
criminal proceedings.
Reyes submitted a reply,15 declaring that the defect in the affidavit of service
attached to his petition for review had been due to oversight; that he had
substantially complied with the rules; that there existed a prejudicial question that
could affect the extent of his liability in light of Supreme Court Administrative
Circular No. 12-2000; and that the CA erred in finding that the Secretary of Justice
committed grave abuse of discretion.
To be resolved is whether or not the civil action for rescission of the contract of sale
raised a prejudicial question that required the suspension of the criminal
prosecution for violation of Batas Pambansa Blg.22.
Ruling
The petition for review is without merit.
A prejudicial question generally comes into play in a situation where a civil action
and a criminal action are both pending, and there exists in the former an issue that
must first be determined before the latter may proceed, because howsoever the
issue raised in the civil action is resolved would be determinative juris et de jure of
the guilt or innocence of the accused in the criminal case.16 The rationale for the
suspension on the ground of a prejudicial question is to avoid conflicting
decisions.17
Two elements that must concur in order for a civil case to be considered a
prejudicial question are expressly stated in Section 7, Rule 111 of the 2000 Rules of
Criminal Procedure, to wit:
Section 7. Elements of prejudicial question. – The elements of a prejudicial question
are: (a) the previously instituted civil action involves an issue similar or intimately
related to the issue raised in the subsequent criminal action, and (b) the resolution
of such issue determines whether or not the criminal action may proceed.
In Sabandal v. Tongco,18 the concept of prejudicial question is explained in this
wise:
For a civil action to be considered prejudicial to a criminal case as to cause the
suspension of the criminal proceedings until the final resolution of the civil, the
following requisites must be present: (1) the civil case involves facts intimately
related to those upon which the criminal prosecution would be based; (2) in the
resolution of the issue or issues raised in the civil action, the guilt or innocence of
the accused would necessarily be determined; and (3) jurisdiction to try said
question must be lodged in another tribunal.
If both civil and criminal cases have similar issues or the issue in one is intimately
related to the issues raised in the other, then a prejudicial question would likely
exist, provided the other element or characteristic is satisfied. It must appear not
only that the civil case involves the same facts upon which the criminal prosecution
would be based, but also that the resolution of the issues raised in the civil action
would be necessarily determinative of the guilt or innocence of the accused. If the
resolution of the issue in the civil action will not determine the criminal responsibility
of the accused in the criminal action based on the same facts, or there is no
necessity “that the civil case be determined first before taking up the criminal case,”
therefore, the civil case does not involve a prejudicial question. Neither is there a
prejudicial question if the civil and the criminal action can, according to law, proceed
independently of each other.
Contending that the rescission of the contract of sale constitutes a prejudicial
question, Reyes posits that the resolution of the civil action will be determinative of
whether or not he was criminally liable for the violations of Batas Pambansa Blg.
22. He states that if the contract would be rescinded, his obligation to pay under
the conditional deed of sale would be extinguished, and such outcome would
necessarily result in the dismissal of the criminal proceedings for the violations
of Batas Pambansa Blg. 22.
The action for the rescission of the deed of sale on the ground that Advanced
Foundation did not comply with its obligation actually seeks one of the alternative
remedies available to a contracting party under Article 1191 of the Civil Code, to wit:
Article 1191. The power to rescind obligations is implied in reciprocal ones, in case
one of the obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfilment and the rescission of the
obligation, with the payment of damages in either case. He may also seek
rescission, even after he has chosen fulfilment, if the latter should become
impossible.
The court shall decree the rescission claimed, unless there be just cause
authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third persons who have
acquired the thing, in accordance with Articles 1385 and 1388 and the Mortgage
Law.
Article 1191 of the Civil Code recognizes an implied or tacit resolutory condition in
reciprocal obligations. The condition is imposed by law, and applies even if there is
no corresponding agreement thereon between the parties. The explanation for this
is that in reciprocal obligations a party incurs in delay once the other party has
performed his part of the contract; hence, the party who has performed or is ready
and willing to perform may rescind the obligation if the other does not perform, or is
not ready and willing to perform.19
It is true that the rescission of a contract results in the extinguishment of the
obligatory relation as if it was never created, the extinguishment having a
retroactive effect. The rescission is equivalent to invalidating and unmaking the
juridical tie, leaving things in their status before the celebration of the
contract.20 However, until the contract is rescinded, the juridical tie and the
concomitant obligations subsist.
To properly appreciate if there is a prejudicial question to warrant the suspension of
the criminal actions, reference is made to the elements of the crimes charged. The
violation of Batas Pambansa Blg. 22 requires the concurrence of the following
elements, namely: (1) the making, drawing, and issuance of any check to apply for
account or for value; (2) the knowledge of the maker, drawer, or issuer that at the
time of issue he does not have sufficient funds in or credit with the drawee bank for
the payment of the check in full upon its presentment; and (3) the subsequent
dishonor of the check by the drawee bank for insufficiency of funds or credit or
dishonor for the same reason had not the drawer, without any valid cause, ordered
the bank to stop payment.21 The issue in the criminal actions upon the violations
of Batas Pambansa Blg. 22 is, therefore, whether or not Reyes issued the
dishonoured checks knowing them to be without funds upon presentment. On the
other hand, the issue in the civil action for rescission is whether or not the breach in
the fulfilment of Advanced Foundation’s obligation warranted the rescission of the
conditional sale. If, after trial on the merits in the civil action, Advanced Foundation
would be found to have committed material breach as to warrant the rescission of
the contract, such result would not necessarily mean that Reyes would be absolved
of the criminal responsibility for issuing the dishonored checks because, as the
aforementioned elements show, he already committed the violations upon the
dishonor of the checks that he had issued at a time when the conditional sale was
still fully binding upon the parties. His obligation to fund the checks or to make
arrangements for them with the drawee bank should not be tied up to the future
event of extinguishment of the obligation under the contract of sale through
rescission. Indeed, under Batas Pambansa Blg. 22, the mere issuance of a
worthless check was already the offense in itself. Under such circumstances, the
criminal proceedings for the violation of Batas Pambansa Blg. 22 could proceed
despite the pendency of the civil action for rescission of the conditional sale.
Accordingly, we agree with the holding of the CA that the civil action for the
rescission of contract was not determinative of the guilt or innocence of Reyes. We
consider the exposition by the CA of its reasons to be appropriate enough, to wit:
xxxx
We find merit in the petition.
A careful perusal of the complaint for rescission of contract and damages reveals
that the causes of action advanced by respondent Reyes are the alleged
misrepresentation committed by the petitioner and AFCSC and their alleged failure
to comply with his demand for proofs of ownership. On one hand, he posits that his
consent to the contract was vitiated by the fraudulent act of the company in
misrepresenting the condition and quality of the dredging pump. Alternatively, he
claims that the company committed a breach of contract which is a ground for the
rescission thereof. Either way, he in effect admits the validity and the binding effect
of the deed pending any adjudication which nullifies the same.
Indeed, under the law on contracts, vitiated consent does not make a contract
unenforceable but merely voidable, the remedy of which would be to annul the
contract since voidable contracts produce legal effects until they are annulled. On
the other hand, rescission of contracts in case of breach pursuant to Article 1191 of
the Civil Code of the Philippines also presupposes a valid contract unless rescinded
or annulled.
As defined, a prejudicial question is one that arises in a case, the resolution of
which is a logical antecedent of the issue involved therein, and the cognizance of
which pertains to another tribunal. The prejudicial question must be determinative
of the case before the court but the jurisdiction to try and resolve the question must
be lodged in another court or tribunal.
It is a question based on a fact distinct and separate from the crime but so
intimately connected with it that it determines the guilt or innocence of the accused,
and for it to suspend the criminal action, it must appear not only that said case
involves facts intimately related to those upon which the criminal prosecution would
be based but also that in the resolution of the issue or issues raised in the civil
case, the guilt or innocence of the accused would necessarily be determined. It
comes into play generally in a situation where a civil action and a criminal action are
both pending and there exists in the former an issue which must be preemptively
resolved before the criminal action may proceed, because howsoever the issue
raised in the civil action is resolved would be determinative juris et de jure of the
guilt or innocence of the accused in the criminal case.
In this light, it is clear that the pendency of the civil case does not bar the
continuation of the proceedings in the preliminary investigation on the ground that it
poses a prejudicial question. Considering that the contracts are deemed to be
valid until rescinded, the consideration and obligatory effect thereof are also
deemed to have been validly made, thus demandable. Consequently, there
was no failure of consideration at the time when the subject checks were
dishonored. (Emphasis supplied)
xxxx
WHEREFORE, the Court DENIES the petition for review; AFFIRMS the decision
the Court of Appeals promulgated on May 30, 2003; and DIRECTS the petitioner to
pay the costs of suit.
SO ORDERED.
[G.R. No. 139523. May 26, 2005] SPS. FELIPE AND LETICIA
CANNU, petitioners, vs. SPS. GIL AND FERNANDINA GALANG
AND NATIONAL HOME MORTGAGE FINANCE
CORPORATION, respondents.
DECISION
CHICO-NAZARIO, J.:
Before Us is a Petition for Review on Certiorari which seeks to set
aside the decision[1] of the Court of Appeals dated 30 September 1998
which affirmed with modification the decision of Branch 135 of the Regional
Trial Court (RTC) of Makati City, dismissing the complaint for Specific
Performance and Damages filed by petitioners, and its Resolution[2] dated
22 July 1999 denying petitioners motion for reconsideration.
A complaint[3] for Specific Performance and Damages was filed by
petitioners-spouses Felipe and Leticia Cannu against respondents-spouses
Gil and Fernandina Galang and the National Home Mortgage Finance
Corporation (NHMFC) before Branch 135 of the RTC of Makati, on 24 June
1993. The case was docketed as Civil Case No. 93-2069.
The facts that gave rise to the aforesaid complaint are as follows:
Respondents-spouses Gil and Fernandina Galang obtained a loan
from Fortune Savings & Loan Association for P173,800.00 to purchase a
house and lot located at Pulang Lupa, Las Pias, with an area of 150 square
meters covered by Transfer Certificate of Title (TCT) No. T-8505 in the
names of respondents-spouses. To secure payment, a real estate mortgage
was constituted on the said house and lot in favor of Fortune Savings &
Loan Association. In early 1990, NHMFC purchased the mortgage loan of
respondents-spouses from Fortune Savings & Loan Association
for P173,800.00.
Respondent Fernandina Galang authorized[4] her attorney-in-fact,
Adelina R. Timbang, to sell the subject house and lot.
Petitioner Leticia Cannu agreed to buy the property for P120,000.00
and to assume the balance of the mortgage obligations with the NHMFC
and with CERF Realty[5] (the Developer of the property).
Of the P120,000.00, the following payments were made by
petitioners:
Date Amount Paid
July 19, 1990 P40,000.00[6]
March 13, 1991 15,000.00[7]
April 6, 1991 15,000.00[8]
November 28, 1991 5,000.00[9]
Total P75,000.00
Thus, leaving a balance of P45,000.00.
A Deed of Sale with Assumption of Mortgage Obligation[10] dated 20
August 1990 was made and entered into by and between spouses
Fernandina and Gil Galang (vendors) and spouses Leticia and Felipe
Cannu (vendees) over the house and lot in question which contains, inter
alia, the following:
NOW, THEREFORE, for and in consideration of the sum of TWO
HUNDRED FIFTY THOUSAND PESOS (P250,000.00), Philippine
Currency, receipt of which is hereby acknowledged by the Vendors
and the assumption of the mortgage obligation, the Vendors hereby
sell, cede and transfer unto the Vendees, their heirs, assigns and
successor in interest the above-described property together with the
existing improvement thereon.
It is a special condition of this contract that the Vendees shall assume
and continue with the payment of the amortization with the National
Home Mortgage Finance Corporation Inc. in the outstanding balance
of P_______________, as of __________ and shall comply with and
abide by the terms and conditions of the mortgage document dated
Feb. 27, 1989 and identified as Doc. No. 82, Page 18, Book VII, S. of
1989 of Notary Public for Quezon City Marites Sto. Tomas Alonzo, as
if the Vendees are the original signatories.
Petitioners immediately took possession and occupied the house
and lot.
Petitioners made the following payments to the NHMFC:
Date Amount Receipt No.
July 9, 1990 P 14,312.47 D-503986[11]
March 12, 1991 8,000.00 D-729478[12]
February 4, 1992 10,000.00 D-999127[13]
March 31, 1993 6,000.00 E-563749[14]
April 19, 1993 10,000.00 E-582432[15]
April 27, 1993 7,000.00 E-618326[16]
P 55,312.47
Petitioners paid the equity or second mortgage to CERF
Realty.[17]
Despite requests from Adelina R. Timbang and Fernandina
Galang to pay the balance of P45,000.00 or in the alternative to vacate
the property in question, petitioners refused to do so.
In a letter[18] dated 29 March 1993, petitioner Leticia Cannu
informed Mr. Fermin T. Arzaga, Vice President, Fund Management
Group of the NHMFC, that the ownership rights over the land covered
by TCT No. T-8505 in the names of respondents-spouses had been
ceded and transferred to her and her husband per Deed of Sale with
Assumption of Mortgage, and that they were obligated to assume the
mortgage and pay the remaining unpaid loan balance. Petitioners
formal assumption of mortgage was not approved by the NHMFC.[19]
Because the Cannus failed to fully comply with their obligations,
respondent Fernandina Galang, on 21 May 1993, paid P233,957.64 as
full payment of her remaining mortgage loan with NHMFC.[20]
Petitioners opposed the release of TCT No. T-8505 in favor of
respondents-spouses insisting that the subject property had already
been sold to them. Consequently, the NHMFC held in abeyance the
release of said TCT.
Thereupon, a Complaint for Specific Performance and Damages
was filed asking, among other things, that petitioners (plaintiffs therein)
be declared the owners of the property involved subject to
reimbursements of the amount made by respondents-spouses
(defendants therein) in preterminating the mortgage loan with NHMFC.
Respondent NHMFC filed its Answer.[21] It claimed that petitioners
have no cause of action against it because they have not submitted the
formal requirements to be considered assignees and successors-in-
interest of the property under litigation.
In their Answer,[22] respondents-spouses alleged that because of
petitioners-spouses failure to fully pay the consideration and to update
the monthly amortizations with the NHMFC, they paid in full the existing
obligations with NHMFC as an initial step in the rescission and
annulment of the Deed of Sale with Assumption of Mortgage. In their
counterclaim, they maintain that the acts of petitioners in not fully
complying with their obligations give rise to rescission of the Deed of
Sale with Assumption of Mortgage with the corresponding damages.
After trial, the lower court rendered its decision ratiocinating:
On the basis of the evidence on record, testimonial and documentary,
this Court is of the view that plaintiffs have no cause of action either
against the spouses Galang or the NHMFC. Plaintiffs have admitted
on record they failed to pay the amount of P45,000.00 the balance due
to the Galangs in consideration of the Deed of Sale With Assumption
of Mortgage Obligation (Exhs. C and 3). Consequently, this is a breach
of contract and evidently a failure to comply with obligation arising
from contracts. . . In this case, NHMFC has not been duly informed
due to lack of formal requirements to acknowledge plaintiffs as legal
assignees, or legitimate tranferees and, therefore, successors-in-
interest to the property, plaintiffs should have no legal personality to
claim any right to the same property.[23]
 The decretal portion of the decision reads:
Premises considered, the foregoing complaint has not been proven
even by preponderance of evidence, and, as such, plaintiffs have no
cause of action against the defendants herein. The above-entitled
case is ordered dismissed for lack of merit.
Judgment is hereby rendered by way of counterclaim, in favor of
defendants and against plaintiffs, to wit:
1. Ordering the Deed of Sale With Assumption of Mortgage Obligation
(Exhs. C and 3) rescinded and hereby declared the same as nullified
without prejudice for defendants-spouses Galang to return the partial
payments made by plaintiffs; and the plaintiffs are ordered, on the
other hand, to return the physical and legal possession of the subject
property to spouses Galang by way of mutual restitution;
2. To pay defendants spouses Galang and NHMFC, each the amount
of P10,000.00 as litigation expenses, jointly and severally;
3. To pay attorneys fees to defendants in the amount of P20,000.00,
jointly and severally; and
4. The costs of suit.
5. No moral and exemplary damages awarded.[24]
A Motion for Reconsideration[25] was filed, but same was denied.
Petitioners appealed the decision of the RTC to the Court of Appeals.
On 30 September 1998, the Court of Appeals disposed of the appeal as
follows:
Obligations arising from contract have the force of law between the
contracting parties and should be complied in good faith. The terms of
a written contract are binding on the parties thereto.
Plaintiffs-appellants therefore are under obligation to pay defendants-
appellees spouses Galang the sum of P250,000.00, and to assume
the mortgage.
Records show that upon the execution of the Contract of Sale or on
July 19, 1990 plaintiffs-appellants paid defendants-appellees spouses
Galang the amount of only P40,000.00.
The next payment was made by plaintiffs-appellants on March 13,
1991 or eight (8) months after the execution of the contract. Plaintiffs-
appellants paid the amount of P5,000.00.
The next payment was made on April 6, 1991 for P15,000.00 and on
November 28, 1991, for another P15,000.00.
From 1991 until the present, no other payments were made by
plaintiffs-appellants to defendants-appellees spouses Galang.
Out of the P250,000.00 purchase price which was supposed to be
paid on the day of the execution of contract in July, 1990 plaintiffs-
appellants have paid, in the span of eight (8) years, from 1990 to
present, the amount of only P75,000.00. Plaintiffs-appellants should
have paid the P250,000.00 at the time of the execution of contract in
1990. Eight (8) years have already lapsed and plaintiffs-appellants
have not yet complied with their obligation.
We consider this breach to be substantial.
The tender made by plaintiffs-appellants after the filing of this case, of
the Managerial Check in the amount of P278,957.00 dated January
24, 1994 cannot be considered as an effective mode of payment.
Performance or payment may be effected not by tender of payment
alone but by both tender and consignation. It is consignation which is
essential in order to extinguish plaintiffs-appellants obligation to pay
the balance of the purchase price.
In addition, plaintiffs-appellants failed to comply with their obligation to
pay the monthly amortizations due on the mortgage.
In the span of three (3) years from 1990 to 1993, plaintiffs-appellants
made only six payments. The payments made by plaintiffs-appellants
are not even sufficient to answer for the arrearages, interests and
penalty charges.
On account of these circumstances, the rescission of the Contract of
Sale is warranted and justified.
...
WHEREFORE, foregoing considered, the appealed decision is hereby
AFFIRMED with modification. Defendants-appellees spouses Galang
are hereby ordered to return the partial payments made by plaintiff-
appellants in the amount of P135,000.00.
No pronouncement as to cost.[26]
The motion for reconsideration[27] filed by petitioners was denied
by the Court of Appeals in a Resolution[28] dated 22 July 1999.
Hence, this Petition for Certiorari.
Petitioners raise the following assignment of errors:
1. THE HONORABLE COURT OF APPEALS ERRED WHEN IT HELD
THAT PETITIONERS BREACH OF THE OBLIGATION WAS
SUBSTANTIAL.
2. THE HONORABLE COURT OF APPEALS ERRED WHEN IN
EFFECT IT HELD THAT THERE WAS NO SUBSTANTIAL
COMPLIANCE WITH THE OBLIGATION TO PAY THE MONTHLY
AMORTIZATION WITH NHMFC.
3. THE HONORABLE COURT OF APPEALS ERRED WHEN IT
FAILED TO CONSIDER THE OTHER FACTS AND
CIRCUMSTANCES THAT MILITATE AGAINST RESCISSION.
4. THE HONORABLE COURT OF APPEALS ERRED WHEN IT
FAILED TO CONSIDER THAT THE ACTION FOR RESCISSION IS
SUBSIDIARY.[29]
Before discussing the errors allegedly committed by the Court of
Appeals, it must be stated a priori that the latter made a misappreciation
of evidence regarding the consideration of the property in litigation when
it relied solely on the Deed of Sale with Assumption of Mortgage
executed by the respondents-spouses Galang and petitioners-spouses
Cannu.
As above-quoted, the consideration for the house and lot stated
in the Deed of Sale with Assumption of Mortgage is P250,000.00, plus
the assumption of the balance of the mortgage loan with NHMFC.
However, after going over the record of the case, more particularly the
Answer of respondents-spouses, the evidence shows the consideration
therefor is P120,000.00, plus the payment of the outstanding loan
mortgage with NHMFC, and of the equity or second mortgage with
CERF Realty (Developer of the property).[30]
Nowhere in the complaint and answer of the petitioners-spouses
Cannu and respondents-spouses Galang shows that the consideration
is P250,000.00. In fact, what is clear is that of the P120,000.00 to be
paid to the latter, only P75,000.00 was paid to Adelina Timbang, the
spouses Galangs attorney-in-fact. This debunks the provision in the
Deed of Sale with Assumption of Mortgage that the amount
of P250,000.00 has been received by petitioners.
Inasmuch as the Deed of Sale with Assumption of Mortgage
failed to express the true intent and agreement of the parties regarding
