Case Notes

Oblicon- January 18, 2024

Case #1
G.R. No. 106063 November 21, 1996
EQUATORIAL REALTY DEVELOPMENT, INC. & CARMELO & BAUERMANN, INC., petitioners,
vs.
MAYFAIR THEATER, INC., respondent.
HERMOSISIMA, JR., J.:
Before us is a petition for review of the decision1 of the Court of
Appeals2 involving questions in the resolution of which the respondent appellate court analyzed and
interpreted particular provisions of our laws on contracts and sales. In its assailed decision, the respondent
court reversed the trial court3 which, in dismissing the complaint for specific performance with damages and
annulment of contract,4 found the option clause in the lease contracts entered into by private respondent
Mayfair Theater, Inc. (hereafter, Mayfair) and petitioner Carmelo & Bauermann, Inc. (hereafter, Carmelo) to be
impossible of performance and unsupported by a consideration and the subsequent sale of the subject
property to petitioner Equatorial Realty Development, Inc. (hereafter, Equatorial) to have been made without
any breach of or prejudice to, the said lease contracts.5
We reproduce below the facts as narrated by the respondent court, which narration, we note, is almost
verbatim the basis of the statement of facts as rendered by the petitioners in their pleadings:
Carmelo owned a parcel of land, together with two 2-storey buildings constructed thereon located at Claro M
Recto Avenue, Manila, and covered by TCT No. 18529 issued in its name by the Register of Deeds of Manila.
On June 1, 1967 Carmelo entered into a contract of lease with Mayfair for the latter's lease of a portion of
Carmelo's property particularly described, to wit:
A PORTION OF THE SECOND FLOOR of the two-storey building, situated at C.M. Recto Avenue, Manila, with
a floor area of 1,610 square meters.
THE SECOND FLOOR AND MEZZANINE of the two-storey building, situated at C.M. Recto Avenue, Manila,
with a floor area of 150 square meters.
for use by Mayfair as a motion picture theater and for a term of twenty (20) years. Mayfair thereafter
constructed on the leased property a movie house known as "Maxim Theatre."
Two years later, on March 31, 1969, Mayfair entered into a second contract of lease with Carmelo for the lease
of another portion of Carmelo's property, to wit:
A PORTION OF THE SECOND FLOOR of the two-storey building, situated at C.M. Recto Avenue, Manila, with
a floor area of 1,064 square meters.
THE TWO (2) STORE SPACES AT THE GROUND FLOOR and MEZZANINE of the two-storey building
situated at C.M. Recto Avenue, Manila, with a floor area of 300 square meters and bearing street numbers
1871 and 1875,
for similar use as a movie theater and for a similar term of twenty (20) years. Mayfair put up another movie
house known as "Miramar Theatre" on this leased property.
Both contracts of lease provides (sic) identically worded paragraph 8, which reads:
That if the LESSOR should desire to sell the leased premises, the LESSEE shall be given 30-days exclusive
option to purchase the same.
In the event, however, that the leased premises is sold to someone other than the LESSEE, the LESSOR is
bound and obligated, as it hereby binds and obligates itself, to stipulate in the Deed of Sale hereof that the
purchaser shall recognize this lease and be bound by all the terms and conditions thereof.
Sometime in August 1974, Mr. Henry Pascal of Carmelo informed Mr. Henry Yang, President of Mayfair,
through a telephone conversation that Carmelo was desirous of selling the entire Claro M. Recto property. Mr.
Pascal told Mr. Yang that a certain Jose Araneta was offering to buy the whole property for US Dollars
1,200,000, and Mr. Pascal asked Mr. Yang if the latter was willing to buy the property for Six to Seven Million
Pesos.
Mr. Yang replied that he would let Mr. Pascal know of his decision. On August 23, 1974, Mayfair replied
through a letter stating as follows:
It appears that on August 19, 1974 your Mr. Henry Pascal informed our client's Mr. Henry Yang through the
telephone that your company desires to sell your above-mentioned C.M. Recto Avenue property.
Under your company's two lease contracts with our client, it is uniformly provided:
8. That if the LESSOR should desire to sell the leased premises the LESSEE shall be given 30-days exclusive
option to purchase the same. In the event, however, that the leased premises is sold to someone other than
the LESSEE, the LESSOR is bound and obligated, as it is (sic) herebinds (sic) and obligates itself, to stipulate
in the Deed of Sale thereof that the purchaser shall recognize this lease and be bound by all the terms and
conditions hereof (sic).
Carmelo did not reply to this letter.
On September 18, 1974, Mayfair sent another letter to Carmelo purporting to express interest in acquiring not
only the leased premises but "the entire building and other improvements if the price is reasonable. However,
both Carmelo and Equatorial questioned the authenticity of the second letter.
Four years later, on July 30, 1978, Carmelo sold its entire C.M. Recto Avenue land and building, which
included the leased premises housing the "Maxim" and "Miramar" theatres, to Equatorial by virtue of a Deed of
Absolute Sale, for the total sum of P11,300,000.00.
In September 1978, Mayfair instituted the action a quo for specific performance and annulment of the sale of
the leased premises to Equatorial. In its Answer, Carmelo alleged as special and affirmative defense (a) that it
had informed Mayfair of its desire to sell the entire C.M. Recto Avenue property and offered the same to
Mayfair, but the latter answered that it was interested only in buying the areas under lease, which was
impossible since the property was not a condominium; and (b) that the option to purchase invoked by Mayfair
is null and void for lack of consideration. Equatorial, in its Answer, pleaded as special and affirmative defense
that the option is void for lack of consideration (sic) and is unenforceable by reason of its impossibility of
performance because the leased premises could not be sold separately from the other portions of the land and
building. It counterclaimed for cancellation of the contracts of lease, and for increase of rentals in view of
alleged supervening extraordinary devaluation of the currency. Equatorial likewise cross-claimed against co-
defendant Carmelo for indemnification in respect of Mayfair's claims.
During the pre-trial conference held on January 23, 1979, the parties stipulated on the following:
1. That there was a deed of sale of the contested premises by the defendant Carmelo . . . in favor of defendant
Equatorial . . .;
2. That in both contracts of lease there appear (sic) the stipulation granting the plaintiff exclusive option to
purchase the leased premises should the lessor desire to sell the same (admitted subject to the contention that
the stipulation is null and void);
3. That the two buildings erected on this land are not of the condominium plan;
4. That the amounts stipulated and mentioned in paragraphs 3 (a) and (b) of the contracts of lease constitute
the consideration for the plaintiff's occupancy of the leased premises, subject of the same contracts of lease,
Exhibits A and B;
xxx xxx xxx
6. That there was no consideration specified in the option to buy embodied in the contract;
7. That Carmelo & Bauermann owned the land and the two buildings erected thereon;
8. That the leased premises constitute only the portions actually occupied by the theaters; and
9. That what was sold by Carmelo & Bauermann to defendant Equatorial Realty is the land and the two
buildings erected thereon.
xxx xxx xxx
After assessing the evidence, the court a quo rendered the appealed decision, the decretal portion of which
reads as follows:
WHEREFORE, judgment is hereby rendered:
(1) Dismissing the complaint with costs against the plaintiff;
(2) Ordering plaintiff to pay defendant Carmelo & Bauermann P40,000.00 by way of attorney's fees on its
counterclaim;
(3) Ordering plaintiff to pay defendant Equatorial Realty P35,000.00 per month as reasonable compensation
for the use of areas not covered by the contract (sic) of lease from July 31, 1979 until plaintiff vacates said area
(sic) plus legal interest from July 31, 1978; P70,000 00 per month as reasonable compensation for the use of
the premises covered by the contracts (sic) of lease dated (June 1, 1967 from June 1, 1987 until plaintiff
vacates the premises plus legal interest from June 1, 1987; P55,000.00 per month as reasonable
compensation for the use of the premises covered by the contract of lease dated March 31, 1969 from March
30, 1989 until plaintiff vacates the premises plus legal interest from March 30, 1989; and P40,000.00 as
attorney's fees;
(4) Dismissing defendant Equatorial's crossclaim against defendant Carmelo & Bauermann.
The contracts of lease dated June 1, 1967 and March 31, 1969 are declared expired and all persons claiming
rights under these contracts are directed to vacate the premises.6
The trial court adjudged the identically worded paragraph 8 found in both aforecited lease contracts to be an
option clause which however cannot be deemed to be binding on Carmelo because of lack of distinct
consideration therefor.
The court a quo ratiocinated:
Significantly, during the pre-trial, it was admitted by the parties that the option in the contract of lease is not
supported by a separate consideration. Without a consideration, the option is therefore not binding on
defendant Carmelo & Bauermann to sell the C.M. Recto property to the former. The option invoked by the
plaintiff appears in the contracts of lease . . . in effect there is no option, on the ground that there is no
consideration. Article 1352 of the Civil Code, provides:
Contracts without cause or with unlawful cause, produce no effect whatever. The cause is unlawful if it is
contrary to law, morals, good custom, public order or public policy.
Contracts therefore without consideration produce no effect whatsoever. Article 1324 provides:
When the offeror has allowed the offeree a certain period to accept, the offer may be withdrawn at any time
before acceptance by communicating such withdrawal, except when the option is founded upon consideration,
as something paid or promised.
in relation with Article 1479 of the same Code:
A promise to buy and sell a determine thing for a price certain is reciprocally demandable.
An accepted unilateral promise to buy or to sell a determine thing for a price certain is binding upon the
promissor if the promise is supported by a consideration distinct from the price.
The plaintiff cannot compel defendant Carmelo to comply with the promise unless the former establishes the
existence of a distinct consideration. In other words, the promisee has the burden of proving the consideration.
The consideration cannot be presumed as in Article 1354:
Although the cause is not stated in the contract, it is presumed that it exists and is lawful unless the debtor
proves the contrary.
where consideration is legally presumed to exists. Article 1354 applies to contracts in general, whereas when it
comes to an option it is governed particularly and more specifically by Article 1479 whereby the promisee has
the burden of proving the existence of consideration distinct from the price. Thus, in the case of Sanchez
vs. Rigor, 45 SCRA 368, 372-373, the Court said:
(1) Article 1354 applies to contracts in general, whereas the second paragraph of Article 1479 refers to sales in
particular, and, more specifically, to an accepted unilateral promise to buy or to sell. In other words, Article
1479 is controlling in the case at bar.
(2) In order that said unilateral promise may be binding upon the promissor, Article 1479 requires the
concurrence of a condition, namely, that the promise be supported by a consideration distinct from the price.
Accordingly, the promisee cannot compel the promissor to comply with the promise, unless the former
establishes the existence of said distinct consideration. In other words, the promisee has the burden of proving
such consideration. Plaintiff herein has not even alleged the existence thereof in his complaint. 7
It follows that plaintiff cannot compel defendant Carmelo & Bauermann to sell the C.M. Recto property to the
former.
Mayfair taking exception to the decision of the trial court, the battleground shifted to the respondent Court of
Appeals. Respondent appellate court reversed the court a quo and rendered judgment:
1. Reversing and setting aside the appealed Decision;
2. Directing the plaintiff-appellant Mayfair Theater Inc. to pay and return to Equatorial the amount of
P11,300,000.00 within fifteen (15) days from notice of this Decision, and ordering Equatorial Realty
Development, Inc. to accept such payment;
3. Upon payment of the sum of P11,300,000, directing Equatorial Realty Development, Inc. to execute the
deeds and documents necessary for the issuance and transfer of ownership to Mayfair of the lot registered
under TCT Nos. 17350, 118612, 60936, and 52571; and
4. Should plaintiff-appellant Mayfair Theater, Inc. be unable to pay the amount as adjudged, declaring the Deed
of Absolute Sale between the defendants-appellants Carmelo & Bauermann, Inc. and Equatorial Realty
Development, Inc. as valid and binding upon all the parties.8
Rereading the law on the matter of sales and option contracts, respondent Court of Appeals differentiated
between Article 1324 and Article 1479 of the Civil Code, analyzed their application to the facts of this case, and
concluded that since paragraph 8 of the two lease contracts does not state a fixed price for the purchase of the
leased premises, which is an essential element for a contract of sale to be perfected, what paragraph 8 is,
must be a right of first refusal and not an option contract. It explicated:
Firstly, the court a quo misapplied the provisions of Articles 1324 and 1479, second paragraph, of the Civil
Code.
Article 1324 speaks of an "offer" made by an offeror which the offeree may or may not accept within a certain
period. Under this article, the offer may be withdrawn by the offeror before the expiration of the period and
while the offeree has not yet accepted the offer. However, the offer cannot be withdrawn by the offeror within
the period if a consideration has been promised or given by the offeree in exchange for the privilege of being
given that period within which to accept the offer. The consideration is distinct from the price which is part of
the offer. The contract that arises is known as option. In the case of Beaumont vs. Prieto, 41 Phil. 670, the
Supreme court, citing Bouvier, defined an option as follows: "A contract by virtue of which A, in consideration of
the payment of a certain sum to B, acquires the privilege of buying from or selling to B, certain securities or
properties within a limited time at a specified price," (pp. 686-7).
Article 1479, second paragraph, on the other hand, contemplates of an "accepted unilateral promise to buy or
to sell a determinate thing for a price within (which) is binding upon the promisee if the promise is supported by
a consideration distinct from the price." That "unilateral promise to buy or to sell a determinate thing for a price
certain" is called an offer. An "offer", in laws, is a proposal to enter into a contract (Rosenstock vs. Burke, 46
Phil. 217). To constitute a legal offer, the proposal must be certain as to the object, the price and other
essential terms of the contract (Art. 1319, Civil Code).
Based on the foregoing discussion, it is evident that the provision granting Mayfair "30-days exclusive option to
purchase" the leased premises is NOT AN OPTION in the context of Arts. 1324 and 1479, second paragraph,
of the Civil Code. Although the provision is certain as to the object (the sale of the leased premises) the price
for which the object is to be sold is not stated in the provision Otherwise stated, the questioned stipulation is
not by itself, an "option" or the "offer to sell" because the clause does not specify the price for the subject
property.
Although the provision giving Mayfair "30-days exclusive option to purchase" cannot be legally categorized as
an option, it is, nevertheless, a valid and binding stipulation. What the trial court failed to appreciate was the
intention of the parties behind the questioned proviso.
xxx xxx xxx
The provision in question is not of the pro-forma type customarily found in a contract of lease. Even appellees
have recognized that the stipulation was incorporated in the two Contracts of Lease at the initiative and behest
of Mayfair. Evidently, the stipulation was intended to benefit and protect Mayfair in its rights as lessee in case
Carmelo should decide, during the term of the lease, to sell the leased property. This intention of the parties is
achieved in two ways in accordance with the stipulation. The first is by giving Mayfair "30-days exclusive option
to purchase" the leased property. The second is, in case Mayfair would opt not to purchase the leased
property, "that the purchaser (the new owner of the leased property) shall recognize the lease and be bound by
all the terms and conditions thereof."
In other words, paragraph 8 of the two Contracts of lease, particularly the stipulation giving Mayfair "30-days
exclusive option to purchase the (leased premises)," was meant to provide Mayfair the opportunity to purchase
and acquire the leased property in the event that Carmelo should decide to dispose of the property. In order to
realize this intention, the implicit obligation of Carmelo once it had decided to sell the leased property, was not
only to notify Mayfair of such decision to sell the property, but, more importantly, to make an offer to sell the
leased premises to Mayfair, giving the latter a fair and reasonable opportunity to accept or reject the offer,
before offering to sell or selling the leased property to third parties. The right vested in Mayfair is analogous to
the right of first refusal, which means that Carmelo should have offered the sale of the leased premises to
Mayfair before offering it to other parties, or, if Carmelo should receive any offer from third parties to purchase
the leased premises, then Carmelo must first give Mayfair the opportunity to match that offer.
In fact, Mr. Pascal understood the provision as giving Mayfair a right of first refusal when he made the
telephone call to Mr. Yang in 1974. Mr. Pascal thus testified:
Q Can you tell this Honorable Court how you made the offer to Mr. Henry Yang by telephone?
A I have an offer from another party to buy the property and having the offer we decided to make an offer to
Henry Yang on a first-refusal basis. (TSN November 8, 1983, p. 12.).
and on cross-examination:
Q When you called Mr. Yang on August 1974 can you remember exactly what you have told him in connection
with that matter, Mr. Pascal?
A More or less, I told him that I received an offer from another party to buy the property and I was offering him
first choice of the enter property. (TSN, November 29, 1983, p. 18).
We rule, therefore, that the foregoing interpretation best renders effectual the intention of the parties.9
Besides the ruling that paragraph 8 vests in Mayfair the right of first refusal as to which the requirement of
distinct consideration indispensable in an option contract, has no application, respondent appellate court also
addressed the claim of Carmelo and Equatorial that assuming arguendo that the option is valid and effective, it
is impossible of performance because it covered only the leased premises and not the entire Claro M. Recto
property, while Carmelo's offer to sell pertained to the entire property in question. The Court of Appeals ruled
as to this issue in this wise:
We are not persuaded by the contentions of the defendants-appellees. It is to be noted that the Deed of
Absolute Sale between Carmelo and Equatorial covering the whole Claro M. Recto property, made reference
to four titles: TCT Nos. 17350, 118612, 60936 and 52571. Based on the information submitted by Mayfair in its
appellant's Brief (pp. 5 and 46) which has not been controverted by the appellees, and which We, therefore,
take judicial notice of the two theaters stand on the parcels of land covered by TCT No. 17350 with an area of
622.10 sq. m and TCT No. 118612 with an area of 2,100.10 sq. m. The existence of four separate parcels of
land covering the whole Recto property demonstrates the legal and physical possibility that each parcel of
land, together with the buildings and improvements thereof, could have been sold independently of the other
parcels.
At the time both parties executed the contracts, they were aware of the physical and structural conditions of the
buildings on which the theaters were to be constructed in relation to the remainder of the whole Recto property.
The peculiar language of the stipulation would tend to limit Mayfair's right under paragraph 8 of the Contract of
Lease to the acquisition of the leased areas only. Indeed, what is being contemplated by the questioned
stipulation is a departure from the customary situation wherein the buildings and improvements are included in
and form part of the sale of the subjacent land. Although this situation is not common, especially considering
the non-condominium nature of the buildings, the sale would be valid and capable of being performed. A sale
limited to the leased premises only, if hypothetically assumed, would have brought into operation the provisions
of co-ownership under which Mayfair would have become the exclusive owner of the leased premises and at
the same time a co-owner with Carmelo of the subjacent land in proportion to Mayfair's interest over the
premises sold to it.10
Carmelo and Equatorial now comes before us questioning the correctness and legal basis for the decision of
respondent Court of Appeals on the basis of the following assigned errors:
I
THE COURT OF APPEALS GRAVELY ERRED IN CONCLUDING THAT THE OPTION CLAUSE IN THE
CONTRACTS OF LEASE IS ACTUALLY A RIGHT OF FIRST REFUSAL PROVISO. IN DOING SO THE
COURT OF APPEALS DISREGARDED THE CONTRACTS OF LEASE WHICH CLEARLY AND
UNEQUIVOCALLY PROVIDE FOR AN OPTION, AND THE ADMISSION OF THE PARTIES OF SUCH
OPTION IN THEIR STIPULATION OF FACTS.
II
WHETHER AN OPTION OR RIGHT OF FIRST REFUSAL, THE COURT OF APPEALS ERRED IN
DIRECTING EQUATORIAL TO EXECUTE A DEED OF SALE EIGHTEEN (18) YEARS AFTER MAYFAIR
FAILED TO EXERCISE ITS OPTION (OR, EVEN ITS RIGHT OF FIRST REFUSAL ASSUMING IT WAS ONE)
WHEN THE CONTRACTS LIMITED THE EXERCISE OF SUCH OPTION TO 30 DAYS FROM NOTICE.
III
THE COURT OF APPEALS GRIEVOUSLY ERRED WHEN IT DIRECTED IMPLEMENTATION OF ITS
DECISION EVEN BEFORE ITS FINALITY, AND WHEN IT GRANTED MAYFAIR A RELIEF THAT WAS NOT
EVEN PRAYED FOR IN THE COMPLAINT.
IV
THE COURT OF APPEALS VIOLATED ITS OWN INTERNAL RULES IN THE ASSIGNMENT OF APPEALED
CASES WHEN IT ALLOWED THE SAME DIVISION XII, PARTICULARLY JUSTICE MANUEL HERRERA, TO
RESOLVE ALL THE MOTIONS IN THE "COMPLETION PROCESS" AND TO STILL RESOLVE THE MERITS
OF THE CASE IN THE "DECISION STAGE".11

We shall first dispose of the fourth assigned error respecting alleged irregularities in the raffle of this case in
the Court of Appeals. Suffice it to say that in our Resolution,12 dated December 9, 1992, we already took note
of this matter and set out the proper applicable procedure to be the following:
On September 20, 1992, counsel for petitioner Equatorial Realty Development, Inc. wrote a letter-complaint to
this Court alleging certain irregularities and infractions committed by certain lawyers, and Justices of the Court
of Appeals and of this Court in connection with case CA-G.R. CV No. 32918 (now G.R. No. 106063). This
partakes of the nature of an administrative complaint for misconduct against members of the judiciary. While
the letter-complaint arose as an incident in case CA-G.R. CV No. 32918 (now G.R. No. 106063), the
disposition thereof should be separate and independent from Case G.R. No. 106063. However, for purposes of
receiving the requisite pleadings necessary in disposing of the administrative complaint, this Division shall
continue to have control of the case. Upon completion thereof, the same shall be referred to the Court En
Banc for proper disposition.13
This court having ruled the procedural irregularities raised in the fourth assigned error of Carmelo and
Equatorial, to be an independent and separate subject for an administrative complaint based on misconduct by
the lawyers and justices implicated therein, it is the correct, prudent and consistent course of action not to pre-
empt the administrative proceedings to be undertaken respecting the said irregularities. Certainly, a discussion
thereupon by us in this case would entail a finding on the merits as to the real nature of the questioned
procedures and the true intentions and motives of the players therein.
In essence, our task is two-fold: (1) to define the true nature, scope and efficacy of paragraph 8 stipulated in
the two contracts of lease between Carmelo and Mayfair in the face of conflicting findings by the trial court and
the Court of Appeals; and (2) to determine the rights and obligations of Carmelo and Mayfair, as well as
Equatorial, in the aftermath of the sale by Carmelo of the entire Claro M. Recto property to Equatorial.
Both contracts of lease in question provide the identically worded paragraph 8, which reads:
That if the LESSOR should desire to sell the leased premises, the LESSEE shall be given 30-days exclusive
option to purchase the same.
In the event, however, that the leased premises is sold to someone other than the LESSEE, the LESSOR is
bound and obligated, as it hereby binds and obligates itself, to stipulate in the Deed of Sale thereof that the
purchaser shall recognize this lease and be bound by all the terms and conditions thereof.14
We agree with the respondent Court of Appeals that the aforecited contractual stipulation provides for a right of
first refusal in favor of Mayfair. It is not an option clause or an option contract. It is a contract of a right of first
refusal.
As early as 1916, in the case of Beaumont vs. Prieto,15 unequivocal was our characterization of an option
contract as one necessarily involving the choice granted to another for a distinct and separate consideration as
to whether or not to purchase a determinate thing at a predetermined fixed price.
It is unquestionable that, by means of the document Exhibit E, to wit, the letter of December 4, 1911, quoted at
the beginning of this decision, the defendant Valdes granted to the plaintiff Borck the right to purchase the
Nagtajan Hacienda belonging to Benito Legarda, during the period of three months and for its assessed
valuation, a grant which necessarily implied the offer or obligation on the part of the defendant Valdes to sell to
Borck the said hacienda during the period and for the price mentioned . . . There was, therefore, a meeting of
minds on the part of the one and the other, with regard to the stipulations made in the said document. But it is
not shown that there was any cause or consideration for that agreement, and this omission is a bar which
precludes our holding that the stipulations contained in Exhibit E is a contract of option, for, . . . there can be no
contract without the requisite, among others, of the cause for the obligation to be established.
In his Law Dictionary, edition of 1897, Bouvier defines an option as a contract, in the following language:
A contract by virtue of which A, in consideration of the payment of a certain sum to B, acquires the privilege of
buying from, or selling to B, certain securities or properties within a limited time at a specified price. (Story vs.
Salamon, 71 N.Y., 420.)
From vol. 6, page 5001, of the work "Words and Phrases," citing the case of Ide vs. Leiser (24 Pac., 695; 10
Mont., 5; 24 Am. St. Rep., 17) the following quotation has been taken:
An agreement in writing to give a person the option to purchase lands within a given time at a named price is
neither a sale nor an agreement to sell. It is simply a contract by which the owner of property agrees with
another person that he shall have the right to buy his property at a fixed price within a certain time. He does not
sell his land; he does not then agree to sell it; but he does sell something; that is, the right or privilege to buy at
the election or option of the other party. The second party gets in praesenti, not lands, nor an agreement that
he shall have lands, but he does get something of value; that is, the right to call for and receive lands if he
elects. The owner parts with his right to sell his lands, except to the second party, for a limited period. The
second party receives this right, or, rather, from his point of view, he receives the right to elect to buy.
But the two definitions above cited refer to the contract of option, or, what amounts to the same thing, to the
case where there was cause or consideration for the obligation, the subject of the agreement made by the
parties; while in the case at bar there was no such cause or consideration. 16 (Emphasis ours.)
The rule so early established in this jurisdiction is that the deed of option or the option clause in a contract, in
order to be valid and enforceable, must, among other things, indicate the definite price at which the person
granting the option, is willing to sell.
Notably, in one case we held that the lessee loses his right to buy the leased property for a named price per
square meter upon failure to make the purchase within the time specified;17 in one other case we freed the
landowner from her promise to sell her land if the prospective buyer could raise P4,500.00 in three weeks
because such option was not supported by a distinct consideration;18 in the same vein in yet one other case,
we also invalidated an instrument entitled, "Option to Purchase" a parcel of land for the sum of P1,510.00
because of lack of consideration;19 and as an exception to the doctrine enumerated in the two preceding
cases, in another case, we ruled that the option to buy the leased premises for P12,000.00 as stipulated in the
lease contract, is not without consideration for in reciprocal contracts, like lease, the obligation or promise of
each party is the consideration for that of the other. 20 In all these cases, the selling price of the object thereof
is always predetermined and specified in the option clause in the contract or in the separate deed of option.
We elucidated, thus, in the very recent case of Ang Yu Asuncion vs. Court of Appeals21 that:
. . . In sales, particularly, to which the topic for discussion about the case at bench belongs, the contract is
perfected when a person, called the seller, obligates himself, for a price certain, to deliver and to transfer
ownership of a thing or right to another, called the buyer, over which the latter agrees. 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 therefor a price certain in money or its equivalent.
A contract of sale may be absolute or conditional.
When the sale is not absolute but conditional, such as in a "Contract to Sell" where invariably the ownership of
the thing sold in retained until the fulfillment of a positive suspensive condition (normally, the full payment of the
purchase price), the breach of the condition will prevent the obligation to convey title from acquiring an
obligatory force. . . .
An unconditional mutual promise to buy and sell, as long as the object is made determinate and the price is
fixed, can be obligatory on the parties, and compliance therewith may accordingly be exacted.
An accepted unilateral promise which specifies the thing to be sold and the price to be paid, when coupled with
a valuable consideration distinct and separate from the price, is what may properly be termed a perfected
contract of option. This contract is legally binding, and in sales, it conforms with the second paragraph of Article
1479 of the Civil Code, viz:
Art. 1479. . . .
An accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding upon the
promisor if the promise is supported by a consideration distinct from the price. (1451a).
Observe, however, that the option is not the contract of sale itself. The optionee has the right, but not the
obligation, to buy. Once the option is exercised timely, i.e., the offer is accepted before a breach of the option, a
bilateral promise to sell and to buy ensues and both parties are then reciprocally bound to comply with their
respective undertakings.
Let us elucidate a little. A negotiation is formally initiated by an offer. An imperfect promise (policitacion) is
merely an offer. Public advertisements or solicitations and the like are ordinarily construed as mere invitations
to make offers or only as proposals. These relations, until a contract is perfected, are not considered binding
commitments. Thus, at any time prior to the perfection of the contract, either negotiating party may stop the
negotiation. The offer, at this stage, may be withdrawn; the withdrawal is effective immediately after its
manifestation, such as by its mailing and not necessarily when the offeree learns of the withdrawal (Laudico vs.
Arias, 43 Phil. 270). Where a period is given to the offeree within which to accept the offer, the following rules
generally govern:
(1) If the period is not itself founded upon or supported by a consideration, the offeror is still free and has the
right to withdraw the offer before its acceptance, or if an acceptance has been made, before the offeror's
coming to know of such fact, by communicating that withdrawal to the offeree (see Art. 1324, Civil Code; see
also Atkins, Kroll & Co. vs. Cua, 102 Phil. 948, holding that this rule is applicable to a unilateral promise to sell
under Art. 1479, modifying the previous decision in South Western Sugar vs. Atlantic Gulf, 97 Phil. 249; see
also Art. 1319, Civil Code; Rural Bank of Parañaque, Inc. vs. Remolado, 135 SCRA 409; Sanchez vs. Rigos,
45 SCRA 368). The right to withdraw, however, must not be exercised whimsically or arbitrarily; otherwise, it
could give rise to a damage claim under Article 19 of the Civil Code which ordains that "every person must, in
the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and
observe honesty and good faith."
(2) If the period has a separate consideration, a contract of "option" deemed perfected, and it would be a
breach of that contract to withdraw the offer during the agreed period. The option, however, is an independent
contract by itself; and it is to be distinguished from the projected main agreement (subject matter of the option)
which is obviously yet to be concluded. If, in fact, the optioner-offeror withdraws the offer before its acceptance
(exercise of the option) by the optionee-offeree, the latter may not sue for specific performance on the
proposed contract ("object" of the option) since it has failed to reach its own stage of perfection. The optioner-
offeror, however, renders himself liable for damages for breach of the opinion. . .
In the light of the foregoing disquisition and in view of the wording of the questioned provision in the two lease
contracts involved in the instant case, we so hold that no option to purchase in contemplation of the second
paragraph of Article 1479 of the Civil Code, has been granted to Mayfair under the said lease contracts.
Respondent Court of Appeals correctly ruled that the said paragraph 8 grants the right of first refusal to Mayfair
and is not an option contract. It also correctly reasoned that as such, the requirement of a separate
consideration for the option, has no applicability in the instant case.
There is nothing in the identical Paragraphs "8" of the June 1, 1967 and March 31, 1969 contracts which would
bring them into the ambit of the usual offer or option requiring an independent consideration.
An option is a contract granting a privilege to buy or sell within an agreed time and at a determined price. It is a
separate and distinct contract from that which the parties may enter into upon the consummation of the option.
It must be supported by consideration.22 In the instant case, the right of first refusal is an integral part of the
contracts of lease. The consideration is built into the reciprocal obligations of the parties.
To rule that a contractual stipulation such as that found in paragraph 8 of the contracts is governed by Article
1324 on withdrawal of the offer or Article 1479 on promise to buy and sell would render in effectual or "inutile"
the provisions on right of first refusal so commonly inserted in leases of real estate nowadays. The Court of
Appeals is correct in stating that Paragraph 8 was incorporated into the contracts of lease for the benefit of
Mayfair which wanted to be assured that it shall be given the first crack or the first option to buy the property at
the price which Carmelo is willing to accept. It is not also correct to say that there is no consideration in an
agreement of right of first refusal. The stipulation is part and parcel of the entire contract of lease. The
consideration for the lease includes the consideration for the right of first refusal. Thus, Mayfair is in effect
stating that it consents to lease the premises and to pay the price agreed upon provided the lessor also
consents that, should it sell the leased property, then, Mayfair shall be given the right to match the offered
purchase price and to buy the property at that price. As stated in Vda. De Quirino vs. Palarca,23 in reciprocal
contract, the obligation or promise of each party is the consideration for that of the other.
The respondent Court of Appeals was correct in ascertaining the true nature of the aforecited paragraph 8 to
be that of a contractual grant of the right of first refusal to Mayfair.
We shall now determine the consequential rights, obligations and liabilities of Carmelo, Mayfair and Equatorial.
The different facts and circumstances in this case call for an amplification of the precedent in Ang Yu Asuncion
vs. Court of Appeals.24
First and foremost is that the petitioners acted in bad faith to render Paragraph 8 "inutile".
What Carmelo and Mayfair agreed to, by executing the two lease contracts, was that Mayfair will have the right
of first refusal in the event Carmelo sells the leased premises. It is undisputed that Carmelo did recognize this
right of Mayfair, for it informed the latter of its intention to sell the said property in 1974. There was an
exchange of letters evidencing the offer and counter-offers made by both parties. Carmelo, however, did not
pursue the exercise to its logical end. While it initially recognized Mayfair's right of first refusal, Carmelo
violated such right when without affording its negotiations with Mayfair the full process to ripen to at least an
interface of a definite offer and a possible corresponding acceptance within the "30-day exclusive option" time
granted Mayfair, Carmelo abandoned negotiations, kept a low profile for some time, and then sold, without
prior notice to Mayfair, the entire Claro M Recto property to Equatorial.
Since Equatorial is a buyer in bad faith, this finding renders the sale to it of the property in question rescissible.
We agree with respondent Appellate Court that the records bear out the fact that Equatorial was aware of the
lease contracts because its lawyers had, prior to the sale, studied the said contracts. As such, Equatorial
cannot tenably claim to be a purchaser in good faith, and, therefore, rescission lies.
. . . Contract of Sale was not voidable but rescissible. Under Article 1380 to 1381(3) of the Civil Code, a
contract otherwise valid may nonetheless be subsequently rescinded by reason of injury to third persons, like
creditors. The status of creditors could be validly accorded the Bonnevies for they had substantial interests that
were prejudiced by the sale of the subject property to the petitioner without recognizing their right of first priority
under the Contract of Lease.
According to Tolentino, rescission is a remedy granted by law to the contracting parties and even to third
persons, to secure reparation for damages caused to them by a contract, even if this should be valid, by
means of the restoration of things to their condition at the moment prior to the celebration of said contract. It is
a relief allowed for the protection of one of the contracting parties and even third persons from all injury and
damage the contract may cause, or to protect some incompatible and preferent right created by the contract.
Rescission implies a contract which, even if initially valid, produces a lesion or pecuniary damage to someone
that justifies its invalidation for reasons of equity.
It is true that the acquisition by a third person of the property subject of the contract is an obstacle to the action
for its rescission where it is shown that such third person is in lawful possession of the subject of the contract
and that he did not act in bad faith. However, this rule is not applicable in the case before us because the
petitioner is not considered a third party in relation to the Contract of Sale nor may its possession of the subject
property be regarded as acquired lawfully and in good faith.
Indeed, Guzman, Bocaling and Co. was the vendee in the Contract of Sale. Moreover, the petitioner cannot be
deemed a purchaser in good faith for the record shows that it categorically admitted it was aware of the lease
in favor of the Bonnevies, who were actually occupying the subject property at the time it was sold to it.
Although the Contract of Lease was not annotated on the transfer certificate of title in the name of the late Jose
Reynoso and Africa Reynoso, the petitioner cannot deny actual knowledge of such lease which was equivalent
to and indeed more binding than presumed notice by registration.
A purchaser in good faith and for value is one who buys the property of another without notice that some other
person has a right to or interest in such property and pays a full and fair price for the same at the time of such
purchase or before he has notice of the claim or interest of some other person in the property. Good faith
connotes an honest intention to abstain from taking unconscientious advantage of another. Tested by these
principles, the petitioner cannot tenably claim to be a buyer in good faith as it had notice of the lease of the
property by the Bonnevies and such knowledge should have cautioned it to look deeper into the agreement to
determine if it involved stipulations that would prejudice its own interests.
The petitioner insists that it was not aware of the right of first priority granted by the Contract of Lease.
Assuming this to be true, we nevertheless agree with the observation of the respondent court that:
If Guzman-Bocaling failed to inquire about the terms of the Lease Contract, which includes Par. 20 on priority
right given to the Bonnevies, it had only itself to blame. Having known that the property it was buying was
under lease, it behooved it as a prudent person to have required Reynoso or the broker to show to it the
Contract of Lease in which Par. 20 is contained.25
Petitioners assert the alleged impossibility of performance because the entire property is indivisible property. It
was petitioner Carmelo which fixed the limits of the property it was leasing out. Common sense and fairness
dictate that instead of nullifying the agreement on that basis, the stipulation should be given effect by including
the indivisible appurtenances in the sale of the dominant portion under the right of first refusal. A valid and legal
contract where the ascendant or the more important of the two parties is the landowner should be given effect,
if possible, instead of being nullified on a selfish pretext posited by the owner. Following the arguments of
petitioners and the participation of the owner in the attempt to strip Mayfair of its rights, the right of first refusal
should include not only the property specified in the contracts of lease but also the appurtenant portions sold to
Equatorial which are claimed by petitioners to be indivisible. Carmelo acted in bad faith when it sold the entire
property to Equatorial without informing Mayfair, a clear violation of Mayfair's rights. While there was a series of
exchanges of letters evidencing the offer and counter-offers between the parties, Carmelo abandoned the
negotiations without giving Mayfair full opportunity to negotiate within the 30-day period.
Accordingly, even as it recognizes the right of first refusal, this Court should also order that Mayfair be
authorized to exercise its right of first refusal under the contract to include the entirety of the indivisible
property. The boundaries of the property sold should be the boundaries of the offer under the right of first
refusal. As to the remedy to enforce Mayfair's right, the Court disagrees to a certain extent with the concluding
part of the dissenting opinion of Justice Vitug. The doctrine enunciated in Ang Yu Asuncion vs. Court of
Appeals should be modified, if not amplified under the peculiar facts of this case.
As also earlier emphasized, the contract of sale between Equatorial and Carmelo is characterized by bad faith,
since it was knowingly entered into in violation of the rights of and to the prejudice of Mayfair. In fact, as
correctly observed by the Court of Appeals, Equatorial admitted that its lawyers had studied the contract of
lease prior to the sale. Equatorial's knowledge of the stipulations therein should have cautioned it to look
further into the agreement to determine if it involved stipulations that would prejudice its own interests.
Since Mayfair has a right of first refusal, it can exercise the right only if the fraudulent sale is first set aside or
rescinded. All of these matters are now before us and so there should be no piecemeal determination of this
case and leave festering sores to deteriorate into endless litigation. The facts of the case and considerations of
justice and equity require that we order rescission here and now. Rescission is a relief allowed for the
protection of one of the contracting parties and even third persons from all injury and damage the contract may
cause or to protect some incompatible and preferred right by the contract.26 The sale of the subject real
property by Carmelo to Equatorial should now be rescinded considering that Mayfair, which had substantial
interest over the subject property, was prejudiced by the sale of the subject property to Equatorial without
Carmelo conferring to Mayfair every opportunity to negotiate within the 30-day stipulated period.27
This Court has always been against multiplicity of suits where all remedies according to the facts and the law
can be included. Since Carmelo sold the property for P11,300,000.00 to Equatorial, the price at which Mayfair
could have purchased the property is, therefore, fixed. It can neither be more nor less. There is no dispute over
it. The damages which Mayfair suffered are in terms of actual injury and lost opportunities. The fairest solution
would be to allow Mayfair to exercise its right of first refusal at the price which it was entitled to accept or reject
which is P11,300,000.00. This is clear from the records.
To follow an alternative solution that Carmelo and Mayfair may resume negotiations for the sale to the latter of
the disputed property would be unjust and unkind to Mayfair because it is once more compelled to litigate to
enforce its right. It is not proper to give it an empty or vacuous victory in this case. From the viewpoint of
Carmelo, it is like asking a fish if it would accept the choice of being thrown back into the river. Why should
Carmelo be rewarded for and allowed to profit from, its wrongdoing? Prices of real estate have skyrocketed.
After having sold the property for P11,300,000.00, why should it be given another chance to sell it at an
increased price?
Under the Ang Yu Asuncion vs. Court of Appeals decision, the Court stated that there was nothing to execute
because a contract over the right of first refusal belongs to a class of preparatory juridical relations governed
not by the law on contracts but by the codal provisions on human relations. This may apply here if the contract
is limited to the buying and selling of the real property. However, the obligation of Carmelo to first offer the
property to Mayfair is embodied in a contract. It is Paragraph 8 on the right of first refusal which created the
obligation. It should be enforced according to the law on contracts instead of the panoramic and indefinite rule
on human relations. The latter remedy encourages multiplicity of suits. There is something to execute and that
is for Carmelo to comply with its obligation to the property under the right of the first refusal according to the
terms at which they should have been offered then to Mayfair, at the price when that offer should have been
made. Also, Mayfair has to accept the offer. This juridical relation is not amorphous nor is it merely preparatory.
Paragraphs 8 of the two leases can be executed according to their terms.
On the question of interest payments on the principal amount of P11,300,000.00, it must be borne in mind that
both Carmelo and Equatorial acted in bad faith. Carmelo knowingly and deliberately broke a contract entered
into with Mayfair. It sold the property to Equatorial with purpose and intend to withhold any notice or knowledge
of the sale coming to the attention of Mayfair. All the circumstances point to a calculated and contrived plan of
non-compliance with the agreement of first refusal.
On the part of Equatorial, it cannot be a buyer in good faith because it bought the property with notice and full
knowledge that Mayfair had a right to or interest in the property superior to its own. Carmelo and Equatorial
took unconscientious advantage of Mayfair.
Neither may Carmelo and Equatorial avail of considerations based on equity which might warrant the grant of
interests. The vendor received as payment from the vendee what, at the time, was a full and fair price for the
property. It has used the P11,300,000.00 all these years earning income or interest from the amount.
Equatorial, on the other hand, has received rents and otherwise profited from the use of the property turned
over to it by Carmelo. In fact, during all the years that this controversy was being litigated, Mayfair paid rentals
regularly to the buyer who had an inferior right to purchase the property. Mayfair is under no obligation to pay
any interests arising from this judgment to either Carmelo or Equatorial.
WHEREFORE, the petition for review of the decision of the Court of Appeals, dated June 23, 1992, in CA-G.R.
CV No. 32918, is HEREBY DENIED. The Deed of Absolute Sale between petitioners Equatorial Realty
Development, Inc. and Carmelo & Bauermann, Inc. is hereby deemed rescinded; petitioner Carmelo &
Bauermann is ordered to return to petitioner Equatorial Realty Development the purchase price. The latter is
directed to execute the deeds and documents necessary to return ownership to Carmelo and Bauermann of
the disputed lots. Carmelo & Bauermann is ordered to allow Mayfair Theater, Inc. to buy the aforesaid lots for
P11,300,000.00.
SO ORDERED.

Case #2
EN BANC

[G.R. No. L-2724. August 24, 1950.]

JOSE DE LEON, CECILIO DE LEON, ALBINA DE LEON, in their individual capacity, and JOSE DE LEON and
CECILIO DE LEON, as administrators of the intestate estate of Felix de Leon, Petitioner, v. ASUNCION
SORIANO, Respondent.

Lorenzo Sumulong and Jose Santos, for Petitioners.

Vicente J. Francisco, for Respondent.

SYLLABUS
1. OBLIGATIONS AND CONTRACTS; DETERMINATE AND GENERIC THING, DISTINGUISHED. — A
determinate thing is a concrete particularized object indicated by its own individuality, while a generic thing is
one whose determination is confined to that of its nature, to the genus (genero) to which it pertains, such as a
horse, a chair.

2. ID.; AGREEMENT TO DELIVER AMOUNT OF CROPS; WHEN FORTUITOUS CAUSE DID NOT EXCUSED
PERFORMANCE. — Except as to quality and quantity, the first of which is itself generic, the contract sets no
bounds or limits to that palay to be paid, nor was there even any stipulation that the cereal was to be the
produced of any particular land. Any palay of the quality stipulated regardless of origin or however acquired
(lawfully) would be obligatory on the part of the obligee to receive and would discharge the obligation. It seems
therefore plain that the alleged failure of crops through alleged fortuitous cause did not excuse performance.