its consideration, the same should not be fully relied upon. The
foregoing facts lead us to hold that the case on hand falls within one of
the recognized exceptions to the parole evidence rule. Under the Rules
of Court, a party may present evidence to modify, explain or add to the
terms of the written agreement if he puts in issue in his pleading, among
others, its failure to express the true intent and agreement of the parties
thereto.[31]
In the case at bar, when respondents-spouses enumerated in
their Answer the terms and conditions for the sale of the property under
litigation, which is different from that stated in the Deed of Sale with
Assumption with Mortgage, they already put in issue the matter of
consideration. Since there is a difference as to what the true
consideration is, this Court has admitted evidence aliunde to explain
such inconsistency. Thus, the Court has looked into the pleadings and
testimonies of the parties to thresh out the discrepancy and to clarify the
intent of the parties.
As regards the computation[32] of petitioners as to the breakdown
of the P250,000.00 consideration, we find the same to be self-serving
and unsupported by evidence.
On the first assigned error, petitioners argue that the Court erred
when it ruled that their breach of the obligation was substantial.
Settled is the rule that rescission or, more accurately,
resolution,[33] of a party to an obligation under Article 1191[34] is
predicated on a breach of faith by the other party that violates the
reciprocity between them.[35] Article 1191 reads:
Art. 1191. The power to rescind obligations is implied in reciprocal
ones, in case one of the obligors should not comply with what is
incumbent upon him.
The injured party may choose between the fulfillment and the
rescission of the obligation, with the payment of damages in either
case. He may also seek rescission, even after he has chosen
fulfillment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just
cause authorizing the fixing of a period.
Rescission will not be permitted for a slight or casual breach of
the contract. Rescission may be had only for such breaches that are
substantial and fundamental as to defeat the object of the parties in
making the agreement.[36] The question of whether a breach of contract
is substantial depends upon the attending circumstances[37] and not
merely on the percentage of the amount not paid.
In the case at bar, we find petitioners failure to pay the remaining
balance of P45,000.00 to be substantial. Even assuming arguendo that
only said amount was left out of the supposed consideration
of P250,000.00, or eighteen (18%) percent thereof, this percentage is
still substantial. Taken together with the fact that the last payment made
was on 28 November 1991, eighteen months before the respondent
Fernandina Galang paid the outstanding balance of the mortgage loan
with NHMFC, the intention of petitioners to renege on their obligation is
utterly clear.
Citing Massive Construction, Inc. v. Intermediate Appellate
Court,[38] petitioners ask that they be granted additional time to complete
their obligation. Under the facts of the case, to give petitioners additional
time to comply with their obligation will be putting premium on their
blatant non-compliance of their obligation. They had all the time to do
what was required of them (i.e., pay the P45,000.00 balance and to
properly assume the mortgage loan with the NHMFC), but still they
failed to comply. Despite demands for them to pay the balance, no
payments were made.[39]
The fact that petitioners tendered a Managers Check to
respondents-spouses Galang in the amount of P278,957.00 seven
months after the filing of this case is of no moment. Tender of payment
does not by itself produce legal payment, unless it is completed by
consignation.[40] Their failure to fulfill their obligation gave the
respondents-spouses Galang the right to rescission.
Anent the second assigned error, we find that petitioners were
not religious in paying the amortization with the NHMFC. As admitted
by them, in the span of three years from 1990 to 1993, their payments
covered only thirty months.[41] This, indeed, constitutes another breach
or violation of the Deed of Sale with Assumption of Mortgage. On top of
this, there was no formal assumption of the mortgage obligation with
NHMFC because of the lack of approval by the NHMFC[42] on account
of petitioners non-submission of requirements in order to be considered
as assignees/successors-in-interest over the property covered by the
mortgage obligation.[43]
On the third assigned error, petitioners claim there was no clear
evidence to show that respondents-spouses Galang demanded from
them a strict and/or faithful compliance of the Deed of Sale with
Assumption of Mortgage.
We do not agree.
There is sufficient evidence showing that demands were made
from petitioners to comply with their obligation. Adelina R. Timbang,
attorney-in-fact of respondents-spouses, per instruction of respondent
Fernandina Galang, made constant follow-ups after the last payment
made on 28 November 1991, but petitioners did not pay.[44] Respondent
Fernandina Galang stated in her Answer[45] that upon her arrival from
America in October 1992, she demanded from petitioners the complete
compliance of their obligation by paying the full amount of the
consideration (P120,000.00) or in the alternative to vacate the property
in question, but still, petitioners refused to fulfill their obligations under
the Deed of Sale with Assumption of Mortgage. Sometime in March
1993, due to the fact that full payment has not been paid and that the
monthly amortizations with the NHMFC have not been fully updated,
she made her intentions clear with petitioner Leticia Cannu that she will
rescind or annul the Deed of Sale with Assumption of Mortgage.
We likewise rule that there was no waiver on the part of
petitioners to demand the rescission of the Deed of Sale with
Assumption of Mortgage. The fact that respondents-spouses accepted,
through their attorney-in-fact, payments in installments does not
constitute waiver on their part to exercise their right to rescind the Deed
of Sale with Assumption of Mortgage. Adelina Timbang merely
accepted the installment payments as an accommodation to petitioners
since they kept on promising they would pay. However, after the lapse
of considerable time (18 months from last payment) and the purchase
price was not yet fully paid, respondents-spouses exercised their right
of rescission when they paid the outstanding balance of the mortgage
loan with NHMFC. It was only after petitioners stopped paying that
respondents-spouses moved to exercise their right of rescission.
Petitioners cite the case of Angeles v. Calasanz[46] to support
their claim that respondents-spouses waived their right to rescind. We
cannot apply this case since it is not on all fours with the case before
us. First, in Angeles, the breach was only slight and casual which is not
true in the case before us. Second, in Angeles, the buyer had already
paid more than the principal obligation, while in the instant case, the
buyers (petitioners) did not pay P45,000.00 of the P120,000.00 they
were obligated to pay.
We find petitioners statement that there is no evidence of
prejudice or damage to justify rescission in favor of respondents-
spouses to be unfounded. The damage suffered by respondents-
spouses is the effect of petitioners failure to fully comply with their
obligation, that is, their failure to pay the remaining P45,000.00 and to
update the amortizations on the mortgage loan with the NHMFC.
Petitioners have in their possession the property under litigation. Having
parted with their house and lot, respondents-spouses should be fully
compensated for it, not only monetarily, but also as to the terms and
conditions agreed upon by the parties. This did not happen in the case
before us.
Citing Seva v. Berwin & Co., Inc.,[47] petitioners argue that no
rescission should be decreed because there is no evidence on record
that respondent Fernandina Galang is ready, willing and able to comply
with her own obligation to restore to them the total payments they made.
They added that no allegation to that effect is contained in respondents-
spouses Answer.
We find this argument to be misleading.
First, the facts obtaining in Seva case do not fall squarely with the
case on hand. In the former, the failure of one party to perform his
obligation was the fault of the other party, while in the case on hand,
failure on the part of petitioners to perform their obligation was due to
their own fault.
Second, what is stated in the book of Justice Edgardo L. Paras is
[i]t (referring to the right to rescind or resolve) can be demanded only if
the plaintiff is ready, willing and able to comply with his own obligation,
and the other is not. In other words, if one party has complied or fulfilled
his obligation, and the other has not, then the former can exercise his
right to rescind. In this case, respondents-spouses complied with their
obligation when they gave the possession of the property in question to
petitioners. Thus, they have the right to ask for the rescission of the
Deed of Sale with Assumption of Mortgage.
On the fourth assigned error, petitioners, relying on Article 1383
of the Civil Code, maintain that the Court of Appeals erred when it failed
to consider that the action for rescission is subsidiary.
Their reliance on Article 1383 is misplaced.
The subsidiary character of the action for rescission applies to
contracts enumerated in Articles 1381[48] of the Civil Code. The contract
involved in the case before us is not one of those mentioned therein.
The provision that applies in the case at bar is Article 1191.
In the concurring opinion of Justice Jose B.L. Reyes in Universal
Food Corp. v. Court of Appeals,[49] rescission under Article 1191 was
distinguished from rescission under Article 1381. Justice J.B.L. Reyes
said:
. . . The rescission on account of breach of stipulations is not
predicated on injury to economic interests of the party plaintiff but on
the breach of faith by the defendant, that violates the reciprocity
between the parties. It is not a subsidiary action, and Article 1191 may
be scanned without disclosing anywhere that the action for rescission
thereunder is subordinated to anything other than the culpable breach
of his obligations by the defendant. This rescission is a principal action
retaliatory in character, it being unjust that a party be held bound to
fulfill his promises when the other violates his. As expressed in the old
Latin aphorism: Non servanti fidem, non est fides servanda. Hence,
the reparation of damages for the breach is purely secondary.
On the contrary, in the rescission by reason of lesion or economic
prejudice, the cause of action is subordinated to the existence of that
prejudice, because it is the raison dtre as well as the measure of the
right to rescind. Hence, where the defendant makes good the
damages caused, the action cannot be maintained or continued, as
expressly provided in Articles 1383 and 1384. But the operation of
these two articles is limited to the cases of rescission
for lesion enumerated in Article 1381 of the Civil Code of the
Philippines, and does not apply to cases under Article 1191.
From the foregoing, it is clear that rescission (resolution in the Old
Civil Code) under Article 1191 is a principal action, while rescission
under Article 1383 is a subsidiary action. The former is based on breach
by the other party that violates the reciprocity between the parties, while
the latter is not.
In the case at bar, the reciprocity between the parties was violated
when petitioners failed to fully pay the balance of P45,000.00 to
respondents-spouses and their failure to update their amortizations with
the NHMFC.
Petitioners maintain that inasmuch as respondents-spouses
Galang were not granted the right to unilaterally rescind the sale under
the Deed of Sale with Assumption of Mortgage, they should have first
asked the court for the rescission thereof before they fully paid the
outstanding balance of the mortgage loan with the NHMFC. They claim
that such payment is a unilateral act of rescission which violates existing
jurisprudence.
In Tan v. Court of Appeals,[50] this court said:
. . . [T]he power to rescind obligations is implied in reciprocal ones in
case one of the obligors should not comply with what is incumbent
upon him is clear from a reading of the Civil Code provisions.
However, it is equally settled that, in the absence of a stipulation to the
contrary, this power must be invoked judicially; it cannot be exercised
solely on a partys own judgment that the other has committed a
breach of the obligation. Where there is nothing in the contract
empowering the petitioner to rescind it without resort to the courts, the
petitioners action in unilaterally terminating the contract in this case is
unjustified.
It is evident that the contract under consideration does not contain
a provision authorizing its extrajudicial rescission in case one of the
parties fails to comply with what is incumbent upon him. This being the
case, respondents-spouses should have asked for judicial intervention
to obtain a judicial declaration of rescission. Be that as it may, and
considering that respondents-spouses Answer (with affirmative
defenses) with Counterclaim seeks for the rescission of the Deed of
Sale with Assumption of Mortgage, it behooves the court to settle the
matter once and for all than to have the case re-litigated again on an
issue already heard on the merits and which this court has already taken
cognizance of. Having found that petitioners seriously breached the
contract, we, therefore, declare the same is rescinded in favor of
respondents-spouses.
As a consequence of the rescission or, more accurately,
resolution of the Deed of Sale with Assumption of Mortgage, it is the
duty of the court to require the parties to surrender whatever they may
have received from the other. The parties should be restored to their
original situation.[51]
The record shows petitioners paid respondents-spouses the
amount of P75,000.00 out of the P120,000.00 agreed upon. They also
made payments to NHMFC amounting to P55,312.47. As to the
petitioners alleged payment to CERF Realty of P46,616.70, except for
petitioner Leticia Cannus bare allegation, we find the same not to be
supported by competent evidence. As a general rule, one who pleads
payment has the burden of proving it.[52]However, since it has been
admitted in respondents-spouses Answer that petitioners shall assume
the second mortgage with CERF Realty in the amount of P35,000.00,
and that Adelina Timbang, respondents-spouses very own witness,
testified[53] that same has been paid, it is but proper to return this amount
to petitioners. The three amounts total P165,312.47 -- the sum to be
returned to petitioners.
WHEREFORE, premises considered, the decision of the Court of
Appeals is hereby AFFIRMED with MODIFICATION. Spouses Gil and
Fernandina Galang are hereby ordered to return the partial payments
made by petitioners in the amount of P165,312.47. With costs.
SO ORDERED.
[ GR No. 202947, Dec 09, 2015 ] ASB REALTY CORPORATION v. ORTIGAS +
DECISION
BERSAMIN, J.:
This appeal seeks the review and reversal of the amended decision promulgated on
January 9, 2012,[1] whereby the Court of Appeals (CA) disposed thusly:
WHEREFORE, premises considered, judgment is rendered:
1. Granting the appeal of plaintiff-appellant and herein movant Ortigas and
Company Limited Partnership, and reversing the Decision of the court a quo dated
December 14, 2009;
2. Rescinding the June 24, 1994 Deed of Sale between Ortigas and Company
Limited Partnership and Amethyst Pearl Corporation in view of the material
breached (sic) thereof by AMETHYST;
3. Ordering ASB Realty Corporation, by way of mutual restitution, the
RECONVEYANCE to ORTIGAS of the subject property covered by TCT No. PT-
105797 upon payment by ORTIGAS to ASB of the amount of Two Million Twenty
Four Thousand Pesos (PhP 2,024,000.00) plus legal interest at the rate of 6% per
annum from the time of the finality of this judgment until the same shall have been
fully paid; and
4. Ordering the Register of Deeds of Pasig City to cancel TCT No. PT-105797 and
issue a new title over the subject property under the name of ORTIGAS &
COMPANY LIMITED PARTNERSHIP.
No pronouncement as to cost.
SO ORDERED.[2]
The petitioner also assails the resolution promulgated on July 26, 2012,[3] whereby
the CA denied its Motion for Reconsideration.
Antecedents
On June 29, 1994, respondent Ortigas & Company Limited Partnership (Ortigas)
entered into a Deed of Sale with Amethyst Pearl Corporation (Amethyst) involving
the parcel of land with an area of 1,012 square meters situated in Barrio Oranbo,
Pasig City and registered under Transfer Certificate of Title (TCT) No. 65118 of the
Register of Deeds of Rizal[4] for the consideration of P2,024,000.00. The Deed of
Sale[5] contained the following stipulations, among others:
COVENANTS, CONDITIONS AND RESTRICTIONS
This lot has been segregated by ORTIGAS from its subdivisions to form part of a
zonified BUILDING AREA pursuant to its controlled real estate development project
and subdivision scheme, and is subject to the following covenants which form part
of the consideration of ORTIGAS' sale to VENDEE and its assigns, namely:
xxxx
B. BUILDING WORKS AND ARCHITECTURE:
1. The building to be constructed on the lot shall be of reinforced concrete, cement
hollow blocks and other high-quality materials and shall be of the following height of
not more than: fourteen (14) storeys plus one penthouse.
xxxx
L. SUBMISSION OF PLANS:
The final plans and specifications of the said building shall be submitted to
ORTIGAS for approval not later than six (6) months from date hereof. Should
ORTIGAS object to the same, it shall notify and specify to the VENDEE in writing
the amendments required to conform with its building restrictions and VENDEE
shall submit the amended plans within sixty (60) days from receipt of said notice.
M. CONSTRUCTION AND COMPLETION OF BUILDING:
The VENDEE shall finish construction of its building within four (4) years from
December 31, 1991.[6]
As a result, the Register of Deeds of Rizal cancelled TCT No. 65118 and issued
TCT No. PT-94175 in the name of Amethyst.[7] The conditions contained in
the Deed of Sale were also annotated on TCT No. PT-94175 as encumbrances.[8]
On December 28, 1996, Amethyst assigned the subject property to its sole
stockholder, petitioner ASB Realty Corporation (the petitioner), under a so-
called Deed of Assignment in Liquidation in consideration of 10,000 shares of the
petitioner's outstanding capital stock.[9] Thus, the property was transferred to the
petitioner free from any liens or encumbrances except those duly annotated on TCT
No. PT-94175.[10] The Register of Deeds of Rizal cancelled TCT No. PT-94175 and
issued TCT No. PT-105797 in the name of the petitioner with the same
encumbrances annotated on TCT No. PT-94175.[11]
On July 7, 2000, Ortigas filed its complaint for specific performance against the
petitioner,[12] which was docketed as Civil Case No. 67978 of the Regional Trial
Court (RTC) in Pasig City.[13] Ortigas amended the complaint, and alleged,[14] among
others, that:
5. Defendant has violated the terms of the Deed of Absolute Sale (Annex "A") in the
following manner:
a. While the lot may be used only "for office and residential purposes", defendant
introduced constructions on the property which are commercial in nature, like
restaurants, retail stores and the like (see par. A, Deed of Absolute Sale, Annex
"A").
b. The commercial structures constructed by defendant on the property extend up
to the boundary lines of the lot in question violating the setbacks established in the
contract (see par. B.A., ibid).
c. Defendant likewise failed to submit the final plans and specifications of its
proposed building not later than six (6) months from June 29, 1994 and to complete
construction of the same within four (4) years from December 31, 1991. (see pars. L
and M, ibid).
d. Being situated in a first-class office building area, it was agreed that no
advertisements or any kind of commercial signs shall be allowed on the lot or the
improvements therein but this was violated by defendant when it put up commercial
signs and advertisements all over the area, (see par. F, ibid).
6. Any of the afore-described violations committed by the defendant empower the
plaintiff to sue under parangraph "N. Unilateral Cancellation", plaintiff may have the
Deed of Absolute Sale (Annex "A") cancelled and the property reverted to it by
paying the defendant the amount it has paid less the items indicated therein.[15]
For reliefs, Ortigas prayed for the reconveyance of the subject property, or,
alternatively, for the demolition of the structures and improvements thereon, plus
the payment of penalties, attorney's fees and costs of suit.[16]
During the pendency of the proceedings in the RTC, the petitioner amended its
Articles of Incorporation to change its name to St. Francis Square Realty
Corporation.[17]
After trial on the merits, the RTC rendered its decision on December 14,
2009,[18] and dismissed the complaint, pertinently holding as follows:
Ortigas sold the property [to] Amethyst on 29 June 1994. Amethyst was supposed
to finish construction on 31 December 1995. Yet, up to the time the property was
transferred to ASB on 28 December 1996, Ortigas never initiated any
action against Amethyst to enforce said provision. Ortigas is therefore guilty of
laches or negligence or omission to assert a right within a reasonable time,
warranting a presumption that the party entitled to assert it either has abandoned it
or declined to assert it. (Tijam v. Sibonghanoy, L-21450, 15 April 1968, 23 SCRA
29).
It is worth mentioning that the restrictions annotated in TCT No. 94175 (in the name
of Amethyst Pearl Corporation) and TCT No. PT-105797 (in the name of ASB)
repeatedly and consistently refer to the VENDEE. The term VENDEE in the said
restrictions obviously refer to Amethyst Pearls Corporation considering the fact that
the date referred to in Paragraph N thereof (Construction and Completion of
Building), which is four (4) years from December 31, 1991, obviously refer to the
plaintiffs VENDEE Amethyst Pearl Corporation. Definitely, it cannot refer to the
defendant ASB which is not a vendee of the plaintiff. Therefore, all references to
VENDEE in the restrictions evidently refer to Amethyst Pearl Corporation, the
VENDEE in the sale from the plaintiff. Such explanation is more consistent with
logic than the plaintiffs convoluted assertions that the said restrictions apply to the
defendant ASB.
Reconveyance of the property to Ortigas necessarily implies rescission of the sale
or transfer from Amethyst to ASB and from Ortigas to Amethyst. But Amethyst was
not made a party to the case. Reconveyance of the property to the original seller
(Ortigas) applies only on the sale to the original vendee (Amethyst) and not to
subsequent vendees to whom the property was sold (Ayala Corp. v. Rosa Diana
Realty and Dev. Corp., G.R. No. 134284, Dec. 1, 2000, 346 SCRA 663).
The non-compliance by the plaintiff with the requisites of its own restrictions further
proves that it had no intention whatsoever to enforce or implement the same. If at
all, this evinces an afterthought of the plaintiff to belatedly and unjustifiably single
out the defendant for alleged non compliance of the said restrictions which are not
applicable to it anyway.
WHEREFORE, foregoing premises considered, the present complaint is
hereby dismissed for lack of basis.
SO ORDERED.[19]
Ortigas appealed to the CA, which initially affirmed the RTC under the decision
promulgated on September 6, 2011,[20] ruling thusly:
x x x x ORTIGAS can no longer enforce the said restrictions as against ASB.
The "Covenants, Conditions and Restrictions" of ORTIGAS with respect to the
property clearly states the following purpose:
"This lot has been segregated by ORTIGAS from its subdivisions to form part of a