DECISION
TUASON, J.:
This is an appeal by certiorari from a decision of the Court of Appeals affirming a judgment of the Court of First
Instance of Bulacan.

Jose de Leon, Cecilio de Leon and Albina de Leon, petitioners herein and defendants in the court below, were
natural children of Felix de Leon, deceased, while Asuncion Soriano, respondent herein and plaintiff below, is
his widow. In the administration and settlement of the decedent’s estate then pending in the Court of First
Instance, the said widow, on the one hand, and the natural children, on the other, reached on March 23, 1943
an agreement, approved by the probate court, whereby the natural children obligated themselves, among other
things, as follows:jgc:chanrobles.com.ph

"2. At the end of each agricultural year, by which shall be understood for the purposes of this agreement the
month of March of every year, the following amounts of palay shall be given to the party of the FIRST PART
(Asuncion Soriano) by the parties of the SECOND PART (De Leons): in the month of March of the current year
1943; one thousand two hundred (1,200) cavanes of palay (macan); in the month of March of 1944, one
thousand four hundred (1,400) cavanes of palay (macan); in the month of March 1945, one thousand five
hundred (1,500) cavanes of palay (macan); and in the month of March of 1946 and every succeeding year
thereafter, one thousand six hundred (1,600) cavanes of palay (macan). Delivery of the palay shall be made in
the warehouse required by the government, or if there be none such, at the warehouse to be selected by the
party of the FIRST PART, in San Miguel, Bulacan, free from the cost of hauling, transportation, and from any
and all taxes or charges.

"It is expressly stipulated that this annual payment of palay shall cease upon the death of the party of the
FIRST PART and shall not be transmissible to her heirs or to any other person, but during her lifetime this
obligation for the annual payment of the palay hereinabove mentioned shall constitute a first lien upon all the
rice lands of the estate of Dr. Felix de Leon in San Miguel, Bulacan."cralaw virtua1aw library

The defendants made deliveries to the plaintiff of 1,200 cavanes of palay in 1934, 700 in 1944, 200 in 1945,
and another 200 in 1946, a total of 2,300 cavanes which was 3,400 cavanes short of the 5,700 cavanes which
should have been delivered up to and including 1946. It was to recover this shortage or its value that this
action was commenced.

For answer, the defendants averred that their failure to pay the exact quantities of palay promised for 1944,
1945 and 1946 was due to "the Huk troubles in Central Luzon which rendered impossible full compliance with
the terms of the agreement;" and it was contended that "inasmuch as the obligations of the defendants to
deliver the full amount of the palay is depending upon the produce as this is in the nature of an annuity, . . . the
obligations of the defendants have been fully fulfilled by delivering in good faith all that could be possible under
the circumstances."cralaw virtua1aw library

The court gave judgment for the plaintiff for 3,400 cavanes of palay or its equivalent in cash, which was found
to be 24,900, and legal interest, As above stated, that judgment was affirmed by the appellate court.

Article 1182 of the Civil Code which was in force at the time the agreement in question was entered into,
provides that "Any obligation which consists in the delivery of a determinate thing shall be extinguished if such
thing should be lost or destroyed without fault on the part of the debtor and before he is in default. Inversely,
the obligation is not extinguished if the thing that perishes is indeterminate.

Manresa explains the distinction between determinate and generic thing in his comment on article 1096 of the
Civil Code of Spain, saying that the first is a concrete, particularized object, indicated by its own individuality,
while a generic thing is one whose determination is confined to that of its nature, to the genus (genero) to
which it pertains, such as a horse, a chair. These definitions are in accord with the popular meaning of the
terms defined.

Except as to quality and quantity, the first of which is itself generic, the contract sets no bounds or limits to the
palay to be paid, nor was there even any stipulation that the cereal was to be the produce of any particular
land. Any palay of the quality stipulated regardless of origin on however acquired (lawfully) would be obligatory
on the part of the obligee to receive and would discharge the obligation. It seems therefore plain that the
alleged failure of crops through alleged fortuitous cause did not excuse performance.

As Escriche, in his Diccionario Razonado de Legislacion y Jurisprudencia, puts it, speaking of the effects of the
loss of a thing:jgc:chanrobles.com.ph

"Extingue la obligacion del deudor cuando la cosa debida es un cuerpo cierto y determinado: pero si fuese
generica o no estuviese determinada sino en cuanto a la especie, como por ejemplo, una onza de oro, 50
panegas de trigo o 3 toneladas de vino, siempre se perderia para el deudor, el cual, por consiguiente, no se
libraria de la deuda, ya que se supone que el genero por su naturaleza nunca parece, ’nun quan genusperit’,
ya porque aunque se diga que parece ro puede parecer, sino para su dueño, que es el deudor ’res domino suo
perit’. (Libro 18 y su glosa 1.a Titulo 11, Partida 5.a)

And he gives this example:jgc:chanrobles.com.ph

"Si prestais, pues, a Pedro una onza de oro que luego le roban, tendra que pagartela, porque su obligacion no
consistia en haberte de dar aquella misma onza, sino generalmente una onza."cralaw virtua1aw library

In the case of Yu Tek & Co., v. Gonzales (29 Phil., 384), it appeared that the plaintiff advanced P3,000 to
defendant in payment of 600 piculs of sugar. The contract in writing did not specify that the sugar was to come
from the crop on defendant’s land which was destroyed. It was held that the sugar to be sold not having been
segregated, the sale was not perfected and the loss of the crop, even though through force majeure did not
extinguish defendant’s obligation to deliver the sugar.

In the more recent decision of this Court, in the case of Reyes v. Caltex (Phil.) Inc. (47 Off. Gaz., 1193; 84 Phil.,
654), a question similar to that at bar arose. There, we ruled that the inability of the lessee of a commercial
property to pay the stipulated rent because of war and because the premises had been occupied by Japanese
forces did not affect the lessee’s liability to fulfill its commitments. Shifting to American authorities, we cited
Pollard v. Shaefer (1 Dall. [Pa. ], 210), where the Court said that, "since by the lease, the lessee was to have
the advantage of casual profits of the leased premises, he should run the hazard of casual losses during the
term and not lay the whole burden of them upon the lessor." This court went on to say:jgc:chanrobles.com.ph

"The general rule on performance of contracts is graphically set forth in American treatises, which is also the
rule, in our opinion, obtaining under the Civil Code.

"Where a person by a 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, it is
his duty to provide therefor in his contract. Hence, performance is not excused by subsequent’ inability to
perform, by unforeseen difficulties, by unusual or unexpected expenses, by danger, by inevitable accident, by
the breaking of machinery, by strikes, by sickness, by failure of a party to avail himself of the benefits to be had
under the contract, by weather conditions, by financial stringency, or by stagnation of business. Neither is
performance excused by the fact that the contract turns out to be hard and improvident, unprofitable or
impracticable, ill advised, or even foolish, or less profitable, or unexpectedly burdensome. (17 C. J. S. 946-
948). "In the absence of a statute to the contrary, conditions arising from a state of war in which the country is
engaged, will not ordinarily constitute an excuse for non-performance of contract; and impossibility of
performance arising from the acts of the legislature and the executive branch of government in war time does
not, without more, constitute an excuse for non-performance. (17 C. J. S., 953, 954.)

"A few words are in order to straighten out the apparent confusion (of ideas) that exists regarding the influence
of fortuitous events in contracts; when they excuse performance and when not.

"In considering the effect of impossibility of performance on the rights of the parties, it is necessary to keep in
mind the distinction between: (1) Natural impossibility preventing performance from the nature of the things
and (2) impossibility in fact, in the absence of inherent impossibility in the nature of the thing stipulated to be
performed. (17 C. J. S., 951.) In the words of one Court impossibility must consist in the nature of thing to be
done and not in the inability of the party to do it. (City of Montpelier v. National Surety Co., 122 A., 484; 97 Vt.,
Ill; 33 A. L. R., 489.) As others have put it, to bring the case within the rule of impossibility, it must appear that
the thing to be done cannot by any means be accomplished, for if it is only improbable or out of the power of
the obligor, it is not in law deemed impossible. (17 C. J. S., 442). The first class of impossibility goes to the
consideration and renders the contract void. The second, which is the class of impossibility that we have to do
here, does not. (17 C. J. S., 951, 952.)

"For illustration, where the entire product of a manufacturer was taken by the government under orders
pursuant to a commandeering statute during the World War, it was held that such action excused non-
performance of a contract to supply civilian trade. (40 S. Ct., 5; 252 U. S., 493; 64 Law. ed., 1031.) Another
example: where a party obligates himself to deliver certain (determinate) things and the things perish through
war or in a shipwreck performance is excused, the destruction operating as a rescission or dissolution of the
covenant. But if the promisor is unable to deliver the goods promised and his inability arises, not from their
destruction but from, say, his inability to raise money to buy them due to sickness, typhoons, or the like, his
liability is not discharged. In the first case, the doing of the thing which the obligor finds impossible is the
foundation of the undertaking. (C. J. S., 951, note.) In the second, the impossibility partakes of the nature of
the risk which the promisor took within the limits of his undertaking of being able to perform. (C. J. S., supra,
946, note). It is a contingency which he could have taken due precaution to guard against in the contract.

"Summoning the above principles to our aid, and by way of hypothesis, the defendant-appellee here would be
relieved from the obligation to pay rent if the subject matter of the lease, were this possible had disappeared,
for the personal occupation of the premises is the foundation of the contract, the consideration that induced it
(lessee) to enter into the agreement. But a mere trespass with which the landlord had nothing to do is a casual
disturbance not going to the essence of the undertaking. It is a collateral incident which might have been
provided for by a proper stipulation."cralaw virtua1aw library

See also Lacson Et. Al. v. Diaz, supra, p. 150.

The decision of the Court of Appeals is affirmed with costs against the petitioners and appellants.

Moran, C.J., Ozaeta, Pablo, Bengzon, Montemayor and Reyes, JJ., concur.

Case # 3
G.R. No. 91029 February 7, 1991
NORKIS DISTRIBUTORS, INC., petitioner,
vs.
THE COURT OF APPEALS & ALBERTO NEPALES, respondents.
Jose D. Palma for petitioner.
Public Attorney's Office for private respondent.
GRIÑO-AQUINO, J.:
Subject of this petition for review is the decision of the Court of Appeals (Seventeenth Division) in CA-G.R. No.
09149, affirming with modification the judgment of the Regional Trial Court, Sixth (6th) Judicial Region, Branch
LVI. Himamaylan, Negros Occidental, in Civil Case No. 1272, which was private respondent Alberto Nepales'
action for specific performance of a contract of sale with damages against petitioner Norkis Distributors, Inc.
The facts borne out by the record are as follows:
Petitioner Norkis Distributors, Inc. (Norkis for brevity), is the distributor of Yamaha motorcycles in Negros
Occidental with office in Bacolod City with Avelino Labajo as its Branch Manager. On September 20, 1979,
private respondent Alberto Nepales bought from the Norkis-Bacolod branch a brand new Yamaha Wonderbike
motorcycle Model YL2DX with Engine No. L2-329401K Frame No. NL2-0329401, Color Maroon, then
displayed in the Norkis showroom. The price of P7,500.00 was payable by means of a Letter of Guaranty from
the Development Bank of the Philippines (DBP), Kabankalan Branch, which Norkis' Branch Manager Labajo
agreed to accept. Hence, credit was extended to Nepales for the price of the motorcycle payable by DBP upon
release of his motorcycle loan. As security for the loan, Nepales would execute a chattel mortgage on the
motorcycle in favor of DBP. Branch Manager Labajo issued Norkis Sales Invoice No. 0120 (Exh.1) showing
that the contract of sale of the motorcycle had been perfected. Nepales signed the sales invoice to signify his
conformity with the terms of the sale. In the meantime, however, the motorcycle remained in Norkis'
possession.
On November 6, 1979, the motorcycle was registered in the Land Transportation Commission in the name of
Alberto Nepales. A registration certificate (Exh. 2) in his name was issued by the Land Transportation
Commission on November 6, 1979 (Exh. 2-b). The registration fees were paid by him, evidenced by an official
receipt, Exhibit 3.
On January 22, 1980, the motorcycle was delivered to a certain Julian Nepales who was allegedly the agent of
Alberto Nepales but the latter denies it (p. 15, t.s.n., August 2, 1984). The record shows that Alberto and Julian
Nepales presented the unit to DBP's Appraiser-Investigator Ernesto Arriesta at the DBP offices in Kabankalan,
Negros Occidental Branch (p. 12, Rollo). The motorcycle met an accident on February 3, 1980 at Binalbagan,
Negros Occidental. An investigation conducted by the DBP revealed that the unit was being driven by a certain
Zacarias Payba at the time of the accident (p. 33, Rollo). The unit was a total wreck (p. 36, t.s.n., August
2,1984; p. 13, Rollo), was returned, and stored inside Norkis' warehouse.
On March 20, 1980, DBP released the proceeds of private respondent's motorcycle loan to Norkis in the total
sum of P7,500. As the price of the motorcycle later increased to P7,828 in March, 1980, Nepales paid the
difference of P328 (p. 13, Rollo) and demanded the delivery of the motorcycle. When Norkis could not deliver,
he filed an action for specific performance with damages against Norkis in the Regional Trial Court of
Himamaylan, Negros Occidental, Sixth (6th) Judicial Region, Branch LVI, where it was docketed as Civil Case
No. 1272. He alleged that Norkis failed to deliver the motorcycle which he purchased, thereby causing him
damages.
Norkis answered that the motorcycle had already been delivered to private respondent before the accident,
hence, the risk of loss or damage had to be borne by him as owner of the unit.
After trial on the merits, the lower court rendered a decision dated August 27, 1985 ruling in favor of private
respondent (p. 28, Rollo.) thus:
WHEREFORE, judgment is rendered in favor of the plaintiff and against the defendants. The defendants are
ordered to pay solidarity to the plaintiff the present value of the motorcycle which was totally destroyed, plus
interest equivalent to what the Kabankalan Sub-Branch of the Development Bank of the Philippines will have to
charge the plaintiff on fits account, plus P50.00 per day from February 3, 1980 until full payment of the said
present value of the motorcycle, plus P1,000.00 as exemplary damages, and costs of the litigation. In lieu of
paying the present value of the motorcycle, the defendants can deliver to the plaintiff a brand-new motorcycle
of the same brand, kind, and quality as the one which was totally destroyed in their possession last February 3,
1980. (pp. 28-29, Rollo.)
On appeal, the Court of appeals affirmed the appealed judgment on August 21, 1989, but deleted the award of
damages "in the amount of Fifty (P50.00) Pesos a day from February 3, 1980 until payment of the present
value of the damaged vehicle" (p35, Rollo). The Court of Appeals denied Norkis' motion for reconsideration.
Hence, this Petition for Review.
The principal issue in this case is who should bear the loss of the motorcycle. The answer to this question
would depend on whether there had already been a transfer of ownership of the motorcycle to private
respondent at the time it was destroyed.
Norkis' theory is that:
. . . After the contract of sale has been perfected (Art. 1475) and even before delivery, that is, even before the
ownership is transferred to the vendee, the risk of loss is shifted from the vendor to the vendee. Under Art.
1262, the obligation of the vendor to deliver a determinate thing becomes extinguished if the thing is lost by
fortuitous event (Art. 1174), that is, without the fault or fraud of the vendor and before he has incurred in delay
(Art. 11 65, par. 3). If the thing sold is generic, the loss or destruction does not extinguish the obligation (Art.
1263). A thing is determinate when it is particularly designated or physically segregated from all others of the
same class (Art. 1460). Thus, the vendor becomes released from his obligation to deliver the determinate thing
sold while the vendee's obligation to pay the price subsists. If the vendee had paid the price in advance the
vendor may retain the same. The legal effect, therefore, is that the vendee assumes the risk of loss by
fortuitous event (Art. 1262) after the perfection of the contract to the time of delivery. (Civil Code of the
Philippines, Ambrosio Padilla, Vol. 5,1987 Ed., p. 87.)
Norkis concedes that there was no "actual" delivery of the vehicle. However, it insists that there was
constructive delivery of the unit upon: (1) the issuance of the Sales Invoice No. 0120 (Exh. 1) in the name of
the private respondent and the affixing of his signature thereon; (2) the registration of the vehicle on November
6, 1979 with the Land Transportation Commission in private respondent's name (Exh. 2); and (3) the issuance
of official receipt (Exh. 3) for payment of registration fees (p. 33, Rollo).
That argument is not well taken. As pointed out by the private respondent, the issuance of a sales invoice does
not prove transfer of ownership of the thing sold to the buyer. An invoice is nothing more than a detailed
statement of the nature, quantity and cost of the thing sold and has been considered not a bill of sale (Am. Jur.
2nd Ed., Vol. 67, p. 378).
In all forms of delivery, it is necessary that the act of delivery whether constructive or actual, be coupled with
the intention of delivering the thing. The act, without the intention, is insufficient (De Leon, Comments and
Cases on Sales, 1978 Ed., citing Manresa, p. 94).
When the motorcycle was registered by Norkis in the name of private respondent, Norkis did not intend yet to
transfer the title or ownership to Nepales, but only to facilitate the execution of a chattel mortgage in favor of
the DBP for the release of the buyer's motorcycle loan. The Letter of Guarantee (Exh. 5) issued by the DBP,
reveals that the execution in its favor of a chattel mortgage over the purchased vehicle is a pre-requisite for the
approval of the buyer's loan. If Norkis would not accede to that arrangement, DBP would not approve private
respondent's loan application and, consequently, there would be no sale.
In other words, the critical factor in the different modes of effecting delivery, which gives legal effect to the act,
is the actual intention of the vendor to deliver, and its acceptance by the vendee. Without that intention, there is
no tradition (Abuan vs. Garcia, 14 SCRA 759).
In the case of Addison vs. Felix and Tioco (38 Phil. 404, 408), this Court held:
The Code imposes upon the vendor the obligation to deliver the thing sold. The thing is considered to be
delivered when it is "placed in the hands and possession of the vendee." (Civil Code, Art. 1462). It is true that
the same article declares that the execution of a public instrument is equivalent to the delivery of the thing
which is the object of the contract, but, in order that this symbolic delivery may produce the effect of tradition, it
is necessary that the vendor shall have had such control over the thing sold that, at the moment of the sale, its
material delivery could have been made. It is not enough to confer upon the purchaser the ownership and
the right of possession. The thing sold must be placed in his control. When there is no impediment whatever to
prevent the thing sold passing into the tenancy of the purchaser by the sole will of the vendor, symbolic
delivery through the execution of a public instrument is sufficient. But if notwithstanding the execution of the
instrument, the purchaser cannot have the enjoyment and material tenancy of the thing and make use of it
himself or through another in his name, because such tenancy and enjoyment are opposed by the interposition
of another will, then fiction yields to reality-the delivery has riot been effects .(Emphasis supplied.)
The Court of Appeals correctly ruled that the purpose of the execution of the sales invoice dated September
20, 1979 (Exh. B) and the registration of the vehicle in the name of plaintiff-appellee (private respondent) with
the Land Registration Commission (Exhibit C) was not to transfer to Nepales the ownership and dominion over
the motorcycle, but only to comply with the requirements of the Development Bank of the Philippines for
processing private respondent's motorcycle loan. On March 20, 1980, before private respondent's loan was
released and before he even paid Norkis, the motorcycle had already figured in an accident while driven by
one Zacarias Payba. Payba was not shown by Norkis to be a representative or relative of private respondent.
The latter's supposed relative, who allegedly took possession of the vehicle from Norkis did not explain how
Payba got hold of the vehicle on February 3, 1980. Norkis' claim that Julian Nepales was acting as Alberto's
agent when he allegedly took delivery of the motorcycle (p. 20, Appellants' Brief), is controverted by the latter.
Alberto denied having authorized Julian Nepales to get the motorcycle from Norkis Distributors or to enter into
any transaction with Norkis relative to said motorcycle. (p. 5, t.s.n., February 6, 1985). This circumstances
more than amply rebut the disputable presumption of delivery upon which Norkis anchors its defense to
Nepales' action (pp. 33-34, Rollo).
Article 1496 of the Civil Code which provides that "in the absence of an express assumption of risk by the
buyer, the things sold remain at seller's risk until the ownership thereof is transferred to the buyer," is
applicable to this case, for there was neither an actual nor constructive delivery of the thing sold, hence, the
risk of loss should be borne by the seller, Norkis, which was still the owner and possessor of the motorcycle
when it was wrecked. This is in accordance with the well-known doctrine of res perit domino.
WHEREFORE, finding no reversible error in the decision of the Court of Appeals in CA-G.R. No. 09149, we
deny the petition for review and hereby affirm the appealed decision, with costs against the petitioner.
SO ORDERED.
Narvasa, Cruz, Gancayco and Medialdea, JJ., concur.

Case #4
G.R. No. L-55372 May 31, 1989
LETTY HAHN, petitioner,
vs.
COURT OF APPEALS, JOSIE M. SANTOS and FRANCISCO SANTOS, respondents.
Raymundo A. Armovit for petitioner.
Mary Concepcion Bautista for respondents.