zonified BUILDING AREA pursuant to its controlled real estate development project
and subdivision scheme. x x x"
However, it appears from the circumstances obtaining in this case that ORTIGAS
failed to pursue the aforequoted purpose. It never filed a complaint against its
vendee, AMETHYST, notwithstanding that it required the latter to complete
construction of the building within four (4) years from the execution of the Deed of
Sale. Neither did it make a demand to enforce the subject restriction. Moreover,
while it imposed a restriction on the registration and issuance of title in the name of
the vendee under Paragraph "P" on "Registration of Sale", to wit:
"P. REGISTRATION OF SALE:
The VENDEE hereby agrees that, for the time being, this Deed will not be
registered and that its title shall not be issued until the satisfactory construction of
the contemplated Office Building and VENDEE's compliance with all conditions
therein. x x x"
AMETHYST was nonetheless able to procure the title to the property in its name,
and subsequently, assigned the same to ASB.
Besides, records show that there are registered owner-corporations of several
properties within the Ortigas area, where the subject property is located, that have
likewise failed to comply with the restriction on building construction notwithstanding
the fact of its annotation on the titles covering their properties. In fact, the tax
declarations covering these properties in the respective names of UNIMART INC.,
CHAILEASE DEVELOPMENT CO. INC., CANOGA PARK DEVELOPMENT
CORPORATION, and MAKATI SUPERMARKET CORPORATION reveal that no
improvements or buildings have been erected thereon.
Notwithstanding such blatant non-compliance, however, records are bereft of
evidence to prove that ORTIGAS took steps to demand observance of the said
restriction from these corporations, or that it opted to institute any case against
them in order to enforce its rights as seller. Thus, while ORTIGAS effectively
tolerated the non-compliance of these other corporations, it nonetheless proceeded
with the filing of the Complaint a quo against ASB, seeking the rescission of the
original Deed of Sale on the ground of non-compliance of the very same
restriction being violated by other property owners similarly situated.
On the basis of the foregoing acts or omissions of ORTIGAS, and the factual milieu
of the present case, it cannot be pretended that it failed to actively pursue the
attainment of its objective of having a "controlled real estate development project
and subdivision scheme". The Court thus concurs with the ratiocinations of the RTC
when it posited that the restrictions imposed by ORTIGAS on ASB have been
"rendered obsolete and inexistent" for failure of ORTIGAS to enforce the
same uniformly and indiscriminately against all non-complying property owners. If
the purpose of ORTIGAS for imposing the restrictions was for its "controlled real
estate development project and subdivision scheme", then it should have sought
compliance from all property owners that have violated the restriction on building
completion. As things stand, ASB would appear to have been singled out by
ORTIGAS, rendering the present action highly suspect and a mere afterthought.
Consequently, while it may be true that ASB was bound by the restrictions
annotated on its title, specifically the restriction on building completion, ORTIGAS is
now effectively estopped from enforcing the same by virtue of its inaction and
silence.
xxxx
In this case, ORTIGAS acquiesced to the conveyance of the property from
AMETHYST to ASB with nary a demand, reservation or complaint for the
enforcement of the restriction on building construction. It allowed the four-year
period within which to construct a building to lapse before it decided that it wanted,
after all, to enforce the restriction, which cannot be allowed lest the property rights
of the registered owner, ASB, be transgressed. Such a silence or inaction, which in
effect led ASB to believe that ORTIGAS no longer sought the enforcement of the
restrictions on the contract, therefore bars ORTIGAS from enforcing the restriction it
imposed on the subject property.
xxxx
WHEREFORE, premises considered, the instant appeal is DENIED. The assailed
Decision is hereby AFFIRMED.
SO ORDERED.[21]
Acting on Ortigas' Motion for Reconsideration, however, the CA promulgated its
assailed amended decision on January 9, 2012,[22] whereby it reversed the decision
promulgated on September 6, 2011. It observed and ruled as follows:
It is not disputed that AMETHYST failed to finish construction within the period
stated in the 1994 Deed of Sale. As correctly pointed out by ORTIGAS, in
accordance with Article 1144 of the Civil Code, the prescriptive period within which
to enforce remedies under the 1994 Deed of sale is ten (10) years from the time the
right of action accrues.
ORTIGAS, therefore, had ten (10) years from 31 December 1995 or until 31
December 2005 within which to file suit to enforce the restriction. ORTIGAS filed
the present complaint on 07 July 2000 well within the prescriptive period for
filing the same.
ASB contends that it could not have complied with the particular restriction to finish
construction of the building as the period to finish the same had already lapsed by
the time ASB acquired the property by way of a Deed of Assignment in Liquidation
between AMETHYST and ASB on 28 December 1996. We hold, however, that the
mere assignment or transfer of the subject property from AMETHYST to ASB
does not serve to defeat the vested right of ORTIGAS to avail of remedies to
enforce the subject restriction within the applicable prescriptive period.
xxxx
As to the argument that the inaction of ORTIGAS with respect to other non-
compliant properties in the Ortigas area is tantamount to consenting to such non-
compliance, it must be mentioned that it is the sole prerogative and discretion of
Ortigas to initiate any action against the violators of the deed restrictions. This Court
cannot interfere with the exercise of such prerogative/discretion. Furthermore, We
cannot sustain estoppel in doubtful inference. Absent the conclusive proof that its
essential elements are present, estoppel must fail. Estoppel, when misapplied,
becomes an effective weapon to accomplish an injustice, inasmuch as it shuts a
man's mouth from speaking the truth.[23]
By its resolution promulgated on July 26, 2012, the CA denied the
petitioner's Motion for Reconsideration[24] for being filed out of time.[25]
Issues
Hence, this appeal in which ASB submits: (1) that its Motion for
Reconsideration vis-a-vis the CA's amended decision was filed on time; and (2) that
the amended decision promulgated on January 9, 2012 by CA be reversed and set
aside, and the decision promulgated on September 6, 2011 be reinstated.[26]
The petitioner essentially seeks the resolution of the issue of whether or not Ortigas
validly rescinded the Deed of Sale due to the failure of Amethyst and its assignee,
the petitioner, to fulfil the covenants under the Deed of Sale.
Ruling of the Court
The petition for review is meritorious.
1.
Petitioner's motion for reconsideration vis-a-vis the amended decision of the
CA was timely filed
In denying the petitioner's Motion for Reconsideration, the CA concluded as follows:
Per allegation of material dates, the Motion for Reconsideration filed by Balgos
Gumara & Jalandoni, co-counsel with Jose, Mendoza & Associates, on January 30,
2012 appears to have been filed on time. However, per registry return attached at
the back of p. 212 of the Rollo, the Motion for Reconsideration was filed three (3)
days late considering that the Amended Decision was received by defendant
appellee's counsel of record, Jose, Mendoza & Associates, on January 12, 2012.[27]
The conclusion of the CA was unwarranted because the petitioner established that
its filing of the Motion for Reconsideration was timely.
It is basic that the party who asserts a fact or the affirmative of an issue has the
burden of proving it.[28] Here, that party was the petitioner. To comply with its
burden, it attached to its petition for review on certiorari: (1) the affidavit executed
by Noel S.R. Rose, Senior Partner of Jose, Mendoza & Associates attesting that he
had requested the postmaster of the Mandaluyong City Post Office to certify the
date when Jose, Mendoza & Associates had received the copy of the amended
decision of the CA;[29] and (2) the certification issued on August 15, 2012 by
Postmaster Rufino C. Robles, and Letter Carrier, Jojo Salvador, both of the
Mandaluyong Central Post Office, certifying that Registered Letter No. MVC 457
containing the copy of the amended decision had been delivered to and received on
January 18, 2012 by Jose, Mendoza & Associates, through Ric Ancheta.[30] It
thereby sought to prove that it had received the copy of the amended decision only
on January 18, 2012, not January 12, 2012 as stated in the registry return card on
record. Thus, it had until February 2, 2012, or 15 days from January 18, 2012,
within which to file the same. In contrast, Ortigas relied only on the copy of the
registry return to refute the petitioner's assertion.[31] Under the circumstances, the
filing on January 30, 2012 of the Motion for Reconsideration was timely.
2.
Ortigas' action for rescission could not prosper
The petitioner reiterates that although the restrictions and covenants imposed by
Ortigas under the Deed of Salewith Amethyst, particularly with regard to the
construction of the building, were similarly imposed on Ortigas' other buyers and
annotated on the latter's respective certificates of title,[32] Ortigas never took to task
such other buyers and Amethyst for failing to construct the buildings within the
periods contractually imposed.[33] It maintains, therefore, that Ortigas slept on its
rights because it did not take any action against Amethyst during the period
prescribed in the Deed of Sale.[34] It argues that even assuming that it was bound by
the terms of the Deed of Sale, certain circumstances occurred in the interim that
rendered it impossible for the petitioner to comply with the covenants embodied in
the Deed of Sale, namely: (1) the delay in the petitioner's possession of the property
resulted from the complaint for forcible entry it had filed in the Metropolitan Trial
Court in Pasig City; (2) at the time the property was transferred to the petitioner, the
period within which to construct the building had already expired without Ortigas
enforcing the obligation against Amethyst; and (3) the petitioner was placed under
corporate rehabilitation by the Securities and Exchange Commission (SEC) by
virtue of which a stay order was issued on May 4, 2000.[35]
In contrast, Ortigas contends that it had the sole discretion whether or not to
commence any action against a party who violated a restriction in the Deed of
Sale;[36] and that it could not be estopped because the Deed of Sale with Amethyst
and the deeds of sale with its other buyers contained a uniform provision to the
effect that "any inaction, delay or tolerance by OCLP (Ortigas) in respect to violation
of any of the covenants and restrictions committed by these buyers shall not bar or
estop the institution of an action to enforce them."[37]
In asserting its right to rescind, Ortigas insists that the petitioner was bound by the
covenants of the Deed of Saleannotated on TCT No. PT-10597 in the name of the
petitioner;[38] and that the petitioner's privity to the Deed of Sale was by virtue of its
being the successor-in-interest or assignee of Amethyst.[39]
After evaluating the parties' arguments and the records of the case, the Court holds
that Ortigas could not validly demand the reconveyance of the property, or the
demolition of the structures thereon through rescission.
The Deed of Assignment in Liquidation executed between Amethyst and the
petitioner expressly stated, in part, that:
x x x x [T]he ASSIGNOR hereby assigns, transfers and conveys unto the
ASSIGNEE, its successors and assigns, free from any lien or encumbrance except
those that are duly annotated on the Transfer Certificate of Title (TCT), one parcel
of real property (with improvements). x x x.
xxxx
The ASSIGNEE in turn in consideration of the foregoing assignment of assets to
it, hereby surrenders to ASSIGNOR, Amethyst Pearl Corporation, Stock Certificate
Nos. (006, 007, 008, 009, 010, 011), covering a total of TEN THOUSAND SHARES
(10,000) registered in the name of the ASSIGNEE and its nominees in the books of
ASSIGNOR, receipt of which is hereby acknowledged, and in addition hereby
releases ASSIGNOR from any and all claims.[40]
The express terms of the Deed of Assignment in Liquidation, supra, indicate that
Amethyst transferred to the petitioner only the tangible asset consisting of the
parcel of land covered by TCT No. PT-94175 registered in the name of Amethyst.
By no means did Amethyst assign the rights or duties it had assumed under
the Deed of Sale. The petitioner thus became vested with the ownership of the
parcel of land "free from any lien or encumbrance except those that are duly
annotated on the [title]" from the time Amethyst executed the Deed of Assignment in
Liquidation.
Although the Deed of Sale stipulated that:
3. The lot, together with any improvements thereon, or any rights thereto, shall not
be transferred, sold or encumbered before the final completion of the building as
herein provided unless it is with the prior express written approval of ORTIGAS.[41]
xxxx
The VENDEE hereby agrees that, for the time being, this Deed will not be
registered and that its title shall not be issued until the satisfactory construction of
the contemplated Office Building and VENDEE's compliance with all conditions
herein. x x x[42]
Ortigas apparently recognized without any reservation the issuance of the new
certificate of title in the name of Amethyst and the subsequent transfer by
assignment from Amethyst to the petitioner that resulted in the issuance of the new
certificate of title under the name of the petitioner. As such, Ortigas was estopped
from assailing the petitioner's acquisition and ownership of the property.
The application of estoppel was appropriate. The doctrine of estoppel was based on
public policy, fair dealing, good faith and justice, and its purpose was to forbid a
party to speak against his own act or omission, representation, or commitment to
the injury of another to whom the act, omission, representation, or commitment was
directed and who reasonably relied thereon. The doctrine sprang from equitable
principles and the equities in the case, and was designed to aid the law in the
administration of justice where without its aid injustice would result. Estoppel has
been applied by the Court wherever and whenever special circumstances of the
case so demanded.[43]
Yet, the query that persists is whether or not the covenants annotated on TCT No.
PT-10597 bound the petitioner to the performance of the obligations assumed by
Amethyst under the Deed of Sale.
We agree with Ortigas that the annotations on TCT No. PT-10597 bound the
petitioner but not to the extent that rendered the petitioner liable for the non-
performance of the covenants stipulated in the Deed of Sale.
Section 39 of Act No. 496 (The Land Registration Act) requires that every person
receiving a certificate of title in pursuance of a decree of registration, and every
subsequent purchaser of registered land who takes a certificate of title for value in
good faith shall hold the same free of all encumbrances except those noted on said
certificate. An encumbrance in the context of the provision is "anything that impairs
the use or transfer of property; anything which constitutes a burden on the title; a
burden or charge upon property; a claim or lien upon property."[44] It denotes "any
right to, or interest in, land which may subsist in another to the diminution of its
value, but consistent with the passing of the fee by conveyance."[45] An annotation,
on the other hand, is "a remark, note, case summary, or commentary on some
passage of a book, statutory provision, court decision, of the like, intended to
illustrate or explain its meaning."[46] The purpose of the annotation is to charge the
purchaser or title holder with notice of such burden and claims.[47] Being aware of
the annotation, the purchaser must face the possibility that the title or the real
property could be subject to the rights of third parties.[48]
By acquiring the parcel of land with notice of the covenants contained in the Deed
of Sale between the vendor (Ortigas) and the vendee (Amethyst), the petitioner
bound itself to acknowledge and respect the encumbrance. Even so, the petitioner
did not step into the shoes of Amethyst as a party in the Deed of Sale. Thus, the
annotation of the covenants contained in the Deed of Sale did not give rise to a
liability on the part of the petitioner as the purchaser/successor-in-interest without
its express assumption of the duties or obligations subject of the annotation. As
stated, the annotation was only the notice to the purchaser/successor-in-interest of
the burden, claim or lien subject of the annotation. In that respect, the Court has
observed in Garcia v. Villar:[49]
The sale or transfer of the mortgaged property cannot affect or release the
mortgage; thus the purchaser or transferee is necessarily bound to acknowledge
and respect the encumbrance.
xxxx
x x x However, Villar, in buying the subject property with notice that it was
mortgaged, only undertook to pay such mortgage or allow the subject property to be
sold upon failure of the mortgage creditor to obtain payment from the principal
debtor once the debt matures. Villar did not obligate herself to replace the debtor in
the principal obligation, and could not do so in law without the creditors consent.
Article 1293 of the Civil Code provides:
Art. 1293. Novation which consists in substituting a new debtor in the place of the
original one, may be made even without the knowledge or against the will of the
latter, but not without the consent of the creditor. Payment by the new debtor gives
him the rights mentioned in articles 1236 and 1237.
Therefore, the obligation to pay the mortgage indebtedness remains with the
original debtors Galas and Pingol. x x x
To be clear, contractual obligations, unlike contractual rights or benefits, are
generally not assignable. But there are recognized means by which obligations may
be transferred, such as by sub-contract and novation. In this case, the substitution
of the petitioner in the place of Amethyst did not result in the novation of the Deed
of Sale. To start with, it does not appear from the records that the consent of
Ortigas to the substitution had been obtained despite its essentiality to the novation.
Secondly, the petitioner did not expressly assume Amethyst's obligations under
the Deed of Sale, whether through the Deed of Assignment in Liquidation or
another document. And, thirdly, the consent of the new obligor (i.e., the petitioner),
which was as essential to the novation as that of the obligee (i.e., Ortigas), was not
obtained.[50]
Even if we would regard the petitioner as the assignee of Amethyst as far as
the Deed of Sale was concerned, instead of being the buyer only of the subject
property, there would still be no express or implied indication that the petitioner had
assumed Amethyst's obligations. In short, the burden to perform the covenants
under the Deed of Sale, or the liability for the non-performance thereof, remained
with Amethyst. As held in an American case:
The mere assignment of a bilateral executory contract may not be interpreted as a
promise by the assignee to the assignor to assume the performance of the
assignor's duties, so as to have the effect of creating a new liability on the part of
the assignee to the other party to the contract assigned. The assignee of the
vendee is under no personal engagement to the vendor where there is no privity
between them. (Champion v. Brown, 6 Johns. Ch. 398; Anderson v. N. Y. & H. R.
R. Co., 132 App. Div. 183, 187, 188; Hugel v. Habel, 132 App. Div. 327, 328.) The
assignee may, however, expressly or impliedly, bind himself to perform the
assignor's duties. This he may do by contract with the assignor or with the other
party to the contract. It has been held (Epstein v. Gluckin, 233 N. Y. 490) that where
the assignee of the vendee invokes the aid of a court of equity in an action for
specific performance, he impliedly binds himself to perform on his part and subjects
himself to the conditions of the judgment appropriate thereto. "He who seeks equity
must do equity." The converse of the proposition, that the assignee of the vendee
would be bound when the vendor began the action, did not follow from the decision
in that case. On the contrary, the question was wholly one of remedy rather than
right and it was held that mutuality of remedy is important only so far as its
presence is essential to the attainment of the ends of justice. This holding was
necessary to sustain the decision. No change was made in the law of contracts nor
in the rule for the interpretation of an assignment of a contract.
A judgment requiring the assignee of the vendee to perform at the suit of the vendor
would operate as the imposition of a new liability on the assignee which would be
an act of oppression and injustice, unless the assignee had, expressly or by
implication, entered into a personal and binding contract with the assignor or with
the vendor to assume the obligations of the assignor.[51]
Is rescission the proper remedy for Ortigas to recover the subject property from the
petitioner?
The Civil Code uses rescission in two different contexts, namely: (1) rescission on
account of breach of contract under Article 1191; and (2) rescission by reason of
lesion or economic prejudice under Article 1381. Cogently explaining the
differences between the contexts of rescission in his concurring opinion in Universal
Food Corp. v. Court of Appeals,[52] the eminent Justice J.B.L. Reyes observed:
favor of the plaintiff by whatever means and under whatever law it arises or is
created; (2) an obligation on the part of the defendant not to violate such right; and
(3) an act or omission on the part of the defendant in violation of the right of the
plaintiff or constituting a breach of the obligation of the defendant to the plaintiff for
which the latter may maintain an action for recovery of damages or other relief. It is
only upon the occurrence of the last element that the cause of action arises, giving
the plaintiff the right to file an action in court for the recovery of damages or other
relief.[54]
The second and third elements were absent herein. The petitioner was not privy to
the Deed of Sale because it was not the party obliged thereon. Not having come
under the duty not to violate any covenant in the Deed of Salewhen it purchased the
subject property despite the annotation on the title, its failure to comply with the
covenants in the Deed of Sale did not constitute a breach of contract that gave rise
to Ortigas' right of rescission. It was rather Amethyst that defaulted on the
covenants under the Deed of Sale; hence, the action to enforce the provisions of
the contract or to rescind the contract should be against Amethyst. In other words,
rescission could not anymore take place against the petitioner once the subject
property legally came into the juridical possession of the petitioner, who was a third
party to the Deed of Sale.[55]
In view of the outcome, we consider to be superfluous any discussion of the other
matters raised in the petition, like the effects of the petitioner's corporate
rehabilitation and whether Ortigas was guilty of laches.
WHEREFORE, the Court GRANTS the petition for review
on certiorari; ANNULS and REVERSES the amended decision promulgated on
January 9, 2012 and the resolution promulgated on July 26, 2012 by the Court of
Appeals in C.A.-G.R. CV No. 94997; DISMISSES Civil Case No. 67978 for lack of
cause of action; and ORDERS respondent ORTIGAS & COMPANY LIMITED
PARTNERSHIP to pay the costs of suit.
SO ORDERED.

x x x The rescission on account of breach of stipulations is not predicated on injury

to economic interests of the party plaintiff but on the breach of faith by the
defendant, that violates the reciprocity between the parties. It is not a subsidiary
action, and Article 1191 may be scanned without disclosing anywhere that the
action for rescission thereunder is subordinated to anything; other than the culpable
breach of his obligations by the defendant. This rescission is in principal action
retaliatory in character, it being unjust that a party be held bound to fulfill his
promises when the other violates his, as expressed in the old Latin aphorism: "Non
servanti fidem, non est fides servanda." Hence, the reparation of damages for the
breach is purely secondary.

On the contrary, in the rescission by reason of lesion or economic prejudice, the

cause of action is subordinated to the existence of that prejudice, because it is
the raison d'etre as well as the measure of the right to rescind. Hence, where the
defendant makes good the damages caused, the action cannot be maintained or
continued, as expressly provided in Articles 1383 and 1384. But the operation of
these two articles is limited to the cases of rescission for lesion enumerated in
Article 1381 of the Civil Code of the Philippines, and does not apply to cases under
Article 1191.
Based on the foregoing, Ortigas' complaint was predicated on Article 1191 of
the Civil Code, which provides:

Article 1191. The power to rescind obligations is implied in reciprocal ones, in case
one of the obligors should not comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the
obligation, with the payment of damages in either case. He may also seek
rescission, even after he has chosen fulfillment, if the latter should become
impossible.

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

This is understood to be without prejudice to the rights of third persons who have
acquired the thing, in accordance with articles 1385 and 1388 and the Mortgage
Law.
Rescission under Article 1191 of the Civil Code is proper if one of the parties to the
contract commits a substantial breach of its provisions. It abrogates the contract
from its inception and requires the mutual restitution of the benefits
received;[53] hence, it can be carried out only when the party who demands
rescission can return whatever he may be obliged to restore.