CRUZ, J.:
It is said that diamonds are a girl's best friend, but private respondent Josie M. Santos may have her doubts
about this. The fact is that they have caused her not a little difficulty, and her troubles are not yet over. This
case was decided against her by the trial court and later by the respondent court which, however, mitigated the
judgment of the former. The petitioner does not like this and wants the earlier decision reinstated. That is why
she is now before this Court.
The basic facts as determined by the trial court 1 and affirmed by the respondent court 2 are no longer in issue.
It has been established that Santos received two diamond rings with a total value of P47,000.00 in 1966 from
the petitioner. She issued separate receipts therefor in which she acknowledged that they had been delivered
by Letty Hahn to her for sale on commission and that they would be returned upon demand if unsold. 3 The
rings were not sold nor were they returned when demanded by Hahn.
Hahn sued for recovery of the rings or their value. While the civil case was pending, she also filed a criminal
action for estafa against Santos. Santos was acquitted on reasonable doubt. 4 In the civil action, however,
where she also pleaded that the contracts between her and Hahn were not of agency but of sale, Santos did
not fare as well.
The trial court ordered her to return the two rings or pay the plaintiff their value, which was increased to
P65,000.00, with legal interest, plus P10,000 moral damages, P5,000 exemplary damages, and P6,000.00
attorney's fees. 5 The increase on the original value of the rings was based on Article 1250 of the Civil Code
calling for an adjustment of the payment due in case of extraordinary inflation or deflation. The moral and
exemplary damages were imposed because of the defendant's "seeming lack of scruples and
conscientiousness."
On appeal, this decision was modified. The Court of Appeals found that Article 1250 was not applicable and
that the appellant had not acted in bad faith or with malice. Accordingly, it rendered judgment:
A. Ordering the defendants to return to the plaintiff the two rings in question; to pay plaintiff legal interest on the
value of the ring, P47,000.00, from the time of the filing of the complaint until restitution in made; and attorney's
fees in the amount of P6,000.00.
B. Sentencing the defendants, in case return of the rings is no longer feasible, to pay to the plaintiff the value
thereof, which is P47,000.00, with interest at the legal rate from the time of the filing of the complaint until full
payment and P6,000.00 attorney's fees. 6
In challenging this decision, the petitioner contends that the respondent erred in not allowing an upward
adjustment of the original price of the two rings and in disallowing the moral and exemplary damages granted
by the trial court. These are the issues in this petition.
On the first question, the petitioner cites Central Bank figures to show that the amount of P47,000.00 in 1966,
when the obligation to return it or the rings fell due, was equivalent to about P235,000.00 in 1980 (and
necessarily to an even higher amount now in view of the continued reduction in the purchasing power of the
peso). As the increase ordered by the trial court (to P65,000.00 on August 7, 1971) was a finding of fact based
on official figures, the Court of Appeals was not justified in reversing the same.
The petitioner also argues that the award of moral and exemplary damages by the trial court was entirely
justified and should not have been disallowed by the respondent court. The reason is that there was sufficient
showing that the private respondent had acted with malice and in bad faith toward the petitioner who had
trusted her.
Thus, Santos misrepresented her agreements with the petitioner as contracts of sale when the very language
of the receipts she herself had written and signed clearly shows that she was receiving the rings in trust from
the petitioner, as later found in both the criminal and civil cases. 7 Second, she claimed she had made
installment payments directly and personally to the petitioner during the period from August 14 to November
20, 1966, and when this lie was exposed with evidence that the petitioner was abroad during that period,
changed her testimony to make it appear that the alleged payments had been made when Hahn was in the
country. 8 In fact, the finding of the trial court as sustained by the respondent court was that she had made no
payment at all at any time. 9 Third, when Santos offered to return the solitaire ring to the petitioner, the latter
readily saw that it was not the same ring she had entrusted to the private respondent, who evidently wanted to
foist another deception upon her. 10
For her part, the private respondent dismisses the claim for upward adjustment of the amount due and says
Article 1250 of the Civil Code is not applicable, there being no inflation or deflation. The Central Bank statistics
Hahn invokes are hearsay and immaterial. Not in point either is the case of Zulueta v. Pan-American World
Airways," 11 as cited by the petitioner, where the issue of inflation was not even raised. Moreover, the delay in
the payment of the amount due was imputable not to her but to the petitioner, who had unreasonably
prevented her from discharging her obligation.
As early as December of 1966, she says she had offered to return the marquisette ring to the petitioner but the
petitioner's lawyer, acting on her instructions, refused to accept it and demanded the return also of the
P35,000.00 solitaire ring. 12 She offered to pay for this other ring on installment but this offer was also
rejected. 13 At the trial of the criminal case against her, she brought the solitaire ring to prove that she had not
disposed of it, but the petitioner denied it was the ring she had delivered to the accused. 14 Still later, she
offered to pay for both rings on installment, but the offer was also rejected without reason by the petitioner. 15 In
sum, it is the petitioner who has delayed payment of the amount due and not the private respondent, who was
ready to settle her obligation.
The trial court cited no legal basis for the upward adjustment of the original amount due although the reason
was presumably Article 1250 of the Civil Code. We agree with the respondent court that such adjustment was
erroneous for, as explained by Justice Serafin M. Cuevas (later a member of this Court):
We, however, find the contention of appellant under her fifth assignment of error — that the lower court erred in
applying the floating rate to the purely peso transaction — to be meritorious.
In this regard, Article 1250 of the Civil Code provides —
In case an extraordinary inflation or deflation of the currency stipulated should supervene, the value of the
currency at the time of the establishment of the obligation should be the basis of payment, unless there is an
agreement to the contrary.
By extraordinary inflation or deflation of currency is understood to be any uncommon decrease or increase in
the purchasing power of currency which the parties could not have reasonably foreseen and which has been
due to war and the effects thereof, or any unusual force majeure or fortuitous event. (Civil Code of the
Philippines, Dean Capistrano, Vol. III, p. 186.)
Under the circumstances, we do not find any legal justification in applying the so-called 'floating rate," since
there has been no 'extraordinary inflation" of currency within the meaning of the aforequoted Art. 1250 of the
Civil Code. 16
The Court holds that, in determining the accountability of the private respondent, the trial judge should have
applied the following provisions of the Civil Code, as the respondent court apparently did:
Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the
indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed
upon, and in the absence of stipulation, the legal interest, which is six per cent per annum.
Art. 2210. Interest may, in the discretion of the court, be allowed upon damages awarded for breach of
contract.
Art. 2212. Interest due shall earn legal interest from the time it is judicially demanded, although the obligation
may be silent upon this point.
The Court notes, however, that the respondent court should also have imposed interest on the interest due on
the principal amount of P47,000.00, conformably to Article 2212. The interest due started to earn interest from
the date it was judicially demanded with the filing of the complaint on January 6,1967.
As to the delay in the performance of the private respondent's obligation, our ruling is that it was caused by the
private respondent herself and not the petitioner who had the right to demand performance in full of the
former's obligation she had assumed under their written agreement.
The receipts composed and signed by Santos, which were offered as Exhibits A and B, read as follows:
June 2, 1966
Received from Mrs. Letty Hahn 1 ring solo diamond worth P12,000 to be sold on commission or to be return
upon demand.
Josie M. Santos
266 A. del Mundo
Grace Park
Tel. No. 3-57-87
June 7,1966
Received from Mrs. Letty Hahn 1 ring solo diamond worth P35,000 to be sold on commission basis or to be
return upon demand.
Josie M. Santos
266 A. del Mundo
Grace Park
Tels. 2-28-21 & 2-57-87
From the moment demand was made upon Santos and she did not or could not comply, she has already
incurred in delay. The meaning of the receipts is unmistakable. Her contention that it was the private
respondent who had prevented her from fulfilling her obligation is simply untenable and unacceptable.
There is no doubt that the petitioner could validly reject the private respondent's offer to pay for the rings on
installment because Hahn was entitled to payment in full. If such payment could not be made, Santos was
obligated to return both of the rings — and not one or the other only at her option — "upon demand," under the
separate receipts she had signed. According to Article 1233 of the Civil Code, "a debt shall not be understood
to have been paid unless the thing or service in which the obligation consists has been completely delivered or
rendered as the case may be."
As for the private respondent's offer to return the solitaire ring, which was also refused, the pertinent rule is
Article 1244, providing that "the debtor of a thing cannot compel the creditor to receive a different one,
although the latter may be of the same value as, or more valuable than that which is due." More so then in the
case at bar if, as averred by the petitioner, the ring offered was less valuable than the one that was due . 17
We cannot sustain the respondent court, however, on the moral and exemplary damages which it disallowed
on the ground that "there was no clear showing of malice and bad faith on the part of the defendant." The
Court thinks otherwise. We hold that the moral and exemplary damages should be restored in light of her
dubious conduct as recounted in the petitioner's brief and the following findings of the trial court which we have
no reason to disturb:
The Court cannot but take note of the relative ease with which i Josie M. Santos says one thing at one given
time and another altogether i n subsequently afterwards, even if the statements different version are both
under the sanction of an oath. This seeming lack of scruples and conscientiousness on her part do not place
her in a favorable light under the painstaking scrutiny of the Court. There is so much deviousness and
complexity in her testimony that does not invite the confidence of the Court. 18
WHEREFORE, the petition is partly GRANTED. The decision of the respondent court dated August 29, 1980,
is MODIFIED as follows: a) the award of moral damages in the sum of I P10,000.00 and exemplary damages
in the sum of P5,000.00 is i added to the other amounts to be paid by the private respondent to the petitioner in
accordance with the said decision; and b) I interest on the principal amount of P47,00.00 shall earn interest
also at the legal rate, from January 6, 1967, and until full payment is made. Costs against the private
respondent.
SO ORDERED.
Narvasa (Chairman), Gancayco and Medialdea, JJ., concur.
Griño-Aquino, J., took no part.

Case #5

G.R. No. 189401, June 15, 2016

VIL-REY PLANNERS AND BUILDERS, Petitioners, v. LEXBER, INC., Respondent.

G.R. NO. 189447

LEXBER, INC., Petitioner, v. STRONGHOLD INSURANCE COMPANY, INC., Respondent.

DECISION

SERENO, C.J.:

Before us are petitions for review on certiorari under Rule 45 of the Rules of Court seeking to nullify the Court of
Appeals (CA) Decision1 and Resolution2 in CA-G.R. CV No. 90241. The CA Decision found Vil-Rey Planners and
Builders (Vil-Rey) and Stronghold Insurance Company, Inc. (Stronghold), solidarily liable to Lexber, Inc. (Lexber) in
the amount of P284,084.46 plus attorney's fees of P50,000. The CA Resolution denied the motions for
reconsideration filed by Vil-Rey and Stronghold.

FACTS

Vil-Rey and Lexber entered into a Construction Contract dated 17 April 1996 3 (first contract) whereby the former
undertook to work on the compacted backfill of the latter's 56,565-square-meter property in Barangay Bangad,
Cabanatuan City. Based on the first contract, Vil-Rey shall complete the project in 60 days for a consideration of
P5,100,000. Lexber released to Vil-Rey a mobilization downpayment of P500,000 secured by Surety Bond G(16)
No. 0669154 (first surety bond) issued by Stronghold. For its part, Vil-Rey agreed to indemnify Stronghold for
whatever amount the latter might be adjudged to pay Lexber under the surety bond. 5 ChanRoblesVirtualawlibrary

Vil-Rey and Lexber mutually terminated the first contract and entered into a Construction Contract dated 1 July
19966 (second contract) to cover the remaining works, but under revised terms and conditions. The contract amount
was P2,988,700.20, and the scope of work was required to be completed in 60 days.

On 23 December 1996, Vil-Rey and Lexber executed Work Order No. CAB-96-097 (third contract) for the completion
of the remaining works by 15 January 1997. Under the third contract, a consideration of P1,168,728.37 shall be paid
on the following basis: 50% downpayment to be secured by a surety bond in the same amount issued by Stronghold
upon approval of the work order and 50% balance upon completion of the works. Accordingly, Stronghold, issued
Surety Bond G(16) No. 0772588 (second surety bond) in the amount of P584,364.19 in favor of Lexber. Vil-Rey
again obligated itself to indemnify Stronghold for whatever amount the latter might be held to pay under the surety
bond.9ChanRoblesVirtualawlibrary

In a letter dated 21 January 199710 addressed to Lexber, Vil-Rey requested the extension of the contract period to
31 January 1997. Lexber granted the request for extension.11 However, Vil-Rey failed to complete the works by the
end of the extended period, or even after Lexber gave it another five days to finish the works. 12 Lexber then wrote
Stronghold seeking to collect on the two surety bonds issued in favor of the former. 13 ChanRoblesVirtualawlibrary

When negotiations failed, Lexber filed a Complaint14 for sum of money and damages against Vil-Rey and Stronghold
before the Regional Trial Court of Quezon City, Branch 93 (RTC).
In its Answer (with Counterclaim),15 Vil-Rey denied that it was guilty of breach of contract and insisted that it was
Lexber that owed the amount of P1,960,558.40 to the former. Vil-Rey alleged that under the first contract, it was
able to finish 75.33% of the works, but that Lexber paid an amount equivalent to only 50% of the contract, thereby
leaving a balance of PI,291,830 in Vil-Rey's favor. Furthermore, considering that almost 100% of the works were
finished under the third contract, Vil-Rey had receivables of P668/728.40 representing the contract amount of
P1,168,728.37 less the downpayment of P500,000. It also prayed for the payment of moral damages and attorney's
fees.

Stronghold filed its Answer16 alleging that its liability under the surety bonds was very specific. Under the first surety
bond, it guaranteed only the mobilization down payment of 10% of the total consideration for the first contract. The
mobilization downpayment was fully liquidated prior to the mutual termination of the first contract. Also, no collection
could be made on the second surety bond, because Lexber failed to allege that there were defects in the materials
used and workmanship utilized by Vil-Rey in undertaking the works. Stronghold put forward its counterclaim against
Lexber for attorney's fees, litigation expenses, and cross-claim against Vil-Rey for any and all amounts Stronghold
may be ordered to pay under the surety bonds pursuant to the indemnity agreements.

RULING OF THE RTC

In a Decision dated 12 December 2005,17 the RTC adjudged Vil-Rey and Stronghold jointly and severally liable to
Lexber in the amount of P2,988,700.20, with interest at the rate of 12% per annum as actual and compensatory
damages from the time of the breach until full satisfaction. The trial court also ordered Vil-Rey and Stronghold to pay
attorney's fees in the amount of P500,000 plus the costs of suit. It upheld the indemnity agreements and granted
Stronghold's cross-claim against Vil-Rey.

The RTC emphasized that parties to a contract are bound by the stipulations therein. When the contract requires the
accomplishment of tasks at a given time and the obligor fails to deliver, there is breach of contract that entitles the
obligee to damages. In this case, when Vil-Rey failed to finish the works on time, it became liable to Lexber for
damages brought about by the breach. The trial court found no merit in the claim of Vil-Rey that there was
underpayment and brushed aside the latter's counterclaim.

As regards Stronghold, the trial court found that the wording of the surety bonds did not embody the parties' true
intent, which was to ensure the faithful performance by Vil-Rey of its obligations. Considering its failure in this
regard, Stronghold should pay the total amount of the two surety bonds to Lexber.

In an Order dated 22 October 2007,18 the RTC decreed a partial reconsideration and ordered Vil-Rey and
Stronghold to pay Lexber in solidum in the amount of PI,084,364.19. This represented the true total amount of the
two surety bonds, with 12% interest per annum as actual and compensatory damages from the time of the breach
until full satisfaction. Furthermore, attorney's fees were reduced to P200,000.

Vil-Rey and Stronghold filed an appeal before the CA.

RULING OF THE CA

In the assailed Decision dated 16 April 2009,19 the CA modified the RTC Order and further lowered the liability of Vil-
Rey and Stronghold to P284,084.46 with interest at the rate of 6% per annum from 11 February 1997 until the
finality of the Decision. Thereafter, the amount shall earn 12% interest per annum until full satisfaction. The
appellate court also reduced attorney's fees to P50,000.

The CA ruled that, considering the mutual termination of the first and second contracts, no liability could be
assessed against Vil-Rey. Whatever claims Lexber had against Vil-Rey had been deemed waived with the
execution of the third contract. Consequently, Stronghold could not be made to pay under the first surety bond,
which covered only the mobilization downpayment under the first contract.

Nevertheless, there was a clear breach of the third contract, and Vil-Rey should be held liable for the natural and
probable consequences of the breach as duly proven. In this case, Lexber was able to prove that it sustained
damages in the amount of P284,084.46, which was the amount it paid another contractor tasked to complete the
works left unfinished by Vil-Rey. That amount was charged against the second surety bond, which guaranteed not
only the workmanship and the quality of the materials used in the project, but also the obligations of Vil-Rey.
The CA modified the interest imposed considering that the obligation breached was not a loan or forbearance of
money. Like the RTC, it denied the counterclaims of Vil-Rey and Stronghold against Lexber, but upheld Stronghold's
cross-claim against Vil-Rey.

Vil-Rey's motion for reconsideration and Stronghold's motion for partial reconsideration were denied by the CA in
the challenged Resolution dated 1 September 2009.20 ChanRoblesVirtualawlibrary

Issues

Dissatisfied, Vil-Rey and Stronghold filed the instant petitions before us raising the following issues for our
resolution:

1. Whether Vil-Rey is liable for breach of contract

2. Whether Stronghold's liability under the second surety bond was extinguished by the extension of the third
contract
3. Whether Lexber is entitled to attorney's fees

Our Ruling

I.
Vil-Rey is liable for breach of contract.

In resisting the ruling of the CA that Vil-Rey was guilty of breach of contract, the latter alleges that the appellate
court's findings are based on a misapprehension of facts.21 Vil-Rey argues that the consideration for the third
contract was P1,168,728.37, of which it was paid only P500,000. Considering that there remained a balance of
P668,728.37, the amount was more than enough to offset that incurred by Lexber in order to finish the works.

The argument misses the point.

Breach of contract is the failure of a party, without legal reason, to comply with the terms of a contract or perform
any promise that forms either a part or the whole of it.22 The failure of Vil-Rey to complete the works under the third
contract was never an issue in this case. In fact, that failure was readily admitted by Moises Villarta, its managing
partner,23 in his testimony before the trial court:

Q. What happened after you accomplished 95% under the [third contract]?
A. The only remaining there would be the compaction and fill density test.
Q. Could you please tell us why you did not finish the compaction and density test under the
[third] contract.
A. Because I lacked funds. 1 was not paid anymore.24

To clarify, aside from this testimony, no proof was presented to show that Vil-Rey was able to accomplish 95% of
the works under the third contract. Nevertheless, even if we were to assume that this claim is true, it still falls short
of the obligation to finish 100% of the works.

In the third contract, Vil-Rey and Lexber agreed on the following terms of payment:

50% downpayment upon approval of this work order against a surety bond from Stronghold Insurance Corporation
50% balance upon completion of work

The work will be completed on or before 15 January 1997 x x x.25

It is clear that the next payment for Vil-Rey would have fallen due upon completion of the works. Thus, it cannot put
up the defense that its failure to comply with its obligation was because it was not paid.
Under the above provisions, the parties clearly took on reciprocal obligations. These are obligations that arise from
the same cause, such that the obligation of one is dependent upon that of the other. 26 ChanRoblesVirtualawlibrary

The reciprocal obligation in this case was Lexber's payment of the 50% balance upon Vil-Rey's completion of the
works on or before 15 January 1997. However, despite the grant of extension until 31 January 1997, and even after
the lapse of another five-day grace period, Vil-Rey failed to finish the works under the third contract.

The law provides that the obligation of a person who fails to fulfill it shall be executed at that person's cost. 27 The CA
was correct in ruling that Vil-Rey should be held liable for the amount paid by Lexber to another contractor to
complete the works. Furthermore, Article 2201 of the Civil Code provides:

Article 2201. In contracts and quasi-contracts, the damages for which the obligor who acted in good faith is liable
shall be those that are the natural and probable consequences of the breach of the obligation, and which the parties
have foreseen or could have reasonably foreseen at the time the obligation was constituted.

In case of fraud, bad faith, malice or wanton attitude, the obligor shall be responsible for all damages which may be
reasonably attributed to the non-performance of the obligation.

In the absence of a clear showing of bad faith on the part of Vil-Rey, it shall be liable for damages only with regard
to those that are the natural and probable consequences of its breach. In this case, the failure of Vil-Rey to finish the
works compelled Lexber to secure the services of another contractor, to which the latter paid a total of P284,084.46.
Considering that this amount was not a loan or forbearance of money, We impose interest at the rate of 6% per
annum28 from 17 February 199729 until the finality of this Decision. Thereafter, it shall earn interest at the rate of 6%
per annum until satisfaction.30ChanRoblesVirtualawlibrary

We shall not close this discussion without passing upon another reciprocal obligation assumed by the parties under
the third contract. As agreed, Vil-Rey shall acquire a surety bond from Stronghold equivalent to 50% of the contract
price of P1,168,728.37 upon Lexber's downpayment of the same amount. Accordingly, on 24 December 1996, Vil-
Rey secured the second surety bond in the amount of P584,364.19. On the same day, Lexber made a
downpayment of only P500,000.31 ChanRoblesVirtualawlibrary

Article 1169 of the Civil Code provides that in reciprocal obligations, delay by one of the parties begins from the
moment the other fulfills the obligation. In this case, Lexber is guilty of delay with regard to the amount of
P84,364.19, which should be paid. Also, the delay shall make it liable to Vil-Rey for damages, 32 which We impose in
the form of interest at the rate of 6% per annum33 from 24 December 1996 until the finality of this Decision.
Thereafter, it shall earn interest at the rate of 6% per annum until satisfaction. 34 ChanRoblesVirtualawlibrary

The parties shall be allowed to compensate the amounts due them to the extent of their respective obligations.