Considering the foregoing, Ortigas did not have a cause of action against the
petitioner for the rescission of the Deed of Sale. Under Section 2, Rule 2 of
the Rules of Court, a cause of action is the act or omission by which a party violates
a right of another. The essential elements of a cause of action are: (1) a right in
G.R. No. 163075 - AYALA LIFE ASSURANCE, INC., Petitioner, - versus -
RAY BURTON DEVELOPMENT CORPORATION, Respondent. January 23,
2006
DECISION
SANDOVAL-GUTIERREZ, J.:
Before us for resolution is the petition for review on
certiorari[1] assailing the Decision[2] dated January 21, 2004 of the Court of
Appeals in CA-G.R. CV No. 74635,[3] as well as its Resolution dated April 2,
2004 denying petitioners motion for reconsideration.
The facts are:
On December 22, 1995, Ayala Life Assurance, Inc., petitioner, and
Ray Burton Development Corporation, respondent, entered into a contract
denominated as a Contract to Sell, with a Side Agreement of even date. In
these contracts, petitioner agreed to sell to respondent a parcel of land, with an
area of 1,691 square meters, situated
at Madrigal Business Park, Ayala Alabang Village, Muntinlupa City, covered by
Transfer Certificate of Title No. 186485 of the Registry of Deeds
of Makati City. The purchase price of the land is P55,000.00 per square meter
or a total of P93,005,000.00, payable as follows:
(a) On contract date P24,181,300.00 representing 26
percent of the purchase price, inclusive of
the P1,000,000.00 option money;
(b) Not later than January 6,
1996 P3,720,200.00 representing 4 percent of the
purchase price to complete 30 percent down payment;
and
(c) In consecutive quarterly installments for a period of 5
years from December 22,
1995 P65,103,500.00 representing the 70 percent
balance of the purchase price.
The contract contains a stipulation in paragraphs 3 and 3.1 for an
Event of Default. It provides that in case the purchaser (respondent) fails to pay
any installment for any reason not attributable to the seller (petitioner), the latter
has the right to assess the purchaser a late penalty interest on the unpaid
installment at two (2%) percent per month, computed from the date the amount
became due until full payment thereof. And if such default continues for a
period of six (6) months, the seller has the right to cancel the contract without
need of court declaration by giving the purchaser a written notice of
cancellation. In case of such cancellation, the seller shall return to the
purchaser the amount he received, less penalties, unpaid charges and dues on
the property.
Respondent paid thirty (30%) down payment and the quarterly
amortization, including the one that fell due on June 22, 1998.
However, on August 12, 1998, respondent notified petitioner in
writing that it will no longer continue to pay due to the adverse effects of the
economic crisis to its business. Respondent then asked for the immediate
cancellation of the contract and for a refund of its previous payments as provided
in the contract.
Petitioner refused to cancel the contract to sell. Instead, on
November 25, 1999, it filed with the Regional Trial Court, Branch 66, MakatiCity,
a complaint for specific performance against respondent, docketed as Civil Case
No. 99-2014, demanding from the latter the payment of the remaining unpaid
quarterly installments beginning September 21, 1999 in the total sum
of P33,242,382.43, inclusive of interest and penalties.
Respondent, in its answer, denied any further obligation to
petitioner, asserting that on August 12, 1998, it (respondent) notified the latter
of its inability to pay the remaining installments. Respondent invoked the
provisions of paragraphs 3 and 3.1 of the contract to sell providing for the refund
to it of the amounts paid, less interest and the sum of 25% of all sums paid as
liquidated damages.
After pre-trial, petitioner moved for a summary judgment on the
ground that respondents answer failed to tender any genuine issue as to any
material fact, except as to the amount of damages. The trial court granted the
motion and ordered the parties to submit their memoranda.
On December 10, 2001, the trial court rendered a Decision holding
that respondent transgressed the law in obvious bad
faith. The dispositive portion reads:
WHEREFORE, defendant (now respondent)
is hereby sentenced and ordered to pay plaintiff (now
petitioner) the sum of P33,242,383.43, representing the
unpaid balance of the principal amount owing under the
contract, interest agreed upon, and
penalties. Defendant is further ordered to pay plaintiff
the sum of P200,000.00 as attorneys fees and the costs
of suit.
Upon full payment of the aforementioned
amounts by defendant, plaintiff shall, as it is hereby
ordered, execute the appropriate deed of absolute sale
conveying and transferring full title and ownership of the
parcel of land subject of the sale to and in favor of
defendant.
On appeal, the Court of Appeals rendered a Decision dated January
21, 2004 in CA-G.R. CV No. 74635, reversing the trial courts Decision, thus:
WHEREFORE, the decision appealed from
is hereby REVERSED and SET ASIDE. Ayala Life is
hereby ordered to refund all sums paid under the
Contract to Sell, with interest of twelve percent
(12%) per annum from 12 August 1998 until fully paid,
less the amount equivalent to 25% of the total amount
paid as liquidated damages.
SO ORDERED.
The Court of Appeals ruled that the parties transaction in question is
in the nature of a contract to sell, as distinguished from a contract of sale. Under
their contract, ownership of the land is retained by petitioner until respondent
shall have fully paid the purchase price. Its failure to pay the price in full is not
a breach of contract but merely an event that prevents petitioner from conveying
the title to respondent. Under such a situation, a cause of action for specific
performance does not arise. What should govern the parties relation are the
provisions of their contract on the Event of Default stated earlier.
Hence, the instant petition for review on certiorari.
Petitioner contends that the Court of Appeals committed a reversible
error in holding that: (a) the remedy of specific performance is not available in a
contract to sell, such as the one at bar; and (b) petitioner is liable to refund
respondent all the sums the latter paid under the contract to sell, with interest at
12% per annum from August 12, 1998 until fully paid, less the amount equivalent
to 25% of the total amount paid as liquidated damages.
Petitioner argues that by virtue of the contract to sell, it has the right
to choose between fulfillment and rescission of the contract, with damages in
either case. Thus, it is immaterial to determine whether the parties subject
agreement is a contract to sell or a contract of sale.
In its comment, respondent disputed petitioners allegations and
prayed that the petition be denied for lack of merit.
The issues are:
1. Whether respondents non-payment of
the balance of the purchase price gave rise to a cause
of action on the part of petitioner to demand full payment
of the purchase price; and
2. Whether petitioner should refund
respondent the amount the latter paid under the contract
to sell.
At the outset, it is significant to note that petitioner does not dispute that
its December 22, 1995 transaction with respondent is a contract to sell. It
bears stressing that the exact nature of the parties contract determines whether
petitioner has the remedy of specific performance.
It is thus imperative that we first determine the nature of the parties
contract.
The real nature of a contract may be determined from the express
terms of the written agreement and from the contemporaneous and subsequent
acts of the contracting parties.[4] In the construction or interpretation of an
instrument, the intention of the parties is primordial and is to be pursued.[5] If
the terms of the contract are clear and leave no doubt upon the intention of the
contracting parties, the literal meaning of its stipulations shall control.[6] If the
words appear to be contrary to the evident intention of the parties, the latter shall
prevail over the former.[7] The denomination or title given by the parties in their
contract is not conclusive of the nature of its contents.[8]
Here, the questioned agreement clearly indicates that it is a contract
to sell, not a contract of sale. Paragraph 4 of the contract provides:
4. TITLE AND OWNERSHIP OF THE
PROPERTY. The title to the property shall transfer to the
PURCHASER upon payment of the balance of the
Purchase Price and all expenses, penalties and other
 costs which shall be due and payable hereunder or
which may have accrued thereto. Thereupon, the
SELLER shall execute a Deed of Absolute Sale in favor
of the PURCHASER conveying all the SELLERS rights,
title and interest in and to the Property to the
PURCHASER.[9]
As correctly stated by the Court of Appeals in its assailed Decision, The
ruling of the Supreme Court in Lim v. Court of Appeals (182 SCRA 564 [1990]) is
most illuminating. In the said case, a contract to sell and a contract of sale were
clearly and thoroughly distinguished from each other, with the High Tribunal
stressing that in a contract of sale, the title passes to the buyer upon the delivery
of the thing sold. In a contract to sell, the ownership is reserved in the seller
and is not to pass until the full payment of the purchase price is made. In the
first case, non-payment of the price is a negative resolutory condition; in the
second case, full payment is a positive suspensive condition. In the first case,
the vendor has lost and cannot recover the ownership of the property until and
unless the contract of sale is itself resolved and set aside. In the second case,
the title remains in the vendor if the vendee does not comply with the condition
precedent of making payment at the time specified in the contract.[10]
Considering that the parties transaction is a contract to sell, can
petitioner, as seller, demand specific performance from respondent, as buyer?
Blacks Law Dictionary defined specific performance as (t)he remedy
of requiring exact performance of a contract in the specific form in which it was
made, or according to the precise terms agreed upon. The actual
accomplishment of a contract by a party bound to fulfill it.[11]
Evidently, before the remedy of specific performance may be availed
of, there must be a breach of the contract.
Under a contract to sell, the title of the thing to be sold is retained by
the seller until the purchaser makes full payment of the agreed purchase
price. Such payment is a positive suspensive condition, the non-fulfillment of
which is not a breach of contract but merely an eventthat prevents the seller
from conveying title to the purchaser. The non-payment of the purchase price
renders the contract to sell ineffective and without force and effect. Thus, a
cause of action for specific performance does not arise.
In Rayos v. Court of Appeals,[12] we held:
x x x. Under the two contracts, the petitioners
bound and obliged themselves to execute a deed of
absolute sale over the property and transfer title thereon
to the respondents after the payment of the full purchase
price of the property, inclusive of the quarterly
installments due on the petitioners loan with the PSB:
xxx
Construing the contracts together, it is evident
that the parties executed a contract to sell and not a
contract of sale. The petitioners retained ownership
without further remedies by the respondents until the
payment of the purchase price of the property in
full. Such payment is a Decision and Resolution, did not commit any reversible error.
positive suspensive condition, failure of which is
not really a breach, serious or otherwise, but an
event that prevents the obligation of the petitioners
to convey title from arising, in accordance with
Article 1184 of the Civil Code (Leano v. Court of
Appeals, 369 SCRA 36 [2001]; Lacanilao v. Court of
Appeals, 262 SCRA 486 [1996]).
The non-fulfillment by the respondent of his
obligation to pay, which is a suspensive condition to
the obligation of the petitioners to sell and deliver
the title to the property, rendered the contract to sell
ineffective and without force and effect (Agustin v.
Court of Appeals, 186 SCRA 375 [1990]). The parties
stand as if the conditional obligation had never
existed. Article 1191[13] of the New Civil Code will not
apply because it presupposes an obligation already
extant (Padilla v. Posadas, 328 SCRA 434
[2001]. There can be no rescission of an obligation that
is still non-existing, the suspensive condition not having
happened (Rillo v. Court of Appeals, 274 SCRA 461
[1997]). (Underscoring supplied)
Here, the provisions of the contract to sell categorically indicate that
respondents default in the payment of the purchase price is considered merely
as an event, the happening of which gives rise to the respective obligations of
the parties mentioned therein, thus:
3. EVENT OF DEFAULT. The
following event shall constitute an Event of Default
under this contract: the PURCHASER fails to pay any
installment on the balance, for any reason not
attributable to the SELLER, on the date it is due,
provided, however, that the SELLER shall have the right
to charge the PURCHASER a late penalty interest on the
said unpaid interest at the rate of 2% per month
computed from the date the amount became due and
payable until full payment thereof.
3.1. If the Event of Default shall have
occurred, then at any time thereafter, if any such event
shall then be continuing for a period of six (6) months,
the SELLER shall have the right to cancel this Contract
without need of court declaration to that effect by giving
the PURCHASER a written notice of cancellation sent to
the address of the PURCHASER as specified herein by
registered mail or personal delivery. Thereafter, the
SELLER shall return to the PURCHASER the
aggregate amount that the SELLER shall have received
as of the cancellation of this Contract, less: (i) penalties
accrued as of the date of such cancellation, (ii) an
amount equivalent to twenty five percent (25%) of the
total amount paid as liquidated damages, and (iii) any
unpaid charges and dues on the Property. Any amount
to be refunded to the PURCHASER shall be collected by
the PURCHASER at the office of the SELLER. Upon
notice to the PURCHASER of such cancellation, the
SELLER shall be free to dispose of the Property covered
hereby as if this Contract had not been executed. Notice
to the PURCHASER sent by registered mail or by
personal delivery to its address stated in this Contract
shall be considered as sufficient compliance with all
requirements of notice for purposes of this Contract.[14]
Therefore, in the event of respondents default in payment, petitioner,
under the above provisions of the contract, has the right to retain an amount
equivalent to 25% of the total payments. As stated by the Court of Appeals,
petitioner having been informed in writing by respondent of its intention not to
proceed with the contract on August 12, 1998, or prior to incurring delay in
payment of succeeding installments,[15] the provisions in the contract relative to
penalties and interest find no application.
The Court of Appeals further held that with respect to the award of
interest, petitioner is liable to pay interest of 12% per annum upon the net
refundable amount due from the time respondent made the extrajudicial demand
upon it on August 12, 1998 to refund payment under the Contract to
Sell,[16] pursuant to our ruling in Eastern Shipping Lines, Inc. v. Court of
Appeals.[17]
In sum, we find that the Court of Appeals, in rendering the assailed
WHEREFORE, the petition is DENIED. The assailed Decision and
Resolution of the Court of Appeals are AFFIRMED. Costs against petitioner.
SO ORDERED.
THE HEIRS OF GEORGE Y. POE, Petitioners, - versus - MALAYAN INSURANCE
COMPANY, INC., Respondent. G.R. No. 156302 , April 7, 2009
DECISION
CHICO-NAZARIO, J.:
The instant Petition for Review under Rule 45[1]of the Rules of Court assails the
Decision[2] dated 26 June 2002 of the Court of Appeals in CA-G.R. SP No. 67297, which
granted the Petition for Certiorari of respondent Malayan Insurance Company, Inc. (MICI)
and recalled and set aside the Order[3] dated 6 September 2001 of the Regional Trial Court
(RTC), Branch 73, of Antipolo City, in Civil Case No. 93-2705. The RTC, in its recalled
Order, denied the Notice of Appeal of MICI and granted the Motion for the Issuance of a
Writ of Execution filed by petitioners Heirs of George Y. Poe. The present Petition also
challenges the Resolution[4] dated 29 November 2002 of the appellate court denying
petitioners Motion for Reconsideration.
Records show that on 26 January 1996 at about 4:45 a.m., George Y. Poe (George) while
waiting for a ride to work in front of Capital Garments Corporation, Ortigas Avenue
Extension, Barangay Dolores, Taytay, Rizal, was run over by a ten-wheeler Isuzu hauler
truck with Plate No. PMH-858 owned by Rhoda Santos (Rhoda), and then being driven by
Willie Labrador (Willie).[5] The said truck was insured with respondent MICI under Policy
No. CV-293-007446-8.
To seek redress for Georges untimely death, his heirs and herein petitioners, namely, his
widow Emercelinda, and their children Flerida and Fernando, filed with the RTC a
Complaint for damages against Rhoda and respondent MICI, docketed as Civil Case No.
93-2705.[6] Petitioners identified Rhoda and respondent MICI, as follows:
Defendant RHODA SANTOS is likewise of legal age, Filipino
and a resident of Real Street, Pamplona, Las Pias, Metro
Manila where she may be served with summons and other court
processes.
[Herein respondent] MALAYAN INSURANCE COMPANY, INC.
(hereinafter [MICI] for brevity) is a corporation duly organized
and existing under Philippine law with address at Yuchengco
Bldg., 484 Q. Paredes Street, Binondo, Manila where it may be
served with summons and other processes of this Honorable
Court;
Defendant Rhoda Santos, who is engaged in the business,
among others, of selling gravel and sand is the registered owner
of one Isuzu Truck, with Plate No. PMH-858 and is the employer
of Willie Labrador the authorized driver of the aforesaid truck.
[Respondent MICI] on the other hand is the insurer of Rhoda
Santos under a valid and existing insurance policy duly issued
by said [MICI], Policy No. CV-293-007446-8 over the subject
vehicle owned by Rhoda Santos, Truck-Hauler Isuzu 10 wheeler
with plate no. PMH-858, serial no. SRZ451-1928340 and motor
no. 10PA1-403803. Under said insurance policy, [MICI] binds
itself, among others, to be liable for damages as well as any
bodily injury to third persons which may be caused by the
operation of the insured vehicle.[7]
And prayed that:
[J]udgment issue in favor of [herein petitioners] ordering [Rhoda
and herein respondent MICI] jointly and solidarily to pay the
[petitioners] the following:
1. Actual damages in the total amount of THIRTY SIX
THOUSAND (P36,000.00) PESOS for funeral and burial
expenses;
2. Actual damages in the amount of EIGHT HUNDRED FIVE
THOUSAND NINE HUNDRED EIGHTY FOUR (P805,984.00)
PESOS as loss of earnings and financial support given by the
deceased by reason of his income and employment;
3. Moral damages in the amount of FIFTY THOUSAND
(P50,000.00) PESOS;
4. Exemplary damages in the amount of FIFTY THOUSAND
(P50,000.00) PESOS;
5. Attorneys fees in the amount of FIFTY THOUSAND
(P50,000.00) PESOS and litigation expense in the amount of
ONE THOUSAND FIVE HUNDRED (P1,500.00) PESOS for
each court appearance;
6. The costs of suit.
Other reliefs just and equitable in the premises are likewise
prayed for.[8]
Rhoda and respondent MICI made the following admissions in their Joint Answer[9]:
That [Rhoda and herein respondent MICI] admit the
allegations in paragraphs 2, 3 and 4 of the complaint;
That [Rhoda and respondent MICI] admit the allegations in
paragraph 5 of the complaint that the cargo truck is insured
with [respondent] Malayan Insurance Company, Inc. [(MICI)]
however, the liability of the insured company attached only if
there is a judicial pronouncement that the insured and her
driver are liable and moreover, the liability of the insurance
company is subject to the limitations set forth in the insurance
policy.[10]
Rhoda and respondent MICI denied liability for Georges death averring, among other
defenses, that: a) the accident was caused by the negligent act of the victim George, who
surreptitiously and unexpectedly crossed the road, catching the driver Willie by surprise,
and despite the latters effort to swerve the truck to the right, the said vehicle still came into
contact with the victim; b) the liability of respondent MICI, if any, would attach only upon a
judicial pronouncement that the insured Rhoda and her driver Willie are liable; c) the liability
of MICI should be based on the extent of the insurance coverage as embodied in Rhodas
policy; and d) Rhoda had always exercised the diligence of a good father of a family in the
selection and supervision of her driver Willie.
After the termination of the pre-trial proceedings, trial on the merits ensued.
Petitioners introduced and offered evidence in support of their claims for damages against
MICI, and then rested their case. Thereafter, the hearings for the reception of the evidence
of Rhoda and respondent MICI were scheduled, but they failed to adduce their evidence
despite several postponements granted by the trial court. Thus, during the hearing on 9
June 1995, the RTC, upon motion of petitioners counsel, issued an Order[11] declaring that
Rhoda and respondent MICI had waived their right to present evidence, and ordering the
parties to already submit their respective Memorandum within 15 days, after which, the
case would be deemed submitted for decision.
Rhoda and respondent MICI filed a Motion for Reconsideration [12] of the Order dated 9
June 1995, but it was denied by the RTC in another Order dated 11 August 1995.[13]
Consequently, Rhoda and respondent MICI filed a Petition
for Certiorari, Mandamus,[14] Prohibition and Injunction with Prayer for a Temporary
Restraining Order and Writ of Preliminary Injunction, assailing the Orders dated 9 June
1995 and 11 August 1995 of the RTC foreclosing their right to adduce evidence in support
of their defense. The Petition was docketed as CA-G.R. SP No. 38948.
The Court of Appeals, through its Third Division, promulgated a Decision [15] on 29 April
1996, denying due course to the Petition in CA-G.R. SP No. 38948. Rhoda and respondent
MICI elevated the matter to the Supreme Court via a Petition for Certiorari,[16] docketed as
G.R. No. 126244. This Court likewise dismissed the Petition in G.R. No. 126244 in a
Resolution dated 30 September 1996.[17] Entry of Judgment was made in G.R. No. 126244
on 8 November 1996.[18]
On 28 February 2000, the RTC rendered a Decision in Civil Case No. 93-2705, the
dispositive portion of which reads:
Wherefore, [Rhoda and herein respondent MICI] are hereby
ordered to pay jointly and solidarily to the [herein petitioners] the
following:
1. Moral damages amounting to P100,000.00;
2. Actual damages for loss of earning capacity amounting
to P805,984.00;
3. P36,000.00 for funeral expenses;
4. P50,000.00 as exemplary damages;
5. P50,000.00 for attorneys fees plus P1,500 per court
appearance; and
6. Cost of suit.[19]
Rhoda and respondent MICI received their copy of the foregoing RTC Decision on 14
March 2000.[20] On 22 March 2000, respondent MICI and Rhoda filed a Motion for
Reconsideration[21] of said Decision, averring therein that the RTC erred in ruling that the
obligation of Rhoda and respondent MICI to petitioners was solidary or joint and several;
in computing Georges loss of earning capacity not in accord with established jurisprudence;
and in awarding moral damages although it was not buttressed by evidence.
Resolving the Motion of respondent MICI and Rhoda, the RTC issued an Order [22] on 24
January 2001 modifying and amending its Decision dated 28 February 2000, and
dismissing the case against respondent MICI.
The RTC held that:
 After a careful evaluation of the issues at hand, the contention
of the [herein respondent MICI] as far as the solidary liability of
the insurance company with the other defendant [Rhoda] is
meritorious. However, the assailed Decision can be modified
or amended to correct the same honest inadvertence without
necessarily reversing it and set aside to conform with the
evidence on hand.
The RTC also re-computed Georges loss of earning capacity, as follows:
The computation of actual damages for loss of earning
capacity was determined by applying the formula adopted in
the American Expectancy Table of Mortality or the actuarial of
Combined Experience Table of Mortality applied in x x x Villa
Rey Transit, Inc. v. Court of Appeals (31 SCRA 521). Moral
damages is awarded in accordance with Article 2206 of the
New Civil Code of the Philippines. While death indemnity in the
amount of P50,000.00 is automatically awarded in cases
where the victim had died (People v. Sison, September 14,
1990 [189 SCRA 643]).[23]
In the end, the RTC decreed:
WHEREFORE, in view of the foregoing consideration, the
Decision of this Court dated 28 February 2000 is hereby
amended or modified. Said Decision should read as follows:
Wherefore, defendant Rhoda Santos
is hereby ordered to pay to the
[herein petitioners] the following:
1. Moral damages amounting
to P100,000.00;
2. Actual damages for loss of earning
capacity amounting
to P102,106.00;
3. P36,000.00 for funeral expenses;
4. P50,000.00 as death indemnity;
5. P50,000.00 for attorneys fees
plus P1,500.00 per
court appearance;
6. Costs of the suit.
The case against Malayan Insurance
Company, Inc. is hereby
dismissed.[24]
It was petitioners turn to file a Motion for Reconsideration [25] of the 24 January 2001 Order,
to which respondent MICI filed a Vigorous Opposition to the Plaintiffs Motion for
Reconsideration.[26]
On 15 June 2001, the RTC issued an Order reinstating its Decision dated 28 February
2000, relevant portions of which state:
Finding the arguments raised by the [herein petitioners] in their
Motion for Reconsideration of the Order of this Court dated
January 24, 2001 to be more meritorious to [herein respondents]
Malayan Insurance Co., Inc. (sic) arguments in its vigorous
opposition thereto, said motion is hereby granted.
Accordingly, the Order under consideration is hereby
reconsidered and set aside. The decision of this Court
dated February 28, 2000 is hereby reinstated.
Notify parties herein.[27]
Respondent MICI received a copy of the 15 June 2001 Order of the RTC on 27 June 2001.
Aggrieved by the latest turn of events, respondent MICI filed on 9 July 2001 a
Notice of Appeal[28] of the 28 February 2000 Decision of the RTC, reinstated by the 15 June
2001 Resolution of the same court. Rhoda did not join respondent MICI in its Notice of