II.
THE EXTENSION OF THE THIRD CONTRACT
DID NOT EXTINGUISH STRONGHOLD'S LIABILITY
UNDER THE SECOND SURETY BOND.

Stronghold claims that the extension of time for the completion of the works under the third contract from 15 January
1997 to 31 January 1997 was made without its consent as surety.35 It is argued that an extension of payment given
by the creditor to the debtor without notice to or consent of the surety extinguishes the surety's obligation, unless a
continuing guarantee was executed by the surety. Stronghold insists that the CA erred in construing the second
surety bond as a continuing guarantee despite clear stipulations to the contrary. 36 Furthermore, considering that the
second surety bond guaranteed only the materials and the workmanship that would be utilized by Vil-Rey, the
absence of any complaint from Lexber in this respect discharged Stronghold.37 ChanRoblesVirtualawlibrary

The following were the conditions and the obligations assumed by Stronghold under the second surety bond:

TO GUARANTEE [VIL-REY'S] OBLIGATIONS AND TO ANSWER FOR ANY DEFECTS IN THE MATERIALS
USED AND WORKMANSHIP UTILIZED IN THE LAND FILLING OF LEXBER HOMES CABANATUAN
(REMAINING WORKS).
AND THAT THE LIABILITY OF THIS BOND SHALL NOT EXCEED THE SUM OF PESOS, FIVE HUNDRED
EIGHTY FOUR THOUSAND THREE HUNDRED SIXTY FOUR & 19/100 ONLY, (P584,364.19), PHILIPPINE
CURRENCY.38 cralawred

The second surety bond clearly guaranteed the full and faithful performance of the "obligations" of Vil-Rey under the
third contract, and it was not secured just to answer for "defects in the materials used and workmanship utilized." As
a performance bond, the second surety bond guaranteed that Vil-Rey would perform the contract, and provided that
if the latter defaults and fails to complete the contract, Stronghold itself shall complete the contract or pay damages
up to the limit of the bond.39 ChanRoblesVirtualawlibrary

A surety bond is an accessory contract dependent for its existence upon the principal obligation it
guarantees.40 Being so associated with the third contract as a necessary condition or component thereof, the
second surety bond cannot be separated or severed from its principal. Considering that the third contract provided
that the works shall be completed on or before 15 January 1997, the second surety bond was deemed to have
guaranteed the completion of the works on the same date.

It is true that a surety is discharged from its obligation when there is a material alteration of the principal contract,
such as a change that imposes a new obligation on the obligor; or takes away some obligation already imposed; or
changes the legal effect, and not merely the form, of the original contract. 42 Nevertheless, no release from the
obligation shall take place when the change in the contract does not have the effect of making the obligation more
onerous to the surety.43 ChanRoblesVirtualawlibrary

In this case, the extension of the third contract for 15 days and the grant of an additional five-day grace period did
not make Stronghold's obligation more onerous. On the contrary, the extensions were aimed at the completion of
the works, which would have been for the benefit of Stronghold. This perspective comes from the provision of the
second surety bond that "if [Vil-Rey] shall in all respects duly and fully observe and perform all xxx the aforesaid
covenants, conditions and agreements to the true intent and meaning thereof, then this obligation shall be null and
void, otherwise to remain in full force and effect."44 The completion of the works would have discharged Stronghold
from its liability.

We find no merit in the contention of Stronghold that the extensions extinguished its obligation as a surety. 45 We
note that it also realized the importance of the completion of the works as far as it was concerned, as shown in its
letter to Vil-Rey dated 25 March 1997:

Enclosed is a copy of the letter dated February 18, 1997 we received on February 20, 1997 from Lexber, Inc.,
posting formal claim against our bonds at caption due to your failure to complete your contracted project within the
stipulated period.

Please take appropriate action to make good your commitment and contractual obligations to the Obligee within five
(5) days from receipt hereof and advise us on any development you have with them on the matter for our
guidance.46

Even as late as 25 March 1997, Stronghold still sought the completion of the works to the point of giving Vil-Rey a
period of five days to fulfill its commitments. Clearly, it cannot now claim that it was prejudiced by the extensions
given by Lexber, when it was prepared to give an extension of its own just so Vil-Rey could finish the works.

Stronghold contends that the extension of time for the completion of the third contract without its knowledge
discharged it from its obligation under the second surety bond. What further militates against this contention is the
fact that it was raised for the first time in the Motion for Partial Reconsideration 47 of the CA Decision dated 16 April
2009. Prior to the filing of that motion by Stronghold, its consistent argument before the RTC and even before the
CA was that the second surety bond guaranteed only the materials and the workmanship utilized by Vil-Rey; and
that the absence of any complaint from Lexber in this regard discharged Stronghold.

We have ruled that issues, grounds, points of law, or theories not brought to the attention of the trial courts cannot
be passed upon by reviewing courts.48 Thus, when a party deliberately adopts a certain theory, which becomes the
basis for the manner on which the case is tried and decided, the party will not be permitted to change that theory on
appeal; otherwise, it would be unfair to the adverse party.49 ChanRoblesVirtualawlibrary
At any rate, as surety, Stronghold has the right to be indemnified for whatever it may be ordered to pay Lexber. This
right is provided in the law and not merely based on the indemnity agreement Stronghold executed with Vil-Rey.

In Esca�o v. Ortigas, Jr.,50 we explained the right to full reimbursement by a surety for whatever it pays the
creditor:

[E]ven as the surety is solidarity bound with the principal debtor to the creditor, the surety who does pay the creditor
has the right to recover the full amount paid, and not just any proportional share, from the principal debtor or
debtors. Such right to full reimbursement falls within the other rights, actions and benefits which pertain to the surety
by reason of the subsidiary obligation assumed by the surety.

What is the source of this right to full reimbursement by the surety? We find the right under Article 2066 of the Civil
Code, which assures that "[t]he guarantor who pays for a debtor must be indemnified by the latter," such indemnity
comprising of, among others, "the total amount of the debt." Further, Article 2067 of the Civil Code likewise
establishes that "ft]he guarantor who pays is subrogated by virtue thereof to all the rights which the creditor had
against the debtor."

Articles 2066 and 2067 explicitly pertain to guarantors, and one might argue that the provisions should not extend to
sureties, especially in light of the qualifier in Article 2047 that the provisions on joint and several obligations should
apply to sureties. We reject that argument, and instead adopt Dr. Tolentino's observation that "[t]he reference in the
second paragraph of [Article 2047] to the provisions of Section 4, Chapter 3, Title I, Book IV, on solidary or several
obligations, however, does not mean that suretyship is withdrawn from the applicable provisions governing
guaranty." For if that were not the implication, there would be no material difference between the surety as defined
under Article 2047 and the joint and several debtors, for both classes of obligors would be governed by exactly the
same rules and limitations.

Accordingly, the rights to indemnification and subrogation as established and granted to the guarantor by Articles
2066 and 2067 extend as well to sureties as defined under Article 2047. x x x 51 cralawred

III.
Lexber is entitled to reduced attorney's fees.

Section 9.3 of the first contract provides that in the event Lexber has to institute judicial proceedings in order to
enforce any term or condition therein, Vil-Rey shall pay attorney's fees equivalent to not less than 25% of the total
amount adjudged.52 This provision was adopted in the second contract53 and even in the third contract, which
provides that all conditions in the second contract shall remain in force.54 ChanRoblesVirtualawlibrary

Attorney's fees as provided for in the contracts are in the nature of liquidated damages agreed upon by the parties.
These fees are to be paid in case of breach of the contractual stipulations necessitating a party to seek judicial
intervention to protect its rights.55 Normally, the obligor is bound to pay the stipulated indemnity without the necessity
of proof of the existence or the measure of damages caused by the breach. 56 ChanRoblesVirtualawlibrary

In this case, the failure of Vil-Rey to fulfill its obligation to finish the works under the third contract compelled Lexber
to seek judicial intervention. Pursuant to a contractual stipulation therefor, the payment of attorney's fees to Lexber
shall be the obligation of Vil-Rey and Stronghold.

However, considering the circumstances surrounding this case, We reduce the award to 10% of P284,084.46, which
was the amount Lexber paid to another contractor for the completion of the works. Liquidated damages may be
equitably reduced by the courts.57 Since the failure of Vil-Rey to fulfill its obligations was apparently caused by
financial difficulties, and Lexber was also guilty of delay with regard to the latter's reciprocal obligation to make a
downpayment of 50% of the amount of the third contract upon Vil-Rey's acquisition of a surety bond in the same
amount, the courts' power may be properly exercised in this case.

WHEREFORE, the Court of Appeals Decision dated 16 April 2009 and Resolution dated 1 September 2009 in CA-
G.R. CV No. 90241 are hereby MODIFIED as follows:

1. Vil-Rey Planners and Builders and Stronghold Insurance Company, Inc., are hereby ORDERED to jointly
and severally pay the following amounts to Lexber, Inc.:
 a. P284,084.46, with interest at the rate of 6% per annum from 17 February 1997 until full payment

b. 10% of F284,084.46 as attorney's fees

2. Vil-Rey Planners and Builders is hereby ORDERED to indemnify Stronghold Insurance Company, Inc., for
whatever amount the latter shall pay Lexber, Inc.

3. Lexber, Inc. is hereby ORDERED to pay Vil-Rey Planners and Builders the amount of P84,364.19, with
interest at the rate of 6% per annum from 24 December 1996 until full payment.

Vil-Rey Planners and Builders and Lexber, Inc., shall be allowed to compensate the amounts due them to the extent
of their respective obligations.

SO ORDERED. chanroblesvirtuallawlibrary

Case #6

G.R. No. 190601 February 7, 2011

SPOUSES LUIGI M. GUANIO and ANNA HERNANDEZ-GUANIO, Petitioners,

vs.
MAKATI SHANGRI-LA HOTEL and RESORT, INC., also doing business under the name of SHANGRI-LA
HOTEL MANILA, Respondent.

DECISION

CARPIO MORALES, J.:

For their wedding reception on July 28, 2001, spouses Luigi M. Guanio and Anna Hernandez-Guanio (petitioners)
booked at the Shangri-la Hotel Makati (the hotel).

Prior to the event, Makati Shangri-La Hotel & Resort, Inc. (respondent) scheduled an initial food tasting. Petitioners
claim that they requested the hotel to prepare for seven persons ─ the two of them, their respective parents, and the
wedding coordinator. At the scheduled food tasting, however, respondent prepared for only six.

Petitioners initially chose a set menu which included black cod, king prawns and angel hair pasta with wild
mushroom sauce for the main course which cost ₱1,000.00 per person. They were, however, given an option in
which salmon, instead of king prawns, would be in the menu at ₱950.00 per person. They in fact partook of the
salmon.

Three days before the event, a final food tasting took place. Petitioners aver that the salmon served was half the
size of what they were served during the initial food tasting; and when queried about it, the hotel quoted a much
higher price (₱1,200.00) for the size that was initially served to them. The parties eventually agreed on a final price
─ ₱1,150 per person.

A day before the event or on July 27, 2001, the parties finalized and forged their contract. 1

Petitioners claim that during the reception, respondent’s representatives, Catering Director Bea Marquez and Sales
Manager Tessa Alvarez, did not show up despite their assurance that they would; their guests complained of the
delay in the service of the dinner; certain items listed in the published menu were unavailable; the hotel’s waiters
were rude and unapologetic when confronted about the delay; and despite Alvarez’s promise that there would be no
charge for the extension of the reception beyond 12:00 midnight, they were billed and paid ₱8,000 per hour for the
three-hour extension of the event up to 4:00 A.M. the next day.
Petitioners further claim that they brought wine and liquor in accordance with their open bar arrangement, but these
were not served to the guests who were forced to pay for their drinks.

Petitioners thus sent a letter-complaint to the Makati Shangri-la Hotel and Resort, Inc. (respondent) and received an
apologetic reply from Krister Svensson, the hotel’s Executive Assistant Manager in charge of Food and Beverage.
They nevertheless filed a complaint for breach of contract and damages before the Regional Trial Court (RTC) of
Makati City.

In its Answer, respondent claimed that petitioners requested a combination of king prawns and salmon, hence, the
price was increased to ₱1,200.00 per person, but discounted at ₱1,150.00; that contrary to petitioners’ claim,
Marquez and Alvarez were present during the event, albeit they were not permanently stationed thereat as there
were three other hotel functions; that while there was a delay in the service of the meals, the same was occasioned
by the sudden increase of guests to 470 from the guaranteed expected minimum number of guests of 350 to a
maximum of 380, as stated in the Banquet Event Order (BEO);2 and that Isaac Albacea, Banquet Service Director,
in fact relayed the delay in the service of the meals to petitioner Luigi’s father, Gil Guanio.

Respecting the belated service of meals to some guests, respondent attributed it to the insistence of petitioners’
wedding coordinator that certain guests be served first.

On Svensson’s letter, respondent, denying it as an admission of liability, claimed that it was meant to maintain
goodwill to its customers.

By Decision of August 17, 2006, Branch 148 of the Makati RTC rendered judgment in favor of petitioners, disposing
as follows:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiffs and against the
defendant ordering the defendants to pay the plaintiff the following:

1) The amount of ₱350,000.00 by way of actual damages;

2) The amount of ₱250,000.00 for and as moral damages;

3) The amount of ₱100,000.00 as exemplary damages;

4) The amount of ₱100,000.00 for and as attorney’s fees.

With costs against the defendant.

SO ORDERED.3

In finding for petitioners, the trial court relied heavily on the letter of Svensson which is partly quoted below:

Upon receiving your comments on our service rendered during your reception here with us, we are in fact, very
distressed. Right from minor issues pappadums served in the soup instead of the creutons, lack of valet parkers,
hard rolls being too hard till a major one – slow service, rude and arrogant waiters, we have disappointed you in all
means.

Indeed, we feel as strongly as you do that the services you received were unacceptable and definitely not up to our
standards. We understand that it is our job to provide excellent service and in this instance, we have fallen short of
your expectations. We ask you please to accept our profound apologies for causing such discomfort and
annoyance. 4 (underscoring supplied)

The trial court observed that from "the tenor of the letter . . . the defendant[-herein respondent] admits that the
services the plaintiff[-herein petitioners] received were unacceptable and definitely not up to their standards." 5
On appeal, the Court of Appeals, by Decision of July 27, 2009,6 reversed the trial court’s decision, it holding that the
proximate cause of petitioners’ injury was an unexpected increase in their guests:

x x x Hence, the alleged damage or injury brought about by the confusion, inconvenience and disarray during the
wedding reception may not be attributed to defendant-appellant Shangri-la.

We find that the said proximate cause, which is entirely attributable to plaintiffs-appellants, set the chain of events
which resulted in the alleged inconveniences, to the plaintiffs-appellants. Given the circumstances that obtained,
only the Sps. Guanio may bear whatever consequential damages that they may have allegedly
suffered.7 (underscoring supplied)

Petitioners’ motion for reconsideration having been denied by Resolution of November 19, 2009, the present petition
for review was filed.

The Court finds that since petitioners’ complaint arose from a contract, the doctrine of proximate cause finds no
application to it:

The doctrine of proximate cause is applicable only in actions for quasi-delicts, not in actions involving breach of
contract. x x x The doctrine is a device for imputing liability to a person where there is no relation between him and
another party. In such a case, the obligation is created by law itself. But, where there is a pre-existing contractual
relation between the parties, it is the parties themselves who create the obligation, and the function of the law is
merely to regulate the relation thus created.8 (emphasis and underscoring supplied)

What applies in the present case is Article 1170 of the Civil Code which reads:

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

RCPI v. Verchez, et al. 9 enlightens:

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

The pertinent provisions of the Banquet and Meeting Services Contract between the parties read:

4.3 The ENGAGER shall be billed in accordance with the prescribed rate for the minimum guaranteed number of
persons contracted for, regardless of under attendance or non-appearance of the expected number of guests,
except where the ENGAGER cancels the Function in accordance with its Letter of Confirmation with the HOTEL.
Should the attendance exceed the minimum guaranteed attendance, the ENGAGER shall also be billed at the
actual rate per cover in excess of the minimum guaranteed attendance.

xxxx
4.5. The ENGAGER must inform the HOTEL at least forty eight (48) hours before the scheduled date and time of
the Function of any change in the minimum guaranteed covers. In the absence of such notice, paragraph 4.3 shall
apply in the event of under attendance. In case the actual number of attendees exceed the minimum
guaranteed number

by ten percent (10%), the HOTEL shall not in any way be held liable for any damage or inconvenience which
may be caused thereby. The ENGAGER shall also undertake to advise the guests of the situation and take
positive steps to remedy the same.10 (emphasis, italics and underscoring supplied)

Breach of contract is defined as the failure without legal reason to comply with the terms of a contract. It is also
defined as the [f]ailure, without legal excuse, to perform any promise which forms the whole or part of the contract. 11

The appellate court, and even the trial court, observed that petitioners were remiss in their obligation to inform
respondent of the change in the expected number of guests. The observation is reflected in the records of the case.
Petitioners’ failure to discharge such obligation thus excused, as the above-quoted paragraph 4.5 of the parties’
contract provide, respondent from liability for "any damage or inconvenience" occasioned thereby.

As for petitioners’ claim that respondent departed from its verbal agreement with petitioners, the same fails, given
that the written contract which the parties entered into the day before the event, being the law between them.

Respecting the letter of Svensson on which the trial court heavily relied as admission of respondent’s liability but
which the appellate court brushed aside, the Court finds the appellate court’s stance in order. It is not uncommon in
the hotel industry to receive comments, criticisms or feedback on the service it delivers. It is also customary for hotel
management to try to smooth ruffled feathers to preserve goodwill among its clientele.

Kalalo v. Luz holds:12

Statements which are not estoppels nor judicial admissions have no quality of conclusiveness, and an opponent
whose admissions have been offered against him may offer any evidence which serves as an explanation for his
former assertion of what he now denies as a fact.

Respondent’s Catering Director, Bea Marquez, explained the hotel’s procedure on receiving and processing
complaints, viz:

ATTY. CALMA:

Q You mentioned that the letter indicates an acknowledgement of the concern and that there was-the first
letter there was an acknowledgment of the concern and an apology, not necessarily indicating that such or
admitting fault?

A Yes.

Q Is this the letter that you are referring to?

If I may, Your Honor, that was the letter dated August 4, 2001, previously marked as plaintiff’s exhibits, Your
Honor. What is the procedure of the hotel with respect to customer concern?

A Upon receipt of the concern from the guest or client, we acknowledge receipt of such concern, and as part
of procedure in service industry particularly Makati Shangri-la we apologize for whatever inconvenience but
at the same time saying, that of course, we would go through certain investigation and get back to them for
the feedback with whatever concern they may have.

Q Your Honor, I just like at this point mark the exhibits, Your Honor, the letter dated August 4, 2001
identified by the witness, Your Honor, to be marked as Exhibit 14 and the signature of Mr. Krister Svensson
be marked as Exhibit 14-A.13
 xxxx

Q In your opinion, you just mentioned that there is a procedure that the hotel follows with respect to the
complaint, in your opinion was this procedure followed in this particular concern?

A Yes, ma’am.

Q What makes you say that this procedure was followed?

A As I mentioned earlier, we proved that we did acknowledge the concern of the client in this case and we
did emphatize from the client and apologized, and at the same time got back to them in whatever
investigation we have.

Q You said that you apologized, what did you apologize for?

A Well, first of all it is a standard that we apologize, right? Being in the service industry, it is a practice that we
apologize if there is any inconvenience, so the purpose for apologizing is mainly to show empathy and to ensure the
client that we are hearing them out and that we will do a better investigation and it is not in any way that we are
admitting any fault.14 (underscoring supplied)

To the Court, the foregoing explanation of the hotel’s Banquet Director overcomes any presumption of admission of
breach which Svensson’s letter might have conveyed.

The exculpatory clause notwithstanding, the Court notes that respondent could have managed the "situation" better,
it being held in high esteem in the hotel and service industry. Given respondent’s vast experience, it is safe to
presume that this is not its first encounter with booked events exceeding the guaranteed cover. It is not audacious to
expect that certain measures have been placed in case this predicament crops up. That regardless of these
measures, respondent still received complaints as in the present case, does not amuse. 1avvphil

Respondent admitted that three hotel functions coincided with petitioners’ reception. To the Court, the delay in
service might have been avoided or minimized if respondent exercised prescience in scheduling events. No less
than quality service should be delivered especially in events which possibility of repetition is close to nil. Petitioners
are not expected to get married twice in their lifetimes.

In the present petition, under considerations of equity, the Court deems it just to award the amount of ₱50,000.00 by
way of nominal damages to petitioners, for the discomfiture that they were subjected to during to the event. 15 The
Court recognizes that every person is entitled to respect of his dignity, personality, privacy and peace of
mind.16 Respondent’s lack of prudence is an affront to this right.

WHEREFORE, the Court of Appeals Decision dated July 28, 2009 is PARTIALLY REVERSED. Respondent is, in
light of the foregoing discussion, ORDERED to pay the amount of ₱50,000.00 to petitioners by way of nominal
damages.

SO ORDERED.

Case #7

G.R. No. 164349 January 31, 2006

RADIO COMMUNICATIONS OF THE PHILIPPINES, INC. (RCPI),Petitioner,

vs.
ALFONSO VERCHEZ, GRACE VERCHEZ-INFANTE, MARDONIO INFANTE, ZENAIDA VERCHEZ-CATIBOG,
AND FORTUNATO CATIBOG, Respondents.

DECISION
CARPIO MORALES, J.:

On January 21, 1991, Editha Hebron Verchez (Editha) was confined at the Sorsogon Provincial Hospital due to an
ailment. On even date, her daughter Grace Verchez-Infante (Grace) immediately hied to the Sorsogon Branch of the
Radio Communications of the Philippines, Inc. (RCPI) whose services she engaged to send a telegram to her sister
Zenaida Verchez-Catibog (Zenaida) who was residing at 18 Legal St., GSIS Village, Quezon City 1 reading: "Send
check money Mommy hospital." For RCPI’s services, Grace paid P10.502 for which she was issued a receipt.3

As three days after RCPI was engaged to send the telegram to Zenaida no response was received from her, Grace
sent a letter to Zenaida, this time thru JRS Delivery Service, reprimanding her for not sending any financial aid.

Immediately after she received Grace’s letter, Zenaida, along with her husband Fortunato Catibog, left on January
26, 1991 for Sorsogon. On her arrival at Sorsogon, she disclaimed having received any telegram.

In the meantime, Zenaida and her husband, together with her mother Editha left for Quezon City on January 28,
1991 and brought Editha to the Veterans Memorial Hospital in Quezon City where she was confined from January
30, 1991 to March 21, 1991.

The telegram was finally delivered to Zenaida 25 days later or on February 15, 1991. 4 On inquiry from RCPI why it
took that long to deliver it, a messenger of RCPI replied that he had nothing to do with the delivery thereof as it was
another messenger who previously was assigned to deliver the same but the address could not be located, hence,
the telegram was resent on February 2, 1991, and the second messenger finally found the address on February 15,
1991.