Appeal.[29]
Petitioners filed their Opposition[30] to the Notice of Appeal of respondent MICI, with a
Motion for the Issuance of Writ of Execution.
After considering the recent pleadings of the parties, the RTC, in its Order dated 6
September 2001, denied the Notice of Appeal of respondent MICI and granted petitioners
Motion for the Issuance of Writ of Execution. The RTC reasoned in its Order:
The records disclosed that on February 28, 2000 this Court
rendered a Decision in favor of the [herein petitioners] and
against [Rhoda and herein respondent MICI]. The Decision was
said to have been received by MICI on March 14, 2000. Eight
days after or on March 22, 2000, MICI mailed its Motion for
Reconsideration to this Court and granted the same in the Order
dated January 24, 2001. From this Order, [petitioners] filed a
Motion for Reconsideration on February 21, 2001 to which MICI
filed a vigorous opposition. On June 15, 2001 this Court granted
[petitioners] motion reinstating the Decision dated February 28,
2000. According to MICI, the June 15, 2001 order was received
by it on June 27, 2001. MICI filed a Notice of Appeal on July 9,
2001 or twelve (12) days from receipt of said Order.
[Petitioners] contend that the Notice of Appeal was filed out of
time while [respondent] MICI opposes, arguing otherwise. The
latter interposed that the Order dated June 15, 2001 is in reality
a new Decision thereby giving it a fresh fifteen (15) days within
which to file notice of appeal.
[Respondent] MICIs contention is not meritorious. The fifteen
(15) day period within which to file a notice of appeal should be
reckoned from the date it received the Decision on March 14,
2000. So that when MICI mailed its Motion for Reconsideration
on March 22, 2000, eight (8) days had already lapsed, MICI has
remaining seven (7) days to file a notice of appeal. However,
when it received the last Order of this Court it took [respondent]
MICI twelve (12) days to file the same. Needless to say, MICIs
Notice of Appeal was filed out of time. The Court cannot
countenance the argument of MICI that a resolution to a motion
for a final order or judgment will have the effect of giving a fresh
reglementary period. This would be contrary to what was
provided in the rules of procedure.[31]
Accordingly, the RTC adjudged:
WHEREFORE, premises considered, [herein respondent]
MICIs Notice of Appeal is hereby Denied for having filed out of
time making the Decision of this Court dated February 28, 2000
as final and executory. Accordingly, the Motion for Issuance of
Writ of Execution filed by [herein petitioners] is hereby Granted.
Notify parties herein.[32]
Respondent MICI filed a Petition for Certiorari[33] under Rule 65 of the Rules of Court before
the Court of Appeals, which was docketed as CA-G.R. SP No. 67297. The Petition
assailed, for having been rendered by the RTC with grave abuse of discretion amounting
to lack or excess of jurisdiction, the following: (1) the Order dated 6 September 2001,
denying the Notice of Appeal of respondent MICI and granting petitioners Motion for the
Issuance of Writ of Execution; (2) the Decision dated 28 February 2000, holding Rhoda
and respondent MICI jointly and severally liable for Georges death; and (3) the Order dated
15 June 2001, reinstating the Decision dated 28 February 2000.
The Court of Appeals granted the Petition for Certiorari of respondent MICI in a Decision
dated 26 June 2000, ratiocinating thus:
Prescinding therefrom, we hold that the fifteen (15) day
period to appeal must be reckoned from the time the [herein
respondent] Malayan received the order dated 15 June 2001
reversing in toto the order of 24 January 2000 and
reinstating in full the Decision dated 28 February
2000.Thus, [respondent] Malayan had until 12 July
2001 within which to file its notice of appeal. Therefore,
when [respondent] Malayan filed its notice of appeal on 09
July 2001, it was well within the reglementary period and
should have been given due course by the public
respondent court.
It was therefore, an excess of jurisdiction on the part of the
public respondent court when it reckoned the [respondent]
Malayans period to appeal on the date it received on 14 March
2000 the formers decision dated 28 February 2000. As earlier
expostulated, the said decision was completely vacated insofar
as the [respondent] Malayan is concerned when the public
respondent court in its order dated 24 January 2001 dismissed
the case against the former. Thus, to reckon the fifteen (15)
days to appeal from the day the [respondent] Malayan received
the said decision on 14 March 2000, is the height of absurdity
because there was nothing for the [respondent] Malayan to
appeal inasmuch as the public respondent court vacated the
said decision in favor of the former.
The aforesaid conclusion finds support in Sta. Romana vs.
Lacson (104 SCRA 93), where the court, relying on the case of
Magdalena Estate, Inc. vs. Caluag, 11 SCRA 334, held that
where the court of origin made a thoroughly (sic) restudy of the
original judgment and rendered the amended and clarified
 judgment only after considering all the factual and legal issues,
the amended and clarified decision was an entirely new decision
which superseded (sic).For all intents and purposes, the court
concluded the trial court rendered a new judgment from which
the time to appeal must be reckoned.
In the instant case, what is involved is not merely a substantial
amendment or modification of the original decision, but the total
reversal thereof in the order dated 24 January 2000. Given the
rationale in the aforecited cases, it is only logical that the period
of appeal be counted from 27 June 2001, the date that
[respondent] Malayan received the order dated 15 June
2001 reversing in toto the order of 24 January 2000 and
reinstating the Decision dated 28 February 2000.[34] (Emphasis
supplied.)
The fallo of the Decision of the Court of Appeals reads:
WHEREFORE, in consideration of the foregoing premises, the
petition for certiorari is partially GRANTED. Accordingly, the
public respondent courts order dated 06 September 2001 is
hereby RECALLED and SET ASIDE.
Public respondent court is hereby directed to approve the
petitioner Malayans notice of appeal and to refrain from
executing the writ of execution granted on 06 September
2001.[35]
The Court of Appeals denied petitioners Motion for Reconsideration in a
Resolution dated 29 November 2002.
Understandably distraught, petitioners come before this Court in this Petition for Review,
which raise the following issues:
I.
Whether or not the respondent Court of Appeals committed
grave abuse of discretion when it ruled that private respondent
could file a Petition for Certiorari even though its Motion for
Reconsideration was still pending resolution with the lower
court.
II.
Whether or not the respondent Court of Appeals committed
grave abuse of discretion when it ruled that the private
respondent had filed its Notice of Appeal with the trial court
within the reglementary period.[36]
The Court first turns its attention to the primary issue for its
resolution: whether the Notice of Appeal filed by respondent MICI before the RTC was filed
out of time.
The period for filing a Notice of Appeal is set by Rule 41, Section 3 of the
1997 Rules of Court:
SEC. 3. Period of ordinary appeal. The appeal
shall be taken within fifteen (15) days from notice of the
judgment or final order appealed from. Where a record on
appeal is required, the appellants shall file a notice of appeal
and a record on appeal within thirty (30) days from notice of the
judgment or final order. x x x.
The period of appeal shall be interrupted by a
timely motion for new trial or reconsideration. No motion for
extension of time to file a motion for new trial or reconsideration
shall be allowed.
It is clear under the Rules that an appeal should be taken within 15 days from
the notice of judgment or final order appealed from.[37] A final judgment or order is one that
finally disposes of a case, leaving nothing more for the court to do with respect to it. It is
an adjudication on the merits which, considering the evidence presented at the trial,
declares categorically what the rights and obligations of the parties are; or it may be an
order or judgment that dismisses an action.[38]
Propitious to petitioners is Neypes v. Court of Appeals,[39] which the Court
promulgated on 14 September 2005, and wherein it laid down the fresh period rule:
To standardize the appeal periods provided in the
Rules and to afford litigants fair opportunity to appeal their
cases, the Court deems it practical to allow a fresh period of
15 days within which to file the notice of appeal in the
Regional Trial Court, counted from receipt of the order
dismissing a motion for a new trial or motion for reconsideration.
Henceforth, this fresh period rule shall also
apply to Rule 40 governing appeals from the Municipal Trial
Courts to the Regional Trial Courts; Rule 42 on petitions for
review from the Regional Trial Courts to the Court of
Appeals; Rule 43 on appeals from quasi-judicial agencies to the
Court of Appeals and Rule 45 governing appeals by certiorari to
the Supreme Court. The new rule aims to regiment or make the
appeal period uniform, to be counted from receipt of the order
denying the motion for new trial, motion for reconsideration
(whether full or partial) or any final order or resolution.
(Emphases ours.)
The fresh period of 15 days becomes significant when a party opts to file a
motion for new trial or motion for reconsideration. In this manner, the trial court which
rendered the assailed decision is given another opportunity to review the case and, in the
process, minimize and/or rectify any error of judgment.[40] With the advent of the fresh
period rule, parties who availed themselves of the remedy of motion for reconsideration are
now allowed to file a notice of appeal within fifteen days from the denial of that motion.[41]
The Court has accentuated that the fresh period rule is not inconsistent with
Rule 41, Section 3 of the Rules of Court which states that the appeal shall be taken within
fifteen (15) days from notice of judgment or final order appealed from. The use of the
disjunctive word or signifies disassociation and independence of one thing from another. It
should, as a rule, be construed in the sense which it ordinarily implies. [42] Hence, the use
of or in the above provision supposes that the notice of appeal may be filed within 15 days
from the notice of judgment or within 15 days from notice of the final order in the case.
Applying the fresh period rule, the Court agrees with the Court of Appeals and
holds that respondent MICI seasonably filed its Notice of Appeal with the RTC on 9 July
2001, just 12 days from 27 June 2001, when it received the denial of its Motion for
Reconsideration of the 15 June 2001 Resolution reinstating the 28 February 2000 Decision
of the RTC.
The fresh period rule may be applied to the case of respondent MICI, although
the events which transpired concerning its Notice of Appeal took place in June and July
2001, inasmuch as rules of procedure may be given retroactive effect on actions pending
and undetermined at the time of their passage. The Court notes that Neypes was
promulgated on 14 September 2005, while the instant Petition was still pending before this
Court.
Reference may be made to Republic v. Court of Appeals,[43] involving the
retroactive application of A.M. No. 00-2-03-SC which provided that the 60-day period within
which to file a petition for certiorari shall be reckoned from receipt of the order denying the
motion for reconsideration. In said case, the Court declared that rules of procedure may be
given retroactive effect to actions pending and undetermined at the time of their passage
and this will not violate any right of a person who may feel that he is adversely affected,
inasmuch as there is no vested rights in rules of procedure.
Hence, the fresh period rule laid down in Neypes was applied by the Court in
resolving the subsequent cases of Sumaway v. Urban Bank, Inc.,[44] Elbia v.
Ceniza, First Aqua Sugar Traders, Inc. v. Bank of the Philippine Islands,[46] even though
[45]
the antecedent facts giving rise to said cases transpired before the promulgation
of Neypes.
In De los Santos v. Vda de Mangubat,[47] particularly, the Court applied the
fresh period rule, elucidating that procedural law refers to the adjective law which
prescribes rules and forms of procedure in order that courts may be able to administer
justice. Procedural laws do not come within the legal conception of a retroactive law, or the
general rule against the retroactive operation of statutes. The fresh period rule is
irrefragably procedural, prescribing the manner in which the appropriate period for appeal
is to be computed or determined and, therefore, can be made applicable to actions pending
upon its effectivity without danger of violating anyone elses rights.
Since the Court affirms the ruling of the Court of Appeals that respondent MICI filed its
Notice of Appeal with the RTC within the reglementary period, the appropriate action,
under ordinary circumstances, would be for the Court to remand the case to the RTC so
that the RTC could approve the Notice of Appeal of respondent MICI and respondent MICI
could already file its appeal with the Court of Appeals.
However, considering that the case at bar has been pending for almost sixteen
years,[48] and the records of the same are already before this Court, remand is no longer
necessary.
Jurisprudence dictates that remand of a case to a lower court does not follow if, in the
interest of justice, the Supreme Court itself can resolve the dispute based on the records
before it. As a rule, remand is avoided in the following instances: (a) where the ends of
justice would not be subserved by a remand; or (b) where public interest demands an early
disposition of the case; or (c) where the trial court has already received all the evidence
presented by both parties, and the Supreme Court is in a position, based upon said
evidence, to decide the case on its merits.[49] In Lao v. People,[50] the Supreme Court, in
consideration of the years that it had taken for the controversy therein to reach it, concluded
that remand of the case to a lower court was no longer the more expeditious and practical
route to follow, and it then decided the said case based on the evidentiary record before it.
The consistent stand of the Court has always been that a case should be decided in its
totality, resolving all interlocking issues in order to render justice to all concerned and to
end the litigation once and for all. Verily, courts should always strive to settle the entire
controversy in a single proceeding, leaving no root or branch to bear the seed of future
litigation.[51] Where the public interest so demands, the court will broaden its inquiry into a
case and decide the same on the merits rather than merely resolve the procedural question
raised.[52] Such rule obtains in this case.
The Court is convinced that the non-remanding of the case at bar is
absolutely justified. Petitioners have already suffered from the tragic loss of a loved one,
and must not be made to endure more pain and uncertainty brought about by the continued
pendency of their claims against those liable. The case has been dragging on for almost
16 years now without the petitioners having been fully compensated for their loss. The
Court cannot countenance such a glaring indifference to petitioners cry for justice. To be
sure, they deserve nothing less than full compensation to give effect to their substantive
rights.[53]
The complete records of the present case have been elevated to this Court,
and the pleadings and evidence therein could fully support its factual adjudication. Indeed,
after painstakingly going over the records, the Court finds that the material and decisive
facts are beyond dispute: George was killed when he was hit by the truck driven by Willie,
an employee of Rhoda; and the truck is insured with respondent MICI. The only issue left
for the Court to resolve is the extent of the liability of Rhoda and respondent MICI for
Georges death and the appropriate amount of the damages to be awarded to petitioners.
The Court now turns to the issue of who is liable for damages for the death of
George.
Respondent MICI does not deny that it is the insurer of the truck. Nevertheless, it asserts
that its liability is limited, and it should not be held solidarily liable with Rhoda for all the
damages awarded to petitioners.
A solidary or joint and several obligation is one in which each debtor is liable
for the entire obligation, and each creditor is entitled to demand the whole obligation. In a
joint obligation, each obligor answers only for a part of the whole liability and to each
obligee belongs only a part of the correlative rights. Well-entrenched is the rule that
solidary obligation cannot lightly be inferred. There is solidary liability only when the
obligation expressly so states, when the law so provides or when the nature of the
obligation so requires.[54]
It is settled that where the insurance contract provides for indemnity against liability to third
persons, the liability of the insurer is direct and such third persons can directly sue the
insurer. The direct liability of the insurer under indemnity contracts against third party
liability does not mean, however, that the insurer can be held solidarily liable with the
insured and/or the other parties found at fault, since they are being held liable under
different obligations. The liability of the insured carrier or vehicle owner is based on tort, in
accordance with the provisions of the Civil Code;[55]while that of the insurer arises from
contract, particularly, the insurance policy. The third-party liability of the insurer is only up
to the extent of the insurance policy and that required by law; and it cannot be held solidarily
liable for anything beyond that amount.[56] Any award beyond the insurance coverage
would already be the sole liability of the insured and/or the other parties at fault. [57]
In Vda. de Maglana v. Consolacion,[58] it was ruled that an insurer in an indemnity contract
for third-party liability is directly liable to the injured party up to the extent specified in the
agreement, but it cannot be held solidarily liable beyond that amount. According to
respondent MICI, its liability as insurer of Rhodas truck is limited. Following Vda. de
Maglana, petitioners would have had the option either (1) to claim the amount awarded to
them from respondent MICI, up to the extent of the insurance coverage, and the balance
from Rhoda; or (2) to enforce the entire judgment against Rhoda, subject to reimbursement
from respondent MICI to the extent of the insurance coverage. The Court, though, is
precluded from applying its ruling in Vda. de Maglana by the difference in one vital detail
between the said case and the one at bar. The insurer was able to sufficiently establish its
limited liability in Vda. de Maglana, while the same cannot be said for respondent MICI
herein.
The Court highlights that in this case, the insurance policy between Rhoda and respondent
MICI, covering the truck involved in the accident which killed George, was never
presented. There is no means, therefore, for this Court to ascertain the supposed limited
liability of respondent MICI under said policy. Without the presentation of the insurance
policy, the Court cannot determine the existence of any limitation on the liability of
respondent MICI under said policy, and the extent or amount of such limitation.
It should be remembered that respondent MICI readily admits that it is the insurer of the
truck that hit and killed George, except that it insists that its liability under the insurance
policy is limited. As the party asserting its limited liability, respondent MICI then has the
burden of evidence to establish its claim. In civil cases, the party that alleges a fact has the
burden of proving it. Burden of proof is the duty of a party to present evidence on the facts
in issue necessary to prove its claim or defense by the amount of evidence required by
law.[59] Regrettably, respondent MICI failed to discharge this burden. [60] The Court cannot
rely on mere allegations of limited liability sans proof.
The failure of respondent MICI to present the insurance policy which,
understandably, is not in petitioners possession, but in the custody and absolute control of
respondent MICI as the insurer and/or Rhoda as the insured gives rise to the presumption
that its presentation is prejudicial to the cause of respondent MICI. [61] When the evidence
tends to prove a material fact which imposes a liability on a party, and he has it in his power
to produce evidence which, from its very nature, must overthrow the case made against
him if it is not founded on fact, and he refuses to produce such evidence, the presumption
arises that the evidence, if produced, would operate to his prejudice and support the case
of his adversary.[62]
Respondent MICI had all the opportunity to prove before the RTC that its
liability under the insurance policy it issued to Rhoda, was limited; yet, respondent MICI
failed to do so. The failure of respondent MICI to rebut that which would have naturally
invited an immediate, pervasive, and stiff opposition from it created an adverse inference
that either the controverting evidence to be presented by respondent MICI would only
prejudice its case, or that the uncontroverted evidence of petitioners indeed speaks of the
truth. And such adverse inference, recognized and adhered to by courts in judging the
weight of evidence in all kinds of proceedings, surely is not without basis its rationale and
effect rest on sound, logical and practical considerations, viz:
The presumption that a man will do that which tends to his
obvious advantage, if he possesses the means, supplies a most
important test for judging of the comparative weight of evidence
x x x If, on the supposition that a charge or claim is unfounded,
the party against whom it is made has evidence within his reach
by which he may repel that which is offered to his prejudice, his
omission to do so supplies a strong presumption that the charge
or claim is well founded; it would be contrary to every principle
of reason, and to all experience of human conduct, to form any
other conclusion. (Starkie on Evidence, p. 846, Moore on
Facts, Vol. I, p. 544)
xxxx
The ordinary rule is that one who has knowledge peculiarly
within his own control, and refuses to divulge it, cannot complain
if the court puts the most unfavorable construction upon his
silence, and infers that a disclosure would have shown the fact
to be as claimed by the opposing party." (Societe, etc., v. Allen,
90 Fed. Rep. 815, 817, 33 C.C.A. 282, per Taft, C.J., Moore on
Facts, Vol. I, p. 561).[63]
The inference still holds even if it be assumed, for argument's sake, that the solidary liability
of respondent MICI with Rhoda is improbable, for it has likewise been said that:
Weak evidence becomes strong by the neglect of the party
against whom it is put in, in not showing by means within the
easy control of that party that the conclusion drawn from such
evidence is untrue. (Pittsburgh, etc., R. Co. v. Callaghan, 50 III.
App. 676, 681, Moore on Facts, Vol. I, p. 572).[64]
Given the admission of respondent MICI that it is the insurer of the truck
involved in the accident that killed George, and in the utter absence of proof to establish
both the existence and the extent/amount of the alleged limited liability of respondent MICI
as insurer, the Court could only conclude that respondent MICI had agreed to fully
indemnify third-party liabilities. Consequently, there is no more difference in the amounts
of damages which petitioners can recover from Rhoda or respondent MICI; petitioners can
recover the said amounts in full from either of them, thus, making their liabilities solidary or
joint and several.
The Court now comes to the issue of the amounts of the damages awarded.
In its Decision dated 22 February 2000, the RTC awarded petitioners moral and actual
damages, as well as funeral expenses and attorneys fees.Subsequently, in its Order
dated 24 January 2001, the RTC reduced the amount of actual damages
from P805,984.00 to P102,106.00, but additionally awarded death indemnity in the amount
of P50,000.00. Its award of moral damages and funeral expenses as well as attorneys fees
remained constant in its 28 February 2000 decision and was carried over to its 24 January
2001 Order.
The Court shall now proceed to scrutinize said award of damages.
As regards the award of actual damages, Article 2199 of the Civil Code provides that
[e]xcept as provided by law or by stipulation one is entitled to an adequate compensation
only for such pecuniary loss suffered by him as he has duly proved x x x.
The RTC awarded P36,000.00 for burial expenses. The award of P36,000.00 for burial
expenses is duly supported by receipts evidencing that petitioners did incur this
expense. The petitioners held a wake for two days at their residence and another two days
at the Loyola Memorial Park.[65] The amount covered the expenses by petitioners for the
wake, funeral and burial of George.[66]
As to compensation for loss of earning capacity, the RTC initially awarded P805,984.00 in
its 28 February 2000 Decision, which it later reduced to P102,106.00 on 24 January 2001.
Article 2206 of the Civil Code provides that in addition to the indemnity for death caused
by a crime or quasi-delict, the defendant shall be liable for the loss of the earning capacity
of the deceased, and the indemnity shall be paid to the heirs of the latter, x x
x. Compensation of this nature is awarded not for loss of earnings but for loss of capacity
to earn money. Hence, it is proper that compensation for loss of earning capacity should
be awarded to the petitioners in accordance with the formula established in decided cases
for computing net earning capacity, to wit:
The formula for the computation of unearned income is:
Net Earning Capacity = life expectancy x (gross annual income
-reasonable and necessary living expenses).
Life expectancy is determined in accordance with the formula:
 2 / 3 x [80 - age of deceased at the time of death][67]
Jurisprudence provides that the first factor, i.e., life expectancy, shall be computed by
applying the formula (2/3 x [80 - age at death]) adopted in the American Expectancy Table
of Mortality or the Actuarial of Combined Experience Table of Mortality.
social humiliation, and similar injury unjustly caused a
person. Although incapable of pecuniary computation, they
must be proportionate to the suffering inflicted. The amount of
the award bears no relation whatsoever with the wealth or
means of the offender.