Editha’s husband Alfonso Verchez (Verchez), by letter of March 5, 1991, 5 demanded an explanation from the
manager of the Service Quality Control Department of the RCPI, Mrs. Lorna D. Fabian, who replied, by letter of
March 13, 1991,6 as follows:

Our investigation on this matter disclosed that subject telegram was duly processed in accordance with our standard
operating procedure. However, delivery was not immediately effected due to the occurrence of circumstances which
were beyond the control and foresight of RCPI. Among others, during the transmission process, the radio link
connecting the points of communication involved encountered radio noise and interferences such that subject
telegram did not initially registered (sic) in the receiving teleprinter machine.

Our internal message monitoring led to the discovery of the above. Thus, a repeat transmission was made and
subsequent delivery was effected. (Underscoring supplied)

Verchez’s lawyer thereupon wrote RCPI’s manager Fabian, by letter of July 23, 1991, 7 requesting for a conference
on a specified date and time, but no representative of RCPI showed up at said date and time.

On April 17, 1992, Editha died.

On September 8, 1993, Verchez, along with his daughters Grace and Zenaida and their respective spouses, filed a
complaint against RCPI before the Regional Trial Court (RTC) of Sorsogon for damages. In their complaint, the
plaintiffs alleged that, inter alia, the delay in delivering the telegram contributed to the early demise of the late Editha
to their damage and prejudice,8 for which they prayed for the award of moral and exemplary damages9 and
attorney’s fees.10

After its motion to dismiss the complaint for improper venue11 was denied12 by Branch 5 of the RTC of Sorsogon,
RCPI filed its answer, alleging that except with respect to Grace,13 the other plaintiffs had no privity of contract with
it; any delay in the sending of the telegram was due to force majeure, "specifically, but not limited to, radio noise and
interferences which adversely affected the transmission and/or reception of the telegraphic message"; 14 the clause
in the Telegram Transmission Form signed by Grace absolved it from liability for any damage arising from the
transmission other than the refund of telegram tolls;15 it observed due diligence in the selection and supervision of its
employees; and at all events, any cause of action had been barred by laches. 16
The trial court, observing that "although the delayed delivery of the questioned telegram was not apparently the
proximate cause of the death of Editha," ruled out the presence of force majeure. Respecting the clause in the
telegram relied upon by RCPI, the trial court held that it partakes of the nature of a contract of adhesion.

Finding that the nature of RCPI’s business obligated it to dispatch the telegram to the addressee at the earliest
possible time but that it did not in view of the negligence of its employees to repair its radio transmitter and the
concomitant delay in delivering the telegram on time, the trial court, upon the following provisions of the Civil Code,
to wit:

Article 2176 – Whoever by act or omission causes damage to another, there being at fault or negligence, is obliged
to pay for the damage done. Such fault or negligence if there is no pre-existing contractual relation between the
parties, is called quasi-delict and is governed by the provisions of this Chapter.

Article 1173 defines the fault of (sic) negligence of the obligor as the "omission of the diligence which is required by
the nature of the obligation and corresponds with the circumstances of the person, of the time, or the place."

In the instant case, the obligation of the defendant to deliver the telegram to the addressee is of an urgent nature. Its
essence is the early delivery of the telegram to the concerned person. Yet, due to the negligence of its employees,
the defendant failed to discharge of its obligation on time making it liable for damages under Article 2176.

The negligence on the part of the employees gives rise to the presumption of negligence on the part of the
employer.17 (Underscoring supplied),

rendered judgment against RCPI. Accordingly, it disposed:

WHEREFORE, in the light of the foregoing premises, judgment is hereby rendered in favor of the plaintiffs and
against the defendant, to wit:

Ordering the defendant to pay the plaintiffs the following amount:

1. The amount of One Hundred Thousand (P100,000.00) Pesos as moral damages;

2. The amount of Twenty Thousand (P20,000.00) Pesos as attorney’s fees; and

3. To pay the costs.

SO ORDERED.18

On appeal, the Court of Appeals, by Decision of February 27, 2004, 19 affirmed the trial court’s decision.

Hence, RCPI’s present petition for review on certiorari, it raising the following questions: (1) "Is the award of moral
damages proper even if the trial court found that there was no direct connection between the injury and the alleged
negligent acts?"20 and (2) "Are the stipulations in the ‘Telegram Transmission Form,’ in the nature "contracts of
adhesion" (sic)?21

RCPI insists that respondents failed to prove any causal connection between its delay in transmitting the telegram
and Editha’s death.22

RCPI’s stand fails. It bears noting that its liability is anchored on culpa contractual or breach of contract with regard
to Grace, and on tort with regard to her co-plaintiffs-herein-co-respondents.

Article 1170 of the Civil Code provides:

Those who in the performance of their obligations are guilty of fraud, negligence, or delay, and those who in any
manner contravene the tenor thereof, are liable for damages. (Underscoring supplied)
Passing on this codal provision, this Court explained:

In culpa contractual x x x the mere proof of the existence of the contract and the failure of its compliance
justify, prima facie, a corresponding right of relief. The law, recognizing the obligatory force of contracts, will not
permit a party to be set free from liability for any kind of misperformance of the contractual undertaking or a
contravention of the tenor thereof. A breach upon the contract confers upon the injured party a valid cause for
recovering that which may have been lost or suffered. The remedy serves to preserve the interests of the promissee
that may include his "expectation interest," which is his interest in having the benefit of his bargain by being put in
as good a position as he would have been in had the contract been performed, or his "reliance interest," which is
his interest in being reimbursed for loss caused by reliance on the contract by being put in as good a position as he
would have been in had the contract not been made; or his "restitution interest," which is his interest in having
restored to him any benefit that he has conferred on the other party. Indeed, agreements can accomplish little,
either for their makers or for society, unless they are made the basis for action. The effect of every infraction is to
create a new duty, that is, to make recompense to the one who has been injured by the failure of another to observe
his contractual obligation unless he can show extenuating circumstances, like proof of his exercise of due
diligence x x x or of the attendance of fortuitous event, to excuse him from his ensuing liability.23 (Emphasis and
underscoring supplied)

In the case at bar, RCPI bound itself to deliver the telegram within the shortest possible time. It took 25 days,
however, for RCPI to deliver it.

RCPI invokes force majeure, specifically, the alleged radio noise and interferences which adversely affected the
transmission and/or reception of the telegraphic message. Additionally, its messenger claimed he could not locate
the address of Zenaida and it was only on the third attempt that he was able to deliver the telegram.

For the defense of force majeure to prosper,

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

xxxx

Article 1174 of the Civil Code states that no person shall be responsible for a fortuitous event that could not be
foreseen or, though foreseen, was inevitable. In other words, there must be an exclusion of human intervention
from the cause of injury or loss.24 (Emphasis and underscoring supplied)

Assuming arguendo that fortuitous circumstances prevented RCPI from delivering the telegram at the soonest
possible time, it should have at least informed Grace of the non-transmission and the non-delivery so that she could
have taken steps to remedy the situation. But it did not. There lies the fault or negligence.

In an earlier case also involving RCPI, this Court held:

Considering the public utility of RCPI’s business and its contractual obligation to transmit messages, it should
exercise due diligence to ascertain that messages are delivered to the persons at the given address and
should provide a system whereby in cases of undelivered messages the sender is given notice of non-delivery.
Messages sent by cable or wireless means are usually more important and urgent than those which can wait for
the mail.25

xxxx

People depend on telecommunications companies in times of deep emotional stress or pressing financial
needs. Knowing that messages about the illnesses or deaths of loved ones, births or marriages in a family,
important business transactions, and notices of conferences or meetings as in this case, are coursed through the
petitioner and similar corporations, it is incumbent upon them to exercise a greater amount of care and concern than
that shown in this case. Every reasonable effort to inform senders of the non-delivery of messages should be
undertaken.26

(Emphasis and underscoring supplied)

RCPI argues, however, against the presence of urgency in the delivery of the telegram, as well as the basis for the
award of moral damages, thus:27

The request to send check as written in the telegraphic text negates the existence of urgency that private
respondents’ allegations that ‘time was of the essence’ imports. A check drawn against a Manila Bank and
transmitted to Sorsogon, Sorsogon will have to be deposited in a bank in Sorsogon and pass thru a minimum
clearing period of 5 days before it may be encashed or withdrawn. If the transmittal of the requested check to
Sorsogon took 1 day – private respondents could therefore still wait for 6 days before the same may be withdrawn.
Requesting a check that would take 6 days before it could be withdrawn therefore contradicts plaintiff’s claim of
urgency or need.28

At any rate, any sense of urgency of the situation was met when Grace Verchez was able to communicate to Manila
via a letter that she sent to the same addressee in Manila thru JRS.29

xxxx

As far as the respondent court’s award for moral damages is concerned, the same has no basis whatsoever since
private respondent Alfonso Verchez did not accompany his late wife when the latter went to Manila by bus. He
stayed behind in Sorsogon for almost 1 week before he proceeded to Manila. 30

When pressed on cross-examination, private respondent Alfonso Verchez could not give any plausible reason as to
the reason why he did not accompany his ailing wife to Manila.31

xxxx

It is also important to consider in resolving private respondents’ claim for moral damages that private respondent
Grace Verchez did not accompany her ailing mother to Manila.32

xxxx

It is the common reaction of a husband to be at his ailing wife’s side as much as possible. The fact that private
respondent Alfonso Verchez stayed behind in Sorsogon for almost 1 week convincingly demonstrates that he
himself knew that his wife was not in critical condition.33

(Emphasis and underscoring supplied)

RCPI’s arguments fail. For it is its breach of contract upon which its liability is, it bears repeating, anchored. Since
RCPI breached its contract, the presumption is that it was at fault or negligent. It, however, failed to rebut this
presumption.

For breach of contract then, RCPI is liable to Grace for damages.

And for quasi-delict, RCPI is liable to Grace’s co-respondents following Article 2176 of the Civil Code which
provides:

Whoever by act or omission causes damage to another, there being fault or negligence, is obliged to pay for the
damage done. Such fault or negligence, if there is no pre-existing contractual relation between the parties, is called
a quasi-delict and is governed by the provisions of this Chapter. (Underscoring supplied)
RCPI’s liability as an employer could of course be avoided if it could prove that it observed the diligence of a good
father of a family to prevent damage. Article 2180 of the Civil Code so provides:

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

xxxx

The owners and managers of an establishment or enterprise are likewise responsible for damages caused by their
employees in the service of the branches in which the latter are employed or on the occasion of their functions.

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

xxxx

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

RCPI failed, however, to prove that it observed all the diligence of a good father of a family to prevent damage.

Respecting the assailed award of moral damages, a determination of the presence of the following requisites to
justify the award is in order:

x x x firstly, evidence of besmirched reputation or physical, mental or psychological suffering sustained by the
claimant; secondly, a culpable act or omission factually established; thirdly, proof that the wrongful act or omission
of the defendant is the proximate cause of damages sustained by the claimant; and fourthly, that the case is
predicated on any of the instances expressed or envisioned by Article 2219 and Article 2220 of the Civil Code. 34

Respecting the first requisite, evidence of suffering by the plaintiffs-herein respondents was correctly appreciated by
the CA in this wise:

The failure of RCPI to deliver the telegram containing the message of appellees on time, disturbed their filial
tranquillity. Family members blamed each other for failing to respond swiftly to an emergency that involved the life of
the late Mrs. Verchez, who suffered from diabetes.35

As reflected in the foregoing discussions, the second and third requisites are present.

On the fourth requisite, Article 2220 of the Civil Code provides:

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

After RCPI’s first attempt to deliver the telegram failed, it did not inform Grace of the non-delivery thereof and waited
for 12 days before trying to deliver it again, knowing – as it should know – that time is of the essence in the delivery
of telegrams. When its second long-delayed attempt to deliver the telegram again failed, it, again, waited for another
12 days before making a third attempt. Such nonchalance in performing its urgent obligation indicates gross
negligence amounting to bad faith. The fourth requisite is thus also present.

In applying the above-quoted Article 2220, this Court has awarded moral damages in cases of breach of contract
where the defendant was guilty of gross negligence amounting to bad faith, or in wanton disregard of his contractual
obligation.36

As for RCPI’s tort-based liability, Article 2219 of the Civil Code provides:
Moral damages may be recovered in the following and analogous cases:

xxxx

(10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34, and 35. (Emphasis supplied)

Article 26 of the Civil Code, in turn, provides:

Every person shall respect the dignity, personality, privacy and peace of mind of his neighbors and other persons.
The following and similar acts, though they may not constitute a criminal offense, shall produce a cause of action for
damages, prevention, and other relief:

xxxx

(2) Meddling with or disturbing the private life or family relations of another. (Emphasis supplied)

RCPI’s negligence in not promptly performing its obligation undoubtedly disturbed the peace of mind not only of
Grace but also her co-respondents. As observed by the appellate court, it disrupted the "filial tranquillity" among
them as they blamed each other "for failing to respond swiftly to an emergency." The tortious acts and/or omissions
complained of in this case are, therefore, analogous to acts mentioned under Article 26 of the Civil Code, which are
among the instances of quasi-delict when courts may award moral damages under Article 2219 of the Civil Code.

In fine, the award to the plaintiffs-herein respondents of moral damages is in order, as is the award of attorney’s
fees, respondents having been compelled to litigate to protect their rights.

Clutching at straws, RCPI insists that the limited liability clause in the "Telegram Transmission Form" is not a
contract of adhesion. Thus it argues:

Neither can the Telegram Transmission Form be considered a contract of adhesion as held by the respondent court.
The said stipulations were all written in bold letters right in front of the Telegram Transmission Form. As a matter of
fact they were beside the space where the telegram senders write their telegraphic messages. It would have been
different if the stipulations were written at the back for surely there is no way the sender will easily notice them. The
fact that the stipulations were located in a particular space where they can easily be seen, is sufficient notice to any
sender (like Grace Verchez-Infante) where she could manifest her disapproval, leave the RCPI station and avail of
the services of the other telegram operators.37 (Underscoring supplied)

RCPI misunderstands the nature of a contract of adhesion. Neither the readability of the stipulations nor their
physical location in the contract determines whether it is one of adhesion.

A contract of adhesion is defined as one in which one of the parties imposes a ready-made form of contract, which
the other party may accept or reject, but which the latter cannot modify. One party prepares the stipulation in the
contract, while the other party merely affixes his signature or his "adhesion" thereto, giving no room for
negotiation and depriving the latter of the opportunity to bargain on equal footing.38 (Emphasis and
underscoring supplied)

While a contract of adhesion is not necessarily void and unenforceable, since it is construed strictly against the party
who drafted it or gave rise to any ambiguity therein, it is stricken down as void and unenforceable or subversive of
public policy when the weaker party is imposed upon in dealing with the dominant bargaining party and is reduced
to the alternative of taking it or leaving it, completely deprived of the opportunity to bargain on equal footing. 39

This Court holds that the Court of Appeals’ finding that the parties’ contract is one of adhesion which is void is, given
the facts and circumstances of the case, thus well-taken.

WHEREFORE, the petition is DENIED, and the challenged decision of the Court of Appeals is AFFIRMED.

Costs against petitioner.

SO ORDERED.

Case #8

G.R. No. 193723 July 20, 2011

GENERAL MILLING CORPORATION, Petitioner,

vs.
SPS. LIBRADO RAMOS and REMEDIOS RAMOS, Respondents.

DECISION

VELASCO, JR., J.:

The Case

This is a petition for review of the April 15, 2010 Decision of the Court of Appeals (CA) in CA-G.R. CR-H.C. No.
85400 entitled Spouses Librado Ramos & Remedios Ramos v. General Milling Corporation, et al., which affirmed
the May 31, 2005 Decision of the Regional Trial Court (RTC), Branch 12 in Lipa City, in Civil Case No. 00-0129 for
Annulment and/or Declaration of Nullity of Extrajudicial Foreclosure Sale with Damages.

The Facts

On August 24, 1989, General Milling Corporation (GMC) entered into a Growers Contract with spouses Librado and
Remedios Ramos (Spouses Ramos). Under the contract, GMC was to supply broiler chickens for the spouses to
raise on their land in Barangay Banaybanay, Lipa City, Batangas.1 To guarantee full compliance, the Growers
Contract was accompanied by a Deed of Real Estate Mortgage over a piece of real property upon which their
conjugal home was built. The spouses further agreed to put up a surety bond at the rate of PhP 20,000 per 1,000
chicks delivered by GMC. The Deed of Real Estate Mortgage extended to Spouses Ramos a maximum credit line of
PhP 215,000 payable within an indefinite period with an interest of twelve percent (12%) per annum. 2

The Deed of Real Estate Mortgage contained the following provision:

WHEREAS, the MORTGAGOR/S has/have agreed to guarantee and secure the full and faithful compliance of
[MORTGAGORS’] obligation/s with the MORTGAGEE by a First Real Estate Mortgage in favor of the
MORTGAGEE, over a 1 parcel of land and the improvements existing thereon, situated in the Barrio/s of -
Banaybanay, Municipality of Lipa City, Province of Batangas, Philippines, his/her/their title/s thereto being evidenced
by Transfer Certificate/s No./s T-9214 of the Registry of Deeds for the Province of Batangas in the amount of TWO
HUNDRED FIFTEEN THOUSAND (P 215,000.00), Philippine Currency, which the maximum credit line payable
within a x x x day term and to secure the payment of the same plus interest of twelve percent (12%) per annum.

Spouses Ramos eventually were unable to settle their account with GMC. They alleged that they suffered business
losses because of the negligence of GMC and its violation of the Growers Contract. 3

On March 31, 1997, the counsel for GMC notified Spouses Ramos that GMC would institute foreclosure
proceedings on their mortgaged property.4

On May 7, 1997, GMC filed a Petition for Extrajudicial Foreclosure of Mortgage. On June 10, 1997, the property
subject of the foreclosure was subsequently sold by public auction to GMC after the required posting and
publication.5 It was foreclosed for PhP 935,882,075, an amount representing the losses on chicks and feeds
exclusive of interest at 12% per annum and attorney’s fees.6 To complicate matters, on October 27, 1997, GMC
informed the spouses that its Agribusiness Division had closed its business and poultry operations. 7

On March 3, 2000, Spouses Ramos filed a Complaint for Annulment and/or Declaration of Nullity of the Extrajudicial
Foreclosure Sale with Damages. They contended that the extrajudicial foreclosure sale on June 10, 1997 was null
and void, since there was no compliance with the requirements of posting and publication of notices under Act No.
3135, as amended, or An Act to Regulate the Sale of Property under Special Powers Inserted in or Annexed to Real
Estate Mortgages. They likewise claimed that there was no sheriff’s affidavit to prove compliance with the
requirements on posting and publication of notices. It was further alleged that the Deed of Real Estate Mortgage
had no fixed term. A prayer for moral and exemplary damages and attorney’s fees was also included in the
complaint.8 Librado Ramos alleged that, when the property was foreclosed, GMC did not notify him at all of the
foreclosure.9

During the trial, the parties agreed to limit the issues to the following: (1) the validity of the Deed of Real Estate
Mortgage; (2) the validity of the extrajudicial foreclosure; and (3) the party liable for damages. 10

In its Answer, GMC argued that it repeatedly reminded Spouses Ramos of their liabilities under the Growers
Contract. It argued that it was compelled to foreclose the mortgage because of Spouses Ramos’ failure to pay their
obligation. GMC insisted that it had observed all the requirements of posting and publication of notices under Act
No. 3135.11

The Ruling of the Trial Court

Holding in favor of Spouses Ramos, the trial court ruled that the Deed of Real Estate Mortgage was valid even if its
term was not fixed. Since the duration of the term was made to depend exclusively upon the will of the debtors-
spouses, the trial court cited jurisprudence and said that "the obligation is not due and payable until an action is
commenced by the mortgagee against the mortgagor for the purpose of having the court fix the date on and after
which the instrument is payable and the date of maturity is fixed in pursuance thereto." 12

The trial court held that the action of GMC in moving for the foreclosure of the spouses’ properties was premature,
because the latter’s obligation under their contract was not yet due.

The trial court awarded attorney’s fees because of the premature action taken by GMC in filing extrajudicial
foreclosure proceedings before the obligation of the spouses became due.

The RTC ruled, thus:

WHEREFORE, premises considered, judgment is rendered as follows:

1. The Extra-Judicial Foreclosure Proceedings under docket no. 0107-97 is hereby declared null and void;

2. The Deed of Real Estate Mortgage is hereby declared valid and legal for all intents and puposes;

3. Defendant-corporation General Milling Corporation is ordered to pay Spouses Librado and Remedios
Ramos attorney’s fees in the total amount of P 57,000.00 representing acceptance fee of P30,000.00 and
P3,000.00 appearance fee for nine (9) trial dates or a total appearance fee of P 27,000.00;

4. The claims for moral and exemplary damages are denied for lack of merit.

IT IS SO ORDERED.13

The Ruling of the Appellate Court

On appeal, GMC argued that the trial court erred in: (1) declaring the extrajudicial foreclosure proceedings null and
void; (2) ordering GMC to pay Spouses Ramos attorney’s fees; and (3) not awarding damages in favor of GMC.

The CA sustained the decision of the trial court but anchored its ruling on a different ground. Contrary to the findings
of the trial court, the CA ruled that the requirements of posting and publication of notices under Act No. 3135 were
complied with. The CA, however, still found that GMC’s action against Spouses Ramos was premature, as they
were not in default when the action was filed on May 7, 1997.14
The CA ruled:

In this case, a careful scrutiny of the evidence on record shows that defendant-appellant GMC made no demand to
spouses Ramos for the full payment of their obligation. While it was alleged in the Answer as well as in the Affidavit
constituting the direct testimony of Joseph Dominise, the principal witness of defendant-appellant GMC, that
demands were sent to spouses Ramos, the documentary evidence proves otherwise. A perusal of the letters
presented and offered as evidence by defendant-appellant GMC did not "demand" but only request spouses Ramos
to go to the office of GMC to "discuss" the settlement of their account. 15

According to the CA, however, the RTC erroneously awarded attorney’s fees to Spouses Ramos, since the
presumption of good faith on the part of GMC was not overturned.