The second factor is computed by multiplying the life expectancy by the net earnings of
the deceased, i.e., the total earnings less expenses necessary in the creation of such
earnings or income and less living and other incidental expenses. The loss is not
equivalent to the entire earnings of the deceased, but only such portion that he would have
used to support his dependents or heirs. Hence, the Court deducts from his gross earnings
the necessary expenses supposed to be used by the deceased for his own needs. The
Court explained in Villa Rey Transit v. Court of Appeals[68]:
[The award of damages for loss of
earning capacity is] concerned with
the determination of the losses or
damages sustained by the private
respondents, as dependents and
intestate heirs of the deceased, and
that said damages consist, not of
the full amount of his earnings, but
of the support they received or
would have received from him had
he not died in consequence of the
negligence of petitioner's agent. In
fixing the amount of that support, we
must reckon with the necessary
expenses of his own living, which
should be deducted from his
earnings. Thus, it has been
consistently held that earning
capacity, as an element of damages
to one's estate for his death by
wrongful act is necessarily his net
earning capacity or his capacity to
acquire money, less necessary
expense for his own living. Stated
otherwise, the amount recoverable
is not the loss of the entire earning,
but rather the loss of that portion of
the earnings which the beneficiary
would have received. In other
words, only net earnings, and not
gross earnings are to be considered
that is, the total of the earnings less
expenses necessary in the creation
of such earnings or income and less
living and other incidental
expenses.
In the instant case, petitioners testimonies reveal the intense suffering which
they continue to experience as a result of Georges death.[73] It is not difficult to comprehend
that the sudden and unexpected loss of a husband and father would cause mental anguish
and serious anxiety in the wife and children he left behind. Moral damages in the amount
of P100,000.00 are proper for Georges death.[74]
The RTC also awarded P50,000.00 as death indemnity which the Court shall not
disturb. The award of P50,000.00 as death indemnity is in accordance with current rulings
of the Court.[75]
Finally, the RTC awarded attorneys fees to petitioners. Petitioners are entitled to attorneys
fees. Under Article 2008 of the Civil Code, attorneys fees may be granted when a party is
compelled to litigate or incur expenses to protect his interest by reason of an unjustified
act of the other party.[76] In Metro Manila Transit Corporation v. Court of Appeals,[77] the
Court held that an award of P50,000.00 as attorneys fees was reasonable.Hence,
petitioners are entitled to attorneys fees in that amount. [78]
WHEREFORE, premises considered, the instant Petition
is PARTIALLY GRANTED. While the Court AFFIRMS the Decision, dated 26 June 2002,
and Resolution, dated 29 November 2002, of the Court of Appeals in CA-G.R. SP No.
67297, granting the Petition for Certiorari of respondent Malayan Insurance Company, Inc.,
the Court, nonetheless, RESOLVES, in consideration of the speedy administration of
justice, and the peculiar circumstances of the case, to give DUE COURSE to the present
Petition and decide the same on its merits.
Rhoda Santos and respondent Malayan Insurance Company, Inc. are hereby ordered to
pay jointly and severally the petitioners Heirs of George Y. Poe the following:
(1) Funeral expenses P36,000.00;
(2) Actual damages for loss of earning capacity P611,386.92;
(3) Moral damages amounting to P100,000.00;
(4) Death indemnity P50,000.00; and
(5) Attorneys fees P50,000.00 plus P1,500.00 per court appearance.
No costs.
SO ORDERED.