The CA disposed of the case as follows:

WHEREFORE, and in view of the foregoing considerations, the Decision of the Regional Trial Court of Lipa City,
Branch 12, dated May 21, 2005 is hereby AFFIRMED with MODIFICATION by deleting the award of attorney’s fees
to plaintiffs-appellees spouses Librado Ramos and Remedios Ramos.16

Hence, We have this appeal.

The Issues

A. WHETHER [THE CA] MAY CONSIDER ISSUES NOT ALLEGED AND DISCUSSED IN THE LOWER
COURT AND LIKEWISE NOT RAISED BY THE PARTIES ON APPEAL, THEREFORE HAD DECIDED THE
CASE NOT IN ACCORD WITH LAW AND APPLICABLE DECISIONS OF THE SUPREME COURT.

B. WHETHER [THE CA] ERRED IN RULING THAT PETITIONER GMC MADE NO DEMAND TO
RESPONDENT SPOUSES FOR THE FULL PAYMENT OF THEIR OBLIGATION CONSIDERING THAT
THE LETTER DATED MARCH 31, 1997 OF PETITIONER GMC TO RESPONDENT SPOUSES IS
TANTAMOUNT TO A FINAL DEMAND TO PAY, THEREFORE IT DEPARTED FROM THE ACCEPTED
AND USUAL COURSE OF JUDICIAL PROCEEDINGS.17

The Ruling of this Court

Can the CA consider matters not alleged?

GMC asserts that since the issue on the existence of the demand letter was not raised in the trial court, the CA, by
considering such issue, violated the basic requirements of fair play, justice, and due process. 18

In their Comment,19 respondents-spouses aver that the CA has ample authority to rule on matters not assigned as
errors on appeal if these are indispensable or necessary to the just resolution of the pleaded issues.

In Diamonon v. Department of Labor and Employment,20 We explained that an appellate court has a broad
discretionary power in waiving the lack of assignment of errors in the following instances:

(a) Grounds not assigned as errors but affecting the jurisdiction of the court over the subject matter;

(b) Matters not assigned as errors on appeal but are evidently plain or clerical errors within contemplation of
law;

(c) 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 interests of a justice or to avoid dispensing
piecemeal justice;
 (d) 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;

(e) Matters not assigned as errors on appeal but closely related to an error assigned;

(f) Matters not assigned as errors on appeal but upon which the determination of a question properly
assigned, is dependent.

Paragraph (c) above applies to the instant case, for there would be a just and complete resolution of the appeal if
there is a ruling on whether the Spouses Ramos were actually in default of their obligation to GMC.

Was there sufficient demand?

We now go to the second issue raised by GMC. GMC asserts error on the part of the CA in finding that no demand
was made on Spouses Ramos to pay their obligation. On the contrary, it claims that its March 31, 1997 letter is akin
to a demand.

We disagree.

There are three requisites necessary for a finding of default. First, the obligation is demandable and liquidated;
second, the debtor delays performance; and third, the creditor judicially or extrajudicially requires the debtor’s
performance.21

According to the CA, GMC did not make a demand on Spouses Ramos but merely requested them to go to GMC’s
office to discuss the settlement of their account. In spite of the lack of demand made on the spouses, however,
GMC proceeded with the foreclosure proceedings. Neither was there any provision in the Deed of Real Estate
Mortgage allowing GMC to extrajudicially foreclose the mortgage without need of demand.

Indeed, Article 1169 of the Civil Code on delay requires the following:

Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extrajudicially
demands from them the fulfilment of their obligation.

However, the demand by the creditor shall not be necessary in order that delay may exist:

(1) When the obligation or the law expressly so declares; x x x

As the contract in the instant case carries no such provision on demand not being necessary for delay to exist, We
agree with the appellate court that GMC should have first made a demand on the spouses before proceeding to
foreclose the real estate mortgage.

Development Bank of the Philippines v. Licuanan finds application to the instant case:

The issue of whether demand was made before the foreclosure was effected is essential. If demand was made and
1avvphi1

duly received by the respondents and the latter still did not pay, then they were already in default and foreclosure
was proper. However, if demand was not made, then the loans had not yet become due and demandable. This
meant that respondents had not defaulted in their payments and the foreclosure by petitioner was premature.
Foreclosure is valid only when the debtor is in default in the payment of his obligation. 22

In turn, whether or not demand was made is a question of fact. 23 This petition filed under Rule 45 of the Rules of
Court shall raise only questions of law. For a question to be one of law, it must not involve an examination of the
probative value of the evidence presented by the litigants or any of them. The resolution of the issue must rest solely
on what the law provides on the given set of circumstances. Once it is clear that the issue invites a review of the
evidence presented, the question posed is one of fact.24 It need not be reiterated that this Court is not a trier of
facts.25 We will defer to the factual findings of the trial court, because petitioner GMC has not shown any
circumstances making this case an exception to the rule.

WHEREFORE, the petition is DENIED. The CA Decision in CA-G.R. CR-H.C. No. 85400 is AFFIRMED.

SO ORDERED.

Case #9

G.R. No. 169975 March 18, 2010

PAN PACIFIC SERVICE CONTRACTORS, INC. and RICARDO F. DEL ROSARIO, Petitioners,
vs.
EQUITABLE PCI BANK (formerly THE PHILIPPINE COMMERCIAL INTERNATIONAL BANK), Respondent.

DECISION

CARPIO, J.:

The Case

Pan Pacific Service Contractors, Inc. and Ricardo F. Del Rosario (petitioners) filed this Petition for Review 1 assailing
the Court of Appeals’ (CA) Decision2 dated 30 June 2005 in CA-G.R. CV No. 63966 as well as the Resolution 3 dated
5 October 2005 denying the Motion for Reconsideration. In the assailed decision, the CA modified the 12 April 1999
Decision4 of the Regional Trial Court of Makati City, Branch 59 (RTC) by ordering Equitable PCI Bank 5 (respondent)
to pay petitioners ₱1,516,015.07 with interest at the legal rate of 12% per annum starting 6 May 1994 until the
amount is fully paid.

The Facts

Pan Pacific Service Contractors, Inc. (Pan Pacific) is engaged in contracting mechanical works on airconditioning
system. On 24 November 1989, Pan Pacific, through its President, Ricardo F. Del Rosario (Del Rosario), entered
into a contract of mechanical works (Contract) with respondent for ₱20,688,800. Pan Pacific and respondent also
agreed on nine change orders for ₱2,622,610.30. Thus, the total consideration for the whole project was
₱23,311,410.30.6 The Contract stipulated, among others, that Pan Pacific shall be entitled to a price adjustment in
case of increase in labor costs and prices of materials under paragraphs 70.1 7 and 70.28 of the "General Conditions
for the Construction of PCIB Tower II Extension" (the escalation clause). 9

Pursuant to the contract, Pan Pacific commenced the mechanical works in the project site, the PCIB Tower II
extension building in Makati City. The project was completed in June 1992. Respondent accepted the project on 9
July 1992.10

In 1990, labor costs and prices of materials escalated. On 5 April 1991, in accordance with the escalation clause,
Pan Pacific claimed a price adjustment of ₱5,165,945.52. Respondent’s appointed project engineer, TCGI
Engineers, asked for a reduction in the price adjustment. To show goodwill, Pan Pacific reduced the price
adjustment to ₱4,858,548.67.11

On 28 April 1992, TCGI Engineers recommended to respondent that the price adjustment should be pegged at
₱3,730,957.07. TCGI Engineers based their evaluation of the price adjustment on the following factors:

1. Labor Indices of the Department of Labor and Employment.

2. Price Index of the National Statistics Office.

PD 1594 and its Implementing Rules and Regulations as amended, 15 March 1991.

Shipping Documents submitted by PPSCI.

Sub-clause 70.1 of the General Conditions of the Contract Documents.12

Pan Pacific contended that with this recommendation, respondent was already estopped from disclaiming liability of
at least ₱3,730,957.07 in accordance with the escalation clause.13

Due to the extraordinary increases in the costs of labor and materials, Pan Pacific’s operational capital was
becoming inadequate for the project. However, respondent withheld the payment of the price adjustment under the
escalation clause despite Pan Pacific’s repeated demands.14 Instead, respondent offered Pan Pacific a loan of ₱1.8
million. Against its will and on the strength of respondent’s promise that the price adjustment would be released
soon, Pan Pacific, through Del Rosario, was constrained to execute a promissory note in the amount of ₱1.8 million
as a requirement for the loan. Pan Pacific also posted a surety bond. The ₱1.8 million was released directly to
laborers and suppliers and not a single centavo was given to Pan Pacific.15

Pan Pacific made several demands for payment on the price adjustment but respondent merely kept on promising to
release the same. Meanwhile, the ₱1.8 million loan matured and respondent demanded payment plus interest and
penalty. Pan Pacific refused to pay the loan. Pan Pacific insisted that it would not have incurred the loan if
respondent released the price adjustment on time. Pan Pacific alleged that the promissory note did not express the
true agreement of the parties. Pan Pacific maintained that the ₱1.8 million was to be considered as an advance
payment on the price adjustment. Therefore, there was really no consideration for the promissory note; hence, it is
null and void from the beginning.16

Respondent stood firm that it would not release any amount of the price adjustment to Pan Pacific but it would offset
the price adjustment with Pan Pacific’s outstanding balance of ₱3,226,186.01, representing the loan, interests,
penalties and collection charges.17

Pan Pacific refused the offsetting but agreed to receive the reduced amount of ₱3,730,957.07 as recommended by
the TCGI Engineers for the purpose of extrajudicial settlement, less ₱1.8 million and ₱414,942 as advance
payments.18

On 6 May 1994, petitioners filed a complaint for declaration of nullity/annulment of the promissory note, sum of
money, and damages against the respondent with the RTC of Makati City, Branch 59. On 12 April 1999, the RTC
rendered its decision, the dispositive portion of which reads:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiffs and against the
defendant as follows:

1. Declaring the promissory note (Exhibit "B") null and void;

Ordering the defendant to pay the plaintiffs the following amounts:

a. ₱1,389,111.10 representing unpaid balance of the adjustment price, with interest thereon at the
legal rate of twelve (12%) percent per annum starting May 6, 1994, the date when the complaint was
filed, until the amount is fully paid;

₱100,000.00 representing moral damages;

₱50,000.00 representing exemplary damages; and

₱50,000.00 as and for attorney’s fees.

2. Dismissing defendant’s counterclaim, for lack of merit; and

 With costs against the defendant.

SO ORDERED.19

On 23 May 1999, petitioners partially appealed the RTC Decision to the CA. On 26 May 1999, respondent appealed
the entire RTC Decision for being contrary to law and evidence. In sum, the appeals of the parties with the CA are
as follows:

1. With respect to the petitioners, whether the RTC erred in deducting the amount of ₱126,903.97 from the
balance of the adjusted price and in awarding only 12% annual interest on the amount due, instead of the
bank loan rate of 18% compounded annually beginning September 1992.

2. With respect to respondent, whether the RTC erred in declaring the promissory note void and in awarding
moral and exemplary damages and attorney’s fees in favor of petitioners and in dismissing its counterclaim.

In its decision dated 30 June 2005, the CA modified the RTC decision, with respect to the principal amount due to
petitioners. The CA removed the deduction of ₱126,903.97 because it represented the final payment on the basic
contract price. Hence, the CA ordered respondent to pay ₱1,516,015.07 to petitioners, with interest at the legal rate
of 12% per annum starting 6 May 1994.20

On 26 July 2005, petitioners filed a Motion for Partial Reconsideration seeking a reconsideration of the CA’s
Decision imposing the legal rate of 12%. Petitioners claimed that the interest rate applicable should be the 18%
bank lending rate. Respondent likewise filed a Motion for Reconsideration of the CA’s decision. In a Resolution
dated 5 October 2005, the CA denied both motions.

Aggrieved by the CA’s Decision, petitioners elevated the case before this Court.

The Issue

Petitioners submit this sole issue for our consideration: Whether the CA, in awarding the unpaid balance of the price
adjustment, erred in fixing the interest rate at 12% instead of the 18% bank lending rate.

Ruling of the Court

We grant the petition.

This Court notes that respondent did not appeal the decision of the CA. Hence, there is no longer any issue as to
the principal amount of the unpaid balance on the price adjustment, which the CA correctly computed at
₱1,516,015.07. The only remaining issue is the interest rate applicable for respondent’s delay in the payment of the
balance of the price adjustment.

The CA denied petitioners’ claim for the application of the bank lending rate of 18% compounded annually
reasoning, to wit:

Anent the 18% interest rate compounded annually, while it is true that the contract provides for an interest at the
current bank lending rate in case of delay in payment by the Owner, and the promissory note charged an interest of
18%, the said proviso does not authorize plaintiffs to unilaterally raise the interest rate without the other party’s
consent. Unlike their request for price adjustment on the basic contract price, plaintiffs never informed nor sought
the approval of defendant for the imposition of 18% interest on the adjusted price. To unilaterally increase the
interest rate of the adjusted price would be violative of the principle of mutuality of contracts. Thus, the Court
maintains the legal rate of twelve percent per annum starting from the date of judicial demand. Although the contract
provides for the period when the recommendation of the TCGI Engineers as to the price adjustment would be
binding on the parties, it was established, however, that part of the adjusted price demanded by plaintiffs was
already disbursed as early as 28 February 1992 by defendant bank to their suppliers and laborers for their account. 21

In this appeal, petitioners allege that the contract between the parties consists of two parts, the Agreement 22 and the
General Conditions,23 both of which provide for interest at the bank lending rate on any unpaid amount due under
the contract. Petitioners further claim that there is nothing in the contract which requires the consent of the
respondent to be given in order that petitioners can charge the bank lending rate. 24 Specifically, petitioners invoke
Section 2.5 of the Agreement and Section 60.10 of the General Conditions as follows:

Agreement

2.5 If any payment is delayed, the CONTRACTOR may charge interest thereon at the current bank lending rates,
without prejudice to OWNER’S recourse to any other remedy available under existing law. 25

General Conditions

60.10 Time for payment

The amount due to the Contractor under any interim certificate issued by the Engineer pursuant to this Clause, or to
any term of the Contract, shall, subject to clause 47, be paid by the Owner to the Contractor within 28 days after
such interim certificate has been delivered to the Owner, or, in the case of the Final Certificate referred to in Sub-
Clause 60.8, within 56 days, after such Final Certificate has been delivered to the Owner. In the event of the failure
of the Owner to make payment within the times stated, the Owner shall pay to the Contractor interest at the rate
based on banking loan rates prevailing at the time of the signing of the contract upon all sums unpaid from the date
by which the same should have been paid. The provisions of this Sub-Clause are without prejudice to the
Contractor’s entitlement under Clause 69.26 (Emphasis supplied)

Petitioners thus submit that it is automatically entitled to the bank lending rate of interest from the time an amount is
determined to be due thereto, which respondent should have paid. Therefore, as petitioners have already proven
their entitlement to the price adjustment, it necessarily follows that the bank lending interest rate of 18% shall be
applied.27

On the other hand, respondent insists that under the provisions of 70.1 and 70.2 of the General Conditions, it is
stipulated that any additional cost shall be determined by the Engineer and shall be added to the contract price after
due consultation with the Owner, herein respondent. Hence, there being no prior consultation with the respondent
regarding the additional cost to the basic contract price, it naturally follows that respondent was never consulted or
informed of the imposition of 18% interest rate compounded annually on the adjusted price. 28

A perusal of the assailed decision shows that the CA made a distinction between the consent given by the owner of
the project for the liability for the price adjustments, and the consent for the imposition of the bank lending rate.
Thus, while the CA held that petitioners consulted respondent for price adjustment on the basic contract price,
petitioners, nonetheless, are not entitled to the imposition of 18% interest on the adjusted price, as petitioners never
informed or sought the approval of respondent for such imposition.29

We disagree.

It is settled that the agreement or the contract between the parties is the formal expression of the parties’ rights,
duties, and obligations. It is the best evidence of the intention of the parties. Thus, when the terms of an agreement
have been reduced to writing, it is considered as containing all the terms agreed upon and there can be, between
the parties and their successors in interest, no evidence of such terms other than the contents of the written
agreement.30

The escalation clause of the contract provides:

CHANGES IN COST AND LEGISLATION

70.1 Increase or Decrease of Cost

There shall be added to or deducted from the Contract Price such sums in respect of rise or fall in the cost of labor
and/or materials or any other matters affecting the cost of the execution of the Works as may be determined.

70.2 Subsequent Legislation

If, after the date 28 days prior to the latest date of submission of tenders for the Contract there occur in the country
in which the Works are being or are to be executed changes to any National or State Statute, Ordinance, Decree or
other Law or any regulation or bye-law (sic) of any local or other duly constituted authority, or the introduction of any
such State Statute, Ordinance, Decree, Law, regulation or bye-law (sic) which causes additional or reduced cost to
the contractor, other than under Sub-Clause 70.1, in the execution of the Contract, such additional or reduced cost
shall, after due consultation with the Owner and Contractor, be determined by the Engineer and shall be added to or
deducted from the Contract Price and the Engineer shall notify the Contractor accordingly, with a copy to the
Owner.31

In this case, the CA already settled that petitioners consulted respondent on the imposition of the price adjustment,
and held respondent liable for the balance of ₱1,516,015.07. Respondent did not appeal from the decision of the
CA; hence, respondent is estopped from contesting such fact.

However, the CA went beyond the intent of the parties by requiring respondent to give its consent to the imposition
of interest before petitioners can hold respondent liable for interest at the current bank lending rate. This is
erroneous. A review of Section 2.6 of the Agreement and Section 60.10 of the General Conditions shows that the
consent of the respondent is not needed for the imposition of interest at the current bank lending rate, which occurs
upon any delay in payment.

When the terms of a contract are clear and leave no doubt as to the intention of the contracting parties, the literal
meaning of its stipulations governs. In these cases, courts have no authority to alter a contract by construction or to
make a new contract for the parties. The Court’s duty is confined to the interpretation of the contract which the
parties have made for themselves without regard to its wisdom or folly as the court cannot supply material
stipulations or read into the contract words which it does not contain. It is only when the contract is vague and
ambiguous that courts are permitted to resort to construction of its terms and determine the intention of the parties. 32

The escalation clause must be read in conjunction with Section 2.5 of the Agreement and Section 60.10 of the
General Conditions which pertain to the time of payment. Once the parties agree on the price adjustment after due
consultation in compliance with the provisions of the escalation clause, the agreement is in effect an amendment to
the original contract, and gives rise to the liability of respondent to pay the adjusted costs. Under Section 60.10 of
the General Conditions, the respondent shall pay such liability to the petitioner within 28 days from issuance of the
interim certificate. Upon respondent’s failure to pay within the time provided (28 days), then it shall be liable to pay
the stipulated interest.
1avvphi1

This is the logical interpretation of the agreement of the parties on the imposition of interest. To provide a contrary
interpretation, as one requiring a separate consent for the imposition of the stipulated interest, would render the
intentions of the parties nugatory.

Article 1956 of the Civil Code, which refers to monetary interest, specifically mandates that no interest shall be due
unless it has been expressly stipulated in writing. Therefore, payment of monetary interest is allowed only if:

(1) there was an express stipulation for the payment of interest; and

(2) the agreement for the payment of interest was reduced in writing. The concurrence of the two conditions
is required for the payment of monetary interest.33

We agree with petitioners’ interpretation that in case of default, the consent of the respondent is not needed in order
to impose interest at the current bank lending rate.

Applicable Interest Rate

Under Article 2209 of the Civil Code, the appropriate measure for damages in case of delay in discharging an
obligation consisting of the payment of a sum of money is the payment of penalty interest at the rate agreed upon in
the contract of the parties. In the absence of a stipulation of a particular rate of penalty interest, payment of
additional interest at a rate equal to the regular monetary interest becomes due and payable. Finally, if no regular
interest had been agreed upon by the contracting parties, then the damages payable will consist of payment of legal
interest which is 6%, or in the case of loans or forbearances of money, 12% per annum. 34 It is only when the parties
to a contract have failed to fix the rate of interest or when such amount is unwarranted that the Court will apply the
12% interest per annum on a loan or forbearance of money.35

The written agreement entered into between petitioners and respondent provides for an interest at the current bank
lending rate in case of delay in payment and the promissory note charged an interest of 18%.

To prove petitioners’ entitlement to the 18% bank lending rate of interest, petitioners presented the promissory
note36 prepared by respondent bank itself. This promissory note, although declared void by the lower courts because
it did not express the real intention of the parties, is substantial proof that the bank lending rate at the time of default
was 18% per annum. Absent any evidence of fraud, undue influence or any vice of consent exercised by petitioners
against the respondent, the interest rate agreed upon is binding on them. 37

WHEREFORE, we GRANT the petition. We SET ASIDE the Decision and Resolution of the Court of Appeals in CA-
G.R. CV No. 63966. We ORDER respondent to pay petitioners ₱1,516,015.07 with interest at the bank lending rate
of 18% per annum starting 6 May 1994 until the amount is fully paid.

SO ORDERED.

Case #10

[G.R. NO. 147324 : May 25, 2004]

PHILIPPINE COMMUNICATIONS SATELLITE CORPORATION, Petitioner, v. GLOBE TELECOM, INC. (formerly

and Globe Mckay Cable and Radio Corporation), Respondents.

[G.R. NO. 147334 : May 25, 2004]

GLOBE TELECOM, INC., Petitioner, v. PHILIPPINE COMMUNICATION SATELLITE

CORPORATION, Respondent.

DECISION

TINGA, J.:

Before the Court are two Petitions for Review assailing the Decision of the Court of Appeals, dated 27 February
2001, in CA-G.R. CV No. 63619.1 ςrνll

The facts of the case are undisputed.