Applying the aforestated jurisprudential guidelines in the computation of the amount of

award for damages set out in Villa Rey, the Court computes the award for the loss of
Georges earning capacity as follows:

Life expectancy = 2/3 x [80 - age of deceased at the time of

death]
2/3 x [80 56]
2/3 x [24]

FORMULA NET EARNING CAPACITY (NEC)

If:

Age at time of death of George Poe = 58[69]

Monthly Income at time of death = P6,946[70]
Gross Annual Income (GAI) = [(6,946) (12)] = P83,352
Reasonable/Necessary Living Expenses (R/NLE) = 50% [71] of
GAI = P41,676

NEC = [2/3 (80-58)] [83,352-41,676]

= [2/3 (22)] [41,676]
= [14.67] [41,676]
= P611,386.92

Therefore, Georges lost net earning capacity is equivalent to P611,386.92

The RTC awarded moral damages[72] in the amount of P100,000.00. With respect to moral
damages, the same are awarded under the following circumstances:

The award of moral damages is aimed at a restoration, within

the limits of the possible, of the spiritual status quo ante. Moral
damages are designed to compensate and alleviate in some
way the physical suffering, mental anguish, fright, serious
anxiety, besmirched reputation, wounded feelings, moral shock,
FILINVEST LAND, INC., Petitioner - versus - HON. COURT OF APPEALS,
PHILIPPINE AMERICAN GENERAL INSURANCE COMPANY, and PACIFIC
EQUIPMENT CORPORATION, Respondents
G.R. No.138980 September 20, 2005
DECISION
CHICO-NAZARIO, J.: This is a petition for review on certiorari of the Decision[1] of
the Court of Appeals dated 27 May 1999 affirming the dismissal by the Regional
Trial Court of Makati, Branch 65,[2] of the complaint for damages filed by Filinvest
Land, Inc. (Filinvest) against herein private respondents Pacific Equipment
Corporation (Pecorp) and Philippine American General Insurance Company.
The essential facts of the case, as recounted by the trial court, are as
follows:
On 26 April 1978, Filinvest Land, Inc.
(FILINVEST, for brevity), a corporation engaged in the
development and sale of residential subdivisions, awarded
to defendant Pacific Equipment Corporation (PACIFIC, for
brevity) the development of its residential subdivisions
consisting of two (2) parcels of land located at Payatas,
Quezon City, the terms and conditions of which are
contained in an Agreement. (Annex A, Complaint). To
guarantee its faithful compliance and pursuant to the
agreement, defendant Pacific posted two (2) Surety Bonds
in favor of plaintiff which were issued by defendant
Philippine American General Insurance (PHILAMGEN, for
brevity). (Annexes B and C, Complaint).
Notwithstanding three extensions granted by
plaintiff to defendant Pacific, the latter failed to finish the
contracted works. (Annexes G, I and K, Complaint). On 16
October 1979, plaintiff wrote defendant Pacific advising the
latter of its intention to takeover the project and to hold said
defendant liable for all damages which it had incurred and
will incur to finish the project. (Annex L, Complaint).
On 26 October 1979, plaintiff submitted its
claim against defendant Philamgen under its performance
and guarantee bond (Annex M, Complaint) but Philamgen
refused to acknowledge its liability for the simple reason that
its principal, defendant Pacific, refused to acknowledge
liability therefore. Hence, this action.
In defense, defendant Pacific claims that its
failure to finish the contracted work was due to inclement
weather and the fact that several items of finished work and
change order which plaintiff refused to accept and pay for
caused the disruption of work. Since the contractual relation
between plaintiff and defendant Pacific created a reciprocal
obligation, the failure of the plaintiff to pay its progressing
bills estops it from demanding fulfillment of what is
incumbent upon defendant Pacific. The acquiescence by
plaintiff in granting three extensions to defendant Pacific is
likewise a waiver of the formers right to claim any damages
for the delay. Further, the unilateral and voluntary action of
plaintiff in preventing defendant Pacific from completing the
work has relieved the latter from the obligation of completing
the same.
On the other hand, Philamgen contends that
the various amendments made on the principal contract and
the deviations in the implementation thereof which were
resorted to by plaintiff and co-defendant Pacific without its
(defendant Philamgens) written consent thereto, have
automatically released the latter from any or all liability
within the purview and contemplation of the coverage of the
surety bonds it has issued. Upon agreement of the parties
to appoint a commissioner to assist the court in resolving the
issues confronting the parties, on 7 July 1981, an order was
issued by then Presiding Judge Segundo M. Zosa naming
Architect Antonio Dimalanta as Court Commissioner from
among the nominees submitted by the parties to conduct an
ocular inspection and to determine the amount of work
accomplished by the defendant Pacific and the amount of
work done by plaintiff to complete the project.
On 28 November 1984, the Court received the
findings made by the Court Commissioner. In arriving at his
findings, the Commissioner used the construction
documents pertaining to the project as basis. According to
him, no better basis in the work done or undone could be
made other than the contract billings and payments made
by both parties as there was no proper procedure followed
in terminating the contract, lack of inventory of work
accomplished, absence of appropriate record of work
progress (logbook) and inadequate documentation and
system of construction management.
Based on the billings of defendant Pacific and
the payments made by plaintiff, the work accomplished by
the former amounted to P11,788,282.40 with the exception
of the last billing (which was not acted upon or processed
by plaintiff) in the amount of P844,396.42. The total amount
of work left to be accomplished by plaintiff was based on the
original contract amount less value of work accomplished by
defendant Pacific in the amount of P681,717.58
(12,470,000-11,788,282.42).
As regards the alleged repairs made by plaintiff
on the construction deficiencies, the Court Commissioner
found no sufficient basis to justify the same. On the other
hand, he found the additional work done by defendant
Pacific in the amount of P477,000.00 to be in order.
On 01 April 1985, plaintiff filed its objections to
the Commissioners Resolution on the following grounds:
a) Failure of the commissioner to
conduct a joint survey which according to the latter is
indispensable to arrive at an equitable and fair resolution of
the issues between the parties;
b) The cost estimates of the
commissioner were based on pure conjectures and contrary
to the evidence; and,
c) The commissioner made
conclusions of law which were beyond his assignment or
capabilities.
In its comment, defendant Pacific alleged that
the failure to conduct joint survey was due to plaintiffs
refusal to cooperate. In fact, it was defendant Pacific who
initiated the idea of conducting a joint survey and inventory
dating back 27 November 1983. And even assuming that a
joint survey were conducted, it would have been an exercise
in futility because all physical traces of the actual conditions
then obtaining at the time relevant to the case had already
been obliterated by plaintiff.
On 15 August 1990, a Motion for Judgment
Based on the Commissioners Resolution was filed by
defendant Pacific.
On 11 October 1990, plaintiff filed its opposition
thereto which was but a rehash of objections to the
commissioners report earlier filed by said plaintiff.[3]
On the basis of the commissioners report, the trial court dismissed
Filinvests complaint as well as Pecorps counterclaim. It held:
In resolving this case, the court observes that
the appointment of a Commissioner was a joint undertaking
among the parties. The findings of facts of the
Commissioner should therefore not only be conclusive but
final among the parties. The court therefore agrees with the
commissioners findings with respect to
1. Cost to repair deficiency or
defect P532,324.02
2. Unpaid balance of work done by defendant
- P1,939,191.67
3. Additional work/change order (due to
defendant) P475,000.00
The unpaid balance due defendant therefore
is P1,939,191.67. To this amount should be added
additional work performed by defendant at plaintiffs instance
in the sum of P475,000.00. And from this total
of P2,414,191.67 should be deducted the sum
of P532,324.01 which is the cost to repair the deficiency or
defect in the work done by defendant. The commissioner
arrived at the figure of P532,324.01 by getting the average
 between plaintiffs claim of P758,080.37 and defendants
allegation of P306,567.67. The amount due to defendant
per the commissioners report is therefore P1,881,867.66.
Although the said amount of P1,881,867.66
would be owing to defendant Pacific, the fact remains that
said defendant was in delay since April 25, 1979. The third
extension agreement of September 15, 1979 is very clear in
this regard. The pertinent paragraphs read:
a) You will complete all the
unfinished works not later
than Oct. 15, 1979. It is
agreed and understood that
this date shall DEFINITELY
be the LAST and FINAL
extension & there will be no
further extension for any
cause whatsoever.
b) We are willing to waive all
penalties for delay which
have accrued since April 25,
1979 provided that you are
able to finish all the items of
the contracted works as per
revised CPM; otherwise you
shall continue to be liable to
pay the penalty up to the
time that all the contracted
works shall have been
actually finished, in addition
to other damages which we
may suffer by reason of the
delays incurred.
Defendant Pacific therefore became liable for delay when it
did not finish the project on the date agreed on October 15,
1979. The court however, finds the claim of P3,990,000.00
in the form of penalty by reason of delay (P15,000.00/day
from April 25, 1979 to Jan. 15, 1980) to be excessive. A
forfeiture of the amount due defendant from plaintiff appears
to be a reasonable penalty for the delay in finishing the
project considering the amount of work already performed
and the fact that plaintiff consented to three prior extensions.
The foregoing considered, this case is dismissed. The
counterclaim is likewise dismissed.
No Costs.[4]
The Court of Appeals, finding no reversible error in the appealed
decision, affirmed the same.
Hence, the instant petition grounded solely on the issue of whether or
not the liquidated damages agreed upon by the parties should be reduced
considering that: (a) time is of the essence of the contract; (b) the liquidated damages
was fixed by the parties to serve not only as penalty in case Pecorp fails to fulfill its
obligation on time, but also as indemnity for actual and anticipated damages which
Filinvest may suffer by reason of such failure; and (c) the total liquidated damages
sought is only 32% of the total contract price, and the same was freely and voluntarily
agreed upon by the parties.
At the outset, it should be stressed that as only the issue of liquidated
damages has been elevated to this Court, petitioner Filinvest is deemed to have
acquiesced to the other matters taken up by the courts below. Section 1, Rule 45 of
the 1997 Rules of Court states in no uncertain terms that this Courts jurisdiction in
petitions for review on certiorari is limited to questions of law which must be distinctly
set forth.[5] By assigning only one legal issue, Filinvest has effectively cordoned off
any discussion into the factual issue raised before the Court of Appeals.[6] In effect,
Filinvest has yielded to the decision of the Court of Appeals, affirming that of the trial
court, in deferring to the factual findings of the commissioner assigned to the parties
case. Besides, as a general rule, factual matters cannot be raised in a petition for
review on certiorari. This Court at this stage is limited to reviewing errors of law that
may have been committed by the lower courts.[7] We do not perceive here any of the
exceptions to this rule; hence, we are restrained from conducting further scrutiny of
the findings of fact made by the trial court which have been affirmed by the Court of
Appeals. Verily, factual findings of the trial court, especially when affirmed by the
Court of Appeals, are binding and conclusive on the Supreme Court. [8] Thus, it is
settled that:
(a) Based on Pecorps billings and the payments made by
Filinvest, the balance of work to be
accomplished by Pecorp amounts
to P681,717.58 representing 5.47% of the
contract work. This means to say that Pecorp,
at the time of the termination of its contract,
accomplished 94.53% of the contract work;
(b) The unpaid balance of work done by Pecorp amounts
to P1,939,191.67;
(c) The additional work/change order due Pecorp amounts
to P475,000.00;
(d) The cost to repair deficiency or defect, which is for the
account of Pecorp, is P532,324.02; and
(e) The total amount due Pecorp is P1,881,867.66.
Coming now to the main matter, Filinvest argues that the penalty in its entirety should
be respected as it was a product of mutual agreement and it represents only 32% of
the P12,470,000.00 contract price, thus, not shocking and unconscionable under the
circumstances. Moreover, the penalty was fixed to provide for actual or anticipated
liquidated damages and not simply to ensure compliance with the terms of the
contract; hence, pursuant to Laureano v. Kilayco,[9] courts should be slow in
exercising the authority conferred by Art. 1229 of the Civil Code.
We are not swayed.
There is no question that the penalty of P15,000.00 per day of delay was
mutually agreed upon by the parties and that the same is sanctioned by law. A penal
clause is an accessory undertaking to assume greater liability in case of breach.[10] It
is attached to an obligation in order to insure performance[11] and has a double
function: (1) to provide for liquidated damages, and (2) to strengthen the coercive
force of the obligation by the threat of greater responsibility in the event of
breach.[12] Article 1226 of the Civil Code states:
Art. 1226. In obligations with a penal clause, the
penalty shall substitute the indemnity for damages and the
payment of interests in case of noncompliance, if there is no
stipulation to the contrary. Nevertheless, damages shall be
paid if the obligor refuses to pay the penalty or is guilty of
fraud in the fulfillment of the obligation.
The penalty may be enforced only when it is
demandable in accordance with the provisions of this Code.
As a general rule, courts are not at liberty to ignore the freedom of the
parties to agree on such terms and conditions as they see fit as long as they are not
contrary to law, morals, good customs, public order or public policy.[13] Nevertheless,
courts may equitably reduce a stipulated penalty in the contract in two instances: (1)
if the principal obligation has been partly or irregularly complied; and (2) even if there
has been no compliance if the penalty is iniquitous or unconscionable in accordance
with Article 1229 of the Civil Code which provides:
Art. 1229. The judge shall equitably reduce the
penalty when the principal obligation has been partly or
irregularly complied with by the debtor. Even if there has
been no performance, the penalty may also be reduced by
the courts if it is iniquitous or unconscionable.
In herein case, the trial court ruled that the penalty charge for delay
pegged at P15,000.00 per day of delay in the aggregate amount of P3,990,000.00 -
- was excessive and accordingly reduced it to P1,881,867.66 considering the amount
of work already performed and the fact that [Filinvest] consented to three (3) prior
extensions. The Court of Appeals affirmed the ruling but added as well that the
penalty was unconscionable as the construction was already not far from completion.
Said the Court of Appeals:
Turning now to plaintiffs appeal, We likewise
agree with the trial court that a penalty interest
of P15,000.00 per day of delay as liquidated damages
or P3,990,000.00 (representing 32% penalty of
the P12,470,000.00 contract price) is unconscionable
considering that the construction was already not far from
completion. Penalty interests are in the nature of liquidated
damages and may be equitably reduced by the courts if they
are iniquitous or unconscionable (Garcia v. Court of
Appeals, 167 SCRA 815, Lambert v. Fox, 26 Phil. 588). The
judge shall equitably reduce the penalty when the principal
obligation has been partly or irregularly complied with by the
debtor. Even if there has been no performance, the penalty
may also be reduced by the courts if it is iniquitous or
unconscionable (Art. 1229, New Civil Code). Moreover,
plaintiffs right to indemnity due to defendants delay has
 been cancelled by its obligations to the latter consisting of
unpaid works.
This Court finds no fault in the cost estimates of
the court-appointed commissioner as to the cost to repair
deficiency or defect in the works which was based on the
average between plaintiffs claim of P758,080.37 and
defendants P306,567.67 considering the following factors:
that plaintiff did not follow the standard practice of joint
survey upon take over to establish work already
accomplished, balance of work per contract still to be done,
and estimate and inventory of repair (Exhibit H). As for the
cost to finish the remaining works, plaintiffs estimates were
brushed aside by the commissioner on the reasoned
observation that plaintiffs cost estimate for work (to be) done
by the plaintiff to complete the project is based on a contract
awarded to another contractor (JPT), the nature and
magnitude of which appears to be inconsistent with the
basic contract between defendant PECORP and plaintiff
FILINVEST.[14]
We are hamstrung to reverse the Court of Appeals as it is rudimentary
that the application of Article 1229 is essentially addressed to the sound discretion of
the court.[15] As it is settled that the project was already 94.53% complete and that
Filinvest did agree to extend the period for completion of the project, which extensions
Filinvest included in computing the amount of the penalty, the reduction thereof is
clearly warranted.
Filinvest, however, hammers on the case of Laureano v.
Kilayco,[16] decided in 1915, which cautions courts to distinguish between two kinds
of penalty clauses in order to better apply their authority in reducing the amount
recoverable. We held therein that:
. . . [I]n 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 against the enforcement
in its entirety of the indemnification, 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 contract. But the courts will be slow
in exercising the jurisdiction conferred upon them in
article 1154[17] so as to modify the terms of an agreed upon
indemnification where it appears that in fixing such
indemnification the parties had in mind a fair and reasonable
compensation for actual damages anticipated as a result of
a breach of the contract, or, in other words, where the
principal purpose of the indemnification agreed upon
appears to have been to provide for the payment of actual
anticipated and liquidated damages rather than the
penalization of a breach of the contract. (Emphases
supplied)
Filinvest contends that the subject penalty clause falls under the second
type, i.e., the principal purpose for its inclusion was to provide for payment of actual
anticipated and liquidated damages rather than the penalization of a breach of the
contract. Thus, Filinvest argues that had Pecorp completed the project on time, it
(Filinvest) could have sold the lots sooner and earned its projected income that would
have been used for its other projects.
Unfortunately for Filinvest, the above-quoted doctrine is inapplicable to herein case.
The Supreme Court in Laureano instructed that a distinction between a penalty
clause imposed essentially as penalty in case of breach and a penalty clause
imposed as indemnity for damages should be made in cases where there has been
neither partial nor irregular compliance with the terms of the contract. In cases where
there has been partial or irregular compliance, as in this case, there will be no
substantial difference between a penalty and liquidated damages insofar as legal
results are concerned.[18] The distinction is thus more apparent than real especially in
the light of certain provisions of the Civil Code of the Philippineswhich provides in
Articles 2226 and Article 2227 thereof:
Art. 2226. Liquidated damages are those
agreed upon by the parties to a contract to be paid in case
of breach thereof.
Art. 2227. Liquidated damages, whether
intended as an indemnity or a penalty, shall be equitably
reduced if they are iniquitous or unconscionable.
Thus, we lamented in one case that (t)here is no justification for the Civil Code to
make an apparent distinction between a penalty and liquidated damages because
the settled rule is that there is no difference between penalty and liquidated damages
insofar as legal results are concerned and that either may be recovered without the
necessity of proving actual damages and both may be reduced when proper.[19]
Finally, Filinvest advances the argument that while it may be true that courts may
mitigate the amount of liquidated damages agreed upon by the parties on the basis
of the extent of the work done, this contemplates a situation where the full amount of
damages is payable in case of total breach of contract. In the instant case, as the
penalty clause was agreed upon to answer for delay in the completion of the project
considering that time is of the essence, the parties thus clearly contemplated the
payment of accumulated liquidated damages despite, and precisely because of,
partial performance.[20] In effect, it is Filinvests position that the first part of Article
1229 on partial performance should not apply precisely because, in all likelihood, the
penalty clause would kick in in situations where Pecorp had already begun work but
could not finish it on time, thus, it is being penalized for delay in its completion.
The above argument, albeit sound,[21] is insufficient to reverse the ruling of the Court
of Appeals. It must be remembered that the Court of Appeals not only held that the
penalty should be reduced because there was partial compliance but categorically
stated as well that the penalty was unconscionable. Otherwise stated, the Court of
Appeals affirmed the reduction of the penalty not simply because there was partial
compliance per se on the part of Pecorp with what was incumbent upon it but, more
fundamentally, because it deemed the penalty unconscionable in the light of
Pecorps 94.53% completion rate.
In Ligutan v. Court of Appeals,[22] we pointed out that the question of
whether a penalty is reasonable or iniquitous can be partly subjective and partly
objective as its resolution would depend on such factors as, but not necessarily
confined to, the type, extent and purpose of the penalty, the nature of the obligation,
the mode of breach and its consequences, the supervening realities, the standing
and relationship of the parties, and the like, the application of which, by and large, is
addressed to the sound discretion of the court.[23]
In herein case, there has been substantial compliance in good faith on the part of
Pecorp which renders unconscionable the application of the full force of the penalty
especially if we consider that in 1979 the amount of P15,000.00 as penalty for delay
per day was quite steep indeed. Nothing in the records suggests that Pecorps delay
in the performance of 5.47% of the contract was due to it having acted negligently or
in bad faith. Finally, we factor in the fact that Filinvest is not free of blame either as it
likewise failed to do that which was incumbent upon it, i.e., it failed to pay Pecorp for
work actually performed by the latter in the total amount of P1,881,867.66. Thus, all
things considered, we find no reversible error in the Court of Appeals exercise of
discretion in the instant case.
Before we write finis to this legal contest that had spanned across two
and a half decades, we take note of Pecorps own grievance. From its Comment and
Memorandum, Pecorp, likewise, seeks affirmative relief from this Court by praying
that not only should the instant case be dismissed for lack of merit, but that Filinvest
should likewise be made to pay what the Court Commissioner found was due
defendant in the total amount of P2,976,663.65 plus 12% interest from 1979 until full
payment thereof plus attorneys fees.[24] Pecorp, however, cannot recover that which
it seeks as we had already denied, in a Resolution dated 21 June 2000, its own
petition for review of the 27 May 1999 decision of the Court of Appeals. Thus, as far
as Pecorp is concerned, the ruling of the Court of Appeals has already attained finality
and can no longer be disturbed.
WHEREFORE, premises considered, the Decision of the Court of
Appeals dated 27 May 1999 is AFFIRMED. No pronouncement as to costs.
SO ORDERED.