For several years prior to 1991, Globe Mckay Cable and Radio Corporation, now Globe Telecom, Inc. (Globe), had
been engaged in the coordination of the provision of various communication facilities for the military bases of the
United States of America (US) in Clark Air Base, Angeles, Pampanga and Subic Naval Base in Cubi Point,
Zambales. The said communication facilities were installed and configured for the exclusive use of the US Defense
Communications Agency (USDCA), and for security reasons, were operated only by its personnel or those of
American companies contracted by it to operate said facilities. The USDCA contracted with said American
companies, and the latter, in turn, contracted with Globe for the use of the communication facilities. Globe, on the
other hand, contracted with local service providers such as the Philippine Communications Satellite Corporation
(Philcomsat) for the provision of the communication facilities.
On 07 May 1991, Philcomsat and Globe entered into an Agreement whereby Philcomsat obligated itself to establish,
operate and provide an IBS Standard B earth station (earth station) within Cubi Point for the exclusive use of the
USDCA.2 The term of the contract was for 60 months, or five (5) years. 3 In turn, Globe promised to pay Philcomsat
monthly rentals for each leased circuit involved.4 ςrνll

At the time of the execution of the Agreement, both parties knew that the Military Bases Agreement between the
Republic of the Philippines and the US (RP-US Military Bases Agreement), which was the basis for the occupancy
of the Clark Air Base and Subic Naval Base in Cubi Point, was to expire in 1991. Under Section 25, Article XVIII of
the 1987 Constitution, foreign military bases, troops or facilities, which include those located at the US Naval Facility
in Cubi Point, shall not be allowed in the Philippines unless a new treaty is duly concurred in by the Senate and
ratified by a majority of the votes cast by the people in a national referendum when the Congress so requires, and
such new treaty is recognized as such by the US Government.

Subsequently, Philcomsat installed and established the earth station at Cubi Point and the USDCA made use of the
same.

On 16 September 1991, the Senate passed and adopted Senate Resolution No. 141, expressing its decision not to
concur in the ratification of the Treaty of Friendship, Cooperation and Security and its Supplementary Agreements
that was supposed to extend the term of the use by the US of Subic Naval Base, among others. 5 The last two
paragraphs of the Resolution state: ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

FINDING that the Treaty constitutes a defective framework for the continuing relationship between the two countries
in the spirit of friendship, cooperation and sovereign equality: Now, therefore, be it

Resolved by the Senate, as it is hereby resolved, To express its decision not to concur in the ratification of the
Treaty of Friendship, Cooperation and Security and its Supplementary Agreements, at the same time reaffirming its
desire to continue friendly relations with the government and people of the United States of America. 6 ςrνll

On 31 December 1991, the Philippine Government sent a Note Verbale to the US Government through the US
Embassy, notifying it of the Philippines termination of the RP-US Military Bases Agreement. The Note
Verbale stated that since the RP-US Military Bases Agreement, as amended, shall terminate on 31 December 1992,
the withdrawal of all US military forces from Subic Naval Base should be completed by said date.

In a letter dated 06 August 1992, Globe notified Philcomsat of its intention to discontinue the use of the earth station
effective 08 November 1992 in view of the withdrawal of US military personnel from Subic Naval Base after the
termination of the RP-US Military Bases Agreement. Globe invoked as basis for the letter of termination Section 8
(Default) of the Agreement, which provides: ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

Neither party shall be held liable or deemed to be in default for any failure to perform its obligation under this
Agreement if such failure results directly or indirectly from force majeure or fortuitous event. Either party is thus
precluded from performing its obligation until such force majeure or fortuitous event shall terminate. For the purpose
of this paragraph, force majeure shall mean circumstances beyond the control of the party involved including, but
not limited to, any law, order, regulation, direction or request of the Government of the Philippines, strikes or other
labor difficulties, insurrection riots, national emergencies, war, acts of public enemies, fire, floods, typhoons or other
catastrophies or acts of God.

Philcomsat sent a reply letter dated 10 August 1992 to Globe, stating that we expect [Globe] to know its commitment
to pay the stipulated rentals for the remaining terms of the Agreement even after [Globe] shall have discontinue[d]
the use of the earth station after November 08, 1992. 7 Philcomsat referred to Section 7 of the Agreement, stating as
follows:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

7.DISCONTINUANCE OF SERVICE

Should [Globe] decide to discontinue with the use of the earth station after it has been put into operation, a written
notice shall be served to PHILCOMSAT at least sixty (60) days prior to the expected date of termination.
Notwithstanding the non-use of the earth station, [Globe] shall continue to pay PHILCOMSAT for the rental of the
actual number of T1 circuits in use, but in no case shall be less than the first two (2) T1 circuits, for the remaining life
of the agreement. However, should PHILCOMSAT make use or sell the earth station subject to this agreement, the
obligation of [Globe] to pay the rental for the remaining life of the agreement shall be at such monthly rate as may
be agreed upon by the parties.8 ςrνll

After the US military forces left Subic Naval Base, Philcomsat sent Globe a letter dated 24 November 1993
demanding payment of its outstanding obligations under the Agreement amounting to US$4,910,136.00 plus
interest and attorneys fees. However, Globe refused to heed Philcomsats demand.

On 27 January 1995, Philcomsat filed with the Regional Trial Court of Makati a Complaint against Globe, praying
that the latter be ordered to pay liquidated damages under the Agreement, with legal interest, exemplary damages,
attorneys fees and costs of suit. The case was raffled to Branch 59 of said court.

Globe filed an Answer to the Complaint, insisting that it was constrained to end the Agreement due to the
termination of the RP-US Military Bases Agreement and the non-ratification by the Senate of the Treaty of
Friendship and Cooperation, which events constituted force majeure under the Agreement. Globe explained that the
occurrence of said events exempted it from paying rentals for the remaining period of the Agreement.

On 05 January 1999, the trial court rendered its Decision, the dispositive portion of which reads: ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

WHEREFORE, premises considered, judgment is hereby rendered as follows: ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

1.Ordering the defendant to pay the plaintiff the amount of Ninety Two Thousand Two Hundred Thirty Eight US
Dollars (US$92,238.00) or its equivalent in Philippine Currency (computed at the exchange rate prevailing at the
time of compliance or payment) representing rentals for the month of December 1992 with interest thereon at the
legal rate of twelve percent (12%) per annum starting December 1992 until the amount is fully paid; chanroblesvirtuallawlibrary

2.Ordering the defendant to pay the plaintiff the amount of Three Hundred Thousand (P300,000.00) Pesos as and
for attorneys fees; chanroblesvirtuallawlibrary

3.Ordering the DISMISSAL of defendants counterclaim for lack of merit; and cralawlibrary

4.With costs against the defendant.

SO ORDERED.9 ςrνll

Both parties appealed the trial courts Decision to the Court of Appeals.

Philcomsat claimed that the trial court erred in ruling that: (1) the non-ratification by the Senate of the Treaty of
Friendship, Cooperation and Security and its Supplementary Agreements constitutes force majeure which exempts
Globe from complying with its obligations under the Agreement; (2) Globe is not liable to pay the rentals for the
remainder of the term of the Agreement; and (3) Globe is not liable to Philcomsat for exemplary damages.

Globe, on the other hand, contended that the RTC erred in holding it liable for payment of rent of the earth station
for December 1992 and of attorneys fees. It explained that it terminated Philcomsats services on 08 November
1992; hence, it had no reason to pay for rentals beyond that date.

On 27 February 2001, the Court of Appeals promulgated its Decision dismissing Philcomsats appeal for lack of merit
and affirming the trial courts finding that certain events constituting force majeure under Section 8 the Agreement
occurred and justified the non-payment by Globe of rentals for the remainder of the term of the Agreement.

The appellate court ruled that the non-ratification by the Senate of the Treaty of Friendship, Cooperation and
Security, and its Supplementary Agreements, and the termination by the Philippine Government of the RP-US
Military Bases Agreement effective 31 December 1991 as stated in the Philippine Governments Note Verbale to the
US Government, are acts, directions, or requests of the Government of the Philippines which constitute force
majeure. In addition, there were circumstances beyond the control of the parties, such as the issuance of a formal
order by Cdr. Walter Corliss of the US Navy, the issuance of the letter notification from ATT and the complete
withdrawal of all US military forces and personnel from Cubi Point, which prevented further use of the earth station
under the Agreement.

However, the Court of Appeals ruled that although Globe sought to terminate Philcomsats services by 08 November
1992, it is still liable to pay rentals for the December 1992, amounting to US$92,238.00 plus interest, considering
that the US military forces and personnel completely withdrew from Cubi Point only on 31 December 1992. 10 ςrνll

Both parties filed their respective Petitions for Review assailing the Decision of the Court of Appeals.

In G.R. No. 147324,11 petitioner Philcomsat raises the following assignments of error:

A.THE HONORABLE COURT OF APPEALS ERRED IN ADOPTING A DEFINITION OF FORCE

MAJEURE DIFFERENT FROM WHAT ITS LEGAL DEFINITION FOUND IN ARTICLE 1174 OF THE CIVIL CODE,
PROVIDES, SO AS TO EXEMPT GLOBE TELECOM FROM COMPLYING WITH ITS OBLIGATIONS UNDER THE
SUBJECT AGREEMENT.

B.THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT GLOBE TELECOM IS NOT LIABLE TO
PHILCOMSAT FOR RENTALS FOR THE REMAINING TERM OF THE AGREEMENT, DESPITE THE CLEAR
TENOR OF SECTION 7 OF THE AGREEMENT.

C.THE HONORABLE OCURT OF APPEALS ERRED IN DELETING THE TRIAL COURTS AWARD OF
ATTORNEYS FEES IN FAVOR OF PHILCOMSAT.

D.THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT GLOBE TELECOM IS NOT LIABLE TO
PHILCOMSAT FOR EXEMPLARY DAMAGES.12 ςrνll

Philcomsat argues that the termination of the RP-US Military Bases Agreement cannot be considered a fortuitous
event because the happening thereof was foreseeable. Although the Agreement was freely entered into by both
parties, Section 8 should be deemed ineffective because it is contrary to Article 1174 of the Civil Code. Philcomsat
posits the view that the validity of the parties definition of force majeure in Section 8 of the Agreement as
circumstances beyond the control of the party involved including, but not limited to, any law, order, regulation,
direction or request of the Government of the Philippines, strikes or other labor difficulties, insurrection riots, national
emergencies, war, acts of public enemies, fire, floods, typhoons or other catastrophies or acts of God, should be
deemed subject to Article 1174 which defines fortuitous events as events which could not be foreseen, or which,
though foreseen, were inevitable.13 ςrνll

Philcomsat further claims that the Court of Appeals erred in holding that Globe is not liable to pay for the rental of
the earth station for the entire term of the Agreement because it runs counter to what was plainly stipulated by the
parties in Section 7 thereof.Moreover, said ruling is inconsistent with the appellate courts pronouncement that Globe
is liable to pay rentals for December 1992 even though it terminated Philcomsats services effective 08 November
1992, because the US military and personnel completely withdrew from Cubi Point only in December 1992.
Philcomsat points out that it was Globe which proposed the five-year term of the Agreement, and that the other
provisions of the Agreement, such as Section 4.1 14 thereof, evince the intent of Globe to be bound to pay rentals for
the entire five-year term.15ςrνll

Philcomsat also maintains that contrary to the appellate courts findings, it is entitled to attorneys fees and exemplary
damages.16 ςrνll

In its Comment to Philcomsats Petition, Globe asserts that Section 8 of the Agreement is not contrary to Article
1174 of the Civil Code because said provision does not prohibit parties to a contract from providing for other
instances when they would be exempt from fulfilling their contractual obligations. Globe also claims that the
termination of the RP-US Military Bases Agreement constitutes force majeure and exempts it from complying with its
obligations under the Agreement.17 On the issue of the propriety of awarding attorneys fees and exemplary
damages to Philcomsat, Globe maintains that Philcomsat is not entitled thereto because in refusing to pay rentals
for the remainder of the term of the Agreement, Globe only acted in accordance with its rights. 18 ςrνll
In G.R. No. 147334,19 Globe, the petitioner therein, contends that the Court of Appeals erred in finding it liable for
the amount of US$92,238.00, representing rentals for December 1992, since Philcomsats services were actually
terminated on 08 November 1992.20 ςrνll

In its Comment, Philcomsat claims that Globes petition should be dismissed as it raises a factual issue which is not
cognizable by the Court in a Petition for Review on Certiorari .21 ςrνll

On 15 August 2001, the Court issued a Resolution giving due course to Philcomsats Petition in G.R.
No. 147324 and required the parties to submit their respective memoranda.22 ςrνll

Similarly, on 20 August 2001, the Court issued a Resolution giving due course to the Petition filed by Globe in G.R.
No. 147334and required both parties to submit their memoranda.23 ςrνll

Philcomsat and Globe thereafter filed their respective Consolidated Memoranda in the two cases, reiterating their
arguments in their respective petitions.

The Court is tasked to resolve the following issues: (1) whether the termination of the RP-US Military Bases
Agreement, the non-ratification of the Treaty of Friendship, Cooperation and Security, and the consequent
withdrawal of US military forces and personnel from Cubi Point constitute force majeure which would exempt Globe
from complying with its obligation to pay rentals under its Agreement with Philcomsat; (2) whether Globe is liable to
pay rentals under the Agreement for the month of December 1992; and (3) whether Philcomsat is entitled to
attorneys fees and exemplary damages.

No reversible error was committed by the Court of Appeals in issuing the assailed Decision; hence the petitions are
denied.

There is no merit is Philcomsats argument that Section 8 of the Agreement cannot be given effect because the
enumeration of events constituting force majeure therein unduly expands the concept of a fortuitous event under
Article 1174 of the Civil Code and is therefore invalid.

In support of its position, Philcomsat contends that under Article 1174 of the Civil Code, an event must be
unforeseen in order to exempt a party to a contract from complying with its obligations therein. It insists that since
the expiration of the RP-US Military Bases Agreement, the non-ratification of the Treaty of Friendship, Cooperation
and Security and the withdrawal of US military forces and personnel from Cubi Point were not unforeseeable, but
were possibilities known to it and Globe at the time they entered into the Agreement, such events cannot exempt
Globe from performing its obligation of paying rentals for the entire five-year term thereof.

However, Article 1174, which exempts an obligor from liability on account of fortuitous events or force majeure,
refers not only to events that are unforeseeable, but also to those which are foreseeable, but inevitable:

Art. 1174. Except in cases specified by the law, or when it is otherwise declared by stipulation, or when the nature of
the obligation requires the assumption of risk, no person shall be responsible for those events which, could not be
foreseen, or which, though foreseen were inevitable.

A fortuitous event under Article 1174 may either be an act of God, or natural occurrences such as floods or
typhoons,24 or an act of man, such as riots, strikes or wars.25 ςrνll

Philcomsat and Globe agreed in Section 8 of the Agreement that the following events shall be deemed events
constituting force majeure: ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

1.Any law, order, regulation, direction or request of the Philippine Government; chanroblesvirtuallawlibrary

2.Strikes or other labor difficulties; chanroblesvirtuallawlibrary

3.Insurrection; chanroblesvirtuallawlibrary
4.Riots; chanroblesvirtuallawlibrary

5.National emergencies; chanroblesvirtuallawlibrary

6.War; chanroblesvirtuallawlibrary

7.Acts of public enemies; chanroblesvirtuallawlibrary

8.Fire, floods, typhoons or other catastrophies or acts of God; chanroblesvirtuallawlibrary

9.Other circumstances beyond the control of the parties.

Clearly, the foregoing are either unforeseeable, or foreseeable but beyond the control of the parties. There is
nothing in the enumeration that runs contrary to, or expands, the concept of a fortuitous event under Article 1174.

Furthermore, under Article 130626 of the Civil Code, parties to a contract may establish such stipulations, clauses,
terms and conditions as they may deem fit, as long as the same do not run counter to the law, morals, good
customs, public order or public policy.27 ςrνll

Article 1159 of the Civil Code also provides that [o]bligations arising from contracts have the force of law between
the contracting parties and should be complied with in good faith.28 Courts cannot stipulate for the parties nor amend
their agreement where the same does not contravene law, morals, good customs, public order or public policy, for to
do so would be to alter the real intent of the parties, and would run contrary to the function of the courts to give force
and effect thereto.29 ςrνll

Not being contrary to law, morals, good customs, public order, or public policy, Section 8 of the Agreement which
Philcomsat and Globe freely agreed upon has the force of law between them. 30 ςrνll

In order that Globe may be exempt from non-compliance with its obligation to pay rentals under Section 8, the
concurrence of the following elements must be established: (1) the event must be independent of the human will; (2)
the occurrence must render it impossible for the debtor to fulfill the obligation in a normal manner; and (3) the
obligor must be free of participation in, or aggravation of, the injury to the creditor. 31 ςrνll

The Court agrees with the Court of Appeals and the trial court that the abovementioned requisites are present in the
instant case. Philcomsat and Globe had no control over the non-renewal of the term of the RP-US Military Bases
Agreement when the same expired in 1991, because the prerogative to ratify the treaty extending the life thereof
belonged to the Senate. Neither did the parties have control over the subsequent withdrawal of the US military
forces and personnel from Cubi Point in December 1992: ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

Obviously the non-ratification by the Senate of the RP-US Military Bases Agreement (and its Supplemental
Agreements) under its Resolution No. 141. (Exhibit 2) on September 16, 1991 is beyond the control of the parties.
This resolution was followed by the sending on December 31, 1991 o[f] a Note Verbale (Exhibit 3) by the Philippine
Government to the US Government notifying the latter of the formers termination of the RP-US Military Bases
Agreement (as amended) on 31 December 1992 and that accordingly, the withdrawal of all U.S. military forces from
Subic Naval Base should be completed by said date. Subsequently, defendant [Globe] received a formal order from
Cdr. Walter F. Corliss II Commander USN dated July 31, 1992 and a notification from ATT dated July 29, 1992 to
terminate the provision of T1s services (via an IBS Standard B Earth Station) effective November 08, 1992. Plaintiff
[Philcomsat] was furnished with copies of the said order and letter by the defendant on August 06, 1992.

Resolution No. 141 of the Philippine Senate and the Note Verbale of the Philippine Government to the US
Government are acts, direction or request of the Government of the Philippines and circumstances beyond the
control of the defendant. The formal order from Cdr. Walter Corliss of the USN, the letter notification from ATT and
the complete withdrawal of all the military forces and personnel from Cubi Point in the year-end 1992 are also acts
and circumstances beyond the control of the defendant.

Considering the foregoing, the Court finds and so holds that the afore-narrated circumstances constitute force
majeure or fortuitous event(s) as defined under paragraph 8 of the Agreement.
From the foregoing, the Court finds that the defendant is exempted from paying the rentals for the facility for the
remaining term of the contract.

As a consequence of the termination of the RP-US Military Bases Agreement (as amended) the continued stay of all
US Military forces and personnel from Subic Naval Base would no longer be allowed, hence, plaintiff would no
longer be in any position to render the service it was obligated under the Agreement. To put it blantly (sic), since the
US military forces and personnel left or withdrew from Cubi Point in the year end December 1992, there was no
longer any necessity for the plaintiff to continue maintaining the IBS facility. 32 (Emphasis in the original.)

The aforementioned events made impossible the continuation of the Agreement until the end of its five-year term
without fault on the part of either party. The Court of Appeals was thus correct in ruling that the happening of such
fortuitous events rendered Globe exempt from payment of rentals for the remainder of the term of the Agreement.

Moreover, it would be unjust to require Globe to continue paying rentals even though Philcomsat cannot be
compelled to perform its corresponding obligation under the Agreement. As noted by the appellate court: ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

We also point out the sheer inequity of PHILCOMSATs position. PHILCOMSAT would like to charge GLOBE rentals
for the balance of the lease term without there being any corresponding telecommunications service subject of the
lease.It will be grossly unfair and iniquitous to hold GLOBE liable for lease charges for a service that was not and
could not have been rendered due to an act of the government which was clearly beyond GLOBEs control. The
binding effect of a contract on both parties is based on the principle that the obligations arising from contracts have
the force of law between the contracting parties, and there must be mutuality between them based essentially on
their equality under which it is repugnant to have one party bound by the contract while leaving the other party free
therefrom (Allied Banking Corporation v. Court of Appeals, 284 SCRA 357 ). 33 ςrνll

With respect to the issue of whether Globe is liable for payment of rentals for the month of December 1992, the
Court likewise affirms the appellate courts ruling that Globe should pay the same.

Although Globe alleged that it terminated the Agreement with Philcomsat effective 08 November 1992 pursuant to
the formal order issued by Cdr. Corliss of the US Navy, the date when they actually ceased using the earth station
subject of the Agreement was not established during the trial. 34 However, the trial court found that the US military
forces and personnel completely withdrew from Cubi Point only on 31 December 1992. 35 Thus, until that date, the
USDCA had control over the earth station and had the option of using the same. Furthermore, Philcomsat could not
have removed or rendered ineffective said communication facility until after 31 December 1992 because Cubi Point
was accessible only to US naval personnel up to that time. Hence, the Court of Appeals did not err when it affirmed
the trial courts ruling that Globe is liable for payment of rentals until December 1992.

Neither did the appellate court commit any error in holding that Philcomsat is not entitled to attorneys fees and
exemplary damages.

The award of attorneys fees is the exception rather than the rule, and must be supported by factual, legal and
equitable justifications.36 In previously decided cases, the Court awarded attorneys fees where a party acted in
gross and evident bad faith in refusing to satisfy the other partys claims and compelled the former to litigate to
protect his rights;37 when the action filed is clearly unfounded, 38 or where moral or exemplary damages are
awarded.39 However, in cases where both parties have legitimate claims against each other and no party actually
prevailed, such as in the present case where the claims of both parties were sustained in part, an award of attorneys
fees would not be warranted.40 ςrνll

Exemplary damages may be awarded in cases involving contracts or quasi-contracts, if the erring party acted in a
wanton, fraudulent, reckless, oppressive or malevolent manner. 41 In the present case, it was not shown that Globe
acted wantonly or oppressively in not heeding Philcomsats demands for payment of rentals. It was established
during the trial of the case before the trial court that Globe had valid grounds for refusing to comply with its
contractual obligations after 1992.

WHEREFORE, the Petitions are DENIED for lack of merit. The assailed Decision of the Court of Appeals in CA-
G.R. CV No. 63619 is AFFIRMED.
SO ORDERED.